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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, 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 (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
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)
N/A
(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 1, 2004, the registrant had 4,169,847 shares of common stock, par
value $1.00 per share, outstanding.
1
Page 1 of 46 pages
Index to Exhibits located on page 42
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
ASSETS
Loans:
Commercial $ 229,041,682 $ 212,440,053
Real estate - construction 49,285,941 46,415,577
Real estate - mortgage 281,178,894 283,367,122
Consumer 37,891,593 41,696,414
------------- -----------------
597,398,110 583,919,166
Less allowance for loan losses 8,641,498 8,267,380
------------- -----------------
Loans, net 588,756,612 575,651,786
Investments in available for sale debt
and equity securities, at fair value 212,088,272 188,955,832
Federal funds sold 23,534,555 29,227,798
Cash due from banks 20,559,435 27,817,117
Premises and equipment 19,279,771 17,774,633
Accrued interest receivable 5,232,662 5,107,980
Goodwill 25,196,736 25,196,736
Intangible assets 905,688 1,013,244
Other assets 5,935,973 4,850,866
------------- -----------------
Total assets $ 901,489,704 $ 875,595,992
============= =================
Continued on next page
2
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Demand deposits $ 91,986,710 $ 89,214,182
Time deposits 584,070,104 576,047,783
------------- -----------------
Total deposits 676,056,814 665,261,965
Federal funds purchased and securities
sold under agreements to repurchase 62,983,694 72,983,423
Interest-bearing demand notes to U.S. Treasury 1,756,795 688,978
Other borrowed money 63,864,626 41,629,893
Accrued interest payable 1,484,774 1,650,292
Other liabilities 6,444,392 5,598,697
------------- -----------------
Total liabilities 812,591,095 787,813,248
Stockholders' equity:
Common stock - $1 par value; 15,000,000 shares
authorized; 4,298,353 issued 4,298,353 4,298,353
Surplus 22,014,894 21,999,714
Retained earnings 65,710,729 62,789,107
Accumulated other comprehensive income (loss),
net of tax (472,858) 1,348,079
Treasury stock, 128,506 shares at cost (2,652,509) (2,652,509)
------------- -----------------
Total stockholders' equity 88,898,609 87,782,744
------------- -----------------
Total liabilities and stockholders' equity $ 901,489,704 $ 875,595,992
============= =================
See accompanying notes to unaudited condensed consolidated financial statements.
3
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Interest Income $ 9,984,344 $ 9,552,528 $19,746,197 $18,984,175
Interest Expense 3,181,269 3,253,036 6,135,662 6,535,511
----------- ----------- ----------- -----------
Net interest income 6,803,075 6,299,492 13,610,535 12,448,664
Provision for loan losses 210,500 235,500 446,000 471,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 6,592,575 6,063,992 13,164,535 11,977,664
Noninterest income 1,550,814 1,465,175 2,997,469 3,437,178
Noninterest expense 4,990,709 4,584,194 9,662,972 9,084,534
----------- ----------- ----------- -----------
Income before income taxes 3,152,680 2,944,973 6,499,032 6,330,308
Income taxes 1,023,712 902,353 2,076,265 1,932,451
----------- ----------- ----------- -----------
Net income $ 2,128,968 $ 2,042,620 $ 4,422,767 $ 4,397,857
=========== =========== =========== ===========
Basic earning per share $ 0.51 $ 0.49 $ 1.06 $ 1.05
Diluted earnings per share $ 0.51 $ 0.49 $ 1.05 $ 1.05
Weighed average shares of common stock outstanding
Basic 4,169,847 4,169,681 4,169,847 4,169,011
Diluted 4,203,766 4,209,858 4,207,944 4,201,890
Dividends per share:
Declared $ 0.18 $ 0.18 $ 0.18 $ 0.31
Paid $ 0.18 $ 0.13 $ 0.18 $ 0.27
4
See accompanying notes to unaudited condensed consolidated financial statements.
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
------------------------------
2004 2003
------------- -------------
Cash flow from operating activities:
Net income $ 4,422,767 $ 4,397,857
Adjustments to reconcile net income to net cash
cash provided by operating activities:
Provision for loan losses 446,000 471,000
Depreciation expense 762,243 851,666
Net amortization of debt securities premiums and discounts 747,649 646,362
Amortization of intangible assets 107,556 149,340
(Increase) decrease in accrued interest receivable (124,682) 171,769
Decrease in other assets 92,613 573,889
Decrease in accrued interest payable (165,518) (221,585)
Increase (decrease) in other liabilities 845,695 (559,663)
Gain on sales and calls of debt securities (2,537) (53,235)
Origination of mortgage loans for sale (27,807,405) (75,180,679)
Proceeds from the sale of mortgage loans held for sale 28,269,706 76,791,207
Gain on sale of mortgage loans (462,301) (1,610,528)
Gain on disposition of premises and equipment - (3,921)
Other, net 15,180 (179,940)
------------- -------------
Net cash provided by operating activities 7,146,966 6,243,539
Cash flow from investing activities:
Net increase in loans (13,970,030) (41,467,211)
Purchase of available-for-sale debt securities (146,499,286) (123,355,972)
Proceeds from maturities of available-for-sale debt securities 95,822,867 83,832,326
Proceeds from calls of available-for-sale debt securities 23,747,425 37,740,000
Proceeds from sales of available-for-sale debt securities 250,000 1,553,235
Purchase of premises and equipment (2,267,381) (225,352)
Proceeds from dispositions of premises and equipment - 5,000
Proceeds from sales of other real estate owned and repossessions 221,989 504,799
Purchase of branch, net of cash and cash equivalents acquired - (786,017)
------------- -------------
Net cash used in investing activities (42,694,416) (42,199,192)
------------- -------------
Continued on next page
5
