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Share Name | Share Symbol | Market | Type |
---|---|---|---|
Princeton National Bancorp Inc (CE) | USOTC:PNBC | OTCMarkets | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 0.0001 | 0.00 | 01:00:00 |
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION |
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Washington D.C. 20549 |
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FORM 10-Q |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2009 |
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Commission File Number 0-20050 |
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PRINCETON NATIONAL BANCORP, INC. |
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(Exact name of registrant as specified in its charter) |
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Delaware |
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36-3210283 |
(State
or other jurisdiction
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(I.R.S. Employer Identification No.) |
606 S. Main Street, Princeton, IL 61356
(Address of principal
executive offices and Zip Code)
(815) 875-4444
(Registrants telephone number, including
area code)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding twelve months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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x |
Non-accelerated filer |
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Smaller reporting company |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of April 30, 2009, the registrant had outstanding 3,300,139 shares of its $5 par value common stock.
Page 1 of 34 pages
Part I: FINANCIAL INFORMATION
The unaudited consolidated financial statements of Princeton National Bancorp, Inc. and Subsidiary and managements discussion and analysis of financial condition and results of operation are presented in the schedules as follows:
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Schedule 1: |
Consolidated Balance Sheets |
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Schedule 2: |
Consolidated Statements of Income |
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Schedule 3: |
Consolidated Statements of Stockholders Equity |
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Schedule 4: |
Consolidated Statements of Cash Flows |
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Schedule 5: |
Notes to Consolidated Financial Statements |
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Schedule 6: |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Schedule 7: |
Controls and Procedures |
Part II: OTHER INFORMATION
Item 1A. Risk Factors
The current volatility in economic conditions and the financial markets may adversely affect our industry, business and financial performance. The past six months have witnessed unprecedented disruptions in financial markets, including volatility in asset values and constraints on the availability of credit. In response to these developments, the U.S. government has taken, and may take further, steps designed to stabilize markets generally and strengthen financial institutions in particular. The impact, if any, that these financial market events or these governmental actions might have on the Company and its business is uncertain and cannot be estimated at this time. Item 1A (Risk Factors) of the Companys Annual Report on Form 10-K for the year ended December 31, 2008 discusses some of the principal risks inherent in the Companys business, including interest rate risks, liquidity risks, credit risks, operational risks, risks from economic or market conditions and general business risks among others. The current upheaval in financial markets has accentuated each of these risks and magnified their potential effect on the Company.
At the same time, there appears to be a general weakening of the U.S. economy. To the extent these economic developments continue to worsen, and to the extent legislation or regulatory action adversely affects the U.S. economy, the Companys access to capital or the credit quality of the Companys loan portfolio, or imposes additional limitations or costs on the Companys business, there could be an adverse impact on the Companys costs, credit losses, access to capital or liquidity.
2
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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(a) |
On January 23, 2009, the Corporation completed the sale of $25.1 million of preferred stock and a warrant to purchase common stock to the United States Department of the Treasury (the U.S. Treasury) under U.S. Treasurys Capital Purchase Program under the Emergency Economic Stabilization Act of 2008 (EESA). The Corporation issued and sold (1) 25,083 shares of Fixed Rate Cumulative Perpetual Preferred Stock Series B, liquidation preference of $1,000 per share (the Series B Preferred Shares), and (2) a ten-year warrant (the Warrant) to purchase up to 155,025 shares of the Corporations common stock at an exercise price of $24.27 per share, or an aggregate purchase price of $3.8 million in cash. The issuance of the Series B Preferred Shares and the Warrant was exempt from registration as a transaction by an issuer not involving any public offering under Section 4(2) of the Securities Act of 1933. $16.1 million of the proceeds were used to repay a note payable (see Managements Discussion and Analysis of Financial Condition and Results of Operations) with the remainder of the proceeds to be used to fund loan growth. |
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(c) |
The following table provides information about purchases of the Corporations common stock by the Corporation during the quarter ended March 31, 2009: |
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Period |
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(a) Total number of
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(b) Average price paid
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(c) Total number
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(d) Maximum number
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1/1/09 -1/31/09 |
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0 |
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$ |
0.00 |
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0 |
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20,000 |
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2/1/09 -2/28/09 |
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0 |
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$ |
0.00 |
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0 |
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20,000 |
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3/1/09 3/31/09 |
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0 |
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$ |
0.00 |
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0 |
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20,000 |
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Total |
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0 |
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$ |
0.00 |
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0 |
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20,000 |
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On April 24, 2007, the Board of Directors approved the repurchase of up to an aggregate of 50,000 shares of our common stock pursuant to a repurchase program announced the same day (the Program). The original expiration date of this Program was April 24, 2008, but was extended to October 24, 2008 by the Board of Directors at their meeting held on April 28, 2008. On October 27, 2008, the Board of Directors approved a new 50,000 share repurchase program that will expire on October 27, 2009. Unless terminated earlier by resolution of our Board of Directors, the Program will expire on the earlier of such expiration date or when we have repurchased all shares authorized for repurchase under the Program. |
3
Item 6. Exhibits
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3.1 |
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Certificate of Designations for the Series B Preferred Stock (incorporated by reference from the Form 8-K filed on January 27, 2009). |
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4.1 |
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Warrant to purchase up to 155,025 shares of Common Stock issued January 23, 2009 (incorporated by reference from the Form 8-K filed on January 29, 2009). |
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10.1 |
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Letter Agreement dated January 23, 2009 including the Securities Purchase Agreement Standard Terms incorporated by reference therein between the Company and the U.S. Treasury (incorporated by reference from the Form 8-K filed on January 29, 2009). |
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10.2 |
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Form of Waiver of Senior Executive Officers (incorporated by reference from the Form 8-K filed on January 29, 2009). |
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10.3 |
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Form of Omnibus Amendment Agreement (incorporated by reference from the Form 8-K filed on January 29, 2009). |
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31.1 |
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Certification of Tony J. Sorcic required by Rule 13a-14(a). |
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31.2 |
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Certification of Todd D. Fanning required by Rule 13a-14(a). |
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32.1 |
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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. |
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32.2 |
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Certification of Todd D. Fanning required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PRINCETON NATIONAL BANCORP, INC.
