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 March
31, 2005
Commission File Number 0-20050
PRINCETON NATIONAL BANCORP, INC.
(Exact name of registrant as
specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
36-3210283 (I.R.S. Employer Identification No.) |
606 S. Main Street, Princeton, IL
61356
(Address of principal executive offices and Zip Code)
(815) 875-4444
(Registrant’s telephone number, including area code)
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |
| Yes X No |
| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). |
| Yes X No |
| As of April 18, 2005, the registrant had outstanding 3,041,613 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 2. (c) |
Unregistered Sales of Equity
Securities and Use of Proceeds The following table provides information about purchases of the Corporation's common stock by the Corporation during the quarter ended March 31, 2005: |
| Period | (a) Total number of shares purchased | (b) Average price paid per share | (c) Total number of shares purchased as part of a publicly announced plans or programs | (d) Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1/1/05 -1/31/05 | 0 | $ 0.00 | 0 | 100,000 | ||||||||||
| 2/1/05 -2/28/05 | 0 | $ 0.00 | 0 | 100,000 | ||||||||||
| 3/1/05 - 3/31/05 | 35,100 | $30.62 | 35,100 | 64,900 | ||||||||||
| Total | 35,100 | $30.62 | 35,100 | 64,900 | ||||||||||
| (1) | We purchased an aggregate of 35,100 shares of our common stock pursuant to the repurchase program that we announced on January 24, 2005 (the “Program”). |
| (2) | Our Board of Directors approved the repurchase by us of up to an aggregate of 100,000 shares of our common stock pursuant to the Program. The expiration date of this Program is January 24, 2006. Unless terminated earlier by resolution of our Board of Directors, the Program will expire on the earlier of such expiration date or when we have repurchased all shares authorized for repurchase under the Program. |
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 | 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. |
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: May 10, 2005 | By | /s/ Tony J. Sorcic |
| Tony J. Sorcic President & Chief Executive Officer | ||
| Date: May 10, 2005 | By | /s/ Todd D. Fanning |
| Todd D. Fanning Vice-President & Chief Financial Officer | ||
2
| PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY | Schedule 1 | |||||||
|---|---|---|---|---|---|---|---|---|
| CONSOLIDATED BALANCE SHEETS | ||||||||
| (dollars in thousands, except share data) | March 31, | |||||||
| 2005(unaudited) | December 31, 2004 | |||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | 11,023 | $ | 14,025 | ||||
| Interest-bearing deposits with financial institutions | 57 | 65 | ||||||
| Total cash and cash equivalents | 11,080 | 14,090 | ||||||
| Loans held for sale, at lower of cost or market | 2,176 | 1,301 | ||||||
| Investment securities: | ||||||||
| Available-for-sale, at fair value | 169,248 | 175,129 | ||||||
| Held-to-maturity, at amortized cost (fair value of $14,537 and $14,111) | 14,342 | 13,680 | ||||||
| Total investment securities | 183,590 | 188,809 | ||||||
| Loans: | ||||||||
| Loans, net of unearned interest | 423,189 | 410,044 | ||||||
| Allowance for loan losses | (2,513 | ) | (2,524 | ) | ||||
| Net loans | 420,676 | 407,520 | ||||||
| Premises and equipment, net of accumulated depreciation | 18,037 | 17,924 | ||||||
| Bank-owned life insurance | 16,148 | 15,870 | ||||||
| Accrued interest receivable | 4,244 | 5,000 | ||||||
| Goodwill | 1,355 | 1,355 | ||||||
| Intangible assets, net of accumulated amortization | 1,421 | 1,317 | ||||||
| Other real estate owned | 0 | 0 | ||||||
| Other assets | 2,600 | 2,552 | ||||||
| TOTAL ASSETS | $ | 661,327 | $ | 655,738 | ||||
