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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, 2004
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, 2004, the registrant had 4,169,847 shares of common stock,
par value $1.00 per share, outstanding.
Page 1 of 39 pages
Index to Exhibits located on page 35
1
ITEM 1. FINANCIAL STATEMENTS
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
MARCH 31, 2004 DECEMBER 31, 2003
-------------- -----------------
ASSETS
Loans:
Commercial $217,089,281 $212,440,053
Real estate - construction 44,090,057 46,415,577
Real estate - mortgage 283,916,027 283,367,122
Consumer 38,598,240 41,696,414
------------ ------------
583,693,605 583,919,166
Less allowance for loan losses 8,445,755 8,267,380
------------ ------------
Loans, net 575,247,850 575,651,786
Investments in available for sale debt
and equity securities, at fair value 217,096,521 188,955,832
Federal funds sold 31,846,598 29,227,798
Cash and due from banks 22,333,788 27,817,117
Premises and equipment 18,486,123 17,774,633
Accrued interest receivable 5,235,212 5,107,980
Goodwill 25,196,736 25,196,736
Intangible assets 959,466 1,013,244
Other assets 4,799,626 4,850,866
------------ ------------
Total assets $901,201,920 $875,595,992
============ ============
Continued on next page
2
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
MARCH 31, 2004 DECEMBER 31, 2003
---------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits $ 90,775,993 $ 89,214,182
Time deposits 589,218,955 576,047,783
------------- -------------
Total deposits 679,994,948 665,261,965
Federal funds purchased and securities
sold under agreements to repurchase 74,357,088 72,983,423
Interest-bearing demand notes to U.S. Treasury 474,913 688,978
Other borrowed money 49,059,686 41,629,893
Accrued interest payable 1,560,095 1,650,292
Other liabilities 6,156,038 5,598,697
------------- -------------
Total liabilities 811,602,768 787,813,248
------------- -------------
Stockholders' equity:
Common stock - $1 par value; 15,000,000 shares
authorized; 4,298,353 issued 4,298,353 4,298,353
Surplus 21,999,714 21,999,714
Retained earnings 64,332,333 62,789,107
Accumulated other comprehensive income, net of tax 1,621,261 1,348,079
Treasury stock; 128,506 shares at cost (2,652,509) (2,652,509)
------------- -------------
Total stockholders' equity 89,599,152 87,782,744
------------- -------------
Total liabilities and stockholders' equity $ 901,201,920 $ 875,595,992
============= =============
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,
-----------------------
2004 2003
---------- ----------
Interest income $9,761,853 $9,431,647
Interest expense 2,954,393 3,282,475
---------- ----------
Net interest income 6,807,460 6,149,172
Provision for loan losses 235,500 235,500
---------- ----------
Net interest income after provision for loan losses 6,571,960 5,913,672
Noninterest income 1,446,655 1,972,003
Noninterest expense 4,672,263 4,500,340
---------- ----------
Income before income taxes 3,346,352 3,385,335
Income taxes 1,052,553 1,030,098
---------- ----------
Net income $2,293,799 $2,355,237
========== ==========
Basic earning per share $ 0.55 $ 0.57
Diluted earnings per share $ 0.54 $ 0.56
Weighted average shares of common stock outstanding
Basic 4,169,847 4,168,381
Diluted 4,211,563 4,192,378
Dividend per share:
Declared $ 0.18 $ 0.13
Paid $ 0.18 $ 0.13
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,
----------------------------
2004 2003
--------- -------------
Cash flow from operating activities:
Net income 2,293,799 $ 2,355,237
Adjustments to reconcile net income to net cash
cash provided by operating activities:
Provision for loan losses 235,500 235,500
Depreciation expense 374,353 425,366
Net amortization of debt securities
premiums and discounts 351,857 305,206
Amortization of intangible assets 53,778 74,670
(Increase) decrease in accrued interest receivable (127,232) 170,515
Increase in other assets (83,807) (261,197)
Decrease in accrued interest payable (90,197) (183,424)
Increase in other liabilities 557,340 1,161,887
Gain on sales and calls of debt securities (2,537) (53,235)
Origination of mortgage loans for sale (13,032,376) (30,973,004)
Proceeds from the sale of mortgage loans held for sale 13,252,418 31,664,320
Gain on sale of mortgage loans (220,042) (691,316)
Loss on disposition of premises and equipment - 1,079
Other, net - 14,856
------------ ------------
Net cash provided by operating activities 3,562,854 4,246,460
Cash flow from investing activities:
Net decrease (increase) in loans 19,239 (21,908,229)
Purchase of available-for-sale debt securities (102,063,028) (66,116,574)
Proceeds from maturities of available-for-sale debt securities 62,185,873 51,812,535
Proceeds from calls of available-for-sale debt securities 11,557,425 19,415,000
Proceeds from sales of available-for-sale debt securities 250,000 1,553,235
Purchase of premises and equipment (1,085,843) (69,997)
Proceeds from sales of other real estate owned and repossessions 137,148 121,136
------------ ------------
Net cash used in investing activities (28,999,186) (15,192,894)
------------ ------------
Continued on next page
5
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
------------------------------
2004 2003
------------- -------------
Cash flow from financing activities:
Net increase in demand deposits 1,561,811 2,079,368
Net increase in interest-bearing transaction accounts 19,418,366 5,799,702
Net (decrease) increase in time deposits (6,247,194) 5,634,369
Net increase in federal funds purchased and securities sold
under agreements to repurchase 1,373,665 2,148,346
Net decrease in interest-bearing demand notes
to U.S. Treasury (214,065) (2,600,604)
Proceeds from subordinated debentures 25,774,000 -
Repayment of Federal Home Loan Bank borrowings (393,639) (139,436)
Repayment of other borrowed money (17,950,568) (1,000,000)
Cash dividends paid (750,573) (555,491)
------------ ------------
Net cash provided by in financing activities 22,571,803 11,366,254
------------ ------------
Net (decrease) increase in cash and cash equivalents (2,864,529) 419,820
------------ ------------
Cash and cash equivalents, beginning of period 57,044,915 77,411,243
------------ ------------
Cash and cash equivalents, end of period $ 54,180,386 $ 77,831,063
============ ============
Supplemental disclosure of cash flow information -
Cash paid (received) during period for:
Interest $ 3,044,590 $ 3,465,899
Income taxes 60,000 (122,079)
Supplemental schedule of noncash investing activities -
Other real estate and repossessions acquired in settlement of loans 166,843 185,326
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, 2004 and 2003
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 2003 condensed
consolidated financial statements have been reclassified to conform to the 2004
condensed consolidated presentation. Such reclassifications have no effect on
previously reported net income or stockholders' equity. Operating results for
the period ended March 31, 2004 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2004.
