FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1998
Commission File No. 0-20050
PRINCETON NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-32110283
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
606 S. Main Street, Princeton, IL 61356
(Address of principal executive offices and Zip Code)
(815) 875-4444
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports),and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of November 2, 1998, the registrant had outstanding 3,824,990 shares of
its $5 par value common stock.
Page 1 of 14 pages
<PAGE>
<PAGE>
Part I: FINANCIAL INFORMATION
The consolidated financial statements of Princeton National Bancorp, Inc.
and Subsidiary and management's discussion and analysis of financial condition
and results of operations are presented in the schedules as follows:
Schedule 1: Consolidated Balance Sheets
Schedule 2: Consolidated Statements of Income and Comprehensive Income
Schedule 3: Consolidated Statements of Stockholders' Equity
Schedule 4: Consolidated Statements of Cash Flows
Schedule 5: Note to Consolidated Financial Statements
Schedule 6: Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits :
27 - Financial Data Schedule for the period ended September 30, 1998.
(b) A Form 8-K was filed by the Corporation on July 30, 1998 with respect
to the implementation of a stock repurchase program whereby the
Corporation may purchase up to 5% of its outstanding shares of
common stock.
A Form 8-K was also filed by the Corporation on August 26, 1998 with
respect to the Corporation's subsidiary bank's lawsuit against
Cincinnati Insurance Company (see Schedule 6: Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Current Events.)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRINCETON NATIONAL BANCORP, INC.
Date: November 12, 1998 By /s/ Tony J. Sorcic
---------------------------------
Tony J. Sorcic
President & Chief Executive
Officer
Date: November 12, 1998 By /S/ Todd D. Fanning
---------------------------------
Todd D. Fanning
Chief Financial Officer
2
<PAGE>
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY Schedule 1
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 12,663 $ 21,268
Short-term funds 8,232 11,900
Loans held for sale 1,222 1,576
Investment securities:
Available-for-sale, at fair
value 109,299 107,042
Held-to-maturity (fair value
of $13,714 and $12,661 at
September 30, 1998 and
December 31, 1997, respectively) 13,444 12,498
-------- --------
Total investment securities 122,743 119,540
-------- --------
Loans:
Gross loans 283,841 274,725
Less: Unearned interest (58) (120)
Allowance for possible
loan losses (1,925) (1,830)
-------- --------
Net loans 281,858 272,775
-------- --------
Premises and equipment 9,820 8,752
Interest receivable 6,309 5,808
Goodwill and intangible assets,
net of accumulated amortization 5,044 5,272
Other assets 3,261 2,769
-------- --------
TOTAL ASSETS $451,152 $449,660
-------- --------
-------- --------
LIABILITIES
Deposits:
Demand $ 35,817 $ 42,333
Interest-bearing demand 88,005 87,364
Savings 53,449 52,193
Time 203,444 204,050
-------- --------
Total deposits 380,715 385,940
Short-term borrowings 21,341 13,237
Long-term borrowings 500 3,750
Other liabilities 4,738 4,065
-------- --------
TOTAL LIABILITIES 407,294 406,992
-------- --------
STOCKHOLDERS' EQUITY
Common stock: $5 par value,
7,000,000 shares authorized;
4,139,841 issued at September
30, 1998 and 4,139,917 issued
at December 31, 1997 20,700 20,700
Surplus 6,232 6,235
Retained earnings 18,855 16,569
Accumulated other comprehensive
income, net of tax 1,223 560
Less: Cost of 214,851 treasury
shares at September 30, 1998
and 123,604 treasury shares at
December 31, 1997 (3,152) (1,396)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 43,858 42,668
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $451,152 $449,660
-------- --------
-------- --------
</TABLE>
See accompanying note to consolidated financial statements
3
<PAGE>
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY Schedule 2
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Unaudited) For the Three Months For the Nine Months
(In thousands, except share data) Ended September 30 Ended September 30
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $6,315 $6,290 $18,681 $17,999
Interest and dividends on
investment securities 1,869 1,631 5,446 4,912
Interest on short-term funds 76 43 236 127
-------- -------- -------- --------
Total interest income 8,260 7,964 24,363 23,038
Interest expense:
Interest on deposits 3,907 3,784 11,456 10,716
Interest on short-term borrowings 343 129 786 321
Interest on long-term borrowings 1 88 87 268
-------- -------- -------- --------
Total interest expense 4,251 4,001 12,329 11,305
