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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 June 30, 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 August 13, 2003, the registrant had 4,169,847 shares of common
stock, par value $1.00 per share, outstanding.
Page 1 of 41 pages
Index to Exhibits located on page 37
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, DECEMBER 31,
2003 2002
------------ ------------
ASSETS
Loans:
Commercial $194,107,453 $147,850,348
Real estate -- construction 49,337,340 41,437,000
Real estate -- mortgage 268,334,878 250,318,539
Consumer 43,677,909 46,958,417
------------ ------------
555,457,580 486,564,304
Less allowance for loan losses 7,819,487 7,121,114
------------ ------------
Loans, net 547,638,093 479,443,190
------------ ------------
Investment in debt and equity securities:
Available-for-sale, at fair value 186,936,219 186,724,362
Federal funds sold 33,697,090 49,669,213
Cash and due from banks 28,995,808 27,742,030
Premises and equipment 17,772,460 16,586,332
Accrued interest receivable 5,474,891 5,539,661
Goodwill 25,183,673 23,407,734
Intangible assets 1,170,800 855,140
Other assets 3,540,946 4,450,250
------------ ------------
$850,409,980 $794,417,912
============ ============
Continued on next page
2
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
JUNE 30, DECEMBER 31,
2003 2002
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits $ 83,885,714 77,474,471
Time deposits 562,335,555 513,716,181
------------- -------------
Total deposits 646,221,269 591,190,652
Federal funds purchased and
securities sold under agreements to repurchase 65,812,859 67,359,199
Interest-bearing demand notes to U.S. Treasury 3,018,988 3,061,503
Other borrowed money 41,409,983 41,795,016
Accrued interest payable 1,824,986 1,984,745
Other liabilities 5,780,664 6,199,677
------------- -------------
Total liabilities 764,068,749 711,590,792
------------- -------------
Stockholders' equity:/1/
Common Stock - $1 par value; 15,000,000 shares
authorized; 4,298,353 shares issued 4,298,353 4,298,353
Surplus 21,999,701 21,983,467
Retained earnings 60,022,010 56,930,519
Accumulated other comprehensive income 2,673,690 2,294,471
Treasury stock, 125,506 and
130,020, shares respectively at cost (2,652,523) (2,679,690)
------------- -------------
Total stockholders' equity 86,341,231 82,827,120
------------- -------------
$ 850,409,980 $ 794,417,912
============= =============
See accompanying notes to unaudited condensed consolidated financial statements.
/1/ Adjusted to give retroactive effect of three for two stock dividend paid on
July 15, 2003.
3
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
2003 2002 2003 2002
---------- ----------- ----------- -----------
Interest income $9,552,528 $10,213,633 $18,984,175 $20,506,961
Interest expense 3,253,036 4,174,159 6,535,511 8,562,559
---------- ----------- ----------- -----------
Net interest income 6,299,492 6,039,474 12,448,664 11,944,402
Provision for loan losses 235,500 234,000 471,000 468,000
---------- ----------- ----------- -----------
Net interest income after
provision for loan losses 6,063,992 5,805,474 11,977,664 11,476,402
Noninterest income 1,465,175 1,354,537 3,437,178 2,659,137
Noninterest expense 4,584,194 4,400,313 9,084,534 8,621,021
---------- ----------- ----------- -----------
Income before income taxes 2,944,973 2,759,698 6,330,308 5,514,518
Income taxes 902,353 761,904 1,932,451 1,588,068
---------- ----------- ----------- -----------
Net income $2,042,620 $ 1,997,794 $ 4,397,857 $ 3,926,450
========== =========== =========== ===========
Basic earnings per share /1/ $ 0.49 $ 0.47 $ 1.05 $ 0.92
========== =========== =========== ===========
Diluted earnings per share /1/ $ 0.49 $ 0.47 $ 1.05 $ 0.92
========== =========== =========== ===========
Weighted average shares of
common stock outstanding /1/
Basic 4,169,681 4,251,170 4,169,011 4,251,170
Diluted 4,209,858 4,263,696 4,201,890 4,260,027
Dividends per share: /1/
Declared $ 0.18 $ 0.13 $ 0.31 $ 0.26
========== =========== =========== ===========
Paid $ 0.13 $ 0.13 $ 0.27 $ 0.25
========== =========== =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
/1/ Adjusted to give retroactive effect of three for two stock dividend paid on
July 15, 2003.
4
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
-----------------------------
2003 2002
------------- -----------
Cash flows from operating activities:
Net income $ 4,397,857 3,926,450
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 471,000 468,000
Depreciation expense 851,666 583,303
Net amortization of debt securities
premiums and discounts 646,362 455,429
Amortization of intangible assets 149,340 149,340
Decrease (increase) in accrued
interest receivable 171,769 (103,157)
Decrease (increase) in other assets 573,889 (152,223)
Decrease in accrued interest payable (221,585) (755,888)
(Decrease) increase in other liabilities (559,663) 120,810
Gain on sale of securities, net (53,235) (133,226)
Origination of mortgage loans for sale (75,180,679) (35,791,194)
Proceeds from the sale of mortgage loans
held for sale 76,791,207 36,262,165
Gain on sale of mortgage loans (1,610,528) (470,917)
(Gain) loss on dispositions of premises
and equipment (3,921) 3,417
Other, net (179,940) 15,150
------------- -----------
Net cash provided by operating activities 6,243,539 4,577,405
------------- -----------
Cash flows from investing activities:
Net increase in loans (41,467,211) (11,275,778)
Purchases of available-for-sale debt securities (123,355,972) (52,207,429)
Proceeds from sales of available-for-sale
debt securities 1,553,235 9,382,396
Proceeds from maturities of available-for-sale
debt securities 83,832,326 19,971,847
Proceeds from calls of available-for-sale
debt securities 37,740,000 17,190,000
Purchases of premises and equipment (225,352) (2,106,571)
Proceeds from dispositions of premises
and equipment 5,000 16,000
Proceeds from sales of other real estate
owned and repossessions 504,799 294,631
Purchase of subsidiaries, net of cash and
cash equivalents acquired (786,017) --
------------- -----------
Net cash used in investing activities (42,199,192) (18,734,904)
------------- -----------
Continued on next page
5
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
-----------------------------
2003 2002
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits 2,847,125 (5,794,595)
Net increase (decrease) in interest-bearing
transaction accounts 6,297,780 (2,332,848)
Net increase in time deposits 15,149,315 7,082,379
Net (decrease) increase in federal funds
purchased and securities sold under
agreements to repurchase (1,546,340) 2,847,040
Net (decrease) increase in interest-bearing
demand notes to U.S. Treasury (42,515) 316,010
Proceed from Federal Home Loan Bank
Borrowings 1,000,000 --
Repayment of Federal Home Loan Bank
borrowings (385,033) (568,304)
Repayment of other borrowed money (1,000,000) (500,000)
Cash dividends paid (1,111,275) (1,105,317)
Proceeds from sale of treasury stock 28,251 --
------------ ------------
Net cash provided by (used in)
financing activities 21,237,308 (55,635)
------------ ------------
Net decrease in cash and
cash equivalents (14,718,345) (14,213,134)
Cash and cash equivalents, beginning of period 77,411,243 85,609,147
------------ ------------
Cash and cash equivalents, end of period $ 62,692,898 $ 71,396,013
============ ============
Supplemental schedule of cash flow information-
Cash paid during period for:
Interest $ 6,695,270 $ 9,318,447
Income taxes 2,892,921 1,785,000
Supplemental schedule of noncash
investing activities-
Other real estate and repossessions
acquired in settlement of loans 416,169 205,718
See accompanying notes to unaudited condensed consolidated financial statements.