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
----------------------------
2004 2003
------------ ------------
Cash flow from financing activities:
Net increase in demand deposits 2,772,528 2,847,125
Net increase in interest-bearing transaction accounts 24,815,133 6,297,780
Net (decrease) increase in time deposits (16,792,812) 15,149,315
Net decrease in federal funds purchased and securities sold
under agreements to repurchase (9,999,729) (1,546,340)
Net increase (decrease) in interest-bearing demand notes to U.S. Treasury 1,067,817 (42,515)
Proceeds from subordinated debentures 25,774,000 -
Proceeds from Federal Home Loan Bank borrowings 15,000,000 1,000,000
Repayment of Federal Home Loan Bank borrowings (588,699) (385,033)
Repayment of other borrowed money (17,950,568) (1,000,000)
Cash dividends paid (1,501,145) (1,111,275)
Proceeds from exercise of stock options - 28,251
------------ ------------
Net cash provided by financing activities 22,596,525 21,237,308
Net decrease in cash and cash equivalents (12,950,925) (14,718,345)
Cash and cash equivalents, beginning of period 57,044,915 77,411,243
------------ ------------
Cash and cash equivalents, end of period $ 44,093,990 $ 62,692,898
============ ============
Supplemental disclosure of cash flow information -
Cash paid during period for:
Interest $ 6,301,180 $ 6,695,270
Income taxes 3,035,000 2,892,921
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, 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 June 30, 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 States 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 June 30, 2004 and
December 31, 2003 and the consolidated statements of earnings for the three and
six month periods ended June 30, 2004 and 2003 and cash flows for the six months
ended June 30, 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 and six-month periods
ended June 30, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income, basic and diluted $2,128,968 $2,042,620 $4,422,767 $4,397,857
========== ========== ========== ==========
Average shares outstanding 4,169,847 4,169,681 4,169,847 4,169,011
Effect of dilutive stock options 33,919 40,177 38,097 32,879
---------- ---------- ---------- ----------
Average shares outstanding
including dilutive stock options 4,203,766 4,209,858 4,207,944 4,201,890
Basic earning per share $ 0.51 $ 0.49 $ 1.06 $ 1.05
Diluted earnings per share $ 0.51 $ 0.49 $ 1.05 $ 1.05
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, our 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.
8
The following table illustrates, for the three-month and
six-month periods ended June 30, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net income:
As reported $ 2,128,968 $ 2,042,620 $ 4,422,767 $ 4,397,857
Deduct total stock-based employee
compensation expense determined
under fair-value-based method for
all awards, net of tax (33,797) (23,419) (67,592) (46,836)
------------- ------------- ------------- -------------
Pro forma net income $ 2,095,171 $ 2,019,201 $ 4,355,175 $ 4,351,021
============= ============= ============= =============
Pro forma earnings per common share:
As reported basic $ 0.51 $ 0.49 $ 1.06 $ 1.05
Pro forma basic 0.50 0.48 1.04 1.04
As reported diluted 0.51 0.49 1.05 1.05
Pro forma diluted 0.50 0.48 1.03 1.04
9
COMPREHENSIVE INCOME
For the three-month and six-month periods ended June 30, 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 and six-month periods ended June 30,
2004 and 2003 is summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income $ 2,128,968 $ 2,042,620 $ 4,422,767 $ 4,397,857
Other comprehensive income (loss):
Net unrealized holding gains (losses) on
investments in debt and equity securities
available-for-sale, net of taxes (2,094,118) 359,113 (1,819,287) 414,354
Adjustment for net securities gains realized in net
income, net of applicable income taxes - - (1,649) (35,135)
----------- ----------- ----------- -----------
Total other comprehensive income (loss) (2,094,118) 359,113 (1,820,936) 379,219
----------- ----------- ----------- -----------
Comprehensive income $ 34,850 $ 2,401,733 $ 2,601,831 $ 4,777,076
=========== =========== =========== ===========
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 are 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.
10
JUNE 30, 2004
------------------------------------------------------------------------------------
THE EXCHANGE CITIZENS UNION
NATIONAL BANK OF STATE BANK AND OSAGE VALLEY CORPORATE AND
JEFFERSON CITY TRUST OF CLINTON BANK OF WARSAW OTHER TOTAL
---------------- ---------------- -------------- ------------- ------------
Balance sheet information
Loans, net of allowance
for loan losses $ 361,425,765 $ 180,948,722 $ 46,382,125 $ - $588,756,612
Debt and equity securities 132,719,260 45,205,702 33,389,310 774,000 212,088,272
Goodwill 4,382,098 16,701,762 4,112,876 - 25,196,736
Intangible assets - 905,688 - - 905,688
Total assets 536,648,593 274,405,573 89,271,962 1,163,576 901,489,704
Deposits 395,934,963 222,016,767 74,237,688 (16,132,604) 676,056,814
Stockholders' equity $ 49,494,511 $ 38,491,788 $ 9,937,457 $ (9,025,147) $ 88,898,609
================ ================ ============== ============= ============
DECEMBER 31, 2003
------------------------------------------------------------------------------------
THE EXCHANGE CITIZENS UNION
NATIONAL BANK OF STATE BANK AND OSAGE VALLEY CORPORATE AND
JEFFERSON CITY TRUST OF CLINTON BANK OF WARSAW 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 JUNE 30, 2004
------------------------------------------------------------------------------------
THE EXCHANGE
NATIONAL BANK CITIZENS UNION
OF JEFFERSON STATE BANK AND OSAGE VALLEY CORPORATE AND
CITY TRUST OF CLINTON BANK OF WARSAW OTHER TOTAL
---------------- ---------------- -------------- ------------- ------------
