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 September 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 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
As of November 9, 2001, the registrant had 2,854,145 shares of common
stock, par value $1.00 per share, outstanding.
Page 1 of 34 pages
Index to Exhibits located on page 34
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
---------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
ASSETS
Loans:
Commercial $140,656,317 $151,329,889
Real estate -- construction 23,529,000 20,500,000
Real estate -- mortgage 247,596,854 238,157,787
Consumer 50,227,034 58,483,757
------------ ------------
462,009,205 468,471,433
Less allowance for loan losses 7,303,354 6,939,991
------------ ------------
Loans, net 454,705,851 461,531,442
------------ ------------
Investment in debt and equity securities:
Available-for-sale, at fair value 184,056,225 133,453,720
Held-to-maturity, fair value of
$22,675,700 at December 31, 2000 -- 22,463,180
------------ ------------
Total investment in debt
and equity securities 184,056,225 155,916,900
------------ ------------
Federal funds sold 56,922,011 23,550,366
Cash and due from banks 20,090,501 25,374,115
Premises and equipment 14,937,383 15,791,222
Accrued interest receivable 6,173,427 6,795,268
Intangible assets 24,950,728 26,099,648
Other assets 4,223,649 4,544,385
------------ ------------
$766,059,775 $719,603,346
============ ============
Continued on next page
2
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
---------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits $ 65,942,178 $ 68,722,835
Time deposits 503,187,021 507,540,052
------------ ------------
Total deposits 569,129,199 576,262,887
Federal funds purchased and
securities sold under agreements to repurchase 63,218,351 16,398,484
Interest-bearing demand notes to U.S. Treasury 1,272,567 543,667
Other borrowed money 40,831,205 42,377,787
Accrued interest payable 3,309,074 4,420,054
Other liabilities 9,817,812 6,016,730
------------ ------------
Total liabilities 687,578,208 646,019,609
------------ ------------
Stockholders' equity:
Common Stock - $1 par value; 15,000,000 shares
authorized; 2,863,493 shares issued 2,863,493 2,863,493
Surplus 21,970,425 21,955,275
Retained earnings 51,671,703 48,106,530
Accumulated other comprehensive income 2,227,645 658,439
Treasury stock; 9,348 shares at cost (251,699) --
------------ ------------
Total stockholders' equity 78,481,567 73,583,737
------------ ------------
$766,059,775 $719,603,346
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
3
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
---------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Interest income $12,196,884 $12,963,234 $38,036,636 $33,749,772
Interest expense 6,163,441 7,210,067 20,277,447 17,875,919
----------- ----------- ----------- -----------
Net interest income 6,033,443 5,753,167 17,759,189 15,873,853
Provision for loan losses 231,000 273,000 710,000 839,000
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 5,802,443 5,480,167 17,049,189 15,034,853
Noninterest income 1,289,655 910,295 3,597,258 2,585,049
Noninterest expense 4,402,571 4,111,909 12,747,807 11,360,220
----------- ----------- ----------- -----------
Income before
income taxes 2,689,527 2,278,553 7,898,640 6,259,682
Income taxes 924,343 727,426 2,703,052 1,950,601
----------- ----------- ----------- -----------
Net income $ 1,765,184 $1,551,127 $5,195,588 $4,309,081
=========== =========== =========== ===========
Basic earnings per share $0.62 $0.54 $1.81 $1.65
===== ===== ===== =====
Diluted earnings per share $0.62 $0.54 $1.81 $1.65
===== ===== ===== =====
Weighted average shares of
common stock outstanding:
Basic 2,860,851 2,863,493 2,862,603 2,604,190
Diluted 2,861,034 2,863,493 2,862,603 2,604,190
Dividends per share:
Declared $0.19 $0.19 $0.57 $0.57
===== ===== ===== =====
Paid $0.19 $0.19 $0.57 $0.57
===== ===== ===== =====
See accompanying notes to unaudited condensed consolidated financial statements.
