Exhibit 13
2005
ANNUAL REPORT
TO
SHAREHOLDERS
EXCHANGE NATIONAL BANCSHARES, INC.
JEFFERSON CITY, MISSOURI
EXCHANGE NATIONAL BANCSHARES, INC.
Jefferson City, Missouri
March 16, 2006
Dear Shareholders:
As of the most recent public data, Exchange National Bancshares is the 12th
largest multi-bank company in the State of Missouri with 25 branch locations
throughout central and west central Missouri. We are pleased with your Company's
growth, yet your management team realizes that growth alone does not ensure
profitability. As such, internal credit monitoring practices were enhanced in
2005 by appointing a chief credit officer responsible for identifying loan
quality concerns in their earliest stages.
Exchange National Bancshares' business strategy is premised on the
objectives of providing solid earnings, steady asset growth and consistent
dividends to investors. Results in 2005 met or exceeded in all respects each of
our business plan objectives.
- Earnings increased $1,610,000 or 19.4% over 2004.
- Assets grew $202,596,000 or 21.9% over 2004.
- Dividend rate on a per share basis was consistent with 2004.
On May 2, 2005, your Company completed the purchase of Bank 10 of Belton,
Missouri and that purchase enhanced our already strong balance sheet position by
providing $157 million in additional earning assets. Due to a higher volume of
earning assets as well as an increased yield on those same assets, your
Company's net interest margin increased from 3.43% for 2004 to 3.50% for 2005.
On a per share basis, diluted earnings increased 19.2% from $1.98 per share in
2004 to $2.36 per share for 2005.
Shareholders received dividends totaling $0.81 per share in 2005 and 2004.
Although the 2005 payout ratio was unchanged from the prior year, higher
quarterly dividends are replacing the year-end special dividend beginning with
the January 1, 2006 regular dividend. The special dividend was originally
intended to reflect the Company's strong performance over the course of a given
year. Because the special payment has been made for 19 consecutive years, the
Board of Directors incorporated the special dividend into the regular quarterly
dividend rate beginning January 1, 2006.
Regarding 2005 financial highlights, total assets increased 21.9% to
$1,126,470,000 due in large part to the purchase of Bank 10 of Belton, Missouri.
For 2005, return on average equity was 10.47% and the return on average assets
was 0.91% compared to 9.16% and 0.93%, respectively for 2004.
Capitalization expressed in terms of tier one capital to adjusted average
total assets (leverage ratio) was 7.88% at year-end 2005 compared to 10.39% at
December 31, 2004. Total capital to risk-weighted assets ratio was 12.70% at
December 31, 2005 compared to 14.58% at December 31, 2004. The increased
leverage position results from the Bank 10 acquisition. Both ratios continue to
exceed the Federal Reserve's definition of "well capitalized".
Thank you for your investment and we appreciate the opportunity to serve
you. Your management team expects 2006 to be a favorable year for Exchange
National Bancshares, Inc.
Sincerely,
/s/ James E. Smith
----------------------------------------
JAMES E. SMITH
Chairman & Chief Executive Officer
EXCHANGE NATIONAL BANCSHARES, INC.
DESCRIPTION OF BUSINESS
Exchange National Bancshares, Inc. is a bank holding company registered
under the Bank Holding Company Act of 1956, as amended. Exchange was
incorporated under the laws of the State of Missouri on October 23, 1992, and on
April 7, 1993 it acquired all of the issued and outstanding capital stock of The
Exchange National Bank of Jefferson City, a national banking association,
pursuant to a corporate reorganization involving an exchange of shares. On
November 3, 1997, our Company acquired Union State Bancshares, Inc., and Union's
wholly-owned subsidiary, Citizens Union State Bank. 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. On October 25, 1999,
Exchange established ENB Holdings, Inc. as a wholly-owned subsidiary for the
sole purpose of effecting the June 16, 2000 merger with CNS Bancorp, Inc. and
its subsidiary, City National Savings Bank, FSB. City National subsequently was
merged into Exchange National Bank. ENB Holdings owns 27.4% of Exchange National
Bank with the balance owned by Exchange. On October 17, 2001, Exchange and Union
each received approval from the Federal Reserve to become a financial holding
company. On May 2, 2005 our Company acquired 100 percent of the outstanding
common shares of Bank 10 from Drexel Bancshares, Inc. of Belton, Missouri. In
addition to ownership of its subsidiaries, Exchange could seek expansion through
acquisition and may engage in those activities (such as investments in banks or
operations closely related to banking) in which it is permitted to engage under
applicable law. It is not currently anticipated that Exchange will engage in any
business other than that directly related to its ownership of its banking
subsidiaries or other financial institutions. Except as otherwise provided
herein, references herein to "Exchange" or our "Company" include Exchange and
its consolidated subsidiaries.
Exchange National Bank, located in Jefferson City, Missouri, was founded in
1865. Exchange National Bank is the oldest bank in Cole County, and became a
national bank in 1927. Exchange National Bank has seven banking offices,
including its principal office at 132 East High Street in Jefferson City's
central business district, three Jefferson City branch facilities and a branch
facility in each of the Missouri communities of Tipton, California and St.
Robert.
Citizens Union State Bank was founded in 1932 as a Missouri bank known as
Union State Bank of Clinton. Citizens Union State Bank converted from a Missouri
bank to a Missouri trust company on August 16, 1989, changing its name to Union
State Bank and Trust of Clinton. Citizens Union State Bank has ten banking
offices, including its principal office at 102 North Second Street in Clinton,
Missouri, four Clinton branch facilities, and a branch facility in each of the
Missouri communities of Springfield, Branson, Collins, Lee's Summit, Osceola and
Windsor.
Osage Valley Bank was founded in 1891 as a Missouri state bank. Osage
Valley Bank has two banking offices, including its principal office at 200 Main
Street in Warsaw, Missouri and a branch facility at 1891 Commercial in Warsaw,
Missouri.
Bank 10 was founded in 1910 as a Missouri state bank. Bank 10 has six
banking offices, including its principal office at 8127 East 171st Street in
Belton, Missouri with two branch facilities in the Missouri communities of
Independence, Missouri, and a branch facility in each of the Missouri
communities of Drexel, Harrisonville and Raymore.
Each of our subsidiary Banks is a full service bank conducting a general
banking business, offering its customers checking and savings accounts, debit
cards, certificates of deposit, safety deposit boxes and a wide range of lending
services, including commercial and industrial loans, residential real estate
loans, single payment personal loans, installment loans and credit card
accounts. In addition, Exchange National Bank and Citizens Union State Bank each
provide trust services.
The deposit accounts of our Banks are insured by the Federal Deposit
Insurance Corporation (the "FDIC") to the extent provided by law. Exchange
National Bank is a member of the Federal Reserve System, and its operations are
supervised and regulated by the Office of the Comptroller of the Currency (the
"OCC"), the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") and the FDIC. The operations of Citizens
2
Union State Bank, Osage Valley Bank and Bank 10 are supervised and regulated by
the FDIC and the Missouri Division of Finance. A periodic examination of
Exchange National Bank is conducted by representatives of the OCC, and periodic
examinations of Citizens Union State Bank, Osage Valley Bank and Bank 10 are
conducted by representatives of the FDIC and the Missouri Division of Finance.
Such regulations, supervision and examinations are principally for the benefit
of depositors, rather than for the benefit of shareholders. Exchange, Union, Mid
Central Bancorp and ENB Holdings are subject to supervision by the Federal
Reserve Board.
3
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial information
for our Company as of and for each of the years in the five-year period ended
December 31, 2005. The selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of our Company, including
the related notes, presented elsewhere herein.
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2005 2004 2003 2002 2001
---------- --------- --------- --------- ---------
INCOME STATEMENT DATA
Interest income $ 57,340 41,091 38,922 40,463 49,289
Interest expense 23,673 13,387 12,798 16,326 25,389
---------- --------- --------- --------- ---------
Net interest income 33,667 27,704 26,124 24,137 23,900
Provision for loan losses 1,322 942 1,092 936 1,154
---------- --------- --------- --------- ---------
Net interest income
after provision for loan losses 32,345 26,762 25,032 23,201 22,746
---------- --------- --------- --------- ---------
Security gains (losses), net (25) (8) 38 163 98
Other noninterest income 7,290 5,741 6,666 5,940 5,299
---------- --------- --------- --------- ---------
Total noninterest income 7,265 5,733 6,704 6,103 5,397
Noninterest expense 25,368 20,383 18,536 17,832 17,400
---------- --------- --------- --------- ---------
Income before income taxes 14,242 12,112 13,200 11,472 10,743
Income taxes 4,327 3,807 4,156 3,379 3,641
---------- --------- --------- --------- ---------
Net income $ 9,915 8,305 9,044 8,093 7,102
========== ========= ========= ========= =========
DIVIDENDS
Declared on common stock $ 3,503 3,378 3,183 2,510 2,425
Paid on common stock 3,378 3,378 2,988 2,493 2,425
Ratio of total dividends
declared to net income 35.33% 40.67 35.19 31.01 34.15
PER SHARE DATA
Basic earnings per common share $ 2.38 1.99 2.17 1.91 1.66
Diluted earnings per common share 2.36 1.98 2.15 1.90 1.66
Basic weighted average shares of
common stock outstanding 4,169,847 4,169,847 4,169,432 4,242,858 4,287,378
Diluted weighted average shares of
common stock outstanding 4,198,859 4,204,752 4,209,272 4,253,163 4,288,408
4
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2005 2004 2003 2002 2001
---------- ------- ------- ------- -------
BALANCE SHEET DATA
(AT PERIOD END)
Investment securities $ 179,692 171,718 188,956 186,724 181,649
Loans 813,535 636,637 583,919 486,564 464,364
Total assets 1,126,470 923,874 875,596 794,418 775,825
Total deposits 881,455 726,649 665,262 591,191 579,794
Securities sold under agreements to
repurchase and other short term
borrowed funds 38,094 35,413 73,672 70,421 62,033
Subordinated notes 49,486 25,774 -- -- --
Other borrowed money 52,180 39,525 41,630 41,795 43,138
Total stockholders' equity 96,733 91,771 87,783 82,827 78,353
EARNINGS RATIOS
Return on average total assets 0.91% 0.93 1.09 1.04 0.96
Return on average stockholders'
equity 10.47 9.16 10.45 9.89 9.21
ASSET QUALITY RATIOS
Allowance for loan losses to loans 1.12 1.18 1.42 1.46 1.44
Nonperforming loans to loans (1) 1.11 0.96 0.52 0.62 0.86
Allowance for loan losses
to nonperforming loans (1) 100.39 123.05 274.29 236.66 166.98
Nonperforming assets to loans
and foreclosed assets (2) 1.30 0.97 0.54 0.67 1.03
Net loan charge-offs to
average loans 0.15 0.29 0.03 0.10 0.31
CAPITAL RATIOS
Average stockholders' equity to
average total assets 8.73% 10.11 10.39 10.51 10.37
Total risk-based capital ratio 12.70 14.58 10.98 12.10 11.83
Tier 1 risk-based capital ratio 9.83 13.47 9.78 10.88 10.58
Leverage ratio 7.88 10.39 7.18 7.36 7.05
- ----------
(1) Nonperforming loans consist of nonaccrual loans and loans contractually
past due 90 days or more and still accruing interest.
