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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________________to
Commission File Number: 0-23636
EXCHANGE NATIONAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1626350
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
132 EAST HIGH STREET, JEFFERSON CITY, MISSOURI 65101
(Address of principal executive offices) (Zip Code)
(573) 761-6100
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report.)
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. |X| Yes | | No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act). |X| Yes | | No
As of May 1, 2003, the registrant had 2,779,930 shares of common stock,
par value $1.00 per share, outstanding.
Page 1 of 35 pages
Index to Exhibits located on page 33
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
ASSETS
Loans:
Commercial $158,014,006 $147,850,348
Real estate - construction 42,942,831 41,437,000
Real estate - mortgage 263,006,002 250,318,539
Consumer 44,336,978 46,958,417
------------ ------------
508,299,817 486,564,304
Less allowance for loan losses 7,369,224 7,121,114
------------ ------------
Loans, net 500,930,593 479,443,190
Investments in available for sale debt
and equity securities, at fair value 179,838,658 186,724,362
Federal funds sold 45,224,608 49,669,213
Cash and due from banks 32,606,455 27,742,030
Premises and equipment 16,229,884 16,586,332
Accrued interest receivable 5,369,146 5,539,661
Goodwill 23,407,734 23,407,734
Intangible assets 780,470 855,140
Other assets 4,765,280 4,450,250
------------ ------------
Total assets $809,152,828 $794,417,912
============ ============
Continued on next page
2
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits $ 79,553,839 $ 77,474,471
Time deposits 525,150,252 513,716,181
------------- -------------
Total deposits 604,704,091 591,190,652
Federal funds purchased and securities
sold under agreements to repurchase 69,507,545 67,359,199
Interest-bearing demand notes to U.S. Treasury 460,899 3,061,503
Other borrowed money 40,655,580 41,795,016
Accrued interest payable 1,801,321 1,984,745
Other liabilities 7,361,564 6,199,677
------------- -------------
Total liabilities 724,491,000 711,590,792
------------- -------------
Stockholders' equity:
Common stock - $1 par value; 15,000,000 shares
authorized; 2,865,601 issued and outstanding 2,865,601 2,865,601
Surplus 21,998,617 21,983,467
Retained earnings 60,162,723 58,363,271
Accumulated other comprehensive income, net of tax 2,314,577 2,294,471
Treasury stock; 86,680 shares at cost (2,679,690) (2,679,690)
------------- -------------
Total stockholders' equity 84,661,828 82,827,120
------------- -------------
Total liabilities and stockholders' equity $ 809,152,828 $ 794,417,912
============= =============
See accompanying notes to unaudited condensed consolidated financial statements.
3
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
2003 2002
---------- -----------
Interest income $9,431,647 $10,293,328
Interest expense 3,282,475 4,388,398
---------- -----------
Net interest income 6,149,172 5,904,930
Provision for loan losses 235,500 234,000
---------- -----------
Net interest income after provision for loan losses 5,913,672 5,670,930
Noninterest income 1,972,003 1,304,600
Noninterest expense 4,500,340 4,220,710
---------- -----------
Income before income taxes 3,385,335 2,754,820
Income taxes 1,030,098 826,164
---------- -----------
Net income $2,355,237 $ 1,928,656
========== ===========
Basic earning per share $ 0.85 $ 0.68
Diluted earnings per share $ 0.84 $ 0.68
Weighted average shares of common stock outstanding
Basic 2,778,921 2,834,145
Diluted 2,794,919 2,834,604
Dividend per share:
Declared $ 0.20 $ 0.19
Paid $ 0.20 $ 0.19
See accompanying notes to unaudited condensed consolidated financial statements.
4
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED MARCH 31,
---------------------------------
2003 2002
------------ ------------
Cash flow from operating activities:
Net income $ 2,355,237 $ 1,928,656
Adjustments to reconcile net income to net cash
cash provided by operating activities:
Provision for loan losses 235,500 234,000
Depreciation expense 425,366 292,568
Net amortization of debt securities
premiums and discounts 305,206 206,213
Amortization of intangible assets 74,670 74,670
Decrease in accrued interest receivable 170,515 360,130
Increase in other assets (261,197) (191,556)
Decrease in accrued interest payable (183,424) (400,220)
Increase (decrease) in other liabilities 1,161,887 (109,916)
Gain on sales and calls of debt securities (53,235) --
Origination of mortgage loans for sale (30,973,004) (22,471,951)
Proceeds from the sale of mortgage loans held for sale 31,664,320 22,769,528
Gain on sale of mortgage loans (691,316) (297,577)
Loss on disposition of premises and equipment 1,079 298
Other, net 14,856 15,153
------------ ------------
Net cash provided by operating activities 4,246,460 2,409,996
Cash flow from investing activities:
Net increase in loans (21,908,229) (1,582,236)
Purchase of available-for-sale debt securities (66,116,574) (26,091,373)
Proceeds from maturities of available-for-sale debt securities 51,812,535 15,516,654
Proceeds from calls of available-for-sale debt securities 19,415,000 11,135,000
Proceeds from sales of available-for-sale debt securities 1,553,235 --
Purchase of premises and equipment (69,997) (887,762)
Proceeds from sales of other real estate owned and repossessions 121,136 148,672
------------ ------------
Net cash used in investing activities (15,192,894) (1,761,045)
------------ ------------
Continued on next page
5
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
------------ ------------
Cash flow from financing activities:
Net increase (decrease) in demand deposits 2,079,368 (9,682,077)
Net increase (decrease) in interest-bearing transaction accounts 5,799,702 (3,960,278)
Net increase in time deposits 5,634,369 4,304,893
Net increase in federal funds purchased and securities sold
under agreements to repurchase 2,148,346 4,922,840
Net (decrease) increase in interest-bearing demand notes
to U.S. Treasury (2,600,604) 1,525,761
Repayment of Federal Home Loan Bank borrowings (139,436) (333,412)
Repayment of other borrowed money (1,000,000) --
Cash dividends paid (555,491) (538,487)
------------ ------------
Net cash provided by (used) in financing activities 11,366,254 (3,760,760)
------------ ------------
Net increase (decrease) in cash and cash equivalents 419,820 (3,111,809)
------------ ------------
Cash and cash equivalents, beginning of period 77,411,243 85,609,147
------------ ------------
Cash and cash equivalents, end of period $ 77,831,063 $ 82,497,338
============ ============
Supplemental disclosure of cash flow information -
Cash paid (received) during period for:
Interest $ 3,465,899 $ 4,788,618
Income taxes (122,079) --
Supplemental schedule of noncash investing activities -
Other real estate and repossessions acquired in settlement of loans 185,326 111,515
See accompanying notes to unaudited condensed consolidated financial statements.
