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, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to______________
Commission File Number: 0-23636
EXCHANGE NATIONAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1626350
(State or other jurisdiction of (I.R.S. Employer
of 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)
N/A
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act).
[X] Yes [ ] No
As of November 9, 2004, the registrant had 4,169,847 shares of common stock, par
value $1.00 per share, outstanding.
Page 1 of 45 pages
Index to Exhibits located on page 41
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
ASSETS
Loans:
Commercial $ 239,341,783 $ 212,440,053
Real estate - construction 53,999,425 46,415,577
Real estate - mortgage 285,363,571 283,367,122
Consumer 36,550,903 41,696,414
------------------ -----------------
615,255,682 583,919,166
Less allowance for loan losses 8,754,161 8,267,380
------------------ -----------------
Loans, net 606,501,521 575,651,786
Investments in available for sale debt
and equity securities, at fair value 166,809,609 188,955,832
Federal funds sold 28,101,889 29,227,798
Cash due from banks 27,119,391 27,817,117
Premises and equipment 19,820,216 17,774,633
Accrued interest receivable 5,301,439 5,107,980
Mortgage servicing rights 1,625,268 1,591,289
Goodwill 25,196,736 25,196,736
Intangible assets 851,910 1,013,244
Other assets 3,614,962 3,259,577
------------------ -----------------
Total assets $ 884,942,941 $ 875,595,992
================== =================
Continued on next page
2
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Demand deposits $ 100,250,749 $ 89,214,182
Time deposits 587,715,636 576,047,783
------------------ -----------------
Total deposits 687,966,385 665,261,965
Federal funds purchased and securities
sold under agreements to repurchase 33,979,008 72,983,423
Interest-bearing demand notes to U.S. Treasury 1,055,208 688,978
Subordinated notes 25,774,000 -
Other borrowed money 39,794,128 41,629,893
Accrued interest payable 1,557,883 1,650,292
Other liabilities 3,413,638 5,598,697
------------------ -----------------
Total liabilities 793,540,250 787,813,248
Stockholders' equity:
Common stock - $1 par value; 15,000,000 shares
authorized; 4,298,353 issued 4,298,353 4,298,353
Surplus 22,014,894 21,999,714
Retained earnings 67,015,891 62,789,107
Accumulated other comprehensive income,
net of tax 726,062 1,348,079
Treasury stock, 128,506 shares at cost (2,652,509) (2,652,509)
------------------ -----------------
Total stockholders' equity 91,402,691 87,782,744
------------------ -----------------
Total liabilities and stockholders' equity $ 884,942,941 $ 875,595,992
================== =================
See accompanying notes to unaudited condensed consolidated financial statements.
3
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT 30, SEPT 30,
---------------------------- -------------------------
2004 2003 2004 2003
-------------- ----------- ----------- -----------
Interest Income $ 10,404,311 $ 9,997,501 $30,150,508 $28,981,676
Interest Expense 3,458,738 3,172,415 9,594,400 9,707,926
-------------- ----------- ----------- -----------
Net interest income 6,945,573 6,825,086 20,556,108 19,273,750
Provision for loan losses 160,500 310,500 606,500 781,500
-------------- ----------- ----------- -----------
Net interest income after provision for loan losses 6,785,073 6,514,586 19,949,608 18,492,250
Noninterest income 1,371,530 1,901,897 4,368,999 5,339,075
Noninterest expense 5,177,503 4,589,992 14,840,475 13,674,526
-------------- ----------- ----------- -----------
Income before income taxes 2,979,100 3,826,491 9,478,132 10,156,799
Income taxes 923,366 1,282,165 2,999,631 3,214,616
-------------- ----------- ----------- -----------
Net income $ 2,055,734 $ 2,544,326 $ 6,478,501 $ 6,942,183
============== =========== =========== ===========
Basic earning per share $ 0.49 $ 0.61 $ 1.55 $ 1.67
Diluted earnings per share $ 0.49 $ 0.60 $ 1.54 $ 1.65
Weighed average shares of common stock outstanding
Basic 4,169,847 4,169,847 4,169,847 4,169,432
Diluted 4,201,432 4,216,320 4,205,929 4,208,000
Dividends per share:
Declared $ 0.18 $ 0.18 $ 0.54 $ 0.49
Paid $ 0.18 $ 0.18 $ 0.54 $ 0.45
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,
------------------------------
2004 2003
------------- -------------
Cash flow from operating activities:
Net income $ 6,478,501 $ 6,942,183
Adjustments to reconcile net income to net cash
cash provided by operating activities:
Provision for loan losses 606,500 781,500
Depreciation expense 1,163,300 1,244,371
Net amortization of debt securities premiums and discounts 1,069,620 1,053,785
Amortization of intangible assets 161,334 240,618
(Increase) decrease in accrued interest receivable (193,459) 40,916
Decrease in other assets 33,660 371,317
Decrease in accrued interest payable (92,409) (323,882)
Decrease in other liabilities (2,185,059) (358,730)
Loss (gain) on sales and calls of debt securities 7,612 (37,689)
Origination of mortgage loans for sale (32,058,389) (105,145,670)
Proceeds from the sale of mortgage loans held for sale 32,691,395 107,487,338
Gain on sale of mortgage loans (633,006) (2,341,668)
Loss (gain) on disposition of premises and equipment 4,822 (318)
Other, net 15,180 (179,931)
------------- -------------
Net cash provided by operating activities 7,069,602 9,774,140
Cash flow from investing activities:
Net increase in loans (31,954,969) (60,117,854)
Purchase of available-for-sale debt securities (257,866,701) (167,949,778)
Proceeds from maturities of available-for-sale debt securities 234,016,986 103,805,489
Proceeds from calls of available-for-sale debt securities 33,657,425 47,307,300
Proceeds from sales of available-for-sale debt securities 10,304,331 9,929,230
Purchase of premises and equipment (3,213,705) (845,005)
Proceeds from dispositions of premises and equipment - 6,170
Proceeds from sales of other real estate owned and repossessions 410,643 635,376
Purchase of branch, net of cash and cash equivalents acquired - (814,572)
------------- -------------
Net cash used in investing activities (14,645,990) (68,043,644)
------------- -------------
Continued on next page
5
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2004 2003
------------ ------------
Cash flow from financing activities:
Net increase in demand deposits 11,036,567 9,364,441
Net increase in interest-bearing transaction accounts 28,650,258 12,570,154
Net (decrease) increase in time deposits (16,982,405) 15,045,505
Net decrease in federal funds purchased and securities sold
under agreements to repurchase (39,004,415) (2,597,231)
Net increase (decrease) in interest-bearing demand notes to U.S. Treasury 366,230 (2,248,586)
Proceeds from subordinated debentures 25,774,000 -
Proceeds from Federal Home Loan Bank borrowings 17,000,000 2,000,000
Repayment of Federal Home Loan Bank borrowings (885,197) (758,144)
Repayment of other borrowed money (17,950,568) (1,000,000)
Purchase of common stock - (2,503)
Cash dividends paid (2,251,717) (1,861,856)
Proceeds from sale of treasury stock - 28,251
------------ ------------
Net cash provided by financing activities 5,752,753 30,540,031
Net decrease in cash and cash equivalents (1,823,635) (27,729,473)
Cash and cash equivalents, beginning of period 57,044,915 77,411,243
------------ ------------
Cash and cash equivalents, end of period $ 55,221,280 $ 49,681,770
============ ============
Supplemental disclosure of cash flow information -
Cash paid during period for:
Interest $ 9,686,809 $ 10,031,808
Income taxes 5,352,761 4,113,657
Supplemental schedule of noncash investing activities -
Other real estate and repossessions
acquired in settlement of loans 498,734 571,252
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, 2004 and 2003
The accompanying unaudited condensed consolidated financial statements
include all adjustments that in the opinion of management are necessary in order
to make those statements not misleading. Certain amounts in the 2003 condensed
consolidated financial statements have been reclassified to conform to the 2004
condensed consolidated presentation. Such reclassifications have no effect on
previously reported net income or stockholders' equity. Operating results for
the period ended September 30, 2004 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2004.
It is suggested that these unaudited condensed consolidated interim
financial statements be read in conjunction with our Company's audited
consolidated financial statements included in its 2003 Annual Report to
Shareholders under the caption "Consolidated Financial Statements" and
incorporated by reference into its Annual Report on Form 10-K for the year ended
December 31, 2003 as Exhibit 13.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. Certain information and note disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed and
omitted. Our Company believes that these financial statements contain all
adjustments (consisting of normal recurring accruals) necessary to present
fairly our Company's consolidated financial position as of September 30, 2004
and December 31, 2003 and the consolidated statements of earnings for the three
and nine month periods ended September 30, 2004 and 2003 and cash flows for the
nine months ended September 30, 2004 and 2003.
The weighted average common and diluted shares outstanding as well as
dividends per share and earnings per share amounts have been restated to give
effect to a three-for-two stock split accounted for as a dividend on July 15,
2003.
