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, 1999
Commission File No. 0-20050
PRINCETON NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-32110283
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
606 S. Main Street, Princeton, IL 61356
(Address of principal executive offices and Zip Code)
(815) 875-4444
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
As of November 8, 1999, the registrant had outstanding 3,722,147 shares
of its $5 par value common stock.
Page 1 of 16 pages
<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, 1999.
(b) A Form 8-K was filed by the Corporation on July 21, 1999 with respect
to the implementation of a stock repurchase program whereby the
Corporation may purchase up to 3% of its outstanding shares of common
stock.
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, 1999 By
-------------------------------------
Tony J. Sorcic
President & Chief Executive Officer
Date: November 12, 1999 By /s/ Todd D. Fanning
-------------------------------------
Todd D. Fanning
Chief Financial Officer
2
<PAGE>
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY Schedule 1
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 11,461 $ 31,133
Federal funds sold 1,400 23,000
Loans held for sale, at lower of cost or market 8,031 5,363
Investment securities:
Available-for-sale, at fair value 99,323 109,530
Held-to-maturity (fair value of $19,639 and $21,643 at
September 30, 1999 and December 31, 1998, respectively) 19,869 21,396
------------- -------------
Total investment securities 119,192 130,926
------------- -------------
Loans:
Gross loans 296,435 265,655
Less: Unearned interest (14) (181)
Allowance for possible loan losses (1,915) (1,800)
------------- -------------
Net loans 294,506 263,674
------------- -------------
Premises and equipment, net of accumulated depreciation 11,210 10,627
Interest receivable 6,015 5,604
Goodwill and intangible assets, net of accumulated amortization 4,270 4,609
Other assets 4,677 3,975
------------- -------------
TOTAL ASSETS $ 460,762 $ 478,911
============= =============
LIABILITIES
Deposits:
Demand $ 39,973 $ 47,355
Interest-bearing demand 89,340 93,982
Savings 54,268 54,378
Time 201,564 212,123
------------- -------------
Total deposits 385,145 407,838
Borrowings:
Customer repurchase agreements 15,177 13,768
Advances from Federal Home Loan Bank 8,669 9,111
Federal funds purchased 3,000 0
Int.-bearing demand notes issued to the U.S. Treasury 2,400 217
Notes payable 1,700 1,200
------------- -------------
Total borrowings 30,946 24,296
Other liabilities 3,318 4,171
------------- -------------
TOTAL LIABILITIES 419,409 436,305
------------- -------------
STOCKHOLDERS' EQUITY
Common stock: $5 par value, 7,000,000 shares
authorized; 4,139,841 issued and outstanding 20,699 20,699
Surplus 6,328 6,305
Retained earnings 21,434 19,588
Accumulated other comprehensive income (loss), net of tax (751) 862
Less: Cost of 407,694 treasury shares at September 30, 1999
and 312,061 treasury shares at December 31, 1998 (6,357) (4,848)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 41,353 42,606
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 460,762 $ 478,911
============= =============
</TABLE>
SEE ACCOMPANYING NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
Schedule 2
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 6,230 $ 6,315 $ 18,299 $ 18,681
Interest and dividends on investment securities 1,690 1,869 5,321 5,446
Interest on short-term funds 51 76 231 236
---------- ---------- ---------- ----------
Total interest income 7,971 8,260 23,851 24,363
INTEREST EXPENSE:
Interest on deposits 3,462 3,907 10,512 11,456
Interest on borrowings 363 344 969 873
---------- ---------- ---------- ----------
Total interest expense 3,825 4,251 11,481 12,329
---------- ---------- ---------- ----------
NET INTEREST INCOME 4,146 4,009 12,370 12,034
Provision for possible loan losses 200 134 385 262
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 3,946 3,875 11,985 11,772
NON-INTEREST INCOME:
Trust & farm management fees 284 239 904 864
Service charges on deposit accounts 421 392 1,186 1,089
Other service charges 177 132 522 382
Gain on sales of securities 22 0 41 21
Loan servicing fees and other fees 30 77 169 236
Other income 104 61 226 226
---------- ---------- ---------- ----------
Total non-interest income 1,038 901 3,048 2,818
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,016 1,951 5,885 5,551
Occupancy 255 273 774 773
Equipment expense 277 216 862 613
FDIC/OCC assessments 46 46 142 140
Goodwill and intangible assets amortization 108 116 339 350
Data processing 142 169 410 459
Other expense 887 847 2,571 2,408
