10-Q 1 pnb024005_10q.txt PRINCETON NATIONAL BANCORP, INC. FORM 10-Q 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, 2002 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 Identification No.) of incorporation or organization) 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 _____ As of July 31, 2002, the registrant had outstanding 3,306,826 shares of its $5 par value common stock. Page 1 of 17 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 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 9, 2002, 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 -------------- ------------ ------------ Craig O. Wesner 2,539,579 3,467 209,644 Don S. Browning 2,292,941 250,105 209,644 Donald E. Grubb 2,494,518 48,528 209,644 Ervin I. Pietsch 2,541,999 1,047 209,644 In addition, the following directors' terms of offices continued after the meeting: Gary C. Bruce Thomas R. Lasier Sharon L. Covert Thomas M. Longman John R. Ernat James B. Miller Dr. Harold C. Hutchinson, Jr. Stephen W. Samet Mark Janko Tony J. Sorcic ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 99.1 Certification of Tony J. Sorcic 99.2 Certification of Todd D. Fanning (b) No reports on Form 8-K were filed by the Corporation for the quarter ended June 30, 2002. 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 12, 2002 By /s/ Tony J. Sorcic ----------------------------------------- Tony J. Sorcic President & Chief Executive Officer Date: August 12, 2002 By /s/ Todd D. Fanning ----------------------------------------- Todd D. Fanning Chief Financial Officer 2 PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY Schedule 1 CONSOLIDATED BALANCE SHEETS (unaudited) (dollars in thousands, except share data)
JUNE 30, DECEMBER 31, 2002 2001 --------- --------- ASSETS Cash and due from banks $ 12,348 $ 16,740 Interest-bearing deposits with financial institutions 1,172 6,586 Federal funds sold 6,500 10,400 --------- --------- Total cash and cash equivalents 20,020 33,726 Loans held for sale, at lower of cost or market 2,390 8,490 Investment securities: Available-for-sale, at fair value 145,972 128,605 Held-to-maturity, at amortized cost 14,107 16,055 --------- --------- Total investment securities 160,079 144,660 --------- --------- Loans: Gross loans, net of unearned interest 347,956 333,399 Allowance for loan losses (2,725) (2,300) --------- --------- Net loans 345,231 331,099 --------- --------- Premises and equipment, net of accumulated depreciation 13,687 13,766 Bank-owned life insurance 13,317 12,452 Interest receivable 4,901 5,799 Goodwill, net of accumulated amortization 3,119 3,218 Intangible assets, net of accumulated amortization 845 668 Other assets 1,293 1,447 --------- --------- TOTAL ASSETS $ 564,882 $ 555,325 ========= ========= LIABILITIES Deposits: Demand $ 47,932 $ 58,378 Interest-bearing demand 129,661 116,587 Savings 53,331 51,966 Time 258,305 254,807 --------- --------- Total deposits 489,229 481,738 Borrowings: Customer repurchase agreements 9,913 12,217 Advances from Federal Home Loan Bank 6,067 6,451 Interest-bearing demand notes issued to the U.S. Treasury 1,623 377 Notes payable 1,450 1,550 --------- --------- Total borrowings 19,053 20,595 Other liabilities 5,602 5,492 --------- --------- TOTAL LIABILITIES 513,884 507,825 --------- --------- STOCKHOLDERS' EQUITY Common stock: $5 par value, 7,000,000 shares authorized; 4,139,841 issued 20,699 20,699 Surplus 6,451 6,416 Retained earnings 34,168 31,937 Accumulated other comprehensive income, net of tax 1,753 537 Less: Cost of 833,018 and 835,831 treasury shares at June 30, 2002 and December 31, 2001, respectively (12,073) (12,089) --------- --------- TOTAL STOCKHOLDERS' EQUITY 50,998 47,500 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 564,882 $ 555,325 ========= =========