4
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
---------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2001 2000
------------- ------------
Cash flows from operating activities:
Net income $ 5,195,588 $ 4,309,081
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 710,000 839,000
Depreciation expense 937,698 892,111
Net accretion of debt securities
premiums and discounts (594,300) (275,902)
Amortization of intangible assets 1,142,798 935,642
Decrease (increase) in accrued
interest receivable 621,841 (1,068,362)
Decrease (increase) in other assets (451,566) 353,437
Decrease (increase) in accrued interest
payable (1,110,980) 647,569
Increase in other liabilities 3,801,082 1,584,962
Net securities losses -- 27,710
Other, net 21,276 (118,387)
Origination of mortgage loans for sale (65,574,504) (18,860,925)
Proceeds from the sale of mortgage loans
held for sale 66,467,894 19,148,997
Gain on dispositions of premises and equipment (127,379) --
Gain on sale of mortgage loans (893,390) (288,072)
------------- ------------
Net cash provided by operating activities 10,146,058 8,126,861
------------- ------------
Cash flows from investing activities:
Net decrease (increase) in loans 5,321,192 (24,265,861)
Purchases of available-for-sale debt securities (174,988,707) (75,026,185)
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 105,007,558 74,349,802
Held-to-maturity -- 4,279,884
Proceeds from calls of debt securities:
Available-for-sale 44,835,000 --
Held-to-maturity -- 710,000
Purchase of subsidiaries, net of
cash and cash equivalents acquired -- (7,886,356)
Purchases of premises and equipment (1,595,526) (1,239,894)
Proceeds from dispositions of premises
and equipment 1,639,043 50,156
Proceeds from sales of other real estate
owned and repossessions 737,030 592,245
------------- ------------
Net cash used in investing activities (19,044,410) (27,923,562)
------------- ------------
Continued on next page
5
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
---------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2001 2000
----------- ------------
Cash flows from financing activities:
Net decrease in demand deposits (2,780,657) (19,915,038)
Net increase (decrease) in interest-bearing
transaction accounts (4,955,497) 2,579,653
Net increase in time deposits 602,466 31,213,380
Net increase in federal funds purchased and
securities sold under agreements to repurchase 46,819,867 (6,964,827)
Net increase (decrease) in interest-bearing
demand notes to U.S. Treasury 728,900 (1,721,319)
Proceeds from Federal Home Loan Bank
borrowings 1,000,000 12,000,000
Repayment of Federal Home Loan Bank
borrowings (1,046,582) (7,512,551)
Proceeds from other borrowed money -- 12,000,000
Repayment of other borrowed money (1,500,000) (2,000,000)
Purchase of common stock (251,699) --
Cash dividends paid (1,630,415) (1,313,026)
----------- -----------
Net cash provided by financing activities 36,986,383 18,366,272
----------- -----------
Net increase (decrease) in cash and
cash equivalents 28,088,031 (1,430,429)
Cash and cash equivalents, beginning of period 48,924,481 32,601,208
----------- -----------
Cash and cash equivalents, end of period $77,012,512 $31,170,779
=========== ===========
Supplemental schedule of cash flow information-
Cash paid during period for:
Interest $21,388,427 $16,307,136
Income taxes 203,960 555,135
Supplemental schedule of noncash
investing activities-
Other real estate and repossessions
acquired in settlement of loans 794,399 659,239
Transfer of securities from held-to-maturity
to available-for-sale 22,675,700 --
See accompanying notes to unaudited condensed consolidated financial statements.
6
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
---------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 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 their respective dates of
acquisition. A summary of unaudited pro forma combined financial information for
the nine months ended September 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.
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000
-------------------
NET INTEREST INCOME $17,155,040
NET INCOME $ 4,060,017
EARNINGS PER SHARE $1.56
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 to
the 2001 condensed consolidated presentation. Such reclassifications have no
effect on previously reported net income. Operating results for the period ended
September 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 our 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.
7
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. Bancshares 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 September 30, 2001
and December 31, 2000, consolidated statements of earnings for the three and
nine month periods ended September 30, 2001 and 2000 and cash flows for the nine
months ended September 30, 2001 and 2000.
The following table reflects, for the three and nine months periods ended
September 30, 2001 and 2000, the numerators (net income) and denominators
(average shares outstanding) for the basic and diluted net income per share
computations:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------
2001 2000 2001 2000
---------- ---------- --------- ----------
Net income, basic and diluted $1,765,184 $1,551,127 $5,195,588 $4,309,081
Average shares outstanding 2,860,851 2,863,493 2,862,603 2,604,190
Effect of dilutive securities 183 -- -- --
---------- ---------- ---------- ----------
Average shares outstanding
including dilutive securities 2,861,034 2,863,493 2,862,603 2,604,190
Net income per share, basic $0.62 $0.54 $1.81 $1.65
===== ===== ===== =====
Net income per share, diluted $0.62 $0.54 $1.81 $1.65
===== ===== ===== =====
8
For the three-month and nine-month periods ended September 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 nine-month periods ended
September 30, 2001 and 2000 is summarized as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net income $1,765,184 $1,551,127 $5,195,588 $4,309,081
Other comprehensive
income:
Net unrealized holding
gains on investments
in debt and
equity securities
available-for-sale,
net of taxes 494,693 778,310 1,569,206 746,441
Adjustment for net
securities losses
realized in net
income, net of
applicable income taxes -- -- -- 18,287
---------- ---------- ---------- ----------
Total other comprehensive
income 494,693 778,310 1,569,206 764,728
---------- ---------- ---------- ----------
Comprehensive income $2,259,877 $2,329,437 $6,764,794 $5,073,809
========== ========== ========== ==========
Through the respective branch network, ENB, CUSB and OVB provide similar
products and services in three defined geographic areas. The products and
services offered include a broad range of commercial and personal banking
services, including certificates of deposit, individual retirement and other
time deposit accounts, checking and other demand deposit accounts, interest
checking accounts, savings accounts, and money market accounts. Loans include
real estate, commercial, installment, and other consumer loans. Other financial
services include automatic teller machines, trust services, credit related
insurance, and safe deposit boxes. The revenues generated by each business
segment consist primarily of interest income, generated from the loan and debt
and equity security portfolios, and service charges and fees, generated from the
deposit products and services. The geographic areas are defined to be
communities surrounding Jefferson City, Clinton and Warsaw, Missouri. The
products and services are offered to customers primarily within their respective
geographical areas. The business segment results that follow are consistent with
Our Company's internal reporting system which is consistent, in all material
respects, with accounting principles generally accepted in the United Sates of
America and practices prevalent in the banking industry.