| LIABILITIES | ||||||||
| Deposits: | ||||||||
| Demand | $ | 72,744 | $ | 75,015 | ||||
| Interest-bearing demand | 187,934 | 191,271 | ||||||
| Savings | 61,615 | 58,675 | ||||||
| Time | 256,864 | 248,600 | ||||||
| | ||||||||
| Total deposits | 579,157 | 573,561 | ||||||
| Borrowings: | ||||||||
| Customer repurchase agreements | 13,328 | 16,870 | ||||||
| Advances from the Federal Home Loan Bank | 5,000 | 5,000 | ||||||
| Interest-bearing demand notes issued to the U.S. Treasury | 1,446 | 1,765 | ||||||
| Federal funds purchased | 6,100 | 1,000 | ||||||
| Note payable | 841 | 900 | ||||||
| | ||||||||
| Total borrowings | 26,715 | 25,535 | ||||||
| Other liabilities | 3,816 | 4,273 | ||||||
| TOTAL LIABILITIES | 609,688 | 603,369 | ||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock: $5 par value, 7,000,000 shares | ||||||||
| authorized; 4,139,841 issued | 20,699 | 20,699 | ||||||
| Surplus | 8,138 | 7,810 | ||||||
| Retained earnings | 43,009 | 42,156 | ||||||
| Accumulated other comprehensive (loss) income, net of tax | (161 | ) | 951 | |||||
| Less: Cost of 1,098,228 and 1,081,841 treasury shares at | ||||||||
| March 31, 2005 and December 31, 2004, respectively | (20,046 | ) | (19,247 | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | 51,639 | 52,369 | ||||||
| | ||||||||
| TOTAL LIABILITIES AND | ||||||||
| STOCKHOLDERS’ EQUITY | $ | 661,327 | $ | 655,738 | ||||
See accompanying notes to consolidated financial statements
3
| PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY | Schedule 2 | |||||||
|---|---|---|---|---|---|---|---|---|
| CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (dollars in thousands, except share data) | ||||||||
| For the Three Months Ended March 31 |
||||||||
| 2005 | 2004 | |||||||
| Interest income: | ||||||||
| Interest and fees on loans | $ | 6,291 | $ | 5,711 | ||||
| Interest and dividends on investment securities | 1,705 | 1,529 | ||||||
| Interest on federal funds sold | 1 | 2 | ||||||
| Interest on interest-bearing time deposits in other banks | 1 | 2 | ||||||
|
| ||||||||
| Total interest income | 7,998 | 7,244 | ||||||
| Interest expense: | ||||||||
| Interest on deposits | 2,441 | 2,139 | ||||||
| Interest on borrowings | 182 | 96 | ||||||
|
| ||||||||
| Total interest expense | 2,623 | 2,235 | ||||||
|
| ||||||||
| Net interest income | 5,375 | 5,009 | ||||||
| Provision for loan losses | 0 | 100 | ||||||
|
| ||||||||
| Net interest income after provision | ||||||||
| for loan losses | 5,375 | 4,909 | ||||||
| Non-interest income: | ||||||||
| Trust & farm management fees | 397 | 346 | ||||||
| Service charges on deposit accounts | 708 | 743 | ||||||
| Other service charges | 262 | 259 | ||||||
| Gain on sales of securities available-for-sale | 20 | 182 | ||||||
| Brokerage fee income | 160 | 178 | ||||||
| Mortgage banking income | 131 | 148 | ||||||
| Bank-owned life insurance income | 139 | 141 | ||||||
| Other operating income | 58 | 42 | ||||||
|
| ||||||||
| Total non-interest income | 1,875 | 2,039 | ||||||
| Non-interest expense: | ||||||||
| Salaries and employee benefits | 2,954 | 2,692 | ||||||
| Occupancy | 342 | 338 | ||||||
| Equipment expense | 465 | 410 | ||||||
| Federal insurance assessments | 58 | 63 | ||||||
| Intangible assets amortization | 52 | 52 | ||||||
| Data processing | 194 | 172 | ||||||
| Advertising | 156 | 147 | ||||||
| Other operating expense | 776 | 910 | ||||||
|
| ||||||||
| Total non-interest expense | 4,997 | 4,784 | ||||||
|
| ||||||||
| Income before income taxes | 2,253 | 2,164 | ||||||
| Income tax expense | 545 | 523 | ||||||
|
| ||||||||
| Net income | $ | 1,708 | $ | 1,641 | ||||
|
| ||||||||
| Earnings per share: | ||||||||
| Basic | 0.56 | 0.53 | ||||||
| Diluted | 0.55 | 0.52 | ||||||
