1
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, 2001
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 sincelast 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
As of August 10, 2001, the registrant had 2,863,493 shares of common stock,
par value $1.00 per share, outstanding.
Page 1 of 35 pages
Index to Exhibits located on page 35
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, DECEMBER 31,
2001 2000
------------ -----------
ASSETS
Loans:
Commercial $144,579,173 $151,329,889
Real estate -- construction 20,883,000 20,500,000
Real estate -- mortgage 245,737,910 238,157,787
Consumer 52,955,631 58,483,757
------------ ------------
464,155,714 468,471,433
Less allowance for loan losses 7,178,837 6,939,991
------------ ------------
Loans, net 456,976,877 461,531,442
------------ ------------
Investment in debt and equity securities:
Available-for-sale, at fair value 148,174,166 133,453,720
Held-to-maturity, fair value of
$22,675,700 at December 31, 2000 -- 22,463,180
------------ ------------
Total investment in debt
and equity securities 148,174,166 155,916,900
------------ ------------
Federal funds sold 62,410,131 23,550,366
Cash and due from banks 21,045,439 25,374,115
Premises and equipment 14,867,598 15,791,222
Accrued interest receivable 6,413,445 6,795,268
Intangible assets 25,339,903 26,099,648
Other assets 4,654,209 4,544,385
------------ ------------
$739,881,768 $719,603,346
============ ============
Continued on next page
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EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits $ 72,650,817 68,722,835
Time deposits 513,077,776 507,540,052
------------ ------------
Total deposits 585,728,593 576,262,887
Federal funds purchased and
securities sold under agreements to repurchase 22,431,122 16,398,484
Interest-bearing demand notes to U.S. Treasury 1,723,712 543,667
Other borrowed money 40,124,799 42,377,787
Accrued interest payable 3,764,372 4,420,054
Other liabilities 9,108,644 6,016,730
------------ ------------
Total liabilities 662,881,242 646,019,609
------------ ------------
Stockholders' equity:
Common Stock - $1 par value; 15,000,000 shares
authorized; 2,863,493 shares issued and
outstanding 2,863,493 2,863,493
Surplus 21,955,275 21,955,275
Retained earnings 50,448,806 48,106,530
Accumulated other comprehensive income 1,732,952 658,439
------------ ------------
Total stockholders' equity 77,000,526 73,583,737
------------ ------------
$739,881,768 $719,603,346
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
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4
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Interest income $12,586,823 $11,318,998 $25,839,752 $20,786,538
Interest expense 6,790,265 5,926,205 14,114,006 10,665,852
----------- ----------- ----------- -----------
Net interest income 5,796,558 5,392,793 11,725,746 10,120,686
Provision for loan losses 231,000 308,000 479,000 566,000
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 5,565,558 5,084,793 11,246,746 9,554,686
Noninterest income 1,211,393 839,092 2,285,611 1,674,753
Noninterest expense 4,215,543 3,871,466 8,323,244 7,248,310
----------- ----------- ----------- -----------
Income before
income taxes 2,561,408 2,052,419 5,209,113 3,981,129
Income taxes 892,451 638,736 1,778,709 1,223,175
----------- ----------- ----------- -----------
Net income $ 1,668,957 $1,413,683 $3,430,404 $2,757,954
=========== =========== =========== ===========
Basic and diluted
earnings per share $0.58 $0.56 $1.20 $1.12
===== ===== ===== =====
Weighted average shares of
common stock outstanding 2,863,493 2,508,177 2,863,493 2,473,114
Dividends per share:
Declared $0.19 $0.19 $0.38 $0.38
===== ===== ===== =====
Paid $0.19 $0.19 $0.38 $0.35
===== ===== ===== =====
See accompanying notes to condensed consolidated financial statements.
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5
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2001 2000
----------- -----------
Cash flows from operating activities:
Net income $ 3,430,404 2,757,954
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 479,000 566,000
Depreciation expense 640,546 562,554
Net accretion of debt securities
premiums and discounts (601,798) (15,067)
Amortization of intangible assets 753,623 548,818
Decrease (increase) in accrued
interest receivable 381,823 (884,047)
Decrease (increase) in other assets (493,378) 625,912
Decrease in accrued interest payable (655,682) (6,482)
Increase in other liabilities 3,091,914 474,957
Net securities losses -- 27,710
Other, net 6,122 (67,679)
Origination of mortgage loans for sale (39,902,291) (11,764,897)
Proceeds from the sale of mortgage loans
held for sale 40,470,194 11,923,204
Gain on sale of mortgage loans (567,903) (158,307)
----------- -----------
Net cash provided by operating activities 7,032,574 4,590,630
----------- -----------
Cash flows from investing activities:
Net decrease (increase) in loans 3,456,298 (27,513,070)
Purchases of available-for-sale debt securities (80,962,120) (53,122,501)
Purchases of held-to-maturity debt securities -- (466,231)
Proceeds from sales of available-for-sale
debt securities -- 978,878
Proceeds from maturities of debt securities:
Available-for-sale 50,790,188 47,674,751
Held-to-maturity -- 3,202,937
Proceeds from calls of debt securities:
Available-for-sale 40,150,000 --
Held-to-maturity -- 710,000
Purchase of subsidiaries, net of
cash and cash equivalents acquired -- (7,812,299)
Purchases of premises and equipment (1,185,244) (552,026)
Proceed from dispositions of premises
and equipment 1,468,322 49,647
Proceeds from sales of other real estate
owned and repossessions 443,798 382,853
----------- -----------
Net cash provided (used)
in investing activities 14,161,242 (36,467,061)
----------- -----------
Continued on next page
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6
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2001 2000
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in demand deposits 3,927,982 (16,594,574)
Net increase in interest-bearing
transaction accounts 9,030,218 10,903,651
Net increase (decrease) in time deposits (3,492,494) 14,757,289
Net increase in federal funds purchased and
securities sold under agreements to repurchase 6,032,638 20,996
Net increase (decrease) in interest-bearing
demand notes to U.S. Treasury 1,180,045 (913,559)
Proceeds from Federal Home Loan Bank
borrowings -- 12,000,000
Repayment of Federal Home Loan Bank
borrowings (752,988) (237,488)
Proceeds from other borrowed money -- 12,000,000
Repayment of other borrowed money (1,500,000) --
Cash dividends paid (1,088,128) (849,797)
----------- -----------
Net cash provided by financing activities 13,337,273 31,086,518
----------- -----------
Net increase (decrease) in cash and
cash equivalents 34,531,089 (789,913)
Cash and cash equivalents, beginning of period 48,924,481 32,601,208
----------- -----------
Cash and cash equivalents, end of period $83,455,570 $31,811,295
=========== ===========
Supplemental schedule of cash flow information-
Cash paid during period for:
Interest $14,769,688 $9,751,121
Income taxes 309,475 555,135
Supplemental schedule of noncash
investing activities-
Other real estate and repossessions
acquired in settlement of loans 619,267 735,194
Transfer of securities from held-to-maturity
to available-for-sale 22,675,700 --
See accompanying notes to unaudited condensed consolidated financial statements.
