ANALYSIS OF FINANCIAL CONDITION
Total
assets at March 31, 2009 increased to $1,215,484,000 from $1,163,130,000 at
December 31, 2008 (an increase of $52.4 million or 4.5%). Total loan balances
decreased by $16.0 million during the three month period to $774.8 million due
to seasonal pay downs in the agricultural portfolio, along with the refinancing
of adjustable-rate residential real estate loans into fixed rate products which
are sold in the secondary market. Investment balances totaled $274,534,000 at
March 31, 2009, compared to $251,115,000 at December 31, 2008 (an increase of
$23.4 million or 9.3%), as excess liquidity is invested due to declining loan
demand. Total deposits increased to $1,010,964,000 at March 31, 2009 from
$962,132,000 at December 31, 2008 (an increase of $48.8 million or 5.1%).
Comparing categories of deposits at March 31, 2009 to December 31, 2008, time
deposits increased $39.4 million (or 7.2%), interest-bearing demand deposits
increased $9.4 million (or 3.8%), savings deposits increased $5.1 million (or
8.4%), and demand deposits decreased $5.1 million (or 4.6%). Borrowings,
consisting of customer repurchase agreements, federal funds purchased, notes
payable, treasury, tax, and loan (TT&L) deposits, and Federal Home Loan
Bank advances, decreased from $118,016,000 at December 31, 2008 to $97,066,000
at March 31, 2009 (a decrease of $20.9 million or 17.8%). The majority of this
decrease was due to the repayment of the note payable (balance of $16.05
million at December 31, 2008) with proceeds from the sale of preferred stock
under the Capital Purchase Program.
CAPITAL PURCHASE PROGRAM
On January
23, 2009, the Corporation received $25,083 of equity capital by issuing to the
United States Department of Treasury 25,083 shares of the Corporations 5.00%
Series B Fixed Rate Cumulative Perpetual Preferred Stock, no par value, with a
liquidation preference of $1,000 per share and a ten-year warrant to purchase
up to 155,025 shares of the Corporations common stock, par value $0.01 per
share, at an exercise price of $24.27 per share. The proceeds received were
allocated to the preferred stock and common stock warrants based on their
relative fair values. The resulting discount on the preferred stock is
amortized against retained earnings and is reflected in the Corporations
consolidated statement of income as Preferred shares dividends, resulting in
additional dilution to the Corporations earnings per common share. The
warrants are immediately exercisable, in whole or in part, over a term of 10
years. The warrants were included in the Corporations diluted average common
shares outstanding (subject to anti-dilution). Both the preferred securities
and warrants were accounted for as additions to the Corporations regulatory
Tier 1 and total capital.
The Series
B Preferred stock is not mandatorily redeemable and will pay cumulative
dividends at a rate of 5% per year for the first five years and 9% per year
thereafter. Any redemption requires Federal Reserve approval. The Series B
Perpetual Preferred stock ranks senior to the Corporations existing authorized Series A
Junior Participating Preferred stock.
A company
that participates must adopt certain standards for executive compensation,
including (a) prohibiting golden parachute payments as defined in the
Emergency Economic Stabilization Act of 2008 (EESA) to senior Executive
Officers; (b) requiring recovery of any compensation paid to senior Executive
Officers based on criteria that is later proven to be materially inaccurate;
(c) prohibiting incentive compensation that encourages unnecessary and
excessive risks that threaten the value of the financial institution; and (d)
accept restrictions on the payment of dividends and the repurchase of common
stock.
24
ASSET QUALITY
For the
three months ended March 31, 2009, the subsidiary bank charged off $412,000 of
loans and had recoveries of $42,000, compared to charge-offs of $546,000 and
recoveries of $65,000 during the three months ended March 31, 2008. The
allowance for loan losses is based on factors that include the overall
composition of the loan portfolio, types of loans, underlying collateral, past
loss experience, loan delinquencies, substandard and doubtful credits, and such
other factors that, in managements reasonable judgment, warrant consideration.
The adequacy of the allowance is monitored monthly. At March 31, 2009, the
allowance was $5,864,000 which is 17.6% of non-performing loans and 0.76% of
total loans, compared with $5,064,000 which was 15.3% of non-performing loans
and 0.64% of total loans at December 31, 2008.