| Basic weighted average shares outstanding | 3,055,021 | 3,119,404 | ||||||
| Diluted weighted average shares outstanding | 3,081,018 | 3,146,266 | ||||||
See accompanying notes to
consolidated financial statements
4
| PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY | Schedule 2 | |||||||
|---|---|---|---|---|---|---|---|---|
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (dollars in thousands) | ||||||||
| For the Three Months Ended March 31 |
||||||||
| 2005 | 2004 |
|||||||
| Net income | $ | 1,708 | $ | 1,641 | ||||
| Other comprehensive income (loss), net of tax | ||||||||
| Unrealized holding gains (losses) arising during the period | (1,100 | ) | 531 | |||||
| Less: Reclassification adjustment for realized gains on | ||||||||
| sales of securities included in net income | (12 | ) | (111 | ) | ||||
|
| ||||||||
| Other comprehensive income (loss) | (1,112 | ) | 420 | |||||
|
| ||||||||
| Comprehensive income | $ | 596 | $ | 2,061 | ||||
|
| ||||||||
See accompanying notes to
consolidated financial statements
5
PRINCETON NATIONAL BANCORP, INC. AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(dollars in thousands except per share data)
| Accumulated Other Comprehensive | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| For the Three Months Ended March 31, 2005 | Common Stock | Surplus | Retained Earnings | Income (loss) net of tax effect | Treasury Stock | Total | ||||||||||||||
| Balance, January 1, 2005 | $ | 20,699 | $ | 7,810 | $ | 42,156 | $ | 951 | ($19,247 | ) | $ | 52,369 | ||||||||
| Net income | 1,708 | 1,708 | ||||||||||||||||||
| Sale of 2,348 shares | ||||||||||||||||||||
| of treasury stock | 30 | 39 | 69 | |||||||||||||||||
| Purchase of 35,100 shares | ||||||||||||||||||||
| of treasury stock | (1,075 | ) | (1,075 | ) | ||||||||||||||||
| Exercise of stock options and | ||||||||||||||||||||
| re-issuance of treasury | ||||||||||||||||||||
| stock (16,365 shares) | 298 | (213 | ) | 237 | 322 | |||||||||||||||
| Cash dividends | ||||||||||||||||||||
| ($.21 per share) | (642 | ) | (642 | ) | ||||||||||||||||
| Other comprehensive loss, | ||||||||||||||||||||
| net of $703 tax effect | (1,112 | ) | (1,112 | ) | ||||||||||||||||
| Balance, March 31, 2005 | $ | 20,699 | $ | 8,138 | $ | 43,009 | ($161 | ) | ($20,046 | ) | $ | 51,639 | ||||||||
| For the Three Months Ended | ||||||||||||||||||||
| March 31, 2004 | ||||||||||||||||||||
| Balance, January 1, 2004 | $ | 20,699 | $ | 7,020 | $ | 38,726 | $ | 1,275 | ($16,845 | ) | $ | 50,875 | ||||||||
| Net income | 1,641 | 1,641 | ||||||||||||||||||
| Sale of 1,099 shares | ||||||||||||||||||||
| of treasury stock | 16 | 15 | 31 | |||||||||||||||||
| Purchase of 37,000 shares | ||||||||||||||||||||
| of treasury stock | (1,055 | ) | (1,055 | ) | ||||||||||||||||
| Exercise of stock options and | ||||||||||||||||||||
| re-issuance of treasury | ||||||||||||||||||||
| stock (28,568 shares) | 384 | (261 | ) | 383 | 506 | |||||||||||||||
| Cash dividends | ||||||||||||||||||||
| ($.18 per share) | (562 | ) | (562 | ) | ||||||||||||||||
| Other comprehensive income, | ||||||||||||||||||||
| net of $266 tax effect | 420 | 420 | ||||||||||||||||||
| Balance, March 31, 2004 | $ | 20,699 | $ | 7,420 | $ | 39,544 | $ | 1,695 | ($17,502 | ) | $ | 51,856 | ||||||||
See accompanying notes to consolidated financial statements
6
| PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY | Schedule 4 | |||||||
|---|---|---|---|---|---|---|---|---|
| CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (dollars in thousands) | ||||||||
| For the Three Months Ended March 31 |
||||||||
| 2005 | 2004 |
|||||||
| Operating activities: | ||||||||
| Net income | $ | 1,708 | $ | 1,641 | ||||
| Adjustments to reconcile net income to net | ||||||||
| cash provided by operating activities: | ||||||||
