Add
PNBC to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| PNBC > SEC Filings for PNBC > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
For the three and nine months ended September 30, 2008 and 2007
The following discussion provides information about Princeton National Bancorp, Inc.'s ("PNBC" or the "Corporation") financial condition and results of operations for the three and nine month periods ended September 30, 2008 and 2007. This discussion should be read in conjunction with the attached consolidated financial statements and notes thereto. This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), such as discussions of the Company's pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses and planned schedules. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are identified by use of the words "believe", "expect", "intend", "anticipate", "estimate", "project", or similar expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many risks and uncertainties including: the effect of the current severe disruption in financial markets and the United States government programs introduced to restore stability and liquidity, changes in interest rates, general economic conditions and the weakening state of the United States economy, legislative/regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including a discussion of these and additional factors that could materially affect the Company's financial results, is included in the Company's 2007 Annual Report on Form 10-K under the headings "Item 1. Business" and "Item 1A. Risk Factors."
RESULTS OF OPERATIONS
The Company continues to generate strong earnings in 2008, once again realizing a significant improvement in earnings during the third quarter and the first nine months of the year. Net income for the third quarter of 2008 was $2,187,000, or basic and diluted earnings per share of $0.66, as compared to net income of $1,740,000 in the third quarter of 2007, or basic earnings per share of $0.53 (diluted earnings per share of $0.52). This represents an increase of $447,000 (or 25.7%), $0.13 basic earnings per share and $0.14 diluted earnings per share. The earnings expansion is attributable to an increase in net interest income, discussed below, due to growth in the balance sheet and an improving net interest margin. Net income for the first nine months of 2008 was $6,298,000 or basic earnings per share of $1.91 and diluted earnings per share of $1.90, compared to net income of $4,723,000, or basic earnings per share of $1.42 and diluted earnings per share of $1.41 for the first nine months of 2007. This represents an increase of $1,575,000, (33.3%) or $0.49 per basic share and diluted share. The higher net income figure is primarily attributed to an increase in the net yield on interest-earning assets from 3.17% for the first nine months of 2007 to 3.46% for the first nine months of 2008. The annualized return on average assets and return on average equity were 0.78% and 12.54%, respectively, for the third quarter of 2008, compared with 0.67% and 10.65% for the third quarter of 2007. For the nine-month periods, the annualized return on average assets and return on average equity were 0.77% and 12.17%, respectively for 2008, compared with 0.61% and 9.67%, respectively for 2007.
Net interest income before provision for loan losses was $8,172,000 for the third quarter of 2008, compared to $6,850,000 for the third quarter of 2007 (an increase of $1,322,000 or 19.3%). This improvement is a result of an increase in average interest-earning assets of $78.7 million over the past twelve months. For the three months ended September 30, 2008, average interest-earning assets were $988.9 million compared to $910.2 million for the three months ended September 30, 2007. Additionally, the resulting net yield on interest-earning assets (on a fully taxable equivalent basis) increased to 3.50% in the third quarter of 2008 compared to 3.23% in the third quarter of 2007, contributing to the higher net income reported above. Net interest income before any provision for loan losses for the first nine months of 2008 was $23,443,000, an increase of $3.6 million, or 18.2%, from the $19,829,000 reported for the first nine months of 2007. This is attributable to an increase in average interest-earning assets of $56.0 million over the past twelve months, along with the resulting net yield on interest-earning assets (on a fully taxable equivalent basis) increasing to 3.46% in the first three-quarters of 2008 from 3.17% for the same time frame of 2007, an improvement of 9.1%.
The Corporation's provision for loan loss expense recorded each quarter is determined by management's evaluation of the risk characteristics of the loan portfolio. For the third quarter of 2008, PNBC had net charge-offs of $103,000, (0.06% of total loans) comparable to net charge-offs of $139,000 for the third quarter of 2007. For the nine-month comparable periods, PNBC had net charge-offs of $774,000 in 2008 and net charge-offs of $382,000 in 2007. PNBC recorded a loan loss provision of $550,000 in the third quarter of 2008 and $1,368,000 in the first nine months of 2008 compared to a provision of $250,000 in the third quarter of 2007 and $550,000 in the first nine months of 2007. The ratio of non-performing loans to total loans at September 30, 2008 has increased to 2.15% compared to 0.93% at September 30, 2007, but remains low by industry standards, particularly in light of the current economic situation. The Corporation has no sub-prime loans in the loan portfolio, nor is there any sub-prime exposure to securities in the investment portfolio.
