INCOME TAXES
Income
tax expense totaled $282,000 for the second quarter of 2009, as compared to
$589,000 for the second quarter of 2008. The effective tax rate was 12.9% for
the three month period ended June 30, 2009 and 22.6% for the three month period
ended June 30, 2008. Income tax expense totaled $178,000 for the first six
months of 2009, as compared to $1,177,000 for the first six months of 2008. The
effective tax rate was 5.5% for the six month period ended June 30, 2009 and
22.3% for the six month period ended June 30, 2008. The lower income tax
expense is due to a lower pre-tax income coupled with the effect of tax-exempt
investment interest income. For more information on the Corporations income
taxes see Note 8 Income Taxes in the Notes to Consolidated Financial Statements.
FDIC
On
February 27, 2009, the FDIC adopted a final rule modifying the risk-based
assessment system and setting initial base assessment rates beginning April 1,
2009, at 12 to 50 basis points and, due to extraordinary circumstances,
extended the period of the Restoration Plan to seven years. The Corporations
assessment, according to the new formula is now 14 basis points. Previously,
the quarterly assessment rate was 7 basis points. Accordingly, the new
assessment rates increased the Corporations quarterly federal insurance
expense by approximately $200,000.
On May 22,
2009, the FDIC adopted a final rule imposing a 5 basis point special assessment
on each insured depository institutions assets minus Tier 1 capital as of June
30, 2009. The amount of the special assessment for any institution will not
exceed 10 basis points times the institutions assessment base for the second
quarter 2009. The special assessment will be collected on September 30, 2009.
This assessment equates to a one-time cost of $600,000 and is reflected in the
Corporations income statement for the six months ended June 30, 2009. An
additional special assessment of up to 5 basis points later in 2009 is
probable, which would also be approximately $600,000.
ANALYSIS OF FINANCIAL CONDITION
Total
assets at June 30, 2009 increased to $1,258,054,000 from $1,163,130,000 at
December 31, 2008 (an increase of $94.9 million or 8.2%). Total loan balances
decreased by $25.1 million during the six month period to $765.8 million due to
a general slow-down in the economy, seasonal pay downs in the agricultural
portfolio, and the refinancing of adjustable-rate residential real estate loans
into fixed rate products which are sold in the secondary market. Investment
balances totaled $332,700,000 at June 30, 2009, compared to $251,115,000 at
December 31, 2008 (an increase of $81.6 million or 32.5%), as excess liquidity
is invested due to declining loan demand. Total deposits increased to
$1,055,657,000 at June 30, 2009 from $962,132,000 at December 31, 2008 (an
increase of $93.5 million or 9.7%). Comparing categories of deposits at June
30, 2009 to December 31, 2008, time deposits increased $46.4 million (or 8.5%),
interest-bearing demand deposits increased $42.7 million (or 17.3%), savings
deposits increased $6.1 million (or 9.9%), and demand deposits decreased $1.6
million (or 1.5%). Borrowings, consisting of customer repurchase agreements,
federal funds purchased, notes payable, treasury, tax, and loan (TT&L)
deposits, and Federal Home Loan Bank advances, decreased from $118,016,000 at
December 31, 2008 to $94,633,000 at June 30, 2009 (a decrease of $23.4 million
or 19.8%). The majority of this decrease was due to the repayment of the note
payable (balance of $16.05 million at December 31, 2008) with proceeds from the
sale of preferred stock under the Capital Purchase Program.
30
CAPITAL PURCHASE PROGRAM
On January
23, 2009, the Corporation received $25,083 of equity capital by issuing to the
United States Department of Treasury 25,083 shares of the Corporations 5.00%
Series B Fixed Rate Cumulative Perpetual Preferred Stock, no par value, with a
liquidation preference of $1,000 per share and a ten-year warrant to purchase
up to 155,025 shares of the Corporations common stock, par value $0.01 per
share, at an exercise price of $24.27 per share. The proceeds received were
allocated to the preferred stock and common stock warrants based on their
relative fair values. The resulting discount on the preferred stock is
amortized against retained earnings and is reflected in the Corporations
consolidated statement of income as Preferred shares dividends, resulting in
additional dilution to the Corporations earnings per common share. The
warrants are immediately exercisable, in whole or in part, over a term of 10
years. The warrants were included in the Corporations diluted average common
shares outstanding (subject to anti-dilution). Both the preferred securities
and warrants were accounted for as additions to the Corporations regulatory
Tier 1 and total capital.