(2) Nonperforming assets consist of nonperforming loans plus foreclosed assets.
5
A WORD CONCERNING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements with respect to the
financial condition, results of operations, plans, objectives, future
performance and business of our Company and its subsidiaries, including, without
limitation:
- - statements that are not historical in nature, and
- - statements preceded by, followed by or that include the words "believes,"
"expects," "may," "will," "should," "could," "anticipates," "estimates,"
"intends" or similar expressions.
Forward-looking statements are not guarantees of future performance or results.
They involve risks, uncertainties and assumptions. Actual results may differ
materially from those contemplated by the forward-looking statements due to,
among others, the following factors:
- - competitive pressures among financial services companies may increase
significantly,
- - costs or difficulties related to the integration of the business of
Exchange and its acquisition targets may be greater than expected,
- - changes in the interest rate environment may reduce interest margins,
- - general economic conditions, either nationally or in Missouri, may be less
favorable than expected,
- - legislative or regulatory changes may adversely affect the business in
which Exchange and its subsidiaries are engaged, and
- - changes may occur in the securities markets.
We have described under the caption "Risk Factors" in our Annual Report on Form
10-K for the year ended December 31, 2005, and in other reports that we file
with the SEC from time to time, additional factors that could cause actual
results to be materially different from those described in the forward-looking
statements. Other factors that we have not identified in this report could also
have this effect. You are cautioned not to put undue reliance on any
forward-looking statement, which speak only as of the date they were made.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This overview of management's discussion and analysis highlights selected
information in this document 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 document. 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. On May 2, 2005 our Company purchased
Bank 10 of Belton, Missouri.
MATERIAL CHALLENGES AND RISKS: Our Company may experience difficulties in
managing growth and in 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, 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 Lee's Summit,
Missouri. The products and services are offered to customers primarily within
their respective geographical areas. The business segment results which follow
are consistent with our Company's internal reporting system which is consistent,
in all material respects, with generally accepted accounting principles and
practices prevalent in the banking industry.
Much of our Company's business is commercial, commercial real estate
development, and mortgage lending. Our Company has experienced continued strong
loan demand in the communities within which we operate
7
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 refinancings.
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 all of the consolidated financial information 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.
Our Company's consolidated net income increased $1,610,000 or 19.4% to
$9,915,278 for 2005 compared to $8,304,980 for 2004 and followed a $739,000 or
8.2% decrease for 2004 compared to 2003. Basic earnings per common share
decreased from $2.17 for 2003 to $1.99 for 2004 and increased to $2.38 for 2005.
Diluted earnings per common share decreased from $2.15 for 2003 to $1.98 for
2004 and increased to $2.36 for 2005. Return on average total assets decreased
from 1.09% for 2003 to 0.93% for 2004 and to 0.91% for 2005. Return on average
total stockholders' equity decreased from 10.45% for 2003 to 9.16% for 2004 and
increased to 10.47% for 2005.
Average loans outstanding increased $142,019,000 or 23.6% to $743,382,000
for 2005 compared to $601,363,000 for 2004 and followed a $61,451,000 or 11.4%
increase for 2004 compared to 2003. Approximately $89,844,000 of the increase in
loans reflects loans of Bank 10. Excluding loans acquired in the acquisition of
Bank 10, average commercial loans outstanding increased $3,635,000 or 2.6% for
2005 compared to 2004 and followed a $22,450,000 or 19.3% increase for 2004
compared to 2003. Average real estate loans outstanding increased $50,730,000 or
11.9% for 2005 compared to 2004 and followed a $44,327,000 or 11.6% increase for
2004 compared to 2003. Average consumer loans outstanding decreased $2,190,000
or 5.8% for 2005 compared to 2004 and followed a $5,326,000 or 12.4% decrease
for 2004 compared to 2003.
The primary reason for the increases in average loans outstanding in 2005
and 2004 is due to continued strong loan demand in our Company's trade areas
especially in commercial real estate development lending as well as expanded our
branch network. Excluding construction real estate loans acquired in the
acquisition of Bank 10, average real estate construction loans increased
approximately $33,573,000 from 2004 to 2005. Non-construction related
residential real estate loans remained relatively stable from 2004 to 2005. It
should be noted that consumer loans decreased on average in 2005, 2004 and 2003.
These decreases reflect the low rates that existed in the consumer auto market
that was fueled by manufacturers' low or zero rate financing programs. Our
Company chose to not aggressively pursue consumer auto loans during the periods
presented and as such this portion of the loan portfolio declined in balance.
Average investment securities and federal funds sold increased $17,342,000
or 7.8% to $240,955,000 for 2005 compared to $223,613,000 for 2004 and followed
a $426,000 or 0.19% decrease for 2004 compared to 2003. Excluding approximately
$22,373,000 of average investment securities and federal funds sold resulting
from the acquisition of Bank 10, average investment securities and federal funds
sold decreased $5,031,000 or 2.3% in 2005. The decreases reflect the use of
investment liquidity to fund our Company's growth in the loan portfolio.
Average demand deposits increased $25,775,000 or 28.0% to $117,840,000 for
2005 compared to $92,065,000 for 2004 and followed a $11,925,000 or 14.9%
increase for 2004 compared to 2003. Approximately $17,179,000 of the increase
for 2005 is due to the acquisition of Bank 10, while the 2004 increase reflects
the opening of branches in two new locations.
Average total time deposits increased $132,619,000 or 22.4% to $724,515,000
for 2005 compared to $591,896,000 for 2004 and followed a $43,893,000 or 8.0%
increase for 2004 compared to 2003. Approximately $84,463,000 of the increase in
average time deposits for 2005 is attributed to the acquisition of Bank 10.
Other than the increase attributed to the acquisition, average time deposits
increased approximately $41,768,000 or 11.0%. This is attributed to a 47.0% or
$41,674,000 increase in money markets from 2004 to 2005 due to special money
market promotions and the opening of two new branches. Approximately $6,388,000
of the remaining increase in
8
average time deposits for 2005 represents brokered time deposits. These brokered
time deposits represent certificates of deposit issued in denominations of less
than $100,000 for various terms up to two years in length.
Average federal funds purchased and securities sold under agreements to
repurchase decreased $13,028,000 or 22.0% to $46,265,000 for 2005 compared to
$59,293,000 for 2004 and followed a $9,566,000 or 13.9% decrease for 2004
compared to 2003. Approximately $815,000 of the average balance is attributed to
the Bank 10 acquisition. The remaining variances reflected competition for
institutional funds awarded based upon competitive bids.
Average interest-bearing demand notes to U.S. Treasury increased $17,000 or
2.5% to $696,000 for 2005 compared to $679,000 for 2004 and followed a $123,000
or 15.3% decrease for 2004 compared to 2003. Balances in this account are
governed by the U.S. Treasury's funding requirements.
Average subordinated notes increased $24,262,000 or 119.2% to $44,614,000
for 2005 compared to $20,352,000 for 2004. Our Company had no subordinated notes
in 2003. Our Company issued $23,712,000 and $25,774,000 of subordinated notes in
March 2005 and 2004 respectively. In 2005 the proceeds were used to provide part
of the funding for the acquisition of Bank 10. In 2004 $11,000,000 of the
proceeds were used to pay existing debt with the balance retained for general
corporate purposes.
Average other borrowed money increased $12,928,000 or 36.4% to $48,430,000
for 2005 compared to $35,502,000 for 2004 and followed a $5,940,000 or 14.3%
decrease for 2004 compared to 2003. Approximately $8,986,000 of the increase in
average borrowed money for 2005 is attributed to the acquisition of Bank 10. The
balances of the 2005 increase reflects additional borrowings to fund loan
growth. The 2004 decrease reflects the repayment of debt.
Average stockholders' equity increased $4,038,000 or 4.5% to $94,663,000
for 2005 compared to $90,625,000 for 2004 and followed a $4,090,000 or 4.7%
increase for 2004 compared to 2003. The increases represent net income retained
in excess of dividends declared plus adjustments for unrealized gains or losses
on debt and equity securities, net of taxes.
9
The following table provides a comparison of fully taxable equivalent earnings,
including adjustments to interest income and tax expense for interest on
tax-exempt loans and investments.