6
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2003 and 2002
Exchange National Bancshares, Inc. ("Bancshares" or the "Company") is a
bank holding company registered under the Bank Holding Company Act of 1956.
Bancshares' activities currently are limited to ownership of the outstanding
capital stock of The Exchange National Bank of Jefferson City (ENB), Union State
Bancshares, Inc. (Union), which owns 100% of Citizens Union State Bank and Trust
of Clinton (CUSB), and Mid Central Bancorp, Inc. (Mid Central), which owns 100%
of Osage Valley Bank of Warsaw (OVB). Bancshares acquired ENB on April 7, 1993,
Union on November 3, 1997 and Mid Central on January 3, 2000. In addition,
Bancshares acquired Calhoun Bancshares, Inc. (Calhoun) and its wholly owned
subsidiary, Citizens State Bank of Calhoun on May 4, 2000. Immediately upon
acquisition, Calhoun Bancshares, Inc. was dissolved and Citizens State Bank was
merged with Union State Bank and Trust with the surviving institution being
renamed Citizens Union State Bank and Trust of Clinton (CUSB). On June 16, 2000
Bancshares acquired CNS Bancorp, Inc. (CNS) and its wholly owned subsidiary,
City National Savings Bank, FSB. Immediately upon acquisition, CNS Bancorp, Inc.
was dissolved and City National Savings Bank, FSB was merged with ENB. All
acquisitions were accounted for as purchase transactions.
On April 11, 2003 our Company signed a definitive agreement with Trustcorp
Financial, Inc. for the acquisition of Trustcorp's branch of Missouri State Bank
in Springfield, Missouri. Our Company will receive approximately $30 million in
loans and $34 million in deposits as well as the real estate and tangible assets
of the branch. Total cost of the transaction is approximately $4 million and
will be financed with cash on hand. Upon completion of the transaction the
branch will be merged with and operated as a branch of CUSB.
The accompanying unaudited condensed consolidated financial statements
include all adjustments that in the opinion of management are necessary in order
to make those statements not misleading. Certain amounts in the 2002 condensed
consolidated financial statements have been reclassified to conform to the 2003
condensed consolidated presentation. Such reclassifications have no effect on
previously reported net income or stockholders' equity. Operating results for
the period ended March 31, 2003 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2003.
It is suggested that these unaudited condensed consolidated interim
financial statements be read in conjunction with Bancshares' audited
consolidated financial statements included in its 2002 Annual Report to
Shareholders under the caption "Consolidated Financial Statements" and
incorporated by reference into its Annual Report on Form 10-K for the year ended
December 31, 2002 as Exhibit 13.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. Certain information and note disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United State of America have
7
been condensed and omitted. Bancshares believes that these financial statements
contain all adjustments (consisting of normal recurring accruals) necessary to
present fairly Bancshares' consolidated financial position as of March 31, 2003
and December 31, 2002 and the consolidated statements of earnings and cash flows
for the three months ended March 31, 2003 and 2002.
The following table reflects, for the three-month periods ended March 31,
2003 and 2002, the numerators (net income) and denominators (average shares
outstanding) for the basic and diluted net income per share computations:
THREE MONTHS ENDED
MARCH 31,
-----------------------
2003 2002
---------- ----------
Net income, basic and diluted $2,355,237 $1,928,656
========== ==========
Average shares outstanding 2,778,921 2,834,145
Effect of dilutive stock options 15,998 3,459
---------- ----------
Average shares outstanding
including dilutive stock options 2,794,919 2,837,604
Net income per share, basic $ 0.85 $ 0.68
========== ==========
Net income per share, diluted $ 0.84 $ 0.68
========== ==========
8
Our Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. Our Company provides pro forma net
income and pro forma net income per share disclosures for employee stock option
grants as if the fair-value-based method defined in SFAS No. 123, Accounting for
Stock-Based Compensation, had been applied.
The following table illustrates, for the three-month periods ended March
31, 20023 and 2002, the effect on net income if the fair-value-based method had
been applied to all outstanding and unvested awards in each period:
THREE MONTHS ENDED
MARCH 31,
----------------------------
2003 2002
------------ ------------
Net income:
As reported $ 2,355,237 $ 1,928,656
Deduct total stock-based employee
compensation expense determined
under fair-value-based method for
all awards, net of tax (22,887) (15,277)
------------ ------------
Pro forma net income $ 2,332,350 $ 1,913,379
============ ============
Pro forma earnings per common share:
As reported basic $ 0.85 $ 0.68
Pro forma basic 0.84 0.68
As reported diluted 0.84 0.68
Pro forma diluted 0.83 0.67
9
For the three-month periods ended March 31, 2003 and 2002, unrealized
holding gains and losses on investments in debt and equity securities
available-for-sale were Bancshares' only other comprehensive income component.