The Series
B Preferred stock is not mandatorily redeemable and will pay cumulative
dividends at a rate of 5% per year for the first five years and 9% per year
thereafter. Any redemption requires Federal Reserve approval. The Series B
Perpetual Preferred stock ranks senior to the Corporations existing authorized
Series A Junior Participating Preferred stock.
A company
that participates must adopt certain standards for executive compensation,
including (a) prohibiting golden parachute payments as defined in the
Emergency Economic Stabilization Act of 2008 (EESA) to senior Executive
Officers; (b) requiring recovery of any compensation paid to senior Executive
Officers based on criteria that is later proven to be materially inaccurate;
(c) prohibiting incentive compensation that encourages unnecessary and
excessive risks that threaten the value of the financial institution; and (d)
accept restrictions on the payment of dividends and the repurchase of common
stock.
ASSET QUALITY
For the six
months ended June 30, 2009, the subsidiary bank charged off $1,640,000 of loans
and had recoveries of $100,000, compared to charge-offs of $769,000 and
recoveries of $99,000 during the six months ended June 30, 2008. The allowance
for loan losses is based on factors that include the overall composition of the
loan portfolio, types of loans, underlying collateral, past loss experience,
loan delinquencies, substandard and doubtful credits, and such other factors
that, in managements reasonable judgment, warrant consideration. The adequacy
of the allowance is monitored monthly. At June 30, 2009, the allowance was
$6,160,000, 28.0% of non-performing loans and 0.80% of total loans, compared
with $5,064,000, 15.3% of non-performing loans and 0.64% of total loans at
December 31, 2008. The increase in the allowance for loan losses as a
percentage of total loans is based on the increase in impaired loans in the
portfolio (discussed below).
Non-performing
loans decreased to $22,021,000 or 2.88% of net loans at June 30, 2009, as
compared to $33,038,000 or 4.18% of net loans at December 31, 2008 (see the
Other Real Estate Owned section below). At June 30, 2009 non-accrual loans were
$21,527,000 compared to $30,383,000 at December 31, 2008. Impaired loans
totaled $6,530,000 at June 30, 2009 compared to $3,540,000 at December 31,
2008. The total amount of loans ninety days or more past due and still accruing
interest at June 30, 2009 was $494,000 compared to $2,655,000 at December 31, 2008.
There was a specific loan loss reserve of $1,530,000 established for impaired
loans as of June 30, 2009 compared to a specific loan loss reserve of $818,000
at December 31, 2008. PNBCs management analyzes the allowance for loan losses
monthly and believes the current level of allowance is adequate to meet
probable losses as of June 30, 2009.
31
OTHER REAL ESTATE OWNED
At June 30,
2009, the Corporation had other real estate owned of $15,250,000, an increase
of $12.8 million (or 513.2%) since December 31, 2008. Of this increase, $11.0
million represents one commercial loan that was previously listed as a
non-performing loan. This loan was originally a participation with a
up-stream correspondent bank. Based on collateral values, the Corporation
made the decision to purchase their interest and continue with foreclosure. The
Corporation expects the ultimate resolution of this property to have a positive
outcome.
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, 2009, total
risk-based capital of PNBC was 11.46%, compared to 8.30% at December 31, 2008.
The Tier 1 capital ratio increased from 6.22% at December 31, 2008, to 7.72% at
June 30, 2009. Total stockholders equity to total assets at June 30, 2009
increased to 7.80% from 6.23% at December 31, 2008. The increase in these
ratios is due to the equity investment received from the U.S. Treasury in the
form of Preferred Stock as part of the Capital Purchase Program discussed
above.
LIQUIDITY
Liquidity
is measured by a financial institutions ability to raise funds through
deposits, borrowed funds, capital, or the sale of assets. Additional sources of
liquidity include cash flow from the repayment of loans and the maturity of
investment securities. Major uses of cash include the origination of loans and purchase
of investment securities. Cash flows provided by financing and operating
activities, offset by those used in investing activities, resulted in a net
increase in cash and cash equivalents of $28,409,000 from December 31, 2008 to
June 30, 2009. This increase was primarily the result of the proceeds received
from the issuance of preferred stock, an increase in deposits and a decrease in
loans, offset by net purchases of investments and the pay off of the
Corporations note payable. For more detailed information, see PNBCs
Consolidated Statements of Cash Flows.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET
RISK
The
Corporation generates agribusiness, commercial, mortgage and consumer loans to
customers located primarily in North Central Illinois. The Corporations loans
are generally secured by specific items of collateral including real property,
consumer assets and business assets. Although the Corporation has a diversified
loan portfolio, a substantial portion of its debtors ability to honor their
contracts is dependent upon economic conditions in the agricultural industry.