(DOLLARS EXPRESSED IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------
2005 2004 2003
-------- ------- -------
Interest income $ 57,340 41,091 38,922
Fully taxable equivalent (FTE) adjustment 882 663 679
-------- ------- -------
Interest income (FTE basis) 58,222 41,754 39,601
Interest expense 23,673 13,387 12,798
-------- ------- -------
Net interest income (FTE basis) 34,549 28,367 26,803
Provision for loan losses 1,322 942 1,092
-------- ------- -------
Net interest income after provision
for loan losses (FTE basis) 33,227 27,425 25,711
Noninterest income 7,265 5,733 6,704
Noninterest expense 25,368 20,383 18,536
-------- ------- -------
Income before income taxes
(FTE basis) 15,124 12,775 13,879
Income taxes 4,327 3,807 4,156
FTE adjustment 882 663 679
-------- ------- -------
Income taxes (FTE basis) 5,209 4,470 4,835
-------- ------- -------
Net income $ 9,915 8,305 9,044
======== ======= =======
Average total earning assets $985,848 827,710 767,928
======== ======= =======
Net interest margin 3.50% 3.43% 3.49%
======== ======= =======
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 $6,182,000 or 21.8% to $34,549,000 for 2005
compared to $28,367,000 for 2004, and followed a $1,564,000 or 5.8% increase for
2004 compared to 2003. Measured as a percentage of average earning assets, the
net interest margin (expressed on a fully taxable equivalent basis) decreased
from 3.49% for 2003 to 3.43% for 2004, and increased to 3.50% for 2005. The
increase in net interest margin in 2005 reflects increases in interest rates
during 2005. The decrease in net interest margin from 2003 to 2004 reflects a
continual decline in interest rates during those periods.
The provision for loan losses increased $380,000 or 40.3% to $1,322,000 for
2005 compared to $942,000 for 2004 and followed a $150,000 or 13.7% decrease for
2004 compared to 2003. The 2005 provision reflects the amount management
determined was appropriate to maintain the allowance for loan losses at a level
that was adequate to cover probable losses in the loan portfolio. The increase
in the provision in 2005 was primarily due to increased reserve allocations
associated with impaired loans. The allowance for loan losses totaled $9,085,000
or 1.12% of loans outstanding at December 31, 2005 compared to $7,495,000 or
1.18% of loans outstanding at December 31, 2004 and $8,267,000 or 1.42% of loans
outstanding at December 31, 2003. The allowance for loan losses expressed as a
percentage of nonperforming loans was 100.39% at December 31, 2005, 123.07% at
10
December 31, 2004, and 274.29% at December 31, 2003. Further discussion of
managements methodology related to the allowance for loan losses may be found in
the Lending and Credit Management section of this report.
CRITICAL ACCOUNTING POLICIES
The following accounting policies are considered most critical to the
understanding of our Company's financial condition and results of operations.
These critical accounting policies require management's most difficult,
subjective and complex judgments about matters that are inherently uncertain.
Because these estimates and judgments are based on current circumstances, they
may change over time or prove to be inaccurate based on actual experiences. In
the event that different assumptions or conditions were to prevail, and
depending upon the severity of such changes, the possibility of a materially
different financial condition and/or results of operations could reasonably be
expected. The impact and any associated risks related to our critical accounting
policies on our business operations is discussed throughout "Management's
Discussion and Analysis of Financial Condition and Results of Operations," where
such polices affect our reported and expected financial results. For a detailed
discussion on the application of these and other accounting policies, see Note 1
of our consolidated financial statements.
ALLOWANCE FOR LOAN LOSSES
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.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of costs over fair value of net assets of
businesses acquired. Goodwill and intangible assets acquired in a purchase
business combination and determined to have an indefinite useful life are not
amortized, but instead are tested for impairment at least annually. Intangible
assets with estimable useful lives are also amortized over their respective
estimated useful lives and reviewed for impairment in accordance with SFAS No.
144, Accounting for Impairment or Disposal of Long-Lived Assets.
The Company performs an annual review of intangible assets for impairment
to determine whether the carrying value of underlying assets may not be
recoverable. The Company measures recoverability based upon the future cash
flows expected to result from the use of the underlying asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying value of the underlying
asset, the Company recognizes an impairment loss. The impairment loss recognized
represents the amount by which the carrying value of the underlying asset
exceeds the fair value of the underlying asset. As such adjustments become
necessary, they are reflected in the results of operations in the periods in
which they become known.
11
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2005 AND 2004
Our Company's net income increased by $1,610,000 or 19.4% to $9,915,000 for
the year ended December 31, 2005 compared to $8,305,000 for 2004. Net interest
income on a fully taxable equivalent basis increased to $34,549,000 or 3.50% of
average earning assets for 2005 compared to $28,367,000 or 3.43% of average
earning assets for 2004. The provision for loan losses for 2005 was $1,322,000
compared to $942,000 for 2004. Net loans charged off for 2005 were $1,151,000
compared to $1,714,000 for 2004. Approximately $875,000 of the 2005 charge-offs
is represented by two credits. One is an automobile dealership and one
represents the loss on a foreclosure of a single family residence.
Noninterest income and noninterest expense for the years ended December 31,
2005 and 2004 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
YEAR ENDED
DECEMBER 31, INCREASE (DECREASE)
---------------- -------------------
2005 2004 AMOUNT %
------- ------ ------ ------
NONINTEREST INCOME
Service charges on deposit accounts $ 4,245 3,041 1,204 39.6%
Trust department income 810 694 116 16.7
Mortgage loan servicing fees, net 427 431 (4) 0.9
Gain on sales of mortgage loans 676 797 (121) (15.2)
Loss on sales and calls of debt securities (25) (8) (17) 212.5
Other 1,132 778 354 45.5
------- ------ ----- ------
$ 7,265 5,733 1,532 26.7%
======= ====== ===== ======
NONINTEREST EXPENSE
Salaries and employee benefits $13,920 11,227 2,693 24.0%
Occupancy expense, net 1,600 1,143 457 40.0
Furniture and equipment expense 2,150 2,014 136 6.8
Legal, examination, and professional fees 1,420 1,108 312 28.2
Advertising and promotion 819 575 244 42.4
Postage, printing, and supplies 976 825 151 18.3
Processing expense 751 401 350 87.3
Amortization of intangible assets 807 215 592 275.3
Other 2,925 2,875 50 1.7
------- ------ ----- ------
$25,368 20,383 4,985 24.5%
======= ====== ===== ======
Noninterest income increased $1,532,000 or 26.7% to $7,265,000 for 2005
compared to $5,733,000 for 2004. $1,188,000 of the increase in noninterest
income is attributed to the acquisition of Bank 10. Excluding noninterest income
associated with the acquisition, service charge income increased $120,000 or
3.9%. Trust department income increased $116,000 or 16.7% due primarily to the
collection of more transactional based distribution fees during 2005 compared to
2004. Gain on sales of mortgage loans decreased $121,000 or 15.2% due to a
decrease in volume of loans originated and sold to the secondary market from
approximately $48,989,000 in 2004 to approximately $38,768,000 in 2005. Mortgage
rates were relatively stable during 2005 and 2004. As a result, there were fewer
loans refinanced during 2005 and 2004 resulting in the decreased volume of loans
sold.
12
Noninterest expense increased $4,985,000 or 24.5% to $25,368,000 for 2005
compared to $20,383,000 for 2004. Approximately $4,333,000 of the increase in
noninterest expense is attributed to the acquisition of Bank 10. Excluding costs
associated with the acquisition, salaries and benefits increased $528,000 or
4.7%, occupancy expense increased $130,000 or 11.4%, advertising and promotion
increased $103,000 or 17.9%, legal, examination, and professional fees increased
$119,000 or 10.7%, processing expense increased $144,000 or 35.9% and other
noninterest expense decreased $276,000 or 9.6%. The increase in salaries and
benefits reflects normal salary increases, additional hires and higher health
insurance premiums. The increase in occupancy expense primarily reflects
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, higher audit costs
associated with Sarbanes-Oxley compliance, internal audit and benefit
consulting, and legal fees associated with various lawsuits the Company is
involved in related to various problem credits. The increase in processing
expense is related to costs associated with switching to a new ATM network. The
decrease in other noninterest expense reflects an IRS settlement of $318,000
paid in 2004 related to income that had been deferred for tax purposes but not
book.
Income taxes as a percentage of earnings before income taxes as reported in
the consolidated financial statements were 30.4% for 2005 compared to 31.4% for
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.
13
YEARS ENDED DECEMBER 31, 2004 AND 2003
Our Company's net income decreased by $739,000 or 8.2% to $8,305,000 for
the year ended December 31, 2004 compared to $9,044,000 for 2003. Net interest
income on a fully taxable equivalent basis increased to $28,367,000 or 3.43% of
average earning assets for 2004 compared to $26,803,000 or 3.49% of average
earning assets for 2003. The provision for loan losses for 2004 was $942,000
compared to $1,092,000 for 2003. Net loans charged off for 2004 were $1,714,000
compared to $158,000 for 2003. The increase in net loans charged off primarily
represents one large commercial credit for which management had made adequate
provisions in the reserve for loan losses.
Noninterest income and noninterest expense for the years ended December 31,
2004 and 2003 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
YEAR ENDED
DECEMBER 31, INCREASE (DECREASE)
---------------- -------------------
2004 2003 AMOUNT %
------- ------ ------- ------
NONINTEREST INCOME
Service charges on deposit accounts $ 3,041 2,752 289 10.5%
Trust department income 694 793 (99) (12.5)
Mortgage loan servicing fees, net 431 (125) 556 444.8
Gain on sales of mortgage loans 797 2,506 (1,709) (68.2)
(Loss) gain on sales and
calls of debt securities (8) 38 (46) (121.1)
Other 778 740 38 5.1
------- ------ ------ ------
$ 5,733 6,704 (971) (14.5)%
======= ====== ====== ======
NONINTEREST EXPENSE
Salaries and employee benefits $11,227 10,088 1,139 11.3%
Occupancy expense, net 1,143 1,074 69 6.4
Furniture and equipment expense 2,014 2,087 (73) (3.5)
Legal, examination, and professional fees 1,108 745 363 48.7
Advertising and promotion 575 560 15 2.7
Postage, printing, and supplies 825 847 (22) (2.6)
Processing expense 401 307 94 30.6
Amortization of intangible assets 215 307 (92) (30.0)
Other 2,875 2,521 354 14.0
------- ------ ------ ------
$20,383 18,536 1,847 10.0%
======= ====== ====== ======
Noninterest income decreased $971,000 or 14.5% to $5,733,000 for 2004
compared to $6,704,000 for 2003. The $289,000 or 10.5% increase in service
charges on deposit accounts reflects an increase in the per item insufficient
check fee charged by one of our Company's subsidiary banks. Trust department
income decreased $99,000 or 12.5% due primarily to the collection of more
distribution fees during 2003 compared to 2004. The $556,000 or 444.8% increase
in mortgage loan servicing fees reflects a $556,000 impairment charge to
mortgage servicing rights taken during 2003. There has been no impairment to the
carrying value of mortgage servicing rights in 2004. Gain on sales of mortgage
loans decreased $1,709,000 or 68.2% due to a decrease in volume of loans
originated and sold to the secondary market from approximately $112,749,000 in
2003 to approximately $48,989,000 in 2004. Mortgage rates were relatively stable
during 2004 compared to a period of declining mortgage rates during 2003. As a
result, there were fewer loans refinanced during 2004 compared to 2003 resulting
in the decreased volume of loans sold. The $46,000 or 121.1% decrease in gains
on sales and calls of debt securities represents a decrease in the volume of
securities sold in 2004 versus 2003.