| Depreciation | 336 | 372 | ||||||
| Provision for loan losses | 0 | 100 | ||||||
| Amortization of other intangible assets | 52 | 52 | ||||||
| Amortization of premiums on investment | ||||||||
| securities, net of accretion | 387 | 419 | ||||||
| Gain on securities transactions, net | (20 | ) | (182 | ) | ||||
| FHLB stock dividends | (27 | ) | (30 | ) | ||||
| Loans originated for sale | (7,903 | ) | (9,273 | ) | ||||
| Proceeds from sales of loans originated for sale | 7,028 | 9,470 | ||||||
| Increase in accrued interest payable | 151 | 90 | ||||||
| Decrease in accrued interest receivable | 756 | 729 | ||||||
| Increase in other assets | (482 | ) | (10 | ) | ||||
| Increase (decrease) in other liabilities | 95 | (517 | ) | |||||
|
| ||||||||
| Net cash provided by operating activities | 2,081 | 2,861 | ||||||
|
| ||||||||
| Investing activities: | ||||||||
| Proceeds from sales of investment securities available-for-sale | 1,106 | 8,462 | ||||||
| Proceeds from maturities of investment securities available-for-sale | 8,344 | 7,726 | ||||||
| Purchase of investment securities available-for-sale | (5,726 | ) | (13,948 | ) | ||||
| Proceeds from maturities of investment securities held-to-maturity | 35 | 249 | ||||||
| Purchase of investment securities held-to-maturity | (695 | ) | (140 | ) | ||||
| Net increase in loans | (13,156 | ) | (6,568 | ) | ||||
| Purchases of premises and equipment | (449 | ) | (678 | ) | ||||
|
| ||||||||
| Net cash used in investing activities | (10,541 | ) | (4,897 | ) | ||||
|
| ||||||||
| Financing activities: | ||||||||
| Net increase in deposits | 5,596 | 624 | ||||||
| Net increase (decrease) in borrowings | 1,180 | 282 | ||||||
| Dividends paid | (642 | ) | (562 | ) | ||||
| Purchases of treasury stock | (1,075 | ) | (1,055 | ) | ||||
| Exercise of stock options and issuance of treasury stock | 322 | 506 | ||||||
| Sales of treasury stock | 69 | 31 | ||||||
|
| ||||||||
| Net cash provided by (used in) financing activities | 5,450 | (174 | ) | |||||
|
| ||||||||
| Decrease in cash and cash equivalents | (3,010 | ) | (2,210 | ) | ||||
| Cash and cash equivalents at beginning of period | 14,090 | 16,414 | ||||||
|
| ||||||||
| Cash and cash equivalents at March 31 | $ | 11,080 | $ | 14,204 | ||||
|
| ||||||||
|
| ||||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 2,472 | $ | 2,145 | ||||
| Income taxes | $ | 125 | $ | 300 | ||||
| Supplemental disclosures of non-cash flow activities: | ||||||||
| Loans transferred to other real estate owned | $ | 0 | $ | 0 | ||||
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 2004 Annual Report on Form 10-K. Results of operations for interim periods are not necessarily indicative of the results that may be expected for the year. Certain amounts in the 2004 consolidated financial statements have been reclassified to conform to the 2005 presentation.
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except share data):
| Three Months Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | |||||||
| Numerator: | ||||||||
| Net income | $ | 1,708 | $ | 1,641 | ||||
| Denominator: | ||||||||
| Basic earnings per share- | ||||||||
| weighted average shares | 3,055,021 | 3,119,404 | ||||||
| Effect of dilutive securities- | ||||||||
| stock options | 25,997 | 26,862 | ||||||
| Diluted earnings per share- | ||||||||
| adjusted weighted average shares | 3,081,018 | 3,146,266 | ||||||
| Net income per share: | ||||||||
| Basic | $ | 0.56 | $ | 0.53 | ||||
| Diluted | $ | 0.55 | $ | 0.52 | ||||
8
The balance of goodwill, net of accumulated amortization, totaled $1,355,000 at March 31, 2005 and December 31, 2004. The balance of intangible assets, net of accumulated amortization, totaled $1,421,000 and $1,317,000 at March 31, 2005 and December 31, 2004, respectively.