It is suggested that these unaudited condensed consolidated interim
financial statements be read in conjunction with our Company's audited
consolidated financial statements included in its 2003 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, 2003 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 been condensed and
omitted. Our Company believes that these financial statements contain all
adjustments (consisting of normal recurring accruals) necessary to present
fairly our Company's consolidated financial position as of March 31, 2004 and
December 31, 2003 and the consolidated statements of earnings and cash flows for
the three months ended March 31, 2004 and 2003.
The weighted average common and diluted shares outstanding as well as
dividends per share and earnings per share amounts have been restated to give
effect to a three-for-two stock split accounted for as a dividend on July 15,
2003.
7
EARNINGS PER SHARE
The following table reflects, for the three-month periods ended March 31,
2004 and 2003, the numerators (net income) and denominators (average shares
outstanding) for the basic and diluted net income per share computations:
THREE MONTHS ENDED
MARCH 31,
-----------------------
2004 2003
---------- ----------
Net income, basic and diluted $2,293,799 $2,355,237
========== ==========
Average shares outstanding 4,169,847 4,168,381
Effect of dilutive stock options 41,716 23,997
---------- ----------
Average shares outstanding
including dilutive stock options 4,211,563 4,192,378
Net income per share, basic $ 0.55 $ 0.57
========== ==========
Net income per share, diluted $ 0.54 $ 0.56
========== ==========
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. SFAS No. 123, Accounting for
Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of SFAS No. 123,
establish accounting and disclosure requirements using a fair-value based method
of accounting for stock-based employee compensation plans. As permitted by
existing accounting standards, the Company has elected to continue to apply the
provision of APB Opinion No. 25, as described above, and has adopted only the
disclosure requirements of SAFS No. 123, as amended by SFAS No. 148.
The following table illustrates, for the three-month periods ended March
31, 2004 and 2003, 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,
--------------------------------
2004 2003
------------- ---------------
Net income:
As reported $ 2,293,799 $ 2,355,237
Deduct total stock-based employee
compensation expense determined
under fair-value-based method for
all awards, net of tax (33,797) (23,419)
------------- -------------
Pro forma net income $ 2,260,002 $ 2,331,818
============= =============
Pro forma earnings per common share:
As reported basic $ 0.55 $ 0.57
Pro forma basic 0.54 0.56
As reported diluted 0.54 0.56
Pro forma diluted 0.54 0.55
9
COMPREHENSIVE INCOME
For the three-month periods ended March 31, 2004 and 2003, unrealized
holding gains and losses on investments in debt and equity securities
available-for-sale were our Company's only other comprehensive income component.
Comprehensive income for the three-month periods ended March 31, 2004 and 2003
is summarized as follows:
THREE MONTHS ENDED
MARCH 31,
--------------------------
2004 2003
----------- -----------
Net income $ 2,293,799 $ 2,355,237
Other compreshensive income:
Net unrealized holding gains on
investments in debt and equity securities
available-for-sale, net of taxes 274,831 55,241
Adjustment for net securities gains realized in net
income, net of applicable income taxes (1,649) (35,135)
----------- -----------
Total other comprehensive income 273,182 20,106
----------- -----------
Comprehensive income $ 2,566,981 $ 2,375,343
=========== ===========
10
SEGMENTS
Through the respective branch network, Exchange National Bank, Citizens
Union State Bank, and Osage Valley Bank 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 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.
MARCH 31, 2004
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 $357,869,983 $172,654,759 $ 44,723,10$ $ - $575,247,850
Debt and equity securities 136,601,928 44,698,452 35,022,141 774,000 217,096,521
Goodwill 4,382,098 16,701,762 4,112,876 - 25,196,736
Intangible assets - 959,466 - - 959,466
Total assets 527,651,267 283,453,986 89,516,335 580,332 901,201,920
Deposits 392,928,809 229,374,151 73,613,021 (15,921,033) 679,994,948
Stockholders' equity 50,337,053 38,274,731 10,238,023 (9,250,655) 89,599,152
============ ============ ============ ============ ============
DECEMBER 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 $356,157,080 $174,415,896 $ 45,078,810 $ - $575,651,786
Debt and equity securities 110,422,665 45,520,374 33,012,793 - 188,955,832
Goodwill 4,382,098 16,701,762 4,112,876 - 25,196,736
Intangible assets - 1,013,244 - - 1,013,244
Total assets 502,800,863 281,534,651 91,417,739 (157,261) 875,595,992
Deposits 370,806,600 228,706,626 74,414,622 (8,665,883) 665,261,965
Stockholders' equity 50,025,363 37,444,782 9,911,423 (9,598,824) 87,782,744
============ ============ ============ ============ ============
11
THREE MONTHS ENDED MARCH 31, 2004
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 $5,566,376 $3,136,931 $1,079,486 $ (20,940) $9,761,853
Total interest expense 1,604,185 867,756 408,786 73,666 2,954,393
---------- ---------- ---------- ---------- ----------
Net interest income 3,962,191 2,269,175 670,700 (94,606) 6,807,460
Provision for loan losses 150,000 75,000 10,500 - 235,500
Noninterest income 974,056 403,160 90,550 (21,111) 1,446,655
Noninterest expense 2,693,351 1,520,253 418,517 40,142 4,672,263
Income taxes 675,650 334,869 96,634 (54,600) 1,052,553
---------- ---------- ---------- ---------- ----------
Net income (loss) $1,417,246 $ 742,213 $ 235,599 $ (101,259) $2,293,799
========== ========== ========== ========== ==========
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
========== ========== ========== ========== ==========
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, 2003, AS WELL AS
THOSE DISCUSSED ELSEWHERE IN OUR COMPANY'S REPORTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
13
OVERVIEW
This overview of management's discussion and analysis highlights selected
information in this document and may not contain all of the information that is
important to you. For a more complete understanding of trends, events,
commitments, uncertainties, liquidity, capital resources and critical accounting
estimates, you should carefully read this entire document. These have an impact
on our Company's financial condition and results of operation.