9
SEPTEMBER 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 $300,449,190 $117,379,647 $36,877,014 $ -- $454,705,851
Debt and equity securities 103,613,518 53,611,808 26,830,899 -- 184,056,225
Total assets 456,213,565 238,573,954 71,445,963 (173,707) 766,059,775
Deposits 327,354,006 187,050,122 58,763,566 (4,038,495) 569,129,199
Stockholders' equity 48,793,205 35,834,189 9,738,489 (15,884,316) 78,481,567
============ ============ =========== ============ ============
DECEMBER 31, 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
------------- -------------- ------------ ------------ ------------
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 SEPTEMBER 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 $ 7,421,416 $ 3,567,832 $ 1,207,636 -- $ 12,196,884
Total interest expense 3,439,257 1,868,382 550,396 305,406 6,163,441
------------ ------------ ----------- ------------ ------------
Net interest income 3,982,159 1,699,450 657,240 (305,406) 6,033,443
Provision for loan losses 150,000 75,000 6,000 -- 231,000
Noninterest income 931,422 195,658 57,188 -- 1,184,268
Noninterest expense 2,520,938 1,297,097 367,199 111,950 4,297,184
Income taxes 727,200 212,990 123,553 (139,400) 924,343
------------ ------------ ----------- ------------ ------------
Net income (loss) $ 1,515,443 $ 310,021 $ 217,676 $ (277,956) $ 1,765,184
============ ============ =========== ============ ============
THREE MONTHS ENDED SEPTEMBER 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 $ 7,910,417 $ 3,976,547 $ 1,069,495 $ 6,775 $ 12,963,234
Total interest expense 4,119,041 2,096,362 564,873 429,791 7,210,067
------------ ------------ ----------- ------------ ------------
Net interest income 3,791,376 1,880,185 504,622 (423,016) 5,753,167
Provision for loan losses 225,000 45,000 3,000 -- 273,000
Noninterest income 681,828 176,817 51,650 -- 910,295
Noninterest expense 2,457,661 1,199,238 338,312 116,698 4,111,909
Income taxes 556,900 281,288 70,238 (181,000) 727,426
------------ ------------ ----------- ------------ ------------
Net income (loss) $ 1,233,643 $ 531,476 $ 144,722 $ (358,714) $ 1,551,127
============ ============ =========== ============ ============
10
NINE MONTHS ENDED SEPTEMBER 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 $ 22,767,419 $ 11,382,723 $ 3,880,784 $ 5,710 $ 38,036,636
Total interest expense 11,363,626 6,179,157 1,757,423 977,241 20,277,447
------------ ------------ ----------- ------------ ------------
Net interest income 11,403,793 5,203,566 2,123,361 (971,531) 17,759,189
Provision for loan losses 450,000 225,000 35,000 -- 710,000
Noninterest income 2,734,640 571,248 163,992 -- 3,469,880
Noninterest expense 7,504,983 3,748,629 1,092,753 274,064 12,620,429
Income taxes 1,990,870 709,125 418,857 (415,800) 2,703,052
------------ ------------ ----------- ------------ ------------
Net income (loss) $ 4,192,580 $ 1,092,060 $ 740,743 $ (829,795) $ 5,195,588
============ ============ =========== ============ ============
NINE MONTHS ENDED SEPTEMBER 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 $ 20,707,635 $ 9,946,938 $ 3,069,313 $ 25,886 $ 33,749,772
Total interest expense 10,232,339 5,064,040 1,567,765 1,011,775 17,875,919
------------ ------------ ----------- ------------ ------------
Net interest income 10,475,296 4,882,898 1,501,548 (985,889) 15,873,853
Provision for loan losses 675,000 155,000 9,000 -- 839,000
Noninterest income 1,940,642 490,646 153,761 -- 2,585,049
Noninterest expense 6,730,478 3,234,732 997,963 397,047 11,360,220
Income taxes 1,527,900 673,931 211,270 (462,500) 1,950,601
------------ ------------ ----------- ------------ ------------
Net income (loss) $ 3,482,560 $ 1,309,881 $ 437,076 $ (920,436) $ 4,309,081
============ ============ =========== ============ ============
11
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, THAT THE
ALLOWANCE FOR LOAN LOSSES ADEQUATELY COVERS ANY EXPOSURE ON SPECIFIC CREDITS,
AND THAT SPECIFIED LEVELS OF UNAMORTIZED GOODWILL, UNAMORTIZED IDENTIFIABLE
INTANGIBLE ASSETS AND NEGATIVE GOODWILL ARE EXPECTED AS A RESULT OF THE
IMPLEMENTATION OF FASB STATEMENTS 141 AND 142 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, 2000, AS WELL AS THOSE DISCUSSED ELSEWHERE IN OUR COMPANY'S REPORTS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
12
Net income for the three months ended September 30, 2001 of $1,765,000
increased $214,000 when compared to the third quarter of 2000. Earnings per
common share for the third quarter of 2001 of $0.62 increased 8 cents or 14.8%
when compared to the third quarter of 2000. Net income for the nine months ended
September 30, 2001 of $5,196,000 increased $887,000 when compared to the first
nine months of 2000. Earnings per common share for the nine months ended
September 30, 2001 of $1.81 increased 16 cents or 9.7% when compared to the
first nine 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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