14
Noninterest expense increased $1,847,000 or 10.0% to $20,383,000 for 2004
compared to $18,536,000 for 2003. Salaries and benefits increased $1,139,000 or
11.3%. Approximately $518,000 of this increase reflects salaries and benefits
related to an additional branch purchased in June of 2003 as well as two
additional branches opened in 2004. The balance of the increase reflects normal
salary increases, additional hires and higher health insurance premiums. The
$73,000 or 3.5% decrease in furniture and equipment expense is primarily the
result of decreased depreciation and amortization expense for equipment and
software purchased in prior years. Our Company utilizes both straight-line and
accelerated depreciation methods. Assets utilizing accelerated methods recognize
higher depreciation expense in early years and lower expense in later years of
the life of assets. The $363,000 or 48.7% increase in legal, examination, and
professional fees represents increased costs associated with Sarbanes-Oxley
compliance, benefit plan consulting, and strategic planning. Amortization of
intangible assets decreased $92,000 or 30.0% due to a decrease in the amount of
intangible assets requiring amortization. Other expense increased $405,000 or
16.2% primarily due to an IRS settlement of $318,000 on income that had been
deferred for tax purposes but not book.
Income taxes as a percentage of earnings before income taxes as reported in
the consolidated financial statements were 31.4% for 2004 compared to 31.5% for
2003.
NET INTEREST INCOME
Fully taxable equivalent net interest income increased $6,182,000 or 21.8%
to $34,549,000 for 2005 compared to $28,367,000 for 2004, and followed a
$1,564,000 or 5.8% increase from 2004 compared to 2003. The increase in net
interest income in 2005 and was the result of increases in both earning assets
and the net interest margin. The increase in net interest income in 2004 was the
result of increased earning assets.
15
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 each of the years in the
three-year period ended December 31, 2005.
(DOLLARS EXPRESSED IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2005 2004
---------------------------------- -------------------------------
INTEREST RATE INTEREST RATE
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE(1) PAID(1) BALANCE EXPENSE(1) PAID(1)
---------- ---------- -------- -------- ---------- -------
ASSETS
Loans: (2) (4) $ 743,382 $49,437 6.65% $601,363 $35,338 5.88%
Investment in debt and equity
securities: (3) U.S. Treasury
and U.S. Government agencies 156,553 4,963 3.17 161,449 3,921 2.43
State and municipal 45,442 2,505 5.51 31,359 1,893 6.04
Other 6,765 259 3.83 5,125 165 3.22
Federal funds sold 32,195 1,019 3.17 25,680 403 1.57
Interest bearing deposits
in other financial institutions 1,511 39 2.58 2,734 34 1.24
---------- ------- -------- -------
Total interest earning assets 985,848 58,222 5.91 827,710 41,754 5.04
All other assets 106,528 76,930
Allowance for loan losses (8,630) (8,596)
---------- --------
Total assets $1,083,746 $896,044
========== ========
YEAR ENDED DECEMBER 31,
-------------------------------
2003
-------------------------------
INTEREST RATE
AVERAGE INCOME/ EARNED/
BALANCE EXPENSE(1) PAID(1)
-------- ---------- -------
ASSETS
Loans: (2) (4) $539,912 $32,679 6.05%
Investment in debt and equity
securities: (3) U.S. Treasury
and U.S. Government agencies 151,806 4,284 2.82
State and municipal 31,375 2,062 6.57
Other 4,653 170 3.65
Federal funds sold 36,205 365 1.01
Interest bearing deposits
in other financial institutions 3,977 41 1.03
-------- -------
Total interest earning assets 767,928 39,601 5.16
All other assets 72,962
Allowance for loan losses (7,717)
--------
Total assets $833,173
========
Continued on next page
16
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
2005 2004 2003
--------------------------------- ------------------------------- -------------------------------
INTEREST RATE INTEREST RATE INTEREST RATE
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE(1) PAID(1) BALANCE EXPENSE(1) PAID(1) BALANCE EXPENSE(1) PAID(1)
---------- ---------- ------- -------- ---------- ------- -------- ---------- -------
LIABILITIES AND
STOCKHOLDERS' EQUITY
NOW accounts $ 125,303 $ 1,666 1.33% $115,277 $ 794 0.69% $100,959 $ 672 0.67%
Savings 55,826 319 0.57 55,743 319 0.57 53,630 371 0.69
Money market 145,004 3,618 2.50 88,352 1,265 1.43 64,999 582 0.90
Time deposits of $100,000
and over 105,661 3,330 3.15 84,983 1,929 2.27 77,631 1,859 2.39
Other time deposits 292,721 8,741 2.99 247,541 5,931 2.40 250,784 6,881 2.74
---------- -------- -------- ------- -------- -------
Total time deposits 724,515 17,674 2.44 591,896 10,238 1.73 548,003 10,365 1.89
Federal funds purchased
and securities sold under
agreements to repurchase 46,265 1,256 2.71 59,293 689 1.16 68,859 664 0.96
Interest - bearing demand
notes to U.S. Treasury 696 20 2.87 679 7 1.03 802 7 0.87
Subordinated notes 44,614 2,747 6.16 20,352 886 4.35 -- -- --
Other borrowed money 48,430 1,976 4.08 35,502 1,567 4.41 41,442 1,762 4.25
---------- -------- -------- ------- -------- -------
Total interest -
bearing liabilities 864,520 23,673 2.74 707,722 13,387 1.89 659,106 12,798 1.94
Demand deposits 117,840 92,065 80,140
Other liabilities 6,723 5,632 7,392
---------- -------- --------
Total liabilities 989,083 805,419 746,638
Stockholders' equity 94,663 90,625 86,535
---------- -------- --------
Total liabilities and
stockholders' equity $1,083,746 $896,044 $833,173
========== ======== ========
Net interest income $ 34,549 $28,367 $26,803
======== ======= =======
Net interest margin 3.50% 3.43% 3.49%
==== ==== ====
(1) Interest income and yields are presented on a fully taxable equivalent
basis using the Federal statutory income tax rate of 35%, net of
nondeductible interest expense. Such adjustments totaled $882,000, $663,000
and $679,000 for the years ended December 31, 2005, 2004 and 2003,
respectively.
(2) Nonaccruing loans are included in the average amounts outstanding.
(3) Average balances based on amortized cost.
(4) Fees on loans are included in interest income.
17
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)
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
COMPARED TO COMPARED TO
DECEMBER 31, 2004 DECEMBER 31, 2003
------------------------ ------------------------
CHANGE DUE TO CHANGE DUE TO
TOTAL -------------- TOTAL ---------------
CHANGE VOLUME RATE CHANGE VOLUME RATE
------- ------ ----- ------ ------ ------
INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS:
Loans: (1) (3) $14,099 9,055 5,044 $2,659 3,635 (976)
Investment in debt and
equity securities:
U.S. Treasury and U.S.
Government agencies 1,042 (122) 1,164 (363) 260 (623)
State and municipal(2) 612 788 (176) (169) (1) (168)
Other 94 59 35 (5) 16 (21)
Federal funds sold 616 123 493 38 (126) 164
Interest bearing deposits
in other financial
Institutions 5 (20) 25 (7) (15) 8
------- ----- ----- ------ ----- ------
Total interest Income 16,468 9,883 6,585 2,153 3,769 (1,616)
Continued on next page
18
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
COMPARED TO COMPARED TO
DECEMBER 31, 2004 DECEMBER 31, 2003
------------------------ ------------------------
CHANGE DUE TO CHANGE DUE TO
TOTAL -------------- TOTAL ---------------
CHANGE VOLUME RATE CHANGE VOLUME RATE
------- ------ ----- ------ ------ ------
INTEREST EXPENSE:
NOW accounts 872 74 798 122 97 25
Savings -- -- -- (52) 14 (66)
Money market 2,353 1,090 1,263 683 256 427
Time deposits of
$100,000 and over 1,401 539 862 70 170 (100)
Other time
Deposits 2,810 1,197 1,613 (950) (88) (862)
Federal funds purchased
and securities sold
under agreements
to repurchase 567 (179) 746 25 (100) 125
Interest-bearing
demand notes to
U.S. Treasury 13 -- 13 -- (1) 1
Subordinated notes 1,861 1,381 480 886 886 --
Other borrowed money 409 535 (126) (195) (261) 66
------- ----- ----- ------ ----- ------
Total interest
Expense 10,286 4,637 5,649 589 973 (384)
------- ----- ----- ------ ----- ------
NET INTEREST INCOME
ON A FULLY TAXABLE
EQUIVALENT BASIS $ 6,182 5,246 936 $1,564 2,796 (1,232)
======= ===== ===== ====== ===== ======
(1) Nonaccruing loans are included in the average amounts outstanding.
(2) Interest income and yields are presented on a fully taxable equivalent
basis using the federal statutory income tax rate of 35%, net of
nondeductible interest expense. Such adjustments totaled $882,000, $663,000
and $379,000 for the years ended December 31, 2005, 2004 and 2003,
respectively.
