FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 27, 1999, the registrant had outstanding 3,765,579
shares of its $5 par value common stock.
Page 1 of 15 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Princeton National Bancorp, Inc. was
held on April 13, 1999, for the purpose of electing four directors each to serve
for a term of three years. Proxies for the meeting were solicited by Management
pursuant to Regulation 14A under the Securities Exchange Act of 1934, and there
was no solicitation in opposition to Management's solicitation.
All four of Management's nominees for director listed in the proxy
statement were elected. The results of the vote were as follows:
Shares
Voted Shares
"For" "Withheld" Abstain
--------- ---------- -------
Don S. Browning 2,933,288 9,355 325,128
Donald E. Grubb 2,942,643 0 325,138
Ervin I. Pietsch 2,941,293 1,350 325,138
Craig O. Wesner 2,933,513 9,130 325,138
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits :
27 - Financial Data Schedule for the period ended June 30, 1999.
(b) No reports on Form 8-K were filed by the Corporation for the quarter
ending June 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRINCETON NATIONAL BANCORP, INC.
Date: August 12, 1999 By /s/ Tony J. Sorcic
------------------------------------------
Tony J. Sorcic
President & Chief Executive Officer
Date: August 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>
JUNE 30, December 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 22,703 $ 31,133
Federal funds sold 3,700 23,000
Loans held for sale, at lower of cost or market 7,249 5,363
Investment securities:
Available-for-sale, at fair value 105,158 109,530
Held-to-maturity (fair value of $22,269 and $21,643 at
June 30, 1999 and December 31, 1998, respectively) 22,370 21,396
--------- ---------
Total investment securities 127,528 130,926
--------- ---------
Loans:
Gross loans 278,124 265,655
Less: Unearned interest (22) (181)
Allowance for possible loan losses (1,880) (1,800)
--------- ---------
Net loans 276,222 263,674
--------- ---------
Premises and equipment, net of accumulated depreciation 11,211 10,627
Interest receivable 4,790 5,604
Goodwill and intangible assets, net of accumulated amortization 4,378 4,609
Other assets 4,712 3,975
--------- ---------
TOTAL ASSETS $ 462,493 $ 478,911
========= =========
LIABILITIES
Deposits:
Demand $ 38,211 $ 47,355
Interest-bearing demand 91,883 93,982
Savings 56,592 54,378
Time 197,616 212,123
--------- ---------
Total deposits 384,302 407,838
Borrowings:
Customer repurchase agreements 20,464 13,768
Advances from Federal Home Loan Bank 8,867 9,111
Int. -- bearing demand notes issued to the U.S. Treasury 2,399 217
Notes payable 1,050 1,200
--------- ---------
Total borrowings 32,780 24,296
Other liabilities 3,435 4,171
--------- ---------
TOTAL LIABILITIES 420,517 436,305
--------- ---------
STOCKHOLDERS' EQUITY
Common stock: $5 par value, 7,000,000 shares
authorized; 4,139,841 issued and outstanding 20,699 20,699
Surplus 6,318 6,305
Retained earnings 21,046 19,588
Accumulated other comprehensive income (loss), net of tax (400) 862
Less: Cost of 361,762 treasury shares at June 30, 1999
and 312,061 treasury shares at December 31, 1998 (5,687) (4,848)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 41,976 42,606
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 462,493 $ 478,911
========= =========
</TABLE>
SEE ACCOMPANYING NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY Schedule 2
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30 Ended June 30
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 6,058 $ 6,242 $ 12,069 $ 12,366
Interest and dividends on investment securities 1,779 1,822 3,631 3,577
Interest on short-term funds 61 74 180 160
---------- ---------- ---------- ----------
Total interest income 7,898 8,138 15,880 16,103
INTEREST EXPENSE:
Interest on deposits 3,450 3,769 7,050 7,549
Interest on borrowings 311 276 606 529
---------- ---------- ---------- ----------
Total interest expense 3,761 4,045 7,656 8,078
---------- ---------- ---------- ----------
NET INTEREST INCOME 4,137 4,093 8,224 8,025
Provision for possible loan losses 175 73 185 128
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 3,962 4,020 8,039 7,897
NON-INTEREST INCOME:
Trust & farm management fees 275 296 620 625
Service charges on deposit accounts 401 372 765 697
Other service charges 189 132 345 250
Gain on sales of securities 8 11 19 21
Loan servicing fees and other charges 56 84 139 159
Other income 53 69 122 165
---------- ---------- ---------- ----------
Total non-interest income 982 964 2,010 1,917
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,981 1,796 3,869 3,600
Occupancy 256 249 519 500
Equipment expense 294 201 585 397
FDIC/OCC assessments 48 48 96 94
Goodwill and intangible assets amortization 114 117 231 234
Data processing 137 118 268 290