7
EARNINGS PER SHARE
The following table reflects, for the three-month and nine-month periods
ended September 30, 2004 and 2003, the numerators (net income) and denominators
(average shares outstanding) for the basic and diluted net income per share
computations:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ---------------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income, basic and diluted $ 2,055,734 $ 2,544,326 $ 6,478,501 $ 6,942,183
=========== =========== =========== ===========
Average shares outstanding 4,169,847 4,169,847 4,169,847 4,169,432
Effect of dilutive stock options 31,585 46,473 36,082 38,568
----------- ----------- ----------- -----------
Average shares outstanding
including dilutive stock options 4,201,432 4,216,320 4,205,929 4,208,000
Basic earning per share $ 0.49 $ 0.61 $ 1.55 $ 1.67
Diluted earnings per share $ 0.49 $ 0.60 $ 1.54 $ 1.65
Our Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. SFAS No. 123, Accounting for
Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of SFAS No. 123,
establish accounting and disclosure requirements using a fair-value based method
of accounting for stock-based employee compensation plans. As permitted by
existing accounting standards, our Company has elected to continue to apply the
provision of APB Opinion No. 25, as described above, and has adopted only the
disclosure requirements of SFAS No. 123, as amended by SFAS No. 148.
8
The following table illustrates, for the three-month and nine-month
periods ended September 30, 2004 and 2003, the effect on net income if the
fair-value-based method had been applied to all outstanding and unvested awards
in each period:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ---------------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income:
As reported $ 2,055,734 $ 2,544,326 $ 6,478,501 $ 6,942,183
Deduct total stock-based employee
compensation expense determined
under fair-value-based method for
all awards, net of tax (33,797) (23,419) (101,389) (70,255)
----------- ----------- ----------- -----------
Pro forma net income $ 2,021,937 $ 2,520,907 $ 6,377,112 $ 6,871,928
=========== =========== =========== ===========
Pro forma earnings per common share:
As reported basic $ 0.49 $ 0.61 $ 1.55 $ 1.67
Pro forma basic 0.48 0.60 1.53 1.65
As reported diluted 0.49 0.60 1.54 1.65
Pro forma diluted 0.48 0.60 1.52 1.64
9
COMPREHENSIVE INCOME
For the three-month and nine-month periods ended September 30, 2004 and
2003, unrealized holding gains and losses on investments in debt and equity
securities available-for-sale were our Company's only other comprehensive income
component. Comprehensive income for the three-month and nine-month periods ended
September 30, 2004 and 2003 is summarized as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income $ 2,055,734 $ 2,544,326 $ 6,478,501 $ 6,942,183
Other comprehensive income (loss):
Net unrealized holding gains (losses) on
investments in debt and equity securities
available-for-sale, net of taxes 1,192,322 (974,894) (615,420) (561,072)
Adjustment for net securities losses (gains) realized in
net income, net of applicable income taxes 6,597 10,105 4,948 (24,498)
----------- ----------- ----------- -----------
Total other comprehensive income (loss) 1,198,919 (964,789) (610,472) (585,570)
----------- ----------- ----------- -----------
Comprehensive income $ 3,254,653 $ 1,579,537 $ 5,868,029 $ 6,356,613
=========== =========== =========== ===========
Segments Through the respective branch network, Exchange National Bank,
Citizens Union State Bank, and Osage Valley Bank provide similar products and
services in three defined geographic areas. The products and services offered
include a broad range of commercial and personal banking services, including
certificates of deposit, individual retirement and other time deposit accounts,
checking and other demand deposit accounts, interest checking accounts, savings
accounts and money market accounts. Loans include real estate, commercial,
installment and other consumer loans. Other financial services include automatic
teller machines, trust services, credit related insurance, and safe deposit
boxes. The revenues generated by each business segment consist primarily of
interest income, generated from the loan and debt and equity security
portfolios, and service charges and fees, generated from the deposit products
and services. The geographic areas are defined to be communities surrounding
Jefferson City, Clinton and Warsaw, Missouri. The products and services are
offered to customers primarily within their respective geographical areas. The
business segments results that follow are consistent with our Company's internal
reporting system which is consistent, in all material respects, with accounting
principles generally accepted in the United States of America and practices
prevalent in the banking industry.
10
SEPTEMBER 30, 2004
----------------------------------------------------------------------------------------------
THE EXCHANGE
NATIONAL BANK CITIZENS UNION
OF JEFFERSON STATE BANK AND OSAGE VALLEY CORPORATE AND
CITY TRUST OF CLINTON BANK OF WARSAW OTHER TOTAL
------------- ---------------- -------------- ------------- -------------
Balance sheet information
Loans, net of allowance
for loan losses $ 366,233,489 $ 192,320,791 $ 47,947,241 $ - $ 606,501,521
Debt and equity securities 91,406,003 41,854,959 32,774,647 774,000 166,809,609
Goodwill 4,382,098 16,701,762 4,112,876 - 25,196,736
Intangible assets - 851,910 - - 851,910
Total assets 509,382,720 280,432,411 94,230,605 897,205 884,942,941
Deposits 399,386,238 228,312,508 76,697,676 (16,430,037) 687,966,385
Stockholders' equity $ 50,289,384 $ 39,469,938 $ 10,421,579 $ (8,778,210) $ 91,402,691
============= ================ ============== ============= =============
DECEMBER 31, 2003
----------------------------------------------------------------------------------------------
THE EXCHANGE
NATIONAL BANK CITIZENS UNION
OF JEFFERSON STATE BANK AND OSAGE VALLEY CORPORATE AND
CITY TRUST OF CLINTON BANK OF WARSAW OTHER TOTAL
------------- ---------------- -------------- ------------- -------------
Balance sheet information
Loans, net of allowance
for loan losses $ 356,157,080 $ 174,415,896 $ 45,078,810 $ - $ 575,651,786
Debt and equity securities 110,422,665 45,520,374 33,012,793 - 188,955,832
Goodwill 4,382,098 16,701,762 4,112,876 - 25,196,736
Intangible assets - 1,013,244 - - 1,013,244
Total assets 502,800,863 281,534,651 91,417,739 (157,261) 875,595,992
Deposits 370,806,600 228,706,626 74,414,622 (8,665,883) 665,261,965
Stockholders' equity $ 50,025,363 $ 37,444,782 $ 9,911,423 $ (9,598,824) $ 87,782,744
============= ================ ============== ============= =============
11
THREE MONTHS ENDED SEPTEMBER 30, 2004
----------------------------------------------------------------------------------------------
THE EXCHANGE
NATIONAL BANK CITIZENS UNION
OF JEFFERSON STATE BANK AND OSAGE VALLEY CORPORATE AND
CITY TRUST OF CLINTON BANK OF WARSAW OTHER TOTAL
------------- ---------------- -------------- ------------- -------------
Statement of earnings:
Total interest income $ 5,918,842 $ 3,389,362 $ 1,087,712 $ 8,395 $ 10,404,311
Total interest expense 1,973,396 832,989 403,318 249,035 3,458,738
------------- ---------------- -------------- ------------- -------------
Net interest income 3,945,446 2,556,373 684,394 (240,640) 6,945,573
Provision for loan losses 75,000 75,000 10,500 - 160,500
Noninterest income 907,290 389,161 97,883 (22,804) 1,371,530
Noninterest expense 2,885,627 1,819,326 424,921 47,629 5,177,503
Income taxes 606,050 324,505 101,391 (108,580) 923,366
------------- ---------------- -------------- ------------- -------------
Net income (loss) $ 1,286,059 $ 726,703 $ 245,465 $ (202,493) $ 2,055,734
============= ================ ============== ============= =============
THREE MONTHS ENDED SEPTEMBER 30, 2003
----------------------------------------------------------------------------------------------
THE EXCHANGE
NATIONAL BANK CITIZENS UNION
OF JEFFERSON STATE BANK AND OSAGE VALLEY CORPORATE AND
CITY TRUST OF CLINTON BANK OF WARSAW OTHER TOTAL
------------- ---------------- -------------- ------------- -------------
Statement of earnings:
Total interest income $ 5,713,100 $ 3,223,163 $ 1,061,238 $ - $ 9,997,501
Total interest expense 1,648,291 980,089 418,205 125,830 3,172,415
------------- ---------------- -------------- ------------- -------------
Net interest income 4,064,809 2,243,074 643,033 (125,830) 6,825,086
Provision for loan losses 225,000 75,000 10,500 - 310,500
Noninterest income 1,516,613 313,401 98,859 (26,976) 1,901,897
Noninterest expense 2,682,804 1,448,439 396,166 62,583 4,589,992
Income taxes 915,300 346,521 100,744 (80,400) 1,282,165
------------- ---------------- -------------- ------------- -------------
Net income (loss) $ 1,758,318 $ 686,515 $ 234,482 $ (134,989) $ 2,544,326
============= ================ ============== ============= =============
12
NINE MONTHS ENDED SEPTEMBER 30, 2004
----------------------------------------------------------------------------------------------
THE EXCHANGE
NATIONAL BANK CITIZENS UNION
OF JEFFERSON STATE BANK AND OSAGE VALLEY CORPORATE AND
CITY TRUST OF CLINTON BANK OF WARSAW OTHER TOTAL
------------- ---------------- -------------- ------------- -------------
Statement of earnings:
Total interest income $ 17,170,080 $ 9,769,148 $ 3,227,069 $ (15,789) $ 30,150,508
Total interest expense 5,338,561 2,520,571 1,205,613 529,655 9,594,400
------------- ---------------- -------------- ------------- -------------
Net interest income 11,831,519 7,248,577 2,021,456 (545,444) 20,556,108
Provision for loan losses 350,000 225,000 31,500 - 606,500
Noninterest income 2,931,787 1,214,069 289,477 (66,334) 4,368,999
Noninterest expense 8,374,690 4,994,407 1,271,807 199,571 14,840,475
Income taxes 1,950,100 1,040,347 292,864 (283,680) 2,999,631
------------- ---------------- -------------- ------------- -------------