---------- ---------- ---------- ----------
Total non-interest expense 3,731 3,618 10,983 10,294
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,253 1,158 4,050 4,296
Income tax expense 526 263 1,217 1,077
---------- ---------- ---------- ----------
NET INCOME $ 727 $ 895 $ 2,833 $ 3,219
========== ========== ========== ==========
NET INCOME PER SHARE:
Basic 0.19 0.23 0.75 0.81
Diluted 0.19 0.23 0.75 0.81
Basic weighted average shares outstanding 3,761,031 3,959,711 3,788,247 3,988,497
Diluted weighted average shares outstanding 3,773,981 3,972,661 3,801,197 4,001,447
Dividends per share 0.09 0.08 0.26 0.24
</TABLE>
SEE ACCOMPANYING NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
Schedule 2
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
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
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income $ 727 $ 895 $ 2,833 $ 3,219
Other comprehensive income (loss), net of tax
Unrealized holding gain (loss) arising during the period (318) 683 (1,551) 695
Less: Reclassification adjustment for realized gains
included in net income (33) 0 (62) (32)
-------- -------- -------- --------
Other comprehensive income (loss) (351) 683 (1,613) 663
-------- -------- -------- --------
Comprehensive income $ 376 $ 1,578 $ 1,220 $ 3,882
======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
Schedule 3
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Balance, January 1 $ 42,606 $ 42,668
Net income 2,833 3,219
Cash dividends (988) (934)
Other comprehensive income (loss), net of tax (1,613) 663
Purchases of treasury stock (1,528) (1,783)
Sales of treasury stock 43 25
---------- ----------
Balance, September 30 $ 41,353 $ 43,858
========== ==========
</TABLE>
SEE ACCOMPANYING NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
Schedule 4
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
(IN THOUSANDS) 1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 727 $ 895 $ 2,833 $ 3,219
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 266 169 828 481
Provision for possible loan losses 200 134 385 262
Amortization of goodwill and other intangible assets 108 116 339 350
Amortization of premiums on investment
securities, net of accretion 85 48 154 133
Gain on sales of securities, net (22) 0 (41) (21)
Loss (gain) on sales of other real estate 5 (8) 5 (8)
Loans originated for sale (2,666) (9,527) (12,303) (19,439)
Proceeds from sales of loans originated for sale 1,884 9,948 9,635 19,793
Decrease (increase) in accrued interest payable (98) 165 (201) (1)
Increase in accrued interest receivable (1,225) (1,185) (411) (501)
Increase in other assets (41) (111) (810) (685)
Increase (decrease) in other liabilities 162 (48) 179 332
---------- ---------- ---------- ----------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (615) 596 592 3,915
---------- ---------- ---------- ----------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available-for-sale 1,064 0 4,054 5,016
Proceeds from maturities of investment securities available-for-sale 9,268 9,677 28,481 27,968
Purchase of investment securities available-for-sale (2,242) (4,355) (26,293) (34,347)
Proceeds from maturities of investment securities held-to-maturity 260 172 14,615 768
Purchase of investment securities held-to-maturity (608) (600) (11,679) (1,715)
Proceeds from sales of other real estate owned 70 34 102 79
Net increase in loans (18,484) (7,418) (31,217) (9,345)
Purchases of premises and equipment (265) (1,061) (1,411) (1,549)
---------- ---------- ---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (10,937) (3,551) (23,348) (13,125)
---------- ---------- ---------- ----------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 843 6,004 (22,693) (5,225)
Net increase in borrowings (1,834) (8,261) 6,650 4,854
Dividends paid (340) (318) (988) (934)
Purchase of treasury stock (680) (852) (1,528) (1,783)
Sales of treasury stock 21 5 43 25
---------- ---------- ---------- ----------
NET CASH USED FOR FINANCING ACTIVITIES (1,990) (3,422) (18,516) (3,063)
---------- ---------- ---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (13,542) (6,377) (41,272) (12,273)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 26,403 27,272 54,133 33,168
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30 $ 12,861 $ 20,895 $ 12,861 $ 20,895
========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,920 $ 4,615 $ 11,679 $ 12,330
Income taxes $ 342 $ 515 $ 1,399 $ 1,279
Supplemental disclosures of non-cash flow activities:
Amounts transferred to other real estate owned $ 0 $ 0 $ 202 $ 34
</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 1998 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.