Other expense 843 804 1,684 1,562
---------- ---------- ---------- ----------
Total non-interest expense 3,673 3,333 7,252 6,677
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,271 1,651 2,797 3,137
Income tax expense 300 433 691 814
---------- ---------- ---------- ----------
NET INCOME $ 971 $ 1,218 $ 2,106 $ 2,323
========== ========== ========== ==========
NET INCOME PER SHARE:
Basic $ 0.26 $ 0.31 $ 0.55 $ 0.58
Diluted $ 0.26 $ 0.31 $ 0.55 $ 0.58
Basic weighted average shares outstanding 3,785,317 3,993,123 3,802,080 4,003,129
Diluted weighted average shares outstanding 3,798,267 3,993,123 3,815,030 4,003,129
Dividends per share $ 0.09 $ 0.08 $ 0.17 $ 0.16
</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 Six Months
Ended June 30 Ended June 30
1999 1998 1999 1998
----- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income $ 971 $ 1,218 $ 2,106 $ 2,323
Other comprehensive income (loss), net of tax
Unrealized holding loss arising during the period (956) 60 (1,249) (6)
Less: Reclassification adjustment for realized gains
included in net income (5) (7) (13) (14)
----- ------- ------- -------
Other comprehensive income (loss) (961) 53 (1,262) (20)
----- ------- ------- -------
Comprehensive income $ 10 $ 1,271 $ 844 $ 2,303
===== ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY Schedule 3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
For the Six Months
Ended June 30
1999 1998
-------- --------
(IN THOUSANDS)
Balance, January 1 $ 42,606 $ 42,668
Net income 2,106 2,323
Cash dividends (648) (616)
Other comprehensive income (loss), net of tax (1,262) (20)
Purchases of treasury stock (848) (931)
Sales of treasury stock 22 20
-------- --------
Balance, June 30 $ 41,976 $ 43,444
======== ========
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 Six Months
Ended June 30 Ended June 30
(IN THOUSANDS) 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 971 $ 1,218 $ 2,106 $ 2,323
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 278 159 562 312
Provision for possible loan losses 175 73 185 128
Amortization of goodwill and other intangible assets 114 117 231 234
Amortization of premiums on investment
securities, net of accretion (60) 44 69 85
Gain on sales of securities, net (8) (11) (19) (21)
Loans originated for sale (3,918) (4,438) (9,637) (9,912)
Proceeds from sales of loans originated for sale 1,927 4,975 7,751 9,845
Decrease in accrued interest payable (1) (76) (103) (166)
(Increase) decrease in accrued interest receivable (406) (96) 814 684
Increase in other assets (726) (341) (769) (574)
(Decrease) increase in other liabilities (395) 0 17 381
-------- -------- -------- --------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (2,049) 1,624 1,207 3,319
-------- -------- -------- --------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available-for-sale 2,005 2,008 2,990 5,016
Proceeds from maturities of investment securities available-for-sale 9,197 9,387 19,213 18,291
Purchase of investment securities available-for-sale (7,898) (14,516) (24,051) (29,992)
Proceeds from maturities of investment securities held-to-maturity 6,595 90 14,355 596
Purchase of investment securities held-to-maturity (2,526) (285) (11,071) (1,115)
Proceeds from sales of other real estate owned 32 0 32 45
Net increase in loans (5,733) (7,530) (12,733) (1,927)
Purchases of premises and equipment (465) (346) (1,146) (488)
-------- -------- -------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 1,207 (11,192) (12,411) (9,574)
-------- -------- -------- --------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits (2,435) 376 (23,536) (11,229)
Net increase in borrowings 8,565 10,238 8,484 13,115
Dividends paid (342) (322) (648) (616)
Purchase of treasury stock (362) (799) (848) (931)
Sales of treasury stock 11 11 22 20
-------- -------- -------- --------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 5,437 9,504 (16,526) 359
-------- -------- -------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 4,595 (64) (27,730) (5,896)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,808 27,336 54,133 33,168
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT JUNE 30 $ 26,403 $ 27,272 $ 26,403 $ 27,272
======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,966 $ 3,845 $ 7,759 $ 7,715
Income taxes $ 882 $ 678 $ 1,057 $ 764
Supplemental disclosures of non-cash flow activities:
Amounts transferred to other real estate owned $ 128 $ 34 $ 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
JUNE 30, 1999
(UNAUDITED)
The following discussion provides information about Princeton National
Bancorp, Inc.'s (PNB) financial condition and results of operations for the
quarter ended June 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. PNB cautions that such forward-looking
statements involve risks and uncertainties that may cause actual results to
differ materially from those expressed or implied.