Net income (loss) $ 4,088,516 $ 2,202,892 $ 714,762 $ (527,669) $ 6,478,501
============= ================ ============== ============= =============
NINE MONTHS ENDED SEPTEMBER 30, 2003
----------------------------------------------------------------------------------------------
THE EXCHANGE
NATIONAL BANK CITIZENS UNION
OF JEFFERSON STATE BANK AND OSAGE VALLEY CORPORATE AND
CITY TRUST OF CLINTON BANK OF WARSAW OTHER TOTAL
------------- ---------------- -------------- ------------- -------------
Statement of earnings:
Total interest income $ 16,949,139 $ 8,867,340 $ 3,165,197 $ - $ 28,981,676
Total interest expense 5,278,571 2,786,135 1,267,722 375,498 9,707,926
------------- ---------------- -------------- ------------- -------------
Net interest income 11,670,568 6,081,205 1,897,475 (375,498) 19,273,750
Provision for loan losses 525,000 225,000 31,500 - 781,500
Noninterest income 4,177,064 957,838 269,710 (65,537) 5,339,075
Noninterest expense 8,145,808 4,078,936 1,168,516 281,266 13,674,526
Income taxes 2,343,400 848,824 275,192 (252,800) 3,214,616
------------- ---------------- -------------- ------------- -------------
Net income (loss) $ 4,833,424 $ 1,886,283 $ 691,977 $ (469,501) $ 6,942,183
============= ================ ============== ============= =============
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS MADE IN
THIS REPORT ON FORM 10-Q ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE WORDS "SHOULD", "EXPECT", "ANTICIPATE", "BELIEVE", "INTEND",
"MAY", "HOPE", "FORECAST" AND SIMILAR EXPRESSIONS MAY IDENTIFY FORWARD LOOKING
STATEMENTS. IN PARTICULAR, STATEMENTS THAT THE PERIODIC REVIEW OF OUR LOAN
PORTFOLIO KEEPS MANAGEMENT INFORMED OF POSSIBLE LOAN PROBLEMS AND THAT THE
ALLOWANCE FOR LOAN LOSSES ADEQUATELY COVERS ANY EXPOSURE ON SPECIFIC CREDITS ARE
ALL FORWARD-LOOKING STATEMENTS. OUR COMPANY'S ACTUAL RESULTS, FINANCIAL
CONDITION, OR BUSINESS COULD DIFFER MATERIALLY FROM ITS HISTORICAL RESULTS,
FINANCIAL CONDITION, OR BUSINESS, OR THE RESULTS OF OPERATIONS, FINANCIAL
CONDITION, OR BUSINESS CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS
THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY
THE FORWARD LOOKING STATEMENTS HEREIN INCLUDE MARKET CONDITIONS AS WELL AS
CONDITIONS SPECIFICALLY AFFECTING THE BANKING INDUSTRY GENERALLY AND FACTORS
HAVING A SPECIFIC IMPACT ON BANCSHARES INCLUDING, BUT NOT LIMITED TO,
FLUCTUATIONS IN INTEREST RATES AND IN THE ECONOMY; THE IMPACT OF LAWS AND
REGULATIONS APPLICABLE TO BANCSHARES AND CHANGES THEREIN; COMPETITIVE CONDITIONS
IN THE MARKETS IN WHICH BANCSHARES CONDUCTS ITS OPERATIONS, INCLUDING
COMPETITION FROM BANKING AND NON-BANKING COMPANIES WITH SUBSTANTIALLY GREATER
RESOURCES THAN BANCSHARES, SOME OF WHICH MAY OFFER AND DEVELOP PRODUCTS AND
SERVICES NOT OFFERED BY BANCSHARES; AND THE ABILITY OF BANCSHARES TO RESPOND TO
CHANGES IN TECHNOLOGY. ADDITIONAL FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES WERE DISCUSSED UNDER THE CAPTION "FACTORS THAT MAY AFFECT FUTURE
RESULTS OF OPERATIONS, FINANCIAL CONDITION, OR BUSINESS," IN OUR COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003, AS WELL AS
THOSE DISCUSSED ELSEWHERE IN OUR COMPANY'S REPORTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
14
OVERVIEW
This overview of management's discussion and analysis highlights selected
information in this report and may not contain all of the information that is
important to you. For a more complete understanding of trends, events,
commitments, uncertainties, liquidity, capital resources and critical accounting
estimates, you should carefully read this entire report. These have an impact on
our Company's financial condition and results of operation.
BUSINESS STRATEGY: In 1865, The Exchange National Bank of Jefferson City
opened for business serving the loan and deposit needs of citizens living in
Missouri's State Capitol of Jefferson City. Leveraging off of its strong equity
position, Exchange National Bank's Board of Directors established Exchange
National Bancshares, Inc., a multi-bank holding company on October 23, 1992. On
April 7, 1993, Exchange National Bancshares, Inc. acquired The Exchange National
Bank of Jefferson City. On November 3, 1997, our Company acquired Union State
Bancshares, Inc. and its wholly-owned subsidiary, Union State Bank and Trust of
Clinton, Missouri. Following the May 4, 2000 acquisition of Calhoun Bancshares,
Inc. by Union State Bank., Calhoun Bancshares' wholly-owned subsidiary, Citizens
State Bank of Calhoun, merged into Union State Bank. The surviving bank in this
merger is called Citizens Union State Bank & Trust. On January 3, 2000, our
Company acquired Mid Central Bancorp, Inc., and Mid Central's wholly-owned
subsidiary, Osage Valley Bank of Warsaw, Missouri. On June 16, 2000, our Company
acquired CNS Bancorp, Inc. and its subsidiary, City National Savings Bank, FSB,
Jefferson City, Missouri. City National subsequently was merged into Exchange
National Bank. Finally, on June 26, 2003 our Company purchased the Springfield,
Missouri branch of Missouri State Bank. Following the purchase, this branch was
merged into Citizens Union State Bank and Trust.
RECENT EVENTS: Our Company's business strategy continues to focus on
increasing loan and deposit levels through internal, organic means in addition
to expanding our de novo branching network into metropolitan growth areas.
During the first quarter of 2004, our Company announced regulatory filings to
establish de novo branches in the Branson and Lee's Summit, Missouri
communities. Our Company also announced the completion of a $25,000,000 private
placement of floating-rate trust preferred securities. $11,000,000 of the
proceeds from the placement was used to reduce existing debt. The balance of the
proceeds may be used to finance expansion into new markets and for other general
corporate purposes.
15
MATERIAL CHALLENGES AND RISKS: Our Company may experience difficulties
managing growth and effectively integrating newly established branches. As part
of our general strategy, our Company may continue to acquire banks and establish
de novo branches that we believe provide a strategic fit. To the extent that our
Company does grow, there can be no assurances that we will be able to adequately
and profitably manage such growth. The successes of our Company's growth
strategy will depend primarily on the ability of our banking subsidiaries to
generate an increasing level of loans and deposits at acceptable risk levels and
on acceptable terms without significant increases in non-interest expenses
relative to revenues generated. Our Company's financial performance also
depends, in part, on our ability to manage various portfolios and to
successfully introduce additional financial products and services. Furthermore,
the success of our Company's growth strategy will depend on our ability to
maintain sufficient regulatory capital levels and on general economic conditions
that are beyond our control.
REVENUE SOURCE: Through the respective branch network, Exchange National
Bank, Citizens Union State Bank and Osage Valley Bank provide similar products
and services in six defined geographic areas. The products and services offered
include a broad range of commercial and personal banking services, including
certificates of deposit, individual retirement and other time deposit accounts,
checking and other demand deposit accounts, interest checking accounts, savings
accounts, and money market accounts. Loans include real estate, commercial,
installment, and other consumer loans. Other financial services include
automatic teller machines, trust services, credit related insurance, and safe
deposit boxes. The revenues generated by each business segment consist primarily
of interest income, generated primarily from the loan and debt and equity
security portfolios, and service charges and fees, generated from the deposit
products and services. The geographic areas are defined to be communities
surrounding Jefferson City, Clinton, Warsaw, Springfield, Branson and Lee's
Summit, Missouri. The products and services are offered to customers primarily
within their respective geographical areas. The business segment results which
follow are consistent with our Company's internal reporting system which is
consistent, in all material respects, with generally accepted accounting
principles and practices prevalent in the banking industry.
Much of our Company's business is commercial, commercial real estate
development, and mortgage lending. Our Company has experienced continued strong
loan demand in the communities within which we operate even during economic
slowdowns. Our Company's income from mortgage brokerage activities is directly
dependent on mortgage rates and the level of home purchases and refinancing.
Our Company's primary source of revenue is net interest income derived
primarily from lending and deposit taking activities. A secondary source of
revenue is investment income. Our Company also derives income from trust,
brokerage, credit card and mortgage banking activities and service charge
income.
16
Our Company has prepared the consolidated financial statements in this
report in accordance with accounting principles generally accepted in the United
States of America (U.S. GAAP). In preparing the consolidated financial
statements in accordance with U.S. GAAP, our Company makes estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. There can be no assurances that actual results will not differ
from those estimates.
We have identified the accounting policy related to the allowance for loan
losses as critical to the understanding of our Company's results of operations,
since the application of this policy requires significant management assumptions
and estimates that could result in materially different amounts to be reported
if conditions or underlying circumstances were to change. The impact and any
associated risks related to these policies on our business operations are
discussed in the "Lending and Credit Management" section below.