2001 2000 2001 2000
------- ------- ------- -------
Interest income $12,196 $12,963 $38,037 $33,750
Fully taxable equivalent (FTE) adjustment 202 268 617 614
------- ------- ------- -------
Interest income (FTE basis) 12,398 13,231 38,654 34,364
Interest expense 6,163 7,210 20,277 17,876
------- ------- ------- -------
Net interest income (FTE basis) 6,235 6,021 18,377 16,488
Provision for loan losses 231 273 710 839
------- ------- ------- -------
Net interest income after provision
for loan losses (FTE basis) 6,004 5,748 17,667 15,649
Noninterest income 1,290 910 3,597 2,585
Noninterest expense 4,403 4,112 12,748 11,360
------- ------- ------- -------
Earnings before income taxes (FTE basis) 2,891 2,546 8,516 6,874
------- ------- ------- -------
Income taxes 924 727 2,703 1,951
FTE adjustment 202 268 617 614
------- ------- ------- -------
Income taxes (FTE basis) 1,126 995 3,320 2,565
------- ------- ------- -------
Net income $ 1,765 $ 1,551 $ 5,196 $ 4,309
======= ======= ======= =======
13
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 2000
Net interest income on a fully taxable equivalent basis increased $214,000
or 3.6% to $6,235,000 or 3.68% of average earning assets for the third quarter
of 2001 compared to $6,021,000 or 3.70% of average earning assets for the same
period of 2000. The provision for loan losses for the three months ended
September 30, 2001 was $231,000 compared to $273,000 for the same period of
2000.
Noninterest income and noninterest expense for the three month periods
ended September 30, 2001 and 2000 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS
ENDED
SEPTEMBER 30, INCREASE(DECREASE)
---------------- ------------------
2001 2000 AMOUNT %
------- ------ ------- -------
NONINTEREST INCOME
Service charges on deposit accounts $ 505 $ 412 $ 93 22.6 %
Trust department income 94 104 (10) (9.6)
Brokerage income 21 20 1 5.0
Mortgage loan servicing fees 81 136 (55) (40.4)
Gain on sales of mortgage loans 325 130 195 150.0
Credit card fees 39 36 3 8.3
Other 225 72 153 212.5
------ ------ ------
$1,290 $ 910 $ 380 41.8 %
====== ====== ======
NONINTEREST EXPENSE
Salaries and employee benefits $2,168 $1,960 $ 208 10.6 %
Occupancy expense, net 289 268 21 7.8
Furniture and equipment expense 379 405 (26) (0.6)
FDIC insurance assessment 33 36 (3) (8.3)
Advertising and promotion 106 107 (1) (0.9)
Postage, printing, and supplies 197 195 2 1.0
Legal, examination, and
professional fees 211 161 50 31.1
Credit card expenses 22 26 (4) 15.4
Credit investigation and loan
collection expenses 59 77 (18) (23.4)
Amortization of intangible assets 389 387 2 0.5
Other 550 490 60 12.2
------ ------ ------
$4,403 $4,112 $ 291 7.1 %
====== ====== ======
Noninterest income increased $380,000 or 41.8% to $1,290,000 for the third
quarter of 2001 compared to $910,000 for the same period of 2000. Service
charges on deposit accounts increased $93,000 or 22.6% due primarily to the
institution of a new overdraft program at ENB. This program has generated an
increase of $80,000 in insufficient fund fees collected this year compared to
the same period last year. Gains on sales of mortgage loans increased $195,000
or 150.0% due to an increase in volume of loans originated and sold to the
secondary market from approximately $7,384,000 in the third quarter of 2000 to
approximately $25,672,000 for the third quarter of 2001.
14
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. The decrease in mortgage
servicing fees of $55,000 reflects the write-down of $53,000 of Bancshares'
mortgage servicing rights to their fair value at September 30, 2001. This
write-down is reflective of the high refinancing activity that our company has
experienced in its servicing portfolio during the second and third quarters of
2001. The $153,000 or 212.5% increase in other noninterest income is primarily
the result of a gain of $109,000 recognized on the sale of property obtained in
one of the prior acquisitions. This property was not being used as a banking
branch. The balance of the increase is spread across various categories of other
noninterest income including ATM surcharge fees, safe deposit box rental income
and miscellaneous fee income.
Noninterest expense increased $291,000 or 7.1% to $4,403,000 for the third
quarter of 2001 compared to $4,112,000 for the third quarter of 2000. Salaries
and benefits increased $208,000 or 10.6%. This increase represents normal salary
adjustments, increased insurance benefit costs, and additional hires. The
$50,000 or 31.1% increase in legal, examination and professional fees is
primarily the result of consulting fees paid in the third quarter for tax and
technology related issues. Approximately $25,000 of the $60,000 or 12.2%
increase in other noninterest expense represents an increase in forgery and
fraud losses experienced by the banks compared to the same period last year.