Statement of earnings:
Total interest income $ 5,684,862 $ 3,242,855 $ 1,059,871 $ (3,244) $ 9,984,344
Total interest expense 1,760,980 819,826 393,509 206,954 3,181,269
---------------- ---------------- -------------- ------------- ------------
Net interest income 3,923,882 2,423,029 666,362 (210,198) 6,803,075
Provision for loan losses 125,000 75,000 10,500 - 210,500
Noninterest income 1,050,441 421,748 101,044 (22,419) 1,550,814
Noninterest expense 2,795,712 1,654,828 428,369 111,800 4,990,709
Income taxes 668,400 380,973 94,839 (120,500) 1,023,712
---------------- ---------------- -------------- ------------- ------------
Net income (loss) $ 1,385,211 $ 733,976 $ 233,698 $ (223,917) $ 2,128,968
================ ================ ============== ============= ============
THREE MONTHS ENDED JUNE 30, 2003
------------------------------------------------------------------------------------
THE EXCHANGE CITIZENS UNION
NATIONAL BANK OF STATE BANK AND OSAGE VALLEY CORPORATE AND
JEFFERSON CITY TRUST OF CLINTON BANK OF WARSAW OTHER TOTAL
---------------- ---------------- -------------- ------------- ------------
Statement of earnings:
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
================ ================ ============== ============= ============
12
SIX MONTHS ENDED JUNE 30, 2004
------------------------------------------------------------------------------------
THE EXCHANGE CITIZENS UNION
NATIONAL BANK OF STATE BANK AND OSAGE VALLEY CORPORATE AND
JEFFERSON CITY TRUST OF CLINTON BANK OF WARSAW OTHER TOTAL
---------------- ---------------- -------------- ------------- ------------
Statement of earnings:
Total interest income $ 11,251,238 $ 6,379,786 $ 2,139,357 $ (24,184) $ 19,746,197
Total interest expense 3,365,165 1,687,582 802,295 280,620 6,135,662
---------------- ---------------- -------------- ------------- ------------
Net interest income 7,886,073 4,692,204 1,337,062 (304,804) 13,610,535
Provision for loan losses 275,000 150,000 21,000 - 446,000
Noninterest income 2,024,497 824,908 191,594 (43,530) 2,997,469
Noninterest expense 5,489,063 3,175,081 846,886 151,942 9,662,972
Income taxes 1,344,050 715,842 191,473 (175,100) 2,076,265
---------------- ---------------- -------------- ------------- ------------
Net income (loss) $ 2,802,457 $ 1,476,189 $ 469,297 $ (325,176) $ 4,422,767
================ ================ ============== ============= ============
SIX MONTHS ENDED JUNE 30, 2003
------------------------------------------------------------------------------------
THE EXCHANGE CITIZENS UNION
NATIONAL BANK OF STATE BANK AND OSAGE VALLEY CORPORATE AND
JEFFERSON CITY TRUST OF CLINTON BANK OF WARSAW OTHER TOTAL
---------------- ---------------- -------------- ------------- ------------
Statement of earnings:
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
================ ================ ============== ============= ============
13
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.
14
OVERVIEW
This overview of management's discussion and analysis highlights selected
information in this report 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 report. 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.
15
MATERIAL CHALLENGES AND RISKS: Our Company may experience difficulties
managing growth and 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 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 six 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, Springfield, Branson and Lee's
Summit, 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 refinancing.
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. Our Company also derives income from trust,
brokerage, credit card and mortgage banking activities and service charge
income.
16
Our Company has prepared the consolidated financial statements 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.
RESULTS OF OPERATIONS
Net income for the three months ended June 30, 2004 of $2,129,000
increased $86,000 when compared to the second quarter of 2003. Diluted earnings
per common share for the second quarter of 2004 of $0.51 increased 2 cents or
4.1% when compared to the second quarter of 2003. Net income for the six months
ended June 30, 2004 of $4,423,000 increased $25,000 when compared to the six
months ended June 30, 2003. Diluted earnings per common share for both the six
months ended June 30, 2004 and 2003 was $1.05.
17
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2004 2003 2004 2003
------- ------- ------- -------
Interest income $ 9,984 $ 9,553 $19,746 $18,984
Fully taxable equivalent (FTE) adjustment 155 161 316 348
------- ------- ------- -------
Interest income (FTE basis) 10,139 9,714 20,062 19,332
Interest expense 3,181 3,253 6,136 6,535
------- ------- ------- -------
Net Interest income (FTE basis) 6,958 6,461 13,926 12,797
Provision for loan losses 210 236 446 471
------- ------- ------- -------
Net interest income after provision for
loan losses (FTE basis) 6,748 6,225 13,480 12,326
Noninterest income 1,551 1,465 2,997 3,437
Noninterest expense 4,991 4,584 9,663 9,085
------- ------- ------- -------
Earnings before income taxes (FTE basis) 3,308 3,106 6,814 6,678
------- ------- ------- -------
Income taxes 1,024 902 2,076 1,932
FTE adjustment 155 161 316 348
------- ------- ------- -------
Income taxes (FTE basis) 1,179 1,063 2,392 2,280
------- ------- ------- -------
Net Income $ 2,129 $ 2,043 $ 4,422 $ 4,398
======= ======= ======= =======
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
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 $497,000 or 7.7% to $6,958,000 or 3.32% of
average earning assets for the second quarter of 2004 compared to $6,461,000 or
3.46% of average earning assets for the same period of 2003. The provision for
loan losses was $210,000 and $236,000 for the three months ended June 30, 2004
and 2003 respectively.