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 2004 of $2,056,000
decreased $488,000 when compared to the third quarter of 2003. Diluted earnings
per common share for the third quarter of 2004 of $0.49 decreased 11 cents or
18.3% when compared to the third quarter of 2003. Net income for the nine months
ended September 30, 2004 of $6,479,000 decreased $463,000 when compared to the
nine months ended September 30, 2003. Diluted earnings per common share for the
nine months ended September 30, 2004 of $1.54 decreased 11 cents or 6.7% when
compared to the nine months ended September 30, 2003.
17
The following table provides a comparison of fully taxable equivalent
earnings, including adjustments to interest income and tax expense for interest
on tax-exempt loans and investments.
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -----------------------
2004 2003 2004 2003
-------- ------- -------- --------
Interest income $ 10,404 $ 9,998 $ 30,151 $ 28,982
Fully taxable equivalent (FTE) adjustment 169 170 485 518
-------- ------- -------- --------
Interest income (FTE basis) 10,573 10,168 30,636 29,500
Interest expense 3,459 3,173 9,594 9,708
-------- ------- -------- --------
Net interest income (FTE basis) 7,114 6,995 21,042 19,792
Provision for loan losses 160 311 607 781
-------- ------- -------- --------
Net interest income after provision for
loan losses (FTE basis) 6,954 6,684 20,435 19,011
Noninterest income 1,372 1,902 4,369 5,339
Noninterest expense 5,178 4,590 14,840 13,675
-------- ------- -------- --------
Earnings before income taxes (FTE basis) 3,148 3,996 9,964 10,675
-------- ------- -------- --------
Income taxes 923 1,282 3,000 3,215
FTE adjustment 169 170 485 518
-------- ------- -------- --------
Income taxes (FTE basis) 1,092 1,452 3,485 3,733
-------- ------- -------- --------
Net Income $ 2,056 $ 2,544 $ 6,479 $ 6,942
======== ======= ======== ========
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
Our Company's primary source of earnings is net interest income, which is
the difference between the interest earned on interest earning assets and the
interest paid on interest bearing liabilities. Net interest income on a fully
taxable equivalent basis increased $119,000 or 1.7% to $7,114,000 or 3.40% of
average earning assets for the third quarter of 2004 compared to $6,995,000 or
3.49% of average earning assets for the same period of 2003. The provision for
loan losses was $160,000 and $311,000 for the three months ended September 30,
2004 and 2003 respectively.
18
Noninterest income and noninterest expense for the three-month periods
ended September 30, 2004 and 2003 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED
SEPTEMBER 30, INCREASE (DECREASE)
---------------------- -------------------
2004 2003 AMOUNT %
------- ------- ------ -----
NONINTEREST INCOME
Service charges on deposit accounts $ 772 $ 724 $ 48 6.6%
Trust department income 147 182 (35) (19.2)
Brokerage income 30 20 10 50.0
Mortgage loan servicing fees 125 107 18 16.8
Gain on sale of mortgage loans 171 731 (560) (76.6)
Net losses on sales and calls of debt securities (10) (16) 6 (37.5)
Credit card fees 52 43 9 20.9
Other 85 111 (26) (23.4)
------- ------- ------ -----
$ 1,372 $ 1,902 $ (530) (27.9)%
======= ======= ====== =====
NONINTEREST EXPENSE
Salaries and employee benefits $ 2,812 $ 2,558 $ 254 9.9%
Occupancy expense 287 274 13 4.7
Furniture and equipment expense 515 508 7 1.4
Loss on disposition of premises and equipment (5) - (5) -
FDIC insurance assessment 25 24 1 4.2
Advertising and promotion 143 138 5 3.6
Postage, printing and supplies 179 205 (26) (12.7)
Legal, examination, and professional fees 174 185 (11) (5.9)
Credit card expenses 28 24 4 16.7
Credit investigation and loan collection expenses 45 35 10 28.6
Amortization of intangible assets 54 91 (37) (40.7)
Other 921 548 373 68.1
------- ------- ------ -----
$ 5,178 $ 4,590 $ 588 12.8%
======= ======= ====== =====
19
Noninterest income decreased $530,000 or 27.9% to $1,372,000 for the third
quarter of 2004 compared to $1,902,000 for the same period of 2003. The $48,000
or 6.6% increase in service charges on deposit accounts reflects an increase in
the per item insufficient check fee charged by one of our Company's subsidiary
banks. Trust department income decreased $35,000 or 19.2% when compared to the
same period in 2003 due primarily to a decrease in the amount of trust
distribution fees collected. The $10,000 or 50.0% increase in brokerage income
reflects higher sales volume during the third quarter of 2004 compared to 2003.
The $18,000 or 16.8% increase in mortgage loan servicing fees reflects a larger
portfolio of serviced loans in 2004. Gain on sales of mortgage loans decreased
$560,000 or 76.6% due to a decrease in volume of loans originated and sold to
the secondary market from approximately $44,208,000 in the third quarter of 2003
to approximately $14,775,000 for the third quarter of 2004. The $26,000 or 23.4%
decrease in other noninterest income reflects a correction in the amount of
insurance commissions accrued in the prior two quarters of 2004.
Noninterest expense increased $588,000 or 12.8% to $5,178,000 for the
third quarter of 2004 compared to $4,590,000 for the third quarter of 2003.
Salaries and benefits increased $254,000 or 9.9%. Approximately $200,000 of this
increase reflects salaries and benefits related to an additional branch
purchased in June of 2003 and two new branches opened in 2004. The balance of
the increase reflects normal salary increases, additional hires and higher
health insurance premiums. Amortization of intangible assets decreased $37,000
or 40.7% due to a decrease in the amount of intangible assets requiring
amortization. Other expense increased $373,000 or 68.1% primarily due to an IRS
settlement of $318,000 on income that had been deferred for tax purposes but not
book.
Income taxes as a percentage of earnings before income taxes as reported
in the condensed consolidated financial statements were 31.0% for the third
quarter of 2004 compared to 33.5% for the third quarter of 2003.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED JUNE 30, 2003
Net interest income on a fully taxable equivalent basis increased $1,249,000 or
6.3% to $21,042,000 or 3.39% of average earning assets for the first nine months
of 2004 compared to $19,792,000 or 3.49% of average earning assets for the same
period of 2003. The provision for loan losses was $607,000 and $781,000 for the
periods ended September 30, 2004 and 2003 respectively.
20
Noninterest income and noninterest expense for the nine-month periods
ended September 30, 2004 and 2003 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30, INCREASE (DECREASE)
---------------------- -------------------
2004 2003 AMOUNT %
------- ------- ------ ------
NONINTEREST INCOME
Service charges on deposit accounts $ 2,292 $ 2,031 $ 261 12.9%
Trust department income 518 659 (141) (21.4)
Brokerage income 72 77 (5) (6.5)
Mortgage loan servicing fees 340 (265) 605 228.3
Gain on sale of mortgage loans 633 2,342 (1,709) (73.0)
Net (losses) gains on sales and calls of debt securities (8) 38 (46) (121.1)
Credit card fees 135 118 17 14.4
Other 387 339 48 14.2
------- ------- ------- ------
$ 4,369 $ 5,339 $ (970) (18.2)%
======= ======= ======= ======
NONINTEREST EXPENSE
Salaries and employee benefits $ 8,388 $ 7,490 $ 898 12.0%
Occupancy expense 838 802 36 4.5
Furniture and equipment expense 1,458 1,570 (112) (7.1)
Gain on disposition of premises and equipment (5) - (5) -
FDIC insurance assessment 76 72 4 5.6
Advertising and promotion 386 393 (7) (1.8)
Postage, printing and supplies 566 592 (26) (4.4)
Legal, examination, and professional fees 606 570 36 6.3
Credit card expenses 78 71 7 9.9
Credit investigation and loan collection expenses 118 93 25 26.9
Amortization of intangible assets 161 241 (80) 33.2)
Other 2,170 1,781 389 21.8
------- ------- ------- ------
$14,840 $13,675 $ 1,165 8.5%
======= ======= ======= ======
21
Noninterest income decreased $970,000 or 18.2% to $4,369,000 for the first
nine months of 2004 compared to $5,339,000 for the same period of 2003. The
$261,000 or 12.9% increase in service charges on deposit accounts reflects an
increase in the per item insufficient check fee charged by one of our Company's
subsidiary banks. Trust department income decreased $141,000 or 21.4% due
primarily to the collection of more distribution fees during the first nine
months of 2003 compared to the first nine months of 2004. The $605,000 or 228.3%
increase in mortgage loan servicing fees reflects a $556,000 impairment charge
to mortgage servicing rights taken during 2003. There has been no impairment to
the carrying value of mortgage servicing rights in 2004. Gain on sales of
mortgage loans decreased $1,709,000 or 73.0% due to a decrease in volume of
loans originated and sold to the secondary market from approximately
$105,146,000 in the first nine months of 2003 to approximately $32,058,000 for
the first nine months of 2004. The $46,000 or 121.1% decrease in gains on sales
and call of debt securities represents a decrease in the volume of securities
sold in 2004 versus 2003. The $48,000 or 14.2% increase in other noninterest
income reflects a refund received from a vendor for prior periods' overcharges.
Noninterest expense increased $1,165,000 or 8.5% to $14,840,000 for the
first nine months of 2004 compared to $13,675,000 for the same period of 2003.