Income taxes as a percentage of earnings before income taxes as reported in
the condensed consolidated financial statements was 34.4% for the third quarter
of 2001 compared to 31.9% for the third 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 39.0% for the third quarter of 2001 and 39.1% for the third
quarter of 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 2000
Net interest income on a fully taxable equivalent basis increased
$1,888,000 or 11.5% to $18,376,000 or 3.67% of average earning assets for the
first nine months of 2001 compared to $16,488,000 or 3.88% of average earning
assets for the same period of 2000. The provision for loan losses for the nine
months ended September 30, 2001 was $710,000 compared to $839,000 for the same
period of 2000.
15
Noninterest income and noninterest expense for the nine month periods ended
September 30, 2001 and 2000 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
NINE MONTHS
ENDED
SEPTEMBER 30, INCREASE(DECREASE)
----------------- ------------------
2001 2000 AMOUNT %
------- ------- ------- ------
NONINTEREST INCOME
Service charges on deposit accounts $ 1,428 $ 1,112 $ 316 28.4 %
Trust department income 313 418 (105) (25.1)
Brokerage income 64 68 (4) (5.9)
Mortgage loan servicing fees 321 378 (57) (15.1)
Gain on sales of mortgage loans 893 288 605 210.1
Net loss on sales and calls
of debt securities -- (28) 28 100.0
Credit card fees 114 108 6 5.6
Other 464 241 223 92.5
------- ------- ------
$ 3,597 $ 2,585 $1,012 39.1 %
======= ======= ======
NONINTEREST EXPENSE
Salaries and employee benefits $ 6,370 $ 5,490 $ 880 16.0 %
Occupancy expense, net 760 679 81 11.9
Furniture and equipment expense 1,173 1,121 52 4.6
FDIC insurance assessment 102 93 9 9.7
Advertising and promotion 301 247 54 21.9
Postage, printing, and supplies 586 513 73 14.2
Legal, examination, and
professional fees 544 580 (36) (6.2)
Credit card expenses 70 75 (5) (6.7)
Credit investigation and loan
collection expenses 162 157 5 3.2
Amortization of intangible assets 1,143 936 207 22.1
Other 1,537 1,469 68 4.6
------- ------- ------
$12,748 $11,360 $1,388 12.2 %
======= ======= ======
Noninterest income increased $1,012,000 or 39.1% to $3,597,000 for the
first nine months of 2001 compared to $2,585,000 for the same period of 2000.
Service charges on deposit accounts increased $316,000 or 28.4% primarily due to
the institution of a new overdraft program at ENB. This program has generated an
increase of $245,000 in insufficient fund fees collected during the first nine
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. The decrease in trust department
income reflects lower trust distribution fees collected this year compared to
the same period last year. Gains on sales of mortgage loans increased $605,000
or 210.1% due to an increase in volume of loans originated and sold to the
secondary market from approximately $18,861,000 during the first nine months of
2000 to approximately $65,575,000 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. The decrease in mortgage servicing fees
of $57,000 reflects the write-down of $53,000 of Bancshares' mortgage servicing
rights to their fair
16
value at September 30, 2001. This write-down is reflective of the high
refinancing activity that our company has experienced in its servicing portfolio
during the second and third quarters of 2001. $127,000 of the $223,000 or 92.5%
increase in other noninterest income reflects gains recognized on the sales of
properties obtained in previous acquisitions. The balance of the increase is
spread across various categories of other income including ATM surcharge fees,
safe deposit box rental income and miscellaneous fee income.
Noninterest expense increased $1,388,000 or 12.2% to $12,748,000 for the
first nine months of 2001 compared to $11,360,000 for the first nine 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 $427,000 or 6.7% and reflects normal salary
adjustments, increased insurance benefit costs, and additional hires. The
$81,000 or 11.9% increase in occupancy expense and the $52,000 or 4.6% increase
in furniture and equipment expense are primarily related to increased costs
associated with the acquisitions made in the prior year. The $54,000 or 21.9%
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 14.2% increase in postage, printing and supplies reflects costs incurred by
our 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 $68,000 or 4.6% increase in other noninterest expense is
primarily related increased telephone and communication charges as a result of
the additional locations added in the prior year's acquisitions.
Income taxes as a percentage of earnings before income taxes as reported in
the condensed consolidated financial statements was 34.2% for the first nine
months of 2001 compared to 31.2% for the first nine 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 nine months of 2001 and 37.3% for the
first nine 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 $214,000 or 3.4% and
$1,888,000 or 11.5% respectively for the three month and nine month periods
ended September 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 $71,000 and $547,000 of the increases for
the respective periods reflect income recognized from accelerated discount
accretion on called securities during the first and third quarters of 2001. Our
company also collected approximately $269,000 of interest on nonaccrual loans
during the third quarter 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 nine month
periods ended September 30, 2001 and 2000.
