UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
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)
N/A
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act). [X] Yes [ ] No
As of August 9, 2005, the registrant had 4,169,847 shares of common stock, par
value $1.00 per share, outstanding.
Page 1 of 47 pages
Index to Exhibits located on page 43
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, 2005 DECEMBER 31, 2004
--------------- -----------------
ASSETS
Loans:
Commercial $ 269,502,034 $ 249,497,691
Real estate - construction 86,880,123 65,075,185
Real estate - mortgage 395,469,715 284,309,203
Consumer 38,283,781 37,985,508
Unamortized loan origination fees
and costs, net (387,299) (230,957)
--------------- -----------------
789,748,354 636,636,630
Less allowance for loan losses 9,336,516 7,495,594
--------------- -----------------
Loans, net 780,411,838 629,141,036
Investments in available for sale debt
and equity securities, at fair value 216,593,498 171,717,635
Federal funds sold 52,608,148 41,603,952
Cash and due from banks 27,389,616 24,104,458
Premises and equipment 30,679,747 21,276,387
Accrued interest receivable 7,300,290 5,289,083
Mortgage servicing rights 1,569,578 1,605,930
Goodwill 39,090,025 25,196,736
Core deposit intangible 5,096,826 798,132
Cash surrender value - life insurance 1,620,080 106,218
Other assets 4,058,159 3,034,703
--------------- -----------------
Total assets $ 1,166,417,805 $ 923,874,270
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Demand deposits $ 130,669,397 $ 98,156,124
Time deposits 787,458,356 628,493,352
--------------- -----------------
Total deposits 918,127,753 726,649,476
Federal funds purchased and securities
sold under agreements to repurchase 43,891,974 34,515,323
Interest-bearing demand notes to U.S. Treasury 1,055,522 897,470
Subordinated notes 49,486,000 25,774,000
Other borrowed money 52,490,658 39,524,747
Accrued interest payable 2,785,216 1,795,267
Other liabilities 4,040,923 2,947,204
--------------- -----------------
Total liabilities 1,071,878,046 832,103,487
Stockholders' equity:
Common stock - $1 par value; 15,000,000 shares
authorized; 4,298,353 issued 4,298,353 4,298,353
Surplus 22,030,074 22,014,894
Retained earnings 70,797,784 67,716,511
Accumulated other comprehensive income (loss),
net of tax 66,057 393,534
Treasury stock, 128,506 shares at cost (2,652,509) (2,652,509)
--------------- -----------------
Total stockholders' equity 94,539,759 91,770,783
--------------- -----------------
Total liabilities and stockholders' equity $ 1,166,417,805 $ 923,874,270
=============== =================
See accompanying notes to unaudited condensed consolidated financial statements.
2
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Interest income:
Interest and fees on loans $11,826,533 $ 8,487,563 $21,562,627 $16,817,345
Interest on debt and equity securities:
Taxable 1,344,608 1,057,675 2,466,214 2,074,552
Nontaxable 405,528 314,314 748,442 630,439
Interest on federal funds sold 233,508 81,746 486,160 144,878
Interest on interest-bearing deposits 4,580 3,519 20,502 9,725
Dividends on equity securities 72,506 39,527 130,696 69,258
----------- ----------- ----------- -----------
Total interest income 13,887,263 9,984,344 25,414,641 19,746,197
----------- ----------- ----------- -----------
Interest Expense:
NOW accounts 429,816 173,120 785,361 344,529
Savings 80,644 81,935 151,889 162,317
Money market accounts 825,936 227,819 1,470,662 371,632
Certificates of deposit:
$100,000 and over 811,613 424,893 1,431,695 864,573
Other time deposits 2,111,065 1,470,575 3,770,507 3,014,245
Federal funds purchased and securities sold
under agreements to repurchase 315,697 188,542 583,819 355,860
Subordinated notes 746,544 252,736 1,149,609 293,652
Federal Home Loan borrowings 484,862 360,202 899,552 666,144
Other borrowings 4,929 1,447 8,279 62,710
----------- ----------- ----------- -----------
Total interest expense 5,811,106 3,181,269 10,251,373 6,135,662
----------- ----------- ----------- -----------
Net interest income 8,076,157 6,803,075 15,163,268 13,610,535
Provision for loan losses 237,667 210,500 473,167 446,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 7,838,490 6,592,575 14,690,101 13,164,535
Continued on next page
3
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Noninterest income:
Service charges on deposit accounts $ 1,019,169 $ 779,862 $ 1,699,678 $ 1,520,120
Trust department income 247,954 159,565 429,965 370,994
Brokerage income 50,748 20,614 91,310 41,509
Gain on sales and calls of debt securities - - - 2,537
Mortgage loan servicing fees, net 104,032 112,303 216,799 214,424
Gain on sale of mortgage loans 176,891 242,259 306,587 462,301
Other 198,397 236,211 384,196 385,584
----------- ----------- ----------- -----------
Total noninterest income 1,797,191 1,550,814 3,128,535 2,997,469
----------- ----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 3,434,712 2,795,158 6,320,501 5,576,177
Occupancy expense 386,336 285,183 676,106 550,660
Furniture and equipment expense 541,999 478,116 1,046,228 942,784
Advertising and promotion 204,916 160,041 357,668 242,522
Postage, printing and supplies 254,871 211,970 419,022 387,326
Legal, examination, and professional fees 333,148 267,969 584,244 432,478
Other 1,104,875 792,272 1,832,346 1,531,025
----------- ----------- ----------- -----------
Total noninterest expense 6,260,857 4,990,709 11,236,115 9,662,972
----------- ----------- ----------- -----------
Income before income taxes 3,374,824 3,152,680 6,582,521 6,499,032
Income taxes 1,030,021 1,023,712 2,000,104 2,076,265
----------- ----------- ----------- -----------
Net income $ 2,344,803 $ 2,128,968 $ 4,582,417 $ 4,422,767
=========== =========== =========== ===========
Basic earning per share $ 0.56 $ 0.51 $ 1.10 $ 1.06
Diluted earnings per share $ 0.56 $ 0.51 $ 1.09 $ 1.05
Weighed average shares of common stock outstanding
Basic 4,169,847 4,169,847 4,169,847 4,169,847
Diluted 4,198,333 4,203,766 4,198,808 4,207,944
Dividends per share:
Declared $ 0.18 $ 0.18 $ 0.36 $ 0.36
Paid $ 0.18 $ 0.18 $ 0.36 $ 0.36
See accompanying notes to unaudited condensed consolidated financial statements.
4
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
-------------------------------
2005 2004
------------- -------------
Cash flow from operating activities:
Net income $ 4,582,417 $ 4,422,767
Adjustments to reconcile net income to net cash
cash provided by operating activities:
Provision for loan losses 473,167 446,000
Depreciation expense 842,543 762,243
Net amortization of debt securities premiums and discounts 425,137 747,649
Amortization of intangible assets 201,306 107,556
Increase in accrued interest receivable (762,388) (124,682)
Increase in cash surrender value - life insurance (9,042) (3,282)
(Increase) decrease in other assets (349,526) 95,895
Increase (decrease) in accrued interest payable 792,565 (165,518)
Increase in other liabilities 569,970 845,695
Gain on sales and calls of debt securities - (2,537)
Origination of mortgage loans for sale (19,077,940) (27,807,405)
Proceeds from the sale of mortgage loans held for sale 19,384,527 28,269,706
Gain on sale of mortgage loans (306,587) (462,301)
Loss on disposition of premises and equipment 674 -
Other, net 15,180 15,180
------------- -------------
Net cash provided by operating activities 6,782,003 7,146,966
Cash flow from investing activities:
Net increase in loans (21,907,593) (13,970,030)
Purchase of available-for-sale debt securities (150,620,781) (146,499,286)
Proceeds from maturities of available-for-sale debt securities 116,651,308 95,822,867
Proceeds from calls of available-for-sale debt securities 13,172,500 23,747,425
Proceeds from sales of available-for-sale debt securities 1,071,803 250,000
Acquisition of subsidiary, net of cash and cash equivalents acquired (21,798,564) -
Purchase of premises and equipment (3,127,280) (2,267,381)
Proceeds from sales of other real estate owned and repossessions 1,439,880 221,989
------------- -------------
Net cash used in investing activities (65,118,727) (42,694,416)
------------- -------------
Continued on next page
5
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
-----------------------------
2005 2004
------------ ------------
Cash flow from financing activities:
Net increase in demand deposits $ 8,252,832 $ 2,772,528
Net increase in interest-bearing transaction accounts 23,663,971 24,815,133
Net increase (decrease) in time deposits 10,283,788 (16,792,812)
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase 8,370,728 (9,999,729)
Net increase in interest-bearing demand notes to U.S. Treasury 137,083 1,067,817
Proceeds from subordinated notes 23,712,000 25,774,000
Proceeds from Federal Home Loan Bank borrowings 3,500,000 15,000,000
Repayment of Federal Home Loan Bank borrowings (3,793,180) (588,699)
Repayment of other borrowed money - (17,950,568)
Cash dividends paid (1,501,144) (1,501,145)
------------ ------------
Net cash provided by financing activities 72,626,078 22,596,525
Net increase (decrease) in cash and cash equivalents 14,289,354 (12,950,925)
Cash and cash equivalents, beginning of period 65,708,410 57,044,915
------------ ------------
Cash and cash equivalents, end of period $ 79,997,764 $ 44,093,990
============ ============
Supplemental disclosure of cash flow information -
Cash paid during period for:
Interest $ 9,450,543 $ 6,301,180
Income taxes 1,600,000 3,035,000
Supplemental schedule of noncash investing activities -
Other real estate and repossessions
acquired in settlement of loans $ 1,880,141 $ 419,204
See accompanying notes to unaudited condensed consolidated financial statements.
