Back to GetFilings.com

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:

Part II:   OTHER INFORMATION

Item 2.   Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Item 6.   Exhibits and Reports on Form 8-K

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.

2

Schedule 1

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands, except share data)

See accompanying notes to consolidated financial statements

3

Schedule 2

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands, except share data)

See accompanying notes to consolidated financial statements

4

Schedule 2

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(dollars in thousands)

See accompanying notes to consolidated financial statements

5

Schedule 3

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(dollars in thousands, except per share data)

See accompanying notes to consolidated financial statements

6

Schedule 4

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)

See accompanying notes to consolidated financial statements

7

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 2003 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 2003 consolidated financial statements have been reclassified to conform to the 2004 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):

8

(2)   GOODWILL AND INTANGIBLE ASSETS

        The balance of goodwill, net of accumulated amortization, totaled $1,355,000 at March 31, 2004 and December 31, 2003. The balance of intangible assets, net of accumulated amortization, totaled $1,473,000 and $1,525,000 at March 31, 2004 and December 31, 2003, respectively.

        The following table summarizes the Corporation’s intangible assets, which are subject to amortization, as of March 31, 2004 and December 31, 2003.

        Amortization expense totaled $52,000 for the three months ended March 31, 2004 and March 31, 2003, respectively. The amortization expense will be approximately $155,000 for the remainder of 2004 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 March 31, 2004 no impairment had been recorded. Changes in the carrying value of capitalized mortgage servicing rights are summarized as follows:

        Amortization expense for the mortgage servicing rights asset is 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 March 31, 2004 and December 31, 2003 of approximately $142,101,000, and $138,775,000, respectively.

9

        The following table shows the future estimated amortization expense for mortgage servicing rights based on existing balances as of March 31, 2004. 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:

(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:

10

Schedule 6

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three months ended March 31, 2004 and 2003

        The following discussion provides information about Princeton National Bancorp, Inc.‘s (“PNBC” or the “Corporation”) financial condition and results of operations for the quarters ended March 31, 2004 and 2003. 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 first quarter of 2004 was $1,641,000, or basic earnings per share of $0.53 (diluted earnings per share of $0.52), as compared to net income of $1,772,000 in the first quarter of 2003, or basic and diluted earnings per share of $0.55. This represents a decrease of $131,000 (7.4%) or $.02 per basic share and $.03 per diluted share. During the first quarter of 2003, due to the record-low interest rates, the mortgage refinancing activity was much higher than the first three months of this year resulting in a decrease of $251,000 in mortgage banking income. Additionally, total non-interest expenses for the first quarter of 2004 have increased $360,000 over the same time period in 2003, due to increases in salaries and advertising. The annualized return on average assets and return on average equity were 1.09% and 12.95%, respectively, for the first quarter of 2004, compared with 1.22% and 14.14% for the first quarter of 2003.

        Net interest income before provision for loan losses was $5,009,000 for the first quarter of 2004, compared to $4,946,000 for the first quarter of 2003 (an increase of $63,000 or 1.3%). This increase is a result of an increase in average interest-earning assets, despite a lower net interest margin. For the three months ended March 31, 2004, average interest-earning assets were $553.9 million compared to $538.6 million for the three months ended March 31, 2003. The resulting net yield on interest-earning assets (on a fully taxable equivalent basis) decreased from 3.97% in the first quarter of 2003 to 3.90% in the first quarter of 2004, due generally to interest-earning assets repricing faster than interest-bearing liabilities.

        PNBC recorded a loan loss provision of $100,000 in the both the first quarter of 2004 and the first quarter of 2003. The provision expense recorded each quarter is determined by management’s evaluation

11

of the risk characteristics of the loan portfolio. For the first quarter of 2004, PNBC had net charge-offs of $71,000, compared to net charge-offs of $214,000 for the first quarter of 2003.

        Non-interest income totaled $2,039,000 for the first quarter of 2004, as compared to $2,059,000 in the first quarter of 2003, a decrease of $20,000 (or 1.0%). As previously mentioned, this is a result of the decrease in mortgage banking income of $251,000 (or 62.9%) due to a lower amount of fee income being generated from the origination/refinancing and subsequent sales and servicing of mortgage loans in the secondary market. Partially offsetting the decrease in mortgage banking income was $182,000 in gains on sales of available-for-sale securities in the first quarter of 2004, compared to $0 in the first quarter of 2003. Annualized non-interest income as a percentage of total average assets was 1.35% for the first three months of 2004, compared to 1.40% for the same period in 2003.

        Total non-interest expense for the first quarter of 2004 was $4,784,000, an increase of $360,000 (or 8.1%) from $4,424,000 in the first quarter of 2003. The majority of the increase was in salaries/employee benefits, which increased $225,000 (or 9.1%), and in advertising, which increased $57,000 (or 63.3%) due to expenses relating to the introduction of a new checking account. Collectively, all other categories of non-interest expense increased $78,000 (or 4.2%). Annualized non-interest expense as a percentage of total average assets was 3.17% for the first three months of 2004, compared to 3.01% for the same period in 2003.

INCOME TAXES

        Income tax expense totaled $523,000 for the first quarter of 2004, as compared to $709,000 for the first quarter of 2003. The effective tax rate was 24.2% for the three months ended March 31, 2004 compared to 28.6% for the three months ended March 31, 2003, partially due to an increase in amount of interest income earned from municipal (tax-exempt) securities.