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By |
/s/ Tony J. Sorcic |
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By |
/s/ Todd D. Fanning |
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Tony J. Sorcic |
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Todd D. Fanning |
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President & Chief Executive Officer |
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Sr. VP & Chief Financial Officer |
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May 11, 2009 |
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May 11, 2009 |
4
Schedule 1
PRINCETON NATIONAL BANCORP, INC. AND
SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
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March 31,
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December 31,
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ASSETS |
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Cash and due from banks |
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$ |
67,755 |
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$ |
20,163 |
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Interest-bearing deposits with financial institutions |
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113 |
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98 |
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Total cash and cash equivalents |
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67,868 |
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20,261 |
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Loans held for sale, at lower of cost or market |
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1,084 |
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2,155 |
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Investment securities: |
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Available-for-sale, at fair value |
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259,397 |
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236,883 |
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Held-to-maturity, at amortized cost (fair value of $15,466 and $14,461) |
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15,137 |
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14,232 |
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Total investment securities |
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274,534 |
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251,115 |
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Loans: |
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Loans, net of unearned interest |
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774,802 |
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790,837 |
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Allowance for loan losses |
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(5,864 |
) |
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(5,064 |
) |
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Net loans |
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768,938 |
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785,773 |
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Premises and equipment, net of accumulated depreciation |
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29,243 |
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29,297 |
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Land held for sale, at lower of cost or market |
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2,354 |
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2,354 |
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Federal Reserve and Federal Home Loan Bank stock |
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4,211 |
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4,211 |
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Bank-owned life insurance |
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21,842 |
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21,588 |
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Accrued interest receivable |
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8,301 |
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9,693 |
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Other real estate owned |
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3,170 |
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2,487 |
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Goodwill |
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24,521 |
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24,521 |
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Intangible assets, net of accumulated amortization |
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3,991 |
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4,207 |
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Other assets |
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5,427 |
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5,468 |
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TOTAL ASSETS |
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$ |
1,215,484 |
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$ |
1,163,130 |
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LIABILITIES |
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Deposits: |
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Demand |
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$ |
105,477 |
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$ |
110,559 |
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Interest-bearing demand |
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256,113 |
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246,714 |
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Savings |
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66,234 |
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61,089 |
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Time |
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583,140 |
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543,770 |
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Total deposits |
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1,010,964 |
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962,132 |
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Borrowings: |
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|
|
|
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Customer repurchase agreements |
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38,799 |
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35,532 |
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Federal funds purchased |
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0 |
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6,500 |
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Interest-bearing demand notes issued to the U.S. Treasury |
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|
773 |
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|
2,441 |
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Advances from the Federal Home Loan Bank |
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|
32,494 |
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|
32,493 |
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Trust preferred securities |
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25,000 |
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|
25,000 |
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Note payable |
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0 |
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|
16,050 |
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|
|
|
|
|
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Total borrowings |
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|
97,066 |
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|
118,016 |
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|
|
|
|
|
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Other liabilities |
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|
9,499 |
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|
10,511 |
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TOTAL LIABILITIES |
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|
1,117,529 |
|
|
1,090,659 |
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STOCKHOLDERS EQUITY |
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Preferred stock, no par value; 100,000 shares authorized; 25,083 shares issued and outstanding at March 31, 2009 |
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|
24,938 |
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|
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|
Common stock: $5 par value, 7,000,000 shares authorized; 4,478,295 shares issued |
|
|
22,391 |
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|
22,391 |
|
Common stock warrants |
|
|
150 |
|
|
|
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Additional paid-in capital |
|
|
18,377 |
|
|
18,420 |
|
Retained earnings |
|
|
54,479 |
|
|
54,329 |
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Accumulated other comprehensive income, net of taxes |
|
|
1,655 |
|
|
1,402 |
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Less: Cost of 1,178,156 and 1,180,254 treasury common shares at March 31, 2009 and December 31, 2008, respectively |
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(24,035 |
) |
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(24,071 |
) |
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TOTAL STOCKHOLDERS EQUITY |
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|
97,955 |
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|
72,471 |
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|
|
|
|
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
1,215,484 |
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$ |
1,163,130 |
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See accompanying notes to unaudited consolidated financial statements
5
Schedule 2
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands, except share data)
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For the Three Months
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2009 |
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2008 |
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Interest income: |
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Interest and fees on loans |
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$ |
11,059 |
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$ |
12,350 |
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Interest on investment securities: |
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|
|
|
|
|
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Taxable |
|
|
1,803 |
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|
1,617 |
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Non-taxable |
|
|
1,128 |
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|
1,062 |
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Interest on federal funds sold |
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0 |
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25 |
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Interest on interest-bearing time deposits in other banks |
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16 |
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12 |
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Total interest income |
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14,006 |
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15,066 |
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Interest expense: |
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|
|
|
|
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Interest on deposits |
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5,147 |
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|
6,674 |
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Interest on borrowings |
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|
780 |
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|
938 |
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Total interest expense |
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5,927 |
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|
7,612 |
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Net interest income |
|
|
8,079 |
|
|
7,454 |
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Provision for loan losses |
|
|
1,170 |
|
|
368 |
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Net interest income after provision for loan losses |
|
|
6,909 |
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|
7,086 |
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|
|
|
|
|
|
|
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Non-interest income: |
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|
|
|
|
|
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Trust & farm management fees |
|
|
314 |
|
|
476 |
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Service charges on deposit accounts |
|
|
976 |