6
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 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 June 26, 2003 our Company acquired Trustcorp Financial, Inc.'s branch
of Missouri State Bank in Springfield, Missouri. Our Company received
approximately $28 million in loans, $31 million in deposits as well as the real
estate and tangible assets of the branch. Total cost of the transaction was
approximately $4 million and was financed with cash on hand. The transaction
generated approximately $1,776,000 of goodwill, and $465,000 of core deposit
intangibles which will be amortized on a straight-line basis over seven years.
Upon completion of the transaction the branch was merged with and is operated as
a branch of CUSB. The results of operations of the acquired branch has been
included in the condensed consolidated financial statements since date of
acquisition.
The accompanying unaudited condensed consolidated financial statements
include all adjustments, which 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 June 30, 2003 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2003.
The accompanying unaudited condensed consolidated financial statements
have been adjusted to give retroactive effect of a three for two stock dividend
paid on July 15, 2003.
It is suggested that these unaudited condensed consolidated interim
financial statements be read in conjunction with the Company's 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 States of America have been condensed and
omitted. The Company believes that these financial statements
7
contain all adjustments (consisting of normal recurring accruals) necessary to
present fairly the Company's consolidated financial position as of June 30,
2003, consolidated statements of earnings for the three and six month periods
ended June 30, 2003 and 2002 and cash flows for the six months ended June 30,
2003 and 2002.
8
The following table reflects, for the three-month and six-month periods
ended June 30, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
2003 2002 2003 2002
---------- --------- --------- ---------
Net income, basic and diluted $2,042,620 1,997,794 4,397,857 3,926,450
Average shares outstanding 4,169,681 4,251,170 4,169,011 4,251,170
Effect of dilutive stock options 40,177 12,526 32,879 8,857
Average shares outstanding
including dilutive stock options 4,209,858 4,263,696 4,201,890 4,260,027
Net income per share, basic $ 0.49 $ 0.47 $ 1.05 $ 0.92
Net income per share, diluted $ 0.49 $ 0.47 $ 1.05 $ 0.92
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 and six-month periods
ended June 30, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net income
As reported $ 2,042,620 1,997,794 4,397,857 3,926,450
Deduct stock-based employee
compensation expense
determined under fair-
value-based methods for
all awards, net of tax (22,887) (15,277) (45,775) (30,555)
------------- ------------- ------------- -------------
Pro forma income $ 2,019,733 1,982,517 4,352,082 3,895,895
============= ============= ============= =============
Pro forma earnings per share:
As reported, basic $0.49 $0.47 $1.05 $0.92
Pro forma, basic 0.48 0.47 1.04 0.92
As reported diluted 0.49 0.47 1.05 0.92
Pro forma, diluted 0.48 0.46 1.04 0.91
9
For the three-month and six-month periods ended June 30, 2003 and 2002,
unrealized holding gains and losses on investment in debt and equity securities
available-for-sale were Bancshares' only other comprehensive income component.
Comprehensive income for the three-month and six-month periods ended June 30,
2003 and 2002 is summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income $2,042,620 1,997,794 4,397,857 3,926,450
Other comprehensive income:
Net unrealized holding
gains on
investments in debt
and equity securities
available-for-sale,
net of taxes 359,113 929,804 414,354 481,538
Adjustment for net
securities gains
realized in net
income, net of
applicable income taxes -- (88,569) (35,135) (88,569)
---------- ---------- ---------- ----------
Total other comprehensive income 359,113 841,235 379,219 392,969
---------- ---------- ---------- ----------
Comprehensive income $2,401,733 2,839,029 4,777,076 4,319,419
========== ========== ========== ==========
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 are offered to customers primarily within their respective
geographical areas. The business segment results that follow are consistent with
our Company'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.