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 For the Six Months Ended June 30 Ended June 30 2002 2001 2002 2001 ---------- ---------- ---------- ---------- INTEREST INCOME: Interest and fees on loans $ 6,264 $ 7,165 $ 12,545 $ 14,618 Interest and dividends on investment securities 1,900 1,769 3,811 3,520 Interest on federal funds sold 35 35 70 88 Interest on interest-bearing time deposits in other banks 19 34 44 59 ---------- ---------- ---------- ---------- Total interest income 8,218 9,003 16,470 18,285 INTEREST EXPENSE: Interest on deposits 3,213 4,241 6,661 8,658 Interest on borrowings 129 388 272 871 ---------- ---------- ---------- ---------- Total interest expense 3,342 4,629 6,933 9,529 ---------- ---------- ---------- ---------- NET INTEREST INCOME 4,876 4,374 9,537 8,756 Provision for loan losses 150 25 375 75 ---------- ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,726 4,349 9,162 8,681 NON-INTEREST INCOME: Trust & farm management fees 280 274 583 602 Service charges on deposit accounts 655 575 1,326 1,096 Service charges on loans 25 76 68 182 Other service charges 124 79 247 233 Gain on sales of securities available-for-sale 1 108 41 203 Brokerage fee income 165 218 344 304 Mortgage banking income 278 236 549 389 Other operating income 211 85 474 309 ---------- ---------- ---------- ---------- Total non-interest income 1,739 1,651 3,632 3,318 NON-INTEREST EXPENSE: Salaries and employee benefits 2,430 2,318 4,871 4,568 Occupancy 303 282 601 557 Equipment expense 371 321 727 630 Federal insurance assessments 53 49 106 98 Goodwill amortization 49 105 98 210 Intangible assets amortization 3 3 6 6 Data processing 187 162 371 313 Other operating expense 859 871 1,710 1,743 ---------- ---------- ---------- ---------- Total non-interest expense 4,255 4,111 8,490 8,125 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 2,210 1,889 4,304 3,874 Income tax expense 627 580 1,203 1,086 ---------- ---------- ---------- ---------- NET INCOME $ 1,583 $ 1,309 $ 3,101 $ 2,788 ========== ========== ========== ========== NET INCOME PER SHARE: Basic 0.48 0.40 0.94 0.83 Diluted 0.48 0.39 0.93 0.83 Basic weighted average shares outstanding 3,305,532 3,312,858 3,304,989 3,356,194 Diluted weighted average shares outstanding 3,325,099 3,322,210 3,321,616 3,364,569
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 For the Six Months Ended June 30 Ended June 30 2002 2001 2002 2001 ------- ------- ------- ------- Net Income 1,583 $ 1,309 $ 3,101 $ 2,788 Other comprehensive income, net of tax Unrealized holding gain (loss) arising during the period 1,936 (123) 1,242 495 Less: Reclassification adjustment for realized gains included in net income (1) (66) (26) (124) ------- ------- ------- ------- Other comprehensive income 1,935 (189) 1,216 371 ------- ------- ------- ------- Comprehensive income 3,518 $ 1,120 $ 4,317 $ 3,159 ======= ======= ======= =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 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 2002 2001 -------- -------- Balance, January 1 $ 47,500 $ 47,476 Net income 3,101 2,788 Cash dividends ($0.26 per share in 2002, and $.50 per share in 2001) (859) (1,683) Other comprehensive income, net of tax 1,216 371 Purchases of treasury stock (0 shares in 2002, and 186,000 shares in 2001) 0 (2,912) Exercise stock options and re-issuance of treasury stock (686 shares in 2002 and 0 in 2001) 2 0 Sales of treasury stock (2,127 shares in 2002, and 2,606 shares in 2001) 38 41 -------- -------- Balance, June 30 $ 50,998 $ 46,081 ======== ========
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 Six Months Ended June 30 2002 2001 -------- -------- OPERATING ACTIVITIES: Net income $ 3,101 $ 2,788 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 732 590 Provision for loan losses 375 75 Amortization of goodwill 98 210 Amortization of other intangible assets 6 6 Amortization of premiums on investment securities, net of accretion 407 5 Gain on securities transactions, net (41) (203) Gain on sale of premises and equipment 0 (122) FHLB stock dividends (46) (57) Loans originated for sale (9,166) (8,395) Proceeds from sales of loans originated for sale 15,266 7,492 (Decrease) increase in interest payable (381) 103 Decrease in interest receivable 898 1,205 Increase in other assets (893) (8,727) Decrease in other liabilities (117) (1,261) -------- -------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 10,239 (6,291) -------- -------- INVESTING ACTIVITIES: Proceeds from sales of investment securities available-for-sale 1,308 15,206 Proceeds from maturities of investment securities available-for-sale 22,855 14,510 Purchase of investment securities available-for-sale (38,394) (31,236) Proceeds from maturities