6
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 2005 and 2004
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 2004 condensed
consolidated financial statements have been reclassified to conform to the 2005
condensed consolidated presentation. Such reclassifications have no effect on
previously reported net income or stockholders' equity. Operating results for
the period ended June 30, 2005 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2005.
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 2004 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, 2004 as Exhibit 13.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission. Certain information and note disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed and omitted. Our Company believes that these financial statements
contain all adjustments (consisting of normal recurring accruals) necessary to
present fairly our Company's consolidated financial position as of June 30, 2005
and December 31, 2004 and the consolidated statements of earnings for the three
and six periods ended June 30, 2005 and 2004 and cash flows for the six months
ended June 30, 2005 and 2004.
ACQUISITION
On May 2, 2005 our Company acquired 100 percent of the outstanding common
shares of Bank 10 from Drexel Bancshares, Inc. of Belton, Missouri. Accordingly,
the results of operations of Bank 10 have been included in the condensed
consolidated financial statements since the date of acquisition. Bank 10 has
branches in Belton, Drexel, Independence, Harrisonville, and Raymore, Missouri.
As a result of this acquisition our Company will be able to expand our presence
in the Kansas City, Missouri metropolitan market.
The purchase price payable to Drexel Bancshares, Inc. for Bank 10 was cash
aggregating $34,020,000. $23,000,000 of the purchase price was provided from the
issuance of subordinated notes with the balance being paid from cash and liquid
assets on hand.
7
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. Our company is in
the process of obtaining third-party valuations of loans, deposits and the core
deposit intangible asset; thus, the allocation of the purchase price is subject
to refinement.
AT MAY 2, 2005
--------------
Cash and cash equivalents $ 12,221,439
Loans, net 131,716,517
Investments in available for sale debt
and equity securities, at fair value 26,080,340
Premises and equipment 7,119,297
Core deposit intangible 4,500,000
Goodwill 13,893,289
Other assets 2,773,923
--------------
Total assets acquired 198,304,805
Deposits 149,277,685
Securities sold under agreements
to repurchase 1,005,923
Other borrwed money 13,280,060
Other liabilities 721,134
--------------
Total liabilities acquired 164,284,802
--------------
Net assets acquired $ 34,020,003
==============
The $4,500,000 core deposit intangible has been assigned an estimated 8
year useful life subject to third party verification. The $13,893,289 of
goodwill is expected to be deductible for income tax purposes.
A summary of unaudited pro forma combined financial information for the
three-month and six-month periods ended June 30, 2005 and 2004 for our Company
and Bank 10 as if the transaction had occurred on January 1, 2004 follows. These
pro forma presentations do not include any anticipated expense reductions that
may result from the acquisition.
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- --------------
Net interest income $ 8,593,966 $ 8,000,759 $ 16,896,125 $ 15,994,652
Net income $ 2,403,826 2,256,013 4,695,768 4,679,123
Basic earnings per share $ 0.58 $ 0.54 $ 1.13 $ 1.12
Diluted earnings per share $ 0.57 $ 0.54 $ 1.12 $ 1.11
8
EARNINGS PER SHARE
The following table reflects, for the three-month and six-month periods
ended June 30, 2005 and 2004, the numerators (net income) and denominators
(average shares outstanding) for the basic and diluted net income per share
computations:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income, basic and diluted $2,344,803 $2,128,968 $4,582,417 $4,422,767
========== ========== ========== ==========
Average shares outstanding 4,169,847 4,169,847 4,169,847 4,169,847
Effect of dilutive stock options 28,521 33,919 29,234 38,097
---------- ---------- ---------- ----------
Average shares outstanding
including dilutive stock options 4,198,368 4,203,766 4,199,081 4,207,944
Basic earning per share $ 0.56 $ 0.51 $ 1.10 $ 1.06
Diluted earnings per share $ 0.56 $ 0.51 $ 1.09 $ 1.05
9
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. See Impact
of New Accounting Pronouncements in this report for further discussion of this
issue.
The following table illustrates, for the three-month and six-month periods
ended June 30, 2005 and 2004, the effect on net income if the fair-value-based
method had been applied to all outstanding and unvested awards in each period:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net income:
As reported $ 2,344,803 $ 2,128,968 $ 4,582,417 $ 4,422,767
Add total stock-based employee
compensation expense included
in reported net income, net of tax - - - -
Deduct total stock-based employee
compensation expense determined
under fair-value-based method for
all awards, net of tax (35,700) (34,058) (71,399) (68,113)
------------- ------------- ------------- -------------
Pro forma net income $ 2,309,103 $ 2,094,910 $ 4,511,018 $ 4,354,654
============= ============= ============= =============
Pro forma earnings per common share:
As reported basic $ 0.56 $ 0.51 $ 1.10 $ 1.06
Pro forma basic 0.55 0.50 1.08 1.04
As reported diluted 0.56 0.51 1.09 1.05
Pro forma diluted 0.55 0.50 1.07 1.03
10
COMPREHENSIVE INCOME
For the three-month and six-month periods ended June 30, 2005 and 2004,
unrealized holding gains and losses on investments in debt and equity securities
available-for-sale were our Company's only other comprehensive income component.