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|
1,092 |
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Other service charges |
|
|
446 |
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|
457 |
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Gain on sales of securities available-for-sale |
|
|
187 |
|
|
276 |
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Brokerage fee income |
|
|
198 |
|
|
219 |
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Mortgage banking income, net |
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|
1 |
|
|
348 |
|
Bank-owned life insurance income |
|
|
243 |
|
|
215 |
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Other operating income |
|
|
430 |
|
|
70 |
|
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Total non-interest income |
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|
2,795 |
|
|
3,153 |
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|
|
|
|
|
|
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Non-interest expense: |
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|
|
|
|
|
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Salaries and employee benefits |
|
|
4,471 |
|
|
4,398 |
|
Occupancy |
|
|
709 |
|
|
679 |
|
Equipment expense |
|
|
773 |
|
|
718 |
|
Federal insurance assessments |
|
|
697 |
|
|
84 |
|
Intangible assets amortization |
|
|
208 |
|
|
179 |
|
Data processing |
|
|
316 |
|
|
277 |
|
Advertising |
|
|
197 |
|
|
168 |
|
Other operating expense |
|
|
1,281 |
|
|
1,057 |
|
|
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Total non-interest expense |
|
|
8,652 |
|
|
7,560 |
|
|
|||||||
Income before income taxes |
|
|
1,052 |
|
|
2,679 |
|
Income tax expense (benefit) |
|
|
(104 |
) |
|
589 |
|
|
|||||||
Net income |
|
|
1,156 |
|
|
2,090 |
|
|
|
|
|
|
|
|
|
Preferred stock dividends |
|
|
237 |
|
|
|
|
Accretion of preferred stock discount |
|
|
5 |
|
|
|
|
|
|||||||
Net income available to common stockholders |
|
$ |
914 |
|
$ |
2,090 |
|
Per share information: |
|
|
|
|
|
|
|
BASIC net income per common share available to common stockholders |
|
|
0.28 |
|
|
0.63 |
|
DILUTED net income per common share available to common stockholders |
|
|
0.28 |
|
|
0.63 |
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
3,298,064 |
|
|
3,304,063 |
|
Diluted weighted average shares outstanding |
|
|
3,298,725 |
|
|
3,309,907 |
|
See accompanying notes to unaudited consolidated financial statements
6
Schedule 3
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PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY |
(Unaudited) |
(dollars in thousands except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Three Months Ended
|
|
Preferred
|
|
Common
|
|
Common
|
|
Additional
|
|
Retained
|
|
Accumulated
|
|
Treasury
|
|
Total |
|
||||||||
|
|||||||||||||||||||||||||
Balance, January 1, 2009 |
|
$ |
|
|
$ |
22,391 |
|
$ |
|
|
$ |
18,420 |
|
$ |
54,329 |
|
$ |
1,402 |
|
($ |
24,071 |
) |
$ |
72,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,156 |
|
|
|
|
|
|
|
|
1,156 |
|
Issuance of 25,083 shares of preferred stock and 155,025 common stock warrants, net of expenses |
|
|
24,933 |
|
|
|
|
|
150 |
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
25,020 |
|
Dividends on preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78 |
) |
|
|
|
|
|
|
|
(78 |
) |
Accretion on preferred stock discount |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
Sale of 2,098 shares of treasury common stock |
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
36 |
|
|
32 |
|
Dividends on common stock ($.28 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(923 |
) |
|
|
|
|
|
|
|
(923 |
) |
Stock option compensation expense |
|
|
|
|
|
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
24 |
|
Other comprehensive income, net of $160 tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253 |
|
|
|
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2009 |
|
$ |
24,938 |
|
$ |
22,391 |
|
$ |
150 |
|
$ |
18,377 |
|
$ |
54,479 |
|
$ |
1,655 |
|
($ |
24,035 |
) |
$ |
97,955 |
|
|
|||||||||||||||||||||||||
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2008 |
|
$ |
|
|
$ |
22,391 |
|
$ |
|
|
$ |
18,275 |
|
$ |
51,279 |
|
$ |
344 |
|
($ |
23,682 |
) |
$ |
68,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,090 |
|
|
|
|
|
|
|
|
2,090 |
|
Purchase of 10,000 shares of treasury common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(270 |
) |
|
(270 |
) |
Sale of 1,043 shares of treasury common stock |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
18 |
|
|
28 |
|
Dividends on common stock ($.28 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(926 |
) |
|
|
|
|
|
|
|
(926 |
) |
Stock option compensation expense |
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
21 |
|
Adjustment to apply EITF 06-4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(579 |
) |
|
|
|
|
|
|
|
(579 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of $778 tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,230 |
|
|
|
|
|
1,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2008 |
|
$ |
|
|
$ |
22,391 |
|
$ |
|
|
$ |
18,306 |
|
$ |
51,864 |
|
$ |
1,574 |
|
($ |
23,934 |
) |
$ |
70,201 |
|
See accompanying notes to unaudited consolidated financial statements
7
|
|
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY |
Schedule 4 |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
(Unaudited) |
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
||||
|
|
2009 |
|
2008 |
|
||
Operating activities: |
|
|
|
|
|
|
|
Net income |
|
$ |
1,156 |
|
$ |
2,090 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation |
|
|
564 |
|
|
574 |
|
Provision for loan losses |
|
|
1,170 |
|
|
368 |
|
Amortization of intangible assets and other purchase accounting adjustments, net |
|
|
208 |
|
|
208 |
|
Amortization (accretion) of premiums and discounts on investment securities, net |
|
|
185 |
|
|
(33 |
) |
Gain on sales of securities available-for-sale, net |
|
|
(187 |
) |
|
(276 |
) |
Impairment of mortgage servicing rights |
|
|
556 |
|
|
0 |
|
Compensation expense for vested stock options |
|
|
24 |
|
|
21 |
|
Gain (loss) on sales of other real estate owned, net |
|
|
0 |
|
|
7 |
|
Loans originated for sale |
|
|
(30,651 |
) |
|
(33,037 |
) |
Proceeds from sales of loans originated for sale |
|
|
31,722 |
|
|
30,787 |
|
Increase in accrued interest payable |
|
|
153 |
|
|
16 |
|
Decrease in accrued interest receivable |
|
|
1,392 |
|
|
2,609 |
|
(Increase) decrease in other assets |
|
|
(779 |
) |
|
1,131 |
|
Decrease in other liabilities |
|
|
(1,325 |
) |
|
(919 |
) |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
4,188 |
|
|
3,546 |
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
Proceeds from sales of investment securities available-for-sale |
|
|
18,197 |
|
|
8,670 |
|
Proceeds from maturities of investment securities available-for-sale |
|
|
21,263 |
|
|
13,789 |
|
Purchase of investment securities available-for-sale |
|
|
(61,554 |
) |
|
(22,691 |
) |
Proceeds from maturities of investment securities held-to-maturity |
|
|
1,005 |
|
|
580 |
|
Purchase of investment securities held-to-maturity |
|
|
(1,915 |
) |
|
(1,594 |
) |
Proceeds from sales of other real estate owned |
|
|
0 |
|
|
263 |
|
Net decrease (increase) in loans |
|
|
15,002 |
|
|
(7,539 |
) |
Purchases of premises and equipment |
|
|
(510 |
) |
|
(239 |
) |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(8,512 |
) |
|
(8,761 |
) |
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
Net increase in deposits |
|
|
48,832 |
|
|
27,731 |
|
Net decrease in borrowings |
|
|
(20,952 |
) |
|
(23,522 |
) |
Dividends on common stock |
|
|
(923 |
) |
|
(926 |
) |
Dividends on preferred stock |
|
|
(78 |
) |
|
|
|
Purchases of treasury common stock |
|
|
|
|
|
(270 |
) |
Sales of treasury common stock |
|
|
32 |
|
|
28 |
|
Proceeds from issuance of preferred stock and common stock warrants, net of expenses |
|
|
25,020 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
51,931 |
|
|
3,041 |
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
47,607 |
|
|
(2,174 |
) |
Cash and cash equivalents at beginning of period |
|
|
20,261 |
|
|
27,604 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at March 31 |
|
$ |
67,868 |
|
$ |
25,430 |
|
|
|
|
|
|
|
|
|
|
|||||||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
Interest |
|
$ |
5,774 |
|
$ |
7,596 |
|
Income taxes |
|
$ |
4 |
|
$ |
620 |
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash flow activities: |
|
|
|
|
|
|
|
Loans transferred to other real estate owned |
|
$ |
683 |
|
$ |
42 |
|
See accompanying notes to unaudited consolidated financial statements
8
Schedule 5
PRINCETON NATIONAL BANCORP, INC. AND
SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
The accompanying unaudited condensed consolidated financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods ended March 31, 2009 and 2008, and all such adjustments are of a normal recurring nature. The 2008 year-end consolidated balance sheet data was derived from audited financial statements, but do not include all disclosures required by generally accepted accounting principles.
The unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information required by accounting principles generally accepted in the United States of America for complete financial statements and related footnote disclosures. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered for a fair presentation of the results for the interim period have been included. For further information, refer to the consolidated financial statements and notes included in the Registrants 2008 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 2008 consolidated financial statements have been reclassified to conform to the 2009 presentation.
(1) CAPITAL PURCHASE PROGRAM
On January 23, 2009, the Corporation received $25,083 of equity capital by issuing to the United States Department of Treasury 25,083 shares of the Corporations 5.00% Series B Fixed Rate Cumulative Perpetual Preferred Stock, no par value, with a liquidation preference of $1,000 per share and a ten-year warrant to purchase up to 155,025 shares of the Corporations common stock, par value $0.01 per share, at an exercise price of $24.27 per share. The proceeds received were allocated to the preferred stock and common stock warrants based on their relative fair values. The resulting discount on the preferred stock is amortized against retained earnings and is reflected in the Corporations consolidated statement of income as Preferred shares dividends, resulting in additional dilution to the Corporations earnings per common share. The warrants are immediately exercisable, in whole or in part, over a term of 10 years. The warrants were included in the Corporations diluted average common shares outstanding (subject to anti-dilution). Both the preferred securities and warrants were accounted for as additions to the Corporations regulatory Tier 1 and total capital.
The Series B Preferred stock is not mandatorily redeemable and will pay cumulative dividends at a rate of 5% per year for the first five years and 9% per year thereafter. Any redemption requires Federal Reserve approval. The Series B Perpetual Preferred stock ranks senior to the Corporations existing authorized Series A Junior Participating Preferred stock.
9
A company that participates must adopt certain standards for executive compensation, including (a) prohibiting golden parachute payments as defined in the Emergency Economic Stabilization Act of 2008 (EESA) to senior Executive Officers; (b) requiring recovery of any compensation paid to senior Executive Officers based on criteria that is later proven to be materially inaccurate; (c) prohibiting incentive compensation that encourages unnecessary and excessive risks that threaten the value of the financial institution; and (d) accept restrictions on the payment of dividends and the repurchase of common stock.
(2) 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
|
|
||||
|
|
2009 |
|
2008 |
|
||
Numerator: |
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
914 |
|
$ |
2,090 |
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
Basic earnings per share-weighted average common shares |
|
|
3,298,064 |
|
|
3,304,063 |
|
|
|
|
|
|
|
|
|
Effect of dilutive securities-stock options |
|
|
661 |
|
|
5,844 |
|
|
|
|
|
|
|
|
|
Diluted earnings per share-adjusted weighted average common shares |
|
|
3,298,725 |
|
|
3,309,907 |
|
|
|
|
|
|
|
|
|
Net income per share available to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.28 |
|
$ |
0.63 |
|
Diluted |
|
$ |
0.28 |
|
$ |
0.63 |
|
The following shares were not considered in computing diluted earnings per share for the three-month periods ended March 31, 2009 and 2008 because they were anti-dilutive:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
||||
|
|
2009 |
|
2008 |
|
||
Stock options to purchase shares of common stock |
|
|
448,061 |
|
|
279,816 |
|
|
|
|
|
|
|
|
|
Average dilutive potential common shares associated with common stock warrants |
|
|
155,025 |
|
|
|
|
(3) GOODWILL AND INTANGIBLE ASSETS
The balance of goodwill, net of accumulated amortization, totaled $24,521,000 at March 31, 2009 and December 31, 2008. The balance of intangible assets, net of accumulated amortization, totaled $3,991,000 and $4,207,000 at March 31, 2009 and December 31, 2008, respectively.