10
JUNE 30, 2003
-------------
THE EXCHANGE CITIZENS UNION OSAGE
NATIONAL BANK STATE BANK VALLEY BANK
OF JEFFERSON AND TRUST OF OF CORPORATE
CITY CLINTON WARSAW AND OTHER TOTAL
------------- -------------- ----------- ------------ ------------
Balance sheet information:
Loans, net of allowance
for loan losses $344,238,726 $162,544,869 $40,854,498 -- $547,638,093
Debt and equity securities 100,281,547 54,338,946 32,315,726 -- 186,936,219
Goodwill 4,382,098 16,688,699 4,112,876 -- 25,183,673
Intangible assets -- 1,120,800 -- 50,000 1,170,800
Total assets 485,558,584 281,250,545 84,093,598 (492,747) 850,409,980
Deposits 359,731,386 226,400,668 67,010,889 (6,921,674) 646,221,269
Stockholders' equity 50,423,434 36,495,988 10,655,696 (11,233,887) 86,341,231
============ ============ =========== ============ ============
DECEMBER 31, 2002
-----------------
THE EXCHANGE CITIZENS UNION OSAGE
NATIONAL BANK STATE BANK VALLEY BANK
OF JEFFERSON AND 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 48,856,217 35,513,162 9,979,001 (11,621,260) 82,827,120
============ ============ =========== ============ ============
THREE MONTHS ENDED JUNE 30, 2003
--------------------------------
THE EXCHANGE CITIZENS UNION OSAGE
NATIONAL BANK STATE BANK VALLEY BANK
OF JEFFERSON AND TRUST OF OF CORPORATE
CITY CLINTON WARSAW AND OTHER TOTAL
------------- -------------- ----------- ------------ ------------
Statement of earnings
information:
Total interest income $ 5,669,113 $ 2,812,447 $ 1,070,968 $ -- $ 9,552,528
Total interest expense 1,808,536 895,893 420,770 127,837 3,253,036
------------ ------------ ----------- ------------ ------------
Net interest income 3,860,577 1,916,554 650,198 (127,837) 6,299,492
Provision for loan losses 150,000 75,000 10,500 -- 235,500
Noninterest income 1,084,317 310,393 88,002 (17,537) 1,465,175
Noninterest expense 2,740,081 1,323,627 387,688 132,798 4,584,194
Income taxes 653,000 248,671 95,282 (94,600) 902,353
------------ ------------ ----------- ------------ ------------
Net income (loss) 1,401,813 579,649 244,730 (183,572) 2,042,620
============ ============ =========== ============ ============
THREE MONTHS ENDED JUNE 30, 2002
--------------------------------
THE EXCHANGE CITIZENS UNION OSAGE
NATIONAL BANK STATE BANK VALLEY BANK
OF JEFFERSON AND TRUST OF OF CORPORATE
CITY CLINTON WARSAW AND OTHER TOTAL
------------- -------------- ----------- ------------ ------------
Statement of earnings
information:
Total interest income $ 6,090,091 $ 3,005,235 $ 1,118,307 $ -- $ 10,213,633
Total interest expense 2,265,112 1,193,135 457,323 258,589 4,174,159
------------ ------------ ----------- ------------ ------------
Net interest income 3,824,979 1,812,100 660,984 (258,589) 6,039,474
Provision for loan losses 150,000 75,000 9,000 -- 234,000
Noninterest income 861,275 433,642 59,620 -- 1,354,537
Noninterest expense 2,531,182 1,318,454 402,176 148,501 4,400,313
Income taxes 574,150 250,473 75,681 (138,400) 761,904
------------ ------------ ----------- ------------ ------------
Net income (loss) 1,430,922 601,815 233,747 (268,690) 1,997,794
============ ============ =========== ============ ============
11
SIX MONTHS ENDED JUNE 30, 2003
------------------------------
THE EXCHANGE CITIZENS UNION OSAGE
NATIONAL BANK STATE BANK VALLEY BANK
OF JEFFERSON AND TRUST OF OF CORPORATE
CITY CLINTON WARSAW AND OTHER TOTAL
------------- -------------- ----------- ------------ ------------
Statement of earnings
information:
Total interest income $ 11,236,039 $ 5,644,177 $ 2,103,959 $ -- $ 18,984,175
Total interest expense 3,630,280 1,806,046 849,517 249,668 6,535,511
------------ ------------ ----------- ------------ ------------
Net interest income 7,605,759 3,838,131 1,254,442 (249,668) 12,448,664
Provision for loan losses 300,000 150,000 21,000 -- 471,000
Noninterest income 2,660,451 644,437 170,851 (38,561) 3,437,178
Noninterest expense 5,463,004 2,630,497 772,350 218,683 9,084,534
Income taxes 1,428,100 502,303 174,448 (172,400) 1,932,451
------------ ------------ ----------- ------------ ------------
Net income (loss) 3,075,106 1,199,768 457,495 (334,512) 4,397,857
============ ============ =========== ============ ============
SIX MONTHS ENDED JUNE 30, 2002
------------------------------
THE EXCHANGE CITIZENS UNION OSAGE
NATIONAL BANK STATE BANK VALLEY BANK
OF JEFFERSON AND TRUST OF OF CORPORATE
CITY CLINTON WARSAW AND OTHER TOTAL
------------- -------------- ----------- ------------ ------------
Statement of earnings
information:
Total interest income $ 12,242,328 $ 6,030,316 $ 2,234,317 $ -- $ 20,506,961
Total interest expense 4,625,814 2,455,590 957,544 523,611 8,562,559
------------ ------------ ----------- ------------ ------------
Net interest income 7,616,514 3,574,726 1,276,773 (523,611) 11,944,402
Provision for loan losses 300,000 150,000 18,000 -- 468,000
Noninterest income 1,826,674 717,222 115,241 -- 2,659,137
Noninterest expense 5,001,279 2,601,773 745,516 272,453 8,621,021
Income taxes 1,245,300 440,264 173,204 (270,700) 1,588,068
------------ ------------ ----------- ------------ ------------
Net income (loss) 2,896,609 1,099,911 455,294 (525,364) 3,926,450
============ ============ =========== ============ ============
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. THE 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 THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002, AS WELL AS
THOSE DISCUSSED ELSEWHERE IN THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
13
Net income for the three months ended June 30, 2003 of $2,043,000
increased $45,000 when compared to the second quarter of 2002. Earnings per
diluted share for the second quarter of 2003 of $0.49 increased 2 cents or 4.3%
when compared to the second quarter of 2002. Net income for the six months ended
June 30, 2003 of $4,398,000 increased $472,000 when compared to the first six
months of 2002. Earnings per diluted share for the six months ended June 30,
2000 of $1.05 increased 13 cents or 14.1% when compared to the first six months
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 SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2003 2002 2003 2002
------ ------ ------ ------
Interest income $9,553 10,214 18,984 20,507
Fully taxable equivalent (FTE) adjustment 161 199 348 408
------ ------ ------ ------
Interest income (FTE basis) 9,714 10,413 19,332 20,915
Interest expense 3,253 4,174 6,535 8,563
------ ------ ------ ------
Net interest income (FTE basis) 6,461 6,239 12,797 12,352
Provision for loan losses 236 234 471 468
------ ------ ------ ------
Net interest income after provision
for loan losses (FTE basis) 6,225 6,005 12,326 11,884
Noninterest income 1,465 1,354 3,437 2,659
Noninterest expense 4,584 4,400 9,085 8,621
------ ------ ------ ------
Earnings before income taxes
(FTE basis) 3,106 2,959 6,678 5,922
------ ------ ------ ------
Income taxes 902 762 1,932 1,588
FTE adjustment 161 199 348 408
------ ------ ------ ------
Income taxes (FTE basis) 1,063 961 2,280 1,996
------ ------ ------ ------
Net income $2,043 1,998 4,398 3,926
====== ====== ====== ======
14
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Net interest income on a fully taxable equivalent basis increased $222,000
or 3.6% to $6,461,000 or 3.46% of average earning assets for the second quarter
of 2003 compared to $6,239,000 or 3.53% of average earning assets for the same
period of 2002. The provision for loan losses for the three months ended June
30, 2003 was $236,000 compared to $234,000 for the same period of 2002.