-------- -------- -------- --------
Net interest income 4,009 3,963 12,034 11,733
Provision for possible loan losses 134 173 262 485
------ -------- -------- --------
Net interest income after
provision for possible loan
losses 3,875 3,790 11,772 11,248
Non-interest income:
Trust & farm management fees 239 250 864 805
Service charges on deposit
accounts 392 364 1,089 1,017
Other service charges 132 122 382 332
Gain on sales of securities 0 26 21 94
Loan servicing fees and other
charges 77 52 236 122
Other income 61 45 226 168
------ ------ ------- ------
Total non-interest income 901 859 2,818 2,538
Non-interest expense:
Salaries and employee benefits 1,951 1,706 5,551 5,025
Occupancy 273 245 773 732
Equipment expense 216 208 613 663
FDIC/OCC assessments 46 45 140 99
Goodwill and intangible assets
amortization 116 114 350 348
Data processing 169 176 459 508
Other expense 847 691 2,408 2,007
-------- -------- -------- --------
Total non-interest expense 3,618 3,185 10,294 9,382
-------- -------- -------- --------
Income before income taxes 1,158 1,464 4,296 4,404
Income tax expense 263 382 1,077 1,148
-------- -------- -------- --------
Net income $ 895 $1,082 $ 3,219 $ 3,256
-------- -------- -------- --------
-------- -------- -------- --------
Basic and diluted earnings
per share: 0.23 0.27 0.81 0.80
Weighted average shares
outstanding 3,959,711 4,064,685 3,988,497 4,079,109
Dividends per share 0.08 0.07 0.24 0.21
</TABLE>
See accompanying note to consolidated financial statements
4
<PAGE>
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY Schedule 2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income $ 895 $ 1,082 $ 3,219 $ 3,256
Other comprehensive income,
net of tax
Unrealized holding gain
arising during the period 683 221 684 296
Less: Reclassification
adjustment for realized
gains included in income
statement 0 (26) (21) (94)
-------- -------- -------- --------
Other comprehensive income 683 195 663 202
-------- -------- -------- --------
Comprehensive income $ 1,578 $ 1,277 $ 3,882 $ 3,458
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying note to consolidated financial statements
5
<PAGE>
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY Schedule 3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Balance, January 1 $42,668 $40,197
Net income 3,219 3,256
Cash dividends (934) (845)
Other comprehensive income, net of tax 663 202
Purchases of treasury stock (1,783) (959)
Sales of treasury stock 25 46
------- -------
Balance, September 30 $43,858 $41,897
------- -------
------- -------
</TABLE>
See accompanying note to consolidated financial statements
6
<PAGE>
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY Schedule 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
(In thousands) 1998 1997 1998 1997
---------- --------- -------- --------
<S> <C> <C> <C> <C>
Operating activities:
Net income $ 895 $ 1,082 $ 3,219 $ 3,256
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 169 213 481 665
Provision for possible loan
losses 134 173 262 485
Amortization of goodwill and
other intangible assets 116 114 350 348
Amortization of premiums on
investment securities, net of
accretion 48 9 133 67
Gain on sales of securities, net 0 (26) (21) (94)
(Gain) loss on sales of other
real estate (8) 0 (8) 1
Loans originated for sale (9,527) (3,016) (19,439) (5,281)
Proceeds from sales of loans
originated for sale 9,948 2,681 19,793 5,437
Increase (decrease) in accrued
interest payable 165 181 (1) 309
Increase in accrued interest
receivable (1,185) (1,102) (501) (327)
(Increase) decrease in other
assets (111) 514 (685) (444)
(Decrease) increase in other
liabilities (48) (543) 332 (99)
-------- -------- -------- -------
Net cash provided by
operating activities 596 280 3,915 4,323
-------- -------- -------- -------
Investing activities:
Proceeds from sales of investment
securities available-for-sale 0 3,026 5,016 6,514
Proceeds from maturities of
investment securities available-
for-sale 9,677 11,643 27,968 35,294
Purchase of investment securities
available-for-sale (4,355) (12,868) (34,347) (32,679)
Proceeds from maturities of
investment securities held-to-
maturity 172 40 768 615
Purchase of investment securities
held-to-maturity (600) (1,565) (1,715) (2,458)
Proceeds from sales of other
real estate owned 34 0 79 181
Net increase in loans (7,418) (6,430) (9,345) (17,685)
Purchases of premises and
equipment (1,061) (79) (1,549) (355)
-------- -------- -------- --------
Net cash used for investing
activities (3,551) (6,233) (13,125) (10,573)
-------- -------- -------- --------
Financing activities:
Net increase (decrease) in
deposits 6,004 10,646 (5,225) 19,054
Net (decrease) increase in
short-term borrowings (8,761) 713 8,104 (1,790)