Non-performing
loans increased to $33,278,000 or 4.30% of net loans at March 31, 2009, as
compared to $33,038,000 or 4.18% of net loans at December 31, 2008. Approximately
60% of the non-performing loans is comprised of three larger credits, all of
which are development loans in the Corporations northern and eastern market
areas. No specific reserves had been established for these three relationships
as of March 31, 2009. All loans are individually evaluated and management
continues to maintain adequate reserves in the allowance for loan losses.
At March
31, 2009 non-accrual loans were $33,137,000 compared to $30,383,000 at December
31, 2008. Impaired loans totaled $17,170,000 at March 31, 2009 compared to
$3,540,000 at December 31, 2008. The total amount of loans ninety days or more
past due and still accruing interest at March 31, 2009 was $142,000 compared to
$2,655,000 at December 31, 2008. There was a specific loan loss reserve of
$1,983,000 established for impaired loans as of March 31, 2009 compared to a
specific loan loss reserve of $818,000 at December 31, 2008. PNBCs management
analyzes the allowance for loan losses monthly and believes the current level
of allowance is adequate to meet probable losses as of March 31, 2009.
CAPITAL RESOURCES
Federal
regulations require all financial institutions to evaluate capital adequacy by
the risk-based capital method, which makes capital requirements more sensitive
to the differences in the level of risk assets. At March 31, 2009, total
risk-based capital of PNBC was 11.53%, compared to 8.30% at December 31, 2008.
The Tier 1 capital ratio increased from 6.22% at December 31, 2008, to 7.99% at
March 31, 2009. Total stockholders equity to total assets at March 31, 2009
increased to 8.06% from 6.23% at December 31, 2008. The increase in these
ratios is due to the equity investment received from the U.S. Treasury in the
form of Preferred Stock as part of the Capital Purchase Program discussed
above.
LIQUIDITY
Liquidity
is measured by a financial institutions ability to raise funds through
deposits, borrowed funds, capital, or the sale of assets. Additional sources of
liquidity include cash flow from the repayment of loans and the maturity of
investment securities. Major uses of cash include the origination of loans and
purchase of investment securities. Cash flows provided by financing and
operating activities, offset by those used in investing activities, resulted in
a net increase in cash and cash equivalents of $47,607,000 from December 31,
2008 to March 31, 2009. This increase was primarily the result of the proceeds
received from the issuance of preferred stock, an increase in deposits and a
decrease in loans, offset by net purchases of investments and the pay off of the Corporations note
payable. For more detailed information, see PNBCs Consolidated Statements of
Cash Flows.
25
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET
RISK
The
Corporation generates agribusiness, commercial, mortgage and consumer loans to
customers located primarily in North Central Illinois. The Corporations loans
are generally secured by specific items of collateral including real property,
consumer assets and business assets. Although the Corporation has a diversified
loan portfolio, a substantial portion of its debtors ability to honor their
contracts is dependent upon economic conditions in the agricultural industry.
In the
normal course of business to meet the financing needs of its customers, the
subsidiary bank is party to financial instruments with off-balance sheet risk.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The contract amounts of those instruments reflect
the extent of involvement the subsidiary bank has in particular classes of
financial instruments.
The
subsidiary banks exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional amount
of those instruments. The subsidiary bank uses the same credit policies in
making commitments and conditional obligations as they do for on-balance-sheet
instruments. At March 31, 2009, commitments to extend credit and standby
letters of credit were approximately $135,882,000 and $4,819,000 respectively.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The subsidiary bank evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary, by the subsidiary bank upon extension of credit is based on
managements credit evaluation of the counterparty. Collateral held varies, but
may include real estate, accounts receivable, inventory, property, plant and
equipment, and income-producing properties.
Standby
letters of credit are conditional commitments issued by the subsidiary bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing standby letters of credit is essentially the same as that
involved in extending loan facilities to customers. The subsidiary bank secures
the standby letters of credit with the same collateral used to secure the loan.
The maximum amount of credit that would be extended under standby letters of
credit is equal to the off-balance sheet contract amount. The standby letters
of credit have terms that expire in one year or less.