Comprehensive income for the three-month and six-month periods ended June 30,
2005 and 2004 is summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ---------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net income $ 2,344,803 $ 2,128,968 $ 4,582,417 $ 4,422,767
Other comprehensive income (loss):
Net unrealized holding gains (losses) on
investments in debt and equity securities
available-for-sale, net of taxes 739,264 (2,094,118) (327,477) (1,819,287)
Adjustment for net securities gains realized in net
income, net of applicable income taxes - - - (1,649)
----------- ----------- ----------- -----------
Total other comprehensive income (loss) 739,264 (2,094,118) (327,477) (1,820,936)
----------- ----------- ----------- -----------
Comprehensive income $ 3,084,067 $ 34,850 $ 4,254,940 $ 2,601,831
=========== =========== =========== ===========
INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization of our Company's
amortizable core deposit intangible asset as of June 30, 2005 and December 31,
2004 is as follows:
JUNE 30, 2005 DECEMBER 31, 2004
----------------------------- ----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Core deposit intangible $ 6,765,000 (1,668,174) 2,265,000 (1,466,868)
============== =========== ============== ===========
The aggregate amortization expense of core deposit intangible subject to
amortization for the three-month and six-month periods ended June 30, 2005 and
2004 is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
2005 2004 2005 2004
---------- ------ ---------- -------
Aggregate amortization expense $ 147,528 53,778 $ 201,306 107,556
========== ====== ========== =======
11
The estimated amortization expense for the next five years is as follows:
Estimated amortization expense:
For year ending 2005 $ 590,112
For year ending 2006 777,612
For year ending 2007 764,352
For year ending 2008 628,932
For year ending 2009 628,932
Our Company's mortgage servicing rights are amortized in proportion to the
related estimated net servicing income over the estimated lives of the related
mortgages, which is seven years. Changes in mortgage servicing rights, net of
amortization, for the periods indicated were as follows:
JUNE 30,
---------------------------------
2005 2004
------------- -----------
Balance, beginning of period $ 1,605,930 1,591,289
Originated mortgage servicing rights 183,824 245,940
Amortization (220,176) (212,221)
------------- -----------
Balance, end of period $ 1,569,578 1,625,008
============= ===========
Mortgage loans serviced $ 217,047,351 212,487,000
============= ===========
Mortgage servicing rights as a
percentage of loans serviced 0.72% 0.76%
============= ===========
The estimated amortization expense of mortgage servicing rights for the
next five years is as follows:
Estimated amortization expense:
For year ending 2005 $ 440,000
For year ending 2006 440,000
For year ending 2007 440,000
For year ending 2008 204,000
For year ending 2009 46,000
12
Our Company's goodwill associated with the purchase of subsidiaries by
reporting segments for the periods ended June 30, 2005 and December 31, 2004 is
summarized as follows:
JUNE 30, 2005
-------------------------------------------------------------------
CITIZENS
THE EXCHANGE UNION STATE OSAGE
NATIONAL BANK BANK AND VALLEY
OF JEFFERSON TRUST OF BANK OF
CITY CLINTON WARSAW BANK 10 TOTAL
------------- ----------- --------- ---------- ----------
Goodwill associated with the
purchase of subsidiaries $ 4,382,098 16,701,762 4,112,876 13,893,289 39,090,025
============= =========== ========= ========== ==========
DECEMBER 31, 2004
------------------------------------------------------
CITIZENS
THE EXCHANGE UNION STATE OSAGE
NATIONAL BANK BANK AND 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
============= =========== ========= ==========
13
DEFINED BENEFIT RETIREMENT PLAN
The Exchange National Bank of Jefferson City 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 and six-month periods ended June 30, 2005 and 2004:
ESTIMATED ACTUAL
2005 2004
--------- ---------
Service cost - benefits earned during the year $ 308,105 $ 292,059
Interest cost on projected benefit obligations 245,214 242,384
Expected return on plan assets (369,604) (374,586)
Net amortization and deferral (26,632) (35,512)
Recognized net gains - (6,695)
--------- ---------
Net periodic pension cost - annual $ 157,083 $ 117,650
========= =========
Net periodic pension cost - three months
ended June 30 (actual) $ 39,271 $ 31,615
========= =========
Net periodic pension cost - six months
ended June 30 (actual) $ 78,542 $ 63,230
========= =========
Our Company does not expect to make any contribution to the plan during
2005.
14
SEGMENTS
Through the respective branch network, Exchange National Bank, Citizens
Union State Bank, Osage Valley Bank, and Bank 10 provide similar products and
services in four defined geographic areas. The products and services offered
include a broad range of commercial and personal banking services, including
certificates of deposit, individual retirement and other time deposit accounts,
checking and other demand deposit accounts, interest checking accounts, savings
accounts and money market accounts. Loans include real estate, commercial,
installment and other consumer loans. Other financial services include automatic
teller machines, trust services, credit related insurance, and safe deposit
boxes. The revenues generated by each business segment consist primarily of
interest income, generated from the loan and debt and equity security
portfolios, and service charges and fees, generated from the deposit products
and services. The geographic areas are defined to be communities surrounding
Jefferson City, Clinton, Warsaw and Belton, 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.
15
JUNE 30, 2005
----------------------------------------------------------------------------------------------------
THE EXCHANGE
NATIONAL BANK CITIZENS UNION
OF JEFFERSON STATE BANK AND OSAGE VALLEY CORPORATE AND
CITY TRUST OF CLINTON BANK OF WARSAW BANK 10 OTHER TOTAL
-------------- ---------------- -------------- -------------- -------------- --------------
Balance sheet information
Loans, net of allowance
for loan losses $ 378,165,474 $ 222,704,782 $ 51,161,384 $ 128,380,198 $ - $ 780,411,838
Debt and equity securities 110,708,492 37,630,984 37,495,309 29,272,713 1,486,000 216,593,498
Goodwill 4,382,098 16,701,762 4,112,876 13,893,289 - 39,090,025
Intangible assets - 690,576 - 4,406,250 - 5,096,826
Total assets 547,573,344 319,269,709 97,172,165 200,288,694 2,113,893 1,166,417,805
Deposits 431,851,643 262,432,300 78,479,971 151,965,663 (6,601,824) 918,127,753
Stockholders' equity $ 50,283,174 $ 41,350,810 $ 9,955,772 $ 34,385,950 $ (41,435,947) $ 94,539,759
============== ============== ============== ============== ============== ==============
DECEMBER 31, 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 $ 366,749,286 $213,808,231 $ 48,583,519 $ - $629,141,036
Debt and equity securities 99,466,264 36,449,804 35,027,567 774,000 171,717,635
Goodwill 4,382,098 16,701,762 4,112,876 - 25,196,736
Intangible assets - 798,132 - - 798,132
Total assets 513,839,636 311,756,271 97,507,515 770,848 923,874,270
Deposits 406,897,725 256,351,275 81,077,272 (17,676,796) 726,649,476
Stockholders' equity $ 49,643,120 $ 39,954,448 $ 9,654,137 $ (7,480,922) $ 91,770,783
============= ============ ============ ============ ============
16
THREE MONTHS ENDED JUNE 30, 2005
------------------------------------------------------------------------------------------
THE EXCHANGE
NATIONAL BANK CITIZENS UNION
OF JEFFERSON STATE BANK AND OSAGE VALLEY CORPORATE AND
CITY TRUST OF CLINTON BANK OF WARSAW BANK 10 OTHER TOTAL
------------- ---------------- -------------- ----------- ------------- -----------
Statement of earnings:
Total interest income $ 6,977,560 $ 4,006,187 $ 1,173,086 $ 1,708,824 $ 21,606 $13,887,263
Total interest expense 2,657,604 1,341,438 518,246 599,202 694,616 5,811,106
----------- ----------- ----------- ----------- ----------- -----------
Net interest income 4,319,956 2,664,749 654,840 1,109,622 (673,010) 8,076,157
Provision for loan losses 150,000 75,000 10,500 2,167 - 237,667
Noninterest income 1,017,283 378,843 125,741 297,220 (21,896) 1,797,191
Noninterest expense 2,719,329 1,989,499 448,707 1,000,783 102,539 6,260,857
Income taxes 795,400 300,338 88,067 119,236 (273,020) 1,030,021
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ 1,672,510 $ 678,755 $ 233,307 $ 284,656 $ (524,425) $ 2,344,803
=========== =========== =========== =========== =========== ===========
THREE MONTHS ENDED JUNE 30, 2004
------------------------------------------------------------------------------
THE EXCHANGE
NATIONAL BANK CITIZENS UNION
OF JEFFERSON STATE BANK AND OSAGE VALLEY CORPORATE AND
CITY TRUST OF CLINTON BANK OF WARSAW OTHER TOTAL
------------- ---------------- -------------- ------------- -----------
Statement of earnings:
Total interest income $ 5,684,862 $ 3,242,855 $ 1,059,871 $ (3,244) $9,984,344
Total interest expense 1,760,980 819,826 393,509 206,954 3,181,269
----------- ----------- ----------- ----------- -----------
Net interest income 3,923,882 2,423,029 666,362 (210,198) 6,803,075
Provision for loan losses 125,000 75,000 10,500 - 210,500
Noninterest income 1,050,441 412,748 101,044 (22,419) 1,550,814
Noninterest expense 2,795,712 1,654,828 428,369 111,800 4,990,709
Income taxes 668,400 380,973 94,839 (120,500) 1,023,712
----------- ----------- ----------- ---------- -----------
Net income (loss) $ 1,385,211 $ 733,976 $ 233,698 $ (223,917) $ 2,128,968
=========== =========== =========== ========== ===========
17
SIX MONTHS ENDED JUNE 30, 2005