Noninterest income and noninterest expense for the three months periods
ended June 30, 2003 and 2002 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS
ENDED
JUNE 30, INCREASE(DECREASE)
--------------------- ------------------
2003 2002 AMOUNT %
--------- ------- ------ -----
NONINTEREST INCOME
Service charges on deposit accounts $ 686 657 29 4.4 %
Trust department income 143 106 37 34.9
Brokerage income 45 15 30 200.0
Mortgage loan servicing fees (485) 118 (603) (411.0)
Gain on sales of mortgage loans 919 173 746 431.2
Net gains on sales of
debt securities -- 134 (134) (100.0)
Gain on disposition of premises
and equipment 5 -- 5 100.0
Credit card fees 37 37 -- --
Other 115 114 1 0.9
------- ----- ----- -----
$ 1,465 1,354 111 8.2%
======= ===== ===== =====
NONINTEREST EXPENSE
Salaries and employee benefits $ 2,476 2,342 134 5.7%
Occupancy expense, net 268 277 (9) (3.2)
Furniture and equipment expense 536 369 167 45.3
Loss on disposition of premises
and equipment -- 3 (3) (100.0)
FDIC insurance assessment 24 25 (1) (4.0)
Advertising and promotion 123 112 11 9.8
Postage, printing, and supplies 180 216 (36) (16.7)
Legal, examination, and
professional fees 205 240 (35) (14.6)
Credit card expenses 23 23 -- --
Credit investigation and loan
collection expenses 34 34 -- --
Amortization of intangible assets 75 75 -- --
Other 640 684 (44) (6.4)
------- ----- ----- -----
$ 4,584 4,400 184 4.2%
======= ===== ===== =====
Noninterest income increased $111,000 or 8.2% to $1,465,000 for the second
quarter of 2003 compared to $1,354,000 for the same period of 2002. Mortgage
loan servicing fees decreased $603,000 or 411.0% due to an impairment charge of
$556,000 to our Company's mortgage servicing rights. Gains on sales of mortgage
loans increased $746,000 or 431.2% due to an increase in volume of loans
originated and sold to the secondary market from approximately $13,319,000 in
the second quarter of 2002 to approximately $44,208,000 for the second quarter
of 2003 as well as an increase in funding gains on sold loans. Our company had
no gains or losses on sales of securities during the second quarter of 2003.
15
Noninterest expense increased $184,000 or 4.2% to $4,584,000 for the
second quarter of 2003 compared to $4,400,000 for the second quarter of 2002.
Salaries and benefits increased $134,000 or 5.7%. This increase is due to normal
salary increases and higher health insurance premiums. The $167,000 or 45.3%
increase in furniture and equipment expense reflects higher depreciation expense
related to purchases of core data processing hardware and software during the
second half of the prior year. The $36,000 or 16.7% decrease in advertising and
promotion is due to timing of expense payments. The $35,000 or 14.6% decrease in
legal, examination, and professional fees reflects consulting fees paid in the
prior year for services related to the Company's conversion to a single data
processing system. The $44,000 or 6.4% decrease in other noninterest expense
represents losses recorded in second quarter 2002 on low income housing
partnerships that our Company participates in with other financial institutions.
These losses were recorded during the first quarter of the current year. These
losses are offset by tax credits received from the projects.
Income taxes as a percentage of earnings before income taxes as reported
in the condensed consolidated financial statements was 30.6% for the second
quarter of 2003 compared to 27.6% for the second quarter of 2002. The increase
in the effective tax rate reflects a smaller amount of tax-exempt income in the
current period.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Net interest income on a fully taxable equivalent basis increased $445,000
or 3.6% to $12,797,000 or 3.49% of average earning assets for the first six
months of 2003 compared to $12,352,000 or 3.54% of average earning assets for
the same period of 2002. The provision for loan losses for the six months ended
June 30, 2003 was $471,000 compared to $468,000 for the same period of 2002.