18
Noninterest income and noninterest expense for the three-month periods
ended June 30, 2004 and 2003 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED
JUNE 30, INCREASE (DECREASE)
------------------ -------------------
2004 2003 AMOUNT %
------- ------- ------- ------
NONINTEREST INCOME
Service charges on deposit accounts $ 780 $ 686 $ 94 13.7%
Trust department income 160 143 17 11.9
Brokerage income 21 45 (24) (53.3)
Mortgage loan servicing fees 112 (485) 597 123.1
Gain on sale of mortgage loans 242 919 (677) (73.7)
Gain on disposition of premises and equipment - 5 (5) (100.0)
Credit card fees 48 37 11 29.7
Other 188 115 73 63.5
------- ------- ------- ------
$ 1,551 $ 1,465 $ 86 5.9%
======= ======= ======= ======
NONINTEREST EXPENSE
Salaries and employee benefits $ 2,795 $ 2,476 $ 319 12.9%
Occupancy expense 285 268 17 6.3
Furniture and equipment expense 478 536 (58) (10.8)
FDIC insurance assessment 23 24 (1) (4.2)
Advertising and promotion 160 123 37 30.1
Postage, printing and supplies 212 180 32 17.8
Legal, examination, and professional fees 268 205 63 30.7
Credit card expenses 24 23 1 4.3
Credit investigation and loan collection expenses 51 34 17 50.0
Amortization of intangible assets 54 75 (21) (28.0)
Other 641 640 1 0.2
------- ------- ------- ------
$ 4,991 $ 4,584 $ 407 8.9%
======= ======= ======= ======
19
Noninterest income increased $86,000 or 5.9% to $1,551,000 for the second
quarter of 2004 compared to $1,465,000 for the same period of 2003. The $94,000
or 13.7% 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. The $24,000 or 53.3% decrease in brokerage income reflects lower sales
volume during the second quarter of 2004 compared to 2003. The $597,000 or
123.1% increase in mortgage loan servicing fees reflects a $556,000 impairment
charge to mortgage servicing rights taken during the second quarter of 2003.
There was no impairment to the carrying value of mortgage servicing rights in
2004. Gain on sales of mortgage loans decreased $677,000 or 73.7% due to a
decrease in volume of loans originated and sold to the secondary market from
approximately $44,208,000 in the second quarter of 2003 to approximately
$14,775,000 for the second quarter of 2004. The $73,000 or 63.5% increase in
other noninterest income reflects a refund received from a vendor for prior
periods' overcharges.
Noninterest expense increased $407,000 or 8.9% to $4,991,000 for the
second quarter of 2004 compared to $4,584,000 for the second quarter of 2003.
Salaries and benefits increased $319,000 or 12.9%. Approximately $200,000 of
this increase reflects salaries and benefits related to an additional branch
purchased in June of 2003 and two new branches opened in 2004. The balance of
the increase reflects normal salary increases, additional hires and higher
health insurance premiums. The $58,000 or 10.8% 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 $37,000 or
30.1% increase in advertising and promotion was the result of design and
production costs associated with special product promotions initiated during the
second quarter of 2004. The $32,000 or 17.8% increase in postage, printing and
supplies reflects purchases of various forms and disclosures. The $63,000 or
30.7% increase in legal, examination, and professional fees represents increased
costs associated with Sarbanes-Oxley compliance, benefit plan consulting, and
strategic planning. The $17,000 or 50.0% increase in credit investigation and
loan collection expense reflects costs associated with increased home equity
loan applications.
Income taxes as a percentage of earnings before income taxes as reported
in the condensed consolidated financial statements were 32.5% for the second
quarter of 2004 compared to 30.6% for the second quarter of 2003. The increase
in the effective tax rate reflects higher state taxable income than in prior
periods.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Net interest income on a fully taxable equivalent basis increased $1,129,000 or
8.8% to $13,926,000 or 3.38% of average earning assets for the first six months
of 2004 compared to $12,797,000 or 3.49% of average earning assets for the same
period of 2003. The provision for loan losses was $446,000 and $471,000 for the
periods ended June 30, 2004 and 2003 respectively.
20
Noninterest income and noninterest expense for the six-month periods ended
June 30, 2004 and 2003 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30, INCREASE (DECREASE)
------------------ -------------------
2004 2003 AMOUNT %
------- ------- ------- ------
NONINTEREST INCOME
Service charges on deposit accounts $ 1,520 $ 1,307 $ 213 16.3%
Trust department income 371 476 (105) (22.1)
Brokerage income 41 58 (17) (29.3)
Mortgage loan servicing fees 214 (372) 586 157.5
Net gains on sales and calls of debt securities 3 53 (50) (94.3)
Gain on sale of mortgage loans 462 1,611 (1,149) (71.3)
Gain on disposition of premises and equipment - 5 (5) (100.0)
Credit card fees 83 74 9 12.2
Other 303 225 78 34.7
------- ------- ------- ------
$ 2,997 $ 3,437 $ (440) (12.8)%
======= ======= ======= ======
NONINTEREST EXPENSE
Salaries and employee benefits $ 5,576 $ 4,931 $ 645 13.1%
Occupancy expense 551 529 22 4.2
Furniture and equipment expense 943 1,062 (119) (11.2)
FDIC insurance assessment 50 48 2 4.2
Advertising and promotion 242 256 (14) (5.5)
Postage, printing and supplies 387 386 1 0.3
Legal, examination, and professional fees 432 385 47 12.2
Credit card expenses 50 47 3 6.4
Credit investigation and loan collection expenses 74 58 16 27.6
Amortization of intangible assets 108 149 (41) (27.5)
Other 1,250 1,234 16 1.3
------- ------- ------- ------
$ 9,663 $ 9,085 $ 578 6.4%
======= ======= ======= ======
21
Noninterest income decreased $440,000 or 12.8% to $2,997,000 for the first
six months of 2004 compared to $3,437,000 for the same period of 2003. The
$213,000 or 16.3% 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 $105,000 or 22.1% due
primarily to the collection of more distribution fees during the the first six
months of 2003 compared to the first six months of 2004. Brokerage income
decreased $17,000 or 29.3% due to lower sales volumes in 2004 compared to 2003.
The $586,000 or 157.5% increase in mortgage loan servicing fees reflects a
$556,000 impairment charge to mortgage servicing rights taken during 2003. There
was no impairment to the carrying value of mortgage servicing rights in 2004.