(3) Fees on loans are included in interest income.
LENDING AND CREDIT MANAGEMENT
Interest earned on the loan portfolio is a primary source of interest
income for our Company. Net loans represented 71.4% of total assets as of
December 31, 2005. Total loans increased steadily from December 31, 2003 through
December 31, 2005 due to stable local economies and reasonable interest rates as
well as an expanded branch network and the acquisition of Bank 10.
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.
19
The following table shows the composition of the loan portfolio by major
category and each category as a percentage of the total portfolio as of the
dates indicated.
(DOLLARS EXPRESSED IN THOUSANDS)
DECEMBER 31,
-----------------------------------------------------------------------------------
2005 2004 2003 2002 2001
--------------- --------------- --------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Commercial, financial
and agricultural $154,868 19.0% $141,151 22.2% $130,931 22.4% $ 97,917 20.1% $ 92,505 19.9%
Real estate --
Construction 139,316 17.1 65,075 10.2 46,672 8.0 41,437 8.5 25,820 5.6
Real estate --
Mortgage 480,531 59.1 392,656 61.7 364,620 62.4 300,252 61.7 299,054 64.4
Installment loans
to individuals 38,820 4.8 37,755 5.9 41,696 7.1 46,958 9.7 46,985 10.1
-------- -------- -------- -------- --------
Total loans $813,535 100.0% $636,637 100.0% $583,919 100.0% $486,564 100.0% $464,364 100.0%
======== ======== ======== ======== ========
$12,062,000 of the increase in Commercial, Financial and Agricultural loans
between December 31, 2004 and December 31, 2005 reflects the loans of Bank 10.
$48,895,000 of the increase in Real Estate Construction loans and $75,168,000 of
the increase in Real Estate Mortgage loans reflects loans of Bank 10.
Loans at December 31, 2005 mature as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
OVER ONE YEAR
THROUGH FIVE
YEARS OVER FIVE YEARS
------------------- ------------------
ONE YEAR FIXED FLOATING FIXED FLOATING
OR LESS RATE RATE RATE RATE TOTAL
-------- -------- -------- ------- -------- --------
Commercial, financial,
and agricultural $ 77,474 $ 27,335 $ 41,968 $ 5,530 $ 2,561 $154,868
Real estate - construction 137,281 1,754 -- 50 231 139,316
Real estate - mortgage 138,848 194,885 76,141 26,938 43,719 480,531
Installment loans to
individuals 17,369 20,832 293 289 37 38,820
-------- -------- -------- ------- ------- --------
Total loans $370,972 $244,806 $118,402 $32,807 $46,548 $813,535
======== ======== ======== ======= ======= ========
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 December 31, 2005 our Company was
servicing approximately $220,000,000 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.
20
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 follows the guidance provided
in Statement of Financial Accounting Standards No. 114, Accounting by Creditors
for Impairment of a Loan, (SFAS 114) in identifying and measuring loan
impairment. If management determines that it is probable that all amounts due on
a loan will not be collected under the original terms of the loan agreement the
loan is considered to be impaired. Once a loan has been identified as impaired
management generally measures impairment based upon the fair value of the
underlying collateral. 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.
21
The following table summarizes loan loss experience for the periods
indicated:
(DOLLARS EXPRESSED IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------------------------
2005 2004 2003 2002 2001
-------- ------- ------- ------- -------
Analysis of allowance for loan losses:
Balance beginning of year $ 7,496 8,267 7,121 6,673 6,940
Allowance for loan losses of
acquired companies
at date of acquisitions 1,418 -- 212 -- --
Charge-offs:
Commercial, financial, and agricultural 589 1,596 58 146 689
Real estate -- construction 185 -- -- 19 144
Real estate -- mortgage 286 26 86 22 61
Installment loans to individuals 261 236 340 581 708
-------- ------- ------- ------- -------
Total charge-offs 1,321 1,858 484 768 1,602
Recoveries:
Commercial, financial, and agricultural 40 18 164 115 22
Real estate -- construction -- -- -- -- --
Real estate -- mortgage 28 -- -- 1 8
Installment loans to individuals 102 127 162 164 151
-------- ------- ------- ------- -------
Total recoveries 170 145 326 280 181
-------- ------- ------- ------- -------
Net charge-offs 1,151 1,713 158 488 1,421
-------- ------- ------- ------- -------
Provision for loan losses 1,322 942 1,092 936 1,154
-------- ------- ------- ------- -------
Balance at end of year $ 9,085 7,496 8,267 7,121 6,673
======== ======= ======= ======= =======
Loans outstanding:
Average $743,382 601,363 539,912 475,366 462,468
End of period 813,535 636,637 583,919 486,564 464,364
Allowance for loan losses to loans
outstanding:
Average 1.22% 1.25 1.53 1.50 1.44
End of period 1.12 1.18 1.42 1.46 1.44
Net charge-offs to average
loans outstanding 0.15 0.29 0.03 0.10 0.31
22
YEAR ENDED DECEMBER 31,
--------------------------------------
2005 2004 2003 2002 2001
------ ----- ----- ----- -----
Allocation of allowance for loan losses at
end of period:
Commercial, financial, and agricultural $2,687 3,700 3,979 2,627 2,444
Real estate -- construction 764 288 201 168 104
Real estate -- mortgage 4,138 2,563 2,538 2,208 1,872
Installment loans to individuals 473 429 561 542 669
Unallocated 1,023 516 988 1,576 1,584
------ ----- ----- ----- -----
Total $9,085 7,496 8,267 7,121 6,673
====== ===== ===== ===== =====
Percent of categories to total loans:
Commercial, financial, and agricultural 19.0% 22.2% 22.4 20.1 19.9
Real estate -- construction 17.1 10.2 8.0 8.5 5.6
Real estate -- mortgage 59.1 61.7 62.5 61.7 64.4
Installment loans to individuals 4.8 5.9 7.1 9.7 10.1
------ ----- ----- ----- -----
Total 100.0 100.0 100.0 100.0 100.0
====== ===== ===== ===== =====
Nonperforming loans, defined as loans on nonaccrual status, loans 90 days
or more past due, and restructured loans totaled $9,063,000 or 1.11% of total
loans at December 31, 2005 compared to $6,092,000 or 0.96% of total loans at
December 31, 2004. The following table summarizes our Company's nonperforming
assets at the dates indicated:
23
(DOLLARS EXPRESSED IN THOUSANDS)
DECEMBER 31,
------------------------------------------------
2005 2004 2003 2002 2001
-------- ------- ------- ------- -------
Nonaccrual loans:
Commercial, financial,
and agricultural $ 5,705 4,213 1,520 1,179 2,518
Real estate -- construction 1,760 -- 59 69 66
Real estate -- mortgage 1,090 1,246 1,270 1,152 842
Installment loans to individuals 56 30 55 81 124
-------- ------- ------- ------- -------
Total nonaccrual loans 8,611 5,489 2,904 2,481 3,550
-------- ------- ------- ------- -------
Loans contractually past - due 90 days
or more and still accruing:
Commercial, financial, and agricultural 238 12 66 85 96
Real estate -- construction -- -- -- 169 --
Real estate -- mortgage 187 591 4 254 299
Installment loans to individuals 14 -- 40 20 52
-------- ------- ------- ------- -------
Total loans contractually past -due
90 days or more and still accruing 439 603 110 528 447
Restructured loans -- -- -- -- --
-------- ------- ------- ------- -------
Total nonperforming loans 9,050 6,092 3,014 3,009 3,997
Other real estate 1,568 30 47 116 650
Repossessions -- 42 73 115 141
-------- ------- ------- ------- -------
Total nonperforming assets $ 10,618 6,164 3,134 3,240 4,788
======== ======= ======= ======= =======
Loans $813,535 636,637 583,919 486,564 464,364
Allowance for loan losses to
loans 1.12% 1.18 1.42 1.46 1.44
Nonperforming loans to loans 1.11 0.96 0.52 0.62 0.86
Allowance for loan losses to
nonperforming loans 100.39 123.05 274.29 236.66 166.98
Nonperforming assets to loans and
foreclosed assets 1.30 0.97 0.54 0.67 1.03
As can be seen from the preceding tables, our Company's total loans,
nonperforming loans and allowance for loan losses have increased in 2005 and
2004. However, the allowance, expressed as a percentage of total loans and as a
percentage of nonperforming loans, has decreased in each of those years. Loans
have grown significantly in each of the last two years and the allowance does
not increase at the same rate because losses typically don't occur in the early
years of a loan's life. In addition, the specific reserves associated with loans
which have been identified as impaired pursuant to the provisions of SFAS 114
are less at December 31, 2005 than they were at December 31, 2004.
The $3,112,000 increase in nonaccrual loans is primarily represented by two
large credits. Approximately $1,800,000 represents a loan to an auto dealership.
$1,639,000 represents a real estate development loan on a residential
subdivision. Our Company has allocated $500,000 and $246,000, respectively, of
the allowance for loan loss reserve to these two credits.
24
It is our Company's policy to discontinue the accrual of interest income on
loans when the full collection of principal or interest is in doubt, or when the
payment of principal or interest has become contractually 90 days past due
unless the obligation is both well secured and in the process of collection.
Interest on year-end nonaccrual loans, which would have been recorded under the
original terms of the loans, was approximately $767,000, $547,000 and $227,000
for the years ended December 31, 2005, 2004 and 2003, respectively.
Approximately $253,000, $134,000 and $56,000 was actually recorded as interest
income on such loans for the year ended December 31, 2005, 2004 and 2003,
respectively.
A loan is considered impaired when it is probable a creditor will be unable
to collect all amounts due - both principal and interest - according to the
contractual terms of the loan agreement. In addition to nonaccrual loans at
December 31, 2005 included in the table above, which were considered impaired,
management has identified additional loans totaling approximately $2,369,000
which is not included in the nonaccrual table above but is considered by
management to be impaired.