16
Noninterest income and noninterest expense for the six months periods
ended June 30, 2003 and 2002 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
SIX MONTHS
ENDED
JUNE 30, INCREASE(DECREASE)
------------------- -------------------
2003 2002 AMOUNT %
------- ----- ------ ------
NONINTEREST INCOME
Service charges on deposit accounts $ 1,307 1,266 41 3.2%
Trust department income 476 227 249 109.7
Brokerage income 58 18 40 222.2
Mortgage loan servicing fees (372) 220 (592) (169.1)
Gain on sales of mortgage loans 1,611 471 1,140 242.0
Net gains on sales of
debt securities 53 134 (81) (60.4)
Gain on dispositions of premises
and equipment 5 -- 5 100.0
Credit card fees 74 73 1 1.4
Other 225 250 (25) (10.0)
------- ----- ------ ------
$ 3,437 2,659 778 29.3%
======= ===== ====== ======
NONINTEREST EXPENSE
Salaries and employee benefits $ 4,931 4,645 286 6.2%
Occupancy expense, net 529 534 (5) (0.9)
Furniture and equipment expense 1,062 802 260 32.4
Loss on dispositions of premises
and equipment -- 3 (3) (100.0)
FDIC insurance assessment 48 54 (6) (11.1)
Advertising and promotion 256 202 54 26.7
Postage, printing, and supplies 386 418 (32) (7.7)
Legal, examination, and
professional fees 385 460 (75) (16.3)
Credit card expenses 47 46 1 2.2
Credit investigation and loan
collection expenses 58 62 (4) (6.5)
Amortization of intangible assets 149 149 -- --
Other 1,234 1,246 (12) 1.0
------- ----- ------ ------
$ 9,085 8,621 464 5.4%
======= ===== ====== ======
Noninterest income increased $778,000 or 29.3% to $3,437,000 for the first
six months of 2003 compared to $2,659,000 for the same period of 2002. The
increase in trust department income of $249,000 or 109.7% primarily reflects the
collection of two large trust distribution fees. The $40,000 or 222.2% increase
in brokerage income is the result of higher sales volume in 2003. The $592,000
or 169.1% decrease in mortgage loan servicing fees reflects a $556,000
impairment charge to our Company's mortgage servicing rights. Gains on sales of
mortgage loans increased $1,140,000 or 242.0% due to an increase in volume of
loans originated and sold to the secondary market from approximately $35,791,000
during the first six months of 2002 to approximately $75,181,000 during the same
period in 2003. The Company recognized $53,000 in gains on sales of securities
during the first six months of 2003 compared to $134,000 for the same period in
2002.
Noninterest expense increased $464,000 or 5.4% to $9,085,000 for the first
six months of 2003 compared to $8,621,000 for the first six months of 2002.
Salaries and benefits increased $286,000 or 6.2%. This increase is due to normal
salary increases and higher health insurance premiums. The $260,000 or 32.4%
increase in furniture and equipment expense reflects higher depreciation expense
related to purchases of core data processing hardware and software during the
second half of the prior year. The $54,000 or 26.7% increase in advertising and
promotion reflects startup costs and marketing
17
surveys with a new marketing agency for the Company. The $75,000 or 16.3%
decrease in legal, examination, and professional fees reflects consulting fees
paid in the prior year for services related to the Company's conversion to a
single data processing system.
Income taxes as a percentage of earnings before income taxes as reported
in the condensed consolidated financial statements was 30.5% for the first six
months of 2003 compared to 28.8% for the first six months of 2002. The increase
in the effective tax rate reflects a smaller amount of tax-exempt income in the
current period.
NET INTEREST INCOME
Fully taxable equivalent net interest income increased $222,000 or 3.6%
and $445,000 or 3.6% respectively for the three month and six month periods
ended June 30, 2003 compared to the corresponding periods in 2002. Even though
the net interest margins decreased during both periods, net interest income
increased due to increased net earning assets during the respective periods.
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 and six month
periods ended June 30, 2003 and 2002.
18
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2003 JUNE 30, 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 $ 163,266 $ 2,427 5.96% $ 144,742 $ 2,260 6.26%
Real estate 311,765 4,641 5.97 282,988 4,841 6.86
Consumer 42,120 876 8.34 46,403 1,008 8.71
Investment
securities:/3/
U.S. Treasury and
U.S. Government
agencies 147,400 1,085 2.95 144,381 1,436 3.99
State and municipal 30,994 503 6.51 36,989 635 6.89
Other 5,107 48 3.77 5,035 53 4.22
Federal funds sold 45,986 125 1.09 46,400 174 1.50
Interest-bearing
deposits 3,095 9 1.17 1,289 6 1.87
--------- --------- --------- ---------
Total interest
earning assets 749,733 9,714 5.20 708,227 10,413 5.90
All other assets 70,368 70,726
Allowance for loan
losses (7,485) (6,905)
--------- ---------
Total assets $ 812,616 $ 772,048
========= =========
Continued on next page
19
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2003 JUNE 30, 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 $ 94,867 $ 176 0.74% $ 86,695 $ 233 1.08%
Savings 52,641 106 0.81 50,416 133 1.06
Money market 61,645 151 0.98 60,777 216 1.43
Deposits of
$100,000 and over 72,455 460 2.55 64,815 507 3.14
Other time deposits 247,458 1,739 2.82 240,591 2,247 3.75
-------- --------- --------- ------
Total time deposits 529,066 2,632 2.00 503,294 3,336 2.66
Federal funds purchased
and securities sold
under agreements to
repurchase 72,069 177 0.99 64,723 260 1.61
Interest-bearing demand
notes to U.S. Treasury 818 2 0.98 383 1 1.05
Other borrowed money 41,072 442 4.32 42,103 577 5.50
-------- --------- --------- ------
Total interest-
bearing
liabilities 643,025 3,253 2.03 610,503 4,174 2.74
--------- ------
Demand deposits 75,773 70,215
Other liabilities 7,647 10,888
-------- ---------
Total liabilities 726,445 691,606
Stockholders' equity 86,171 80,442
-------- ---------
Total liabilities
and stockholders'
equity $812,616 $ 772,048
======== =========
Net interest income $ 6,461 $ 6,239
========= ========
Net interest margin/4/ 3.46% 3.53%
==== ====
- ----------
/1/ Interest income and yields are presented on a fully taxable equivalent
basis using the Federal statutory income tax rate. Such adjustments were
$161,000 in 2003 and $199,000 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.