The $50,000 or 94.3% decrease in gains on sales and call of debt securities
represents a decrease in the volume of securities sold in 2004 versus 2003. Gain
on sales of mortgage loans decreased $1,149,000 or 71.3% due to a decrease in
volume of loans originated and sold to the secondary market from approximately
$75,181,000 in the first six months of 2003 to approximately $27,807,000 for the
first six months of 2004. The $78,000 or 34.7% increase in other noninterest
income reflects a refund received from a vendor for prior periods' overcharges.
Noninterest expense increased $578,000 or 6.4% to $9,663,000 for the first
six months of 2004 compared to $9,085,000 for the same period of 2003. Salaries
and benefits increased $645,000 or 13.1%. Approximately $323,000 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 $119,000
or 11.2% 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 $47,000 or 12.2% increase in legal, examination, and
professional fees represents increased costs associated with Sarbanes-Oxley
compliance, benefit plan consulting, and strategic planning. Amortization of
intangible assets decreased $41,000 or 27.5% due to a decrease in the amount of
intangible assets requiring amortization.
Income taxes as a percentage of earnings before income taxes as reported
in the condensed consolidated financial statements were 31.9% for the first six
months of 2004 compared to 30.5% for the same period in 2003. The increase in
the effective tax rate reflects higher state taxable income than in prior
periods.
NET INTEREST INCOME
Fully taxable equivalent net interest income increased $497,000 or 7.7%
and $1,129,000 or 8.8% respectively for the three and six month periods ended
June 30, 2004 compared to the same periods in 2003. The increase in net interest
income for the periods ended June 30, 2004 compared to the periods ended June
30, 2003 was the result of increased earning assets.
22
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, 2004 and 2003.
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2004 JUNE 30, 2003
---------------------------------------- ------------------------------
RATE INTEREST RATE
AVERAGE INTEREST INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE(1) PAID(1) BALANCE EXPENSE(1) PAID(1)
-------- ---------------- ------- -------- ---------- -------
ASSETS
Loans:(2)
Commercial $224,742 $ 3,124 5.58% $163,266 $ 2,427 5.96%
Real estate 329,415 4,605 5.61 311,765 4,641 5.97
Consumer 37,164 768 8.29 42,120 876 8.34
Investment securities:(3)
U.S Treasury and
U.S. Gov't Agencies 188,065 1,058 2.26 147,400 1,085 2.95
State and municipal 30,783 459 5.98 30,994 503 6.51
Other 5,227 40 3.07 5,107 48 3.77
Federal funds sold 22,531 82 1.46 45,986 125 1.09
Interest-bearing deposits 1,832 3 0.66 3,095 9 1.17
-------- ---------------- -------- ----------
Total interest earning assets 839,759 10,139 4.84 749,733 9,714 5.20
All other assets 76,285 70,368
Allowance for loan losses (8,554) (7,485)
-------- --------
Total assets $907,490 $812,616
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW accounts $118,934 $ 173 0.58 $ 94,867 $ 176 0.74%
Savings 57,658 82 0.57 52,641 106 0.81
Money market 77,577 228 1.18 61,645 151 0.98
Deposits of $100,000 and over 84,841 456 2.16 72,455 460 2.55
Other time deposits 248,912 1,439 2.32 247,458 1,739 2.82
-------- ---------------- -------- ----------
Total time deposits 587,922 2,378 1.62 529,066 2,632 2.00
Federal funds purchased and
securities sold under
agreements to repurchase 74,852 188 1.01 72,069 177 0.99
Interest-bearing demand
notes to US Treasury 819 2 0.98 818 2 0.98
Other borrowed money 57,285 613 4.29 41,072 442 4.32
-------- ---------------- -------- ----------
Total interest-bearing liabilities 720,878 3,181 1.77 643,025 3,253 2.03
Demand deposits 90,166 75,773
Other liabilities 5,980 7,647
-------- --------
Total liabilities 817,024 726,445
Stockholders' equity 90,466 86,171
-------- --------
Total liabilities and
Stockholders' equity $907,490 $812,616
======== ========
Net interest income $ 6,958 $ 6,461
================ ==========
Net interest margin(4) 3.32% 3.46%
==== ====
(1) Interest income and yields are presented on a fully taxable equivalent
basis using the Federal statutory income tax rate. Such adjustments were
$155,000 in 2004 and $161,000 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.
23
(DOLLARS EXPRESSED IN THOUSANDS)
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2004 JUNE 30, 2003
-------------------------------------- ------------------------------
RATE INTEREST RATE
AVERAGE INTEREST INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE(1) PAID(1) BALANCE EXPENSE(1) PAID(1)
-------- ---------------- ------- -------- ---------- -------
ASSETS
Loans:(2)
Commercial $218,935 $ 6,080 5.57% $158,217 $ 4,697 5.99%
Real estate 328,469 9,253 5.65 305,723 9,205 6.07
Consumer 38,601 1,507 7.83 43,033 1,749 8.20
Investment securities:(3)
U.S Treasury and
U.S. Gov't Agencies 177,853 2,075 2.34 145,537 2,227 3.09
State and municipal 29,871 923 6.20 32,617 1,093 6.76
Other 4,709 69 2.94 5,259 97 3.72
Federal funds sold 24,194 145 1.20 43,967 238 1.09
Interest-bearing deposits 2,436 10 0.82 4,377 26 1.20
-------- ---------------- -------- ----------
Total interest earning assets 825,068 20,062 4.88 738,730 19,332 5.28
All other assets 75,539 70,935
Allowance for loan losses (8,446) (7,360)
-------- --------
Total assets $892,161 $802,305
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
NOW accounts $119,543 $ 345 0.58 $ 94,925 $ 358 0.76%
Savings 57,174 162 0.57 51,940 210 0.82
Money market 73,150 372 1.02 62,576 303 0.98
Deposits of $100,000 and over 86,461 930 2.16 70,283 906 2.60
Other time deposits 250,980 2,948 2.36 244,105 3,526 2.91
-------- ---------------- -------- ----------
Total time deposits 587,308 4,757 1.62 523,829 5,303 2.04
Federal funds purchased and
securities sold under
agreements to repurchase 73,086 356 0.98 70,165 355 1.02
Interest-bearing demand
notes to US Treasury 643 2 0.62 644 3 0.94
Other borrowed money 47,104 1,021 4.35 40,922 874 4.31
-------- ---------------- -------- ----------
Total interest-bearing liabilities 708,141 6,136 1.74 635,560 6,535 2.07
Demand deposits 88,182 73,784
Other liabilities 6,027 7,770
-------- --------
Total liabilities 802,350 717,114
Stockholders' equity 89,811 85,191
-------- --------
Total liabilities and
Stockholders' equity $892,161 $802,305
======== ========
Net interest income $ 13,926 $ 12,797
================ ==========
Net interest margin(4) 3.38% 3.49%
==== ====
(1) Interest income and yields are presented on a fully taxable equivalent
basis using the Federal statutory income tax rate. Such adjustments were
$316,000 in 2004 and $348,000 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.