6
7
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 2001 and 2000
Exchange National Bancshares, Inc. ("Bancshares" or the "Company") is
a bank holding company registered under the Bank Holding Company Act of 1956.
Bancshares' activities currently are limited to ownership of the outstanding
capital stock of The Exchange National Bank of Jefferson City (ENB), Union State
Bancshares, Inc. (Union) which owns 100% of Citizens Union State Bank and Trust
of Clinton (CUSB) and Mid Central Bancorp, Inc. (Mid Central) which owns 100% of
Osage Valley Bank of Warsaw (OVB). Bancshares acquired ENB on April 7, 1993,
Union on November 3, 1997 and Mid Central on January 3, 2000. In addition,
Bancshares acquired Calhoun Bancshares, Inc. (Calhoun) and its wholly owned
subsidiary, Citizens State Bank of Calhoun on May 4, 2000. Immediately upon
acquisition, Calhoun Bancshares, Inc. was dissolved and Citizens State Bank was
merged with Union State Bank and Trust with the surviving institution being
renamed Citizens Union State Bank and Trust of Clinton (CUSB). On June 16, 2000
Bancshares acquired CNS Bancorp, Inc. (CNS) and its wholly owned subsidiary,
City National Savings Bank, FSB. Immediately upon acquisition, CNS Bancorp, Inc.
was dissolved and City National Savings Bank, FSB was merged with ENB. All
acquisitions were accounted for as purchase transactions. Accordingly, the
results of operations of the acquired companies have been included in the
condensed consolidated financial statements since dates of acquisition. A
summary of unaudited pro forma combined financial information for the three
months and six months ended June 30, 2000 for Bancshares and acquisitions as if
the transactions had occurred on January 1, 2000 follows. These pro forma
presentations do not include any expense reductions that resulted from the
mergers discussed above.
THREE MONTHS ENDED SIX MONTH ENDED
JUNE 30, JUNE 30,
------------------- ---------------
2000 2000
------------------- ---------------
NET INTEREST INCOME $ 5,802,716 $ 11,401,879
NET INCOME $ 1,307,122 $ 2,508,890
EARNINGS PER SHARE $0.52 $1.01
The accompanying unaudited condensed consolidated financial statements
include all adjustments which in the opinion of management are necessary in
order to make those statements not misleading. Certain amounts in the 2000
condensed consolidated financial statements have been reclassified to conform
with the 2001 condensed consolidated presentation. Such reclassifications have
no effect on previously reported net income. Operating results for the period
ended June 30, 2001 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2001.
It is suggested that these unaudited condensed consolidated interim
financial statements be read in conjunction with the Company's audited
consolidated financial statements included in its 2000 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, 2000 as Exhibit 13.
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8
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. The Company believes that these financial statements contain all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the Company's consolidated financial position as of June 30, 2001 and
December 31, 2000, consolidated statements of earnings for the three and six
month periods ended June 30, 2001 and 2000 and cash flows for the six months
ended June 30, 2001 and 2000.
Stock options are the only dilutive potential common shares. At June
30, 2001, 34,929 stock options were not included in the calculation of diluted
earnings per share because their effect was antidilutive.
For the three-month and six-month periods ended June 30, 2001 and 2000,
unrealized holding gains and losses on investment in debt and equity securities
available-for-sale were Bancshares' only other comprehensive income component.
Comprehensive income for the three-month and six-month periods ended June 30,
2001 and 2000 is summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-----------------------------------------------------------
2001 2000 2001 2000
----------- ---------- --------- ---------
Net income $ 1,668,957 1,413,683 3,430,404 2,757,954
Other comprehensive income (loss):
Net unrealized holding
gains (losses) on
investments in debt
and equity securities
available-for-sale,
net of taxes (44,129) (12,619) 1,074,513 (31,869)
Adjustment for net
securities losses
realized in net
income, net of
applicable income taxes -- -- -- 18,287
Total other comprehensive
----------- ---------- --------- ---------
Income (loss) (44,129) (12,619) 1,074,513 (13,582)
----------- ---------- --------- ---------
Comprehensive income $ 1,624,828 1,401,064 4,504,917 2,744,372
=========== ========== ========= =========
8
9
Through the respective branch network, ENB, CUSB and OVB provide similar
products and services in three defined geographic areas. The products and
services offered include a broad range of commercial and personal banking
services, including certificates of deposit, individual retirement and other
time deposit accounts, checking and other demand deposit accounts, interest
checking accounts, savings accounts, and money market accounts. Loans include
real estate, commercial, installment, and other consumer loans. Other financial
services include automatic teller machines, trust services, credit related
insurance, and safe deposit boxes. The revenues generated by each business
segment consist primarily of interest income, generated from the loan and debt
and equity security portfolios, and service charges and fees, generated from the
deposit products and services. The geographic areas are defined to be
communities surrounding Jefferson City, Clinton and Warsaw, Missouri. The
products and services are offered to customers primarily within their respective
geographical areas. The business segment results that follow are consistent with
the Company's internal reporting system which is consistent, in all material
respects, with accounting principles generally accepted in the United Sates of
America and practices prevalent in the banking industry.