Non-interest income totaled $2,851,000 for the third quarter of 2008, compared to $2,935,000 in the third quarter of 2007, a decrease of $84,000 (or 2.9%). Annualized non-interest income as a percentage of average total assets decreased to 1.02% for the third quarter of 2008 from 1.13% for the same period in 2007. This decrease was the result of $95,000 less in gains from the sale of investment securities quarter over quarter. Year-to-date in 2008, non-interest income totaled $8,755,000 compared to $8,302,000 for the first nine months of 2007, an increase of $453,000 (or 5.5%). The primary reason for the positive change is the increase in mortgage banking income which has improved by $213,000 (or 32.0%) in 2008 over 2007. Additionally, the categories of service charges on deposits and other service charges saw increases of $117,000 and $95,000, respectively. Annualized non-interest income as a percentage of average total assets decreased from 1.08% for the first nine months of 2007, to 1.07% for the same period in 2008.
Total non-interest expense for the third quarter of 2008 was $7,628,000, an increase of $241,000 (or 3.3%) from $7,387,000 in the third quarter of 2007. The largest increase was in salaries and employee benefits which went up $202,000, or 4.7%. Annualized non-interest expense as a percentage of total average assets decreased to 2.72% for the third quarter of 2008, compared to 2.85% for the same period in 2007, continuing a positive trend in the effort to control operating expenses as the Corporation grows and expands. The annualized percentage of 2.72% is the lowest the Corporation has reported since 1988. Year-to-date non-interest expense for the first three-quarters of 2008 was $22,696,000, an increase of $644,000 (or 2.9%) from the $22,052,000 for the same period in 2007. Again, the majority of the increase is in salaries and employee benefits which rose $508,000 (or 4.0%), due to an increase in the number of employees. Annualized non-interest expense as a percentage of total average assets also decreased to 2.77% for the first nine months of 2008, compared to 2.87% for the same period in 2007.
INCOME TAXES
Income tax expense totaled $658,000 for the third quarter of 2008, as compared to $408,000 for the third quarter of 2007. The effective tax rate was 23.1% for the three month period ended September 30, 2008 and 19.0% for the three month period ended September 30, 2007. Income tax expense totaled $1,836,000 for the first nine months of 2008, as compared to $806,000 for the first nine months of 2007. The effective tax rate was 22.6% for the nine month period ended September 30, 2008 and 14.6% for the nine month period ended September 30, 2007. The higher effective tax rate in 2008 is due to a higher pre-tax income.
ANALYSIS OF FINANCIAL CONDITION
Total assets at September 30, 2008 increased to $1,123,572,000 from $1,080,702,000 at December 31, 2007 (an increase of $42.9 million or 4.0%). Investment balances totaled $245,791,000 at September 30, 2008, compared to $232,673,000 at December 31, 2007 (an increase of $13.1 million or 5.6%). Total deposits increased to $937,446,000 at September 30, 2008 from $891,407,000 at December 31, 2007 (an increase of $46.0 million or 5.2%). Comparing categories of deposits at September 30, 2008 to December 31, 2007, interest-bearing demand deposits increased $18.3 million (or 7.6%), time deposits increased $31.3 million (or 6.4%), and savings deposits increased $1.5 million (or 2.5%), while demand deposits decreased $5.0 million (or 4.9%). Borrowings, consisting of customer repurchase agreements, notes payable, treasury, tax, and loan ("TT&L") deposits, and Federal Home Loan Bank advances, decreased from $109,089,000 at December 31, 2007 to $107,765,000 at September 30, 2008 (a decrease of $1.3 million or 1.2%).
Loan balances, net of unearned interest, increased to $762,109,000 at September 30, 2008, compared to $722,647,000 at December 31, 2007 (an increase of $39.5 million or 5.5%). Non-performing loans increased to $16,383,000 or 2.15% of net loans at September 30, 2008, as compared to $7,434,000 or 1.03% of net loans at December 31, 2007. Although non-performing loans have increased in terms of total dollars since year-end, the majority of the increase occurred in the first quarter of 2008 and is comprised of two larger credits with substantial collateral. All loans are individually evaluated and management continues to maintain adequate reserves in the allowance for loan losses.