24
(DOLLARS EXPRESSED IN THOUSANDS)
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.
THREE MONTHS ENDED JUNE 30, 2004
COMPARED TO
THREE MONTHS ENDED JUNE 30, 2003
--------------------------------
CHANGE DUE TO
TOTAL ------------------
CHANGE VOLUME RATE
------ ------ ----
INTEREST INCOME ON A FULLY TAXABLE EQUIVALENT BASIS:
Loans:(1)
Commercial $ 697 863 (166)
Real estate (2) (36) 255 (291)
Consumer (108) (102) (6)
Investment securities:(3)
U.S Treasury and
U.S. Gov't Agencies (27) 261 (288)
State and municipal (2) (44) (3) (41)
Other (8) 1 (9)
Federal funds sold (43) (77) 34
Interest-bearing deposits (6) (3) (3)
------ ----- ----
Total interest income 425 1,195 (770)
INTEREST EXPENSE:
NOW accounts $ (3) 40 (43)
Savings (24) 9 (33)
Money market 77 44 33
Deposits of $100,000 and over (4) 73 (77)
Other time deposits (300) 10 (310)
Federal funds purchased and
securities sold under
agreements to repurchase 11 7 4
Interest-bearing demand notes
of U.S. Treasury - - -
Other borrowed money 171 173 (2)
------ ----- ----
Total interest expense (72) 356 (428)
------ ----- ----
Net interest income on a fully
taxable equivalent basis $ 497 839 (342)
====== ===== ====
(1) Interest income and yields are presented on a fully taxable equivalent basis
using the Federal statutory income tax rate. Such adjustments were $155,000 in
2004 and $161,000 in 2003.
(2) Non-accruing loans are included in the average amounts outstanding.
25
(DOLLARS EXPRESSED IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, 2004
COMPARED TO
SIX MONTHS ENDED JUNE 30, 2003
--------------------------------
CHANGE DUE TO
TOTAL ------------------
CHANGE VOLUME RATE
------- ------ ------
INTEREST INCOME ON A FULLY TAXABLE EQUIVALENT BASIS:
Loans:(1)
Commercial $ 1,383 1,704 (321)
Real estate (2) 48 661 (613)
Consumer (242) (175) (67)
Investment securities:(3)
U.S Treasury and
U.S. Gov't Agencies (152) 438 (590)
State and municipal (2) (170) (88) (82)
Other (28) (9) (19)
Federal funds sold (93) (116) 23
Interest-bearing deposits (16) (10) (6)
------- ----- ----
Total interest income 730 2,405 (1,675)
INTEREST EXPENSE:
NOW accounts $ (13) 81 (94)
Savings (48) 19 (67)
Money market 69 53 16
Deposits of $100,000 and over 24 189 (165)
Other time deposits (578) 97 (675)
Federal funds purchased and
securities sold under
agreements to repurchase 1 14 (13)
Interest-bearing demand notes
of U.S. Treasury (1) - (1)
Other borrowed money 147 134 13
------- ----- ----
Total interest expense (399) 587 (986)
------- ----- ----
Net interest income on a fully
taxable equivalent basis $ 1,129 1,818 (689)
======= ===== ====
(1) Interest income and yields are presented on a fully taxable equivalent basis
using the Federal statutory income tax rate. Such adjustments were $316,000 in
2004 and $348,000 in 2003.
(2) Non-accruing loans are included in the average amounts outstanding.
26
LENDING AND CREDIT MANAGEMENT
Interest earned on the loan portfolio is a primary source of interest
income for our Company. Net loans represented 65.3% of total assets as of June
30, 2004 compared to 65.7% as of December 31, 2003 and 64.4% as of June 30,
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 June 30, 2004 our Company was
servicing approximately $211,487,000 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 and $15,000, respectively, for the first and second quarters of 2004.
That compares to net loan recoveries of $13,000 and $2,000, respectively, for
the first and second quarters of 2003. The allowance for loan losses was
increased by a provision charged to expense of $236,000 for the first quarter of
2004 and $210,000 for the second quarter of 2004. That compares to a provision
of $235,000 for the first quarter of 2003 and $236,000 for the second quarter of
2003.
27
The balance of the allowance for loan losses was $8,641,000 at June 30,
2004 compared to $8,267,000 at December 31, 2003 and $7,819,000 at June 30,
2003. The allowance for loan losses as a percent of outstanding loans was 1.45%
at June 30, 2004 compared to 1.42% at December 31, 2003 and 1.41% at June 30,
2003.