Net increase (decrease) in
long-term borrowings 500 (300) (3,250) (450)
Dividends paid (318) (300) (934) (845)
Purchase of treasury stock (852) (959) (1,783) (959)
Sale of treasury stock 5 14 25 46
-------- -------- -------- --------
Net cash provided by
financing activities (3,422) 9,814 (3,063) 15,056
-------- -------- -------- --------
(Decrease) increase in cash and
cash equivalents (6,377) 3,861 (12,273) 8,806
Cash and cash equivalents at
beginning of quarter and year 27,272 26,078 33,168 21,133
-------- -------- -------- --------
Cash and cash equivalents at
September 30 $20,895 $29,939 20,895 29,939
-------- -------- -------- --------
-------- -------- -------- --------
Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest $4,615 $3,730 $12,330 $10,906
Income taxes $515 $433 $1,279 $1,367
Supplemental disclosures of non-
cash flow activities:
Amounts transferred to other
real estate owned $0 $0 $34 $108
</TABLE>
See accompanying note to consolidated financial statements
7
<PAGE>
Schedule 5
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
Note to Consolidated Financial Statements
(Unaudited)
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information required by generally accepted accounting principles 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 financial statements and
notes included in the Registrant's 1997 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.
<PAGE>
Schedule 6
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1998
(unaudited)
The following discussion provides information about Princeton National
Bancorp, Inc.'s (PNB) financial condition and results of operations for the
quarter and nine months ended September 30, 1998. This discussion should be
read in conjunction with the attached consolidated financial statements and note
thereto. Certain statements in this report constitute forward-looking
statements' within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. PNB cautions that such
forward-looking statements involve risks and uncertainties that may cause actual
results to differ materially from those expressed or implied.
STOCK DIVIDEND
- --------------
On April 14, 1998, the Board of Directors of PNB declared a three-for-two
stock split in the form of a 50% stock dividend which was distributed May 15,
1998 to shareholders of record on April 24, 1998. Each shareholder of record
received one new share of common stock for each two shares owned as of the
record date. Cash was paid in lieu of fractional shares. Accordingly, all per
share data stated in this Form 10-Q has been adjusted to reflect this dividend.
RESULTS OF OPERATIONS
- ---------------------
Net income for the third quarter of 1998 was $895,000, or basic and diluted
earnings per share of $0.23 as compared to net income of $1,082,000 in the
second quarter of 1997, or basic and diluted earnings per share of $0.27. This
represents a decrease of $187,000 (17.3%) or $0.04 per share. This decrease is
attributable to a tightening of the net interest margin, an increase in salary
costs, and an increase in legal expenses relating to the subsidiary bank's
lawsuit (see Current Events section). For the first nine months of 1998, net
income was $3,219,000, or basic and diluted earnings per share of $0.81,
compared to $3,256,000, or basic and diluted earnings per share of $0.80 in the
first nine months of 1997. Annualized return on average assets and return on
average equity were 0.78% and 8.19%, respectively, for the third quarter of
1998, compared with 1.01% and 10.36% for the third quarter of 1997. For the
nine-month periods, the annualized returns on average assets and average equity
were 0.97% and 10.00%, respectively, for 1998, compared to 1.03% and 10.59% in
1997.
Net interest income before any provision for loan losses was $4,009,000 for
the third quarter of 1998, compared to $3,963,000 for the third quarter of 1997
(an increase of $46,000 or 1.2%). Additionally, for the nine-month periods, net
interest income before any provision for loan losses was $12,034,000 for 1998,
as compared to $11,733,000 for 1997, representing an increase of $301,000 (or
2.6%). This increase can be attributed to an increase in average interest-
earning assets from $386.0 million at September 30, 1997, to $413.1 million at
September 30, 1998. However, as mentioned previously, due to a decrease in the
net yield on average interest-earning assets and the cost of average interest-
bearing liabilities staying fairly constant the net interest margin has
tightened. Accordingly, the net yield on interest-earning assets (on a fully
taxable equivalent basis) decreased from 4.27% for the first nine months of 1997
to 4.11% for the first nine months of 1998.