Comprehensive income for the three-month periods ended March 31, 2003 and 2002
is summarized as follows:
THREE MONTHS ENDED
MARCH 31,
----------- -----------
2003 2002
Net income $ 2,355,237 $ 1,928,656
Other compreshensive income (loss):
Net unrealized holding gains (losses) on
investments in debt and equity securities
available-for-sale, net of taxes 55,241 (448,266)
Adjustment for net securities gains realized in net
income, net of applicable income taxes (35,135) --
----------- -----------
Total other comprehensive (loss) income 20,106 (448,266)
----------- -----------
Comprehensive income $ 2,375,343 $ 1,480,390
=========== ===========
10
Through the respective branch network, ENB, CUSB and OVB provide similar
products and services in three defined geographic areas. The products and
services offered include a broad range of commercial and personal banking
services, including certificates of deposit, individual retirement and other
time deposit accounts, checking and other demand deposit accounts, interest
checking accounts, savings accounts and money market accounts. Loans include
real estate, commercial, installment and other consumer loans. Other financial
services include automatic teller machines, trust services, credit related
insurance, and safe deposit boxes. The revenues generated by each business
segment consist primarily of interest income, generated from the loan and debt
and equity security portfolios, and service charges and fees, generated from the
deposit products and services. The geographic areas are defined to be
communities surrounding Jefferson City, Clinton and Warsaw, Missouri. The
products and services offered to customers primarily within their respective
geographical areas. The business segments results that follow are consistent
with Bancshares's internal reporting system which is consistent, in all material
respects, with accounting principles generally accepted in the United States of
America and practices prevalent in the banking industry.
MARCH 31, 2003
CITIZENS
THE EXCHANGE UNION STATE OSAGE
NATIONAL BANK BANK AND VALLEY BANK
OF JEFFERSON TRUST OF OF CORPORATE
CITY CLINTON WARSAW AND OTHER TOTAL
------------ ------------ ------------ ------------ ------------
Balance sheet information:
Loans, net of allowance
for loan losses $330,786,310 $129,793,422 $ 40,350,861 $ -- $500,930,593
Debt and equity securities 101,974,881 48,691,909 29,171,868 -- 179,838,658
Goodwill 4,382,098 14,912,760 4,112,876 -- 23,407,734
Intangible assets -- 692,970 -- 87,500 780,470
Total assets 478,319,349 248,624,453 82,687,299 (478,273) 809,152,828
Deposits 349,183,780 194,254,935 67,894,030 (6,628,654) 604,704,091
Stockholders' equity 49,792,223 35,986,257 10,211,333 (11,327,985) 84,661,828
============ ============ ============ ============ ============
DECEMBER 31, 2002
CITIZENS
THE EXCHANGE UNION STATE OSAGE
NATIONAL BANK BANK AND VALLEY BANK
OF JEFFERSON TRUST OF OF CORPORATE
CITY CLINTON WARSAW AND OTHER TOTAL
------------ ------------ ------------ ------------ ------------
Balance sheet information:
Loans, net of allowance
for loan losses $316,680,812 $123,679,641 $ 39,082,737 $ -- $479,443,190
Debt and equity securities 102,210,874 55,259,879 29,253,609 -- 186,724,362
Goodwill 4,382,098 14,912,760 4,112,876 -- 23,407,734
Intangible assets -- 730,140 -- 125,000 855,140
Total assets 472,806,720 240,869,039 81,209,370 (467,217) 794,417,912
Deposits 344,375,565 187,796,880 66,553,127 (7,534,920) 591,190,652
Stockholders' equity 48,956,217 35,513,162 9,979,001 (11,621,260) 82,827,120
============ ============ ============ ============ ============
11
THREE MONTHS ENDED MARCH 31, 2003
CITIZENS
THE EXCHANGE UNION STATE OSAGE
NATIONAL BANK BANK AND VALLEY BANK
OF JEFFERSON TRUST OF OF CORPORATE
CITY CLINTON WARSAW AND OTHER TOTAL
------------ ------------ ------------ ------------ ------------
Statement of earnings:
Total interest income $ 5,566,926 $ 2,831,730 $ 1,032,991 $ -- $ 9,431,647
Total interest expense 1,821,744 910,153 428,747 121,831 3,282,475
------------ ------------ ------------ ------------ ------------
Net interest income 3,745,182 1,921,577 604,244 (121,831) 6,149,172
Provision for loan losses 150,000 75,000 10,500 -- 235,500
Noninterest income 1,576,134 334,044 82,849 (21,024) 1,972,003
Noninterest expense 2,722,923 1,306,870 384,662 85,885 4,500,340
Income taxes 775,100 253,632 79,166 (77,800) 1,030,098
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 1,673,293 $ 620,119 $ 212,765 $ (150,940) $ 2,355,237
============ ============ ============ ============ ============
THREE MONTHS ENDED MARCH 31, 2002
CITIZENS
THE EXCHANGE UNION STATE OSAGE
NATIONAL BANK BANK AND VALLEY BANK
OF JEFFERSON TRUST OF OF CORPORATE
CITY CLINTON WARSAW AND OTHER TOTAL
------------ ------------ ------------ ------------ ------------
Statement of earnings:
Total interest income $ 6,152,237 $ 3,025,081 $ 1,116,010 $ -- $ 10,293,328
Total interest expense 2,360,702 1,262,455 500,221 265,020 4,388,398
------------ ------------ ------------ ------------ ------------
Net interest income 3,791,535 1,762,626 615,789 (265,020) 5,904,930
Provision for loan losses 150,000 75,000 9,000 -- 234,000
Noninterest income 965,399 283,580 55,621 -- 1,304,600
Noninterest expense 2,470,097 1,283,319 343,340 123,954 4,220,710
Income taxes 671,150 189,791 97,523 (132,300) 826,164
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 1,465,687 $ 498,096 $ 221,547 $ (256,674) $ 1,928,656
============ ============ ============ ============ ============
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS MADE IN