10
The Corporation had a goodwill impairment study performed as of March 31, 2009 and December 31, 2008. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements. The goodwill was not deemed impaired as of March 31, 2009 or December 31, 2008.
The following table summarizes the Corporations intangible assets, which are subject to amortization, as of March 31, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
December 31, 2008 |
|
||||||||
|
|
Gross Carrying
|
|
Accumulated
|
|
Gross Carrying
|
|
Accumulated
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangible |
|
$ |
9,004 |
|
$ |
(5,081 |
) |
$ |
9,004 |
|
$ |
(4,869 |
) |
Other intangible assets |
|
|
234 |
|
|
(166 |
) |
|
234 |
|
|
(162 |
) |
Total |
|
$ |
9,238 |
|
$ |
(5,247 |
) |
$ |
9,238 |
|
$ |
(5,031 |
) |
Amortization expense of all intangible assets totaled $208,000 for both of the three months ended March 31, 2009 and 2008, respectively. The amortization expense of these intangible assets will be approximately $624,000 for the remaining three quarters in 2009.
(4) ORIGINATED MORTGAGE SERVICING RIGHTS
The Corporation has originated mortgage servicing rights which are included in other assets on the consolidated balance sheets. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income on a basis similar to the interest method using an accelerated amortization method and are subject to periodic impairment testing. Changes in the carrying value of capitalized mortgage servicing rights are summarized as follows:
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Balance, January 1, 2009 |
|
$ |
2,936 |
|
Servicing rights capitalized |
|
|
328 |
|
Amortization of servicing rights |
|
|
(144 |
) |
Impairment of servicing rights |
|
|
(556 |
) |
Balance, March 31, 2009 |
|
$ |
2,564 |
|
Activity in the valuation allowance for mortgage servicing rights was as follows:
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Balance, January 1, 2009 |
|
$ |
|
|
Additions |
|
|
556 |
|
Reductions |
|
|
|
|
Direct write-downs |
|
|
|
|
Balance, March 31, 2009 |
|
$ |
556 |
|
11
The Corporation services loans for others with unpaid principal balances at March 31, 2009 and December 31, 2008 of approximately $320,831,000, and $304,551,000, respectively.
The following table shows the future estimated amortization expense for mortgage servicing rights based on existing balances as of March 31, 2009. The Corporations actual amortization expense in any given period may be significantly different from the estimated amounts displayed depending on the amount of additional mortgage servicing rights, changes in mortgage interest rates, estimated prepayment speeds, and market conditions.
Estimated Amortization Expense:
|
|
|
|
|
|
|
Amount (in thousands) |
|
|
For the nine months ended December 31, 2009 |
|
$ |
211 |
|
For the year ended December 31, 2010 |
|
|
283 |
|
For the year ended December 31, 2011 |
|
|
264 |
|
For the year ended December 31, 2012 |
|
|
247 |
|
For the year ended December 31, 2013 |
|
|
232 |
|
For the year ended December 31, 2014 |
|
|
217 |
|
Thereafter |
|
|
1,110 |
|
(5) OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes for the three months ended March 31, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
||
|
|
|
|
|
|
|
|
Net unrealized gains on securities available-for-sale |
|
$ |
600 |
|
$ |
2,280 |
|
Less: Reclassification adjustment for realized gains included in income |
|
|
(187 |
) |
|
(276 |
) |
|
|
|
413 |
|
|
2,004 |
|
|
|
|
|
|
|
|
|
Amortization of transition obligation of post retirement health care |
|
|
0 |
|
|
4 |
|
|
|
|
|
|
|
|
|
Other comprehensive income, before tax effect |
|
|
413 |
|
|
2,008 |
|
|
|
|
|
|
|
|
|
Less: Tax expense |
|
|
160 |
|
|
778 |
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
$ |
253 |
|
$ |
1,230 |
|
12
The components of accumulated other comprehensive loss, included in stockholders equity at March 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
||
|
|
|
|
|
|
|
|
Net unrealized gain on securities available-for-sale |
|
$ |
3,232 |
|
$ |
3,121 |
|
Net unrealized benefit obligations |
|
|
(530 |
) |
|
(552 |
) |
|
|
|
2,702 |
|
|
2,569 |
|
|
|
|
|
|
|
|
|
Less: Tax effect |
|
|
1,047 |
|
|
995 |
|
|
|
|
|
|
|
|
|
Net of-tax amount |
|
$ |
1,655 |
|
$ |
1,574 |
|
|
|
|
|
|
|
|
|
(6) FEDERAL HOME LOAN BANK STOCK
The Corporation has Federal Home Loan Bank stock totaling $2,373,000 at March 31, 2009 and December 31, 2008. During the third quarter of 2007, the Federal Home Loan Bank of Chicago received a Cease and Desist Order from their regulator, the Federal Housing Finance Board. The Federal Home Loan Bank will continue to provide liquidity and funding through advances, however, the order prohibits capital stock repurchases and redemptions until a time to be determined by the Federal Housing Finance Board and requires their approval for dividends. With regard to dividends, the Federal Home Loan Bank will continue to assess its dividend capacity each quarter and make appropriate request for approval. There were no dividends paid by the Federal Home Loan Bank of Chicago during the first three months of 2009 or during 2008. Management performed an analysis and deemed the investment in Federal Home Loan Bank stock was not other than temporarily impaired as of March 31, 2009 or December 31, 2008.
(7) FAIR VALUE OF ASSETS AND LIABILITIES
Effective January 1, 2008, the Corporation adopted Statement of Financial Accounting Standards No. 157 (FAS 157), Fair Value Measurements. FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 has been applied prospectively as of the beginning of the period.
FAS 157 defines the fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
In accordance with FAS 157, the Corporation groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
|
|
|
|
Level 1 |
Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. |
13
|
|
|
|
Level 2 |
Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities. |
|
|
|
|
Level 3 |
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet.
Available-for-Sale Securities
The fair value of available-for-sale securities are determined by various valuation methodologies. Where quoted market prices are available in an active market, securities are classified within Level 1. The Corporation has no securities classified within Level 1. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. Level 2 securities include U.S. Treasury securities, Obligations of U.S. government corporations and agencies, Obligations of states and political subdivisions, mortgage-backed securities, collateralized mortgage obligations and corporate bonds. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Corporation has no securities classified within Level 3.
The following table presents the Corporations assets that are measured at fair value on a recurring basis and the level within the FAS 157 hierarchy in which the fair value measurements fall as of March 31, 2009 and December 31, 2008 (in thousands):
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|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|||||||
|
|
Fair Value |
|
Quoted Prices in
|
|
Significant Other
|
|
Significant
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
|
$ |
259,397 |
|
$ |
0 |
|
$ |
259,397 |
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|||||||
|
|
Fair Value |
|
Quoted Prices in
|
|
Significant Other
|
|
Significant
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
|
$ |
236,883 |
|
$ |
0 |
|
$ |
236,883 |
|
$ |
0 |
|
14
Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.
Impaired Loans
Loans for which it is probable that the Corporation will not collect all principal and interest due according to contractual terms are measured for impairment in accordance with the provisions of Financial Accounting Standard No. 114 (FAS 114), Accounting by Creditors for Impairment of a Loan . Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method.
If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. If the impaired loan is determined not to be collateral dependent, then the discounted cash flow method is used. This method requires the impaired loan to be recorded at the present value of expected future cash flows discounted at the loans effective interest rate. The effective interest rate of a loan is the contractual interest rate adjusted for any net deferred loan fees or costs, premiums or discount existing at origination or acquisition of the loan. Impaired loans are classified within Level 3 of the fair value hierarchy.