of investment securities held-to-maturity 1,105 531 Purchase of investment securities held-to-maturity (789) (1,275) Proceeds from sales of premises and equipment 0 175 Net (increase) decrease in loans (14,507) 3,098 Purchases of premises and equipment (653) (1,712) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (29,075) (703) -------- -------- FINANCING ACTIVITIES: Net increase in deposits 7,491 18,519 Net decrease in borrowings (1,542) (5,852) Dividends paid (859) (1,683) Purchases of treasury stock 0 (2,912) Exercise stock options 2 0 Sales of treasury stock 38 41 -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 5,130 8,113 -------- -------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (13,706) 1,119 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 33,726 18,979 -------- -------- CASH AND CASH EQUIVALENTS AT JUNE 30 $ 20,020 $ 20,098 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 7,314 $ 9,426 Income taxes $ 943 $ 1,779
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 2001 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 2001 consolidated financial statements have been reclassified to conform to the 2002 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, 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Numerator: Net income $ 1,583 $ 1,309 $ 3,101 $ 2,788 Denominator: Basic earnings per share- weighted average shares 3,305,532 3,312,858 3,304,989 3,356,194 Effect of dilutive securities- stock options 19,567 9,352 16,627 8,375 ---------- ---------- ---------- ---------- Diluted earnings per share- adjusted weighted average shares 3,325,099 3,322,210 3,321,616 3,364,569 Net income per share: Basic $ 0.48 $ 0.40 $ 0.94 $ 0.83 Diluted $ 0.48 $ 0.39 $ 0.93 $ 0.83
8 (2) IMPACT OF NEW ACCOUNTING STANDARDS -------------------------------------- In July 2001, the FASB issued Statement 141, "Business Combinations" (FAS 141) and Statement 142, "Goodwill and Other Intangible Assets" (FAS 142). FAS 141 required that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. FAS 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. FAS 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. As required under FAS 142, the Corporation adopted FAS 142 effective January 1, 2002. The Corporation completed its evaluation for impairment of goodwill during the six months ended June 30, 2002. No impairment was deemed necessary as a result of the Corporation's analysis. The balance of goodwill, net of accumulated amortization, totaled $3,218,000 at December 31, 2001. Of this amount, $1,355,000, which had annual amortization of $226,000, will no longer be amortized. The remaining balance of $1,863,000 relates to branch acquisitions and, in accordance with the pronouncement, will continue to be amortized. The amortization expense for the second quarter of 2002 was $49,000 and $98,000 for the first six months of 2002. The amortization expense will be approximately $98,000 for the remainder of 2002 and will be approximately $196,000 for each of the next five years. The following is a summary of net income and earnings per share for the three and six months ended June 30, 2002 and 2001, as adjusted to remove the amortization of goodwill:
Three Months Ended June 30, Six Months Ended, June 30 --------------------------- ------------------------- (in thousands, except per share data) 2002 2001 2002 2001 Net Income As Reported $ 1,583 $ 1,309 $ 3,101 $ 2,788 Add back goodwill amortization -- 57 -- 114 Net income as adjusted $ 1,583 $ 1,366 $ 3,101 $ 2,902 Basic Earnings Per Share As Reported $ 0.48 $ 0.40 $ 0.94 $ 0.83 Add back goodwill amortization -- .01 -- .03 Net income as adjusted $ 0.48 $ 0.41 $ 0.94 $ 0.86 Diluted Earnings Per Share As Reported $ 0.48 $ 0.39 $ 0.93 $ 0.83 Add back goodwill amortization -- .02 -- .03 Net income as adjusted $ 0.48 $ 0.41 $ 0.93 $ 0.86
The following table summarizes the Corporation's intangible assets, which are subject to amortization, as of June 30, 2002:
Gross Carrying Accumulated Amount Amortization ------ ------------ Mortgage servicing rights $ 1,538 $ (765) Other intangible assets 160 (88) -------- ------- Total $ 1,698 $ (853) ======== =======