THIS REPORT ON FORM 10-Q ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE WORDS "SHOULD", "EXPECT", "ANTICIPATE", "BELIEVE", "INTEND",
"MAY", "HOPE", "FORECAST" AND SIMILAR EXPRESSIONS MAY IDENTIFY FORWARD LOOKING
STATEMENTS. IN PARTICULAR, STATEMENTS THAT THE PERIODIC REVIEW OF OUR LOAN
PORTFOLIO KEEPS MANAGEMENT INFORMED OF POSSIBLE LOAN PROBLEMS AND THAT THE
ALLOWANCE FOR LOAN LOSSES ADEQUATELY COVERS ANY EXPOSURE ON SPECIFIC CREDITS ARE
ALL FORWARD-LOOKING STATEMENTS. OUR COMPANY'S ACTUAL RESULTS, FINANCIAL
CONDITION, OR BUSINESS COULD DIFFER MATERIALLY FROM ITS HISTORICAL RESULTS,
FINANCIAL CONDITION, OR BUSINESS, OR THE RESULTS OF OPERATIONS, FINANCIAL
CONDITION, OR BUSINESS CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS
THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY
THE FORWARD LOOKING STATEMENTS HEREIN INCLUDE MARKET CONDITIONS AS WELL AS
CONDITIONS SPECIFICALLY AFFECTING THE BANKING INDUSTRY GENERALLY AND FACTORS
HAVING A SPECIFIC IMPACT ON BANCSHARES INCLUDING, BUT NOT LIMITED TO,
FLUCTUATIONS IN INTEREST RATES AND IN THE ECONOMY; THE IMPACT OF LAWS AND
REGULATIONS APPLICABLE TO BANCSHARES AND CHANGES THEREIN; COMPETITIVE CONDITIONS
IN THE MARKETS IN WHICH BANCSHARES CONDUCTS ITS OPERATIONS, INCLUDING
COMPETITION FROM BANKING AND NON-BANKING COMPANIES WITH SUBSTANTIALLY GREATER
RESOURCES THAN BANCSHARES, SOME OF WHICH MAY OFFER AND DEVELOP PRODUCTS AND
SERVICES NOT OFFERED BY BANCSHARES; AND THE ABILITY OF BANCSHARES TO RESPOND TO
CHANGES IN TECHNOLOGY. ADDITIONAL FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES WERE DISCUSSED UNDER THE CAPTION "FACTORS THAT MAY AFFECT FUTURE
RESULTS OF OPERATIONS, FINANCIAL CONDITION, OR BUSINESS," IN OUR COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002, AS WELL AS
THOSE DISCUSSED ELSEWHERE IN OUR COMPANY'S REPORTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
13
Net income for the three months ended March 31, 2003 of $2,355,000
increased $426,000 when compared to the first quarter of 2002. Diluted earnings
per common share for the first quarter of 2003 of $0.84 increased 16 cents or
23.5% when compared to the first quarter of 2002.
The following table provides a comparison of fully taxable equivalent
earnings, including adjustments to interest income and tax expense for interest
on tax-exempt loans and investments.
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
---------------------
2003 2002
-------- --------
Interest income $ 9,431 $ 10,293
Fully taxable equivalent (FTE) adjustment 185 209
-------- --------
Interest income (FTE basis) 9,616 10,502
Interest expense 3,282 4,388
-------- --------
Net interest income (FTE basis) 6,334 6,114
Provision for loan losses 236 234
-------- --------
Net interest income after provision for
loan losses (FTE basis) 6,098 5,880
Noninterest income 1,972 1,305
Noninterest expense 4,500 4,221
-------- --------
Earning before income taxes (FTE basis) 3,570 2,964
-------- --------
Income taxes 1,030 826
FTE adjustment 185 209
-------- --------
Income taxes (FTE basis) 1,215 1,035
-------- --------
Net Income $ 2,355 $ 1,929
======== ========
Net interest income on a fully taxable equivalent basis increased $220,000
or 3.6% to $6,334,000 or 3.53% of average earning assets for the first quarter
of 2003 compared to $6,114,000 or 3.54% of average earning assets for the same
period of 2002. The provision for loan losses for the three months ended March
31, 2003 was $236,000 compared to $234,000 for the same period of 2002.
14
Noninterest income and noninterest expense for the three-month periods
ended March 31, 2003 and 2002 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31, INCREASE (DECREASE)
------------------ --------------------
NONINTEREST INCOME 2003 2002 AMOUNT %
------- ------ ------ -------
Service charges on deposit accounts $ 621 $ 610 $ 11 1.8%
Trust department income 334 121 213 176.0
Brokerage income 13 3 10 333.3
Mortgage loan servicing fees 113 102 11 10.8
Net gains on sale of debt securities 53 -- 53 100.0
Gain on sale of mortgage loans 691 298 393 131.9
Credit card fees 38 35 3 8.6
Other 109 136 (27) (19.9)
------ ------ ------
$1,972 $1,305 667 51.1%
====== ====== ======
NONINTEREST EXPENSE
Salaries and employee benefits 2,455 2,303 $ 152 6.6%
Occupancy expense 261 256 5 2.0
Furniture and equipment expense 526 433 93 21.5
FDIC insurance assessment 24 29 (5) (17.2)
Advertising and promotion 132 89 43 48.3
Postage, printing and supplies 206 202 4 2.0
Legal, examination, and --
professional fees 180 220 (40) (18.2)
Credit card expenses 23 23 -- --
Credit investigation and loan --
collection expenses 24 29 (5) (17.2)
Amortization of intangible assets 75 75 -- --
Other 594 562 32 5.7
------ ------ ------
$4,500 $4,221 $ 279 6.6%
====== ====== ======
Noninterest income increased $667,000 or 51.1% to $1,972,000 for the first
quarter of 2003 compared to $1,305,000 for the same period of 2002. Trust
department income increased $213,000 or 176.0% due primarily to the collection
of distribution fees on two large trusts. Brokerage income increased $10,000 or
333.3% due to increased sales volumes in 2003. Our Company recognized net gains
of $53,000 from the sale of debt securities during the first quarter of 2003.
Gain on sales of mortgage loans increased $393,000 or 131.9% due to an increase
in volume of loans originated and sold to the secondary market from
approximately $22,472,000 in the first quarter of 2002 to approximately
$30,973,000 for the first quarter of 2003. The $27,000
15
or 19.1% decrease in other noninterest income reflects the 2002 receipt of funds
from the demutualization of an insurance vendor that our Company had previously
used for services.