9
10
JUNE 30, 2001
-------------
THE EXCHANGE CITIZENS UNION OSAGE
NATIONAL BANK STATE BANK VALLEY BANK
OF JEFFERSON AND TRUST OF OF CORPORATE
CITY CLINTON WARSAW AND OTHER TOTAL
------------- -------------- ----------- ------------ ------------
Balance sheet information:
Loans, net of allowance
for loan losses $304,111,515 $118,218,973 $34,646,389 -- $456,976,877
Debt and equity securities 66,773,542 53,623,628 27,776,996 -- 148,174,166
Total assets 427,446,395 242,782,010 69,568,866 84,497 739,881,768
Deposits 339,661,690 191,520,196 57,597,474 (3,050,767) 585,728,593
Stockholders' equity 48,179,168 35,274,619 9,359,109 (15,812,370) 77,000,526
============ ============ =========== ============ ============
DECEMBER 30, 2001
-----------------
THE EXCHANGE CITIZENS UNION OSAGE
NATIONAL BANK STATE BANK VALLEY BANK
OF JEFFERSON AND TRUST OF OF CORPORATE
CITY CLINTON WARSAW AND OTHER TOTAL
------------- -------------- ----------- ------------ ------------
Balance sheet information:
Loans, net of allowance
for loan losses $307,896,826 $124,074,520 $29,560,096 -- $461,531,442
Debt and equity securities 59,926,441 68,896,826 27,093,633 -- 155,916,900
Total assets 411,937,825 241,626,885 65,006,410 1,032,226 719,603,346
Deposits 331,374,737 194,121,199 53,974,652 (3,207,701) 576,262,887
Stockholders' equity 46,953,624 34,422,578 9,079,936 (16,872,401) 73,583,737
============ ============ =========== ============ ============
THREE MONTHS ENDED JUNE 30, 2001
--------------------------------
THE EXCHANGE CITIZENS UNION OSAGE
NATIONAL BANK STATE BANK VALLEY BANK
OF JEFFERSON AND TRUST OF OF CORPORATE
CITY CLINTON WARSAW AND OTHER TOTAL
------------- -------------- ----------- ------------ ------------
Statement of earnings
information:
Total interest income $7,523,340 $3,804,960 $1,258,523 -- $12,586,823
Total interest expense 3,805,761 2,081,567 584,704 318,233 6,790,265
---------- ---------- ---------- -------- -----------
Net interest income 3,717,579 1,723,393 673,819 (318,233) 5,796,558
Provision for loan losses 150,000 75,000 6,000 -- 231,000
Noninterest income 966,880 188,722 55,791 -- 1,211,393
Noninterest expense 2,516,343 1,235,690 382,553 80,957 4,215,543
Income taxes 646,800 236,872 141,879 (133,100) 892,451
---------- ---------- ---------- -------- -----------
Net income (loss) 1,371,316 364,553 199,178 (266,090) 1,668,957
========== ========== ========== ======== ===========
THREE MONTHS ENDED JUNE 30, 2000
--------------------------------
THE EXCHANGE CITIZENS UNION OSAGE
NATIONAL BANK STATE BANK VALLEY BANK
OF JEFFERSON AND TRUST OF OF CORPORATE
CITY CLINTON WARSAW AND OTHER TOTAL
------------- -------------- ----------- ------------ ------------
Statement of earnings
information:
Total interest income $6,816,700 $3,477,679 $1,013,598 $ 11,021 $11,318,998
Total interest expense 3,305,331 1,752,733 503,061 365,080 5,926,205
---------- ---------- ---------- --------- -----------
Net interest income 3,511,369 1,724,946 510,537 (354,059) 5,392,793
Provision for loan losses 225,000 80,000 3,000 -- 308,000
Noninterest income 621,435 168,091 49,566 -- 839,092
Noninterest expense 2,237,447 1,144,455 334,108 155,456 3,871,466
Income taxes 515,000 222,476 71,860 (170,600) 638,736
---------- ---------- ---------- --------- -----------
Net income (loss) 1,155,357 446,106 151,135 (338,915) 1,413,683
========== ========== ========== ========= ===========
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SIX MONTHS ENDED JUNE 30, 2001
------------------------------
THE EXCHANGE CITIZENS UNION OSAGE
NATIONAL BANK STATE BANK VALLEY BANK
OF JEFFERSON AND TRUST OF OF CORPORATE
CITY CLINTON WARSAW AND OTHER TOTAL
------------- -------------- ----------- ------------ ------------
Statement of earnings
information:
Total interest income $15,346,003 $7,814,891 $2,673,148 $ 5,710 $25,839,752
Total interest expense 7,924,369 4,310,775 1,207,027 671,835 14,114,006
----------- ---------- ---------- --------- -----------
Net interest income 7,421,634 3,504,116 1,466,121 (666,125) 11,725,746
Provision for loan losses 300,000 150,000 29,000 -- 479,000
Noninterest income 1,803,218 375,590 106,803 -- 2,285,611
Noninterest expense 4,984,045 2,451,532 725,553 162,114 8,323,244
Income taxes 1,263,670 496,135 295,304 (276,400) 1,778,709
----------- ---------- ---------- --------- -----------
Net income (loss) 2,677,137 782,039 523,067 (551,839) 3,430,404
=========== ========== ========== ========= ===========
SIX MONTHS ENDED JUNE 30, 2000
------------------------------
THE EXCHANGE CITIZENS UNION OSAGE
NATIONAL BANK STATE BANK VALLEY BANK
OF JEFFERSON AND TRUST OF OF CORPORATE
CITY CLINTON WARSAW AND OTHER TOTAL
------------- -------------- ----------- ------------ ------------
Statement of earnings
information:
Total interest income $12,797,218 $5,970,391 $1,999,818 19,111 $20,786,538
Total interest expense 6,113,298 2,967,678 1,002,891 581,985 10,665,852
----------- ---------- ---------- -------- -----------
Net interest income 6,683,920 3,002,713 996,927 (562,874) 10,120,686
Provision for loan losses 450,000 110,000 6,000 -- 566,000
Noninterest income 1,258,813 313,829 102,111 -- 1,674,753
Noninterest expense 4,272,817 2,035,494 659,651 280,348 7,248,310
Income taxes 971,000 392,643 141,032 (281,500) 1,223,175
----------- ---------- ---------- -------- -----------
Net income (loss) 2,248,916 778,405 292,355 (561,722) 2,757,954
=========== ========== ========== ======== ===========
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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. THE COMPANY'S ACTUAL RESULTS, FINANCIAL CONDITION, OR BUSINESS COULD
DIFFER MATERIALLY FROM ITS HISTORICAL RESULTS, FINANCIAL CONDITION, OR BUSINESS,
OR THE RESULTS OF OPERATIONS, FINANCIAL CONDITION, OR BUSINESS CONTEMPLATED BY
SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE CONTEMPLATED BY THE FORWARD LOOKING STATEMENTS HEREIN
INCLUDE MARKET CONDITIONS AS WELL AS CONDITIONS SPECIFICALLY AFFECTING THE
BANKING INDUSTRY GENERALLY AND FACTORS HAVING A SPECIFIC IMPACT ON BANCSHARES
INCLUDING, BUT NOT LIMITED TO, FLUCTUATIONS IN INTEREST RATES AND IN THE
ECONOMY; THE IMPACT OF LAWS AND REGULATIONS APPLICABLE TO BANCSHARES AND CHANGES
THEREIN; COMPETITIVE CONDITIONS IN THE MARKETS IN WHICH BANCSHARES CONDUCTS ITS
OPERATIONS, INCLUDING COMPETITION FROM BANKING AND NON-BANKING COMPANIES WITH
SUBSTANTIALLY GREATER RESOURCES THAN BANCSHARES, SOME OF WHICH MAY OFFER AND
DEVELOP PRODUCTS AND SERVICES NOT OFFERED BY BANCSHARES; AND THE ABILITY OF
BANCSHARES TO RESPOND TO CHANGES IN TECHNOLOGY. ADDITIONAL FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES WERE DISCUSSED UNDER THE CAPTION
"FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION, OR
BUSINESS," IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2000, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THE COMPANY'S REPORTS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
12
13
Net income for the three months ended June 30, 2001 of $1,669,000 increased
$255,000 when compared to the second quarter of 2000. Earnings per common share
for the second quarter of 2001 of $0.58 increased 2 cents or 3.6% when compared
to the second quarter of 2000. Net income for the six months ended June 30, 2001
of $3,430,000 increased $672,000 when compared to the first six months of 2000.
The following table provides a comparison of fully taxable equivalent
earnings, including adjustments to interest income and tax expense for interest
on tax-exempt loans and investments.