17
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 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 $142,454 $2,797 7.79% $145,641 $3,335 9.08%
Real estate 267,753 5,618 8.32 266,995 5,558 8.26
Consumer 50,329 1,166 9.19 61,191 1,366 8.86
Investment
securities:/3/
U.S. Treasury and
U.S. Government
agencies 112,151 1,627 5.76 119,512 1,996 6.63
State and municipal 40,226 679 6.70 41,216 779 7.50
Other 4,938 53 4.26 3,672 64 6.91
Federal funds sold 52,885 443 3.32 5,541 92 6.59
Interest-bearing
deposits 1,953 15 3.05 1,969 41 8.26
-------- ------ -------- ------
Total interest
earning assets 672,689 12,398 7.31 645,737 13,231 8.13
All other assets 71,729 71,572
Allowance for loan
losses (7,231) (6,646)
-------- --------
Total assets $737,187 $710,663
======== ========
Continued on next page
18
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 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 $ 86,282 $ 486 2.23% $ 84,329 $ 629 2.96%
Savings 48,263 286 2.35 47,167 334 2.81
Money market 59,768 436 2.89 58,547 600 4.07
Deposits of
$100,000 and over 46,775 608 5.16 47,797 742 6.16
Other time deposits 264,876 3,491 5.23 264,995 3,795 5.68
-------- ------ -------- ------
Total time deposits 505,964 5,307 4.16 502,835 6,100 4.81
Federal funds purchased
and securities sold
under agreements to
repurchase 32,054 239 2.96 21,904 327 5.92
Interest-bearing demand
notes to U.S. Treasury 660 6 3.61 735 14 7.56
Other borrowed money 40,788 611 5.94 45,964 769 6.64
-------- ------ -------- ------
Total interest-
bearing
liabilities 579,466 6,163 4.22 571,438 7,210 5.01
------ ------
Demand deposits 66,740 61,958
Other liabilities 12,903 6,095
-------- --------
Total liabilities 659,109 639,491
Stockholders' equity 78,078 71,172
-------- --------
Total liabilities
and stockholders'
equity $737,187 $710,663
======== ========
Net interest income $6,235 $6,021
====== ======
Net interest margin/4/ 3.68% 3.70%
==== ====
- ----------
/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 $202,000 in 2001 and $268,000 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
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 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 $146,377 $9,133 8.34% $131,672 $ 8,791 8.93%
Real estate 262,328 16,338 8.33 219,869 13,897 8.45
Consumer 52,966 3,638 9.18 57,593 3,744 8.69
Investment
securities:/3/
U.S. Treasury and
U.S. Government
agencies 115,315 5,774 6.69 107,092 5,250 6.55
State and municipal 39,090 2,043 6.99 38,518 2,043 7.09
Other 4,683 173 4.94 3,980 189 6.35
Federal funds sold 46,951 1,472 4.19 7,303 336 6.15
Interest-bearing
deposits 2,420 82 4.53 2,532 114 6.02
-------- ------ -------- ------
Total interest
earning assets 670,130 38,653 7.71 568,559 34,364 8.08
All other assets 72,461 61,254
Allowance for loan
losses (7,108) (5,867)
-------- --------
Total assets $735,483 $623,946
======== ========
Continued on next page
20
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 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 $ 89,068 $ 1,692 2.54% $ 83,286 $ 1,779 2.86%
Savings 46,783 890 2.54 42,935 901 2.81
Money market 59,196 1,510 3.41 52,106 1,544 3.96
Deposits of
$100,000 and over 49,304 2,204 5.98 36,274 1,556 5.74
Other time deposits 267,327 11,173 5.59 219,501 9,133 5.56
-------- ------- -------- -------
Total time deposits 511,678 17,469 4.56 434,102 14,913 4.59
Federal funds purchased
and securities sold
under agreements to
repurchase 30,394 909 4.00 21,461 919 5.73
Interest-bearing demand
notes to U.S. Treasury 728 23 4.22 1,014 49 6.46
Other borrowed money 40,779 1,876 6.15 41,089 1,995 6.49
-------- ------- -------- -------
Total interest-
bearing
liabilities 583,579 20,277 4.65 497,666 17,876 4.80
------- -------
Demand deposits 63,310 59,819
Other liabilities 12,128 5,069
-------- --------
Total liabilities 659,017 562,554
Stockholders' equity 76,466 61,392
-------- --------
Total liabilities
and stockholders'
equity $735,483 $623,946
======== ========
Net interest income $18,376 $16,488
======= =======
Net interest margin/4/ 3.67% 3.88%
==== ====
- ----------
/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 $617,000 in 2001 and $614,000 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
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 SEPTEMBER 30, 2001
COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 2000
-------------------------------------
CHANGE DUE TO
TOTAL ------------------------
CHANGE VOLUME RATE
-------- --------- ------
INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS:
Loans: /1/
Commercial $ (538) (72) (466)
Real estate /2/ 60 16 44
Consumer (200) (250) 50
Investment securities:
U.S. Treasury and U.S.
Government agencies (369) (118) (251)
State and municipal /2/ (100) (19) (81)
Other (11) 18 (29)
Federal funds sold 351 419 (68)
Interest-bearing deposits (26) 0 (26)
------- ---- ------
Total interest income (833) (6) (827)
INTEREST EXPENSE:
NOW accounts (143) 15 (158)
Savings (48) 8 (56)
Money market (164) 13 (177)
Deposits of
$100,000 and over (134) (16) (118)
Other time deposits (304) (2) (302)
Federal funds purchased
and securities sold under
agreements to repurchase (88) 115 (203)
Interest-bearing demand
notes to U.S. Treasury (8) (2) (6)
Other borrowed money (158) (82) (76)
------- ---- ------
Total interest expense (1,047) 49 (1,096)
------- ---- ------
NET INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS $ 214 (55) 269
======= ==== ======
- -----------
/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 $202,000 in 2001 and $268,000 in 2000.