Noninterest expense increased $279,000 or 6.6% to $4,500,000 for the first
quarter of 2003 compared to $4,221,000 for the first quarter of 2002. Salaries
and benefits increased $152,000 or 6.6%. This increase is due to normal salary
increases and higher health insurance premiums. The $93,000 or 21.5% increase in
furniture and equipment expense is primarily the result of increased
depreciation and amortization expense for equipment and software purchased
during our Company's core data processing conversion during 2002 as well as
furnishings purchased for a new branch. The $43,000 or 48.3% increase in
advertising and promotion reflects initial startup costs with a new advertising
agency and the cost of a marketing survey. The $40,000 or 18.2% decrease in
legal and professional fees reflects consulting fees paid in 2002 for project
management related to a core data processing conversion project at the three
banks. The $32,000 or 5.7% increase in other noninterest expense represents
losses recorded on low income housing partnerships that our Company participates
in with other financial institutions.
Income taxes as a percentage of earnings before income taxes as reported
in the condensed consolidated financial statements was 30.4% for the first
quarter of 2003 compared to 30.0% for the first quarter of 2002.
NET INTEREST INCOME
Fully taxable equivalent net interest income decreased $220,000 or 3.6%
for the three-month period ended March 31, 2003 compared to the same period in
2002.
The following table presents average balance sheets, net interest income,
average yields of earning assets, and average costs of interest bearing
liabilities on a fully taxable equivalent basis for the three month periods
ended March 31, 2003 and 2002.
16
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
----------------------------------------- -----------------------------------------
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expense(1) Paid(1) Balance Expense(1) Paid(1)
------------ ------------ ------------ ------------ ------------ ------------
ASSETS
Loans:(2)
Commercial $ 153,112 $ 2,269 6.01% $ 139,291 $ 2,266 6.60%
Real estate 299,613 4,563 6.18 280,661 4,905 7.09
Consumer 43,955 874 8.06 44,652 970 8.81
Investment securities:(3)
U.S Treasury and
U.S. Gov't Agencies 143,653 1,143 3.23 136,370 1,394 4.15
State and municpal 34,257 588 6.96 38,669 666 6.98
Other 5,414 49 3.67 4,959 52 4.25
Federal funds sold 41,926 114 1.10 53,604 231 1.75
Interest-bearing deposits 5,673 16 1.14 2,359 18 3.09
------------ ------------ ------------ ------------
Total interest earning assets 727,603 9,616 5.36 700,565 10,502 6.08
All other assets 71,512 70,724
Allowance for loan losses (7,235) (6,736)
------------ ------------
Total assets $ 791,880 $ 764,553
============ ============
Continued on next page
17
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
----------------------------------------- ----------------------------------------
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expense(1) Paid(1) Balance Expense(1) Paid(1)
------------ ------------ ------------ ------------ ------------ ------------
LIABILITIES AND
STOCKHOLDERS'
EQUITY
NOW accounts $ 94,983 $ 182 0.78% $ 89,244 $ 241 1.10%
Savings 51,232 105 0.83 48,994 128 1.06
Money market 63,517 152 0.97 61,318 212 1.40
Deposits of $100,000
and over 68,086 446 2.66 45,557 443 3.94
Other time deposits 240,717 1,787 3.01 254,721 2,520 4.01
------------ ------------ ------------ ------------
Total time deposits 518,535 2,672 2.09 499,834 3,544 2.88
Federal funds purchased
and securities sold under
agreements to repurchase 68,241 177 1.05 63,314 257 1.65
Interest-bearing demand
notes to US Treasury 468 1 0.87 1,008 4 1.61
Other borrowed money 40,769 432 4.30 42,893 583 5.51
------------ ------------ ------------ ------------
Total interest-bearing
liabilities 628,013 3,282 2.12 607,049 4,388 2.93
------------ ------------
Demand deposits 71,772 66,789
Other liabilities 7,895 11,455
------------ ------------
Total liabilities 707,680 685,293
Stockholders' equity 84,200 79,260
------------ ------------
Total liabilities and
Stockholders' equity $ 791,880 764,553
============ ============
Net interest income $ 6,334 $ 6,114
============ ============
Net interest margin(4) 3.53% 3.54%
==== ====
(1) Interest income and yields are presented on a fully taxable equivalent
basis using the Federal statutory income tax rate. Such adjustments were
$185,000 in 2003 and $209,000 in 2002.
(2) Non-accruing loans are included in the average amounts outstanding.
(3) Average balances based on amortized cost.
(4) Net interest income divided by average total interest earning assets.
The following table presents, on a fully taxable equivalent basis, an
analysis of changes in net interest income resulting from changes in average
volumes of earning assets and interest bearing liabilities and average rates
earned and paid. The change in interest due to the combined rate/volume variance
has been allocated to rate and volume changes in proportion to the absolute
dollar amounts of change in each.
18
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 2003
COMPARED TO
THREE MONTHS ENDED MARCH 31, 2002
---------------------------------
CHANGE DUE TO
TOTAL ----------------------
CHANGE VOLUME RATE
-------- -------- --------
INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS:
Loans: (1)
Commercial $ 3 215 (212)
Real estate (2) (342) 316 (658)
Consumer (96) (15) (81)
Investment securities:
U.S Treasury and U.S.
Governement agencies (251) 71 (322)
State and municipal (2) (78) (76) (2)
Other (3) 5 (8)
Federal funds sold (117) (43) (74)
Interest-bearing deposits (2) 14 (16)
-------- -------- --------
Total interest income (886) 487 (1,373)
INTEREST EXPENSE:
NOW accounts (59) 14 (73)
Savings (23) 6 (29)
Money market (60) 8 (68)
Deposits of $100,000 and over 3 176 (173)
Other time deposits (733) (133) (600)
Federal funds purchased and
securities sold under
agreements to repurchase (80) 19 (99)
Interest-bearing demand notes
of U.S. Treasury (3) (1) (2)
Other borrowed money (151) (28) (123)
-------- -------- --------
Total interest expense (1,106) 61 (1,167)
-------- -------- --------
NET INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS $ 220 426 (206)
======== ======== ========
(1) Non-accruing loans are included in the average amounts outstanding.