8
<PAGE>
Schedule 6
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1999
(UNAUDITED)
The following discussion provides information about Princeton National
Bancorp, Inc.'s ("PNB" or the "Corporation") financial condition and results of
operations for the quarter ended September 30, 1999. 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, including, but not limited
to those statements that include the words "believes", "expects", "anticipates",
"estimates", or similar expressions. PNB cautions that such forward-looking
statements involve risks and uncertainties that may cause actual results to
differ materially from those expressed or implied. Such risks and uncertainties
include potential change in interest rates, competitive factors in the financial
services industry, general economic conditions, the effect of new legislation,
and other risks detailed in documents filed by the Corporation with the
Securities and Exchange Commission from time to time.
RESULTS OF OPERATIONS
Net income for the third quarter of 1999 was $727,000, or basic and
diluted earnings per share of $0.19 as compared to net income of $895,000 in the
third quarter of 1998, or basic and diluted earnings per share of $0.23. This
represents a decrease of $168,000 (18.8%) or $0.04 per share. For the first nine
months of 1999, net income was $2,833,000, or basic and diluted earnings per
share of $0.75, compared to $3,219,000, or basic and diluted earnings per share
of $0.81 in the first nine months of 1998. Annualized return on average assets
and return on average equity were 0.62% and 6.93%, respectively, for the third
quarter of 1999, compared with 0.78% and 8.19% for the third quarter of 1998.
For the nine-month periods, the annualized returns on average assets and average
equity were 0.82% and 8.99%, respectively, for 1999, compared to 0.97% and
10.00% in 1998.
The decrease in net income for the three months ended September 30,
1999 was largely the result of the Corporation utilizing all available state net
operating loss carryforwards in 1998 thereby becoming taxable for state income
tax purposes in 1999. The use of the remaining carryforwards was realized in
conjunction with the filing of the 1998 state income tax return during the third
quarter of 1999. Accordingly, income tax expense for the quarter and nine months
ending September 30, 1999, as compared to the same periods ending September 30,
1998, has increased by approximately $263,000 and $140,000, respectively.
9
<PAGE>
Net interest income before provision for loan losses was $4,146,000 for
the third quarter of 1999, compared to $4,009,000 for the third quarter of 1998
(an increase of $137,000 or 3.4%). Additionally, for the nine-month periods, net
interest income before provision for loan losses was $12,370,000 for 1999, as
compared to $12,034,000 for 1998, representing an increase of $336,000 (or
2.8%). This increase is a result of an increase in average interest-earning
assets from $413.1 million for the nine months ended September 30, 1998, to
$425.9 million for the nine months ended September 30, 1999. Likewise, the
average interest-earning assets for the three months ended September 30, 1999
increased to $425.3 million from $420.2 million for the three months ended
September 30, 1998. The net yield on interest-earning assets (on a fully taxable
equivalent basis) increased from 4.05% for the third quarter of 1998 to 4.14%
for the third quarter of 1999. Additionally, the net yield on interest-earning
assets (on a fully taxable equivalent basis) remained the same at 4.11% for the
first nine months of 1998 and the first nine months of 1999.
The PNB loan loss provision was $200,000 in the third quarter of 1999
compared to $134,000 in the third quarter of 1998. This is a result of continued
loan growth and is also determined by the risk characteristics of the loan
portfolio. For the first nine months of 1999, PNB has recorded $385,000 in loan
loss provision compared to $262,000 for the same period in 1998.