22
(DOLLARS EXPRESSED IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 2001
COMPARED TO
NINE MONTHS ENDED SEPTEMBER 20, 2000
------------------------------------
CHANGE DUE TO
TOTAL ----------------------
CHANGE VOLUME RATE
-------- -------- ----
INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS:
Loans: /1/
Commercial $ 342 944 (602)
Real estate /2/ 2,441 2,647 (206)
Consumer (106) (311) 205
Investment securities:
U.S. Treasury and U.S.
Government agencies 524 410 114
State and municipal /2/ 0 30 (30)
Other (16) 30 (46)
Federal funds sold 1,136 1,275 (139)
Interest-bearing deposits (32) (5) (27)
------ ----- ----
Total interest income 4,289 5,020 (731)
INTEREST EXPENSE:
NOW accounts (87) 119 (206)
Savings (11) 77 (88)
Money market (34) 196 (230)
Deposits of
$100,000 and over 648 579 69
Other time deposits 2,040 1,999 41
Federal funds purchased
and securities sold under
agreements to repurchase (10) 315 (325)
Interest-bearing demand
notes to U.S. Treasury (26) (12) (14)
Other borrowed money (119) (15) (104)
------ ----- ----
Total interest expense 2,401 3,258 (857)
------ ----- ----
NET INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS $1,888 1,762 (126)
====== ===== ====
- -----------
/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 $617,000 in 2001 and $614,000 in 2000.
23
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is based on management's evaluation of the
loan portfolio in light of perceived 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 factors deemed by management
to be relevant. 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, $129,000 for the second quarter of 2001
and $107,000 for the third quarter of 2001. That compares to net loan recoveries
of $7,000 for the first quarter of 2000, $131,000 for the second quarter of 2000
and net loan charge-offs of $137,000 for the third 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, $231,000 for the second quarter of 2001
and $231,000 for the third quarter of 2001. That compares to $258,000 for the
first quarter of 2000, $308,000 for the second quarter of 2000 and $273,000 for
the third quarter of 2000.
The balance of the allowance for loan losses was $7,303,000 at September
30, 2001 compared to $6,940,000 at December 31, 2000 and $6,748,000 at September
30, 2000. The allowance for loan losses as a percent of outstanding loans was
1.58% at September 30, 2001 compared to 1.48% at December 31, 2000 and 1.43% at
September 30, 2000.
FINANCIAL CONDITION
Total assets increased $46,457,000 or 6.5% to $766,060,000 at September 30,
2001 compared to $719,603,000 at December 31, 2000. Total liabilities increased
$41,558,000 or 6.4% to $687,578,000. Stockholders' equity increased $4,898,000
or 6.7% to $78,482,000.
Loans decreased $6,462,000 or 1.4% to $462,009,000 at September 30, 2001
compared to $468,471,000 at December 31, 2000. Commercial loans decreased
$10,674,000; real estate construction loans increased $3,029,000; real estate
mortgage loans increased $9,439,000; and consumer loans decreased $8,257,000.
The increase in real estate mortgage loans reflects increased activity due to
lower rates that currently exist in the markets. Of the $9,438,000 increase in
mortgage loans, approximately $2,853,000 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 our company is unwilling to match, primarily
in the area of automobile financing.
24
Nonperforming loans, defined as loans on nonaccrual status, loans 90 days
or more past due, and restructured loans totaled $5,415,000 or 1.17% of total
loans at September 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)
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
% OF % OF
GROSS GROSS
BALANCE LOANS BALANCE LOANS
------- ----- ------- -----
Nonaccrual loans:
Commercial $2,989 .65% $2,648 .57%
Real Estate:
Construction 821 .18 1,006 .22
Mortgage 1,027 .22 3,584 .77
Consumer 56 .01 453 .09
------ ---- ------ ----
4,893 1.06 7,691 1.65
------ ---- ------ ----
Loans contractually past-due 90 days
or more and still accruing:
Commercial 34 .01 -- --
Real Estate:
Construction -- -- -- --
Mortgage 446 .09 237 .05
Consumer 42 .01 154 .03
------ ---- ------ ----
522 .11 391 .08
------ ---- ------ ----
Restructured loans -- -- -- --
------ ---- ------ ----
Total nonperforming loans 5,415 1.17% 8,082 1.73%
==== ====
Other real estate 10 36
Repossessions 227 143
------ ------
Total nonperforming assets $5,652 $8,261
====== ======
The allowance for loan losses was 134.87% of nonperforming loans at
September 30, 2001 compared to 85.87% of nonperforming loans at December 31,
2000. Our company has allocated $1,034,000 of the allowance for loan losses at
September 30, 2001 which it believes adequately covers any exposure on these
specific credits. The $2,667,000 decrease in nonperforming loans is primarily
the result of one large credit at ENB which is now current on interest and
performing as of the date of this report.