------------------------------------------------------------------------------------------
THE EXCHANGE
NATIONAL BANK CITIZENS UNION
OF JEFFERSON STATE BANK AND OSAGE VALLEY CORPORATE AND
CITY TRUST OF CLINTON BANK OF WARSAW BANK 10 OTHER TOTAL
------------- ---------------- -------------- ----------- ------------- -----------
Statement of earnings:
Total interest income $13,553,568 $ 7,800,694 $ 2,317,845 $ 1,708,824 $ 33,710 $25,414,641
Total interest expense 5,069,279 2,543,067 1,003,869 599,202 1,035,956 10,251,373
----------- ----------- ----------- ----------- ----------- -----------
Net interest income 8,484,289 5,257,627 1,313,976 1,109,622 (1,002,246) 15,163,268
Provision for loan losses 300,000 150,000 21,000 2,167 - 473,167
Noninterest income 1,886,357 762,415 221,116 297,220 (38,573) 3,128,535
Noninterest expense 5,402,871 3,725,958 879,298 1,000,783 227,205 11,236,115
Income taxes 1,490,800 650,023 174,195 119,236 (434,150) 2,000,104
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ 3,176,975 $ 1,494,061 $ 460,599 $ 284,656 $ (833,874) $ 4,582,417
=========== =========== =========== =========== =========== ===========
SIX MONTHS ENDED JUNE 30, 2004
-----------------------------------------------------------------------------
THE EXCHANGE
NATIONAL BANK CITIZENS UNION
OF JEFFERSON STATE BANK AND OSAGE VALLEY CORPORATE AND
CITY TRUST OF CLINTON BANK OF WARSAW OTHER TOTAL
------------- ---------------- -------------- ------------- -----------
Statement of earnings:
Total interest income $11,251,238 $ 6,379,786 $ 2,139,357 $ (24,184) $19,746,197
Total interest expense 3,365,165 1,687,582 802,295 280,620 6,135,662
----------- ----------- ----------- ----------- -----------
Net interest income 7,886,073 4,692,204 1,337,062 (304,804) 13,610,535
Provision for loan losses 275,000 150,000 21,000 - 446,000
Noninterest income 2,024,497 824,908 191,594 (43,530) 2,997,469
Noninterest expense 5,489,063 3,175,081 846,886 151,942 9,662,972
Income taxes 1,344,050 715,842 191,473 (175,100) 2,076,265
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 2,802,457 $ 1,476,189 $ 469,297 $ (325,176) $ 4,422,767
=========== =========== =========== =========== ===========
18
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 FROM 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 OUR COMPANY INCLUDING, BUT NOT LIMITED TO,
FLUCTUATIONS IN INTEREST RATES AND IN THE ECONOMY; THE IMPACT OF LAWS AND
REGULATIONS APPLICABLE TO OUR COMPANY AND CHANGES THEREIN; COMPETITIVE
CONDITIONS IN THE MARKETS IN WHICH OUR COMPANY CONDUCTS ITS OPERATIONS,
INCLUDING COMPETITION FROM BANKING AND NON-BANKING COMPANIES WITH SUBSTANTIALLY
GREATER RESOURCES THAN OUR COMPANY, SOME OF WHICH MAY OFFER AND DEVELOP PRODUCTS
AND SERVICES NOT OFFERED BY OUR COMPANY; AND THE ABILITY OF OUR COMPANY 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, 2004,
AS WELL AS THOSE DISCUSSED ELSEWHERE IN OUR COMPANY'S REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
19
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. 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. Finally, on May 2, 2005, our Company
acquired Bank 10 of Belton, Missouri.
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, Osage Valley Bank, and Bank 10 provide similar
products and services in four defined geographic areas. The products and
services offered include a broad range of commercial and personal banking
services, including certificates of deposit, individual retirement and other
time deposit accounts, checking and other demand deposit accounts, interest
checking accounts, savings accounts, and money market accounts. Loans include
real estate,
20
commercial, installment, and other consumer loans. Other financial services
include automatic teller machines, trust services, credit related insurance, and
safe deposit boxes. The revenues generated by each business segment consist
primarily of interest income, generated primarily from the loan and debt and
equity security portfolios, and service charges and fees, generated from the
deposit products and services. The geographic areas are defined to be
communities surrounding Jefferson City, Clinton, Warsaw, and Belton, 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.
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.
21
RESULTS OF OPERATIONS
Net income for the three months ended June 30, 3005 of $2,345,000
increased $216,000 when compared to the second quarter of 2004. Diluted earnings
per common share for the second quarter of 2005 of $0.56 increased 5 cents or
9.8% when compared to the second quarter of 2004. Net income for the six months
ended June 30, 2005 of $4,582,000 increased $159,000 when compared to the second
quarter of 2004. Diluted earnings per common share for the second quarter of
2005 of $1.09 increased 4 cents or 3.81% when compared to the second quarter of
2004.
Net interest income (on a tax equivalent basis) was $8,428,000, or 3.40%
of average earning assets, for the three months ended June 30, 2005, compared to
$6,958,000, or 3.32% of average earning assets, for the same period in 2004.
Approximately, $1,110,000 of the $1,470,000 increase in net interest income for
the three months ended June 30, 2005 as compared to the same period in 2004 is
related to the acquisition. The balance was the result of an increase in average
interest-earning assets partially offset by a decrease in net interest margin.
Net interest income (on a tax equivalent basis) was $15,697,000, or 3.37%
of average earning assets, for the six months ended June 30, 2005, compared to
$13,926,000, or 3.38% of average earning assets, for the same period in 2004.
Approximately, $1,110,000 of the $1,771,000 increase in net interest income for
the six months ended June 30, 2005 as compared to the same period in 2004 is
related to the acquisition. The balance was the result of an increase in average
interest-earning assets partially offset by a decrease in net interest margin.
Average interest-earning assets for the three months ended June 30, 2005
were $993,873,000, an increase of $154,114,000 or 18.35%, compared to average
interest-earning assets of $839,759,000 for the same period of 2004. The
acquisition of Bank 10 represents approximately $111,434,000 of the increase in
interest-earning assets. In addition to the increase due to the acquisition,
average loans outstanding increased approximately $56,103,000.
The yield on average interest-earning assets increased to 5.75% for the
three month period ended June 30, 2005 compared to 4.84% for the same period in
2004. However, the rate paid on interest-bearing liabilities also increased to
2.67% in 2005 compared to 1.77% in 2004.
Average interest-earning assets for the six months ended June 30, 2005
were $938,087,000, an increase of $113,019,000 or 13.7%, compared to average
interest-earning assets of $825,068,000 for the same period of 2004. The
acquisition of Bank 10 represents approximately $56,025,000 of the increase in
interest-earning assets. In addition to the increase due to the acquisition,
average loans outstanding increased approximately $57,778,000.
The yield on average interest-earning assets increased to 5.58% for the
six month period ended June 30, 2005 compared to 4.88% for the same period in
2004. However, the rate paid on interest-bearing liabilities also increased to
2.53% in 2005 compared to 1.74% in 2004.
22
THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE MONTHS ENDED JUNE 30, 2004
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 $1,322,000 or 19.00% to $8,280,000 or 3.34%
of average earning assets for the second quarter of 2005 compared to $6,958,000
or 3.32% of average earning assets for the same period of 2004. The provision
for loan losses was $238,000 and $210,000 the three months ended June 30, 2005
and 2004 respectively.
Noninterest income and noninterest expense for the three-month periods
ended June 30, 2005 and 2004 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED
JUNE 30, INCREASE (DECREASE)
-------------------- -------------------
2005 2004 AMOUNT %
-------- ------- --------- ------
NONINTEREST INCOME
Service charges on deposit accounts $ 1,019 $ 780 $ 239 30.6 %
Trust department income 248 160 88 55.0
Brokerage income 51 21 30 142.9
Mortgage loan servicing fees, net 104 112 (8) (7.1)
Gain on sale of mortgage loans 177 242 (65) (26.9)
Other 198 236 (38) (16.1)
-------- ------- --------- -----
$ 1,797 $ 1,551 $ 246 15.9 %
======== ======= ========= =====
NONINTEREST EXPENSE
Salaries and employee benefits $ 3,435 $ 2,795 $ 640 22.9 %
Occupancy expense 386 285 101 35.4
Furniture and equipment expense 542 478 64 13.4
Advertising and promotion 205 160 45 28.1
Postage, printing and supplies 255 212 43 20.3
Legal, examination, and professional fees 333 268 65 24.3
Other 1,105 793 312 39.3
-------- ------- --------- -----
$ 6,261 $ 4,991 $ 1,270 25.4 %
======== ======= ========= =====
23
Noninterest income increased $246,000 or 15.9% to $1,797,000 for the
second quarter of 2005 compared to $1,551,000 for the same period of 2004. The
acquisition of Bank 10 contributed $297,000 of additional noninterest income
during the second quarter. In addition to the income due to the acquisition,
trust department income increased $88,000 or 55.0% when compared to the same
period in 2004 due primarily to a large distribution fee collected during the
quarter. Brokerage income increased $30,000 or 142.9% due to higher sales volume
during the second quarter of 2005 compared to 2004. Gain on sales of mortgage
loans decreased $65,000 or 26.9% due to a decrease in volume of loans originated
and sold to the secondary market from approximately $14,775,000 in the second
quarter of 2004 to approximately $9,960,000 for the second quarter of 2005.