Once a loan has been identified as impaired (as defined by paragraph 8 of
SFAS 114), Accounting by Creditors for Impairment of a Loan, management
generally measures impairment based upon the fair value of the underlying
collateral. In general, market prices for loans in our portfolio are not
available, and we have found the fair value of the underlying collateral to be
more readily available and reliable than discounting expected future cash flows
to be received. Once a fair value of collateral has been determined and the
impairment amount calculated, a specific reserve allocation is made. At December
31, 2005, $2,392,000 of our Company's allowance for loan losses was allocated to
impaired loans totaling approximately $10,981,000.
As of December 31, 2005 and 2004 approximately $16,387,000 and $12,438,000,
respectively, of loans not included in the nonaccrual table above or identified
by management as being "impaired" were classified by management as having more
than normal risk which raised doubts as to the ability of the borrower to comply
with present loan repayment terms. The $3,949,000 increase in classified loans
is primarily represented by one large commercial real estate loan representing a
condominium development project. This credit has documentation exceptions
causing it to be classified by regulatory authorities as substandard. The loan
is well secured and is 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 in
the portfolio. Loans may be added to this list for reasons which 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 a 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 percentages
to pools of loans by asset type. These pre-established percentages are based
upon standard bank regulatory classification percentages as well as average
historical loss percentages. These expected loss estimates are sensitive to
changes in delinquency status, realizable value of collateral, and other risk
factors.
25
The unallocated portion of the allowance is based on management's
evaluation of conditions that are not directly reflected in the determination of
the asset-specific component and the expected loss component discussed above.
The evaluation of inherent loss with respect to these conditions is subject to a
higher degree of uncertainty because they may not be identified with specific
problem credits or portfolio segments. Conditions evaluated in connection with
the unallocated portion of the allowance include general economic and business
conditions affecting our key lending areas, credit quality trends (including
trends in substandard loans expected to result from existing conditions),
collateral values, specific industry conditions within portfolio segments, bank
regulatory examination results, and findings of our internal loan review
department.
The underlying assumptions, estimates and assessments used by management to
determine these components are continually evaluated and updated to reflect
management's current view of overall economic conditions and relevant factors
impacting credit quality and inherent losses. Changes in such estimates could
significantly impact the allowance and provision for credit losses. Our Company
could experience credit losses that are different from the current estimates
made by management.
At December 31, 2005, management allocated $8,062,000 of the $9,085,000
total allowance for loan losses to specific loans and loan categories and
$1,023,000 was unallocated. Considering the size of several of our Company's
lending relationships and the loan portfolio in total, management believes that
the December 31, 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.
Additionally, our Company does not have any concentrations of loans exceeding
10% of total loans which are not otherwise disclosed in the loan portfolio
composition table. 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.
INVESTMENT PORTFOLIO
Our Company classifies its debt and equity securities into one of the
following two categories:
Held-to-Maturity - includes investments in debt securities which our
Company has the positive intent and ability to hold until maturity.
Available-for-Sale - includes investments in debt and equity securities not
classified as held to maturity or trading (i.e., investments which our Company
has no present plans to sell in the near-term but may be sold in the future
under different circumstances).
Debt securities classified as held-to-maturity are carried at amortized
cost, while debt and equity securities classified as trading or
available-for-sale are carried at estimated market value. Unrealized holding
gains and losses from available-for-sale securities are excluded from earnings
and reported, net of applicable taxes, as a separate component of stockholders'
equity until realized.
Our Company does not engage in trading activities and accordingly does not
have any debt or equity securities classified as trading securities.
Historically our Company's practice had been to purchase and hold debt
instruments until maturity unless special circumstances exist. However, since
the investment portfolio's major function is to provide liquidity and to balance
our Company's interest rate sensitivity position, certain debt securities along
with stock of the Federal Home Loan Bank and the Federal Reserve Bank are
classified as available-for-sale.
At December 31, 2005, debt and equity securities classified as
available-for-sale represented 18.6% of total consolidated assets. Future levels
of held-to-maturity and available-for-sale investment securities can be expected
to vary depending upon liquidity and interest sensitivity needs as well as other
factors.
26
The following table presents the composition of the investment portfolio by
major category.
(DOLLARS EXPRESSED IN THOUSANDS)
2005 2004 2003
AVAILABLE - AVAILABLE - AVAILABLE -
FOR-SALE FOR-SALE FOR-SALE
----------- ----------- -----------
U.S. Government agencies $113,005 $128,381 $142,332
Asset-backed securities 6,250 4,470 13,242
Obligations of states and
political subdivisions 53,426 33,321 29,327
Other debt securities 2,194 1,764 1,032
-------- -------- --------
Total debt securities 174,875 167,936 185,933
Federal Home Loan Bank of Des Moines Stock 3,904 3,021 2,262
Federal Reserve Bank Stock 752
751 751
Midwest Independent Bank Stock 151 -- --
Federal Agricultural
Mortgage Corporation 10 10 10
-------- -------- --------
Total investments $179,692 $171,718 $188,956
======== ======== ========
27
As of December 31, 2005, the maturity of debt securities in the investment
portfolio was as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
ONE YEAR THROUGH THROUGH OVER AVERAGE
OR LESS FIVE YEARS TEN YEARS TEN YEARS YIELD (1)
-------- ---------- --------- --------- ---------
AVAILABLE-FOR-SALE
U.S. Government agencies $42,158 $64,474 $ 6,130 $ 244 3.76%
Asset-backed (2) 33 6,029 188 -- 4.13
States and political subdivisions (3) 2,242 15,606 23,864 11,713 4.69
Other debt security 708 -- -- 1,486 5.70
------- ------- ------- -------
Total available-for-sale debt securities $45,141 $86,109 $30,182 $13,443 4.12%
======= ======= ======= =======
Weighted average yield (1) 3.37% 4.17% 4.75% 4.90%
(1) Weighted average yield is based on amortized cost.
(2) Asset-backed securities have been included using historic repayment speeds.
Repayment speeds were determined from actual portfolio experience during
the twelve months ended December 31, 2005 calculated separately for each
mortgage-backed security. These repayment speeds are not necessarily
indicative of future repayment speeds and are subject to change based on
changing mortgage interest rates.
(3) Rates on obligations of states and political subdivisions have been
adjusted to fully taxable equivalent rates using the statutory Federal
income tax rate of 35%.
At December 31, 2005, $13,861,000 of debt securities classified as
available-for-sale in the table above had variable rate provisions with
adjustment periods ranging from one week to twelve months.
INTEREST SENSITIVITY AND LIQUIDITY
The concept of interest sensitivity attempts to gauge exposure of our
Company's net interest income to adverse changes in market-driven interest rates
by measuring the amount of interest sensitive assets and interest sensitive
liabilities maturing or subject to repricing within a specified time period.
Liquidity represents the ability of our Company to meet the day-to-day
withdrawal demands of its deposit customers balanced against the fact that those
deposits are invested in assets with varying maturities. Our Company must also
be prepared to fulfill the needs of credit customers for loans with various
types of maturities and other financing arrangements. Our Company monitors its
interest sensitivity and liquidity through the use of static gap reports which
measure the difference between assets and liabilities maturing or repricing
within specified time periods.
At December 31, 2005, Exchange National Bank, Citizens Union State Bank,
Osage Valley Bank and Bank 10 each independently monitored their static gap
reports with their goals being to limit each bank's potential change in net
interest income due to changes in interest rates to acceptable limits. Interest
rate changes used by the individual banks ranged from 2.00% to 3.00% and the
resulting net interest income changes ranged from approximately 3.7% to 18.2%.
28
The following table presents our Company's consolidated static gap position
at December 31, 2005 for the next twelve months and the potential impact on net
interest income for 2005 of an immediate 2% increase in interest rates.
(DOLLARS EXPRESSED IN THOUSANDS)
CUMULATIVE
ONE THROUGH
TWELVE MONTH
PERIOD
------------
Assets maturing or repricing within one year $ 580,732
Liabilities maturing or repricing within one year 719,715
---------
Gap $(138,983)
=========
Ratio of assets maturing or repricing to
liabilities maturing or repricing 81%
=========
Impact on net interest income of an immediate
2.00% increase in interest rates $ (2,780)
=========
Net interest income for 2005 $ 33,667
=========
Percentage change in 2005 net interest
income due to an immediate 2.00% increase in interest rates (8.26)%
=========
In addition to managing interest sensitivity and liquidity through the use of
gap reports, the Banks have provided for emergency liquidity situations with
informal agreements with correspondent banks which permit it to borrow up to
$45,000,000 in federal funds on an unsecured basis. Exchange National Bank,
Citizens Union State Bank, Osage Valley Bank and Bank 10 are members of the
Federal Home Loan Bank of Des Moines which may be used to provide a funding
source for fixed rate real estate loans and/or additional liquidity. Finally,
our Company has $20,000,000 line of credit with a correspondent bank that had no
balance outstanding at December 31, 2005.
At December 31, 2005 and 2004, our Company had certificates and other time
deposits in denominations of $100,000 or more which mature as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
DECEMBER 31,
------------------
2005 2004
-------- -------
Three months or less $ 35,501 $26,549
Over three months through six months 23,864 16,880
Over six months through twelve months 25,443 20,217
Over twelve months 29,801 26,750
-------- -------
$114,609 $90,396
======== =======
29
Securities sold under agreements to repurchase generally mature the next
business day; however, certain agreements with local political subdivisions and
select businesses are fixed rate agreements with original maturities generally
ranging from 30 to 120 days. Information relating to securities sold under
agreements to repurchase is as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
AT END OF PERIOD FOR THE PERIOD ENDING
------------------ ------------------------------
WEIGHTED WEIGHTED
AVERAGE MAXIMUM AVERAGE
INTEREST MONTH-END AVERAGE INTEREST
BALANCE RATE BALANCE BALANCE RATE
------- -------- --------- ------- --------
December 31, 2005 $33,293 3.30% $63,482 $45,832 2.70%
December 31, 2004 34,515 1.73 85,163 57,950 1.15
December 31, 2003 66,774 0.87 72,921 67,597 0.95
LIQUIDITY
The role of liquidity management is to ensure funds are available to meet
depositors' withdrawal and borrowers' credit demands while at the same time
maximizing profitability. This is accomplished by balancing changes in demand
for funds with changes in the supply of those funds. Liquidity to meet the
demands is provided by maturing assets, short-term liquid assets that can be
converted to cash and the ability to attract funds from external sources,
principally depositors. Due to the nature of services offered by our Company,
management prefers to focus on transaction accounts and full service
relationships with customers. Management believes it has the ability to increase
deposits at any time by offering rates slightly higher than the market rate.