BUSINESS STRATEGY: In 1865, The Exchange National Bank of Jefferson City
opened for business serving the loan and deposit needs of citizens living in
Missouri's State Capitol of Jefferson City. Leveraging off of its strong equity
position, Exchange National Bank's Board of Directors established Exchange
National Bancshares, Inc., a multi-bank holding company on October 23, 1992. On
April 7, 1993, Exchange National Bancshares, Inc. acquired The Exchange National
Bank of Jefferson City. On November 3, 1997, our Company acquired Union State
Bancshares, Inc. and its wholly-owned subsidiary, Union State Bank and Trust of
Clinton, Missouri. Following the May 4, 2000 acquisition of Calhoun Bancshares,
Inc. by Union State Bank., Calhoun Bancshares' wholly-owned subsidiary, Citizens
State Bank of Calhoun, merged into Union State Bank. The surviving bank in this
merger is called Citizens Union State Bank & Trust. On January 3, 2000, our
Company acquired Mid Central Bancorp, Inc., and Mid Central's wholly-owned
subsidiary, Osage Valley Bank of Warsaw, Missouri. On June 16, 2000, our Company
acquired CNS Bancorp, Inc. and its subsidiary, City National Savings Bank, FSB,
Jefferson City, Missouri. City National subsequently was merged into Exchange
National Bank. Finally, on June 26, 2003 our Company purchased the Springfield,
Missouri branch of Missouri State Bank. Following the purchase, this branch was
merged into Citizens Union State Bank and Trust.
RECENT EVENTS: With ample capital available, our Company's business
strategy continues to focus on increasing loan and deposit levels through
internal, organic means in addition to expanding our de novo branching network
into metropolitan growth areas. During the first quarter of 2004, our Company
announced regulatory filings to establish de novo branches in the Branson and
Lee's Summit, Missouri communities. Our Company also announced the completion of
a $25,000,000 private placement of floating-rate trust preferred securities.
$11,000,000 of the proceeds from the placement was used to reduce existing debt.
The balance of the proceeds may be used to finance expansion into new markets
and for other general corporate purposes.
MATERIAL CHALLENGES AND RISKS: Our Company may experience difficulties in
managing growth and in effectively integrating newly established branches. As
part of our general strategy, our Company may continue to acquire banks and
establish de novo branches that we believe provide a strategic fit. To the
extent that our Company does grow, there can be no assurances that we will be
able to adequately and profitably manage such growth. The successes of our
Company's growth strategy will depend primarily on the ability of our banking
subsidiaries to generate an increasing level of loans and deposits at acceptable
risk levels and on acceptable terms without significant increases in
non-interest expenses relative to revenues generated. Our Company's financial
performance also depends, in part, on our ability
14
to manage various portfolios and to successfully introduce additional financial
products and services. Furthermore, the success of our Company's growth strategy
will depend on our ability to maintain sufficient regulatory capital levels and
on general economic conditions that are beyond our control.
REVENUE SOURCE: Through the respective branch network, Exchange National
Bank, Citizens Union State Bank and Osage Valley Bank provide similar products
and services in four 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 primarily 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, Warsaw and Springfield, Missouri. The
products and services are offered to customers primarily within their respective
geographical areas. The business segment results which follow are consistent
with our Company's internal reporting system which is consistent, in all
material respects, with generally accepted accounting principles and practices
prevalent in the banking industry.
Much of our Company's business is commercial, commercial real estate
development, and mortgage lending. Our Company has experienced continued strong
loan demand in the communities within which we operate even during economic
slowdowns. Our Company's income from mortgage brokerage activities is directly
dependent on mortgage rates and the level of home purchases and refinancings.
Our Company's primary source of revenue is net interest income derived
primarily from lending and deposit taking activities. A secondary source of
revenue is investment income. The Company also derives income from trust,
brokerage, credit card and mortgage banking activities and service charge
income.
Our Company has prepared all of the consolidated financial information in
this report in accordance with accounting principles generally accepted in the
United States of America (U.S. GAAP). In preparing the consolidated financial
statements in accordance with U.S. GAAP, our Company makes estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. There can be no assurances that actual results will not differ
from those estimates.
We have identified the accounting policy related to the allowance for loan
losses as critical to the understanding of our Company's results of operations,
since the application of this policy requires significant management assumptions
and estimates that could result in materially different amounts to be reported
if conditions or underlying circumstances were to change. The impact and any
associated risks related to these policies on our business operations are
discussed in the "Lending and Credit Management" section below.
15
RESULTS OF OPERATIONS
Net income for the three months ended March 31, 2004 of $2,294,000
decreased $61,000 when compared to the first quarter of 2003. Diluted earnings
per common share for the first quarter of 2004 of $0.54 decreased 2 cents or
3.6% when compared to the first quarter of 2003.