32
In the
normal course of business to meet the financing needs of its customers, the
subsidiary bank is party to financial instruments with off-balance sheet risk.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The
contract amounts of those instruments reflect the extent of involvement the
subsidiary bank has in particular classes of financial instruments.
The
subsidiary banks exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional amount
of those instruments. The subsidiary bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-sheet
instruments. At June 30, 2009, commitments to extend credit and standby letters
of credit were approximately $142,438,000 and $4,552,000 respectively.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The subsidiary bank evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary, by the subsidiary bank upon extension of credit is based on
managements credit evaluation of the counterparty. Collateral held varies, but
may include real estate, accounts receivable, inventory, property, plant and
equipment, and income-producing properties.
Standby
letters of credit are conditional commitments issued by the subsidiary bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing standby letters of credit is essentially the same as that involved
in extending loan facilities to customers. The subsidiary bank secures the
standby letters of credit with the same collateral used to secure the loan. The
maximum amount of credit that would be extended under standby letters of credit
is equal to the off-balance sheet contract amount. The standby letters of
credit have terms that expire in one year or less.
LAND HELD FOR SALE
The
Corporation owns separate lots in Elburn, Aurora and Somonauk, Illinois that
have been removed from the land balance and are now shown on the Corporations
balance sheet as land held-for-sale, at the lower of cost or market. The land
in Elburn, approximately 2 acres, was purchased in 2003 for $930,000 in
anticipation of the construction of a branch facility. The land in Aurora,
consisting of two lots remaining from the original purchase of fourteen acres
in 2004 which was used to construct a branch facility has a cost basis of
$1,344,000. The land in Somonauk, acquired in 2005 during the acquisition of
FSB Bancorp, Inc., consists of approximately two acres with a cost basis of
$80,000.
LEGAL PROCEEDINGS
There are
various claims pending against the Corporations subsidiary bank, arising in
the normal course of business. Management believes, based upon consultation
with legal counsel, that liabilities arising from these proceedings, if any,
will not be material to the Corporations financial position or results of
operation.
33
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There has been
no material change in market risk since December 31, 2008, as reported in
PNBCs 2008 Annual Report on Form 10-K.
EFFECTS OF INFLATION
The
consolidated financial statements and related consolidated financial data
presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America and practices within the
banking industry which require the measurement of financial condition and
operating results in terms of historical dollars, without considering the
changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institutions performance than the
effects of general levels of inflation.
34
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
The
following table sets forth (in thousands) details of average balances, interest
income and expense, and resulting annualized yields/costs for the Corporation
for the periods indicated, reported on a fully taxable equivalent basis, using
a tax rate of 34%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended, June 30, 2009
|
|
Six Months Ended, June 30, 2008
|
|
|
|
Average
Balance
|
|
Interest
|
|
Yield/
Cost
|
|
Average
Balance
|
|
Interest
|
|
Yield/
Cost
|
|
Average Interest-Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
47,171
|
|
$
|
51
|
|
|
0.22
|
%
|
$
|
1,672
|
|
$
|
21
|
|
|
2.47
|
%
|
Taxable investment securities
|
|
|
161,551
|
|
|
3,723
|
|
|
4.65
|
%
|
|
154,210
|
|
|
3,297
|
|
|
4.30
|
%
|
Tax-exempt investment securities
|
|
|
114,108
|
|
|
3,673
|
|
|
6.49
|
%
|
|
77,863
|
|
|
3,091
|
|
|
7.98
|
%
|
Federal funds sold