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
---------------- -----------------
2001 2000 2001 2000
------- ------- ------- -------
Interest income $12,587 11,319 25,840 20,786
Fully taxable equivalent (FTE) adjustment 206 131 414 344
------- ------- ------- -------
Interest income (FTE basis) 12,793 11,450 26,254 21,130
Interest expense 6,790 5,926 14,114 10,666
------- ------- ------- -------
Net interest income (FTE basis) 6,003 5,524 12,140 10,464
Provision for loan losses 231 308 479 566
------- ------- ------- -------
Net interest income after provision
for loan losses (FTE basis) 5,772 5,216 11,661 9,898
Noninterest income 1,211 839 2,285 1,675
Noninterest expense 4,216 3,871 8,323 7,248
------- ------- ------- -------
Earnings before income taxes
(FTE basis) 2,767 2,184 5,623 4,325
------- ------- ------- -------
Income taxes 892 639 1,779 1,223
FTE adjustment 206 131 414 344
------- ------- ------- -------
Income taxes (FTE basis) 1,098 770 2,193 1,567
------- ------- ------- -------
Net income $ 1,669 1,414 3,430 2,758
======= ======= ======= =======
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THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS
ENDED JUNE 30, 2000
Net interest income on a fully taxable equivalent basis increased $479,000
or 8.7% to $6,003,000 or 3.59% of average earning assets for the second quarter
of 2001 compared to $5,524,000 or 3.93% of average earning assets for the same
period of 2000. The provision for loan losses for the three months ended June
30, 2001 was $231,000 compared to $308,000 for the same period of 2000.
Noninterest income and noninterest expense for the three month periods ended
June 30, 2001 and 2000 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS
ENDED
JUNE 30, INCREASE(DECREASE)
---------------- ------------------
2001 2000 AMOUNT %
------- ------- -------- --------
NONINTEREST INCOME
Service charges on deposit accounts $ 469 393 76 19.3 %
Trust department income 110 94 16 17.0
Brokerage income 20 20 -- --
Mortgage loan servicing fees 127 126 1 0.8
Gain on sales of mortgage loans 333 88 245 278.4
Credit card fees 38 35 3 8.6
Other 114 83 31 37.3
------- ------- -------
$ 1,211 839 372 44.3 %
======= ======= =======
NONINTEREST EXPENSE
Salaries and employee benefits $ 2,101 1,778 323 18.2 %
Occupancy expense, net 244 209 35 16.7
Furniture and equipment expense 385 368 17 4.6
FDIC insurance assessment 35 33 2 6.1
Advertising and promotion 118 82 36 43.9
Postage, printing, and supplies 227 176 51 29.0
Legal, examination, and
professional fees 102 150 (48) (32.0)
Credit card expenses 24 24 -- --
Credit investigation and loan
collection expenses 56 39 17 43.6
Amortization of intangible assets 378 315 63 20.0
Other 546 697 (151) (21.7)
------- ------- -------
$ 4,216 3,871 345 8.9 %
======= ======= =======
Noninterest income increased $372,000 or 44.3% to $1,211,000 for the
second quarter of 2001 compared to $839,000 for the same period of 2000.
Service charges on deposit accounts increased $76,000 or 19.3% due primarily to
the institution of a new overdraft program at ENB. This program has generated
an increase of $85,000 in insufficient fund (NSF) fees collected this year
compared to the same period last year. Gains on sales of mortgage loans
increased $245,000 or 278.4% due to an increase in volume of loans originated
and sold to the secondary market from approximately $7,168,000 in the second
quarter of 2000 to approximately $23,316,000 for the second quarter of 2001.
The increase in volume of loans sold is a result of increased refinancing
activity and new mortgage lending as a result of lower mortgage rates in effect
during 2001 compared to those in effect during 2000.
Noninterest expense increased $345,000 or 8.9% to $4,216,000 for the second
quarter of 2001 compared to $3,871,000 for the second quarter of 2000.
Approximately $265,000 of this increase was related to the acquisitions of CNS
and Calhoun. Excluding the increases associated with the acquisitions,
14
15
salaries and benefits increased $150,000 or 8.4%. The $35,000 or 16.7% increase
in occupancy expense and the $17,000 or 4.6% increase in furniture and equipment
expense are also primarily related to the acquisitions. The $36,000 or 43.9%
increase in advertising and promotion is due in part to additional product
advertising at ENB related to trust services and internet banking. The $51,000
or 29.0% increase in postage, printing and supplies reflects costs incurred by
the banks' for compliance with the privacy provisions of the Gramm-Leach-Bliley
act. The entire increase in amortization of intangible assets is related to the
acquisitions. The $151,000 or 21.7% decrease in other non-interest expense
reflects approximately $108,000 of expenses in the second quarter of 2000
related to the merger of Citizens Bank and Union State Bank and Trust and the
subsequent name change of the combined institutions. These expenses included
costs associated with public relation functions, promotional items, and
stationery and supplies expenses.
Income taxes as a percentage of earnings before income taxes as reported in
the condensed consolidated financial statements was 34.8% for the second quarter
of 2001 compared to 31.1% for the second quarter of 2000. After adding a fully
taxable equivalent adjustment to both income taxes and earnings before income
taxes for tax-exempt income on loans and investment securities, the fully
taxable equivalent ratios of income taxes as a percentage of earnings before
income taxes were 39.7% for the second quarter of 2001 and 35.3% for the second
quarter of 2000. The increase in the effective income tax rate reflects a
reduction in the tax-exempt portion of the investment portfolio.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Net interest income on a fully taxable equivalent basis increased
$1,676,000 or 16.0% to $12,140,000 or 3.66% of average earning assets for the
first six months of 2001 compared to $10,464,000 or 3.98% of average earning
assets for the same period of 2000. The provision for loan losses for the six
months ended June 30, 2001 was $479,000 compared to $566,000 for the same period
of 2000.
15
16
Noninterest income and noninterest expense for the six month periods ended
June 30, 2001 and 2000 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
SIX MONTHS
ENDED
JUNE 30, INCREASE(DECREASE)
---------------- ------------------
2001 2000 AMOUNT %
------- ------- -------- --------
NONINTEREST INCOME
Service charges on deposit accounts $ 924 721 203 28.2 %
Trust department income 219 314 (95) (30.3)
Brokerage income 44 48 (4) (8.3)
Mortgage loan servicing fees 240 242 (2) (0.8)
Gain on sales of mortgage loans 568 158 410 259.5
Net loss on sales and calls
of debt securities -- (28) 28 100.0
Credit card fees 75 72 3 4.2
Other 216 148 68 45.9
------- ------- -------
$ 2,286 1,675 611 36.5 %
======= ======= =======
NONINTEREST EXPENSE
Salaries and employee benefits $ 4,202 3,531 671 19.0 %
Occupancy expense, net 491 411 80 19.5
Furniture and equipment expense 752 717 35 4.9
FDIC insurance assessment 69 57 12 21.1
Advertising and promotion 194 140 54 38.6
Postage, printing, and supplies 390 317 73 23.0
Legal, examination, and
professional fees 226 281 (55) (19.6)
Credit card expenses 48 50 (2) (4.0)
Credit investigation and loan
collection expenses 102 80 22 27.5
Amortization of intangible assets 754 549 205 37.3
Other 1,095 1,115 (20) (1.8)
------- ------- -------
$ 8,323 7,248 1,075 14.8 %
======= ======= =======
Noninterest income increased $611,000 or 36.5% to $2,286,000 for the first
six months of 2001 compared to $1,675,000 for the same period of 2000. Service
charges on deposit accounts increased $203,000 or 28.2% primarily due to the
institution of a new overdraft program at ENB. This program has generated an
increase of $164,000 in NSF fees collected during the first six months of this
year compared to the same period last year. The balance of the increase in
service charge income is mainly attributed to the acquisitions made during the
second quarter of the prior year. Gains on sales of mortgage loans increased
$410,000 or 259.5% due to an increase in volume of loans originated and sold to
the secondary market from approximately $11,765,000 during the first six months
of 2000 to approximately $39,902,000 during the same period in 2001. The
increase in volume of loans sold is a result of increased refinancing activity
and new mortgage lending as a result of lower mortgage rates in effect during
2001 compared to those in effect during 2000.