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,
------------------
2004 2003
------ ------
Interest income $9,762 $9,431
Fully taxable equivalent (FTE) adjustment 161 185
------ ------
Interest income (FTE basis) 9,923 9,616
Interest expense 2,954 3,282
------ ------
Net interest income (FTE basis) 6,969 6,334
Provision for loan losses 236 236
------ ------
Net interest income after provision for
loan losses (FTE basis) 6,733 6,098
Noninterest income 1,447 1,972
Noninterest expense 4,672 4,500
------ ------
Earning before income taxes (FTE basis) 3,508 3,570
------ ------
Income taxes 1,053 1,030
FTE adjustment 161 185
------ ------
Income taxes (FTE basis) 1,214 1,215
------ ------
Net Income $2,294 $2,355
====== ======
Our Company's primary source of earning is net interest income, which is
the difference between the interest earned on interest earning assets and the
interest paid on interest bearing liabilities. Net interest income on a fully
taxable equivalent basis increased $635,000 or 10.0% to $6,969,000 or 3.45% of
average earning assets for the first quarter of 2004 compared to $6,334,000 or
3.53% of average earning assets for the same period of 2003. The provision for
loan losses was $236,000 for both reporting periods.
16
Noninterest income and noninterest expense for the three-month periods
ended March 31, 2004 and 2003 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31, INCREASE (DECREASE)
------------------- ---------------------
2004 2003 AMOUNT %
------- ------- ------- ------
NONINTEREST INCOME
Service charges on deposit accounts $ 740 $ 621 $ 119 19.2%
Trust department income 211 334 (123) (36.8)
Brokerage income 21 13 8 61.5
Mortgage loan servicing fees 102 113 (11) (9.7)
Net gains on sales and calls of debt securities 3 53 (50) (94.3)
Gain on sale of mortgage loans 220 691 (471) (68.2)
Credit card fees 35 38 (3) (7.9)
Other 115 109 6 5.5
------- ------- ---- -----
$ 1,447 $ 1,972 (525) (26.6)%
======= ======= ==== =====
NONINTEREST EXPENSE
Salaries and employee benefits 2,781 2,455 $ 326 13.3%
Occupancy expense 265 261 4 1.5
Furniture and equipment expense 465 526 (61) (11.6)
FDIC insurance assessment 28 24 4 16.7
Advertising and promotion 82 132 (50) (37.9)
Postage, printing and supplies 175 206 (31) (15.0)
Legal, examination, and
professional fees 165 180 (15) (8.3)
Credit card expenses 26 23 3 13.0
Credit investigation and loan
collection expenses 22 24 (2) (8.3)
Amortization of intangible assets 54 75 (21) (28.0)
Other 609 594 15 2.5
------- ------- ----- -----
$ 4,672 $ 4,500 $ 172 3.8%
======= ======= ===== =====
Noninterest income decreased $525,000 or 26.6% to $1,447,000 for the first
quarter of 2004 compared to $1,972,000 for the same period of 2003. The $119,000
or 19.2% increase in service charges on deposit accounts reflects an increase in
the per item insufficient check fee charged by one of our Company's subsidiary
banks. Trust department income decreased $123,000 or 36.8% due primarily to the
collection of more distribution fees during the first quarter of 2003 compared
to the first quarter of 2004. The $50,000 or 94.3% decrease in gains on sales
and call of debt securities represents a decrease in the volume of
17
securities sold in 2004 versus 2003. Gain on sales of mortgage loans decreased
$471,000 or 68.2% due to a decrease in volume of loans originated and sold to
the secondary market from approximately $30,973,000 in the first quarter of 2003
to approximately $13,032,000 for the first quarter of 2004.
Noninterest expense increased $172,000 or 3.8% to $4,672,000 for the first
quarter of 2004 compared to $4,500,000 for the first quarter of 2003. Salaries
and benefits increased $326,000 or 13.3%. Approximately $123,000 of this
increase reflects salaries and benefits related to an additional branch
purchased in June of 2003. The balance of the increase reflects normal salary
increases, additional hires and higher health insurance premiums. The $61,000 or
11.6% decrease in furniture and equipment expense is primarily the result of
decreased depreciation and amortization expense for equipment and software
purchased in prior years. Our Company utilizes both straight-line and
accelerated depreciation methods. Assets utilizing accelerated methods recognize
higher depreciation expense in early years and lower expense in later years of
the life of assets. The $50,000 or 37.9% decrease in advertising and promotion
reflects initial startup costs paid in the prior year related to retaining a new
advertising agency and the cost of a marketing survey.
Income taxes as a percentage of earnings before income taxes as reported
in the condensed consolidated financial statements was 31.5% for the first
quarter of 2004 compared to 30.4% for the first quarter of 2003.
NET INTEREST INCOME
Fully taxable equivalent net interest income increased $635,000 or 10.0%
for the three-month period ended March 31, 2004 compared to the same period in
2003. The increase in net interest income for the period ended March 31, 2004
compared to the period ended March 31, 2003 was the result of increased earning
assets.
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, 2004 and 2003.
18
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
------------------------------------- -----------------------------------
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expense/1/ Paid/1/ Balance Expense/1/ Paid/1/
--------- ---------- ---------- --------- ---------- ------
ASSETS
Loans:/2/
Commercial $ 213,127 $ 2,955 5.56% $ 153,112 $ 2,269 6.01%
Real estate 327,522 4,649 5.69 299,613 4,563 6.18
Consumer 40,038 739 7.40 43,955 874 8.06
Investment securities:/3/
U.S Treasury and
U.S. Gov't Agencies 167,640 1,017 2.43 143,653 1,143 3.23
State and municipal 28,959 464 6.43 34,257 588 6.96
Other 4,191 30 2.87 5,414 49 3.67
Federal funds sold 25,857 63 0.98 41,926 114 1.10
Interest-bearing deposits 3,040 6 0.79 5,673 16 1.14
--------- --------- 4.91 --------- --------
Total interest earning assets 810,374 9,923 727,603 9,616 5.36
All other assets 74,796 71,512
Allowance for loan losses (8,337) (7,235)
--------- ---------
Total assets $ 876,833 $ 791,880
========= =========
Continued on next page
19
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
------------------------------------- -----------------------------------
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 $120,152 $ 171 0.57% $ 94,983 $ 182 0.78%
Savings 56,691 80 0.57 51,322 105 0.83
Money market 68,722 144 0.84 63,517 152 0.97
Deposits of $100,000
and over 88,082 474 2.16 68,086 446 2.66
Other time deposits 253,047 1,510 2.39 240,717 1,787 3.01
-------- ------- -------- --------
Total time deposits 586,694 2,379 1.63 518,625 2,672 2.09
Federal funds purchased
and securities sold under
agreements to repurchase 71,319 167 0.94 68,241 177 1.05
Interest-bearing demand
notes to US Treasury 467 1 0.86 468 1 0.87
Other borrowed money 36,924 407 4.42 40,769 432 4.30
-------- ------- ---- -------- --------
Total interest-bearing
liabilities 695,404 2,954 1.70 $628,103 3,282 2.12
Demand deposits 86,198 ------- 71,772
Other liabilities 6,076 7,895
-------- --------
Total liabilities 787,678 707,770
Stockholders' equity 89,155 84,200
-------- --------
Total liabilities and
Stockholders' equity $876,833 791,880
======== ========
Net interest income $ 6,969 $ 6,334
======== ========
Net interest margin/4/ 3.45% 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 2004 and $185,000 in 2003.