Mortgage Servicing Rights
The fair value used to determine the valuation allowance is estimated using discounted cash flow models. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.
The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the FAS 157 fair value hierarchy in which the fair value measurements fall at March 31, 2009 and December 31, 2008.
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|
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|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|||||||
|
|
Fair Value |
|
Quoted Prices in
|
|
Significant Other
|
|
Significant
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans |
|
$ |
17,170 |
|
|
0 |
|
|
0 |
|
$ |
17,170 |
|
Mortgage servicing rights |
|
|
2,564 |
|
|
0 |
|
|
0 |
|
|
2,564 |
|
15
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|||||||
|
|
Fair Value |
|
Quoted Prices in
|
|
Significant Other
|
|
Significant
|
|
||||
Impaired loans |
|
$ |
2,494 |
|
|
0 |
|
|
0 |
|
$ |
2,494 |
|
(8) INCOME TAXES
A reconciliation of income tax expense at 34 percent of pre-tax income to the Corporations actual tax expense (benefit) for the three-month periods ended March 31 is shown below:
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
||
Computed expected tax expense |
|
$ |
358 |
|
$ |
911 |
|
|
|
|
|
|
|
|
|
Increase (decrease) in income taxes resulting from: |
|
|
|
|
|
|
|
Tax-exempt income |
|
|
(379 |
) |
|
(338 |
) |
State income taxes, net of federal tax benefit |
|
|
41 |
|
|
180 |
|
Bank-owned life insurance income |
|
|
(86 |
) |
|
(76 |
) |
Other, net |
|
|
(38 |
) |
|
(88 |
) |
|
|
$ |
(104 |
) |
$ |
589 |
|
(9) IMPACT OF NEW ACCOUNTING STANDARDS
In December 2007, the FASB issued SFAS No. 141R (FAS 141R), Business Combinations, which revises FAS 141 and changes multiple aspects of the accounting for business combinations. Under the guidance in FAS 141R, the acquisition method must be used, which requires the acquirer to recognize most identifiable assets acquired, liabilities assumed, and non-controlling interests in the acquiree at their full fair value on the acquisition date. Goodwill is to be recognized as the excess of the consideration transferred plus the fair value of the non-controlling interest over the fair values of the identifiable net assets acquired. Subsequent changes in the fair value of contingent consideration classified as a liability are to be recognized in earnings, while contingent consideration classified as equity is not to be re-measured. Costs such as transaction costs are to be excluded from acquisition accounting, generally leading to recognizing expense and additionally, restructuring costs that do not meet certain criteria at acquisition date are to be subsequently recognized as post-acquisition costs. FAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The implementation of FAS 141R did not have a material impact on the Corporations financial position or results of operations.
16
In December 2007, the FASB issued Statement of Financial Accounting No. 160 (FAS 160), Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51. The Statement requires that a noncontrolling interest in a subsidiary be reported separately within equity and the amount of consolidated net income specifically attributable to the noncontrolling interest be identified in the consolidated financial statements. It also calls for consistency in the manner of reporting changes in the parents ownership interest and requires fair value measurement of any noncontrolling equity investment retained in deconsolidation. FAS 160 became effective for fiscal years beginning after December 15, 2008. The application of FAS 160 did not have a material impact on the Corporations consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161 (FAS 161), Disclosures About Derivative Instruments and Hedging Activities an amendment of FAS 133. FAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. FAS 161 is effective for fiscal years beginning after November 15, 2008. The implementation of FAS 161 did not have a material impact on its consolidated financial statements.
In May 2008, the FASB issued Statement of Financial Accounting No. 162 (FAS 162), The Hierarchy of Generally Accepted Accounting Principles. This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement became effective on November 15, 2008. The application of FAS 162 did not have a material impact on the Corporations consolidated financial statements.
In January 2009, the FASB issued FSP E 99-20-1, Amendments to the Impairment and Interest Income Measurement Guidance of EITF Issue No. 99-20. FSP EITF 99-20-I amends the impairment guidance in EITF Issue No. 99-20 in order to achieve more consistent determination of whether an other-than- temporary impairment (OTTI) has occurred. Prior to the FSP, the impairment model in EITF 99-20 was different from FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. This FSP amended EITF99-20 to more closely align the OTTI guidance therein to the guidance in Statement No. 115. Retrospective application to a prior interim or annual period is prohibited. The Corporation does not expect the implementation of this FSP to have a material impact on its consolidated financial statements.
In April 2009, the FASB issued three amendments to the fair value measurement, disclosure and other-than-temporary impairment standards:
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|
FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are Not Orderly. |
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|
|
FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. |
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|
|
|
FAS 107 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. |
FASB Statement of Financial Accounting No. 157 (FAS 157), Fair value Measurements , defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. FAS 157-4 provided additional guidance on identifying circumstances when a transaction may not be considered orderly.
17
FAS 157-4 provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with FAS 157.
FAS 157-4 clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of evidence to determine whether the transaction is orderly. It also provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.
FAS 115-2 and FAS 124-2 clarifies the interaction of the factors that should be considered when determining whether a debt security is otherthan-temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.
In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FAS 115-2 and FAS 124-2 changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.
FAS 107-1 and APB 28-1 amends FASB Statement No. 107 (FAS 107), Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FAS 107-1 also amends APB Opinion No. 28, Interim Financial Reporting , to require those disclosures in summarized financial information at interim reporting periods.
All three FASB Staff Positions discussed herein include substantial additional disclosure requirements. The effective date for these new standards is the same: interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. However, early adoption is allowed only if certain FASB Staff Positions are early adopted together. The Corporation will adopt the new standards as of June 30, 2009, and does not expect the adoption to have a material impact on its consolidated financial statements.
18
Schedule 6
PRINCETON NATIONAL BANCORP, INC. AND
SUBSIDIARY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three months ended March 31, 2009 and 2008
The following discussion provides information about Princeton National Bancorp, Inc.s (PNBC or the Corporation) financial condition and results of operations for the three month periods ended March 31, 2009 and 2008. This discussion should be read in conjunction with the attached consolidated financial statements and notes thereto. This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), such as discussions of the Corporations pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses and planned schedules. The Corporation intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Corporation, are identified by use of the words believe, expect, intend, anticipate, estimate, project, or similar expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many risks and uncertainties including: the effect of the current severe disruption in financial markets and the United States government programs introduced to restore stability and liquidity, changes in interest rates, general economic conditions and the weakening state of the United States economy, legislative/regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Corporations market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Corporation and its business, including a discussion of these and additional factors that could materially affect the Corporations financial results, is included in the Corporations 2008 Annual Report on Form 10-K under the headings Item 1. Business and Item 1A. Risk Factors.
CRITICAL ACCOUNTING POLICIES AND USE OF SIGNIFICANT ESTIMATES
The Corporation has established various accounting policies that govern the application of U.S. generally accepted accounting principles in the preparation of the Corporations financial statements. The significant accounting policies of the Corporation are described in the footnotes to the consolidated financial statements.. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and assumptions, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Corporation.
19
Allowance for Loan Losses
The Corporation believes the allowance for loan losses is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of its consolidated financial statements. We determine probable incurred losses inherent in our loan portfolio and establish an allowance for those losses by considering factors including historical loss rates, expected cash flows and estimated collateral values. In assessing these factors, we use organizational history and experience with credit decisions and related outcomes. The allowance for loan losses represents our best estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. We evaluate our allowance for loan losses quarterly. If our underlying assumptions later prove to be inaccurate based on subsequent loss evaluations, the allowance for loan losses is adjusted.