Noninterest expense increased $1,075,000 or 14.8% to $8,323,000 for the
first six months of 2001 compared to $7,248,000 for the first six months of
2000. Approximately $747,000 of this increase was related to the acquisitions of
CNS and Mid Central. Excluding the increases associated with the acquisitions,
salaries and benefits increased $219,000 or 6.2%. The $80,000 or 19.5% increase
in occupancy expense and the $35,000 or 4.9% increase in furniture and equipment
expense are also primarily related to the acquisitions. The $54,000 or 38.6%
increase in advertising and promotion is due in part to additional product
advertising at ENB related to trust services and internet banking. The $73,000
or 23.0% increase in postage, printing and supplies reflects costs incurred by
the banks' for compliance with the privacy
16
17
provisions of the Gramm-Leach-Bliley act. The entire increase in amortization of
intangible assets is related to the acquisitions.
Income taxes as a percentage of earnings before income taxes as reported in
the condensed consolidated financial statements was 34.1% for the first six
months of 2001 compared to 30.7% for the first six months of 2000. After adding
a fully taxable equivalent adjustment to both income taxes and earnings before
income taxes for tax exempt income on loans and investment securities, the fully
taxable equivalent ratios of income taxes as a percentage of earnings before
income taxes were 39.0% for the first six months of 2001 and 36.2% for the first
six months of 2000. The increase in the effective income tax rate reflects a
reduction in the tax-exempt portion of the investment portfolio.
NET INTEREST INCOME
Fully taxable equivalent net interest income increased $479,000 or 8.7%
and $1,676,000 or 16.0% respectively for the three month and six month periods
ended June 30, 2001 compared to the corresponding periods in 2000. Even though
the net interest margins decreased during both periods, net interest income
increased due to increased net earning assets during the respective periods. In
addition, approximately $114,000 and $476,000 of the increases for the
respective periods reflects income recognized from accelerated discount
accretion on called securities during the first and second quarters of 2001.
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, 2001 and 2000.
17
18
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000
--------------------------------- ---------------------------------
INTEREST RATE INTEREST RATE
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE/1/ PAID/1/ BALANCE EXPENSE/1 PAID/1/
-------- ---------- ------- -------- --------- -------
ASSETS
Loans:/2/
Commercial $148,180 $3,089 8.36% $133,014 $2,973 8.96%
Real estate 259,735 5,334 8.24 208,702 4,568 8.78
Consumer 52,735 1,218 9.26 58,161 1,249 8.61
Investment
securities:/3/
U.S. Treasury and
U.S. Government
agencies 112,494 1,817 6.48 108,493 1,798 6.65
State and municipal 38,009 667 7.04 39,294 618 6.31
Other 5,052 75 5.95 3,052 50 6.57
Federal funds sold 52,886 570 4.32 10,693 165 6.19
Interest-bearing
deposits 1,958 23 4.71 2,479 29 4.69
-------- ------ -------- ------
Total interest
earning assets 671,049 12,793 7.65 563,888 11,450 8.14
All other assets 73,104 58,568
Allowance for loan
losses (7,109) (5,825)
-------- --------
Total assets $737,044 $616,631
======== ========
Continued on next page
18
19
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000
--------------------------------- ---------------------------------
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 $ 89,474 $ 558 2.50% $ 84,518 $ 594 2.82%
Savings 47,430 296 2.50 42,753 298 2.80
Money market 59,076 491 3.33 52,717 518 3.94
Deposits of
$100,000 and over 32,216 528 6.57 31,830 438 5.52
Other time deposits 284,076 3,991 5.64 211,322 2,983 5.66
-------- ------ -------- ------
Total time deposits 512,272 5,864 4.59 423,140 4,831 4.58
Federal funds purchased
and securities sold
under agreements to
repurchase 30,329 285 3.77 21,348 317 5.96
Interest-bearing demand
notes to U.S. Treasury 735 7 3.82 1,418 20 5.66
Other borrowed money 40,142 634 6.33 46,910 758 6.48
-------- ------ -------- ------
Total interest-
bearing
liabilities 583,478 6,790 4.67 492,816 5,926 4.82
------ ------
Demand deposits 64,464 62,760
Other liabilities 12,341 5,326
-------- --------
Total liabilities 660,283 560,902
Stockholders' equity 76,761 55,729
-------- --------
Total liabilities
and stockholders'
equity $737,044 $616,631
======== ========
Net interest income $6,003 $5,524
====== ======
Net interest margin/4/ 3.59% 3.93%
==== ====
- ----------
/1/ Interest income and yields are presented on a fully taxable equivalent
basis using the Federal statutory income tax rate of 34%. Such
adjustments were $206,000 in 2001 and $131,000 in 2000.
/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.
19
20
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000
--------------------------------- --------------------------------
INTEREST RATE INTEREST RATE
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE/1/ PAID/1/ BALANCE EXPENSE/1 PAID/1/
-------- ---------- ------- -------- --------- -------
ASSETS
Loans:/2/
Commercial $148,371 $6,336 8.61% $124,610 $5,456 8.83%
Real estate 259,570 10,721 8.33 196,052 8,339 8.58
Consumer 54,305 2,472 9.18 55,770 2,378 8.60
Investment
securities:/3/
U.S. Treasury and
U.S. Government
agencies 116,923 4,147 7.15 100,814 3,255 6.51
State and municipal 38,513 1,363 7.14 37,155 1,262 6.85
Other 4,554 120 5.31 4,136 124 6.05
Federal funds sold 43,936 1,029 4.72 8,193 243 5.98
Interest-bearing
deposits 2,657 66 5.01 2,816 73 5.23
-------- ------ -------- ------
Total interest
earning assets 668,829 26,254 7.92 529,546 21,130 8.05
All other assets 72,833 56,037
Allowance for loan
losses (7,046) (5,472)
-------- --------
Total assets $734,616 $580,111
======== ========
Continued on next page
20
21
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000
--------------------------------- --------------------------------
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 $ 90,485 $ 1,206 2.69% $ 82,758 $ 1,151 2.80%
Savings 46,031 603 2.64 40,795 568 2.81
Money market 58,905 1,075 3.68 48,851 944 3.90
Deposits of
$100,000 and over 34,094 1,095 6.48 30,449 813 5.38
Other time deposits 285,068 8,183 5.79 196,504 5,337 5.48
-------- ------ -------- ------
Total time deposits 514,583 12,162 4.77 399,357 8,813 4.45
Federal funds purchased
and securities sold
under agreements to
repurchase 29,550 648 4.42 21,238 590 5.60
Interest-bearing demand
notes to U.S. Treasury 762 18 4.76 1,156 35 6.11
Other borrowed money 40,775 1,286 6.36 38,624 1,228 6.41
-------- ------ -------- ------
Total interest-
bearing
liabilities 585,670 14,114 4.86 460,375 10,666 4.67
------ ------
Demand deposits 61,566 58,737
Other liabilities 11,734 4,550
-------- --------
Total liabilities 658,970 523,662
Stockholders' equity 75,646 56,449
-------- --------
Total liabilities
and stockholders'
equity $734,616 $580,111
======== ========
Net interest income $12,140 $10,464
======= =======
Net interest margin/4/ 3.66% 3.98%
==== ====
- ----------
/1/ Interest income and yields are presented on a fully taxable equivalent
basis using the Federal statutory income tax rate of 34. Such
adjustments were $414,000 in 2001 and $344,000 in 2000.