/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.
20
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 2004
COMPARED TO
THREE MONTHS ENDED MARCH 31, 2003
CHANGE DUE TO
TOTAL --------------------
CHANGE VOLUME RATE
--------- --------- -------
INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS:
Loans: /1/
Commercial $ 686 840 (154)
Real estate /2/ 86 408 (322)
Consumer (135) (75) (60)
Investment securities:
U.S Treasury and U.S.
Government agencies (126) 172 (298)
State and municipal /2/ (124) (87) (37)
Other (19) (10) (9)
Federal funds sold (51) (40) (11)
Interest-bearing deposits (10) (6) (4)
------ ------ ------
Total interest income 307 1,202 (895)
INTEREST EXPENSE:
NOW accounts (11) 42 (53)
Savings (25) 10 (35)
Money market (8) 12 (20)
Deposits of $100,000 and over 28 117 (89)
Other time deposits (277) 88 (365)
Federal funds purchased and
securities sold under
agreements to repurchase (10) 8 (18)
Interest-bearing demand notes
of U.S. Treasury - - -
Other borrowed money (25) (42) 17
------ ------ ------
Total interest expense (328) 235 (563)
------ ------ ------
NET INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS $ 635 967 (332)
====== ====== ======
/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 2004 and $185,000 in 2003.
21
LENDING AND CREDIT MANAGEMENT
Interest earned on the loan portfolio is a primary source of interest
income for our Company. Net loans represented 63.8% of total assets as of March
31, 2004 compared to 65.7% as of December 31, 2003 and 62.8% as of March 31,
2003.
Lending activities are conducted pursuant to written loan policies
approved by our Banks' Boards of Directors. Larger credits are reviewed by our
Banks' Discount Committees. These committees are comprised of members of senior
management.
Our Company generally does not retain long-term fixed rate residential
mortgage loans in its portfolio. Fixed rate loans conforming to standards
required by the secondary market are offered to qualified borrowers, but are not
funded until our Company has a non-recourse purchase commitment from the
secondary market at a predetermined price. At March 31, 2004 our Company was
servicing approximately $211,082,000 of loans sold to the secondary market.
Mortgage loans retained in our Company's portfolio generally include
provisions for rate adjustments at one to three year intervals. Commercial loans
and real estate construction loans generally have maturities of less than one
year. Installment loans to individuals are primarily fixed rate loans with
maturities from one to five years.
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, value of underlying collateral and other relevant
factors. The allowance for loan losses which is reported as a deduction from
loans, is available for loan charge-offs. This 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.
The allowance for loan losses was decreased by net loan charge-offs of
$57,000 for the first quarter of 2004 compared to net loan recoveries of $13,000
for the first quarter of 2003. The allowance for loan losses was increased by a
provision charged to expense of $236,000 for both the first quarter of 2004 and
the first quarter of 2003.
The balance of the allowance for loan losses was $8,446,000 at March 31,
2004 compared to $8,267,000 at December 31, 2003 and $7,369,000 at March 31,
2003. The allowance for loan losses as a percent of outstanding loans was 1.45%
at March 31, 2004 compared to 1.42% at December 31, 2003 and 1.45% at March 31,
2003.
22
Nonperforming loans, defined as loans on nonaccrual status, loans 90 days
or more past due and still accruing, and restructured loans totaled $6,853,000
or 1.17% of total loans at March 31, 2004 compared to $3,014,000 or 0.52% of
total loans at December 31, 2003. Detail of those balances plus other real
estate and repossessions is as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
MARCH 31, 2004 DECEMBER 31, 2003
------------------------ ---------------------------
% OF % OF
BALANCE GROSS LOANS BALANCE GROSS LOANS
---------- ----------- ----------- -----------
Nonaccrual loans:
Commercial $ 5,398 0.92% $ 1,520 0.26%
Real estate:
Construction 45 0.01 59 0.01
Mortgage 1,214 0.21 1,270 0.22
Consumer 19 - 55 0.01
-------- ----- ---------- -------
6,676 1.14 2,904 0.50
-------- ----- ---------- -------
Loans contractually past-due 90 days
or more and still accruing:
Commercial 120 0.02 66 0.01
Real estate:
Construction - - - -
Mortgage 41 0.01 4 -
Consumer 16 - 40 0.01
-------- ----- ---------- -------
177 0.03 110 0.02
-------- ----- ---------- -------
Restructured loans - - - -
-------- ----- ---------- -------
Total nonperforming loans 6,853 1.17% 3,014 0.52%
===== =======
Other real estate 93 47
Repossessions 56 73
-------- --------
Total noperforming assets $ 7,002 $ 3,134
======== =========
The allowance for loan losses was 123.25% of nonperforming loans at March
31, 2004 compared to 274.29% of nonperforming loans at December 31, 2003. The
increase in nonaccrual commercial loans represents two credits. Management
believes that our Company is well reserved for probable losses related to these
two credits.