Non-interest income increased by $137,000 (or 15.2%) during the third
quarter of 1999 as compared to the third quarter of 1998 from $901,000 to
$1,038,000. For the first nine months of 1999, non-interest income has increased
to $3,048,000 from $2,818,000 in the first nine months of 1998 (an increase of
$230,000 or 8.2%). For the three-month period, the largest increases were seen
in other service charges (increase of $45,000 or 34.1%), trust and farm
management fees (increase of $45,000 or 18.9%), and other income (increase of
$43,000 or 70.5%). Notable increases for the nine-month period were seen in
service charges on deposits (up $97,000 or 8.9%) and in other service charges
(up $140,000 or 36.7%), both of which have increased as the number of deposit
accounts have grown.
Non-interest expenses for the third quarter of 1999 were $3,731,000, an
increase of $113,000 (or 3.1%) from $3,618,000 in the third quarter of 1998.
1999 year-to-date non-interest expenses at $10,983,000 have increased $689,000
(or 6.7%) from 1998. The most notable increases were in salaries/employee
benefits and equipment expense (caused by increased depreciation). The salaries
increase is due mainly to additional staffing needs during the first nine months
of 1999 as compared to 1998, along with normal salary increases. It is
anticipated that salary expense will increase only marginally over the remainder
of 1999. Equipment expense has increased due to additional depreciation expense
being incurred due to an upgrade of the subsidiary bank's computer system.
EARNINGS PER SHARE
Basic income per share is computed by dividing net income by the
weighted average number of shares outstanding which were 3,761,031 and 3,959,711
for the quarters ending
10
<PAGE>
September 30, 1999 and 1998, respectively, and 3,788,247 and 3,988,497 for the
nine-month periods ending September 30, 1999 and 1998, respectively. Diluted
earnings per share is computed by dividing net income by the weighted average
number of basic shares plus potential common stock. This total was 3,773,981 for
the quarter ending September 30, 1999 and 3,801,197 for the nine-month period
ending September 30, 1999.
ANALYSIS OF FINANCIAL CONDITION
Total assets at September 30, 1999 decreased to $460,762,000 from
$478,911,000 at December 31, 1998 ($18.1 million or 3.8%). This decrease is
attributable mainly to deposit growth at the end of 1998 followed by a normal
drop in the first half of the year. Of the total decrease in deposits over the
first nine months of 1999, demand deposits showed the largest decrease (15.6%),
while time deposits (5.0%), interest-bearing deposits (4.9%) , and savings
deposits (0.2%) all decreased. However, in comparing average balances for the
first nine months of 1999 to the first nine months of 1998, total average assets
have increased by $17.8 million (or 4.0%) from $445,026,000 in 1998 to
$462,808,000 in 1999. Likewise, total average deposits have also increased from
$376,078,000 in 1998 to $389,889,000 in 1999 (an increase of $13.8 million or
3.7%). Borrowings, consisting of repurchase agreements and Federal Home Loan
Bank advances, increased from $24,296,000 at December 31, 1998 to $30,946,000 at
September 30, 1999 (increase of 27.4%). This increase is attributable, in part,
to an increased loan demand coupled with the aforementioned decrease in
deposits. The investment balances totaled $119,192,000 at September 30, 1999,
compared to $130,926,000 at December 31, 1998 (a decrease of $11.7 million or
9.0%).
A very strong demand for loans has caused loan balances to increase
sharply during the first nine months of 1999. Accordingly, loan balances, net of
unearned interest, increased to $304,452,000 at September 30, 1999, compared to
$270,837,000 at December 31, 1998 (an increase of $33.6 million or 12.4%).
Non-performing loans totaled $1,733,000 or 0.57% of net loans at September 30,
1999, as compared to $1,406,000 or 0.52% of net loans at December 31, 1998.