Our Banks' Asset/Liability Committees (ALCO), primarily made up of senior
management, have direct oversight responsibility for our Company's liquidity
position and profile. A combination of daily, weekly and monthly reports
provided to management detail the following: internal liquidity metrics,
composition and level of the liquid asset portfolio, timing differences in
short-term cash flow obligations, available pricing and market access to the
financial markets for capital and exposure to contingent draws on our Company's
liquidity.
Our Company has a number of sources of funds to meet liquidity needs on a
daily basis. The deposit base, consisting of consumer and commercial deposits
and large dollar denomination ($100,000 and over) certificates of deposit, is a
source of funds. Our Company has an insignificant amount of deposits on which
the rate paid exceeded the market rate by more that 50 basis points when the
account was established.
Other sources of funds available to meet daily needs include the sales of
securities under agreements to repurchase and funds made available under a
treasury tax and loan note agreement with the federal government. Also, the
Banks are members of the Federal Home Loan Bank of Des Moines (FHLB). As members
of the FHLB, the Banks have access to credit products of the FHLB. At December
31, 2005, the amounts of available credit from the FHLB totaled $72,506,000. As
of December 31, 2005, the Banks had $52,180,000 in outstanding borrowings with
the FHLB. The Banks have federal funds purchased lines with correspondent banks
totaling $45,000,000. Finally, our Company has $20,000,000 line of credit with a
correspondent bank that had no balance outstanding at December 31, 2005.
Our Company's liquidity depends primarily on the dividends paid to it as
the sole shareholder of our subsidiary Banks. As discussed in Note 3 to our
Company's consolidated financial statements, the Banks may pay up to $13,367,000
in dividends to our Company without regulatory approval subject to the ongoing
capital requirements of the Banks.
Over the normal course of business, our Company enters into certain forms
of off-balance sheet transactions, including unfunded loan commitments and
letters of credit. These transactions are managed through our Company's various
risk management processes. Management considers both on-balance sheet and
off-balance
30
sheet transactions in its evaluation of our Company's liquidity. In the section
entitled, "Other Off-Balance Sheet Activities", we disclose that our Company has
$122,167,000 in unused loan commitments as of December 31, 2005. While this
commitment level would be difficult to fund given our Company's current
liquidity resources, we know that the nature of these commitments are such that
the likelihood of such a funding demand is very low.
For the years ended December 31, 2005, 2004 and 2003, net cash provided by
operating activities was $16,892,000 in 2005 versus $10,329,000 in 2004 and
$12,640,000 in 2003. The variances in net cash provided by operating activities
between these years is primarily the result of differences in the timing of tax
payments. Also contributing to the decrease in 2004 versus 2003 was a reduction
in gains recognized on the sale of loans.
Net cash used in investing activities was $61,449,000 in 2005 versus
$45,085,000 in 2004, and $74,466,000 in 2003. The increase in cash used in
investing activities in 2005 versus 2004 is primarily due to the purchase of
Bank 10. The decrease in cash used in investing activities in 2004 versus 2003
is primarily the result of larger growth in our Company's loan portfolio in 2003
compared to 2004.
Net cash provided by financing activities was $26,580,000 in 2005 versus
$43,419,000 in 2004, and $43,460,000 in 2003. The reduction in cash provided by
financing activities in 2005 versus 2004 is primarily due to a smaller increase
in deposits. Net cash provided by financing activities was materially consistent
for the years 2004 and 2003.
OTHER OFF-BALANCE SHEET ACTIVITIES
In the normal course of business, our Company is party to activities that
contain credit, market and operational risk that are not reflected in whole or
in part in our Company's consolidated financial statements. Such activities
include traditional off-balance sheet credit related financial instruments.
Our Company provides customers with off-balance sheet credit support
through loan commitments and standby letters of credit. Summarized
credit-related financial instruments, including both commitments to extend
credit and letters of credit at December 31, 2005 are as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
-------------------------------------------------
LESS THAN 1-3 3-5 OVER 5
TOTAL 1 YEAR YEARS YEARS YEARS
-------- --------- ------- ------- ------
Unused loan commitments $142,490 $92,602 $19,343 $23,859 $6,686
Standby letters of credit 4,757 3,971 561 2 223
Since many of the unused commitments are expected to expire or be only
partially used, the total amount of commitments in the preceding table does not
necessarily represent future cash requirements.
31
CONTRACTUAL CASH OBLIGATIONS
The required payments of time deposits and other borrowed money at December
31, 2005 are as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
PAYMENTS DUE BY PERIOD
------------------------------------------------------------------
TOTAL LESS THAN 1 YEAR 1-3 YEARS 3-5 YEARS OVER 5 YEARS
-------- ---------------- --------- --------- ------------
Time deposits $423,267 $275,517 $118,962 $27,956 $ 832
Other borrowed money 52,180 42,351 4,214 2,732 2,883
CAPITAL
Risk-based capital guidelines for financial institutions were adopted by
regulatory authorities effective January 1, 1991. These guidelines are designed
to relate regulatory capital requirements to the risk profiles of the specific
institutions and to provide more uniform requirements among the various
regulators. Our Company is required to maintain a minimum risk-based capital to
risk-weighted assets ratio of 8.00%, with at least 4.00% being "Tier 1" capital.
In addition, a minimum leverage ratio, Tier 1 capital to adjusted total assets,
of 3.00% must be maintained. However, for all but the most highly rated
financial institutions, a leverage ratio of 3.00% plus an additional cushion of
100 to 200 basis points is expected.
Detail concerning our Company's capital ratios at December 31, 2005 is
included in Note 3 of our Company's consolidated financial statements included
elsewhere in this report.
RECENT ACCOUNTING PRONOUNCEMENTS
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 or 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. No loans acquired in the acquisition of Bank 10 were within the
scope of SOP 03-3 and, accordingly, SOP 03-3 did not have an effect on our
Company's financial statements.
In March 2004, the Emerging Issues Task Force, (EITF) came to a consensus
regarding EITF 03-1. Securities in scope are those subject to SFAS 115. 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.
32
In December 2004, the FASB 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 as 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 interim or annual reporting
period that begins after January 1, 2006. It is anticipated that the application
of the requirements of this statement to our Company's existing share-based
transactions will result in the recognition of additional compensation expense
of approximately $110,000, after taxes, or approximately 2.6 cents per share in
2006.
In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47),
Accounting for Conditional Asset Retirement Obligations, which requires
conditional asset retirement obligations to be recognized if a legal obligation
exists to perform asset retirement activities and a reasonable estimate of the
fair value of the obligation can be made. FIN 47 also provides guidance as to
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. Our Company adopted the provisions of
FIN 47 on December 31, 2005. No conditional asset retirement obligations were
recognized and, accordingly, the adoption of FIN 47 had no effect on our
Company's financial statements.
In May 2005, the FASB issued FASB Statement No. 154, Accounting Changes and
Error Corrections. FASB Statement No. 154 establishes, unless impracticable,
retrospective application as the required method for reporting a change in
accounting principle in the absence of explicit transition requirements specific
to a newly adopted accounting principle. This statement will be effective for
our Company for all accounting changes and any error corrections occurring after
January 1, 2006.
EFFECTS OF INFLATION
The effects of inflation on financial institutions are different from the
effects on other commercial enterprises since financial institutions make few
significant capital or inventory expenditures which are directly affected by
changing prices. Because bank assets and liabilities are virtually all monetary
in nature, inflation does not affect a financial institution as much as do
changes in interest rates. The general level of inflation does underlie the
general level of most interest rates, but interest rates do not increase at the
rate of inflation as do prices of goods and services. Rather, interest rates
react more to changes in the expected rate of inflation and to changes in
monetary and fiscal policy.
Inflation does have an impact on the growth of total assets in the banking
industry, often resulting in a need to increase capital at higher than normal
rates to maintain an appropriate capital to asset ratio. In the opinion of
management, inflation did not have a significant effect on our Company's
operations for the three years ended December 31, 2005.
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 December 31, 2005, the rate shock scenario
models indicated that annual net interest income could change by as much as
8.26% should interest rates rise or fall within 200 basis points from their
current level over a one year period. 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.
33
The following table presents the scheduled repricing of market risk
sensitive instruments at December 31, 2005:
OVER
5 YEARS OR
NO STATED
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 MATURITY TOTAL
-------- ------- ------- ------ ------ ---------- ---------
ASSETS
Inestments in debt and
equity securities $ 72,157 18,243 18,117 18,267 17,282 35,626 179,692
Interest-bearing deposits 967 -- -- -- -- -- 967
Federal funds sold and securities
purchased under agreements
to resell 12,448 -- -- -- -- -- 12,448
Loans 495,160 96,711 104,607 43,504 42,474 31,079 813,535
-------- ------- ------- ------ ------ ------ ---------
Total $580,732 114,954 122,724 61,771 59,756 66,705 1,006,642
======== ======= ======= ====== ====== ====== =========
LIABILITIES
Savings, Now, Money Market
deposits $323,823 -- -- -- -- -- 323,823
Time deposits 289,672 88,638 30,193 6,846 7,131 787 423,267
Federal funds purchased and
securities sold under
agreements to repurchase 36,996 -- -- -- -- -- 36,996
Interest-bearing demand notes
of U.S. treasury 1,098 -- -- -- -- -- 1,098
Subordinated notes 25,774 -- -- -- 23,712 -- 49,486
Other borrowed money 42,352 2,617 1,597 2,047 684 2,883 52,180
-------- ------- ------- ------ ------ ------ ---------
Total $719,715 91,255 31,790 8,893 31,527 3,670 886,850
======== ======= ======= ====== ====== ====== =========
CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of our Company and reports
of our Company's independent auditors appear on the pages indicated.