23
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, 2004 and
2003, which would have been recorded under the original terms of those loans,
was approximately $155,000 and $98,000 for the three months ended March 31, 2004
and 2003, respectively. Approximately $40,000 and $13,000 was actually recorded
as interest income on such loans for the three months ended March 31, 2004 and
2003, 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 $120,000 and $66,000 at March
31, 2004 and December 31, 2003, respectively, which are not included in the
nonaccrual table above but are considered by management to be "impaired". The
$120,000 of loans identified by management as being "impaired" reflected various
commercial loans ranging in size from approximately $14,000 to approximately
$56,000. The average balance of nonaccrual and other "impaired" loans for the
first three months of 2004 was approximately $5,840,000. At March 31, 2004 the
portion of the allowance for loan losses allocated to specific impaired loans
was $1,865,000 compared to $685,000 at December 31, 2003. The balance of
impaired loans with specific loan loss allocations was approximately $3,019,000
at March 31, 2004 compared to $1,572,000 at December 31, 2003.
As of March 31, 2004 and December 31, 2003 approximately $12,800,000 and
$17,167,000 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 which raised doubts as to the ability of the borrower to comply with
present loan repayment terms. The decrease in loans having more than normal risk
is primarily represented by two large commercial credits. One credit totaling
approximately $2,623,000 has been placed on nonaccrual status and is part of the
impaired loan totals presented above. The other credit of approximately
$2,499,000 has been performing as agreed and has been removed from the internal
classified list. 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.
24
The allowance for loan losses is available to absorb probable loan losses
regardless of the category of loan to be charged off. The allowance for loan
losses consists of three components: asset-specific reserves, reserves based on
expected loss estimates, and unallocated reserves. The asset-specific component
applies to loans evaluated individually for impairment and is based on
management's best estimate of discounted cash repayments and proceeds from
liquidating collateral. The actual timing and amount of repayments and the
ultimate realizable value of the collateral may differ from management's
estimate.
The expected loss component is generally determined by applying
statistical loss factors and other risk indicators to pools of loans by asset
type. These expected loss estimates are sensitive to changes in delinquency
status, realizable value of collateral, and other risk factors. The underlying
assumptions, estimates and assessments used by management to determine these
components are continually evaluated and updated to reflect management's current
view of overall economic conditions and relevant factors impacting credit
quality and inherent losses. Changes in such estimates could significantly
impact the allowance and provision for credit losses. Our Company could
experience credit losses that are different from the current estimates made by
management.
At March 31, 2004, management allocated $7,667,000 of the $8,446,000 total
allowance for loan losses to specific loans and loan categories and $988,000 was
unallocated. Considering the size of several of our Company's lending
relationships and the loan portfolio in total, management believes that the
March 31, 2004 allowance for loan losses is adequate. Our Company does not lend
funds for the type of transactions defined as "highly leveraged" by bank
regulatory authorities or for foreign loans. Our Company does not have any
interest-earning assets which would have been included in nonaccrual, past due,
or restructured loans if such assets were loans.
FINANCIAL CONDITION
Total assets increased $25,606,000 or 2.9% to $901,202,000 at March 31,
2004 compared to $875,596,000 at December 31, 2003. Total liabilities increased
$23,790,000 or 3.0% to $811,603,000. Stockholders' equity increased $1,816,000
or 2.1% to $89,599,000. The increase in both total assets and total liabilities
is primarily the result of our Company's issuance of subordinated debentures and
the subsequent investment of excess funds not used to pay down debt.
Loans decreased $225,000 to $583,694,000 at March 31, 2004 compared to
$583,919,000 at December 31, 2003. Commercial loans increased $4,649,000; real
estate construction loans decreased $2,326,000; real estate mortgage loans
increased $549,000; and consumer loans decreased $3,098,000. The increase in
commercial loans represents continued strong loan demand, especially in the
Jefferson City market. The decrease in real estate construction loans represents
the payoff of several commercial real estate construction loans. The decrease in
consumer loans is primarily represented by the payoff of one very large consumer
credit.
Investment in debt and equity securities classified as available-for-sale
increased $28,141,000 or 14.9% to $217,097,000 at March 31, 2004 compared to
$188,956,000 at December 31, 2003. Investments classified as available-for-sale
are carried at fair value. During 2004 the market valuation account was
increased $420,000 to $2,494,000 to reflect the fair value
25
of available-for-sale investments at March 31, 2004 and the net after tax
decrease resulting from the change in the market valuation adjustment of
$273,000 increased the stockholders' equity component to $1,621,000 at March 31,
2004.
The increase in investments in debt and equity securities is primarily the
result of investing excess proceeds from the issuance of trust preferred
securities and the purchase of securities to cover additional pledging
requirements.
At December 31, 2003 the market valuation account for the
available-for-sale investments of $2,074,000 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 $1,348,000 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 $2,865,000 or 5.0% to $54,180,000 at March 31,
2004 compared to $57,045,000 at December 31, 2003. Further discussion of this
decrease may be found in the section of this report titled "Sources and Uses of
Funds".
Premises and equipment increased $711,000 or 4.0% to $18,486,000 at March
31, 2004 compared to $17,775,000 at December 31, 2003. The increase reflects
purchases of premises and equipment of $1,086,000 offset by depreciation expense
of $374,000. The purchase of premises and equipment primarily reflects purchases
of land for two future branches.
Total deposits increased $14,733,000 or 2.2% to $679,995,000 at March 31,
2004 compared to $665,262,000 at December 31, 2003. This increase primarily
reflects increased public funds.
Federal funds purchased and securities sold under agreements to repurchase
increased $1,374,000 or 1.9% to $74,357,000 at March 31, 2004 compared to
$72,983,000 at December 31, 2003. This increase is due primarily to higher
levels of public fund balances at March 31, 2004.