For three months ended September 30, 1999, PNB charged off $235,000 of
loans and had recoveries of $70,000, compared to charge-offs of $235,000 and
recoveries of $138,000 during the three months ended September 30, 1998. During
the first nine months of 1999, PNB charged off $494,000 of loans and had
recoveries of $224,000, compared to charge-offs of $709,000 and recoveries of
$542,000 during the first nine months of 1998. 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. At September 30, 1999, the balance in the allowance was
$1,915,000 which is 110.5% of total non-performing loans, compared with
$1,800,000 or 128.0% of total non-performing loans at December 31, 1998.
11
<PAGE>
At September 30, 1999, the recorded balance in impaired loans totaled
$1,264,000 (compared to $485,000 at September 30, 1998), all of which related to
impaired loans which do not have a specific allowance as the carrying value of
the loans is less than the discounted present value of expected future cash
flows or collateral value. Interest recognized on impaired loans (during both
periods that they were impaired) is not considered material. Loans 90 days or
more past due and still accruing interest at September 30, 1999 were $42,000,
compared to $16,000 at December 31, 1998.
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, 1999, total risk-based capital was 12.23%, compared to 13.68% at
December 31, 1998. The Tier 1 capital ratio decreased from 8.35% at December 31,
1998, to 8.24% at September 30, 1999. Total stockholders' equity to total assets
at September 30, 1999 increased to 8.97% from 8.90% at December 31, 1998.
The Board of Directors announced on July 21, 1999 that another stock
repurchase program will be implemented whereby up to 3% of its outstanding
shares might be repurchased in the open market over the next twelve months.
Through September 30, 1999, the Corporation had purchased 47,500 shares in the
plan at an average cost of $14.32. It is anticipated that the repurchase program
will continue to enhance shareholder 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 used by investing activities, as
well as those used for investing and financing activities, resulted in a net
decrease in cash and cash equivalents of $41,272,000 from December 31, 1998 to
September 30, 1999. This usage was due to a net decrease in deposits and a net
increase in loans, offset by an increase in borrowings. For more detailed cash
flow information, see PNB's Consolidated Statement of Cash Flows.
CURRENT EVENTS
The Corporation's lawsuit against Cincinnati Insurance Company
regarding the 1995 trust issues remains in the U.S. Court of Appeals for the
Seventh Circuit. Oral arguments on the merits of Cincinnati's appeal are
scheduled for November. It is anticipated this case may come to a conclusion
during the latter part of the fourth quarter or in the first quarter of 2000.
12
<PAGE>
YEAR 2000 COMPLIANCE
As of September 30, 1999, the subsidiary bank has successfully met all
critical time frames established by the regulatory authorities. PNB 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,
management does not anticipate significant cost savings to occur after the year
2000 issue is satisfactorily remedied.
In total, PNB expects the cost of solving the year 2000 issue, and
regular replacement of equipment, to be approximately $1.3 million, consisting
of the following:
Estimated capital costs for technology upgrades $1.2 million
Estimated testing costs $ .1 million
Total estimated spending $1.3 million
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires all derivatives to be recognized as either assets or
liabilities in the statement of financial position and to be measured at fair
value. As issued, FAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. In June 1999, the FASB issued Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133" (FAS 137). FAS 137 is effective upon
issuance and it amends FAS 133 to be effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. PNB is in the process of assessing the
impact of adopting the Statements on its financial position, results of
operations, and liquidity.
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 condition.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in market risk since December 31,
1998, as reported in PNB's Annual Report on Form 10-K.
13
<PAGE>
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 condition and operating results in terms of
historical dollars, without considering the changes in the relative purchasing
power of money over time due to inflation. Unlike most industrial companies,
virtually all the assets and liabilities of a financial institution are monetary
in nature. As a result, interest rates have a more significant impact on a
financial institution's performance than the effects of general levels of
inflation.