We estimate the appropriate level of allowance for loan losses by separately evaluating impaired and non-impaired loans. A specific allowance is assigned to an impaired loan when expected cash flows or collateral do not justify the carrying amount of the loan. The methodology used to assign an allowance to a non-impaired loan is more subjective. Generally, the allowance assigned to non-impaired loans is determined by applying historical loss rates to existing loans with similar risk characteristics, adjusted for qualitative factors including the volume and severity of identified classified loans, changes in economic conditions, changes in credit policies or underwriting standards, and changes in the level of credit risk associated with specific industries and markets. Because the economic and business climate in any given industry or market, and its impact on any given borrower, can change rapidly, the risk profile of the loan portfolio is continually assessed and adjusted when appropriate. Notwithstanding these procedures, there still exists the possibility that our assessment could prove to be significantly incorrect and that an immediate adjustment to the allowance for loan losses would be required.
Other Real Estate Owned
Other real estate owned acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a valuation allowance is recorded through non-interest expense. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other non-interest expense.
Deferred Income Tax Assets/Liabilities
Our net deferred income tax asset arises from differences in the dates that items of income and expense enter into our reported income and taxable income. Deferred tax assets and liabilities are established for these items as they arise. From an accounting standpoint, deferred tax assets are reviewed to determine if they are realizable based on the historical level of our taxable income, estimates of our future taxable income and the reversals of deferred tax liabilities. In most cases, the realization of the deferred tax asset is based on our future profitability. If we were to experience net operating losses for tax purposes in a future period, the realization of our deferred tax assets would be evaluated for a potential valuation reserve.
20
Additionally, the Corporation reviews its uncertain tax positions annually under FASB Interpretation 48, Accounting for Uncertainty in Income Taxes. An uncertain tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount actually recognized is the largest amount of tax benefit that is greater than 50% likely to be recognized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. A significant amount of judgment is applied to determine both whether the tax position meets the more likely than not test as well as to determine the largest amount of tax benefit that is greater than 50% likely to be recognized. Differences between the position taken by management and that of taxing authorities could result in a reduction of a tax benefit or increase to tax liability, which could adversely affect future income tax expense.
Impairment of Goodwill and Intangible Assets
Core deposit and customer relationships, which are intangible assets with a finite life, are recorded on our balance sheets. These intangible assets were capitalized as a result of past acquisitions and are being amortized over their estimated useful lives of up to 15 years. Core deposit intangible assets, with finite lives will be tested for impairment when changes in events or circumstances indicate that its carrying amount may not be recoverable. Core deposit intangible assets were tested for impairment during 2008 and 2007, as part of the goodwill impairment test and no impairment was deemed necessary.
As a result of our acquisition activity, goodwill, an intangible asset with an indefinite life, was reflected on our balance sheet in prior periods. Goodwill is evaluated for impairment annually, unless there are factors present that indicate a potential impairment, in which case, the goodwill impairment test is performed more frequently than annually. Accordingly, as the Corporations stock price at March 31, 2009 decreased below book value, a goodwill impairment test was performed and no impairment was deemed necessary (see Note 3 Goodwill and Intangible Assets in the Notes to Consolidated Financial Statements).
Mortgaging Service Rights (MSRs)
MSR fair values are very sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly reduced by prepayments. Prepayments usually increase when mortgage interest rates decline and decrease when mortgage interest rates rise. For discussion regarding the impairment of MSRs, see Note 4 Originated Mortgage Servicing Rights in the Notes to Consolidated Financial Statements.
Fair Value Measurements
The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Corporation estimates the fair value of a financial instrument using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, the Corporation estimates fair value. The Corporations valuation methods consider factors such as liquidity and concentration concerns. Other factors such as model assumptions, market dislocations and unexpected correlations can affect estimates of fair value. Imprecision in estimating these factors can impact the amount of revenue or loss recorded.
21
FASB Statement No. 157, Fair Value Measurements, establishes a framework for measuring the fair value of financial instrument that considers the attributes specific to particular assets or liabilities and establishes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the fair value measurement date. The three levels are defined as follows:
|
|
|
Level 1 - quoted prices (unadjusted) for identical assets or liabilities in active markets. |
|
|
|
Level 2- inputs include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
|
|
|
Level 3 - inputs that are unobservable and significant to the fair value measurement. |
At the end of each quarter, the Corporation assesses the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Transfers into or out of hierarchy levels are based upon the fair value at the beginning of the reporting period. A more detailed description of the fair values measured at each level of the fair value hierarchy can be found in Note 7- Fair Value of Assets and Liabilities in the Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
Net income for the first quarter of 2009 was $1,156,000, or basic and diluted earnings per common share of $0.28, as compared to net income of $2,090,000 in the first quarter of 2008, or basic and diluted earnings per common share of $0.63. This represents a decrease of $934,000 (44.7%) or $.35 per basic and diluted common share. The lower net income figure is attributable to an increase in the provision for loan losses and insurance assessments by the FDIC. The annualized return on average assets and return on average equity decreased accordingly to 0.40% and 5.14%, respectively, for the first quarter of 2009, compared with 0.78% and 12.22% for the first quarter of 2008.
Net interest income before the provision for loan losses was $8,079,000 for the first quarter of 2009, compared to $7,454,000 for the first quarter of 2008 (an increase of $625,000 or 8.4%). The net yield on interest-earning assets (on a fully taxable equivalent basis) increased slightly to 3.40% in the first quarter of 2009 from 3.39% in the first quarter of 2008. However, growth in the balance sheet of $86.7 million in average interest-earning assets was the primary cause for the increase in net interest income over the past twelve months.
The Corporations provision for loan loss expense recorded each quarter is determined by managements evaluation of the risk characteristics of the loan portfolio. As mentioned above, net charge-offs decreased during the first quarter of 2009 to $371,000, compared to net charge-offs of $481,000 for the first quarter of 2008. PNBC recorded a loan loss provision of $1,170,000 in the first quarter of 2009 compared to a provision of $368,000 in the first quarter of 2008. The allowance for loan losses is discussed more fully below.
22
Non-interest income totaled $2,795,000 for the first quarter of 2009, compared to $3,153,000 in the first quarter of 2008, a decrease of $358,000 (or 11.4%). The decrease was primarily due to the impairment of mortgage servicing rights recorded during the first quarter of 2009 of $556,000. This resulted in mortgage banking income decreasing by a net figure of $347,000. The categories of service charges on deposits and trust and farm management fees also experienced decreases of $116,000 (10.6%) and $162,000 (34.0%), respectively, due to a decrease in overdraft fee income and lower fees from a decline in managed asset values. Annualized non-interest income as a percentage of total average assets decreased from 1.18% for the first three months of 2008, to 0.96% for the same period in 2009.
Total non-interest expense for the first quarter of 2009 was $8,652,000, an increase of $1,092,000 (or 14.4%) from $7,560,000 in the first quarter of 2008. The largest difference between the first quarters of 2009 and 2008 was an increase in federal insurance assessments of $613,000, an increase of 729.8%. Most of this increase is attributable to the increase in the assessment rate as well as the expiration of credits from the FDIC in latter 2008. Additionally, the category of other operating expense increased $224,000 (or 21.2%) due mostly to an increase in loan administrative expenses. Annualized non-interest expense as a percentage of total average assets increased to 2.96% for the first three months of 2009, compared to 2.83% for the same period in 2008.
INCOME TAXES
The Corporation recorded an income tax benefit of $104,000 for the first quarter of 2009, as compared to income tax expense of $589,000 for the first quarter of 2008. The effective tax rate was (9.9%) for the three-month period ended March 31, 2009 and 22.0% for the three-month period ended March 31, 2008. The income tax benefit is due to a lower pre-tax income coupled with the effect of tax-exempt investment interest income. For more information on the Corporations income taxes see Note 8 Income Taxes in the Notes to Consolidated Financial Statements.