Other borrowed money increased $7,430,000 or 17.8% to $49,060,000 at March
31, 2004 compared to $41,630,000 at December 31, 2003. This reflects the
issuance of $25,774,000 of subordinated debentures which was partially used to
repay $11,000,000 of other debt. An additional $7,000,000 of debt was repaid
from cash on hand.
The increase in stockholders' equity reflects net income of $2,294,000
less dividends declared of $754,000 and $273,000 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, 2003.
INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization of our Company's
amortized intangible assets for the periods ended March 31, 2004 and December
31, 2003 are as follows:
26
MARCH 31, 2004 DECEMBER 31, 2003
---------------------------------------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
--------------- ------------ -------------- ---------------
Amortized intangible asset:
Core deposit intangible $ 2,265,000 (1,305,534) 2,265,000 (1,251,756)1
=============== ============ ============== ============
The aggregate amortization expense of intangible assets subject to
amortization for the three months periods ended March 31, 2004 and 2003 is as
follows:
THREE MONTHS ENDED
MARCH 31,
-----------------------
2004 2003
---------- ------
Aggregate amortization expense $ 53,778 74,670
========== ======
The estimated amortization expense for the next five years is as follows:
Estimated amortization expense:
For year ended 2004 $ 215,112
For year ended 2005 215,112
For year ended 2006 215,112
For year ended 2007 135,420
For year ended 2008 66,432
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,
-----------------------------
2004 2003
----------- ------------
Balance, beginning of period $ 1,591,289 1,515,848
Originated mortgage servicing rights 126,042 325,912
Amortization (107,341) (99,287)
----------- -----------
Balance, end of period $ 1,609,990 1,742,473
=========== ===========
The estimated amortization expense for the next five years is as follows:
Estimated amortization expense:
27
For year ended 2004 $ 429,300
For year ended 2005 429,300
For year ended 2006 429,300
For year ended 2007 429,300
For year ended 2008 429,300
Our Company's goodwill associated with the purchase of subsidiaries by
reporting segments for the periods ended March 31, 2004 and December 31, 2003 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 16,701,762 4,112,876 25,196,736
========== ========== ============ ==========
DEFINED BENEFIT RETIREMENT PLAN
Our Company provides a noncontributory defined benefit pension plan in
which all full-time employees become participants upon the later of the
completion of one year of qualified service or the attainment of age 21, and in
which they continue to participate as long as they continue to be full-time
employees, until their retirement, death, or termination of employment prior to
normal retirement date. The normal retirement benefits provided under the plan
vary depending upon the participant's rate of compensation, length of
employment, and social security benefits. Retirement benefits are payable for
life, but not less than ten years. Plan assets consist of U.S. Treasury and
government agency securities, corporate common stocks and bonds, real estate
mortgages, and demand deposits. Disclosure information is based on a measurement
date of November 1 for the corresponding year.
The following table represents the components of the net periodic pension
costs for the three-month periods ended March 31, 2004 and 2003:
ESTIMATED ACTUAL
2004 2003
---------- ---------
Service cost - benefits earned during the year $ 292,059 $ 257,103
Interest cost on projected benefit obligations 242,638 231,253
Expected return on plan assets (374,910) (373,976)
Net amortization and deferral (26,632) (35,512)
Recognized net gains (6,695) (29,916)
--------- ---------
Net periodic pension cost - annual $ 126,460 $ 48,952
========= =========
Net periodic pension cost - three months
ended March 31 $ 31,615 $ 12,238
========= =========
Our Company does not expect to make any contribution to the plan during
2004.
28
LIQUIDITY
The role of liquidity management is to ensure funds are available to meet
depositors' withdrawal and borrowers' credit demands while at the same time
maximizing profitability. This is accomplished by balancing changes in demand
for funds with changes in the supply of those funds. Liquidity to meet the
demands is provided by maturing assets, short-term liquid assets that can be
converted to cash and the ability to attract funds from external sources,
principally depositors. Due to the nature of services offered by our Company,
management prefers to focus on transaction accounts and full service
relationships with customers. Management believes it has the ability to increase
deposits at any time by offering rates slightly higher than the market rate.
Our Banks' Asset/Liability Committees (ALCO), primarily made up of senior
management, have direct oversight responsibility for our Company's liquidity
position and profile. A combination of daily, weekly and monthly reports
provided to management detail the following: internal liquidity metrics,
composition and level of the liquid asset portfolio, timing differences in
short-term cash flow obligations, available pricing and market access to the
financial markets for capital and exposure to contingent draws on our Company's
liquidity.
Our Company has a number of sources of funds to meet liquidity needs on a
daily basis. The deposit base, consisting of consumer and commercial deposits
and large dollar denomination ($100,000 and over) certificates of deposit, is a
source of funds. Our Company has an insignificant amount of deposits on which
the rate paid exceeded the market rate by more that 50 basis points when the
account was established.
Other sources of funds available to meet daily needs include the sales of
securities under agreements to repurchase and funds made available under a
treasury tax and loan note agreement with the federal government. Also, the
Banks are members of the Federal Home Loan Bank of Des Moines (FHLB). As members
of the FHLB, the Banks have access to credit products of the FHLB. At March 31,
2004, the amounts of available credit from the FHLB totaled $90,103,000. As of
March 31, 2004, the Banks had $23,286,000 in outstanding borrowings with the
FHLB. The Banks have federal funds purchased lines with correspondent banks
totaling $40,000,000 and agreements with unaffiliated banks to sell and
repurchase securities of $10,000,000. Finally, our Company has $20,000,000 line
of credit with a correspondent bank. This line of credit had no balance in use
as of March 31, 2004.
SOURCES AND USES OF FUNDS
For the periods ended March 31, 2004 and 2003, net cash provided by
operating activities was $3,563,000 and $4,246,000, respectively. Approximately
$471,000 of the decrease in net cash provided by operating activities is
represented by lower gains on sale of mortgage loans.