25
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 September 30, 2001
and 2000, which would have been recorded under the original terms those loans,
was approximately $512,000 and $237,000 for the nine months ended September 30,
2001 and 2000, respectively. Approximately $238,000 and $159,000 was actually
recorded as interest income on such loans for the nine months ended September
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
September 30, 2001 included in the table above, which were considered
"impaired", management has identified additional loans totaling approximately
$5,676,000 which are not included in the table above but are considered by
management to be "impaired". The $5,676,000 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 $3,000,000. The average balance of nonaccrual and other "impaired"
loans for the first nine months of 2001 was approximately $8,772,000. At
September 30, 2001 the allowance for loan losses on impaired loans was
$1,452,000 compared to $1,565,000 at December 31, 2000.
As of September 30, 2001 and December 31, 2000 approximately $5,284,000 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 perceived 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 $50,602,000 or 37.9% to $184,056,000 at September 30, 2001 compared to
$133,454,000 at December 31, 2000. As allowed upon adoption of SFAS 133,
Bancshares 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. The remainder of the increase represents
securities purchased to use as collateral for a large public fund repurchase
agreement awarded to ENB during the third quarter. Investments classified as
available-for-sale are carried at fair value.
26
During 2001, the market valuation account was increased $2,399,000 to $3,434,000
to reflect the fair value of available-for-sale investments at September 30,
2001 and the net after tax increase resulting from the change in the market
valuation adjustment of $1,570,000 increased the stockholders' equity component
to $2,228,000 at September 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.
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 September 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 our 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 $28,089,000 or 57.4% to $77,013,000 at September
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 $854,000 or 5.4% to $14,937,000 at
September 30, 2001 compared to $15,791,000 at December 31, 2000. The decrease
reflects sales and retirements of premises and equipment of $1,512,000 and
depreciation expense of $938,000, offset by purchases for premises and equipment
of $1,596,000.
Total deposits decreased $7,134,000 or 1.2% to $569,129,000 at September
30, 2001 compared to $576,263,000 at December 31, 2000. Most of this decrease is
attributed to decreased public fund balances.
Federal funds purchased and securities sold under agreements to repurchase
increased $46,820,000 or 285.5% to $63,218,000 at September 30, 2001 compared to
$16,398,000 at December 31, 2000. The increase is primarily due increased public
fund repurchase agreements at ENB.
The increase in stockholders' equity reflects net income of $5,196,000 less
dividends declared of $1,630,000, purchase of treasury stock of $252,000 and a
$1,570,000 change in unrealized holding gains, net of taxes, on investment in
debt and equity securities available-for-sale.
No material changes in our company's liquidity or capital resources have
occurred since December 31, 2000.
27
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. Bancshares has adopted SFAS 133 as amended effective January 1, 2001,
but since our company does not participate in any derivative or hedging
activities, SFAS 133, as amended, had no impact on our 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.
28
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.
The implementation of this Statement did not have a material effect on our
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 September 30, 2001 as well as all purchase method business
combinations completed after September 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.
Our 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 September
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 our 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, our 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, our 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 our company to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of
29
adoption. To accomplish this our 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. Our 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 our company must perform
the second step of the transitional impairment test. In the second step, our
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 recognized as the
cumulative effect of a change in accounting principle in our 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, our company expects to have unamortized
goodwill in the amount of $23,408,000, unamortized identifiable intangible
assets in the amount of $1,154,000, 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 $973,000 and $908,000 for the year ended
December 31, 2000 and the nine months ended September 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 our 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.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Bancshares' 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 our banks' management include the standard GAP report subject to
different rate shock scenarios. At September 30, 2001, the rate shock scenario
models indicated that annual net interest income could decrease or increase by
as much as 4 to 5% 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.
31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities and Use of Proceeds None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders None
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
Exhibit No. Description
- ----------- -----------
3.1 Articles of Incorporation of our company (filed as Exhibit 3(a) to
our company's Registration Statement on Form S-4 (Registration
No. 33-54166) and incorporated herein by reference).
3.2 Bylaws of our company (filed as Exhibit 3.2 to our 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 our company's $1.00
par value common stock (filed as Exhibit 4 to our 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.
A report on Form 8-K was filed on August 23, 2001 announcing that
Bancshares' Board of Directors authorized the purchases, through
open market transactions, of up to $2 million market value of our
company's common stock.
32
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
November 9, 2001 Principal Executive Officer
By /s/ Richard G. Rose
-----------------------------------
Richard G. Rose, Treasurer
November 9, 2001
33
EXCHANGE NATIONAL BANCSHARES, INC.
----------------------------------
INDEX TO EXHIBITS
September 30, 2001 Form 10-Q
Exhibit No. Description Page No.
- ----------- ----------- --------
3.1 Articles of Incorporation of our company (filed as
Exhibit 3(a) to our company's Registration Statement
on Form S-4 (Registration No. 33-54166) and
incorporated herein by reference). **
3.2 Bylaws of our company (filed as Exhibit 3.2 to our
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 our
company's $1.00 par value common stock (filed as
Exhibit 4 to our 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.
34