Salaries and benefits increased $898,000 or 12.0%. Approximately $518,000 of
this increase reflects salaries and benefits related to an additional branch
purchased in June of 2003 as well as two additional branches opened in 2004. The
balance of the increase reflects normal salary increases, additional hires and
higher health insurance premiums. The $112,000 or 7.1% decrease in furniture and
equipment expense is primarily the result of decreased depreciation and
amortization expense for equipment and software purchased in prior years. Our
Company utilizes both straight-line and accelerated depreciation methods. Assets
utilizing accelerated methods recognize higher depreciation expense in early
years and lower expense in later years of the life of assets. The $36,000 or
6.3% increase in legal, examination, and professional fees represents increased
costs associated with Sarbanes-Oxley compliance, benefit plan consulting, and
strategic planning. Amortization of intangible assets decreased $80,000 or 33.2%
due to a decrease in the amount of intangible assets requiring amortization.
Other expense increased $389,000 or 21.8% primarily due to an IRS settlement of
$318,000 on income that had been deferred for tax purposes but not book.
Income taxes as a percentage of earnings before income taxes as reported
in the condensed consolidated financial statements were 31.7% for the first nine
months of 2004 compared to 31.6% for the same period in 2003.
NET INTEREST INCOME
Fully taxable equivalent net interest income increased $119,000 or 1.7%
and $1,249,000 or 6.3% respectively for the three and nine month periods ended
September 30, 2004 compared to the same periods in 2003. The increase in net
interest income for the periods ended September 30, 2004 compared to the periods
ended September 30, 2003 was the result of increased earning assets.
22
The following table presents average balance sheets, net interest income,
average yields of earning assets, and average costs of interest bearing
liabilities on a fully taxable equivalent basis for the three and nine month
periods ended September 30, 2004 and 2003.
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------------------- ---------------------------------
INTEREST RATE INTEREST RATE
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE/1/ PAID/1/ BALANCE EXPENSE/1/ PAID/1/
--------- ---------- ------- --------- ---------- -------
ASSETS
Loans:/2/
Commercial $ 234,451 $ 3,384 5.73% $ 198,143 $ 2,922 5.85%
Real estate 334,966 4,831 5.72 324,861 4,740 5.79
Consumer 36,982 760 8.15 41,223 864 8.32
Investment securities:/3/
U.S Treasury and
U.S. Gov't Agencies 161,157 983 2.42 158,201 1,027 2.58
State and municipal 32,392 482 5.90 30,488 494 6.43
Other 5,538 42 3.01 4,054 37 3.62
Federal funds sold 22,153 87 1.56 33,564 76 0.90
Interest-bearing deposits 1,463 4 1.08 3,955 8 0.80
--------- ---------- --------- ----------
Total interest earning assets 829,102 10,573 5.06 794,489 10,168 5.08
All other assets 77,954 74,144
Allowance for loan losses (8,692) (7,958)
--------- ---------
Total assets $ 898,364 $ 860,675
========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
NOW accounts $ 110,422 $ 195 0.70% $ 106,138 $ 154 0.58%
Savings 55,578 80 0.57 55,193 81 0.58
Money market 93,982 374 1.58 66,722 136 0.81
Deposits of $100,000 and over 82,725 473 2.27 84,471 472 2.22
Other time deposits 241,677 1,428 2.34 258,511 1,734 2.66
--------- ---------- --------- ----------
Total time deposits 584,384 2,550 1.73 571,035 2,577 1.79
Federal funds purchased and
securities sold under
agreements to repurchase 59,968 209 1.38 66,005 145 0.87
Interest-bearing demand
notes to US Treasury 654 2 1.21 959 2 0.83
Other borrowed money 64,036 698 4.32 42,017 449 4.24
--------- ---------- --------- ----------
Total interest-bearing liabilities 709,042 3,459 1.94 680,016 3,173 1.85
Demand deposits 93,370 86,096
Other liabilities 5,727 7,043
--------- ---------
Total liabilities 808,139 773,155
Stockholders' equity 90,225 87,520
Total liabilities and
--------- ---------
Stockholders' equity $ 898,364 $ 860,675
========= =========
Net interest income $ 7,114 $ 6,995
========== ==========
Net interest margin/4/ 3.40% 3.49%
======= =======
/1/ Interest income and yields are presented on a fully taxable equivalent
basis using the Federal statutory income tax rate. Such adjustments were
$169,000 in 2004 and $170,000 in 2003.
/2/ Non-accruing loans are included in the average amounts outstanding.
/3/ Average balances based on amortized cost.
/4/ Net interest income divided by average total interest earning assets.
23
(DOLLARS EXPRESSED IN THOUSANDS)
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------------------- ---------------------------------
INTEREST RATE INTEREST RATE
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE/1/ PAID/1/ BALANCE EXPENSE/1/ PAID/1/
--------- ---------- ------- --------- ---------- -------
ASSETS
Loans:/2/
Commercial $ 224,145 $ 9,463 5.62% $ 171,672 $ 7,618 5.93
Real estate 330,650 14,084 5.67 312,172 13,945 5.97
Consumer 38,057 2,267 7.94 42,423 2,614 8.24
Investment securities:/3/
U.S Treasury and
U.S. Gov't Agencies 172,247 3,057 2.36 149,805 3,254 2.90
State and municipal 30,718 1,407 6.10 31,899 1,586 6.65
Other 4,984 112 2.99 4,853 134 3.69
Federal funds sold 23,509 232 1.31 40,461 315 1.04
Interest-bearing deposits 2,109 14 0.88 4,235 34 1.07
--------- ---------- --------- ----------
Total interest earning assets 826,419 30,636 4.94 757,520 29,500 5.21
All other assets 76,352 72,017
Allowance for loan losses (8,529) (7,562)
--------- ---------
Total assets $ 894,242 $ 821,975
========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
NOW accounts $ 116,481 $ 539 0.62% $ 98,704 $ 512 0.69%
Savings 56,638 242 0.57 53,037 291 0.73
Money market 80,144 745 1.24 63,973 438 0.92
Deposits of $100,000 and over 85,207 1,404 2.20 75,064 1,379 2.46
Other time deposits 247,856 4,378 2.35 248,960 5,260 2.82
--------- ---------- --------- ----------
Total time deposits 586,326 7,308 1.66 539,738 7,880 1.95
Federal funds purchased and
securities sold under
agreements to repurchase 68,681 565 1.10 68,763 500 0.97
Interest-bearing demand
notes to US Treasury 647 4 0.82 750 5 0.89
Other borrowed money 52,717 1,717 4.34 41,291 1,323 4.28
--------- ---------- --------- ----------
Total interest-bearing liabilities 708,371 9,594 1.80 650,542 9,708 2.00
Demand deposits 89,924 77,933
Other liabilities 5,926 7,524
--------- ---------
Total liabilities 804,221 735,999
Stockholders' equity 90,021 85,976
Total liabilities and
--------- ---------
Stockholders' equity $ 894,242 $ 821,975
========= =========
Net interest income $ 21,042 $ 19,792
========== ==========
Net interest margin/4/ 3.39% 3.49%
======= =======
/1/ Interest income and yields are presented on a fully taxable equivalent
basis using the Federal statutory income tax rate. Such adjustments were
$485,000 in 2004 and $518,000 in 2003.
/2/ Non-accruing loans are included in the average amounts outstanding.
/3/ Average balances based on amortized cost.
/4/ Net interest income divided by average total interest earning assets.
24
(DOLLARS EXPRESSED IN THOUSANDS)
The following table presents, on a fully taxable equivalent basis, an
analysis of changes in net interest income resulting from changes in average
volumes of earning assets and interest bearing liabilities and average rates
earned and paid. The change in interest due to the combined rate/volume variance
has been allocated to rate and volume changes in proportion to the absolute
dollar amounts of change in each.
THREE MONTHS ENDED SEPTEMBER 30, 2004
COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------------------
CHANGE DUE TO
TOTAL ---------------------------------------
CHANGE VOLUME /3/ RATE /4/
------ ------------- --------
INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS:
Loans:/1/
Commercial $ 462 525 (63)
Real estate /2/ 91 146 (55)
Consumer (104) (87) (17)
Investment securities:/3/
U.S Treasury and
U.S. Gov't Agencies (44) 19 (63)
State and municipal /2/ (12) 30 (42)
Other 5 13 (8)
Federal funds sold 11 (32) 43
Interest-bearing deposits (4) (6) 2
------ ------------- --------
Total interest income 405 608 (203)
INTEREST EXPENSE:
NOW accounts $ 41 6 35
Savings (1) 1 (2)
Money market 238 72 166
Deposits of $100,000 and over 1 (10) 11
Other time deposits (306) (108) (198)
Federal funds purchased and
securities sold under
agreements to repurchase 64 (14) 78
Interest-bearing demand notes
of U.S. Treasury - (1) 1
Other borrowed money 249 240 9
------ ------------- --------
Total interest expense 286 186 100
------ ------------- --------
Net interest income on a fully
taxable equivalent basis $ 119 422 (303)
====== ============= ========
/1/ Interest income and yields are presented on a fully taxable equivalent
basis using the Federal statutory income tax rate. Such adjustments were
$169,000 in 2004 and $170,000 in 2003.
/2/ Non-accruing loans are included in the average amounts outstanding.
/3/ Change in volume multiplied by yield/rate of prior period.
/4/ Change in yield/rate multiplied by volume of prior period.