Non-interest income increased by $42,000 (or 4.9%) during the third quarter
of 1998 as compared to the third quarter of 1997 from $859,000 to $901,000. For
the first nine months of 1998, non-interest income has increased to $2,818,000
from $2,538,000 in the first nine months of 1997 (an increase of $280,000 or
11.0%). With the exception of net gains from securities transactions, which
decreased from $94,000 for the first nine months of 1997 to $21,000 for the
first nine months of 1998, all categories had increases over the same time
frame. Most notably, loan servicing fees increased $114,000 (due to an increase
in activity in the secondary market), service charges on deposit accounts
increased $72,000, trust and farm management fees increased $59,000, and other
service charges increased $40,000.
Non-interest expenses for the third quarter of 1998 were $3,618,000, an
increase of $433,000 (or 13.6%) from the total of $3,185,000 in the third
quarter of 1997. Again, the majority of this increase is due to additional
staff resulting in salaries and employee benefits increasing by $245,000 (or
14.4%) during the aforementioned periods. Year-to-date non-interest expenses of
$10,294,000 for 1998, represents an increase of $912,000 (or 9.7%) from 1997.
On a year-to-date basis, comparing 1998 to 1997, salaries and employee benefits
have increased $526,000 (or 10.5%). Also worth noting is an increase in other
operating expenses from $2,007,000 for the first three quarters of 1997, to
$2,408,000 for the first three quarters of 1998. This is a result of several
small increases over many categories of PNB's operating expenses and additional
legal expenses incurred in the aforementioned lawsuit. Offsetting these
increases was a $50,000 reduction in equipment expense, primarily reduced
depreciation expense.
EARNINGS PER SHARE
- ------------------
Basic income per share is computed by dividing net income by the weighted
average number of shares outstanding which were 3,959,711 and 4,064,685 for the
quarters ending September 30, 1998 and 1997, respectively, and 3,988,497 and
4,079,109 for the nine-month periods ending September 30, 1998 and 1997,
respectively. There were no common stock equivalents during any of these
periods, therefore diluted earnings per share is the same calculation.
ANALYSIS OF FINANCIAL CONDITION
- -------------------------------
Total assets at September 30, 1998 increased to $451,152,000 from
$449,660,000 at December 31, 1997 ($1.5 million or 0.3%). Total deposits and
repurchase agreements as a whole have decreased from $395.7 million at December
31, 1997 to $391.8 million at September 30, 1998 (an decrease of $3.9 million or
1.0%). The investment balances total $122,743,000 at September 30, 1998,
compared to $119,540,000 at December 31, 1997 (an increase of $3.2 million or
2.7%).
Loan demand and refinancing activity continued very strong during the third
quarter of 1998. Accordingly, loan balances, net of unearned interest,
increased to $285,005,000 at September 30, 1998, compared to $276,181,000 at
December 31, 1997 (an increase of $8.8 million or 3.2%). Non-performing loans
totaled $1,157,000 or 0.41% of net loans at September 30, 1998, as compared to
$837,000 or 0.30% of net loans at December 31, 1997.
During the first nine months of 1998, PNB charged off $709,000 of loans and
had recoveries of $542,000. This compares favorably to charge-offs of $763,000
and recoveries of $493,000 during the first nine months of 1997. The allowance
for possible loan losses is based on factors that include the overall
composition of the loan portfolio, types of loans, past loss experience, loan
delinquencies, potential substandard and doubtful credits, and such other
factors that, in management's reasonable judgment, warrant consideration. The
adequacy of the allowance is monitored monthly. During the first nine months of
1998, PNB recorded a loan loss expense of $262,000, compared to $485,000 during
the first nine months of 1997. As loan volume grows during the remainder of
1998, as anticipated, management expects to continue to increase the balance in
the allowance for possible loan losses. At September 30, 1998, the balance in
the allowance was $1,925,000 which is 166.4% of total non-performing loans,
compared with $1,830,000 or 218.6% of total non-performing loans at December 31,
1997.