RESULTS OF OPERATIONS
Net income for the second quarter of 1999 was $971,000, or basic and
diluted earnings per share of $0.26 as compared to net income of $1,218,000 in
the second quarter of 1998, or basic and diluted earnings per share of $0.31.
This represents a decrease of $247,000 (20.3%) or $0.05 per share. For the first
six months of 1999, net income was $2,106,000, or basic and diluted earnings per
share of $0.55, compared to $2,323,000, or basic and diluted earnings per share
of $0.58 in the first six months of 1998. Annualized return on average assets
and return on average equity were 0.85% and 9.20%, respectively, for the second
quarter of 1999, compared with 1.11% and 11.38% for the second quarter of 1998.
For the six-month periods, the annualized returns on average assets and average
equity were 0.92% and 10.02%, respectively, for 1999, compared to 1.06% and
10.93% in 1998.
Net interest income before provision for loan losses was $4,137,000 for
the second quarter of 1999, compared to $4,093,000 for the second quarter of
1998 (an increase of $44,000 or 1.1%). Additionally, for the six-month periods,
net interest income before provision for loan losses was $8,224,000 for 1999, as
compared to $8,025,000 for 1998, representing an increase of $199,000 (or 2.5%).
This increase is a result of an increase in average interest-earning assets from
$407.6 million for the six months ended June 30, 1998, to $426.2 million for the
six months ended June 30, 1999. The net yield on interest-earning assets (on a
fully taxable equivalent basis) decreased from 4.26% for the second quarter of
1998 to 4.14% for the second quarter of 1999. Additionally, the net yield on
interest-earning assets (on a fully taxable equivalent basis) decreased from
4.17% for the first six months of 1998 to 4.10% for the first six months of
1999.
9
<PAGE>
The PNB loan loss provision was $175,000 in the second quarter of 1999
compared to $73,000 in the second 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 six months of 1999, PNB has recorded $185,000 in loan
loss provision compared to $128,000 for the same period in 1998.
Non-interest income increased by $18,000 (or 1.9%) during the second
quarter of 1999 as compared to the second quarter of 1998 from $964,000 to
$982,000. For the first six months of 1999, non-interest income has increased to
$2,010,000 from $1,917,000 in the first six months of 1998 (an increase of
$93,000 or 4.9%). Notable increases were seen in service charges on deposits (up
$68,000 or 9.8%) and in other service charges (up $95,000 or 38.0%), both of
which have increased as the number of deposit accounts have grown.
Non-interest expenses for the second quarter of 1999 were $3,673,000,
an increase of $340,000 (or 10.2%) from $3,333,000 in the second quarter of
1998. 1999 year-to-date non-interest expenses at $7,252,000 have increased
$575,000 (or 8.6%) 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 six months of 1999 as compared to 1998, along with normal
salary increases. It is anticipated that salary expense will increase marginally
in the next six months as compared to the last six months of 1998. Equipment
expense has increased due to additional depreciation expense being incurred due
to an upgrade of the subsidiary bank's computer system.