FDIC
On February 27, 2009, the FDIC adopted a final rule modifying the risk-based assessment system and setting initial base assessment rates beginning April 1,2009, at 12 to 45 basis points and, due to extraordinary circumstances, extended the period of the Restoration Plan to seven years. Also in March 2009, the FDIC Issued final rules on changes to the risk-based assessment system. The final rules both increase base assessment rates and incorporates additional assessments for excess reliance on brokered CDs and FHLB advances. The new rates would increase annual assessment rates from 5 to 7 basis points to 7 to 24 basis points. This new assessment takes effect April 1, 2009 and is payable at the end of September 2009. The Corporation is assessing the effect the new assessment rates will have on its consolidated financial statements.
Also on February 27, 2009, the FDIC adopted an interim rule to impose a 20 basis point emergency special assessment payable September 30. 2009 based on the second quarter 2009 assessment base, to help shore up the Deposit Insurance Fund (DIF). This assessment equates to a one-time cost of $200,000 per $100 million in assessment base. The interim rule also allows the Board to impose possible additional special assessments of up to 10 basis points thereafter to maintain public confidence in the DIF. Should the proposal become final, the Corporation estimates this assessment would have a material impact on its financial statements of approximately $1.7 million.
23
ANALYSIS OF FINANCIAL CONDITION
Total assets at March 31, 2009 increased to $1,215,484,000 from $1,163,130,000 at December 31, 2008 (an increase of $52.4 million or 4.5%). Total loan balances decreased by $16.0 million during the three month period to $774.8 million due to seasonal pay downs in the agricultural portfolio, along with the refinancing of adjustable-rate residential real estate loans into fixed rate products which are sold in the secondary market. Investment balances totaled $274,534,000 at March 31, 2009, compared to $251,115,000 at December 31, 2008 (an increase of $23.4 million or 9.3%), as excess liquidity is invested due to declining loan demand. Total deposits increased to $1,010,964,000 at March 31, 2009 from $962,132,000 at December 31, 2008 (an increase of $48.8 million or 5.1%). Comparing categories of deposits at March 31, 2009 to December 31, 2008, time deposits increased $39.4 million (or 7.2%), interest-bearing demand deposits increased $9.4 million (or 3.8%), savings deposits increased $5.1 million (or 8.4%), and demand deposits decreased $5.1 million (or 4.6%). Borrowings, consisting of customer repurchase agreements, federal funds purchased, notes payable, treasury, tax, and loan (TT&L) deposits, and Federal Home Loan Bank advances, decreased from $118,016,000 at December 31, 2008 to $97,066,000 at March 31, 2009 (a decrease of $20.9 million or 17.8%). The majority of this decrease was due to the repayment of the note payable (balance of $16.05 million at December 31, 2008) with proceeds from the sale of preferred stock under the Capital Purchase Program.
CAPITAL PURCHASE PROGRAM
On January 23, 2009, the Corporation received $25,083 of equity capital by issuing to the United States Department of Treasury 25,083 shares of the Corporations 5.00% Series B Fixed Rate Cumulative Perpetual Preferred Stock, no par value, with a liquidation preference of $1,000 per share and a ten-year warrant to purchase up to 155,025 shares of the Corporations common stock, par value $0.01 per share, at an exercise price of $24.27 per share. The proceeds received were allocated to the preferred stock and common stock warrants based on their relative fair values. The resulting discount on the preferred stock is amortized against retained earnings and is reflected in the Corporations consolidated statement of income as Preferred shares dividends, resulting in additional dilution to the Corporations earnings per common share. The warrants are immediately exercisable, in whole or in part, over a term of 10 years. The warrants were included in the Corporations diluted average common shares outstanding (subject to anti-dilution). Both the preferred securities and warrants were accounted for as additions to the Corporations regulatory Tier 1 and total capital.
The Series B Preferred stock is not mandatorily redeemable and will pay cumulative dividends at a rate of 5% per year for the first five years and 9% per year thereafter. Any redemption requires Federal Reserve approval. The Series B Perpetual Preferred stock ranks senior to the Corporations existing authorized Series A Junior Participating Preferred stock.
A company that participates must adopt certain standards for executive compensation, including (a) prohibiting golden parachute payments as defined in the Emergency Economic Stabilization Act of 2008 (EESA) to senior Executive Officers; (b) requiring recovery of any compensation paid to senior Executive Officers based on criteria that is later proven to be materially inaccurate; (c) prohibiting incentive compensation that encourages unnecessary and excessive risks that threaten the value of the financial institution; and (d) accept restrictions on the payment of dividends and the repurchase of common stock.
24
ASSET QUALITY
For the three months ended March 31, 2009, the subsidiary bank charged off $412,000 of loans and had recoveries of $42,000, compared to charge-offs of $546,000 and recoveries of $65,000 during the three months ended March 31, 2008. The allowance for loan losses is based on factors that include the overall composition of the loan portfolio, types of loans, underlying collateral, past loss experience, loan delinquencies, substandard and doubtful credits, and such other factors that, in managements reasonable judgment, warrant consideration. The adequacy of the allowance is monitored monthly. At March 31, 2009, the allowance was $5,864,000 which is 17.6% of non-performing loans and 0.76% of total loans, compared with $5,064,000 which was 15.3% of non-performing loans and 0.64% of total loans at December 31, 2008.
Non-performing loans increased to $33,278,000 or 4.30% of net loans at March 31, 2009, as compared to $33,038,000 or 4.18% of net loans at December 31, 2008. Approximately 60% of the non-performing loans is comprised of three larger credits, all of which are development loans in the Corporations northern and eastern market areas. No specific reserves had been established for these three relationships as of March 31, 2009. All loans are individually evaluated and management continues to maintain adequate reserves in the allowance for loan losses.
At March 31, 2009 non-accrual loans were $33,137,000 compared to $30,383,000 at December 31, 2008. Impaired loans totaled $17,170,000 at March 31, 2009 compared to $3,540,000 at December 31, 2008. The total amount of loans ninety days or more past due and still accruing interest at March 31, 2009 was $142,000 compared to $2,655,000 at December 31, 2008. There was a specific loan loss reserve of $1,983,000 established for impaired loans as of March 31, 2009 compared to a specific loan loss reserve of $818,000 at December 31, 2008. PNBCs 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, 2009.
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, 2009, total risk-based capital of PNBC was 11.53%, compared to 8.30% at December 31, 2008. The Tier 1 capital ratio increased from 6.22% at December 31, 2008, to 7.99% at March 31, 2009. Total stockholders equity to total assets at March 31, 2009 increased to 8.06% from 6.23% at December 31, 2008. The increase in these ratios is due to the equity investment received from the U.S. Treasury in the form of Preferred Stock as part of the Capital Purchase Program discussed above.
LIQUIDITY
Liquidity is measured by a financial institutions ability to raise funds through deposits, borrowed funds, capital, or the sale of assets. Additional sources of liquidity include cash flow from the repayment of loans and the maturity of investment securities. Major uses of cash include the origination of loans and purchase of investment securities. Cash flows provided by financing and operating activities, offset by those used in investing activities, resulted in a net increase in cash and cash equivalents of $47,607,000 from December 31, 2008 to March 31, 2009. This increase was primarily the result of the proceeds received from the issuance of preferred stock, an increase in deposits and a decrease in loans, offset by net purchases of investments and the pay off of the Corporations note payable. For more detailed information, see PNBCs Consolidated Statements of Cash Flows.
25
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Corporation generates agribusiness, commercial, mortgage and consumer loans to customers located primarily in North Central Illinois. The Corporations loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Although the Corporation has a diversified loan portfolio, a substantial portion of its debtors ability to honor their contracts is dependent upon economic conditions in the agricultural industry.
In the normal course of business to meet the financing needs of its customers, the subsidiary bank is party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the subsidiary bank has in particular classes of financial instruments.
The subsidiary banks exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The subsidiary bank uses the same credit policies in making commitments and conditional obligations as they do for on-balance-sheet instruments. At March 31, 2009, commitments to extend credit and standby letters of credit were approximately $135,882,000 and $4,819,000 respectively.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The subsidiary bank evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, by the subsidiary bank upon extension of credit is based on managements credit evaluation of the counterparty. Collateral held varies, but may include real estate, accounts receivable, inventory, property, plant and equipment, and income-producing properties.