At September 30, 1998, the recorded balance in loans for which impairment
has been recognized in accordance with FASB Statement No. 114 totaled $485,000,
all of which related to impaired loans which do not require a related allowance
for possible loan losses as the carrying value of the loans is less than the
discounted present value of expected future cash flows. Interest recognized on
impaired loans (during the portion of this quarter that they were impaired) is
not considered material.
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 September 30,
1998, total risk-based capital was 13.33%, compared to 13.88% at December 31,
1997. The Tier 1 capital ratio increased from 8.36% at December 31, 1997, to
8.44% at September 30, 1998. Total stockholders' equity to total assets at
September 30, 1998 increased to 9.72% from 9.49% at December 31, 1997.
The Corporation's plan (announced in July, 1997) to repurchase 3% of its
own stock was completed during the second quarter of 1998. In that plan, PNB
repurchased a total of 122,656 shares at an average cost of $16.43. The Board
of Directors announced on July 20, 1998 that it was implementing another stock
repurchase program whereby up to 5% of its outstanding shares of common stock
might be repurchased in the open market over the next twelve months. As of
September 30, 1998, the Corporation had repurchased 47,500 shares in the new
plan at an average cost of $17.91. It is anticipated that the repurchase
program will continue to have a positive impact on future diluted earnings per
share as well as market value.
LIQUIDITY
- ---------
Liquidity is measured by a financial institution's ability to raise funds
through deposits, borrowed funds, capital, or the sale of assets. Additional
sources of liquidity, including cash flow from both the repayment of loans and
the securitization of assets, are also considered in determining whether
liquidity is satisfactory. Cash flows provided by operating activities have
been offset by those used for investing and financing activities, resulting in a
net decrease in cash and cash equivalents of $12,273,000 from December 31, 1997
to September 30, 1998. This usage was due to a net decrease in deposits, a net
increase in loans, a net decrease in long-term borrowings, and an increase in
investments (purchases greater than sales and maturities), offset by a net
increase in short-term borrowings. For more detailed cash flow information, see
PNB's Consolidated Statement of Cash Flows.
CURRENT EVENTS
- --------------
A ruling was received during the third quarter on the subsidiary bank's
lawsuit, stemming from the 1995 Trust Department issue, against Cincinnati
Insurance Company. The case was heard in the United States District Court for
the Northern District of Illinois, Eastern Division, in Chicago, Illinois. The
judge ruled in favor of the bank on all issues and awarded $4,900,000 in
damages, pre-judgment interest, post-judgment interest, and reasonable attorney
fees and costs. Cincinnati Insurance Company has filed an appeal to the
ruling. Citizens First National Bank continues to expense legal fees and if
successful, the majority of such expenses would be reimbursed through the
insurance coverage and the court's judgment.
IMPACT OF NEW ACCOUNTING STANDARDS
- ----------------------------------
In June 1997, FASB Statement No. 131, 'Disclosures about Segments of an
Enterprise and Related Information' (FAS 131), was issued. FAS 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. FAS 131 is effective for financial
periods beginning after December 15, 1997, and is not expected to have a
material impact on the PNB.
YEAR 2000 COMPLIANCE
- --------------------
The Corporation through its subsidiary, Citizens First National Bank, has
undertaken an initiative to address the year 2000 issue and has developed a
comprehensive plan to prepare, as appropriate, the Corporation's computer
systems to recognize the date change on January 1, 2000. If not remedied,
potential risks include business interruption, financial loss, reputation loss,
and/or legal liability. An assessment of the readiness of third parties that
the Corporation interfaces with, such as vendors, counter-parties, customers,
payment systems, and others, is ongoing to mitigate the potential risks that
year 2000 poses to the Corporation. The Corporation's objective is to ensure
that all aspects of the year 2000 issue affecting the Corporation, including
those related to the efforts of third parties, will be fully resolved in
time. The Corporation has consistently maintained contingency plans for
vital systems and business processes to protect the Corporation's assets against
unplanned events that would prevent normal operations. The millennium
changeover presents unique risks, some of which would not be effectively
addressed by existing plans. The Corporation is examining these risks and
developing additional plans to mitigate the effect of potential impacts and
ensure continuity of operation throughout the year 2000 and beyond. The use
of the existing contingency planning infrastructure will ensure optimum
coverage and re-usability of existing arrangements and responsibility
assignments.