Other noninterest income decreased $54,000 or 22.9% due to the receipt in 2004
of a refund of vendor charges that incurred in prior years.
Noninterest expense increased $1,270,000 or 25.4% to $6,261,000 for the
second quarter of 2005 compared to $4,991,000 for the second quarter of 2004.
Approximately $1,001,000 of the increase in noninterest expense is attributed to
the acquisition of Bank 10. Excluding costs associated with the acquisition,
salaries and benefits increased $93,000 or 3.3%, occupancy expense increased
$42,000 or 14.7%, advertising and promotion increased $14,000 or 8.8%, legal,
examination, and professional fees increased $44,000 or 16.4%, and other
noninterest expense increased $76,000 or 9.6%. The increase in salaries and
employees benefits represents normal salary increases and additional hires as
well as increased health care costs. The increase in occupancy expense reflects
additional costs associated with two new branch facilities. The increase in
advertising and promotion reflects additional advertising and promotion in new
market areas. The increase in legal, examination, and professional fees reflects
increases in accruals to cover expected costs associated with Sarbanes-Oxley
compliance and benefit consulting. The increase in other noninterest expense is
primarily in the area of data processing expense with smaller increases in
various other categories.
Income taxes as a percentage of earnings before income taxes as reported
in the condensed consolidated financial statements were 30.5% for the second
quarter of 2005 compared to 32.5% for the second quarter of 2004. The reduction
in the effective tax rate is due to an increase in tax-exempt income as a
percentage of total income in the current year as well as a reduction in the tax
accrual rate to reflect the anticipated effective rate for the current year.
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004
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 $1,622,000 or 11.65% to $15,548,000 or 3.34%
of average earning assets for the six months of 2005 compared to $13,926,000 or
3.38% of average earning assets for the same period of 2004. The provision for
loan losses was $473,000 and $446,000 for the six months ended June 30, 2005 and
2004 respectively.
24
Noninterest income and noninterest expense for the six-month periods ended
June 30, 2005 and 2004 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30, INCREASE (DECREASE)
------------------- -------------------
2005 2004 AMOUNT %
------- ------- --------- ------
NONINTEREST INCOME
Service charges on deposit accounts $ 1,700 $ 1,520 $ 180 11.8 %
Trust department income 430 371 59 15.9
Brokerage income 91 41 50 122.0
Gain on sales and calls of debt securities - 2 (2) (100.0)
Mortgage loan servicing fees, net 217 214 3 1.4
Gain on sale of mortgage loans 307 462 (155) (33.5)
Other 384 387 (3) (0.8)
------- ------- ------- ------
$ 3,129 $ 2,997 $ 132 4.4 %
======= ======= ======= ======
NONINTEREST EXPENSE
Salaries and employee benefits $ 6,320 $ 5,576 $ 744 13.3 %
Occupancy expense 676 551 125 22.7
Furniture and equipment expense 1,046 943 103 10.9
Advertising and promotion 358 242 116 47.9
Postage, printing and supplies 419 387 32 8.3
Legal, examination, and professional fees 584 432 152 35.2
Other 1,833 1,532 301 19.6
------- ------- ------- ------
$11,236 $ 9,663 $ 1,573 16.3 %
======= ======= ======= ======
Noninterest income increased $132,000 or 4.4% to $3,129,000 for the six
months of 2005 compared to $2,997,000 for the same period of 2004. $297,000
additional noninterest income resulted from the acquisition of Bank 10.
Excluding noninterest income associated with the acquisition, service charge
income decreased $90,000 or 5.9%. This reflects a decrease in the amount of
insufficient check fees collected by our banks. Trust department income
increased $59,000 or 15.9% when compared to the same period in 2004 due
primarily to a large distribution fee collected during the quarter. The $50,000
or 122.0% increase in brokerage income reflects higher sales volume during the
second quarter of 2005 compared to 2004. Gain on sales of mortgage loans
decreased $155,000 or 33.5% due to a decrease in volume of loans originated and
sold to the secondary market from approximately $27,807,000 in the first six
months of 2004 to approximately $19,078,000 for the first six months of 2005.
25
Noninterest expense increased $1,573,000 or 16.3% to $11,236,000 for the
first six months of 2005 compared to $9,663,000 for the same period of 2004.
Approximately $1,001,000 of the increase in noninterest expense is attributed to
the acquisition of Bank 10. Excluding costs associated with the acquisition,
salaries and benefits increased $197,000 or 3.5%, occupancy expense increased
$66,000 or 12.0%, furniture and equipment expense increased $47,000 or 5.0%,
advertising and promotion increased $85,000 or 35.1%, legal, examination, and
professional fees increased $131,000 or 30.3%, and other noninterest expense
increased $65,000 or 4.2%. The increase in salaries and benefits reflects normal
salary increases, additional hires and higher health insurance premiums. The
increases in occupancy expense and furniture and equipment expense primarily
reflect additional costs associated with two new branch facilities. The increase
in advertising and promotion expense reflects additional advertising and
promotion in new market areas. The increase in legal, examination, and
professional fees reflects additional costs incurred with the acquisition and
higher audit costs associated with Sarbanes-Oxley compliance and benefit
consulting. The increase in other noninterest expense is primarily in the area
of data processing expense with smaller increases in various other categories.
Income taxes as a percentage of earnings before income taxes as reported
in the condensed consolidated financial statements were 30.4% for the first six
months of 2005 compared to 31.9% for the same period of 2004. The reduction in
the effective tax rate is due to an increase in tax-exempt income as a
percentage of total income in the current year as well as a reduction in the tax
accrual rate to reflect the anticipated effective rate for the current year.
NET INTEREST INCOME
Fully taxable equivalent net interest income increased $1,322,000 or
19.00% and $1,622,000 or 11.65% respectively for the three and six month periods
ended June 30, 2005 compared to the same period in 2004. The increase in net
interest income for the periods ended June 30, 2005 compared to the period ended
June 30, 2004 was the result of increased earning assets.
26
The following table presents average balance sheets, net interest income,
average yields of earning assets, and average costs of interest bearing
liabilities on a fully taxable equivalent basis for the three month periods
ended June 30, 2005 and 2004.
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2005 JUNE 30, 2004
---------------------------------- -----------------------------
INTEREST RATE INTEREST RATE
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE(1) PAID(1) BALANCE EXPENSE(1) PAID(1)
------------- ---------- ------- ---------- ---------- -------
ASSETS
Loans:(2)
Commercial $ 259,540 $ 4,131 6.38 % $ 224,742 $ 3,124 5.58 %
Real estate 438,531 6,958 6.36 329,415 4,605 5.61
Consumer 36,724 767 8.38 37,164 768 8.29
Investment securities:(3)
U.S Treasury and
U.S. Gov't Agencies 176,832 1,345 3.05 188,065 1,058 2.26
State and municipal 42,077 579 5.52 30,783 459 5.98
Other 6,929 73 4.23 5,227 40 3.07
Federal funds sold 32,482 233 2.88 22,531 82 1.46
Interest-bearing deposits 758 5 2.65 1,832 3 0.66
------------- ---------- --------- ----------
Total interest earning assets 993,873 14,091 5.69 839,759 10,139 4.84
All other assets 104,323 76,285
Allowance for loan losses (8,754) (8,554)
------------- ---------
Total assets $ 1,089,442 $ 907,490
============= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
NOW accounts $ 131,880 $ 430 1.31 % $ 118,934 $ 173 0.58 %
Savings 56,792 81 0.57 57,658 82 0.57
Money market 141,731 826 2.34 77,577 228 1.18
Deposits of $100 and over 104,956 812 3.10 84,841 456 2.16
Other time deposits 292,308 2,110 2.90 248,912 1,439 2.32
------------- ---------- --------- ----------
Total time deposits 727,667 4,259 2.35 587,922 2,378 1.62
Federal funds purchased and
securities sold under
agreements to repurchase 47,550 316 2.67 74,852 188 1.01
Interest-bearing demand
notes to US Treasury 760 5 2.64 819 2 0.98
Subordinated debentures 49,486 746 6.05 4,248 253 3.91
Other borrowed money 47,907 485 4.06 53,037 360 4.61
------------- ---------- --------- ----------
Total interest-bearing
liabilities 873,370 5,811 2.67 720,878 3,181 1.77
Demand deposits 116,491 90,166
Other liabilities 6,293 5,980
------------- ---------
Total liabilities 996,154 817,024
Stockholders' equity 93,288 90,466
Total liabilities and ------------- ---------
stockholders' equity $ 1,089,442 $ 907,490
============= =========
Net interest income $ 8,280 $ 6,958
========== ==========
Net interest margin(4) 3.34 % 3.32 %
==== ====
(1) Interest income and yields are presented on a fully taxable equivalent
basis using the Federal statutory income tax rate. Such adjustments were
$204,000 in 2005 and $155,000 in 2004.