26
LAND HELD FOR SALE
The
Corporation owns separate lots in Elburn, Aurora and Somonauk, Illinois that
have been removed from the land balance and are now shown on the Corporations
balance sheet as land held-for-sale, at the lower of cost or market. The land
in Elburn, approximately 2 acres, was purchased in 2003 for $930,000 in
anticipation of the construction of a branch facility. The land in Aurora,
consisting of two lots remaining from the original purchase of fourteen acres
in 2004 which was used to construct a branch facility has a cost basis of
$1,344,000. The land in Somonauk, acquired in 2005 during the acquisition of
FSB Bancorp, Inc., consists of approximately two acres with a cost basis of
$80,000.
LEGAL PROCEEDINGS
There
are various claims pending against the Corporations subsidiary bank, arising
in the normal course of business. Management believes, based upon consultation
with legal counsel, that liabilities arising from these proceedings, if any,
will not be material to the Corporations financial position or results of
operation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There has
been no material change in market risk since December 31, 2008, as reported in
PNBCs 2008 Annual Report on Form 10-K.
EFFECTS OF INFLATION
The
consolidated financial statements and related consolidated financial data
presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America and practices within the
banking industry which require the measurement of financial condition and
operating results in terms of historical dollars, without considering the
changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have
a more significant impact on a financial institutions performance than the
effects of general levels of inflation.
27
PRINCETON NATIONAL BANCORP, INC. AND
SUBSIDIARY
The
following table sets forth (in thousands) details of average balances, interest
income and expense, and resulting annualized yields/costs for the Corporation
for the periods indicated, reported on a fully taxable equivalent basis, using
a tax rate of 34%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended, March 31, 2009
|
|
Three Months Ended, March 31, 2008
|
|
|
|
|
|
|
|
|
|
Average
Balance
|
|
Interest
|
|
Yield/
Cost
|
|
Average
Balance
|
|
Interest
|
|
Yield/
Cost
|
|
Average Interest-Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
35,708
|
|
$
|
16
|
|
0.18
|
%
|
|
$
|
1,666
|
|
$
|
12
|
|
2.90
|
%
|
|
Taxable investment securities
|
|
|
148,917
|
|
|
1,803
|
|
4.91
|
%
|
|
|
134,622
|
|
|
1,617
|
|
4.83
|
%
|
|
Tax-exempt investment securities
|
|
|
106,754
|
|
|
1,710
|
|
6.50
|
%
|
|
|
95,871
|
|
|
1,609
|
|
6.75
|
%
|
|
Federal funds sold
|
|
|
199
|
|
|
0
|
|
0.00
|
%
|
|
|
3,678
|
|
|
25
|
|
2.73
|
%
|
|
Net loans
|
|
|
746,711
|
|
|
11,095
|
|
6.03
|
%
|
|
|
715,719
|
|
|
12,370
|
|
6.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,038,289
|
|
|
14,624
|
|
5.71
|
%
|
|
|
951,556
|
|
|
15,633
|
|
6.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average non-interest earning assets
|
|
|
148,259
|
|
|
|
|
|
|
|
|
122,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets
|
|
$
|
1,186,547
|
|
|
|
|
|
|
|
$
|
1,074,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Interest-Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
262,338
|
|
|
736
|
|
1.14
|
%
|
|
$
|
250,520
|
|
|
1,387
|
|
2.23
|
%
|
|
Savings deposits
|
|
|
63,167
|
|
|
12
|
|
0.08
|
%
|
|
|
60,376
|
|
|
21
|
|
0.14
|
%
|
|
Time deposits
|
|
|
567,448
|
|
|
4,399
|
|
3.14
|
%
|
|
|
495,143
|
|
|
5,265
|
|
4.28
|
%
|
|
Interest-bearing demand notes issued to the U.S. Treasury
|
|
|
1,055
|
|
|
0
|
|
0.00
|
%
|
|
|
741
|
|
|
6
|
|
3.26
|
%
|
|
Federal funds purchased
|
|
|
1,029
|
|
|
1
|
|
0.39
|
%
|
|
|
3,697
|
|
|
38
|
|
4.13
|
%
|
|
Customer repurchase agreements
|
|
|
30,708
|
|
|
81
|
|