Standby letters of credit are conditional commitments issued by the subsidiary bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. The subsidiary bank secures the standby letters of credit with the same collateral used to secure the loan. The maximum amount of credit that would be extended under standby letters of credit is equal to the off-balance sheet contract amount. The standby letters of credit have terms that expire in one year or less.
26
LAND HELD FOR SALE
The Corporation owns separate lots in Elburn, Aurora and Somonauk, Illinois that have been removed from the land balance and are now shown on the Corporations balance sheet as land held-for-sale, at the lower of cost or market. The land in Elburn, approximately 2 acres, was purchased in 2003 for $930,000 in anticipation of the construction of a branch facility. The land in Aurora, consisting of two lots remaining from the original purchase of fourteen acres in 2004 which was used to construct a branch facility has a cost basis of $1,344,000. The land in Somonauk, acquired in 2005 during the acquisition of FSB Bancorp, Inc., consists of approximately two acres with a cost basis of $80,000.
LEGAL PROCEEDINGS
There are various claims pending against the Corporations subsidiary bank, arising in the normal course of business. Management believes, based upon consultation with legal counsel, that liabilities arising from these proceedings, if any, will not be material to the Corporations financial position or results of operation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in market risk since December 31, 2008, as reported in PNBCs 2008 Annual Report on Form 10-K.
EFFECTS OF INFLATION
The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America and practices within the banking industry which require the measurement of financial condition and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institutions performance than the effects of general levels of inflation.
27
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
The following table sets forth (in thousands) details of average balances, interest income and expense, and resulting annualized yields/costs for the Corporation for the periods indicated, reported on a fully taxable equivalent basis, using a tax rate of 34%.
|
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|
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|
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|
|
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|
|
|
|
|
Three Months Ended, March 31, 2009 |
|
Three Months Ended, March 31, 2008 |
|
||||||||||||||
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||||||||||||||
|
|
Average
|
|
Interest |
|
Yield/
|
|
Average
|
|
Interest |
|
Yield/
|
|
||||||
Average Interest-Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
35,708 |
|
$ |
16 |
|
0.18 |
% |
|
$ |
1,666 |
|
$ |
12 |
|
2.90 |
% |
|
Taxable investment securities |
|
|
148,917 |
|
|
1,803 |
|
4.91 |
% |
|
|
134,622 |
|
|
1,617 |
|
4.83 |
% |
|
Tax-exempt investment securities |
|
|
106,754 |
|
|
1,710 |
|
6.50 |
% |
|
|
95,871 |
|
|
1,609 |
|
6.75 |
% |
|
Federal funds sold |
|
|
199 |
|
|
0 |
|
0.00 |
% |
|
|
3,678 |
|
|
25 |
|
2.73 |
% |
|
Net loans |
|
|
746,711 |
|
|
11,095 |
|
6.03 |
% |
|
|
715,719 |
|
|
12,370 |
|
6.95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
1,038,289 |
|
|
14,624 |
|
5.71 |
% |
|
|
951,556 |
|
|
15,633 |
|
6.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average non-interest earning assets |
|
|
148,259 |
|
|
|
|
|
|
|
|
122,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets |
|
$ |
1,186,547 |
|
|
|
|
|
|
|
$ |
1,074,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Interest-Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
$ |
262,338 |
|
|
736 |
|
1.14 |
% |
|
$ |
250,520 |
|
|
1,387 |
|
2.23 |
% |
|
Savings deposits |
|
|
63,167 |
|
|
12 |
|
0.08 |
% |
|
|
60,376 |
|
|
21 |
|
0.14 |
% |
|
Time deposits |
|
|
567,448 |
|
|
4,399 |
|
3.14 |
% |
|
|
495,143 |
|
|
5,265 |
|
4.28 |
% |
|
Interest-bearing demand notes issued to the U.S. Treasury |
|
|
1,055 |
|
|
0 |
|
0.00 |
% |
|
|
741 |
|
|
6 |
|
3.26 |
% |
|
Federal funds purchased |
|
|
1,029 |
|
|
1 |
|
0.39 |
% |
|
|
3,697 |
|
|
38 |
|
4.13 |
% |
|
Customer repurchase agreements |
|
|
30,708 |
|
|
81 |
|
1.07 |
% |
|
|
34,447 |
|
|
242 |
|
2.83 |
% |
|
Advances from Federal Home Loan Bank |
|
|
32,493 |
|
|
247 |
|
3.08 |
% |
|
|
9,622 |
|
|
105 |
|
4.39 |
% |
|
Trust preferred securities |
|
|
25,000 |
|
|
355 |
|
5.76 |
% |
|
|
25,000 |
|
|
355 |
|
5.71 |
% |
|
Note payable |
|
|
9,631 |
|
|
96 |
|
4.04 |
% |
|
|
14,550 |
|
|
193 |
|
5.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
992,868 |
|
|
5,927 |
|
2.42 |
% |
|
|
894,096 |
|
|
7,612 |
|
3.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on average interest-earning assets |
|
|
|
|
$ |
8,697 |
|
3.40 |
% |
|
|
|
|
$ |
8,021 |
|
3.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average non-interest-bearing liabilities |
|
|
102,243 |
|
|
|
|
|
|
|
|
111,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average stockholders equity |
|
|
91,436 |
|
|
|
|
|
|
|
|
68,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average liabilities and stockholders equity |
|
$ |
1,186,547 |
|
|
|
|
|
|
|
$ |
1,074,211 |
|
|
|
|
|
|
|
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
|
|
||||
|
|
2009 |
|
2008 |
|
||
Net interest income as stated |
|
$ |
8,079 |
|
$ |
7,454 |
|
Tax equivalent adjustment-investments |
|
|
582 |
|
|
547 |
|
Tax equivalent adjustment-loans |
|
|
36 |
|
|
20 |
|
|
|
|
|
|
|
|
|
Tax equivalent net interest income |
|
$ |
8,697 |
|
$ |
8,021 |
|
28
Schedule 7. Controls and Procedures
|
|
(a) |
Disclosure controls and procedures. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2009. Our disclosure controls and procedures are the controls and other procedures that we designed to ensure that we record, process, summarize and report in a timely manner the information we must disclose in reports that we file with or submit to the SEC. Tony J. Sorcic, President and Chief Executive Officer, and Todd D. Fanning, Senior Vice-President and Chief Financial Officer, reviewed and participated in this evaluation. Based on this evaluation, Messrs. Sorcic and Fanning concluded that, as of the date of their evaluation, our disclosure controls were effective. |
|
|
(b) |
Internal controls. There have not been any significant changes in our internal accounting controls or in other factors during the quarter ended March 31, 2009 that could significantly affect those controls. |
29
INDEX TO EXHIBITS
|
|
|
Exhibit
|
|
Exhibit
|
|
|
|
3.1 |
|
Certificate of Designations for the Series B Preferred Stock (incorporated by reference from the Form 8-K filed on January 27, 2009). |
|
|
|
4.1 |
|
Warrant to purchase up to 155,025 shares of Common Stock issued January 23, 2009(incorporated by reference from the Form 8-K filed on January 29, 2009). |
|
|
|
10.1 |
|
Letter Agreement dated January 23, 2009 including the Securities Purchase Agreement Standard Terms incorporated by reference therein between the Company and the U.S. Treasury (incorporated by reference from the Form 8-K filed on January 29, 2009). |
|
|
|
10.2 |
|
Form of Waiver of Senior Executive Officers (incorporated by reference from the Form 8-K filed on January 29, 2009). |
|
|
|
10.3 |
|
Form of Omnibus Amendment Agreement (incorporated by reference from the Form 8-K filed on January 29, 2009). |
|
|
|
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. |
30
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