(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.
27
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 six month periods ended
June 30, 2005 and 2004.
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2005 JUNE 30, 2004
---------------------------------- -----------------------------
INTEREST RATE INTEREST RATE
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE(1) PAID(1) BALANCE EXPENSE(1) PAID(1)
------------- ---------- ------- ---------- ---------- -------
ASSETS
Loans:(2)
Commercial $ 254,717 $ 7,888 6.24 % $ 218,935 $ 6,080 5.57 %
Real estate 396,245 12,303 6.26 328,469 9,253 5.65
Consumer 36,748 1,432 7.86 38,601 1,507 7.83
Investment securities:(3)
U.S Treasury and
U.S. Gov't Agencies 167,937 2,466 2.96 177,853 2,075 2.34
State and municipal 38,084 1,072 5.68 29,871 923 6.20
Other 6,302 131 4.19 4,709 69 2.94
Federal funds sold 36,185 486 2.71 24,194 145 1.20
Interest-bearing deposits 1,869 21 2.27 2,436 10 0.82
------------- ---------- --------- ----------
Total interest earning assets 938,087 25,799 5.55 825,068 20,062 4.88
All other assets 91,614 75,539
Allowance for loan losses (8,185) (8,446)
------------- ---------
Total assets $ 1,021,516 $ 892,161
============= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
NOW accounts $ 128,780 $ 785 1.23 % $ 119,543 $ 345 0.58 %
Savings 53,627 152 0.57 57,174 162 0.57
Money market 133,525 1,471 2.22 73,150 372 1.02
Deposits of $100 and over 97,788 1,432 2.95 86,461 930 2.16
Other time deposits 272,355 3,770 2.79 250,980 2,948 2.36
------------- ---------- --------- ----------
Total time deposits 686,075 7,610 2.24 587,308 4,757 1.62
Federal funds purchased and
securities sold under
agreements to repurchase 48,256 584 2.44 73,086 356 0.98
Interest-bearing demand
notes to US Treasury 711 8 2.27 643 2 0.62
Subordinated debentures 39,660 1,150 5.85 4,248 294 3.91
Other borrowed money 43,693 899 4.15 42,856 727 4.55
------------- ---------- --------- ----------
Total interest-bearing
liabilities 818,395 10,251 2.53 708,141 6,136 1.74
Demand deposits 104,452 88,182
Other liabilities 5,667 6,027
------------- ---------
Total liabilities 928,514 802,350
Stockholders' equity 93,002 89,811
Total liabilities and ------------- ---------
stockholders' equity $ 1,021,516 $ 892,161
============= =========
Net interest income $ 15,548 $ 13,926
========== ==========
Net interest margin(4) 3.34 % 3.38 %
==== ====
(1) Interest income and yields are presented on a fully taxable equivalent
basis using the Federal statutory income tax rate. Such adjustments were
$385,000 in 2005 and $316,000 in 2004.
(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.
28
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.
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED JUNE 30, 2005
COMPARED TO
THREE MONTHS ENDED JUNE 30, 2004
------------------------------------
CHANGE DUE TO
TOTAL ----------------------
CHANGE VOLUME (3) RATE (4)
------------ ------------ --------
INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS:
Loans:(1)
Commercial $ 1,007 520 487
Real estate (2) 2,353 1,671 682
Consumer (1) (9) 8
Investment securities:(3)
U.S Treasury and
U.S. Gov't Agencies 287 (66) 353
State and municipal (2) 120 157 (37)
Other 33 15 18
Federal funds sold 151 47 104
Interest-bearing deposits 2 (3) 5
------------ ----- -----
Total interest income 3,952 2,332 1,620
INTEREST EXPENSE:
NOW accounts $ 257 21 236
Savings (1) (1) -
Money market 598 274 324
Deposits of $100 and over 356 125 231
Other time deposits 671 277 394
Federal funds purchased and
securities sold under
agreements to repurchase 128 (90) 218
Interest-bearing demand notes
of U.S. Treasury 3 - 3
Subordinated debentures 493 308 185
Other borrowed money 125 171 (46)
------------ ----- -----
Total interest expense 2,630 1,085 1,545
------------ ----- -----
Net interest income on a fully
taxable equivalent basis $ 1,322 1,247 75
============ ===== =====
(1) Interest income and yields are presented on a fully taxable equivalent
basis using the Federal statutory income tax rate. Such adjustments were
$204,000 in 2005 and $155,000 in 2004.
(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.
29
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.
(DOLLARS EXPRESSED IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, 2005
COMPARED TO
SIX MONTHS ENDED JUNE 30, 2004
------------------------------------
CHANGE DUE TO
TOTAL ----------------------
CHANGE VOLUME (3) RATE (4)
------------ ------------ --------
INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS:
Loans:(1)
Commercial $ 1,808 1,061 747
Real estate (2) 3,050 2,039 1,011
Consumer (75) (72) (3)
Investment securities:(3)
U.S Treasury and
U.S. Gov't Agencies 391 (121) 512
State and municipal (2) 149 237 (88)
Other 62 27 35
Federal funds sold 341 97 244
Interest-bearing deposits 11 (2) 13
------------ ----- -----
Total interest income 5,737 3,266 2,471
INTEREST EXPENSE:
NOW accounts $ 440 29 411
Savings (10) (10) -
Money market 1,099 455 644
Deposits of $100 and over 502 134 368
Other time deposits 822 266 556
Federal funds purchased and
securities sold under
agreements to repurchase 228 (155) 383
Interest-bearing demand notes
of U.S. Treasury 6 - 6
Subordinated debentures 856 658 198
Other borrowed money 172 245 (73)
------------ ----- -----
Total interest expense 4,115 1,622 2,493
------------ ----- -----
Net interest income on a fully
taxable equivalent basis $ 1,622 1,644 (22)
============ ===== =====
(1) Interest income and yields are presented on a fully taxable equivalent
basis using the Federal statutory income tax rate. Such adjustments were
$385,000 in 2005 and $316,000 in 2004.
(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.
30
LENDING AND CREDIT MANAGEMENT
Interest earned on the loan portfolio is a primary source of interest
income for our Company. Net loans represented 66.9% of total assets as of June
30, 2005 compared to 68.1% as of December 31, 2004 and 65.3% as of June 30,
2004.
Lending activities are conducted pursuant to written loan policies
approved by our Banks' Boards of Directors. Larger credits are reviewed by our
Banks' Discount Committees. These committees are comprised of members of senior
management.
Our Company generally does not retain long-term fixed rate residential
mortgage loans in its portfolio. Fixed rate loans conforming to standards
required by the secondary market are offered to qualified borrowers, but are not
funded until our Company has a non-recourse purchase commitment from the
secondary market at a predetermined price. At June 30, 2005, our Company was
servicing approximately $217,047,000 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
$2,000 and $48,000 for the first and second quarter of 2005 compared to $57,000
and $15,000 for the first and second quarter of 2004. The allowance for loan
losses was increased by a provision charged to expense of $236,000 for the first
quarter of 2005 and $237,000 for the second quarter of 2005. That compares to a
provision of $236,000 for the first quarter of 2004 and $210,000 for the second
quarter of 2004.
31
The balance of the allowance for loan losses was $9,336,000 at June 30,
2005 compared to $7,496,000 at December 31, 2004 and $8,641,000 at June 30,
2004. $1,418,000 of the increase in the allowance for loan losses represents the
balance of Bank 10's allowance acquired in the acquisition. The allowance for
loan losses as a percent of outstanding loans was 1.18% at June 30, 2005
compared to 1.18% at December 31, 2004 and 1.45% at June 30, 2004.