(2) Interest income and yields are presented on a fully taxable equivalent
basis using the federal statutory income tax rate. Such adjustments
totaled $185,000 in 2003 and $209,000 in 2002.
19
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is based on management's evaluation of the
loan portfolio in light of national and local economic conditions, changes in
the composition and volume of the loan portfolio, changes in the volume of past
due and nonaccrual loans, and other relevant factors. The allowance for loan
losses, which is reported as a deduction from loans, is available for loan
charge-offs. The allowance is increased by the provision charged to expense and
is reduced by loan charge-offs, net of loan recoveries.
Management formally reviews all loans in excess of certain dollar amounts
(periodically established) at least annually. In addition, on a monthly basis,
management reviews past due, "classified", and "watch list" loans in order to
classify or reclassify loans as "loans requiring attention," "substandard,"
"doubtful," or "loss". During that review, management also determines what loans
should be considered to be "impaired". Management believes, but there can be no
assurance, that these procedures keep management informed of possible problem
loans. Based upon these procedures, both the allowance and provision for loan
losses are adjusted to maintain the allowance at a level considered adequate by
management for probable losses inherent in the loan portfolio. See additional
discussion concerning nonperforming loans under "Financial Condition."
The allowance for loan losses was increased by net loan recoveries of
$13,000 for the first quarter of 2003 compared to net charge-offs of $57,000 for
the first quarter of 2002. The allowance for loan losses was increased by a
provision charged to expense of $236,000 for the first quarter of 2003 compared
to $234,000 for the first quarter of 2002.
The balance of the allowance for loan losses was $7,369,000 at March 31,
2003 compared to $7,121,000 at December 31, 2002 and $6,850,000 at March 31,
2002. The allowance for loan losses as a percent of outstanding loans was 1.45%
at March 31, 2003 compared to 1.46% at December 31, 2002 and 1.47% at March 31,
2002.
FINANCIAL CONDITION
Total assets increased $14,735,000 or 1.9% to $809,153,000 at March 31,
2003 compared to $794,418,000 at December 31, 2002. Total liabilities increased
$12,900,000 or 1.8% to $724,491,000. Stockholders' equity increased $1,835,000
or 2.2% to $84,662,000.
Loans increased $21,736,000 or 4.5% to $508,300,000 at March 31, 2003
compared to $486,564,000 at December 31, 2002. Commercial loans increased
$10,164,000; real estate construction loans increased $1,506,000; real estate
mortgage loans increased $12,687,000; and consumer loans decreased $2,621,000.
The increases in commercial, real estate construction and real estate mortgage
loans reflects the continuing strong loan demand that our Company is
experiencing in its market areas. The increase in commercial loans represents a
broad variety of loans. The increase in real estate mortgage loans primarily
reflects commercial real estate loans. The decrease in consumer loans is
reflective of lower rates in the markets that our Company is unwilling to match,
primarily in the area of automobile financing.
20
Nonperforming loans, defined as loans on nonaccrual status, loans 90 days
or more past due and still accruing, and restructured loans totaled $3,017,000
or 0.59% of total loans at March 31, 2003 compared to $3,009,000 or 0.62% of
total loans at December 31, 2002. Detail of those balances plus other real
estate and repossessions is as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
MARCH 31, 2003 DECEMBER 31, 2002
------------------------ ------------------------
% OF % OF
BALANCE GROSS LOANS BALANCE GROSS LOANS
----------- ----------- ----------- -----------
Nonaccrual loans:
Commercial $ 1,292 0.25% $ 1,179 0.24%
Real estate:
Construction 18 -- 69 0.01
Mortgage 1,115 0.22 1,152 0.24
Consumer 68 0.01 81 0.02
----------- ----------- ----------- -----------
2,493 0.48 2,481 0.51
----------- ----------- ----------- -----------
Loans contractually past-due 90 days
or more and still accruing:
Commercial 141 0.03 85 0.02
Real estate:
Construction -- -- 169 0.03
Mortgage 361 0.07 254 0.05
Consumer 22 0.01 20 0.01
----------- ----------- ----------- -----------
524 0.11 528 0.11
----------- ----------- ----------- -----------
Restructured loans -- -- -- --
----------- ----------- ----------- -----------
Total nonperforming loans 3,017 0.59% 3,009 0.62%
=========== ===========
Other real estate 241 116
Repossessions 54 115
----------- -----------
Total noperforming assets $ 3,312 $ 3,240
=========== ===========
The allowance for loan losses was 244.25% of nonperforming loans at March
31, 2003 compared to 236.66% of nonperforming loans at December 31, 2002.
21
It is our Company's policy to discontinue the accrual of interest income
on loans when the full collection of interest or principal is in doubt, or when
the payment of interest or principal has become contractually 90 days past due
unless the obligation is both well secured and in the process of collection. A
loan remains on nonaccrual status until the loan is current as to payment of
both principal and interest and/or the borrower demonstrates the ability to pay
and remain current. Interest on loans on nonaccrual status at March 31, 2003 and
2002, which would have been recorded under the original terms of those loans,
was approximately $98,000 and $171,000 for the three months ended March 31, 2003
and 2002, respectively. Approximately $13,000 and $9,000 was actually recorded
as interest income on such loans for the three months ended March 31, 2003 and
2002, respectively.
A loan is considered "impaired" when it is probable a creditor will be
unable to collect all amounts due - both principal and interest - according to
the contractual terms of the loan agreement. In addition to nonaccrual loans
included in the table above, which were considered "impaired", management has
identified additional loans totaling approximately $10,105,000 and $9,137,000 at
March 31, 2003 and December 31, 2002, respectively, which are not included in
the nonaccrual table above but are considered by management to be "impaired".
The $10,105,000 of loans identified by management as being "impaired" reflected
various commercial, commercial real estate, real estate, and consumer loans
ranging in size from approximately $1,000 to approximately $2,457,000. The
average balance of nonaccrual and other "impaired" loans for the first three
months of 2003 was approximately $11,763,000. At March 31, 2003 the portion of
the allowance for loan losses allocated to impaired loans was $1,799,000
compared to $1,352,000 at December 31, 2002.