The following table summarizes the Corporation’s intangible assets, which are subject to amortization, as of March 31, 2005 and December 31, 2004.
| 2005 | 2004 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||
| Core deposit intangible | $ | 2,968 | $ | (1,749 | ) | $ | 2,968 | $ | (1,699 | ) | ||||
| Other intangible assets | 316 | (114 | ) | 160 | (112 | ) | ||||||||
| Total | $ | 3,284 | $ | (1,863 | ) | $ | 3,128 | $ | (1,811 | ) | ||||
Amortization expense totaled $52,000 for the three months ended March 31, 2005 and March 31, 2004, respectively. The amortization expense will be approximately $156,000 for the remainder of 2005 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, 2005 no impairment had been recorded. Changes in the carrying value of capitalized mortgage servicing rights are summarized as follows:
| (in thousands) | |||||
| Balance, January 1, 2005 | $ | 1,405 | |||
| Servicing rights capitalized | 132 | ||||
| Amortization of servicing rights | (73 | ) | |||
| Impairment of servicing rights | 0 | ||||
| Balance, March 31, 2005 | $ | 1,464 | |||
The Corporation services loans for others with unpaid principal balances at March 31, 2005 and December 31, 2004 of approximately $145,685,000, and $147,958,000, respectively.
The following table shows the future estimated amortization expense for mortgage servicing rights based on existing balances as of March 31, 2005. The Corporation’s actual amortization expense in any given period may be significantly different from the estimated amounts displayed depending on the amount of additional servicing rights, changes in mortgage interest rates, actual prepayment speeds, and market conditions.
9
| Amount (in thousands) | |||||
|---|---|---|---|---|---|
| For the nine months ended December 31, 2005 | $ | 95 | |||
| For the year ended December 31, 2006 | 120 | ||||
| For the year ended December 31, 2007 | 113 | ||||
| For the year ended December 31, 2008 | 106 | ||||
| For the year ended December 31, 2009 | 99 | ||||
| For the year ended December 31, 2010 | 93 | ||||
| Thereafter | 838 | ||||
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 March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in thousands, except per share data) | 2005 | 2004 | ||||||
| Net Income as reported | $ | 1,708 | $ | 1,641 | ||||
| Deduct: Stock-based compensation, net of | ||||||||
| tax, that would have been reported | ||||||||
| if the fair value based method had | ||||||||
| been applied to all awards | (131 | ) | (100 | ) | ||||
| Pro forma net income | $ | 1,577 | $ | 1,541 | ||||
| Basic Earnings Per Share As Reported | $ | 0.56 | $ | 0.53 | ||||
| Pro Forma | 0.52 | 0.49 | ||||||
| Diluted Earnings Per Share As Reported | $ | 0.55 | $ | 0.52 | ||||
| Pro Forma | 0.51 | 0.49 | ||||||
10
Schedule 6
The following discussion provides information about Princeton National Bancorp, Inc.‘s (“PNBC” or the “Corporation”) financial condition and results of operations for the quarters ended March 31, 2005 and 2004. This discussion should be read in conjunction with the attached consolidated financial statements and notes thereto. Certain statements in this report constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, but not limited to those statements that include the words “believes”, “expects”, “anticipates”, “estimates”, or similar expressions. PNBC cautions that such forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Such risks and uncertainties include potential change in interest rates, competitive factors in the financial services industry, general economic conditions, the effect of new legislation, and other risks detailed in documents filed by the Corporation with the Securities and Exchange Commission from time to time.
Net income for the first quarter of 2005 was $1,708,000, or basic earnings per share of $0.56 (diluted earnings per share of $0.55), as compared to net income of $1,641,000 in the first quarter of 2004, or basic earnings per share of $0.53 (diluted earnings per share of $0.52). This represents an increase of $67,000 (4.1%) or $.03 per basic and diluted share. The increase in net income is due to an improving net interest margin, coupled with an increase in average interest-earning assets. This increase more than offset a decrease in the amount of non-interest income and an increase in non-interest expenses. The annualized return on average assets and return on average equity were 1.06% and 13.24%, respectively, for the first quarter of 2005, compared with 1.09% and 12.95% for the first quarter of 2004.
Net interest income before provision for loan losses was $5,375,000 for the first quarter of 2005, compared to $5,009,000 for the first quarter of 2004 (an increase of $366,000 or 7.3%). This increase is a result of an increase in average interest-earning assets of $41.7 million over the past twelve months. For the three months ended March 31, 2005, average interest-earning assets were $595.6 million compared to $553.9 million for the three months ended March 31, 2004. The resulting net yield on interest-earning assets (on a fully taxable equivalent basis) increased from 3.90% in the first quarter of 2004 to 3.94% in the first quarter of 2005.