Nonperforming loans, defined as loans on nonaccrual status, loans 90 days
or more past due and still accruing, and restructured loans totaled $5,095,000
or 0.65% of total loans at June 30, 2005 compared to $6,092,000 or 0.96% of
total loans at December 31, 2004. Detail of those balances plus other real
estate and repossessions is as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
JUNE 30, 2005 DECEMBER 31, 2004
---------------------- ---------------------
% OF GROSS % OF GROSS
BALANCE LOANS BALANCE LOANS
---------- ---------- --------- ----------
Nonaccrual loans:
Commercial $ 3,918 0.50% $ 4,213 0.67%
Real estate
Construction 142 0.02 - -
Mortgage 914 0.12 1,246 0.20
Consumer 39 - 30 -
---------- ---- --------- ----
5,013 0.64 5,489 0.87
---------- ---- --------- ----
Loans contractual past-due 90 days
or more and still accruing:
Commercial - - 12 -
Real estate
Construction - - - -
Mortgage 27 - 591 0.09
Consumer 55 0.01 - -
---------- ---- --------- ----
82 0.01 603 0.09
---------- ---- --------- ----
Restructured loans - - - -
---------- ---- --------- ----
Total nonperforming loans 5,095 0.65% 6,092 0.96%
==== ====
Other real estate 512 30
Repossessions - 42
---------- ---------
Total nonperforming assets $ 5,607 $ 6,164
========== =========
The allowance for loan losses was 183.24% of nonperforming loans at June 30,
2005 compared to 123.05% of nonperforming loans at December 31, 2004. There has
been no material change in the overall level of nonperforming assets since the
prior year-end.
It is our Company's policy to discontinue the accrual of interest income
on loans when the full collection of interest or principal is in doubt, or when
the payment of interest or principal has become contractually 90 days past due
unless the obligation is both well secured and in the process of collection. A
loan remains on nonaccrual status until the loan is current as to payment of
both principal and interest and/or the borrower demonstrates the ability to pay
and remain current. Interest on loans on nonaccrual status at June 30, 2005 and
2004, which would have been recorded under the original terms of those loans,
was approximately $370,000 and $243,000 for the six months ended June 30, 2005
and 2004, respectively. Approximately $8,000
32
and $38,000 was actually recorded as interest income on such loans for the six
months ended June 30, 2005 and 2004, 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. The nonaccrual loans included in
the table above were the only loans that management has identified as impaired
at June 30, 2005. The average balance of nonaccrual loans for the first six
months of 2005 was approximately $5,632,000. At June 30, 2005 the portion of the
allowance for loan losses allocated to specific impaired loans was $1,486,000
compared to $1,681,000 at December 31, 2004. The balance of impaired loans with
specific loan loss allocations was approximately $5,014,000 at June 30, 2005
compared to $5,501,000 at December 31, 2004.
As of June 30, 2005 and December 31, 2004 approximately $12,085,000 and
$12,879,000 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.
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
33
components are continually evaluated and updated to reflect management's current
view of overall economic conditions and relevant factors impacting credit
quality and inherent losses. Changes in such estimates could significantly
impact the allowance and provision for credit losses. Our Company could
experience credit losses that are different from the current estimates made by
management.
At June 30, 2005, management allocated $7,704,000 of the $9,336,000 total
allowance for loan losses to specific loans and loan categories and $1,632,000
was unallocated. Considering the size of several of our Company's lending
relationships and the loan portfolio in total, management believes that the June
30, 2005 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 $242,543,000 or 26.25% to $1,166,418,000 at June
30, 2005 compared to $923,874,000 at December 31, 2004. Total liabilities
increased $239,775,000 or 28.82% to $1,071,878,000. Stockholders' equity
increased $2,769,000 or 3.02% to $94,540,000. The increase in both total assets
and total liabilities is primarily the result of our Company's acquisition of
Bank 10 and issuance of additional subordinated debentures. A discussion of the
Bank 10 transaction may be found in the section of this report titled "Overview
- - Recent Events - Bank 10 Transaction."
Loans increased $153,112,000 to $789,748,000 at June 30, 2005 compared to
$636,636,000 at December 31, 2004. Approximately $129,804,000 of the increase in
loans reflects loans of Bank 10. Excluding loans acquired in the acquisition,
commercial loans increased $9,096,000; real estate construction loans increased
$21,805,000; real estate mortgage loans decreased $5,032,000; and consumer loans
decreased $2,563,000. The increase in commercial loans and real estate
construction loans represents continued strong loan demand, especially in the
Jefferson City market. The decrease in real estate mortgage loans is primarily
represented by the payoff of one large commercial real estate loan that was
refinanced in the commercial finance market. The decrease in consumer loans was
also due to the payoff of one very large personal consumer credit.
Investment in debt and equity securities classified as available-for-sale
increased $44,876,000 or 26.13% to $216,593,000 at June 30, 2005 compared to
$171,718,000 at December 31, 2004. Investments classified as available-for-sale
are carried at fair value. $29,223,000 the increase reflects securities of Bank
10. During 2005 the market valuation account decreased $504,510 to $101,000 to
reflect the fair value of available-for-sale investments at June 30, 2005 and
the net after tax decrease resulting from the change in the market valuation
adjustment of $327,000 decreased the stockholders' equity component to $66,000
at June 30, 2005.
34
At December 31, 2004 the market valuation account for the
available-for-sale investments of $605,000 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 $394,000 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, increased $14,289,000 or 21.75% to $79,997,000 at June 30,
2005 compared to $65,708,000 at December 31, 2004. Approximately $14,145,000
represents cash and cash equivalents of Bank 10. Further discussion of this
decrease may be found in the section of this report titled "Sources and Uses of
Funds".
Premises and equipment increased $9,403,000 or 44.20% to $30,679,000 at
June 30, 2005 compared to $21,276,000 at December 31, 2004. The increase
reflects $7,119,000 of premises and equipment acquired with Bank 10 and
purchases of premises and equipment of $3,127,000 offset by depreciation expense
of $842,000. The purchase of premises and equipment primarily reflects
construction costs and equipment purchases for two additional branches.
Goodwill increased $13,893,000 or 55.14% to 39,090,000 at June 30, 2005
compared to $25,197,000 at December 31, 2004. The increase reflects the
difference between the purchase price of Bank 10 and the fair value of the
identifiable net assets acquired.
Core deposit intangible increased $4,299,000 or 538.59% to $5,096,826 at
June 30, 2005 compared to $798,132 at December 31, 2004. The increase reflects
an estimated core deposit intangible of $4,500,000 recorded as part of the Bank
10 acquisition. This intangible asset will be amortized on an accelerated basis
over an estimated life of eight years and is subject to a final valuation study.
Additional discussion of intangible assets can be found in the "Intangible
Assets" section that follows.
Total deposits increased $191,478,000 or 26.35% to $918,128,000 at June
30, 2005 compared to $726,649,000 at December 31, 2004. $151,966,000 represents
deposits of Bank 10. The balance of the increase primarily reflects increased
public fund deposits.
Federal funds purchased and securities sold under agreements to repurchase
increased $9,377,000 or 27.17% to $43,892,000 at June 30, 2005 compared to
$34,515,000 at December 31, 2004. $1,009,000 represents securities sold under
agreements to repurchase of Bank 10. The balance represents an increase in
public fund deposits.
Subordinated notes increased $23,712,000 at June 30, 2005 compared to
$25,774,000 at December 31, 2004. Our Company issued $23,712,000 of subordinated
notes in March 2005. The proceeds were used to fund the acquisition of Bank 10.
Other borrowed money increased $12,966,000 or 32.80% to $52,491,000 at
June 30, 2005 compared to $39,525,000 at December 31, 2004. The increase
reflects $13,259,000 of Federal Home Loan Bank advances acquired in the Bank 10
acquisition reduced by regular amortizing payments due or Federal Home Loan Bank
advances.
35
The increase in stockholders' equity reflects net income of $4,582,000
less dividends declared of $1,501,000 and ($327,000) 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, 2004.
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.
Other sources of funds available to meet daily needs include the sales of
securities under agreements to repurchase and funds made available under a
treasury tax and loan note agreement with the federal government. Also, the
Banks are members of the Federal Home Loan Bank of Des Moines (FHLB). As members
of the FHLB, the Banks have access to credit products of the FHLB. At June 30,
2005, the amounts of available credit from the FHLB totaled $123,659,000. As of
June 30, 2005, the Banks had $52,491,000 in outstanding borrowings with the
FHLB. The Banks have federal funds purchased lines with correspondent banks
totaling $45,000,000 and agreements with unaffiliated banks to sell and
repurchase securities of $10,000,000. Finally, our Company has a $20,000,000
line of credit with a correspondent bank. This line of credit had no balance in
use as of June 30, 2005.
36
SOURCES AND USES OF FUNDS
For the six months ended June 30, 2005 and 2004, net cash provided by
operating activities was $6,782,000 and $7,147,000, respectively.
Net cash used in investing activities was $65,119,000 in 2005 versus
$42,694,000 in 2004. The primary increase in cash used in investing activities
reflects our Company's purchase of Bank 10. The cash used in this purchase, net
of cash and cash equivalents acquired, was $21,799,000.