|
|
|
192
|
|
|
0
|
|
|
0.00
|
%
|
|
2,152
|
|
|
29
|
|
|
2.68
|
%
|
Net loans
|
|
|
741,320
|
|
|
22,615
|
|
|
6.15
|
%
|
|
720,843
|
|
|
24,188
|
|
|
6.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-earning assets
|
|
|
1,064,342
|
|
|
30,062
|
|
|
5.70
|
%
|
|
956,740
|
|
|
30,626
|
|
|
6.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average non-interest earning assets
|
|
|
151,214
|
|
|
|
|
|
|
|
|
124,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
average assets
|
|
$
|
1,215,556
|
|
|
|
|
|
|
|
$
|
1,081,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Interest-Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
261,839
|
|
|
1,569
|
|
|
1.21
|
%
|
$
|
252,805
|
|
|
2,428
|
|
|
1.93
|
%
|
Savings deposits
|
|
|
65,198
|
|
|
25
|
|
|
0.08
|
%
|
|
62,152
|
|
|
38
|
|
|
0.12
|
%
|
Time deposits
|
|
|
579,251
|
|
|
8,656
|
|
|
3.01
|
%
|
|
488,364
|
|
|
10,013
|
|
|
4.12
|
%
|
Interest-bearing demand notes issued to the U.S. Treasury
|
|
|
1,034
|
|
|
0
|
|
|
0.00
|
%
|
|
995
|
|
|
10
|
|
|
2.06
|
%
|
Federal funds purchased
|
|
|
512
|
|
|
1
|
|
|
0.39
|
%
|
|
8,009
|
|
|
110
|
|
|
2.77
|
%
|
Customer repurchase agreements
|
|
|
32,563
|
|
|
176
|
|
|
1.09
|
%
|
|
36,427
|
|
|
402
|
|
|
2.22
|
%
|
Advances from Federal Home Loan Bank
|
|
|
32,494
|
|
|
484
|
|
|
3.00
|
%
|
|
11,046
|
|
|
214
|
|
|
3.89
|
%
|
Trust preferred securities
|
|
|
25,000
|
|
|
710
|
|
|
5.73
|
%
|
|
25,000
|
|
|
710
|
|
|
5.71
|
%
|
Note payable
|
|
|
4,789
|
|
|
96
|
|
|
4.04
|
%
|
|
14,550
|
|
|
343
|
|
|
4.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities
|
|
|
1,002,679
|
|
|
11,717
|
|
|
2.36
|
%
|
|
899,348
|
|
|
14,268
|
|
|
3.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on average interest-earning assets
|
|
|
|
|
$
|
18,345
|
|
|
3.48
|
%
|
|
|
|
$
|
16,358
|
|
|
3.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average non-interest-bearing liabilities
|
|
|
118,286
|
|
|
|
|
|
|
|
|
113,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average stockholders equity
|
|
|
94,591
|
|
|
|
|
|
|
|
|
69,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
average liabilities and stockholders equity
|
|
$
|
1,215,556
|
|
|
|
|
|
|
|
$
|
1,081,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table reconciles tax-equivalent net interest income (as shown
above) to net interest income as reported on the Consolidated Statements of
Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
Net
interest income as stated
|
|
|
|
|
$
|
17,024
|
|
$
|
15,271
|
|
|
|
|
|
|
|
|
Tax equivalent adjustment-investments
|
|
|
|
1,249
|
|
|
1,051
|
|
|
|
|
|
|
|
|
Tax equivalent adjustment-loans
|
|
|
|
|
|
72
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
equivalent net interest income
|
|
|
|
|
$
|
18,345
|
|
$
|
16,358
|
|
|
|
|
|
|
|
35
Schedule 7. Controls and Procedures
|
|
(a)
|
Disclosure
controls and procedures. We evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of June 30, 2009. Our
disclosure controls and procedures are the controls and other procedures that
we designed to ensure that we record, process, summarize and report in a
timely manner the information we must disclose in reports that we file with
or submit to the SEC. Tony J. Sorcic, President and Chief Executive Officer,
and Todd D. Fanning, Senior Vice-President and Chief Financial Officer,
reviewed and participated in this evaluation. Based on this evaluation,
Messrs. Sorcic and Fanning concluded that, as of the date of their
evaluation, our disclosure controls were effective.
|
|
|
(b)
|
Internal
controls. There have not been any significant changes in our internal
accounting controls or in other factors during the quarter ended June 30,
2009 that could significantly affect those controls.
|
36
INDEX TO EXHIBITS
|
|
|
|
|
Exhibit
Number
|
|
|
Exhibit
|
|
|
|
|
31.1
|
|
Certification
of Tony J. Sorcic required by Rule 13a-14(a).
|
|
|
|
31.2
|
|
Certification
of Todd D. Fanning required by Rule 13a-14(a).
|
|
|
|
32.1
|
|
Certification
of Tony J. Sorcic required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350.
|
|
|
|
32.2
|
|
Certification
of Todd D. Fanning required by Rule 13a-14(b) and Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
|
37
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