20
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 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 $158,217 $4,697 5.99% $142,032 $4,525 6.42%
Real estate 305,723 9,205 6.07 281,831 9,746 6.97
Consumer 43,033 1,749 8.20 45,532 1,979 8.76
Investment
securities:/3/
U.S. Treasury and
U.S. Government
agencies 145,537 2,227 3.09 140,398 2,829 4.06
State and municipal 32,617 1,093 6.76 37,824 1,301 6.94
Other 5,259 97 3.72 4,997 105 4.24
Federal funds sold 43,967 238 1.09 49,982 405 1.63
Interest-bearing
deposits 4,377 26 1.20 1,906 25 2.65
-------- ------ -------- ------
Total interest
earning assets 738,730 19,332 5.28 704,502 20,915 5.99
All other assets 70,935 70,640
Allowance for loan
losses (7,360) (6,821)
-------- --------
Total assets $802,305 $768,321
======== ========
Continued on next page
21
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 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 $ 94,925 $ 358 0.76% $ 87,962 $ 475 1.09%
Savings 51,940 210 0.82 49,709 261 1.06
Money market 62,576 303 0.98 61,046 428 1.41
Deposits of
$100,000 and over 70,283 906 2.60 55,239 950 3.47
Other time deposits 244,105 3,526 2.91 247,617 4.766 3.88
-------- ---------- ---------- ----------
Total time deposits 523,829 5,303 2.04 501,573 6,880 2.77
Federal funds purchased
and securities sold
under agreements to
repurchase 70,165 355 1.02 64,023 517 1.63
Interest-bearing demand
notes to U.S. Treasury 644 3 0.94 694 5 1.45
Other borrowed money 40,922 874 4.31 42,496 1,161 5.51
-------- ---------- ---------- ----------
Total interest-bearing
liabilities 635,560 6,535 2.07 608,786 8,563 2.84
---------- ----------
Demand deposits 73,784 68,511
Other liabilities 7,770 11,170
-------- ----------
Total liabilities 717,114 688,467
Stockholders' equity 85,191 79,854
-------- ----------
Total liabilities
and stockholders'
equity $802,305 $ 768,321
======== ==========
Net interest income $ 12,797 $ 12,352
======== ==========
Net interest margin/4/ 3.49% 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
$348,000 in 2003 and $408,000 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.
22
The following tables present, 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.
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED JUNE 30, 2003
COMPARED TO
THREE MONTHS ENDED JUNE 30, 2002
--------------------------------
CHANGE DUE TO
TOTAL ---------------------
CHANGE VOLUME RATE
-------- -------- ----------
INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS:
Loans: /1/
Commercial $ 167 279 (112)
Real estate /2/ (200) 464 (664)
Consumer (132) (90) (42)
Investment securities:
U.S. Treasury and U.S.
Government agencies (351) 29 (380)
State and municipal /2/ (132) (99) (33)
Other (5) 1 (6)
Federal funds sold (49) (2) (47)
Interest-bearing deposits 3 6 (3)
------- ------- --------
Total interest income (699) 588 (1,287)
INTEREST EXPENSE:
NOW accounts (57) 20 (77)
Savings (27) 6 (33)
Money market (65) 3 (68)
Deposits of
$100,000 and over (47) 56 (103)
Other time deposits (508) 62 (570)
Federal funds purchased
and securities sold under
agreements to repurchase (83) 26 (109)
Interest-bearing demand
notes to U.S. Treasury 1 1 --
Other borrowed money (135) (14) (121)
------- ------- --------
Total interest expense (921) 160 (1,081)
------- ------- --------
NET INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS $ 222 428 (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 $161,000 in 2003 and $199,000 in 2002.
23
(DOLLARS EXPRESSED IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, 2003
COMPARED TO
SIX MONTHS ENDED JUNE 20, 2002
------------------------------
CHANGE DUE TO
TOTAL -------------------
CHANGE VOLUME RATE
-------- -------- ---------
INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS:
Loans: /1/
Commercial $ 172 490 (318)
Real estate /2/ (541) 784 (1,325)
Consumer (230) (106) (124)
Investment securities:
U.S. Treasury and U.S.
Government agencies (602) 101 (703)
State and municipal /2/ (208) (176) (32)
Other (8) 6 (14)
Federal funds sold (167) (45) (122)
Interest-bearing deposits 1 19 (18)
------- ------- --------
Total interest income (1,583) 1,073 (2,656)
INTEREST EXPENSE:
NOW accounts (117) 36 (153)
Savings (51) 11 (62)
Money market (125) 11 (136)
Deposits of
$100,000 and over (44) 225 (269)
Other time deposits (1,240) (67) (1,173)
Federal funds purchased
and securities sold under
agreements to repurchase (162) 46 (208)
Interest-bearing demand
notes to U.S. Treasury (2) -- (2)
Other borrowed money (287) (42) (245)
------- ------- --------
Total interest expense (2,028) 220 (2,248)
------- ------- --------
NET INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS $ 445 853 (408)
======= ======= ========
- ----------
/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 $348,000 in 2003 and $408,000 in 2002.
24
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 and $2,000 for the second quarter of 2003.
That compares to net loan charge-offs of $57,000 for the first quarter of 2002
and $112,000 for the second quarter of 2002. The allowance for loan losses was
increased by a provision charged to expense of $235,000 for the first quarter of
2003 and $236,000 for the second quarter of 2003. That compares to $234,000 for
both the first quarter and second quarter of 2002. In addition, our Company
acquired $212,000 in loan loss reserves in the Springfield branch acquisition.
The balance of the allowance for loan losses was $7,819,000 at June 30,
2003 compared to $7,121,000 at December 31, 2002 and $6,972,000 at June 30,
2002. The allowance for loan losses as a percent of outstanding loans was 1.41%
at June 30, 2003 compared to 1.46% at December 31, 2002 and 1.47% at June 30,
2002.
FINANCIAL CONDITION
Total assets increased $55,992,000 or 7.0% to $850,410,000 at June 30,
2003 compared to $794,418,000 at December 31, 2002. Total liabilities increased
$52,478,000 or 7.4% to $764,069,000. Stockholders' equity increased $3,514,000
or 4.2% to $86,341,000. Approximately $31,725,000 of the increase in total
assets is attributed to the acquisition of the Springfield branch. Approximately
$30,939,000 of the increase in total liabilities is attributed to the
acquisition.
Loans increased $68,894,000 or 14.2% to $555,458,000 at June 30, 2003
compared to $486,564,000 at December 31, 2002. Approximately $27,827,000 of the
increase in loans is attributed to the acquisition. Other than increase
attributable to the acquisition, commercial loans increased $37,638,000; real
estate construction loans increased $7,900,000; real estate mortgage loans
decreased $600,000; and consumer loans decreased $3,872,000. The increases in
commercial and real estate construction loans reflect 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 construction 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.