9 AGGREGATE AMORTIZATION EXPENSE: For the Quarter Ended June 30, 2002 $ 60 For the Six Months Ended, June 30, 2002 $ 124 Amortization expense for mortgage servicing rights is included as part of mortgage banking income. ESTIMATED AMORTIZATION EXPENSE: For the Six Months Ended December 31, 2002 $ 123 For the Year Ended December 31, 2003 $ 214 For the Year Ended December 31, 2004 $ 167 For the Year Ended December 31, 2005 $ 126 For the Year Ended December 31, 2006 $ 93 For the Year Ended December 31, 2007 $ 63 In June 2002, the FASB issued Statement 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This Statement is effective for exit or disposal activities that are initiated after December 31, 2002. Adoption of this statement is not expected to have a material effect on the Corporation's consolidated financial statements. 10 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, 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, 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 2002 was $1,583,000, or basic and diluted earnings per share of $0.48, as compared to net income of $1,309,000 in the second quarter of 2001, or basic earnings per share of $0.40 (diluted earnings per share of $0.39). This represents an increase of $274,000 (20.9%) or $.08 per basic share (20.0%). For the first six months of 2002, net income was $3,101,000, or basic earnings per share of $0.94 (diluted earnings per share of $0.93). Net income for the first six months of 2001 was $2,788,000, or basic and diluted earnings per share of $0.83. This represents an increase of $313,000 (or 11.2%) during the first six months of 2002 over the same period in 2001, and an increase of $0.11 per basic share (13.3%). Net income for the first six months of 2002 was positively impacted by the discontinuing of a portion of the Corporation's goodwill (consistent with the provisions of FAS 142) of $114,000, as well as an improving net interest margin and increased fee income. Additionally, net income for the first six months of 2001 includes a gain on sale of premises of $122,000. The annualized return on average assets and return on average equity were 1.16% and 12.97%, respectively, for the second quarter of 2002, compared with 1.02% and 11.55% for the second quarter of 2001. For the six-month periods, the annualized return on average assets and average equity were 1.14% and 12.92%, respectively for 2002, compared to 1.09% and 12.23%, respectively for 2001. 11 Net interest income before provision for loan losses was $4,876,000 for the second quarter of 2002, compared to $4,374,000 for the second quarter of 2001 (an increase of $502,000 or 11.5%). This increase is a result of both an increase in average interest-earning assets over the past twelve months and an improving net interest margin. For the three months ended June 30, 2002, average interest-earning assets were $500.0 million compared to $474.4 million for the three months ended June 30, 2001. Additionally, the net yield on interest-earning assets (on a fully taxable equivalent basis) increased from 3.92% in the second quarter of 2001 to 4.17% in the second quarter of 2002. Net interest income before provision for loan losses was $9,537,000 for the first six months of 2002, compared to $8,756,000 for the first six months of 2001 (an increase of $781,000 or 8.9%). This increase is a result of an increase in average interest-earning assets and an improving net interest margin. For the six months ended June 30, 2002, average interest-earning assets were $498.5 million compared to $475.5 million for the six months ended June 30, 2001. Additionally, the net yield on interest-earning assets (on a fully taxable equivalent basis) increased from 3.93% in the first half of 2001 to 4.12% in the first half of 2002. PNBC recorded a loan loss provision of $150,000 in the second quarter of 2002 compared to $25,000 in the second quarter of 2001. For the six-month comparable periods, PNBC recorded a loan loss provision of $375,000 in 2002 and $75,000 in 2001. The provision expense taken each quarter is determined by the risk characteristics of the loan portfolio, as well as the net charge-off activity for the quarter. Non-interest income totaled $1,739,000 for the second quarter of 2002, as compared to $1,651,000 during the second quarter of 2001, an increase of $88,000 (or 5.3%). The