/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.
21
22
The following tables present, on a fully taxable equivalent basis, an
analysis of changes in net interest income resulting from changes in average
volumes of earning assets and interest bearing liabilities and average rates
earned and paid. The change in interest due to the combined rate/volume variance
has been allocated to rate and volume changes in proportion to the absolute
dollar amounts of change in each.
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED JUNE 30, 2001
COMPARED TO
THREE MONTHS ENDED JUNE 30, 2000
--------------------------------
CHANGE DUE TO
TOTAL -------------
CHANGE VOLUME RATE
-------- -------- ---------
INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS:
Loans: /1/
Commercial $ 116 324 (208)
Real estate /2/ 766 1,062 (296)
Consumer (31) (121) 90
Investment securities:
U.S. Treasury and U.S.
Government agencies 19 66 (47)
State and municipal /2/ 49 (20) 69
Other 25 30 (5)
Federal funds sold 405 469 (64)
Interest-bearing deposits (6) (6) 0
------- ------- --------
Total interest income 1,343 1,804 (461)
INTEREST EXPENSE:
NOW accounts (36) 34 (70)
Savings (2) 31 (33)
Money market (27) 58 (85)
Deposits of
$100,000 and over 90 5 85
Other time deposits 1,008 1,022 (14)
Federal funds purchased
and securities sold under
agreements to repurchase (32) 107 (139)
Interest-bearing demand
notes to U.S. Treasury (13) (8) (5)
Other borrowed money (124) (107) (17)
------- ------- --------
Total interest expense 864 1,142 (278)
------- ------- --------
NET INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS $ 479 662 (183)
======= ======= ========
- -----------
/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 of 34%. Such
adjustments totaled $206,000 in 2001 and $131,000 in 2000.
22
23
(DOLLARS EXPRESSED IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, 2001
COMPARED TO
SIX MONTHS ENDED JUNE 20, 2000
------------------------------
CHANGE DUE TO
TOTAL -------------
CHANGE VOLUME RATE
-------- -------- ---------
INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS:
Loans: /1/
Commercial $ 880 1,019 (139)
Real estate /2/ 2,382 2,630 (248)
Consumer 94 (63) 157
Investment securities:
U.S. Treasury and U.S.
Government agencies 892 552 340
State and municipal /2/ 101 47 54
Other (4) 12 (16)
Federal funds sold 786 847 (61)
Interest-bearing deposits (7) (4) (3)
------- ------- --------
Total interest income 5,124 5,040 84
INTEREST EXPENSE:
NOW accounts 55 104 (49)
Savings 35 70 (35)
Money market 131 185 (54)
Deposits of
$100,000 and over 282 104 178
Other time deposits 2,846 2,527 319
Federal funds purchased
and securities sold under
agreements to repurchase 58 199 (141)
Interest-bearing demand
notes to U.S. Treasury (17) (10) (7)
Other borrowed money 58 68 (10)
------- ------- --------
Total interest expense 3,448 3,247 201
------- ------- --------
NET INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS $ 1,676 1,793 (117)
======= ======= ========
- -----------
/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 of 34%. Such
adjustments totaled $414,000 in 2001 and $344,000 in 2000.
23
24
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is based on management's evaluation of the
loan portfolio in light of national and local economic conditions, changes in
the composition and volume of the loan portfolio, changes in the volume of past
due and nonaccrual loans, and other relevant factors. The allowance for loan
losses, which is reported as a deduction from loans, is available for loan
charge-offs. The allowance is increased by the provision charged to expense and
is reduced by loan charge-offs, net of loan recoveries.
Management formally reviews all loans in excess of certain dollar amounts
(periodically established) at least annually. In addition, on a monthly basis,
management reviews past due, "classified", and "watch list" loans in order to
classify or reclassify loans as "loans requiring attention," "substandard,"
"doubtful," or "loss". During that review, management also determines what loans
should be considered to be "impaired". Management believes, but there can be no
assurance, that these procedures keep management informed of possible problem
loans. Based upon these procedures, both the allowance and provision for loan
losses are adjusted to maintain the allowance at a level considered adequate by
management for probable losses inherent in the loan portfolio. See additional
discussion concerning nonperforming loans under "Financial Condition."
The allowance for loan losses was decreased by net loan charge-offs of
$111,000 for the first quarter of 2001 and $129,000 for the second quarter of
2001. That compares to net loan recoveries of $7,000 for the first quarter of
2000 and $131,000 for the second quarter of 2000. The allowance for loan losses
was increased by a provision charged to expense of $248,000 for the first
quarter of 2001 and $231,000 for the second quarter of 2001. That compares to
$258,000 for the first quarter of 2000 and $308,000 for the second quarter of
2000.
The balance of the allowance for loan losses was $7,179,000 at June 30, 2001
compared to $6,940,000 at December 31, 2000 and $6,612,000 at June 30, 2000. The
allowance for loan losses as a percent of outstanding loans was 1.55% at June
30, 2001 compared to 1.48% at December 31, 2000 and 1.39% at June 30, 2000.
FINANCIAL CONDITION
Total assets increased $20,279,000 or 2.8% to $739,882,000 at June 30, 2001
compared to $719,603,000 at December 31, 2000. Total liabilities increased
$16,862,000 or 2.6% to $662,881,000. Stockholders' equity increased $3,417,000
or 4.6% to $77,001,000.
Loans decreased $4,315,000 or 0.9% to $464,156,000 at June 30, 2001 compared
to $468,471,000 at December 31, 2000. Commercial loans decreased $6,751,000;
real estate construction loans increased $383,000; real estate mortgage loans
increased $7,580,000; and consumer loans decreased $5,528,000. The increase in
real estate mortgage loans reflects increased activity due to favorable rates
that currently exist in the markets. Of the $7,580,000 increase in mortgage
loans, approximately $3,177,000 reflects loans that will be sold in the
secondary market. The decreases in commercial and consumer loans are reflective
of lower rates in the markets that the Company is unwilling to match, primarily
in the area of automobile financing.