A year 2000 committee, comprised of representatives from all areas of
the subsidiary, has overall responsibility for ensuring that both the
technical and the business risks imposed by the year 2000 issue are
addressed. This committee regularly monitors the progress toward year 2000
compliance and provides periodic reporting to the subsidiary's Executive
Committee and Board of Directors.
The process for year 2000 compliance is following four major steps:
inventory, impact assessment, validation, and implementation. The Corporation
plans to substantially complete the implementation of the Corporation's
critical systems by the end of 1998. It is anticipated that the implementation
of all systems will be achieved by June 30, 1999. The Corporation expects that
the principal costs will be those associated with the replacement of non-
compliant computer equipment, which was fully depreciated and scheduled for
replacement. These costs, which will be capitalized and amortized over the
equipment's useful lives, will be met from existing resources. As a result,
the Corporation's management does not anticipate significant cost savings to
occur after the year 2000 issue is satisfactorily remedied.
In total the Corporation expects the cost of solving the year 2000 issue,
and regular replacement of equipment, to be approximately $1.3 million,
consisting of following:
Estimated capital costs for technology upgrades $1.2 million
Estimated testing costs $ .1 million
Total estimated spending $1.3 million
As of September 30, 1998, the subsidiary bank has successfully met all
critical time frames established by federal regulatory agencies. At this
point, Management does not believe there will be a material impact on the
Corporation's result of operations, liquidity, or capital resources.
LEGAL PROCEEDINGS
- -----------------
There are various claims pending against PNB's subsidiary bank, arising in
the normal course of business. Management believes, based upon consultation
with counsel, that liabilities arising from these proceedings, if any, will not
be material to PNB's financial position.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
There has been no material change in market risk since December 31, 1997,
as reported in the Corporation's 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 generally accepted
accounting principles and practices within the banking industry which require
the measurement of financial position and operating results in terms of
historical dollars, without considering the changes in the relative purchasing
power of money over time due to inflation. Unlike most industrial companies,
virtually all the assets and liabilities of a financial institution are monetary
in nature. As a result, interest rates have a more significant impact on a
financial institution's performance than the effects of general levels of
inflation.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Princeton National Bancorp, Inc. and Subsidiary Consolidated Balance Sheets and
Statements of Income and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> $12,663
<INT-BEARING-DEPOSITS> $344,898
<FED-FUNDS-SOLD> $2,600
<TRADING-ASSETS> $0
<INVESTMENTS-HELD-FOR-SALE> $109,299
<INVESTMENTS-CARRYING> $13,444
<INVESTMENTS-MARKET> $13,714
<LOANS> $285,005
<ALLOWANCE> $1,925
<TOTAL-ASSETS> $451,152
<DEPOSITS> $380,715
<SHORT-TERM> $21,341
<LIABILITIES-OTHER> $4,738
<LONG-TERM> $500
$0
$0
<COMMON> $20,700
<OTHER-SE> $23,158
<TOTAL-LIABILITIES-AND-EQUITY> $451,152
<INTEREST-LOAN> $18,681
<INTEREST-INVEST> $5,446
<INTEREST-OTHER> $236
<INTEREST-TOTAL> $24,383
<INTEREST-DEPOSIT> $11,456
<INTEREST-EXPENSE> $12,329
<INTEREST-INCOME-NET> $12,034
<LOAN-LOSSES> $262
<SECURITIES-GAINS> $21
<EXPENSE-OTHER> $10,294
<INCOME-PRETAX> $4,296
<INCOME-PRE-EXTRAORDINARY> $4,296
<EXTRAORDINARY> $0
<CHANGES> $0
<NET-INCOME> $3,219
<EPS-PRIMARY> $0.81
<EPS-DILUTED> $0.81
<YIELD-ACTUAL> 4.11
<LOANS-NON> $1,124
<LOANS-PAST> $33
<LOANS-TROUBLED> $0
<LOANS-PROBLEM> $200
<ALLOWANCE-OPEN> $1,925
<CHARGE-OFFS> $709
<RECOVERIES> $542
<ALLOWANCE-CLOSE> $1,925
<ALLOWANCE-DOMESTIC> $1,925
<ALLOWANCE-FOREIGN> $0
<ALLOWANCE-UNALLOCATED> $0
</TABLE>