increase is a result of other operating income increasing by $126,000 (or 148.2%) and service charges on deposit accounts increasing $80,000 (or 13.9%). These increases more than offset a decrease in gains from sales of securities available- for-sale of $107,000. For the six-month periods, non-interest income totaled $3,632,000 in 2002, compared to $3,318,000 in 2001. This represents an increase of $314,000 (or 9.5%). Once again, increases in service charges on deposit accounts (increase of $230,000, or 21.0%) and other operating income (increase of $165,000, or 53.4%) were the reason for the increase, offsetting a decrease in gains from sales of available- for-sale securities of $162,000 (or 79.8%). The increases in other operating income both for the three-month and six-month comparable periods are due to the investment by the Corporation in bank-owned life insurance policies in June, 2001, the earnings from which are included in other operating income. Additionally, PNBC recorded a $122,000 gain from the sale of the subsidiary bank's downtown Oglesby branch building during the first six months of 2001. Total non-interest expense for the second quarter of 2002 was $4,255,000, an increase of $144,000 (or 3.5%) from $4,111,000 in the second quarter of 2001. The largest increase was in salaries/employee benefits, which increased $112,000 (or 4.8%). Equipment and data processing expenses also increased from the second quarter of 2001 to the second quarter of 2002 by $50,000 (15.6%) and $25,000 (15.4%), respectively. These increases offset the decrease in goodwill amortization of $57,000 from the second quarter of 2001 as compared to the second quarter of 2002. Year-to-date non-interest expenses for 2002 of $8,490,000 have increased $365,000 (or 4.5%) from the same period in 2001, but are at expected levels. The most notable increases are again in salaries/employee benefits ($303,000 or 6.6%), equipment expense ($97,000 or 15.4%), and data processing ($58,000 or 18.5%), which were offset by the decrease in goodwill amortization of $114,000 (or 54.3%). 12 INCOME TAXES ------------ Income tax expense totaled $627,000 for the second quarter of 2002, as compared to $580,000 for the second quarter of 2001. For the first six months of 2002, income tax expenses were $1,203,000 compared to $1,086,000 for the first six months of 2001. Additionally, PNBC also recognized a tax benefit of approximately $90,000 from the previously mentioned sale of the Oglesby facility in the first quarter of 2001. As a result, the effective tax rate was 28.0% for the six months ended June 30, 2002 and June 30, 2001. ANALYSIS OF FINANCIAL CONDITION ------------------------------- Total assets at June 30, 2002 increased to $564,882,000 from $555,325,000 at December 31, 2001 (an increase of $9.6 million or 1.7%). Total deposits at June 30, 2002 increased to $489,229,000 from $481,738,000 from December 31, 2001 (an increase of $7.5 million or 1.6%). In comparing categories of deposits at June 30, 2002 to the December 31, 2001 totals, three categories had increasing balances: interest- bearing demand deposits (increase of $13.1 million or 11.2%), time deposits (increase of $3.5 million or 1.4%), and savings deposits (increase of $1.4 million or 2.6%), while demand deposits decreased by $10.4 million (or 17.9%). 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 $20,595,000 at December 31, 2001 to $19,053,000 at June 30, 2002 (decrease of $1.5 million or 8.1%). Investments totaled $160,079,000 at June 30, 2002, compared to $144,660,000 at December 31, 2001 (an increase of $15.4 million or 10.7%). Loan demand increased during the second quarter of 2002. Loan balances, net of unearned interest, increased to $350,346,000 at June 30, 2002, compared to $341,889,000 at December 31, 2001 (an increase of $8.5 million or 2.5%). Non-performing loans totaled $6,872,000 or 1.96% of net loans at June 30, 2002, as compared to $5,718,000 or 1.72% of net loans at December 31, 2001. For the six months ended June 30, 2002, the subsidiary bank charged off $289,000 of loans and had recoveries of $339,000, compared to charge-offs of $461,000 and recoveries of $129,000 during the six months ended June 30, 2001. The allowance for loan losses is based on