25
(DOLLARS EXPRESSED IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 2004
COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------------------
CHANGE DUE TO
TOTAL ---------------------------------------
CHANGE VOLUME /3/ RATE /4/
------ ------------- --------
INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS:
Loans:/1/
Commercial $1,845 2,229 (384)
Real estate /2/ 139 804 (665)
Consumer (347) (262) (85)
Investment securities:/3/
U.S Treasury and
U.S. Gov't Agencies (197) 447 (644)
State and municipal /2/ (179) (57) (122)
Other (22) 4 (26)
Federal funds sold (83) (153) 70
Interest-bearing deposits (20) (15) (5)
------ ------------- --------
Total interest income 1,136 2,997 (1,861)
INTEREST EXPENSE:
NOW accounts $ 27 86 (59)
Savings (49) 19 (68)
Money market 307 128 179
Deposits of $100,000 and over 25 175 (150)
Other time deposits (882) (23) (859)
Federal funds purchased and
securities sold under
agreements to repurchase 65 (1) 66
Interest-bearing demand notes
of U.S. Treasury (1) (1) -
Other borrowed money 394 372 22
------ ------------- --------
Total interest expense (114) 755 (869)
------ ------------- --------
Net interest income on a fully
taxable equivalent basis $1,250 2,242 (992)
====== ============= ========
/1/ Interest income and yields are presented on a fully taxable equivalent
basis using the Federal statutory income tax rate. Such adjustments were
$485,000 in 2004 and $518,000 in 2003.
/2/ Non-accruing loans are included in the average amounts outstanding.
/3/ Change in volume multiplied by yield/rate of prior period.
/4/ Change in yield/rate multiplied by volume of prior period.
26
LENDING AND CREDIT MANAGEMENT
Interest earned on the loan portfolio is a primary source of interest
income for our Company. Net loans represented 68.5% of total assets as of
September 30, 2004 compared to 65.7% as of December 31, 2003 and 64.4% as of
September 30, 2003.
Lending activities are conducted pursuant to written loan policies
approved by our Banks' Boards of Directors. Larger credits are reviewed by our
Banks' Discount Committees. These committees are comprised of members of senior
management.
Our Company generally does not retain long-term fixed rate residential
mortgage loans in its portfolio. Fixed rate loans conforming to standards
required by the secondary market are offered to qualified borrowers, but are not
funded until our Company has a non-recourse purchase commitment from the
secondary market at a predetermined price. At September 30, 2004 our Company was
servicing approximately $214,569,000 of loans sold to the secondary market.
Mortgage loans retained in our Company's portfolio generally include
provisions for rate adjustments at one to three year intervals. Commercial loans
and real estate construction loans generally have maturities of less than one
year. Installment loans to individuals are primarily fixed rate loans with
maturities from one to five years.
The provision for loan losses is based on management's evaluation of the
loan portfolio in light of national and local economic conditions, changes in
the composition and volume of the loan portfolio, changes in the volume of past
due and nonaccrual loans, value of underlying collateral and other relevant
factors. The allowance for loan losses which is reported as a deduction from
loans, is available for loan charge-offs. This allowance is increased by the
provision charged to expense and is reduced by loan charge-offs net of loan
recoveries. Management formally reviews all loans in excess of certain dollar
amounts (periodically established) at least annually. In addition, on a monthly
basis, management reviews past due, "classified", and "watch list" loans in
order to classify or reclassify loans as "loans requiring attention,"
"substandard," "doubtful," or "loss". During that review, management also
determines what loans should be considered to be "impaired". Management
believes, but there can be no assurance, that these procedures keep management
informed of possible problem loans. Based upon these procedures, both the
allowance and provision for loan losses are adjusted to maintain the allowance
at a level considered adequate by management for probable losses inherent in the
loan portfolio.
The allowance for loan losses was decreased by net loan charge-offs of
$57,000, $15,000 and $48,000, respectively, for the first, second and third
quarters of 2004. That compares to net loan recoveries of $13,000 and $2,000,
respectively, for the first and second quarters of 2003 and net loan charge-offs
of $57,000 for the third quarter of 2003. The allowance for loan losses was
increased by a provision charged to expense of $236,000 for the first quarter of
2004, $210,000 for the second quarter of 2004 and $160,000 for the third
quarter. That compares to a provision of $235,000 for the first quarter of 2003,
$236,000 for the second quarter of 2003 and $310,000 for the third quarter of
2003.
27
The balance of the allowance for loan losses was $8,754,161 at September
30, 2004 compared to $8,267,000 at December 31, 2003 and $8,078,000 at September
30, 2003. The allowance for loan losses as a percent of outstanding loans was
1.42% at September 30, 2004 compared to 1.42% at December 31, 2003 and 1.41% at
September 30, 2003.
Nonperforming loans, defined as loans on nonaccrual status, loans 90 days
or more past due and still accruing, and restructured loans totaled $6,985,000
or 1.13% of total loans at September 30, 2004 compared to $3,014,000 or 0.52% of
total loans at December 31, 2003. Detail of those balances plus other real
estate and repossessions is as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------------- ---------------------
% OF GROSS % OF GROSS
BALANCE LOANS BALANCE LOANS
------- ---------- -------- ---------
Nonaccrual loans:
Commercial $ 5,304 0.86% $ 1,520 0.26%
Real estate
Construction - - 59 0.01
Mortgage 1,256 0.20 1,270 0.22
Consumer 38 0.01 55 0.01
------- ---------- -------- ---------
6,598 1.07 2,904 0.50
------- ---------- -------- ---------
Loans contractual past-due 90 days
or more and still accruing:
Commercial 20 - 66 0.01
Real estate
Construction - - - -
Mortgage 339 0.06 4 -
Consumer 28 - 40 0.01
------- ---------- -------- ---------
387 0.06 110 0.02
------- ---------- -------- ---------
Restructured loans - - - -
------- ---------- -------- ---------
Total nonperforming loans 6,985 1.13% 3,014 0.52%
========== =========
Other real estate 185 47
Repossessions 23 73
------- --------
Total nonperforming assets $ 7,193 $ 3,134
======= ========
The allowance for loan losses was 125.33% of nonperforming loans at September
30, 2004 compared to 274.29% of nonperforming loans at December 31, 2003. The
increase in nonaccrual commercial loans is primarily represented by two credits
with balances of $3,313,000 at September 30, 2004. Management has allocated
$1,960,000 of the loan loss reserve to these two credits which is believed to be
sufficient to cover probable losses. Management further believes these two
credits are isolated situations and do not reflect a deficiency in the overall
quality of the loan portfolio.
28
It is our Company's policy to discontinue the accrual of interest income
on loans when the full collection of interest or principal is in doubt, or when
the payment of interest or principal has become contractually 90 days past due
unless the obligation is both well secured and in the process of collection. A
loan remains on nonaccrual status until the loan is current as to payment of
both principal and interest and/or the borrower demonstrates the ability to pay
and remain current. Interest on loans on nonaccrual status at September 30, 2004
and 2003, which would have been recorded under the original terms of those
loans, was approximately $350,000 and $182,000 for the nine months ended
September 30, 2004 and 2003, respectively. Approximately $50,000 and $26,000 was
actually recorded as interest income on such loans for the nine months ended
September 30, 2004 and 2003, respectively.
A loan is considered impaired when it is probable a creditor will be
unable to collect all amounts due - both principal and interest - according to
the contractual terms of the loan agreement. In addition to nonaccrual loans
included in the table above, which were considered impaired, management has
identified additional loans totaling approximately $20,000 and $66,000 at
September 30, 2004 and December 31, 2003, respectively, which are not included
in the nonaccrual table above but are considered by management to be impaired.
The $20,000 of loans identified by management as being impaired reflected one
commercial loan. The average balance of nonaccrual and other impaired loans for
the first nine months of 2004 was approximately $7,623,000. At September 30,
2004 the portion of the allowance for loan losses allocated to specific impaired
loans was $2,180,000 compared to $685,000 at December 31, 2003. The balance of
impaired loans with specific loan loss allocations was approximately $3,019,000
at September 30, 2004 compared to $1,572,000 at December 31, 2003.
As of September 30, 2004 and December 31, 2003 approximately $21,352,000
and $17,167,000 of loans not included in the nonaccrual table above or
identified by management as being impaired were classified by management as
having more than normal risk which raised doubts as to the ability of the
borrower to comply with present loan repayment terms. The increase in loans
having more than normal risk, is primarily represented by two large commercial
real estate credits. These two credits had documentation exceptions causing them
to be classified by regulatory authorities as special mention. However, the
loans are well secured and performing in accordance with the terms of the loan
agreement. In addition to the classified list, our Company also maintains an
internal loan watch list of loans, which for various reasons, not all related to
credit quality, management is monitoring more closely than the average loan
portfolio. Loans may be added to this list for reasons that are temporary and
correctable, such as the absence of current financial statements of the
borrower, or a deficiency in loan documentation. Other loans are added as soon
as any problem is detected which might affect the borrower's ability to meet the
terms of the loan. This could be initiated by the delinquency of a scheduled
loan payment, a deterioration in the borrower's financial condition identified
in a review of periodic financial statements, a decrease in the value of the
collateral securing the loan, or a change in the economic environment within
which the borrower operates. Once the loan is placed on our Company's watch
list, its condition is monitored closely. Any further deterioration in the
condition of the loan is evaluated to determine if the loan should be assigned
to a higher risk category.