Income tax expense for the quarter and six months ending June 30, 1999,
as compared to the same periods ending June 30, 1998, has decreased due to a
combination of lower earnings and an increase in tax-exempt interest.
EARNINGS PER SHARE
Basic income per share is computed by dividing net income by the
weighted average number of shares outstanding which were 3,785,317 and 3,993,123
for the quarters ending June 30, 1999 and 1998, respectively, and 3,802,080 and
4,003,129 for the six-month periods ending June 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
3,798,267 for the quarter ending June 30, 1999 and 3,815,030 for the six-month
period ending June 30, 1999.
ANALYSIS OF FINANCIAL CONDITION
Total assets at June 30, 1999 decreased to $462,493,000 from
$478,911,000 at December 31, 1998 ($16.4 million or 3.4%). 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 six months of 1999, only savings deposits increased
10
<PAGE>
(4.1%), while time deposits, demand deposits, and interest-bearing deposits all
decreased ( 6.8%, 19.3%, and 2.2%, respectively). Borrowings, consisting of
repurchase agreements and Federal Home Loan Bank advances, increased from
$24,296,000 at December 31, 1998 to $32,780,000 at June 30, 1999 (increase of
34.9%). This increase is attributable mainly to local government taxing bodies
having large balances on deposit in repurchase agreements at June 30 due to real
estate tax collections during the latter part of June. The investment balances
totaled $127,528,000 at June 30, 1999, compared to $130,926,000 at December 31,
1998 (a decrease of $3.4 million or 2.6%).
Strong loan demand, annual renewals, and refinancing activity caused
loans to increase during the first six months of 1999. Accordingly, loan
balances, net of unearned interest, increased to $283,471,000 at June 30, 1999,
compared to $269,037,000 at December 31, 1998 (an increase of $14.4 million or
5.4%). Non-performing loans totaled $1,247,000 or 0.44% of net loans at June 30,
1999, as compared to $1,406,000 or 0.52% of net loans at December 31, 1998.
During the first six months of 1999, PNB charged off $259,000 of loans
and had recoveries of $154,000, compared to charge-offs of $468,000 and
recoveries of $404,000 during the first six 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 June 30, 1999, the balance in the allowance
was $1,880,000 which is 150.8% of total non-performing loans, compared with
$1,800,000 or 128.0% of total non-performing loans at December 31, 1998.
At June 30, 1999, the recorded balance in impaired loans totaled
$777,000 (compared to $136,000 at June 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. 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 June 30, 1999 were $166,000, compared to $30,000 at June
30, 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
June 30, 1999, total risk-based capital was 13.08%, compared to 13.68% at
December 31, 1998. The Tier 1 capital ratio decreased from 8.35% at December 31,
1998, to 8.32% at June 30, 1999. Total stockholders' equity to total assets at
June 30, 1999 increased to 9.08% from 8.90% at December 31, 1998.
The Board of Directors announced on July 20, 1998 that it was
implementing a 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. That plan was completed on
11
<PAGE>
May 21, 1999. PNB had repurchased 198,587 shares in the plan at an average cost
of $17.19. Additionally, the Board of Directors announced on July 19, 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. 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 $27,730,000 from December 31,
1998 to June 30, 1999. This usage was due to a net decrease in deposits and a
net increase in loans, offset by an increase in borrowings and a decrease in
investments (sales and maturities greater than purchases). For more detailed
cash flow information, see PNB's Consolidated Statement of Cash Flows.
CURRENT EVENTS
In the past three months, there has been no change in the status of 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. There has been no income recognition by
PNB because no funds have been received and Cincinnati Insurance Company has
filed an appeal to the ruling. Oral arguments remain on the merits of
Cincinnati's appeal with an anticipated conclusion later this year. 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.
YEAR 2000 COMPLIANCE
As of June 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.
12
<PAGE>
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:
<TABLE>
<S> <C>
Estimated capital costs for technology upgrades $1.2 million
Estimated testing costs $ .1 million
Total estimated spending $1.3 million
</TABLE>
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 and results of
operations.
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.
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.