factors that include the overall composition of the loan portfolio, types of loans, past loss experience, loan delinquencies, potential 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, 2002, the allowance was $2,725,000 which is 39.7% of non-performing loans and 0.78% of total loans, compared with $2,300,000 which was 40.2% of non-performing loans and 0.67% of total loans at December 31, 2001. At June 30, 2002, impaired loans totaled $5,582,000 compared to $2,014,000 at December 31, 2001. Loans 90 days or more past due and still accruing interest at June 30, 2002 were $10,000, compared to $42,000 at December 31, 2001. Although the balances of non-performing and impaired loans have increased from the level of prior years, the total is concentrated in a few credits that management believes will not result in any losses to the Corporation. There is a specific loan loss reserve of $100,000 established for an impaired loan as of June 30, 2002, while there were no specific loan loss reserves established for impaired loans as of December 31, 2001. Subsequent to June 30, 2002, one of the largest non-performing loans was transferred to other real estate owned. 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, 2002. 13 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, 2002 total risk-based capital of PNBC was 12.79%, compared to 12.29% at December 31, 2001. The Tier 1 capital ratio increased from 8.10% at December 31, 2001, to 8.38% at June 30, 2002. Total stockholders' equity to total assets at June 30, 2002 increased to 9.03% from 8.55% at December 31, 2001. 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 used for investing and financing activities, offset by those provided by operating activities, resulted in a net decrease in cash and cash equivalents of $13,706,000 from December 31, 2001 to June 30, 2002. This decrease was due to a net increase in loans and investments, offset by a net increase in deposits. For more detailed information, see PNBC's Consolidated Statements of Cash Flows. 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, 2001, as reported in PNBC's 2001 Annual Report on Form 10-K. EFFECTS OF INFLATION -------------------- The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America and practices within the banking industry which require the measurement of financial condition and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. 14 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, 2002 Six Months Ended, June 30, 2001 ------------------------------- ------------------------------- Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost ------- -------- ---- ------- -------- ---- AVERAGE INTEREST-EARNING ASSETS Interest-bearing deposits $ 5,665 $ 44 1.57% $ 2,444 $ 59 4.87% Taxable investment securities 98,778 2,592 5.29% 82,902 2,538 6.17% Tax-exempt investment securities 49,493 1,847 7.53% 38,565 1,488 7.78% Federal funds sold 8,740 70 1.62% 3,616 88 4.91% Net loans 335,870 12,557 7.54% 347,975 14,634 8.48% -------- -------- -------- -------- Total interest-earning assets 498,545 17,110 6.92% $475,502 18,807 7.98% -------- -------- -------- -------- Average non-interest earning assets 51,770 41,135 -------- -------- Total average assets $550,315 $516,637 ======== ======== AVERAGE INTEREST-BEARING LIABILITIES Interest-bearing demand deposits $120,506 1,095 1.83% $ 91,444 1,053 2.32% Savings deposits 55,564 375 1.36% $ 47,331 473 2.02% Time deposits 248,668 5,191 4.21% 248,684 7,132 5.78% Interest-bearing demand notes issued to the U.S. Treasury 993 8 1.63% 996 21 4.25% Federal funds purchased and securities repurchase agreements 11,397 62 1.10% 17,983 405 4.54% Advances from Federal Home Loan Bank 6,330 173 5.52% 12,102 368 6.13% Borrowings 1,523 29 3.81% 1,798 77 8.64% -------- -------- -------- -------- Total interest-bearing liabilities 444,981 6,933 3.14% 420,338 9,529 4.57% -------- -------- -------- -------- Net yield on average interest-earning assets $ 10,177 4.12% $ 9,278 3.93% ======== ======== Average non-interest-bearing liabilities 56,950 50,326 Average stockholders' equity 48,384 45,973 -------- -------- Total average liabilities and stockholders' equity $550,315 $516,637 ======== ========
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