14
<PAGE>
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED AVERAGE BALANCE SHEETS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 17,437 $ 17,706 $ 18,951 $ 16,605
Federal funds sold 4,002 5,499 6,609 5,724
Loans held for sale, at lower of cost or market 7,977 1,659 6,274 1,349
Investment securities:
Available-for-sale 104,607 111,313 109,165 110,683
Held-to-maturity 19,494 15,170 21,459 16,686
---------- ---------- ---------- ----------
Total investment securities 124,101 126,483 130,624 127,369
Loans:
Gross loans 285,571 280,687 277,405 273,303
Less: Unearned interest (18) (66) (27) (84)
Allowance for possible loan losses (1,904) (1,892) (1,845) (1,831)
---------- ---------- ---------- ----------
Net loans 283,649 278,729 275,533 271,388
Premises and equipment 11,152 9,395 10,986 8,901
Interest receivable 5,069 5,541 4,816 5,225
Goodwill and intangible assets, net of accumulated amortization 4,801 5,086 4,895 5,156
Other assets 4,440 3,378 4,120 3,309
---------- ---------- ---------- ----------
TOTAL ASSETS $ 462,628 $ 453,476 $ 462,808 $ 445,026
========== ========== ========== ==========
LIABILITIES
Deposits:
Demand 39,314 36,104 39,409 35,972
Interest-bearing demand 93,179 88,449 92,651 86,904
Savings 56,322 53,641 56,029 53,673
Time 199,564 201,663 201,800 199,529
---------- ---------- ---------- ----------
Total deposits 388,379 379,857 389,889 376,078
Borrowings:
Customer repurchase agreements 17,412 14,858 15,075 12,620
Advances from Federal Home Loan Bank 8,744 9,486 8,926 6,228
Federal funds purchased 103 0 116 2
Int.-bearing demand notes issued to the U.S. Treasury 1,248 1,072 1,054 1,041
Notes payable 1,286 92 1,178 1,370
---------- ---------- ---------- ----------
Total borrowings 28,793 25,508 26,349 21,261
Other liabilities 3,798 4,745 4,424 4,645
---------- ---------- ---------- ----------
TOTAL LIABILITIES 420,970 410,110 420,662 401,984
STOCKHOLDERS' EQUITY
Common stock 20,699 20,700 20,699 17,338
Surplus 6,318 6,232 6,312 6,200
Retained earnings 21,080 18,340 20,415 20,854
Accumulated other comprehensive income, net of tax (501) 626 225 568
Less: Treasury stock (5,938) (2,532) (5,505) (1,918)
---------- ---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY 41,658 43,366 42,146 43,042
---------- ---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 462,628 $ 453,476 $ 462,808 $ 445,026
========== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
15
<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>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 11,461
<INT-BEARING-DEPOSITS> 345,172
<FED-FUNDS-SOLD> 1,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 99,323
<INVESTMENTS-CARRYING> 19,869
<INVESTMENTS-MARKET> 19,639
<LOANS> 304,452
<ALLOWANCE> 1,915
<TOTAL-ASSETS> 460,762
<DEPOSITS> 385,145
<SHORT-TERM> 30,946
<LIABILITIES-OTHER> 3,318
<LONG-TERM> 0
0
0
<COMMON> 20,699
<OTHER-SE> 20,654
<TOTAL-LIABILITIES-AND-EQUITY> 460,762
<INTEREST-LOAN> 18,299
<INTEREST-INVEST> 5,321
<INTEREST-OTHER> 231
<INTEREST-TOTAL> 23,851
<INTEREST-DEPOSIT> 10,512
<INTEREST-EXPENSE> 11,481
<INTEREST-INCOME-NET> 12,370
<LOAN-LOSSES> 385
<SECURITIES-GAINS> 41
<EXPENSE-OTHER> 10,983
<INCOME-PRETAX> 4,050
<INCOME-PRE-EXTRAORDINARY> 4,050
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,833
<EPS-BASIC> 0.75
<EPS-DILUTED> 0.75
<YIELD-ACTUAL> 4.11
<LOANS-NON> 1,691
<LOANS-PAST> 42
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 49
<ALLOWANCE-OPEN> 1,915
<CHARGE-OFFS> 494
<RECOVERIES> 224
<ALLOWANCE-CLOSE> 1,915
<ALLOWANCE-DOMESTIC> 1,915
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