Nonperforming loans, defined as loans on nonaccrual status, loans 90 days
or more past due and still accruing, and restructured loans totaled $7,585,000
or 1.27% of total loans at June 30, 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)
JUNE 30, 2004 DECEMBER 31, 2003
------------------- -------------------
% OF GROSS % OF GROSS
BALANCE LOANS BALANCE LOANS
------- ---------- ------- ----------
Nonaccrual loans:
Commercial $ 6,177 1.03% $ 1,520 0.26%
Real estate
Construction - - 59 0.01
Mortgage 1,186 0.20 1,270 0.22
Consumer 33 0.01 55 0.01
------- ---- ------- ----
7,396 1.24 2,904 0.50
------- ---- ------- ----
Loans contractual past-due 90 days
or more and still accruing:
Commercial 63 0.01 66 0.01
Real estate
Construction - - - -
Mortgage 103 0.02 4 -
Consumer 23 - 40 0.01
------- ---- ------- ----
189 0.03 110 0.02
------- ---- ------- ----
Restructured loans - - - -
------- ---- ------- ----
Total nonperforming loans 7,585 1.27% 3,014 0.52%
==== ====
Other real estate 252 47
Repossessions 64 73
------- -------
Total nonperforming assets $ 7,901 $ 3,134
======= =======
The allowance for loan losses was 113.92% of nonperforming loans at June 30,
2004 compared to 274.29% of nonperforming loans at December 31, 2003. The
increase in nonaccrual commercial loans is primarily represented by two credits
with balances of $4,070,000 at June 30, 2004. Management has allocated
$2,196,000 of the loan loss reserve to these two credits. Management believes
that our Company has established sufficient reserves for probable losses related
to these two credits.
28
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 June 30, 2004 and
2003, which would have been recorded under the original terms of those loans,
was approximately $243,000 and $141,000 for the six months ended June 30, 2004
and 2003, respectively. Approximately $38,000 and $24,000 was actually recorded
as interest income on such loans for the six months ended June 30, 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 $63,000 and $66,000 at June
30, 2004 and December 31, 2003, respectively, which are not included in the
nonaccrual table above but are considered by management to be "impaired". The
$63,000 of loans identified by management as being "impaired" reflected two
commercial loans ranging in size from approximately $29,000 to approximately
$34,000. The average balance of nonaccrual and other "impaired" loans for the
first six months of 2004 was approximately $7,358,000. At June 30, 2004 the
portion of the allowance for loan losses allocated to specific impaired loans
was $2,159,000 compared to $685,000 at December 31, 2003. The balance of
impaired loans with specific loan loss allocations was approximately $3,019,000
at June 30, 2004 compared to $1,572,000 at December 31, 2003.
As of June 30, 2004 and December 31, 2003 approximately $12,765,000 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
June 30, 2004 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 as of June 30, 2004. 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.
29
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 June 30, 2004, management allocated $8,014,000 of the $8,641,000 total
allowance for loan losses to specific loans and loan categories and $627,000 was
unallocated. Considering the size of several of our Company's lending
relationships and the loan portfolio in total, management believes that the June
30, 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 $25,894,000 or 3.0% to $901,490,000 at June 30,
2004 compared to $875,596,000 at December 31, 2003. Total liabilities increased
$24,778,000 or 3.1% to $812,591,000. Stockholders' equity increased $1,116,000
or 1.3% to $88,899,000. 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 increased $13,479,000 to $597,398,000 at June 30, 2004 compared to
$583,919,000 at December 31, 2003. Commercial loans increased $16,602,000; real
estate construction loans increased $2,870,000; real estate mortgage loans
decreased $2,188,000; and consumer loans decreased $3,805,000. The increase in
commercial loans and real estate construction loans represents continued strong
loan demand, especially in the Jefferson City market. The decrease in real
estate mortgage loans is reflective of higher mortgage rates in the industry.
The decrease in consumer loans is primarily represented by the payoff of one
very large consumer credit.
30
Investment in debt and equity securities classified as available-for-sale
increased $23,132,000 or 12.2% to $212,088,000 at June 30, 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
decreased $2,801,000 to $(727,000) to reflect the fair value of
available-for-sale investments at June 30, 2004 and the net after tax decrease
resulting from the change in the market valuation adjustment of $1,821,000
decreased the stockholders' equity component to $(473,000) at June 30, 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 $12,951,000 or 22.7% to $44,094,000 at June 30,
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 $1,505,000 or 8.5% to $19,280,000 at June
30, 2004 compared to $17,775,000 at December 31, 2003. The increase reflects
purchases of premises and equipment of $2,267,000 offset by depreciation expense
of $762,000. The purchase of premises and equipment primarily reflects purchases
of land and equipment for two additional branches.
Total deposits increased $10,795,000 or 1.6% to $676,057,000 at June 30,
2004 compared to $665,262,000 at December 31, 2003. This increase is due in
large part to a special deposit promotion at one bank.
Federal funds purchased and securities sold under agreements to repurchase
decreased $9,999,000 or 13.7% to $62,984,000 at June 30, 2004 compared to
$72,983,000 at December 31, 2003. This decrease is due primarily to increased
deposit balances at June 30, 2004.
Other borrowed money increased $22,234,000 or 53.4% to $63,865,000 at June
30, 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 Company also borrowed an additional $15,000,000 from the
Federal Home Loan Bank during the period to lock in current funding rates.
The increase in stockholders' equity reflects net income of $4,423,000
less dividends declared of $1,501,000 and $(1,821,000) change in unrealized
holding losses, net of taxes, on investment in debt and equity securities
available-for-sale.