29
The allowance for loan losses is available to absorb probable loan losses
regardless of the category of loan to be charged off. The allowance for loan
losses consists of three components: asset-specific reserves, reserves based on
expected loss estimates, and unallocated reserves. The asset-specific component
applies to loans evaluated individually for impairment and is based on
management's best estimate of discounted cash repayments and proceeds from
liquidating collateral. The actual timing and amount of repayments and the
ultimate realizable value of the collateral may differ from management's
estimate.
The expected loss component is generally determined by applying
statistical loss factors and other risk indicators to pools of loans by asset
type. These expected loss estimates are sensitive to changes in delinquency
status, realizable value of collateral, and other risk factors. The underlying
assumptions, estimates and assessments used by management to determine these
components are continually evaluated and updated to reflect management's current
view of overall economic conditions and relevant factors impacting credit
quality and inherent losses. Changes in such estimates could significantly
impact the allowance and provision for credit losses. Our Company could
experience credit losses that are different from the current estimates made by
management.
At September 30, 2004, management allocated $8,589,000 of the $8,754,000
total allowance for loan losses to specific loans and loan categories and
$165,000 was unallocated. Considering the size of several of our Company's
lending relationships and the loan portfolio in total, management believes that
the September 30, 2004 allowance for loan losses is adequate. Our Company does
not lend funds for the type of transactions defined as "highly leveraged" by
bank regulatory authorities or for foreign loans. Our Company does not have any
interest-earning assets which would have been included in nonaccrual, past due,
or restructured loans if such assets were loans.
FINANCIAL CONDITION
Total assets increased $9,347,000 or 1.1% to $884,943,000 at September 30,
2004 compared to $875,596,000 at December 31, 2003. Total liabilities increased
$5,727,000 or 0.7% to $793,540,000. Stockholders' equity increased $3,620,000 or
4.1% to $91,403,000. The increase in both total assets and total liabilities is
primarily the result of our Company's issuance of subordinated debentures and
the subsequent investment of excess funds not used to pay down debt.
Loans increased $31,337,000 to $615,256,000 at September 30, 2004 compared
to $583,919,000 at December 31, 2003. Commercial loans increased $26,902,000;
real estate construction loans increased $7,584,000; real estate mortgage loans
increased $1,996,000; and consumer loans decreased $5,145,000. The increase in
commercial loans, real estate construction loans and real estate mortgage loans
represents continued strong loan demand, especially in the Jefferson City
market. The decrease in consumer loans is primarily represented by the payoff of
one relatively large consumer credit.
Investment in debt and equity securities classified as available-for-sale
decreased $22,146,000 or 11.7% to $166,810,000 at September 30, 2004 compared to
$188,956,000 at
30
December 31, 2003. Investments classified as available-for-sale are carried at
fair value. During 2004 the market valuation account decreased $957,000 to
$1,117,000 to reflect the fair value of available-for-sale investments at
September 30, 2004 and the net after tax decrease resulting from the change in
the market valuation adjustment of $622,000 decreased the stockholders' equity
component to $726,000 at September 30, 2004. The decrease in investments in debt
and equity securities is primarily the result of reduced pledging requirements
as a result of a decrease in public funds on deposit with the Company.
At December 31, 2003 the market valuation account for the
available-for-sale investments of $2,074,000 increased the amortized cost of
those investments to their fair value on that date and the net after tax
increase resulting from the market valuation adjustment of $1,348,000 was
reflected as a separate positive component of stockholders' equity.
Cash and cash equivalents, which consist of cash and due from banks and
Federal funds sold, decreased $1,824,000 or 3.2% to $55,221,000 at September 30,
2004 compared to $57,045,000 at December 31, 2003. Further discussion of this
decrease may be found in the section of this report titled "Sources and Uses of
Funds".
Premises and equipment increased $2,045,000 or 11.5% to $19,820,000 at
September 30, 2004 compared to $17,775,000 at December 31, 2003. The increase
reflects purchases of premises and equipment of $3,214,000 offset by
depreciation expense of $1,070,000. The purchase of premises and equipment
primarily reflects land, construction costs and equipment purchases for two
additional branches.
Total deposits increased $22,704,000 or 3.4% to $687,966,000 at September
30, 2004 compared to $665,262,000 at December 31, 2003. This increase is due in
large part to a special deposit promotion at one bank.
Federal funds purchased and securities sold under agreements to repurchase
decreased $39,004,000 or 53.4% to $33,979,000 at September 30, 2004 compared to
$72,983,000 at December 31, 2003. This decrease is due primarily to the decision
of one large public fund customer to switch to direct investment of its funds
versus utilizing overnight repurchase agreements.
Other borrowed money increased $23,938,000 or 57.5% to $65,568,000 at
September 30, 2004 compared to $41,630,000 at December 31, 2003. This reflects
the issuance of $25,774,000 of subordinated debentures which was partially used
to repay $11,000,000 of other debt. An additional $7,000,000 of debt was repaid
from cash on hand. The Company also borrowed an additional $17,000,000 from the
Federal Home Loan Bank during the period.
The increase in stockholders' equity reflects net income of $6,479,000
less dividends declared of $2,252,000 and ($622,000) change in unrealized
holding losses, net of taxes, on investment in debt and equity securities
available-for-sale.
No material changes in our Company's liquidity or capital resources have
occurred since December 31, 2003.
31
INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization of our Company's
amortized intangible assets for the periods ended September 30, 2004 and
December 31, 2003 are as follows:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
----------------------------------- -----------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized intangible asset:
Core deposit intangible $ 2,265,000 (1,413,090) 2,265,000 (1,251,756)
============== ============ ============== ============
The aggregate amortization expense of intangible assets subject to
amortization for the three and nine month periods ended September 30, 2004 and
2003 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- -----------------------------------
2004 2003 2004 2003
-------------- ------------ -------------- ------------
Aggregate amortization expense $ 53,778 91,278 161,334 240,618
============== ============ ============== ============
The estimated amortization expense for the next five years is as follows:
Estimated amortization expense:
For year ended 2004 $ 215,000
For year ended 2005 215,000
For year ended 2006 215,000
For year ended 2007 135,000
For year ended 2008 66,000
32
Our Company's mortgage servicing rights are amortized in proportion to the
related estimated net servicing income over the estimated lives of the related
mortgages, which is seven years. Changes in mortgage servicing rights, net of
amortization, for the periods indicated were as follows:
SEPTEMBER 30,
-----------------------------------
2004 2003
-------------- ------------
Balance, beginning of period $ 1,591,289 1,515,848
Originated mortgage servicing rights 347,592 1,021,271
Amortization (313,613) (399,837)
Impairment charge - (556,040)
-------------- ------------
Balance, end of period $ 1,625,268 1,581,242
============== ============
Mortgage loans serviced $ 214,569,000 210,244,000
============== ============
Mortgage servicing rights as a
percentage of loans serviced 0.76% 0.75%
============== ============
The estimated amortization expense of mortgage servicing rights for the
next five years is as follows:
Estimated amortization expense:
For year ended 2004 $ 400,000
For year ended 2005 340,000
For year ended 2006 340,000
For year ended 2007 340,000
For year ended 2008 205,000
Our Company's goodwill associated with the purchase of subsidiaries by
reporting segments for the periods ended September 30, 2004 and December 31,
2003 is summarized as follows:
CITIZENS
THE EXCHANGE UNION STATE
NATIONAL BANK BANK AND OSAGE VALLEY
OF JEFFERSON TRUST OF BANK OF
CITY CLINTON WARSAW TOTAL
-------------- ------------ -------------- ------------
Goodwill associated with the
purchase of subsidiaries $ 4,382,098 16,701,762 4,112,876 25,196,736
============== ============ ============== ============
33
DEFINED BENEFIT RETIREMENT PLAN
Our Company provides a noncontributory defined benefit pension plan in
which all full-time employees become participants upon the later of the
completion of one year of qualified service or the attainment of age 21, and in
which they continue to participate as long as they continue to be full-time
employees, until their retirement, death, or termination of employment prior to
normal retirement date. The normal retirement benefits provided under the plan
vary depending upon the participant's rate of compensation, length of
employment, and social security benefits. Retirement benefits are payable for
life, but not less than ten years. Plan assets consist of U.S. Treasury and
government agency securities, corporate common stocks and bonds, real estate
mortgages, and demand deposits. Disclosure information is based on a measurement
date of November 1 for the corresponding year.
The following table represents the components of the net periodic pension
costs for the three-month and nine-month periods ended September 30, 2004 and
2003:
ESTIMATED ACTUAL
2004 2003
--------- --------
Service cost - benefits earned during the year $ 292,059 $257,103
Interest cost on projected benefit obligations 242,638 231,253
Expected return on plan assets (374,910) (373,976)
Net amortization and deferral (26,632) (35,512)
Recognized net gains (6,695) (29,916)
--------- --------
Net periodic pension cost - annual $ 126,460 $ 48,952
========= ========
Net periodic pension cost - three months
ended September 30 $ 31,615 $ 12,238
========= ========
Net periodic pension cost - nine months
ended September 30 $ 94,845 $ 36,714
========= ========
Our Company does not expect to make any contribution to the plan during 2004.