11
PNBC did not record a loan loss provision in the first quarter of 2005, due to a low amount of non-performing loans and the low amount of net charge-offs in the quarter, compared to a provision of $100,000 in the first quarter of 2004. The provision expense recorded each quarter is determined by management’s evaluation of the risk characteristics of the loan portfolio. For the first quarter of 2005, PNBC had net charge-offs of $11,000, compared to net charge-offs of $71,000 for the first quarter of 2004.
Non-interest income totaled $1,875,000 for the first quarter of 2005, as compared to $2,039,000 in the first quarter of 2004, a decrease of $164,000 (or 8.0%). This is a result of a decrease in the amount of gains recorded from the sales of securities available-for-sale of $162,000 from $182,000 for the first three months of 2004 to $20,000 for the first three months of 2005. Partially offsetting the decrease in security gains was an increase in trust and farm management fees of $51,000, an increase of 14.7%. Annualized non-interest income as a percentage of total average assets decreased to 1.15% for the first three months of 2005, compared to 1.34% for the same period in 2004.
Total non-interest expense for the first quarter of 2005 was $4,997,000, an increase of $213,000 (or 4.5%) from $4,784,000 in the first quarter of 2004. This increase is attributable to salaries/employee benefits, which increased $262,000 (or 9.7%). Collectively, all other categories of non-interest expense decreased $49,000 (or 2.3%). Annualized non-interest expense as a percentage of total average assets also decreased to 3.06% for the first three months of 2005, compared to 3.15% for the same period in 2004.
Income tax expense totaled $545,000 for the first quarter of 2005, as compared to $523,000 for the first quarter of 2004. The effective tax rate was 24.2% for both the three month period ended March 31, 2005 and the three month period ended March 31, 2004.
Total assets at March 31, 2005 increased to $661,327,000 from $655,738,000 at December 31, 2004 (an increase of $5.6 million or 0.9%). Total deposits at March 31, 2005 increased to $579,157,000 from $573,561,000 at December 31, 2004 (an increase of $5.6 million or 1.0%). Comparing categories of deposits at March 31, 2005 to the December 31, 2004 totals, time deposits increased by $8.3 million (or 3.3%) and savings deposits increased $2.9 million (or 5.0%). Conversely, interest-bearing demand deposits decreased $3.3 million (or 1.7%) and demand deposits decreased $2.3 million (or 3.0%). Borrowings, consisting of customer repurchase agreements, notes payable, treasury, tax, and loan (“TT&L”) deposits, federal funds purchased, and Federal Home Loan Bank advances, increased from $25,535,000 at December 31, 2004 to $26,715,000 at March 31, 2005 (an increase of $1.2 million or 4.6%). Investment balances totaled $183,590,000 at March 31, 2005, compared to $188,809,000 at December 31, 2004 (a decrease of $5.2 million or 2.8%).
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Loan balances, net of unearned interest, increased to $423,189,000 at March 31, 2005, compared to $410,044,000 at December 31, 2004 (an increase of $13.1 million or 3.2%). This increase was in the commercial and residential real estate areas. Non-performing loans increased to $2,005,000 or 0.47% of net loans at March 31, 2005, as compared to $328,000 or 0.08% of net loans at December 31, 2004. Although non-performing loans increased from the low level at December 31, 2004, this increase was attributable to one commercial credit, which continues to pay down and for which management expects no future losses.
For the three months ended March 31, 2005, the subsidiary bank charged off $59,000 of loans and had recoveries of $48,000, compared to charge-offs of $152,000 and recoveries of $81,000 during the three months ended March 31, 2004. The allowance for loan losses is based on factors that include the overall composition of the loan portfolio, types of loans, underlying collateral, past loss experience, loan delinquencies, substandard and doubtful credits, and such other factors that, in management’s reasonable judgment, warrant consideration. The adequacy of the allowance is monitored monthly. At March 31, 2005, the allowance was $2,513,000 which is 125.3% of non-performing loans and 0.59% of total loans, compared with $2,524,000 which was 769.5% of non-performing loans and 0.62% of total loans at December 31, 2004.