24
25
Nonperforming loans, defined as loans on nonaccrual status, loans 90 days or
more past due, and restructured loans totaled $7,402,000 or 1.60% of total loans
at June 30, 2001 compared to $8,082,000 or 1.73% of total loans at December 31,
2000. Detail of those balances plus repossessions is as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
JUNE 30, 2001 DECEMBER 31, 2000
----------------- -----------------
% OF % OF
GROSS GROSS
BALANCE LOANS BALANCE LOANS
------- ----- ------- -----
Nonaccrual loans:
Commercial $2,666 .58% $2,648 .57%
Real Estate:
Construction 689 .15 1,006 .22
Mortgage 3,622 .78 3,584 .77
Consumer 108 .02 453 .09
------ ---- ------ ----
7,085 1.53 7,691 1.65
------ ---- ------ ----
Loans contractually past-due 90 days
or more and still accruing:
Commercial -- -- -- --
Real Estate:
Construction -- -- -- --
Mortgage 274 .06 237 .05
Consumer 43 .01 154 .03
------ ---- ------ ----
317 .07 391 .08
------ ---- ------ ----
Restructured loans -- -- -- --
------ ---- ------ ----
Total nonperforming loans 7,402 1.60% 8,082 1.73%
==== ====
Other real estate 135 36
Repossessions 220 143
------ ------
Total nonperforming assets $7,757 $8,261
====== ======
The allowance for loan losses was 97.00% of nonperforming loans at June 30,
2001 compared to 85.87% of nonperforming loans at December 31, 2000. The Company
has allocated $1,097,000 of the allowance for loan losses at June 30, 2001 which
it believes adequately covers any exposure on these specific credits.
25
26
It is the Company's policy to discontinue the accrual of interest income on
loans when the full collection of interest or principal is in doubt, or when the
payment of interest or principal has become contractually 90 days past due
unless the obligation is both well secured and in the process of collection. A
loan remains on nonaccrual status until the loan is current as to payment of
both principal and interest and/or the borrower demonstrates the ability to pay
and remain current. Interest on loans on nonaccrual status at June 30, 2001 and
2000, which would have been recorded under the original terms those loans, was
approximately $385,000 and $237,000 for the six months ended June 30, 2001 and
2000, respectively. Approximately $47,000 and $159,000 was actually recorded as
interest income on such loans for the six months ended June 30, 2001 and 2000,
respectively.
A loan is considered "impaired" when it is probable a creditor will be
unable to collect all amounts due - both principal and interest - according to
the contractual terms of the loan agreement. In addition to nonaccrual loans at
June 30, 2001 included in the table above, which were considered "impaired",
management has identified additional loans totaling approximately $2,107,000
which are not included in the table above but are considered by management to be
"impaired". The $2,107,000 of loans identified by management as being "impaired"
reflected various commercial, commercial real estate, real estate, and consumer
loans ranging in size from approximately $3,000 to approximately $200,000. The
average balance of nonaccrual and other "impaired" loans for the first six
months of 2001 was approximately $9,223,000. At June 30, 2001 the allowance for
loan losses on impaired loans was $1,614,000 compared to $1,565,000 at December
31, 2000.
As of June 30, 2001 and December 31, 2000 approximately $8,642,000 and
$5,098,000, respectively, of loans not included in the nonaccrual table above or
identified by management as being "impaired" were classified by management as
having more than normal risk. In addition to the classified list, our Company
also maintains an internal loan watch list of loans which for various reasons,
not all related to credit quality, management is monitoring more closely than
the average loan portfolio. Loans may be added to this list for reasons that are
temporary and correctable, such as the absence of current financial statements
of the borrower, or a deficiency in loan documentation. Other loans are added as
soon as any problem is detected which might affect the scheduled loan payment, a
deterioration in the borrower's financial condition identified in a review of
periodic financial statements, a decrease in the value of the collateral
securing the loan, or a change in the economic environment within which the
borrower operates. Once the loan is placed on our Company's watch list, its
condition is monitored closely. Any further deterioration in the condition of
the loan is evaluated to determine if the loan should be assigned a higher risk
category.
Investment in debt and equity securities classified as available-for-sale
increased $14,720,000 or 11.0% to $148,174,000 at June 30, 2001 compared to
$133,454,000 at December 31, 2000. As allowed upon adoption of SFAS 133, the
Company transferred its held-to-maturity portfolio to its available-for-sale
portfolio. This transfer was made effective January 1, 2001. At the time of
transfer the amortized cost of the securities transferred was $22,463,000 and
the fair value was $22,676,000. Investments classified as available-for-sale are
carried at fair value. During 2001, the market valuation account was increased
$1,661,000 to $2,695,000 to reflect the fair value of available-for-sale
investments at June 30, 2001 and the net after tax increase resulting from the
change in the market valuation adjustment of $1,075,000 increased the
stockholders' equity component to $1,733,000 at June 30, 2001.
At December 31, 2000 the market valuation account for the
available-for-sale investments of $1,035,000 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 $658,000 was
reflected as a separate positive component of stockholders' equity.
26
27
As a result of the transfer of securities previously discussed, investments
in debt securities classified as held-to-maturity decreased $22,463,000 or
100.0% to zero at June 30, 2001 compared to $22,463,000 at December 31, 2000.
Investments classified as held-to-maturity are carried at amortized cost. At
December 31, 2000 the aggregate fair value of the Company's held-to-maturity
investment portfolio was approximately $213,000 more than its aggregate carrying
value.
Cash and cash equivalents, which consist of cash and due from banks and
Federal funds sold, increased $34,532,000 or 70.6% to $83,456,000 at June 30
2001 compared to $48,924,000 at December 31, 2000. Most of this increase
reflects funds received from securities called prior to maturity that have not
been reinvested and are being held in federal funds sold.
Premises and equipment decreased $923,000 or 5.8% to $14,868,000 at June 30,
2001 compared to $15,791,000 at December 31, 2000. The decrease reflects sales
and retirements of premises and equipment of $1,468,000 and depreciation expense
of $640,000, offset by purchases for premises and equipment of $1,185,000.
Total deposits increased $9,466,000 or 1.6% to $585,729,000 at June 30, 2001
compared to $576,263,000 at December 31, 2000. Most of this increase is
attributed to increased public fund balances.
Federal funds purchased and securities sold under agreements to repurchase
increased $6,033,000 or 36.8% to $22,431,000 at June 30, 2001 compared to
$16,398,000 at December 31, 2000. The increase is primarily due increased public
funds at ENB.
The increase in stockholders' equity reflects net income of $3,430,000 less
dividends declared of $1,088,000 and a $1,075,000 change in unrealized holding
gains, net of taxes, on investment in debt and equity securities
available-for-sale.
No material changes in the Company's liquidity or capital resources have
occurred since December 31, 2000.
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IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 establishes
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires an entity
to recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. In September
1999, the FASB issued Statement of Financial Accounting Standards No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No.
133, which defers the effective date of SFAS 133 from fiscal years beginning
after September 15, 1999 to fiscal years beginning after September 15, 2000. In
September 2000, the FASB issued Statement of Financial Accounting Standards No.