ASSET QUALITY
For the nine months ended September 30, 2008, the subsidiary bank charged off $915,000 of loans and had recoveries of $141,000, compared to charge-offs of $569,000 and recoveries of $187,000 during the nine months ended September 30, 2007. 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 management's reasonable judgment, warrant consideration. The adequacy of the allowance is monitored monthly. At September 30, 2008, the allowance was $3,842,000 which is 23.5% of non-performing loans and 0.50% of total loans, compared with $3,248,000 which was 43.7% of non-performing loans and 0.45% of total loans at December 31, 2007. Although the balance of non-performing loans has increased, management has reviewed these loans and deemed they are adequately collateralized.
At September 30, 2008 non-accrual loans were $15,167,000 compared to $7,361,000 at December 31, 2007. Impaired loans totaled $10,903,000 at September 30, 2008 compared to $4,523,000 at December 31, 2007. The total amount of loans ninety days or more past due and still accruing interest at September 30, 2008 was $1,215,000 compared to $73,000 at December 31, 2007. There was a specific loan loss reserve of $140,000 established for impaired loans as of September 30, 2008 compared to a specific loan loss reserve of $207,000 at December 31, 2007. PNBC's management analyzes the allowance for loan losses monthly and believes the current level of allowance is adequate to meet probable losses as of September 30, 2008.
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, 2008, total risk-based capital of PNBC was 8.44%, compared to 8.41% at December 31, 2007. The Tier 1 capital ratio decreased slightly from 6.16% at December 31, 2007, to 6.14% at September 30, 2008. Total stockholders' equity to total assets at September 30, 2008 decreased to 6.17% from 6.35% at December 31, 2007.
The Company is currently evaluating the possibility of raising capital and the opportunities under the recently announced Capital Purchase Program ("CPP") of the U.S. Department of the Treasury (the "Treasury"). Under the CPP, qualified U.S. banking organizations whose applications to participate are approved would sell preferred stock and grant warrants purchasing common stock to the Treasury. The Company is currently evaluating whether it will apply for participation in the CPP and any effects participation would have on the Company's capital structure. There are a variety of factors to be evaluated, including the cost of the capital to be provided and restrictions that would be imposed on the Company by participating in the CPP (such as restrictions on dividend increases and stock buy-backs), as well as the significant opportunities of the program. The Company does not expect to make further announcements with respect to participation in the CPP unless and until it decides to participate.
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 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 used in investing activities, offset by those provided by financing and operating activities, resulted in a net decrease in cash and cash equivalents of $9,415,000 from December 31, 2007 to September 30, 2008. This decrease was primarily due to a net increase in loans and investments, offset by an increase in deposits. For more detailed information, see PNBC's Consolidated Statements of Cash Flows.
In response to the overall economy, the Company has made a concerted effort during 2008 to increase its available liquidity sources to levels which management believes are appropriate given the current state of the economy and the banking industry. As a result, the remaining borrowing sources available to the Company have increased to $95.6 million as of September 30, 2008 compared to $60.9 million as of December 31, 2007.
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 Corporation's 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 bank's 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 September 30, 2008, commitments to extend credit and standby letters of credit were approximately $162,998,000 and $6,597,000 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 customer's 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 management's 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.
MERGERS AND ACQUISITIONS
On February 23, 2007, the Company completed the acquisition, for $10.2 million in cash, of the fixed assets and loans while assuming the deposit liabilities of the Plainfield, Illinois branch of HomeStar Bank in order to expand its market presence in this area. The Company financed the purchase price with existing cash and federal funds sold on the balance sheet at the time of purchase. Since the completion of the merger, the Plainfield location operates as a branch of the Company's subsidiary bank.
The transaction has been accounted for as a purchase, and the results of operations of Plainfield since the acquisition date have been included in the consolidated financial statements.
LAND HELD FOR SALE
In 2004, the Corporation purchased approximately 14 acres of land in Aurora, Illinois in anticipation of the construction of a new branch facility. Construction of the facility was completed in May, 2006 with the remaining acreage sub-divided in two lots and the necessary infrastructure completed. These lots, with a cost basis of $1,344,000, were determined to be held for sale as of March 31, 2007. A real estate appraisal has been completed indicating the market value of each lot to be approximately $2,000,000. Accordingly, these lots were removed from the land balance and are now shown on the Corporation's balance sheet as land held-for-sale, at the lower of cost or market.
LEGAL PROCEEDINGS
There are various claims pending against the Corporation's 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 Corporation's financial position or results of operation.
|
|