Net cash provided by financing activities was $72,626,000 in 2005 versus
$22,597,000 in 2004. Increases in deposits accounted for approximately
$42,200,000 of the cash provided by financing activities in 2005 and
approximately $10,795,000 in 2004. An additional $23,712,000 of cash was
provided by the issuance of subordinated debentures. The proceeds from the
issuance of these subordinated debentures were used to finance the purchase of
Bank 10. During the same period of 2004 our Company issued $25,774,000 of
subordinated debentures and used those proceeds to reduce other borrowed money
by $17,951,000. Securities sold under agreements to repurchase increased
$8,371,000 in 2005 compared to a $10,000,000 decrease during the same period of
2004.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In November 2003, the Emerging Issues Tasks Force (EITF) reached a
consensus on certain disclosure requirements under EITF Issue No 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. The new disclosure requirements apply to investment in debt and
marketable equity securities that are accounted under SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities, and SFAS No. 124,
Accounting for Certain Investments Held by Not-for-Profit Organizations.
Effective for fiscal years ending after December 15, 2003, companies are
required to disclose information about debt or marketable equity securities with
market values below carrying values. Our Company has adopted the disclosure
requirements of EITF Issue No. 03-1 and they are included in Note 5 of our
audited consolidated financial statements included in our 2004 Annual Report to
Shareholders under the caption "Consolidated Financial Statements" and
incorporated by reference in our Annual Report on Form 10-K for the year ended
December 31, 2004.
In March 2004, the Emerging Issues Task Force, (EITF) came to a consensus
regarding EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. Securities in scope are those subject to
SFAS 115 and SFAS 124. The EITF adopted a three-step model that requires
management to determine if impairment exists, decide whether it is other than
temporary, and record other than temporary losses in earnings.
In September 2004, the FASB approved issuing a Staff Position to delay the
requirement to record impairment losses under EITF 03-1, but broadened the
delay's scope to include additional types of securities. As proposed, the delay
would have applied only to those debt securities described in paragraph 16 of
EITF 03-1, the Consensus that provides guidance for determining whether an
investment's impairment is other than temporary and should be
37
recognized in income. The approved delay will apply to all securities within the
scope of EITF 03-1 and is expected to end when new guidance is issued and comes
into effect.
In December 2003, the Accounting Standards Executive Committee, (AcSEC)
issued SOP 03-3, Accounting for Certain Loans or Debt Securities Acquired in a
Transfer, effective for loans acquired in fiscal years beginning after December
15, 2004. The scope of SOP 03-3 applies to "problem" loans that have been
acquired, either individually in a portfolio, in an acquisition. These loans
must have evidence of credit deterioration and the purchaser must not expect to
collect contractual cash flows. SOP 03-3 updates Practice Bulletin (PB) No. 6,
Amortization of Discounts on Certain Acquired Loans, for more recently issued
literature, including FASB Statements No. 114, Accounting by Creditors for
Impairment of a Loan; No. 115, Accounting for Certain Investments in Debt and
Equity Securities; and No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. Additionally, it addresses
FASB Statement No. 91, Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases, which
requires that discounts be recognized as an adjustment of yield over a loan's
life.
SOP 03-3 states that an institution may no longer display discounts on
purchased loans within the scope of SOP 03-3 on the balance sheet and may not
carry over the allowance for loan losses. For those loans within the scope of
SOP 03-3, this Statement clarifies that a buyer cannot carry over the seller's
allowance for loan losses for the acquisition of loans with credit
deterioration. Loans acquired with evidence of deterioration in credit quality
since origination will need to be accounted for under a new method using an
income recognition model. This prohibition also applies to purchases of problem
loans not included in a purchase business combination, which would include
syndicated loans purchased in the secondary market and loans acquired in
portfolio sales. SOP 03-3 did not have a material effect on our Company's
financial statements.
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No 123 (Revised 2004), Share-Based
Payment. This Statement addresses the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. The Statement
eliminates the ability to account for share-based compensation transactions
using APB Opinion No. 25, Accounting for Stock Issued to Employees, and
generally requires instead that such transactions be accounted for using a
fair-value-based method. For public entities, the cost of employee services
received in exchange for an award of equity instruments, such as stock options,
will be measured based on the grant-date fair value of those instruments, and
that cost will be recognized over the period during which an employee is
required to provide service in exchange for the award (usually the vesting
period). This Statement is effective for public entities as of the beginning of
the first annual reporting period that begins after June 15, 2005 and will be
effective for our Company as of January 1, 2006. See the note to consolidated
financial statements titled Earnings per Share for the pro forma net income and
net income per share amounts for the quarters ended June 30, 2005 and 2004 as if
we had used a fair value based method similar to the methods required under SFAS
123R to measure compensation expense for employee stock incentive awards.
38
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our Company's exposure to market risk is reviewed on a regular basis by
our Banks' Asset/Liability Committees and Boards of Directors. Interest rate
risk is the potential of economic losses due to future interest rate changes.
These economic losses can be reflected as a loss of future net interest income
and/or a loss of current fair market values. The objective is to measure the
effect on net interest income and to adjust the balance sheet to minimize the
inherent risk while at the same time maximizing income. Management realizes
certain risks are inherent and that the goal is to identify and minimize those
risks. Tools used by our Banks' management include the standard GAP report
subject to different rate shock scenarios. At June 30, 2005, the rate shock
scenario models indicated that annual net interest income could decrease or
increase by as much as 13% should interest rates rise or fall, respectively,
within 200 basis points from their current level over a one year period compared
to a like amount at December 31, 2004. However there are no assurances that the
change will not be more or less than this estimate. Management further believes
this is an acceptable level of risk.
ITEM 4. CONTROLS AND PROCEDURES
Our Company's management has evaluated, with the participation of our
principal executive and principal financial officers, the effectiveness of our
disclosure controls and procedures as of June 30, 2005. Based upon and as of the
date of that evaluation, our principal executive and principal financial
officers concluded that our disclosure controls and procedures were effective to
ensure that information required to be disclosed in the reports we file and
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported as and when required. It should be noted that any system
of disclosure controls and procedures, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system are met. In addition, the design of any system of disclosure controls and
procedures is based in part upon assumptions about the likelihood of future
events. Because of these and other inherent limitations of any such system,
there can be no assurance that any design will always succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.
There has been no change in our Company's internal control over financial
reporting that occurred during the fiscal quarter ended June 30, 2005 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
39
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
At the annual meeting of the shareholders of Exchange National
Bancshares, Inc. held on June 8, 2005, the shareholders elected three
Class I directors, namely, Charles G. Dudenhoeffer, Jr., Phil D. Freeman,
and James E. Smith, to serve terms expiring at the annual meeting of
shareholders in 2008 and ratified the Board of Directors selection of KPMG
LLP as the Company's independent registered public accounting firm for the
year ending December 31, 2005. Class III Directors, namely, Kevin Riley
and David Turner, and Class II directors, namely, David R. Goller, James
R. Loyd, and Gus S. Wetzel, II, continue to serve terms expiring at the
annual meetings of shareholders in 2007 and 2006, respectively.
The following is a summary of votes cast. No broker non-votes were
received.
Withhold
Authority
For Against Abstentions
--------- --------- -----------
Election of Directors:
Charles Dudenhoeffer 3,428,000 33,984 N/A
Phil Freeman 3,454,041 7,943 N/A
James Smith 3,159,527 302,457 N/A
Ratification of KPMG LLP
as independent registered
public accounting firm 3,364,294 59,765 37,925
Item 5. Other Information None
40
Item 6. 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, 2002 (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).
31.1 Certificate of the Chief Executive Officer of our Company
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certificate of the Chief Financial Officer of our Company
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certificate of the Chief Executive Officer of our Company
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certificate of the Chief Financial Officer of our Company
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
41
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
-----------------------------------------------
August 9, 2005 James E. Smith, Chairman of the Board
and Chief Executive Officer (Principal
Executive Officer)
/s/ Richard G. Rose
-----------------------------------------------
August 9, 2005 Richard G. Rose, Treasurer (Principal Financial
Officer and Principal Accounting Officer)
42
EXCHANGE NATIONAL BANCSHARES, INC.
INDEX TO EXHIBITS
June 30, 2005 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, 2002 (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).
31.1 Certificate of the Chief Executive Officer of our Company 44
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certificate of the Chief Financial Officer of our Company 45
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certificate of the Chief Executive Officer of our Company 46
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certificate of the Chief Financial Officer of our Company 47
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- --------------
** Incorporated by reference.
43