As of March 31, 2003 and December 31, 2002 approximately $3,489,000 and
$2,697,000 of loans not included in the nonaccrual table above or identified by
management as being "impaired" were classified by management as having more than
normal risk. In addition to the classified list, our Company also maintains an
internal loan watch list of loans, which for various reasons, not all related to
credit quality, management is monitoring more closely than the average loan
portfolio. Loans may be added to this list for reasons that are temporary and
correctable, such as the absence of current financial statements of the
borrower, or a deficiency in loan documentation. Other loans are added as soon
as any problem is detected which might affect the borrower's ability to meet the
terms of the loan. This could be initiated by the delinquency of a scheduled
loan payment, a deterioration in the borrower's financial condition identified
in a review of periodic financial statements, a decrease in the value of the
collateral securing the loan, or a change in the economic environment within
which the borrower operates. Once the loan is placed on our Company's watch
list, its condition is monitored closely. Any further deterioration in the
condition of the loan is evaluated to determine if the loan should be assigned
to a higher risk category.
Investment in debt and equity securities classified as available-for-sale
decreased $6,885,000 or 3.7% to $179,839,000 at March 31, 2003 compared to
$186,724,000 at December 31, 2002. Investments classified as available-for-sale
are carried at fair value. During 2003 the market valuation account was
increased $31,000 to $3,507,000 to reflect the fair value of available-for-sale
investments at March 31, 2003 and the net after tax decrease resulting from the
change in the market valuation adjustment of $20,000 decreased the stockholders'
equity component to $2,315,000 at March 31, 2003.
22
At December 31, 2002 the market valuation account for the
available-for-sale investments of $3,476,000 increased the amortized cost of
those investments to their fair value on that date and the net after tax
increase resulting from the market valuation adjustment of $2,294,000 was
reflected as a separate positive component of stockholders' equity.
Cash and cash equivalents, which consist of cash and due from banks and
Federal funds sold, increased $420,000 or 0.5% to $77,831,000 at March 31, 2003
compared to $77,411,000 at December 31, 2002.
Premises and equipment decreased $356,000 or 2.1% to $16,230,000 at March
31, 2003 compared to $16,586,000 at December 31, 2002. The decrease reflects
depreciation expense of $425,000 and dispositions of premises and equipment of
$1,000 offset by purchases of premises and equipment of $70,000.
Total deposits increased $13,513,000 or 2.3% to $604,704,000 at March 31,
2003 compared to $591,191,000 at December 31, 2002. This increase primarily
reflects increased public funds as well as approximately $3,500,000 of brokered
time deposits.
Federal funds purchased and securities sold under agreements to repurchase
increased $2,148,000 or 3.2% to $69,508,000 at March 31, 2003 compared to
$67,359,000 at December 31, 2002. This increase is due primarily to higher
levels of public fund balances at March 31, 2003.
The increase in stockholders' equity reflects net income of $2,355,000
less dividends declared of $556,000 and $20,000 change in unrealized holding
losses, net of taxes, on investment in debt and equity securities
available-for-sale.
No material changes in our Company's liquidity or capital resources have
occurred since December 31, 2002.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, our Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). At the date
of adoption, our Company had unamortized goodwill of $23,408,000, core deposit
intangibles of $879,000,consulting/noncompete agreements of $275,000, and
mortgage servicing rights of $1,134,000, all of which were subject to the
transition provisions of SFAS 142. Under SFAS 142, our Company will continue to
amortize, on an accelerated basis, its core deposit intangibles associated with
the purchase of Citizens Union State Bank and Trust. Consulting/noncompete
agreements will continue to amortize on a straight-line basis. Goodwill
associated with the purchase of subsidiaries will no longer be amortized, but
instead, will be tested annually for impairment following our Company's existing
methods of measuring and recording impairment losses. Our Company has completed
the transitional goodwill impairment test required under SFAS 142 to determine
the potential impact, if any, on the consolidated financial statements. Our
Company does not believe the results of the transitional goodwill impairment
testing identified any impairment losses.
23
The gross carrying amount and accumulated amortization of our Company's
amortized intangible assets for the periods ended March 31, 2003 and December
31, 2002 are as follows:
March 31, 2003 December 31, 2002
--------------------------------- ---------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized intangible asset:
Core deposit intangible $ 1,800,000 (1,107,030) 1,800,000 (1,069,860)
Consulting/Noncompete agreements 900,000 (812,500) 900,000 (775,000)
----------- ---------- ---------- ----------
$ 2,700,000 (1,919,530) 2,700,000 (1,844,860)
=========== ========== ========== ==========
The aggregate amortization expense of intangible assets subject to
amortization for the three months periods ended March 31, 2003 and 2002 is as
follows:
Three Months Ended
March 31, March 31,
2003 2002
---------- ----------
Aggregate amortization expense $ 74,670 74,670
========== ==========
The estimated amortization expense for the next five years is as follows:
Estimated amortization expense:
For year ended 2003 $ 273,680
For year ended 2004 148,680
For year ended 2005 148,680
For year ended 2006 148,680
For year ended 2007 135,420
24
Our Company's mortgage servicing rights are amortized in proportion to the
related estimated net servicing income on a straight line basis over the
estimated lives of the related mortgages, which is seven years. Changes in
mortgage servicing rights, net of amortization, for the periods indicated were
as follows:
Three Months Ended
March 31,
------------------------------
2003 2002
----------- ----------
Balance, beginning of period $ 1,515,848 1,134,234
Originated mortgage servicing rights 325,912 180,028
Amortization (99,287) (59,226)
----------- ----------
Balance, end of period $ 1,742,473 1,255,036
=========== ==========
The estimated amortization expense for the next five years is as follows:
Estimated amortization expense:
For year ended 2003 $ 375,800
For year ended 2004 334,300
For year ended 2005 333,100
For year ended 2006 329,200
For year ended 2007 329,200
Our Company's goodwill associated with the purchase of subsidiaries by
reporting segments for the periods ended March 31, 2003 and December 31, 2002 is
summarized as follows:
The Exchange Citizens Union
National Bank State Bank and Osage
of Jefferson Trust of Valley Bank
City Clinton of Warsaw Total
--------------- --------------- ----------- -----------
Goodwill associated with the
purchase of subsidiaries $ 4,382,098 14,912,760 4,112,876 23,407,734
=============== =============== =========== ===========
In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The adoption of SFAS 146 on January 1, 2003 did not have a material
effect on our Company's consolidated financial statements.