Net cash used in investing activities was $28,999,000 in 2004 versus
$15,193,000 in 2003. In 2004 our Company's investment portfolio increased by
approximately $28,070,000 compared to a $6,664,000 decrease for the same period
in 2003. Much of this increase was the result of investing the excess proceeds
from the subordinated debentures issued during the first quarter of 2004. In
2003 our Company's loan portfolio increased approximately $21,908,000 compared
to a $19,000 decrease for the same period in 2004.
29
Net cash provided by financing activities was $22,572,000 in 2004 versus
$11,366,000 in 2003. Increases in deposits accounted for approximately
$14,733,000 of the cash provided by financing activities in 2004 and
approximately $13,513,000 in 2003. An additional $7,430,000 of cash was provided
by additional borrowed funds in 2004.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46 (FIN 46R) (revised December 2003), Consolidation of
Variable Interest Entities, which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an entity through
means other than voting rights and accordingly should consolidate the entity.
FIN 46R is intended to achieve more consistent application of consolidation
policies to variable interest entities and, thus 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 should provide more complete
information about the resources, obligations, risks and opportunities of the
consolidated enterprise. For public companies, FIN 46R is applicable to all
special-purpose entities (SPEs) no later than the end of the first reporting
period ending after December 15, 2003, and immediately to all entities created
after January 31, 2003. The effective dates of FIN 46R vary depending on the
type of reporting enterprise and the type of entity that the enterprise is
involved with.
The only SPE that our Company has in place is a limited purpose trust that
issues trust preferred securities. This limited purpose trust issues preferred
securities to outside investors and uses the proceeds of the issuance to
purchase, from our Company, an equivalent amount of junior subordinated
debentures having stated maturities. The debentures are the only assets of the
limited purpose trust. When our Company makes its payments of interest on the
debentures, the limited purpose trust distributes cash to holders of the trust
preferred securities. The trust preferred securities must be redeemed upon
maturity of the debentures. Under the requirements of FIN 46R, our Company must
deconsolidate the limited purpose trust. This has been reflected in our
Company's consolidated financial statements.
SFAS 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, was issued in May 2003. This
Statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The Statement also includes required disclosures for financial
instruments within its scope. For our Company, the Statement was effective for
instruments entered into or modified after May 31, 2003 and otherwise will be
effective as of January 1, 2004, except for mandatorily redeemable financial
instruments. For certain mandatorily redeemable financial instruments, the
Statement will be effective for our Company on January 1, 2005. The effective
date has been deferred indefinitely for certain other types of manditorily
redeemable financial instruments. Our Company currently does not have any
financial instruments that are within the scope of SFAS 150.
In March 2004, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 105 (SAB 105), Application of Accounting Principles to Loan
Commitments. SAB 105
30
provides guidance regarding loan commitments accounted for as derivative
instruments under FASB Statement No. 133. SAB 105 specifically addresses
commitments to sell loans after funding and the fact that the commitment should
be accounted for as a derivative instrument and measured at fair value. SAB 105
is required to be applied to loan commitments accounted for as derivatives that
are entered into after March 31, 2004. Management is currently evaluating the
effects of SAB 105 and does not expect it to have a material impact on our
Company's consolidated financial statements.
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, 2004, the rate shock
scenario models indicated that annual net interest income could decrease or
increase by as much as 7% 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 6% at December 31, 2003. However there are no assurances that the
change will not be more or less than this estimate. Management further believes
this is an acceptable level of risk.
ITEM 4. CONTROLS AND PROCEDURES
Our Company's management has evaluated, with the participation of our
principal executive and principal financial officers, the effectiveness of our
disclosure controls and procedures as of March 31, 2004. Based upon and as of
the date of that evaluation, our principal executive and principal financial
officers concluded that our disclosure controls and procedures were effective to
ensure that information required to be disclosed in the reports we file and
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported as and when required. It should be noted that any system
of disclosure controls and procedures, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system are met. In addition, the design of any system of disclosure controls and
procedures is based in part upon assumptions about the likelihood of future
events. Because of these and other inherent limitations of any such system,
there can be no assurance that any design will always succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.
There has been no change in our company's internal control over financial
reporting that occurred during the fiscal quarter ended March 31, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases
of Equity 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 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
2002
31.2 Certificate of the Chief Financial Officer of the
Company pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certificate of the Chief Executive Officer of the
Company pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32
32.2 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.
Form 8-K dated January 30, 2004, filed with the SEC on February 4,
2004 with respect to Items 5 and 7 to report our issuance of a press
release dated January 30, 2004 announcing our 2003 earnings. The
press release was filed as an exhibit to the Form 8-K.
Form 8-K dated February 11, 2004, filed with the SEC on February 13,
2004 with respect to Items 5 and 7 to report our issuance of a press
release dated February 11, 2004 announcing the establishment of a de
novo branch in Lee's Summit, Missouri. The press release was filed
as an exhibit to the Form 8-K.
Form 8-K dated February 13, 2004, filed with the SEC on February 13,
2004 with respect to Items 5 and 7 to report our issuance of a press
release dated February 13, 2004 announcing the establishment of a de
novo branch in Branson, Missouri. The press release was filed as an
exhibit to the Form 8-K.
Form 8-K dated April 1, 2004, filed with the SEC on April 4, 2004
with respect to Items 5 and 7 to report our issuance of a press
release dated April 1, 2004 announcing placement of a $25 million
trust preferred offering. The press release was filed as an exhibit
to the Form 8-K.
33
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 10, 2004 James E. Smith, Chairman of the Board
and Chief Executive Officer (Principal
Executive Officer)
By /s/ Richard G. Rose
-----------------------------------
May 10, 2004 Richard G. Rose, Treasurer (Principal Financial
Officer and Principal Accounting Officer)
34
EXCHANGE NATIONAL BANCSHARES, INC.
INDEX TO EXHIBITS
March 31, 2004 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 2002 36
31.2 Certificate of the Chief Financial Officer of the Company pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 37
32.1 Certificate of the Chief Executive Officer of the Company pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 38
32.2 Certificate of the Chief Financial Officer of the Company pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 39
** Incorporated by reference.
35