138 - Accounting for Derivative Instruments and Hedging Activities, an Amendment
of FASB Statement No. 133 (SFAS 138), which addresses a limited number of issues
causing implementation difficulties for numerous entities that apply SFAS 133,
as amended. SFAS 138 amends the accounting and reporting standards of SFAS 133,
as amended, for certain derivative instruments, certain hedging activities, and
for decisions made by the FASB relating to the Derivative Implementation Group
(DIG) process. The Company has adopted SFAS 133 as amended effective January 1,
2001, but since the Company does not participate in any derivative or hedging
activities, SFAS 133, as amended, had no impact on the Company's consolidated
financial position and results of operations, except for the transfer of all
held-to-maturity securities into available-for-sale securities as of January 1,
2001 as permitted by SFAS 133. At the time of the transfer the amortized cost of
the securities transferred was $22,463,000 and the fair value was $22,676,000.
The difference was an unrealized gain recorded net of tax as other comprehensive
income.
In September 2000, the FASB issued SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
that replaces SFAS No. 125. This Statement provides consistent standards for
distinguishing transfers of financial assets that are sales, from transfers that
are secured borrowings. The standards are based on the consistent application of
the financial components approach, where after a transfer, an entity recognizes
the financial and servicing assets it controls and the liabilities it has
incurred, and derecognizes financial liabilities when extinguished.
This statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001. This
Statement was effective for recognition and reclassification of collateral and
for disclosures relating to securitization transactions and collateral for
fiscal years ending after December 31, 2000.
A transfer of financial assets in which the transferor surrenders
control is accounted for as a sale to the extent that consideration other than
beneficial interests in the transferred assets is received in exchange. This
Statement requires that liabilities and derivatives transferred be initially
measured at fair value, if practicable. Servicing assets and other retained
interest in the transferred assets are to be measured by allocating the previous
carrying amount between the assets and retained interests sold, if any, based on
their relative fair values on the date of transfer.
This Statement requires that servicing assets and liabilities be
subsequently measured by amortization in proportion to and over the period
estimated net servicing income or loss, and assessment for asset impairment or
increased obligation based on fair value.
This Statement requires that a liability be derecognized if the debtor
pays the creditor and is relieved of its obligation for the liability, or the
debtor is legally released from being the primary obligor under the liability
either judicially or by the creditor.
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29
The implementation of this Statement did not have a material effect on
the Company's consolidated financial statements.
In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
Statement 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141
immediately and Statement 142 effective January 1, 2002. Furthermore, any
goodwill and any intangible asset determined to have an indefinite useful life
that are acquired in a purchase business combination completed after June 30,
2001 will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate pre-Statement 142 accounting literature.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of
Statement 142.
Statement 141 will require upon adoption of Statement 142, that the
Company evaluate its existing intangible assets and goodwill that were acquired
in a prior purchase business combination, and to make any necessary
reclassifications in order to conform with the new criteria in Statement 141 for
recognition apart from goodwill. Upon adoption of Statement 142, the Company
will be required to reassess the useful lives and residual values of all
intangible assets acquired in purchase business combinations, and make any
necessary amortization period adjustments by the end of the first interim period
after adoption. In addition, to the extent an intangible asset is identified as
having an indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of Statement
142 within the first interim period. Any impairment loss will be measured as of
the date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. To
accomplish this the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption. The Company will then have up to six months from the
date of adoption to determine the fair value of each reporting unit and compare
it to the reporting unit's carrying amount. To the extent a reporting unit's
carrying amount exceeds its fair value, an indication exists that the reporting
unit's goodwill may be impaired and the Company must perform the second step of
the transitional impairment test. In the second step, the Company must compare
the implied fair value of the reporting unit's goodwill, determined by
allocating the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be
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30
recognized as the cumulative effect of a change in accounting principle in the
Company's statement of earnings.
And finally, any unamortized negative goodwill existing at the date
Statement 142 is adopted must be written off as the cumulative effect of a
change in accounting principle.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $24,287,000, unamortized identifiable intangible
assets in the amount of $275,000, and no negative goodwill, all of which will be
subject to the transition provisions of Statements 141 and 142. Amortization
expense related to goodwill was $1,169,000 and $679,000 for the year ended
December 31, 2000 and the six months ended June 30, 2001, respectively. Because
of the extensive effort needed to comply with adopting Statements 141 and 142,
it is not practicable to reasonably estimate the impact of adopting these
Statements on the Company's financial statements at the date of this report,
including whether any transitional impairment losses will be required to be
recognized as the cumulative effect of a change in accounting principle.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our Company's exposure to market risk is reviewed on a regular basis by
the Banks' Asset/Liability Committees and Boards of Directors. Interest rate
risk is the potential of economic losses due to future interest rate changes.
These economic losses can be reflected as a loss of future net interest income
and/or a loss of current fair market values. The objective is to measure the
effect on net interest income and to adjust the balance sheet to minimize the
inherent risk while at the same time maximizing income. Management realizes
certain risks are inherent and that the goal is to identify and minimize those
risks. Tools used by the Banks' management include the standard GAP report
subject to different rate shock scenarios. At June 30, 2001, the rate shock
scenario models indicated that annual net interest income could decrease or
increase by as much as 1 to 2% 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 2% at December 31, 2000.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities None
Item 3. Defaults Upon Senior Securities None
Item 4. At the annual meeting of the shareholders of Exchange National
Bancshares, Inc. held on June 13, 2001, the shareholders elected three
Class III Directors, namely, Donald L. Campbell, David T. Turner, and
Kevin L. Riley to serve terms expiring at the annual meeting of
shareholders in 2004 and ratified the Board of Directors selection of
KPMG LLP as the Company's independent auditors for the year ending
December 31, 2001. Class I Directors, namely, Charles G. Dudenhoeffer,
Jr., Phillip 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 2002
and 2003, respectively.
The following is a summary of votes cast. No broker non-votes
were received.
Withhold
Authority/
For Against Abstentions
--------- ------------ -----------
Election of Directors:
Donald L. Campbell 2,486,767 7,711 N/A
David T. Turner 2,480,002 14,476 N/A
Kevin I. Riley 2,479,428 15,050 N/A
Ratification of KPMG LLP as
independent auditors 2,485,027 1,349 8,102
Item 5. Other Information None
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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, 2000 (Commission file number 0-23636) and incorporated
herein by reference).
4 Specimen certificate representing shares of the Company's
$1.00 par value common stock (filed as Exhibit 4 to the
Company's Annual Report on Form 10-K For the fiscal year
ended December 31, 1999 (Commission File number 0-23636) and
incorporated herein be reference).
(b) Reports on Form 8-K.
No reports were filed on Form 8-K for the three month period ended June
30, 2001.
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34
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/ Donald L. Campbell
---- -----------------------------------
Donald L. Campbell, Chairman of the
Board of Directors, President and
August 10, 2001 Principal Executive Officer
By /s/ Richard G. Rose
-----------------------------------
Richard G. Rose, Treasurer
August 10, 2001
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EXCHANGE NATIONAL BANCSHARES, INC.
INDEX TO EXHIBITS
June 30, 2001 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, 2000 (Commission file number 0-23636)
and incorporated herein by reference). **
4 Specimen certificate representing shares of the Company's
$1.00 par value common stock (filed as Exhibit 4 to 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). **
** Incorporated by reference.
35