31
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 June 30, 2004 and December 31,
2003 are as follows:
JUNE 30, 2004 DECEMBER 31, 2003
----------------------------- ----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized intangible asset:
Core deposit intangible $ 2,265,000 (1,359,312) 2,265,000 (1,251,756)
============== ========== ========= ==========
The aggregate amortization expense of intangible assets subject to
amortization for the three and six month periods ended June 30, 2004 and 2003 is
as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2004 2003 2004 2003
------- ------ ------- -------
Aggregate amortization expense $53,778 74,670 107,556 149,340
======= ====== ======= =======
The estimated amortization expense for the next five years is as follows:
Estimated amortization expense:
For year ended 2004 $ 215,000
For year ended 2005 215,000
For year ended 2006 215,000
For year ended 2007 135,000
For year ended 2008 66,000
32
Our Company's mortgage servicing rights are amortized in proportion to the
related estimated net servicing income 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,
-------------------------------
2004 2003
------------- -----------
Balance, beginning of period $ 1,591,289 1,515,848
Originated mortgage servicing rights 245,940 710,204
Amortization (212,221) (264,237)
Impairment charge - (556,040)
------------- -----------
Balance, end of period $ 1,625,008 1,405,775
============= ===========
Mortgage loans serviced $ 212,487,000 207,746,000
============= ===========
Mortgage servicing rights as a
percentage of loans serviced 0.76% 0.68%
============= ===========
The estimated amortization expense for the next five years is as follows:
Estimated amortization expense:
For year ended 2004 $ 375,000
For year ended 2005 325,000
For year ended 2006 325,000
For year ended 2007 325,000
For year ended 2008 275,000
Our Company's goodwill associated with the purchase of subsidiaries by
reporting segments for the periods ended June 30, 2004 and December 31, 2003 is
summarized as follows:
CITIZENS
THE EXCHANGE UNION STATE
NATIONAL BANK BANK AND OSAGE VALLEY
OF JEFFERSON TRUST OF BANK OF
CITY CLINTON WARSAW TOTAL
------------- ----------- ------------ ----------
Goodwill associated with the
purchase of subsidiaries $ 4,382,098 16,701,762 4,112,876 25,196,736
============= ========== ========= ==========
33
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 June 30, 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 June 30 $ 31,615 $ 12,238
========= =========
Net periodic pension cost - six months
ended June 30 $ 63,230 $ 24,476
========= =========
Our Company does not expect to make any contribution to the plan during 2004.
34
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 June 30,
2004, the amounts of available credit from the FHLB totaled $94,170,000. As of
June 30, 2004, the Banks had $38,091,000 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 a $20,000,000
line of credit with a correspondent bank. This line of credit had no balance in
use as of June 30, 2004.
35
SOURCES AND USES OF FUNDS
For the six months ended June 30, 2004 and 2003, net cash provided by
operating activities was $7,147,000 and $6,244,000, respectively. Approximately
$1,405,000 of the increase in net cash provided by operating activities is
represented by an increase in other liabilities representing loan participation
payments received.
Net cash used in investing activities was $42,694,000 in 2004 versus
$42,199,000 in 2003. In 2004 our Company's investment portfolio increased by
approximately $26,679,000 compared to a $231,000 increase 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 $13,970,000 compared to a
$41,467,000 increase for the same period in 2004. Our Company has also purchased
premised and equipment of approximately $2,267,000 in 2004 compared to $225,000
for the same period of 2003. These purchases primarily represent land and
equipment acquisition for additional branch locations.
Net cash provided by financing activities was $22,597,000 in 2004 versus
$21,237,000 in 2003. Increases in deposits accounted for approximately
$10,795,000 of the cash provided by financing activities in 2004 and
approximately $24,294,000 in 2003. An additional $22,235,000 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 special purpose entity that our Company has in place is a limited
purpose trust that issued trust preferred securities. This limited purpose trust
issued preferred securities to outside investors and used 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
36
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 was
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 mandatorily
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 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. Our Company has
adopted SAB 105 and determined that it did not 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
our 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 our Banks' management include the standard GAP report
subject to different rate shock scenarios. At June 30, 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.
37
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 June 30, 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 June 30, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
38
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
At the annual meeting of the shareholders of Exchange National
Bancshares, Inc. held on June 9, 2004, the shareholders elected two Class
III directors, namely, Kevin L. Riley and David T. Turner, to serve terms
expiring at the annual meeting of shareholders in 2007 and ratified the
Board of Directors selection of KPMG LLP as the Company's independent
auditors for the year ending December 31, 2004. Class I Directors, namely,
Charles G. Dudenhoeffer, Jr., Philip D. Freeman, and James E Smith, and
Class II directors, namely, David R. Goller, James R. Loyd, and Gus S.
Wetzel, II, continue to serve terms expiring at the annual meetings of
shareholders in 2005 and 2006, respectively.
The following is a summary of votes cast. No broker non-votes were
received.
Withhold
Authority/
For Against Abstentions
--------- ---------- -----------
Election of Directors:
Kevin L. Riley 3,594,097 32,755 N/A
David T. Turner 3,597,903 28,545 N/A
Ratification of KPMG LLP
as independent auditors 3,598,416 18,462 10,446
Item 5. Other Information None
39
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
32.2 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 May 6, 2004, filed with the SEC on May 13, 2004 with
respect to Items 5 and 7 to report our issuance of a press release
dated May 6, 2004 announcing our 2004 first quarter earnings. The
press release was filed as an exhibit to the Form 8-K.
Form 8-K dated May 12, 2004, filed with the SEC on May 13, 2004 with
respect to Items 5 and 7 to report our issuance of a press release
dated May 12, 2004 announcing the declaration of a quarterly
dividend. The press release was filed as an exhibit to the Form 8-K.
40
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 9, 2004 James E. Smith, Chairman of the Board
and Chief Executive Officer (Principal
Executive Officer)
By /s/ Richard G. Rose
-----------------------------------
August 9, 2004 Richard G. Rose, Treasurer (Principal Financial
Officer and Principal Accounting Officer)
41
EXCHANGE NATIONAL BANCSHARES, INC.
INDEX TO EXHIBITS
June 30, 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 43
31.2 Certificate of the Chief Financial Officer of the Company pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 44
32.1 Certificate of the Chief Executive Officer of the Company pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 45
32.2 Certificate of the Chief Financial Officer of the Company pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 46
** Incorporated by reference.
42