25
Nonperforming loans, defined as loans on nonaccrual status, loans 90 days
or more past due and still accruing, and restructured loans totaled $3,209,000
or 0.58% of total loans at June 30, 2003 compared to $3,009,000 or 0.62% of
total loans at December 31, 2002. Detail of those balances plus repossessions is
as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
JUNE 30, 2003 DECEMBER 31, 2002
----------------- -----------------
% OF % OF
GROSS GROSS
BALANCE LOANS BALANCE LOANS
------- ----- ------- -----
Nonaccrual loans:
Commercial $1,114 .20% $1,179 .24%
Real Estate:
Construction 17 -- 69 .01
Mortgage 1,290 .23 1,152 .24
Consumer 45 .01 81 .02
------ ---- ------ ----
2,466 0.44 2,481 .51
------ ---- ------ -----
Loans contractually past-due 90 days
or more and still accruing:
Commercial 24 .01 85 .02
Real Estate:
Construction 176 .03 169 .03
Mortgage 518 .09 254 .05
Consumer 25 .01 20 .01
------ ---- ------ ----
743 .14 528 .11
------ ---- ------ ----
Restructured loans -- -- -- --
------ ---- ------ ----
Total nonperforming loans 3,209 0.58% 3,009 .62%
==== ====
Other real estate 115 116
Repossessions 27 115
------ ------
Total nonperforming assets $3,351 $3,240
====== ======
The allowance for loan losses was 243.66% of nonperforming loans at June
30, 2003 compared to 236.66% of nonperforming loans at December 31, 2002.
26
It is the 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 June 30, 2003 and
2002, which would have been recorded under the original terms of those loans,
was approximately $141,000 and $222,000 for the six months ended June 30, 2003
and 2002, respectively. Approximately $24,000 and $19,000 was actually recorded
as interest income on such loans for the six months ended June 30, 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 at
June 30, 2003 included in the table above, which were considered "impaired",
management has identified additional loans totaling approximately $15,412,000
and $9,137,000 at June 30, 2003 and December 31, 2002, respectively, which are
not included in the table above but are considered by management to be
"impaired". The $15,412,000 of loans identified by management as being
"impaired" reflected various commercial, commercial real estate, real estate,
and consumer loans ranging in size from approximately $3,000 to approximately
$5,726,000. The increase in "impaired" loans since December 31, 2002 is
primarily represented by one large auto floor plan line of approximately
$5,700,000. The average balance of nonaccrual and other "impaired" loans for the
first six months of 2003 was approximately $18,189,000. At June 30, 2003 the
allowance for loan losses on impaired loans was $1,762,000 compared to
$1,352,000 at December 31, 2002.
As of June 30, 2003 and December 31, 2002 approximately $5,993,000 and
$2,697,000, respectively, 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. The increase in this category since December 31,
2002 primarily reflects loans to one large commercial borrower that has not
provided current financial statements. 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
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 a
higher risk category.
Investment in debt and equity securities classified as available-for-sale
increased $212,000 or 0.1% to $186,936,000 at June 30, 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 increased
$575,000 to $4,051,000 to reflect the fair value of available-for-sale
investments at June 30, 2003, and the net after tax increase resulting from the
change in the market valuation adjustment of $379,000 increased the
stockholders' equity component to $2,674,000 at June 30, 2003.
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, decreased $14,718,000 or 19.0% to $62,693,000 at June 30
2003 compared to $77,411,000 at December 31, 2002.
27
Premises and equipment increased $1,186,000 or 7.2% to $17,772,000 at June
30, 2003 compared to $16,586,000 at December 31, 2002. The increase reflects
assets acquired in the acquisition of $1,814,000 plus expenditures for premises
and equipment of $225,000, offset by depreciation expense of $852,000 and sales
and retirements of premises and equipment of $1,000.
Goodwill and intangible assets increased $2,091,000 or 8.6% to $26,354,000
at June 30, 2003 compared to $24,263,000 at December 31, 2002. This increase
reflects goodwill and core deposit intangible related to the acquisition.
Total deposits increased $55,030,000 or 9.3% to $646,221,000 at June 30,
2003 compared to $591,191,000 at December 31, 2002. Approximately $30,736,000 of
this increase is attributed to the acquisition. Other than the increase
attributable to the acquisition, demand deposits increased approximately
$2,847,000 and time deposits increased approximately $21,447,000. These
increases reflect increased public funds of approximately $6,800,00,
approximately $8,580,000 of brokered time deposits, as well as a general
increase in consumer deposit levels as a result of depositors moving funds back
into financial institutions.
Federal funds purchased and securities sold under agreements to repurchase
decreased $1,546,000 or 2.3% to $65,813,000 at June 30, 2003 compared to
$67,359,000 at December 31, 2002. The decrease is primarily due to lower public
fund repurchase agreements.
The increase in stockholders' equity reflects net income of $4,398,000
less dividends declared of $1,306,000, a $379,000 change in accumulated other
comprehensive income, and the sale of treasury stock of $28,000.
No material changes in the Company's liquidity or capital resources have
occurred since December 31, 2002.
28
On January 1, 2002, our Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). As of
January 1, 2003 our Company had unamortized goodwill of $23,408,000, core
deposit intangibles of $730,000,consulting/noncompete agreements of $125,000,
and mortgage servicing rights of $1,516,000, all of which were subject to the
transition provisions of SFAS 142. Under SFAS 142, our Company will continue to
amortize, on a straight-line basis, its core deposit intangibles associated with
the purchases of Citizens Union State Bank and Trust and the Springfield branch.
Consulting/noncompete agreements will also 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 completed the annual goodwill impairment test required under
SFAS 142 as of December 31, 2002 and found no impairment existed.