1.07
|
%
|
|
|
34,447
|
|
|
242
|
|
2.83
|
%
|
|
Advances from Federal Home Loan Bank
|
|
|
32,493
|
|
|
247
|
|
3.08
|
%
|
|
|
9,622
|
|
|
105
|
|
4.39
|
%
|
|
Trust preferred securities
|
|
|
25,000
|
|
|
355
|
|
5.76
|
%
|
|
|
25,000
|
|
|
355
|
|
5.71
|
%
|
|
Note payable
|
|
|
9,631
|
|
|
96
|
|
4.04
|
%
|
|
|
14,550
|
|
|
193
|
|
5.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
992,868
|
|
|
5,927
|
|
2.42
|
%
|
|
|
894,096
|
|
|
7,612
|
|
3.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on average interest-earning assets
|
|
|
|
|
$
|
8,697
|
|
3.40
|
%
|
|
|
|
|
$
|
8,021
|
|
3.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average non-interest-bearing liabilities
|
|
|
102,243
|
|
|
|
|
|
|
|
|
111,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average stockholders equity
|
|
|
91,436
|
|
|
|
|
|
|
|
|
68,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average liabilities and stockholders equity
|
|
$
|
1,186,547
|
|
|
|
|
|
|
|
$
|
1,074,211
|
|
|
|
|
|
|
|
The
following table reconciles tax-equivalent net interest income (as shown above)
to net interest income as reported on the Consolidated Statements of Income.
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
March 31,
|
|
|
|
2009
|
|
2008
|
|
Net interest income as
stated
|
|
$
|
8,079
|
|
$
|
7,454
|
|
Tax equivalent adjustment-investments
|
|
|
582
|
|
|
547
|
|
Tax equivalent adjustment-loans
|
|
|
36
|
|
|
20
|
|
|
|
|
|
|
|
|
|
Tax equivalent net interest
income
|
|
$
|
8,697
|
|
$
|
8,021
|
|
28
Schedule 7. Controls and Procedures
|
|
(a)
|
Disclosure
controls and procedures. We evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of March 31, 2009. Our
disclosure controls and procedures are the controls and other procedures that
we designed to ensure that we record, process, summarize and report in a
timely manner the information we must disclose in reports that we file with
or submit to the SEC. Tony J. Sorcic, President and Chief Executive Officer,
and Todd D. Fanning, Senior Vice-President and Chief Financial Officer,
reviewed and participated in this evaluation. Based on this evaluation,
Messrs. Sorcic and Fanning concluded that, as of the date of their
evaluation, our disclosure controls were effective.
|
|
|
(b)
|
Internal
controls. There have not been any significant changes in our internal
accounting controls or in other factors during the quarter ended March 31,
2009 that could significantly affect those controls.
|
29
INDEX TO EXHIBITS
|
|
|
Exhibit
Number
|
|
|
|
|
|
3.1
|
|
Certificate
of Designations for the Series B Preferred Stock (incorporated by reference
from the Form 8-K filed on January 27, 2009).
|
|
|
|
4.1
|
|
Warrant to
purchase up to 155,025 shares of Common Stock issued January 23,
2009(incorporated by reference from the Form 8-K filed on January 29, 2009).
|
|
|
|
10.1
|
|
Letter
Agreement dated January 23, 2009 including the Securities Purchase Agreement
Standard Terms incorporated by reference therein between the Company and
the U.S. Treasury (incorporated by reference from the Form 8-K filed on
January 29, 2009).
|
|
|
|
10.2
|
|
Form of
Waiver of Senior Executive Officers (incorporated by reference from the Form
8-K filed on January 29, 2009).
|
|
|
|
10.3
|
|
Form of
Omnibus Amendment Agreement (incorporated by reference from the Form 8-K
filed on January 29, 2009).
|
|
|
|
31.1
|
|
Certification
of Tony J. Sorcic required by Rule 13a-14(a).
|
|
|
|
31.2
|
|
Certification
of Todd D. Fanning required by Rule 13a-14(a).
|
|
|
|
32.1
|
|
Certification
of Tony J. Sorcic required by Rule 13a-14(b) and Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
|
|
|
|
32.2
|
|
Certification
of Todd D. Fanning required by Rule 13a-14(b) and Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
|
30
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