At March 31, 2005, impaired loans totaled $1,887,000 compared to $175,000 at December 31, 2004, this increase is also attributable to the aforementioned commercial credit in non-performing loans. The total amount of loans ninety days or more past due and still accruing interest at March 31, 2005 and December 31, 2004 was $0. The balances of non-performing and impaired loans continue to be well below industry averages. There was no specific loan loss reserve established for impaired loans as of March 31, 2005 compared to a specific loan loss reserve of $3,000 at December 31, 2004. PNBC’s management analyzes the allowance for loan losses monthly and believes the current level of allowance is adequate to meet probable losses as of March 31, 2005.
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, 2005 total risk-based capital of PNBC was 11.18%, compared to 11.49% at December 31, 2004. The Tier 1 capital ratio decreased from 7.62% at December 31, 2004, to 7.51% at March 31, 2005. Total stockholders’ equity to total assets at March 31, 2005 decreased to 7.81% from 7.99% at December 31, 2004.
Liquidity is measured by a financial institution’s ability to raise funds through deposits, borrowed funds, capital, or the sale of assets. Additional sources of liquidity include cash flow from the repayment of loans and the maturity of investment securities. Major uses of cash include the origination of loans and purchase of investment securities. Cash flows provided by operating and financing activities, offset by
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those used in investing activities, resulted in a net decrease in cash and cash equivalents of $3,010,000 from December 31, 2004 to March 31, 2005. This decrease was primarily due to a net increase in loans, offset by a net increase in deposits and a net increase in the investment portfolio. For more detailed information, see PNBC’s Consolidated Statements of Cash Flows.
The subsidiary bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the subsidiary bank has in particular classes of financial instruments.
The subsidiary bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The subsidiary bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. At March 31, 2005 commitments to extend credit and standby letters of credit were approximately $103,722,000 and $3,635,000, 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.
The Company is finalizing the construction plans for the facility in Aurora, Illinois. Construction of the facility will begin in the second quarter of 2005, with the facility opening in winter of 2005/2006. 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.
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On February 22, 2005, the Company announced the acquisition of Somonauk FSB Bancorp, Inc. (“Somonauk”). Somonauk has full-service locations in Somonauk, Sandwich, Newark and Millbrook, Illinois with an additional location being constructed in Plano, Illinois. These locations will compliment the existing PNB locations and expand the Company’s presence in high-growth markets. Total assets of Somonauk FSB Bancorp, Inc. were $210.2 million at December 31, 2004. Once the acquisition is completed, it is anticipated the Company’s assets will total approximately $890 million. The registration statement on Form S-4 for the acquisition has been filed with the SEC, the appropriate regulatory approvals have been applied for and it is anticipated the closing will take place on or about July 31, 2005.
There are various claims pending against PNBC’s subsidiary bank, arising in the normal course of business. Management believes, based upon consultation with legal counsel, that liabilities arising from these proceedings, if any, will not be material to PNBC’s financial condition.
There has been no material change in market risk since December 31, 2004, as reported in PNBC’s 2004 Annual Report on Form 10-K.
In September 2004, the FASB issued Staff Position No. EITF 03-1-1 which delayed the effective date for the measurement recognition guidance contained in the Emerging Issues Task Force (EITF) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” which was effective for fiscal years ending after December 15, 2003. Until new guidance is issued, companies must continue to comply with the disclosure requirements of EITF 03-1 and all relevant measurement and recognition requirements of other accounting literature. EITF 03-1 requires certain quantitative disclosures for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, that are impaired at the balance sheet date, but for which an other-than-temporary impairment has not been recognized. The Corporation will complete its evaluation of the impact upon issuance of final guidance from the FASB.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) (123R), “Share-Based Payment”, an amendment of FASB Statements No. 123 and 95. SFAS No. 123R will require compensation cost relating to share-based payment transactions be recognized in the consolidated financial statements, effective for the Corporation’s fiscal year beginning January 1, 2006 based on recent
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SEC guidance. The Corporation has not yet completed its evaluation of the standard, but anticipates that it will result in a reduction in earnings and earnings per share, beginning with the first quarter of 2006.
The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America and practices within the banking industry which require the measurement of financial condition and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.