34
LIQUIDITY
The role of liquidity management is to ensure funds are available to meet
depositors' withdrawal and borrowers' credit demands while at the same time
maximizing profitability. This is accomplished by balancing changes in demand
for funds with changes in the supply of those funds. Liquidity to meet the
demands is provided by maturing assets, short-term liquid assets that can be
converted to cash and the ability to attract funds from external sources,
principally depositors. Due to the nature of services offered by our Company,
management prefers to focus on transaction accounts and full service
relationships with customers. Management believes it has the ability to increase
deposits at any time by offering rates slightly higher than the market rate.
Our Banks' Asset/Liability Committees (ALCO), primarily made up of senior
management, have direct oversight responsibility for our Company's liquidity
position and profile. A combination of daily, weekly and monthly reports
provided to management detail the following: internal liquidity metrics,
composition and level of the liquid asset portfolio, timing differences in
short-term cash flow obligations, available pricing and market access to the
financial markets for capital and exposure to contingent draws on our Company's
liquidity.
Our Company has a number of sources of funds to meet liquidity needs on a
daily basis. The deposit base, consisting of consumer and commercial deposits
and large dollar denomination ($100,000 and over) certificates of deposit, is a
source of funds. Our Company has an insignificant amount of deposits on which
the rate paid exceeded the market rate by more that 50 basis points when the
account was established.
Other sources of funds available to meet daily needs include the sales of
securities under agreements to repurchase and funds made available under a
treasury tax and loan note agreement with the federal government. Also, the
Banks are members of the Federal Home Loan Bank of Des Moines (FHLB). As members
of the FHLB, the Banks have access to credit products of the FHLB. At September
30, 2004, the amounts of available credit from the FHLB totaled $97,860,000. As
of September 30, 2004, the Banks had $39,794,000 in outstanding borrowings with
the FHLB. The Banks have federal funds purchased lines with correspondent banks
totaling $40,000,000 and agreements with unaffiliated banks to sell and
repurchase securities of $10,000,000. Finally, our Company has a $20,000,000
line of credit with a correspondent bank. This line of credit had no balance in
use as of September 30, 2004.
35
SOURCES AND USES OF FUNDS
For the nine months ended September 30, 2004 and 2003, net cash provided
by operating activities was $7,070,000 and $9,774,000, respectively.
Approximately $1,405,000 of the decrease in net cash provided by operating
activities is represented by a decrease in other liabilities representing an
increase in taxes paid.
Net cash used in investing activities was $14,646,000 in 2004 versus
$68,044,000 in 2003. In 2004 our Company's investment portfolio decreased by
approximately $20,112,000 compared to a $6,908,000 increase for the same period
in 2003. In 2003 our Company's loan portfolio increased approximately
$60,118,000 compared to a $31,955,000 increase for the same period in 2004. Our
Company has also purchased premises and equipment of approximately $3,214,000 in
2004 compared to $845,000 for the same period of 2003. These purchases primarily
represent land, construction costs and equipment acquisition for additional
branch locations.
Net cash provided by financing activities was $5,753,000 in 2004 versus
$30,540,000 in 2003. Increases in deposits accounted for approximately
$22,704,000 of the cash provided by financing activities in 2004 and
approximately $36,980,000 in 2003. An additional $23,938,000 of cash was
provided by additional borrowed funds in 2004. Offsetting the increase in
deposits in 2004 was a decrease in securities sold under agreements to
repurchase of $39,004,000.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46 (FIN 46R) (revised December 2003), Consolidation of
Variable Interest Entities, which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an entity through
means other than voting rights and accordingly should consolidate the entity.
FIN 46R is intended to achieve more consistent application of consolidation
policies to variable interest entities and, thus improve comparability between
enterprises engaged in similar activities even if some of those activities are
conducted through variable interest entities. Including the assets, liabilities,
and results of activities of variable interest entities in the consolidated
financial statements of their primary beneficiaries should provide more complete
information about the resources, obligations, risks and opportunities of the
consolidated enterprise. For public companies, FIN 46R is applicable to all
special-purpose entities (SPEs) no later than the end of the first reporting
period ending after December 15, 2003, and immediately to all entities created
after January 31, 2003. The effective dates of FIN 46R vary depending on the
type of reporting enterprise and the type of entity that the enterprise is
involved with.
The only special purpose entity that our Company has in place is a limited
purpose trust that issued trust preferred securities. This limited purpose trust
issued preferred securities to outside investors and used the proceeds of the
issuance to purchase, from our Company, an equivalent amount of junior
subordinated debentures having stated maturities. The debentures are the only
assets of the limited purpose trust. When our Company makes its payments of
36
interest on the debentures, the limited purpose trust distributes cash to
holders of the trust preferred securities. The trust preferred securities must
be redeemed upon maturity of the debentures. Under the requirements of FIN 46R,
our Company must deconsolidate the limited purpose trust. This has been
reflected in our Company's consolidated financial statements.
SFAS 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, was issued in May 2003. This
Statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The Statement also includes required disclosures for financial
instruments within its scope. For our Company, the Statement was effective for
instruments entered into or modified after May 31, 2003 and otherwise was
effective as of January 1, 2004, except for mandatorily redeemable financial
instruments. For certain mandatorily redeemable financial instruments, the
Statement will be effective for our Company on January 1, 2005. The effective
date has been deferred indefinitely for certain other types of manditorily
redeemable financial instruments. Our Company currently does not have any
financial instruments that are within the scope of SFAS 150.
In March 2004, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 105 (SAB 105), Application of Accounting Principles to Loan
Commitments. SAB 105 provides guidance regarding loan commitments accounted for
as derivative instruments under FASB Statement No. 133. SAB 105 specifically
addresses commitments to sell loans after funding and the fact that the
commitment should be accounted for as a derivative instrument and measured at
fair value. SAB 105 is required to be applied to loan commitments accounted for
as derivatives that are entered into after March 31, 2004. Our Company has
adopted SAB 105 and determined that it did not have a material impact on our
Company's consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our Company's exposure to market risk is reviewed on a regular basis by
our Banks' Asset/Liability Committees and Boards of Directors. Interest rate
risk is the potential of economic losses due to future interest rate changes.
These economic losses can be reflected as a loss of future net interest income
and/or a loss of current fair market values. The objective is to measure the
effect on net interest income and to adjust the balance sheet to minimize the
inherent risk while at the same time maximizing income. Management realizes
certain risks are inherent and that the goal is to identify and minimize those
risks. Tools used by our Banks' management include the standard GAP report
subject to different rate shock scenarios. At September 30, 2004, the rate shock
scenario models indicated that annual net interest income could decrease or
increase by as much as 3% should interest rates rise or fall, respectively,
within 200 basis points from their current level over a one year period compared
to as much as 6% at December 31, 2003. However there are no assurances that the
change will not be more or less than this estimate. Management further believes
this is an acceptable level of risk.
37
ITEM 4. CONTROLS AND PROCEDURES
Our Company's management has evaluated, with the participation of our
principal executive and principal financial officers, the effectiveness of our
disclosure controls and procedures as of September 30, 2004. Based upon and as
of the date of that evaluation, our principal executive and principal financial
officers concluded that our disclosure controls and procedures were effective to
ensure that information required to be disclosed in the reports we file and
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported as and when required. It should be noted that any system
of disclosure controls and procedures, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system are met. In addition, the design of any system of disclosure controls and
procedures is based in part upon assumptions about the likelihood of future
events. Because of these and other inherent limitations of any such system,
there can be no assurance that any design will always succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.
There has been no change in our company's internal control over financial
reporting that occurred during the fiscal quarter ended September 30, 2004 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
38
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Unregistered Sales of Equity 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
Exhibit No. Description
3.1 Articles of Incorporation of the Company (filed as Exhibit 3(a) to
the Company's Registration Statement on Form S-4 (Registration No.
33-54166) and incorporated herein by reference).
3.2 Bylaws of the Company (filed as Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2002
(Commission file number 0-23636) and incorporated herein by
reference).
4 Specimen certificate representing shares of the Company's $1.00 par
value common stock (filed as Exhibit 4 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999
(Commission File number 0-23636) and incorporated herein by
reference).
31.1 Certificate of the Chief Executive Officer of the Company pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certificate of the Chief Financial Officer of the Company pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certificate of the Chief Executive Officer of the Company pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certificate of the Chief Financial Officer of the Company pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
39
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 /s/ James E. Smith
-----------------------------------
November 9, 2004 James E. Smith, Chairman of the Board
and Chief Executive Officer (Principal
Executive Officer)
/s/ Richard G. Rose
-----------------------------------
November 9, 2004 Richard G. Rose, Treasurer (Principal Financial
Officer and Principal Accounting Officer)
40
EXCHANGE NATIONAL BANCSHARES, INC.
INDEX TO EXHIBITS
September 30, 2004 Form 10-Q
Exhibit No. Description Page No.
- ----------- ----------- --------
3.1 Articles of Incorporation of the Company (filed as Exhibit 3(a) to
the Company's Registration Statement on Form S-4 (Registration No.
33-54166) and incorporated herein by reference). **
3.2 Bylaws of the Company (filed as Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2002
(Commission file number 0-23636) and incorporated herein by
reference). **
4 Specimen certificate representing shares of the Company's $1.00 par
value common stock (filed as Exhibit 4 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999
(Commission file number 0-23636) and incorporated herein by
reference). **
31.1 Certificate of the Chief Executive Officer of the Company pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 42
31.2 Certificate of the Chief Financial Officer of the Company pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 43
32.1 Certificate of the Chief Executive Officer of the Company pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 44
32.2 Certificate of the Chief Financial Officer of the Company pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 45
** Incorporated by reference.
41