13
<PAGE>
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED AVERAGE BALANCE SHEETS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30 Ended June 30
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 19,123 $ 14,928 $ 19,722 $ 16,045
Federal funds sold 5,235 5,308 7,933 5,838
Loans held for sale, at lower of cost or market 5,443 1,218 5,408 1,191
Investment securities:
Available-for-sale 113,955 113,655 113,564 112,346
Held-to-maturity 18,339 13,555 20,380 13,240
--------- --------- --------- ---------
Total investment securities 132,294 127,210 133,944 125,586
Loans:
Gross loans 275,712 272,292 273,254 271,786
Less: Unearned interest (27) (82) (32) (94)
Allowance for possible loan losses (1,819) (1,787) (1,814) (1,801)
--------- --------- --------- ---------
Net loans 273,866 270,423 271,408 269,891
Premises and equipment, net of accumulated depreciation 11,099 8,651 10,902 8,650
Interest receivable 4,258 4,786 4,687 5,064
Goodwill and intangible assets, net of accumulated amortization 4,617 4,828 4,650 4,862
Other assets 4,395 3,625 4,251 3,604
--------- --------- --------- ---------
TOTAL ASSETS $ 460,330 $ 440,977 $ 462,905 $ 440,731
========= ========= ========= =========
LIABILITIES
Deposits:
Demand $ 39,773 $ 35,759 $ 39,635 $ 36,111
Interest-bearing demand 92,125 85,669 92,383 86,119
Savings 56,939 54,390 55,880 53,689
Time 198,918 197,243 202,936 198,444
--------- --------- --------- ---------
Total deposits 387,755 373,061 390,834 374,363
Borrowings
Customer repurchase agreements 14,613 12,275 14,009 11,486
Advances from Federal Home Loan Bank 8,943 7,071 9,019 4,572
Int. -- bearing demand notes issued to the U.S. Treasury 1,193 1,147 955 1,026
Notes payable 1,050 316 1,123 2,019
--------- --------- --------- ---------
Total borrowings 25,799 20,809 25,106 19,103
Other liabilities 4,458 4,485 4,570 4,387
--------- --------- --------- ---------
TOTAL LIABILITIES 418,012 398,039 420,510 397,853
STOCKHOLDERS' EQUITY
Common stock 20,699 17,439 20,699 15,630
Surplus 6,312 6,234 6,308 6,183
Retained earnings 20,459 20,692 20,077 22,132
Accumulated other comprehensive income, net of tax 419 434 597 538
Less: Treasury stock (5,571) (1,861) (5,286) (1,605)
--------- --------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 42,318 42,938 42,395 42,878
--------- --------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 460,330 $ 440,977 $ 462,905 $ 440,731
========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
14
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 22,703
<INT-BEARING-DEPOSITS> 346,091
<FED-FUNDS-SOLD> 3,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 105,158
<INVESTMENTS-CARRYING> 22,370
<INVESTMENTS-MARKET> 22,269
<LOANS> 285,351
<ALLOWANCE> 1,880
<TOTAL-ASSETS> 462,493
<DEPOSITS> 384,302
<SHORT-TERM> 32,780
<LIABILITIES-OTHER> 3,435
<LONG-TERM> 0
0
0
<COMMON> 20,699
<OTHER-SE> 21,277
<TOTAL-LIABILITIES-AND-EQUITY> 462,493
<INTEREST-LOAN> 12,069
<INTEREST-INVEST> 3,631
<INTEREST-OTHER> 180
<INTEREST-TOTAL> 15,880
<INTEREST-DEPOSIT> 7,050
<INTEREST-EXPENSE> 7,656
<INTEREST-INCOME-NET> 8,224
<LOAN-LOSSES> 185
<SECURITIES-GAINS> 19
<EXPENSE-OTHER> 7,252
<INCOME-PRETAX> 2,797
<INCOME-PRE-EXTRAORDINARY> 2,797
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,106
<EPS-BASIC> 0.55
<EPS-DILUTED> 0.55
<YIELD-ACTUAL> 4.10
<LOANS-NON> 1,081
<LOANS-PAST> 166
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 68
<ALLOWANCE-OPEN> 1,880
<CHARGE-OFFS> 259
<RECOVERIES> 154
<ALLOWANCE-CLOSE> 1,880
<ALLOWANCE-DOMESTIC> 1,880
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