The gross carrying amount and accumulated amortization of our Company's
amortized intangible assets for the periods ended June 30, 2003 and December 31,
2002 are as follows:
June 30, 2003 December 31, 2002
---------------------------------- -----------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------- -------------- ------------
Amortized intangible asset:
Core deposit intangible $2,265,000 (1,144,200) 1,800,000 (1,069,860)
Consulting/Noncompete agreements 900,000 (850,000) 900,000 (775,000)
---------- ---------- --------- ----------
$3,165,000 (1,994,200) 2,700,000 (1,844,860)
========== ========== ========= ==========
The aggregate amortization expense of intangible assets subject to
amortization for the three and six month periods ended June 30, 2003 and 2002 is
as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2003 2002 2003 2002
------- ------- ------- -------
Aggregate amortization expense $74,670 74,670 149,340 149,340
======= ======= ======= =======
The estimated amortization expense of intangible assets for the next five
years is as follows:
Estimated amortization expense:
For year ended 2003 $306,896
For year ended 2004 215,112
For year ended 2005 215,112
For year ended 2006 215,112
For year ended 2007 201,852
29
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:
June 30,
-----------------------------------
2003 2002
------------- ------------
Balance, beginning of period $ 1,515,848 1,134,234
Originated mortgage servicing rights 710,204 282,481
Amortization (264,237) (124,881)
Impairment charge (556,040) --
------------- ------------
Balance, end of period $ 1,405,775 1,291,834
============= ============
Mortgage loans serviced $ 207,746,000 182,637,000
============= ============
Mortgage servicing rights as a
percentage of mortgage loans serviced 0.68% 0.71%
The estimated amortization expense of mortgage servicing rights for the
next five years is as follows:
Estimated amortization expense:
For year ended 2003 $444,300
For year ended 2004 348,400
For year ended 2005 348,400
For year ended 2006 348,400
For year ended 2007 348,400
Our Company's goodwill associated with the purchase of subsidiaries by
reporting segments for the periods ended June 30, 2003 and December 31, 2002 is
summarized as follows:
June 30, 2003
----------------------------------------------------------------------------
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 16,688,699 4,112,876 25,183,673
========== ========== ========= ==========
December 31, 2002
----------------------------------------------------------------------------
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
========== ========== ========= ==========
30
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
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.
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 and are not expected to have a material
effect on our Company's consolidated financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics of
Both Liability and Equity (SFAS 150). SFAS 150 establishes standards for how an
issuer clarifies and measures certain financial instruments with characteristics
of both liabilities and equity. It requires that an issuer classify a financial
instrument that is within this scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
This Statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of SFAS 150 will not
have a material effect on our Company's consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation is intended to achieve more consistent application of
consolidation policies to variable interest entities and, thus, to improve
comparability between enterprises engaged in similar activities even if some of
those activities are conducted through variable interest entities. Including the
assets, liabilities, and results of activities of variable interest entities in
the consolidated financial statements of their primary beneficiaries will
provide more complete information about the resources, obligations, risks and
opportunities of the consolidated enterprise. This Interpretation applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. This Interpretation may be
applied prospectively with a cumulative-
31
effect adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated. On
June 30, 2003, we implemented FASB Interpretation No. 46, which did not have a
material effect on our consolidated financial statements.
32
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 June 30, 2003, the rate shock
scenario models indicated that annual net interest income could decrease or
increase by as much as 8% 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.
33
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities None
Item 3. Defaults Upon Senior Securities None
Item 4. At the annual meeting of the shareholders of Exchange National
Bancshares, Inc. held on June 11, 2003, the shareholders elected three
Class II Directors, namely, David R. Goller, James R. Loyd, and Gus S.
Wetzel, II to serve terms expiring at the annual meeting of
shareholders in 2006 and ratified the Board of Directors selection of
KPMG LLP as the Company's independent auditors for the year ending
December 31, 2003. Class III Directors, namely, Kevin L. Riley and
David T. Turner, and Class I Directors, namely, Charles G.
Dudenhoeffer, Jr., Philip D. Freeman, and James E Smith, continue to
serve terms expiring at the annual meetings of shareholders in 2004 and
2005, respectively.
The following is a summary of votes cast. No broker non-votes
were received.
Withhold
Authority/
For Against Abstentions
--------- ------------ -----------
Election of Directors:
David R. Goller 2,112,941 16,974 N/A
James R. Loyd 2,130,159 8,670 N/A
Gus S. Wetzel, II 2,117,992 11,922 N/A
Ratification of KPMG LLP
as independent auditors 2,134,330 2,925 3,575
Item 5. Other Information None
34
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
Exhibit No. Description
----------- -----------
3.1 Articles of Incorporation of the Company (filed as Exhibit
3(a) to the Company's Registration Statement on Form S-4
(Registration No. 33-54166) and incorporated herein by
reference).
3.2 Bylaws of the Company (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 the
Company's Annual Report on Form 10-K For the fiscal year ended
December 31, 1999 (Commission File number 0-23636) and
incorporated herein be reference).
31.1 Certificate of the Chief Executive Officer of the Company
pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
31.2 Certificate of the Chief Financial Officer of the Company
pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
32.1 Certificate of the Chief Executive Officer of the Company
pursuant to Section 906 of the Sarbanes-Oxley Act of 2003
32.2 Certificate of the Chief Financial Officer of the Company
pursuant to Section 906 of the Sarbanes-Oxley Act of 2003
(b) Reports on Form 8-K.
No reports were filed on Form 8-K for the three month period ended June
30, 2003.
35
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
---- -----------------------------------
August 13, 2003 James E. Smith, Chairman of the
Board and Chief Executive Officer
(Principal Executive Officer)
By /s/ Richard G. Rose
-----------------------------------
August 13, 2003 Richard G. Rose, Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
36
EXCHANGE NATIONAL BANCSHARES, INC.
INDEX TO EXHIBITS
June 30, 2003 Form 10-Q
Exhibit No. Description Page No.
----------- ----------- --------
3.1 Articles of Incorporation of the Company (filed as Exhibit 3(a)
to the Company's Registration Statement on Form S-4 (Registration
No. 33-54166) and incorporated herein by reference). **
3.2 Bylaws of the Company (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 the Company'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). **
31.1 Certificate of the Chief Executive Officer of the Company
pursuant to Section 302 of the Sarbanes-Oxley Act of 2003 38
31.2 Certificate of the Chief Financial Officer of the Company
pursuant to Section 302 of the Sarbanes-Oxley Act of 2003 39
32.1 Certificate of the Chief Executive Officer of the Company
pursuant to Section 906 of the Sarbanes-Oxley Act of 2003 40
32.2 Certificate of the Chief Financial Officer of the Company
pursuant to Section 906 of the Sarbanes-Oxley Act of 2003 41
** Incorporated by reference.
37