25
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57 and 107 and a rescission of FASB interpretation No. 34.
This Interpretation elaborated on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken.
Historically, the guarantor has not recorded guarantees until it was
probable that a payment would be required under the guarantee. The new
accounting requirements now require a guarantor to record a liability at its
fair value at the time the guarantee is made. Certain guarantees are subject to
the disclosure requirements of FIN 45, but not its recognition provisions. These
guarantees include, but are limited to, guarantees treated as derivatives under
SFAS 133, guarantees that are considered contingent consideration in a business
combination, and guarantees issued between parent corporations and their
subsidiaries or between entities under common control. The new disclosure
requirements require a guarantor to disclose the following about each guarantee:
the overall details of the guarantee, the maximum potential amount of future
payments that could be required, the carrying amount of the guarantor's
obligation under the guarantee, the fair value of the liability included in the
statement of financial position, and the nature and extent of recourse
provisions and collateral related to the guarantee and the extent of any
potential amounts that the guarantor may recover from third parties as a result
of payments made under the guarantee.
The initial recognition and measurement provisions of the Interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002 and did not have a material effect on our Company's
consolidated financial statements. The disclosure requirements are effective for
financial statements of interim and annual periods ending after December 15,
2002. We have implemented the requirements of FASB Interpretation No. 45 and
determined they did not have a material effect on our Company's consolidated
financial statements other than the additional disclosure requirements.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of FASB Statement No. 123, (SFAS 148). This Statement
amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement No. 123 to require
prominent disclosures in both annual and interim financial statements. Certain
of the disclosures modifications are required for fiscal years ending after
December 15, 2002 and are included in the notes to these consolidated financial
statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS 149). SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under Statement 133. This Statement is
effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. The provisions of this
Statement are applied prospectively.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our Company's exposure to market risk is reviewed on a regular basis by
the Banks' Asset/Liability Committees and Boards of Directors. Interest rate
risk is the potential of economic losses due to future interest rate changes.
These economic losses can be reflected as a loss of future net interest income
and/or a loss of current fair market values. The objective is to measure the
effect on net interest income and to adjust the balance sheet to minimize the
inherent risk while at the same time maximizing income. Management realizes
certain risks are inherent and that the goal is to identify and minimize those
risks. Tools used by the Banks' management include the standard GAP report
subject to different rate shock scenarios. At March 31, 2003, the rate shock
scenario models indicated that annual net interest income could decrease or
increase by as much as 6% should interest rates rise or fall, respectively,
within 200 basis points from their current level over a one year period compared
to as much as 9% at December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Our Company's Chief Executive Officer and Chief Financial Officer have
reviewed and evaluated our Company's disclosure controls and procedures within
90 days of the filing of this report, and have concluded that our Company's
disclosure controls and procedures were adequate and effective to ensure that
information required to be disclosed is recorded, processed, summarized, and
reported in a timely manner.
There were no significant changes in our Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the Chief Executive Officer's and Chief Financial Officer's evaluation,
nor were there any significant deficiencies or material weaknesses in the
controls which required corrective action.
27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders None
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
3.1 Articles of Incorporation of Bancshares (filed as Exhibit
3(a) to Bancshares's Registration Statement on Form S-4
(Registration No. 33-54166) and incorporated herein by
reference).
3.2 Bylaws of Bancshares (filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2002 (Commission file number 0-23636)
and incorporated herein by reference).
4 Specimen certificate representing shares of the Company's
$1.00 par value common stock (filed as Exhibit 4 to
Bancshares's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999 (Commission File number
0-23636) and incorporated herein by reference).
99.1 Certificate of the Chief Executive Officer of the Company
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certificate of the Chief Financial Officer of the Company
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
28
No reports were filed on Form 8-K for the three-month period ended March 31,
2003, except for a report on Form 8-K filed with the SEC on March 19, 2003 to
report the certifications made pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
29
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.
EXCHANGE NATIONAL BANCSHARES, INC.
Date By /s/ James E. Smith
-----------------------------------
May 14, 2003 James E. Smith, Chairman of the Board
and Chief Executive Officer (Principal
Executive Officer)
By /s/ Richard G. Rose
------------------------------------
May 14, 2003 Richard G. Rose, Treasurer (Principal Financial
Officer and Principal Accounting Officer)
30
CERTIFICATIONS
I, James E. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Exchange National
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ James E. Smith
-----------------------
James E. Smith
Chairman of the Board and Chief
Executive Officer
31
CERTIFICATIONS
I, Richard G. Rose, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Exchange National
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ Richard G. Rose
---------------------
Richard G. Rose
Treasurer
32
EXCHANGE NATIONAL BANCSHARES, INC.
INDEX TO EXHIBITS
March 31, 2003 Form 10-Q
Exhibit No. Description Page No.
- ----------- ----------- --------
3.1 Articles of Incorporation of Bancshares (filed as Exhibit
3(a) to Bancshares's Registration Statement on Form S-4
(Registration No. 33-54166) and incorporated herein by
reference). **
3.2 Bylaws of Bancshares (filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000(Commission file number 0-23636)
and incorporated herein by reference). **
4 Specimen certificate representing shares of the Company's
$1.00 par value common stock (filed as Exhibit 4 to
Bancshares's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000 (Commission file number
0-23636) and incorporated herein by reference). **
99.1 Certificate of the Chief Executive Officer of the Company
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 31
99.2 Certificate of the Chief Financial Officer of the Company
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32
** Incorporated by reference.
33