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The following table sets forth (in thousands) details of average balances, interest income and expense, and resulting annualized yields/costs for the Corporation for the periods indicated, reported on a fully taxable equivalent basis, using a tax rate of 34%.
| Three Months Ended, March 31, 2005 | Three Months Ended, March 31, 2004 |
||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Average Balance | Interest | Yield/ Cost | Average Balance | Interest | Yield/ Cost |
||||||||||||||||||||||
| Average Interest-Earning Assets | |||||||||||||||||||||||||||
| Interest-bearing deposits | $ | 249 | $ | 1 | 2.20% | $ | 930 | $ | 2 | 0.83% | |||||||||||||||||
| Taxable investment securities | 115,620 | 938 | 3.29% | 105,366 | 836 | 3.19% | |||||||||||||||||||||
| Tax-exempt investment securities | 69,860 | 1,162 | 6.75% | 61,601 | 1,050 | 6.85% | |||||||||||||||||||||
| Federal funds sold | 96 | 1 | 2.65% | 993 | 2 | 0.95% | |||||||||||||||||||||
| Net loans | 409,781 | 6,306 | 6.24% | 385,001 | 5,720 | 5.98% | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||
| Total interest-earning assets | 595,605 | 8,408 | 5.72% | 553,891 | 7,610 | 5.53% | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||
| Average non-interest earning assets | 57,761 | 53,736 | |||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
| Total average assets | $ | 653,366 | $ | 607,627 | |||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
| Average Interest-Bearing Liabilities | |||||||||||||||||||||||||||
| Interest-bearing demand deposits | $ | 190,822 | 616 | 1.31% | $ | 178,686 | 479 | 1.08% | |||||||||||||||||||
| Savings deposits | 68,341 | 50 | 0.30% | 58,530 | 55 | 0.38% | |||||||||||||||||||||
| Time deposits | 243,159 | 1,775 | 2.96% | 235,325 | 1,604 | 2.74% | |||||||||||||||||||||
| Interest-bearing demand notes | |||||||||||||||||||||||||||
| issued to the U.S. Treasury | 604 | 3 | 1.97% | 539 | 1 | 0.81% | |||||||||||||||||||||
| Federal funds purchased and | |||||||||||||||||||||||||||
| securities repurchase agreements | 19,230 | 101 | 2.14% | 11,557 | 18 | 0.64% | |||||||||||||||||||||
| Advances from Federal Home Loan Bank | 5,000 | 68 | 5.48% | 5,110 | 70 | 5.49% | |||||||||||||||||||||
| Borrowings | 879 | 10 | 4.60% | 1,050 | 7 | 2.85% | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||
| Total interest-bearing liabilities | 528,035 | 2,623 | 2.01% | 490,797 | 2,234 | 1.83% | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||
| Net yield on average interest-earning assets | $ | 5,784 | 3.94% | $ | 5,376 | 3.90% | |||||||||||||||||||||
|
| |||||||||||||||||||||||||||
| Average non-interest-bearing liabilities | 73,022 | 65,870 | |||||||||||||||||||||||||
| Average stockholders’ equity | 52,309 | 50,960 | |||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
| Total average liabilities and | |||||||||||||||||||||||||||
| stockholders' equity | $ | 653,366 | $ | 607,627 | |||||||||||||||||||||||
The following table reconciles tax-equivalent net interest income (as shown above) to net interest income as reported on the Consolidated Statements of Income.
| For the Three Months Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | |||||||
| Net interest income as stated | $ | 7,998 | $ | 7,244 | ||||
| Tax equivalent adjustment-investments | 395 | 357 | ||||||
| Tax equivalent adjustment-loans | 15 | 9 | ||||||
| Tax equivalent net interest income | $ | 8,408 | $ | 7,610 | ||||
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| (a) | Disclosure controls and procedures. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2005. Our disclosure controls and procedures are the controls and other procedures that we designed to ensure that we record, process, summarize and report in a timely manner the information we must disclose in reports that we file with or submit to the SEC. Tony J. Sorcic, President and Chief Executive Officer, and Todd D. Fanning, Vice-President and Chief Financial Officer, reviewed and participated in this evaluation. Based on this evaluation, Messrs. Sorcic and Fanning concluded that, as of the date of their evaluation, our disclosure controls were effective. |
| (b) | Internal controls. There have not been any significant changes in our internal accounting controls or in other factors during the quarter ended March 31, 2005 that could significantly affect those controls. |
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INDEX TO EXHIBITS
| Exhibit Number |
Exhibit |
| 31.1 | Certification of Tony J. Sorcic required by Rule 13a-14(a). |
| 31.2 | Certification of Todd D. Fanning required by Rule 13a-14(a). |
| 32.1 | Certification of Tony J. Sorcic required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
| 32.2 | Certification of Todd D. Fanning required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
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