ANALYSIS OF FINANCIAL CONDITION

        Total assets at March 31, 2004 increased to $611,463,000 from $609,737,000 at December 31, 2003 (an increase of $1.7 million or 0.3%). Total deposits at March 31, 2003 increased to $538,451,000 from $537,817,000 at December 31, 2003 (an increase of $624,000 or 0.1%). Comparing categories of deposits at March 31, 2004 to the December 31, 2003 totals, savings deposits increased $3.8 million (or 6.6%). Conversely, demand deposits decreased $2.6 million (or 3.9%); interest-bearing demand deposits decreased $378,000 (0.2%); and time deposits decreased by $225,000 (or 0.1%). Borrowings, consisting of customer repurchase agreements, notes payable, treasury, tax, and loan (“TT&L”) deposits, federal funds purchased, and Federal Home Loan Bank advances, increased from $16,161,000 at December 31, 2003 to $16,443,000 at March 31, 2004 (an increase of $282,000 or 1.7%). Investment balances totaled $168,022,000 at March 31, 2004, compared to $169,892,000 at December 31, 2003 (a decrease of $1.9 million or 1.1%).

        Loan balances, net of unearned interest, increased to $389,550,000 at March 31, 2003, compared to $383,053,000 at December 31, 2003 (an increase of $6.5 million or 1.7%). Non-performing loans increased slightly totaling $1,087,000 or 0.28% of net loans at March 31, 2004, as compared to $969,000 or 0.25% of net loans at December 31, 2003.

12

        For the three months ended March 31, 2004, the subsidiary bank charged off $152,000 of loans and had recoveries of $81,000, compared to charge-offs of $261,000 and recoveries of $47,000 during the three months ended March 31, 2003. The allowance for loan losses is based on factors that include the overall composition of the loan portfolio, types of loans, underlying collateral, past loss experience, loan delinquencies, substandard and doubtful credits, and such other factors that, in management’s reasonable judgment, warrant consideration. The adequacy of the allowance is monitored monthly. At March 31, 2004, the allowance was $2,279,000 which is 209.7% of non-performing loans and 0.59% of total loans, compared with $2,250,000 which was 232.2% of non-performing loans and 0.59% of total loans at December 31, 2003.

        At March 31, 2004, impaired loans totaled $179,000 compared to $235,000 at December 31, 2003. Loans 90 days or more past due and still accruing interest at March 31, 2004 were $16,000 compared to $44,000 at December 31, 2003. The balances of non-performing and impaired loans continue to be below industry averages. There is a specific loan loss reserve of $11,000 established for impaired loans as of March 31, 2004 compared to a specific loan loss reserve of $15,000 at December 31, 2003. 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 March 31, 2004.

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 March 31, 2004 total risk-based capital of PNBC was 11.36%, compared to 11.22% at December 31, 2003. The Tier 1 capital ratio increased from 7.70% at December 31, 2003, to 7.81% at March 31, 2004. Total stockholders’ equity to total assets at March 31, 2004 increased to 8.48% from 8.34% at December 31, 2003.

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 and the maturity of investment securities. Major uses of cash include the origination of loans and purchase of investment securities. Cash flows provided by operating activities, offset by those used in investing and financing activities, resulted in a net decrease in cash and cash equivalents of $2,210,000 from December 31, 2003 to March 31, 2004. This decrease was primarily due to 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,

13

elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the subsidiary bank has in particular classes of financial instruments.

        The subsidiary bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The subsidiary bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. At March 31, 2004 commitments to extend credit and standby letters of credit were approximately $94,641,000 and $6,243,000, 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.

EXPANSION PLANS

        In 2003, the Corporation signed a sales contract for the purchase of property in Aurora, Illinois. The purchase of this property should be finalized in the second quarter of 2004 with construction of the new bank facility to begin in the fall of 2004. In 2005, once the Aurora facility is completed, a new bank facility will be built on the Elburn, Illinois property which was purchased in July of 2003.

LEGAL PROCEEDINGS

        There are various claims pending against PNBC’s subsidiary bank, arising in the normal course of business. Management believes, based upon consultation with legal counsel, that liabilities arising from these proceedings, if any, will not be material to PNBC’s financial condition.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        There has been no material change in market risk since December 31, 2003, as reported in PNBC’s 2003 Annual Report on Form 10-K.

14

IMPACT OF NEW ACCOUNTING STANDARDS

        In December 2003, the FASB issued FASB Interpretation 46, “Consolidation of Variable Interest Entities” (FIN 46R), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation 46, “Consolidation of Variable Interest Entities”, which was issued on January 17, 2003. Adoption of this Statement did not have a material effect on the Corporation’s consolidated financial statements.

        In March 2004, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin 105, “Application of Accounting Principles to Loan Commitments”, (SAB 105). SAB 105 applies to all registrants that issue loan commitments that relate to the origination of mortgage loans that will be held for sale and applies specifically to loan commitments that are issued after March 31, 2004. The adoption of SAB 105 is not expected to have a material effect on the Corporation’s 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.

15

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%.

16

Schedule 7.   Controls and Procedures

17

INDEX TO EXHIBITS

18