Page
----
Report of Independent Registered Public Accounting Firm 35
Consolidated Balance Sheets as of December 31, 2005 and 2004 36
Consolidated Statements of Income for each of the years ended
December 31, 2005, 2004 and 2003 37
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for each of the years ended December 31, 2005, 2004 and 2003 38
Consolidated Statements of Cash Flows for each of the years ended
December 31, 2005, 2004 and 2003 39
Notes to Consolidated Financial Statements 40
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Exchange National Bancshares, Inc.
Jefferson City, Missouri:
We have audited the accompanying consolidated balance sheets of Exchange
National Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2005
and 2004, and the related consolidated statements of income, stockholders'
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2005. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Exchange National
Bancshares, Inc. and subsidiaries as of December 31, 2005 and 2004, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2005 based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated March 13, 2006 expressed an unqualified opinion on management's assessment
of, and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
St. Louis, Missouri
March 13, 2006
35
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2005 and 2004
ASSETS 2005 2004
-------------- -----------
Loans, net of allowance for loan losses of $9,084,774 and
$7,495,594 at December 31, 2005 and 2004, respectively $ 804,450,102 629,141,036
Investment in available-for-sale debt and equity
securities, at fair value 179,691,826 171,717,635
Federal funds sold and securities purchased under agreements
to resell 12,447,981 41,603,952
Cash and due from banks 35,282,568 24,104,458
Premises and equipment 32,890,908 21,276,387
Accrued interest receivable 7,772,573 5,289,083
Mortgage servicing rights 1,536,331 1,605,930
Goodwill 40,323,775 25,196,736
Intangible assets 4,786,460 798,132
Cash surrender value - life insurance 1,682,836 106,218
Other assets 5,605,116 3,034,703
-------------- -----------
Total assets $1,126,470,476 923,874,270
============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 134,364,788 98,156,124
NOW 110,338,554 117,822,197
Savings 56,213,747 50,918,443
Money market 157,271,050 117,125,302
Time deposits $100,000 and over 114,609,472 90,396,308
Other time deposits 308,657,595 252,231,102
-------------- -----------
Total deposits 881,455,206 726,649,476
Federal funds purchased and securities sold
under agreements to repurchase 36,995,735 34,515,323
Interest-bearing demand notes to U.S. Treasury 1,098,337 897,470
Subordinated notes 49,486,000 25,774,000
Other borrowed money 52,179,661 39,524,747
Accrued interest payable 3,124,365 1,795,267
Other liabilities 5,398,307 2,947,204
-------------- -----------
Total liabilities 1,029,737,611 832,103,487
-------------- -----------
Commitments and contingent liabilities
Stockholders' equity:
Common stock, $1 par value. Authorized 15,000,000
shares; issued 4,298,353 shares 4,298,353 4,298,353
Surplus 22,030,074 22,014,894
Retained earnings 74,129,117 67,716,511
Accumulated other comprehensive income (loss), net of tax (1,072,170) 393,534
Treasury stock; 128,506 shares, at cost (2,652,509) (2,652,509)
-------------- -----------
Total stockholders' equity 96,732,865 91,770,783
-------------- -----------
Total liabilities and stockholders' equity $1,126,470,476 923,874,270
============== ===========
See accompanying notes to consolidated financial statements
36
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2005, 2004, and 2003
2005 2004 2003
----------- ---------- ----------
Interest income:
Interest and fees on loans $49,316,370 35,266,846 32,652,603
Interest on debt securities:
Taxable 5,095,896 4,023,535 4,435,291
Nontaxable 1,645,247 1,233,385 1,291,437
Interest on federal funds sold and securities purchased
under agreements to resell 1,018,459 402,818 365,308
Interest on interest-bearing deposits 38,973 33,595 41,024
Dividends on equity securities 225,089 130,417 136,451
----------- ---------- ----------
Total interest income 57,340,034 41,090,596 38,922,114
----------- ---------- ----------
Interest expense:
NOW accounts 1,665,813 794,070 672,431
Savings accounts 319,247 318,461 370,554
Money market accounts 3,618,277 1,265,068 581,858
Time deposit accounts $100,000 and over 3,330,402 1,928,942 1,859,358
Other time deposit accounts 8,740,619 5,931,091 6,880,756
Securities sold under agreements to repurchase 1,237,899 667,601 645,317
Interest-bearing demand notes to U.S. Treasury 19,950 7,459 7,289
Federal funds purchased 18,309 20,647 18,955
Subordinated notes 2,747,293 886,324 --
Other borrowed money 1,975,781 1,567,248 1,761,823
----------- ---------- ----------
Total interest expense 23,673,590 13,386,911 12,798,341
----------- ---------- ----------
Net interest income 33,666,444 27,703,685 26,123,773
Provision for loan losses 1,321,612 942,000 1,092,000
----------- ---------- ----------
Net interest income after provision for loan losses 32,344,832 26,761,685 25,031,773
----------- ---------- ----------
Noninterest income:
Service charges on deposit accounts 4,244,962 3,041,056 2,752,573
Trust department income 809,998 694,132 793,083
Mortgage loan servicing fees, net 427,127 431,284 (124,988)
Gain on sales of mortgage loans, net 676,666 796,595 2,505,682
(Loss) gain on sales and calls of debt securities (25,416) (7,612) 37,689
Other 1,131,959 777,102 739,974
----------- ---------- ----------
Total noninterest income 7,265,296 5,732,557 6,704,013
----------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 13,920,030 11,226,511 10,088,440
Occupancy expense, net 1,600,424 1,142,734 1,074,400
Furniture and equipment expense 2,150,231 2,014,375 2,087,084
Legal, examination, and professional fees 1,419,614 1,108,335 744,481
Advertising and promotion 819,376 574,586 559,877
Postage, printing, and supplies 975,768 824,782 847,304
Processing expense 750,791 400,989 360,313
Amortization of intangible assets 806,896 215,112 306,896
Other 2,925,020 2,875,282 2,467,212
----------- ---------- ----------
Total noninterest expense 25,368,150 20,382,706 18,536,007
----------- ---------- ----------
Income before income taxes 14,241,978 12,111,536 13,199,779
Income taxes 4,326,700 3,806,556 4,155,865
----------- ---------- ----------
Net income $ 9,915,278 8,304,980 9,043,914
=========== ========== ==========
Basic earnings per share $ 2.38 1.99 2.17
Diluted earnings per share 2.36 1.98 2.15
See accompanying notes to consolidated financial statements.
37
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 2005, 2004, and 2003
ACCUMULATED TOTAL
OTHER STOCK-
COMMON RETAINED COMPREHENSIVE TREASURY HOLDERS'
STOCK SURPLUS EARNINGS INCOME (LOSS) STOCK EQUITY
---------- ---------- ---------- ------------- ----------- ----------
Balance, December 31, 2002 $2,865,601 21,983,467 58,363,271 2,294,471 (2,679,690) 82,827,120
Comprehensive income:
Net income -- -- 9,043,914 -- -- 9,043,914
Other comprehensive loss:
Unrealized loss on debt
and equity securities available-
for-sale, net of tax -- -- -- (921,894) -- (921,894)
Adjustment for gain on sales and
calls of debt and equity securities,
net of tax -- -- -- (24,498) -- (24,498)
----------
Total other comprehensive loss (946,392)
----------
Total comprehensive income 8,097,522
----------
Three-for-two stock split (accounted for as a
dividend) 1,432,752 13 (1,435,282) -- 14 (2,503)
Adjustment for deferred compensation plan -- 15,150 -- -- -- 15,150
Stock options exercised -- 1,084 -- -- 27,167 28,251
Cash dividends declared, $0.76 per share -- -- (3,182,796) -- -- (3,182,796)
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 2003 4,298,353 21,999,714 62,789,107 1,348,079 (2,652,509) 87,782,744
Comprehensive income:
Net income -- -- 8,304,980 -- -- 8,304,980
Other comprehensive loss:
Unrealized loss on debt
and equity securities available-
for-sale, net of tax -- -- -- (959,493) -- (959,493)
Adjustment for loss on sales and
calls of debt and equity securities,
net of tax -- -- -- 4,948 -- 4,948
----------
Total other comprehensive loss (954,545)
----------
Total comprehensive income 7,350,435
----------
Adjustment for deferred compensation plan -- 15,180 -- -- -- 15,180
Cash dividends declared, $0.81 per share -- -- (3,377,576) -- -- (3,377,576)
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 2004 4,298,353 22,014,894 67,716,511 393,534 (2,652,509) 91,770,783
Comprehensive income:
Net income -- -- 9,915,278 -- -- 9,915,278
Other comprehensive income:
Unrealized loss on debt
and equity securities available-
for-sale, net of tax -- -- -- (1,482,224) -- (1,482,224)
Adjustment for loss on sales and
calls of debt and equity securities,
net of tax -- -- -- 16,520 -- 16,520
----------
Total other comprehensive loss (1,465,704)
----------
Total comprehensive income 8,449,574
----------
Adjustment for deferred compensation plan -- 15,180 -- -- -- 15,180
Cash dividends declared, $0.84 per share -- -- (3,502,672) -- -- (3,502,672)
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 2005 $4,298,353 22,030,074 74,129,117 (1,072,170) (2,652,509) 96,732,865
========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
38
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2005, 2004, and 2003
2005 2004 2003
------------- ------------ ------------
Cash flows from operating activities:
Net income $ 9,915,278 8,304,980 9,043,914
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 1,321,612 942,000 1,092,000
Depreciation expense 1,780,696 1,613,561 1,665,737
Net amortization of debt securities, premiums, and discounts 1,665,189 1,348,762 1,441,469
Amortization of intangible assets 806,896 215,112 306,896
(Increase) decrease in accrued interest receivable (1,234,671) (181,103) 538,680
Increase in cash surrender value -life insurance (71,798) (8,023) (10,069)
(Increase) decrease in other assets (206,026) 578,734 (81,526)
Increase (decrease) in accrued interest payable 1,131,714 144,975 (396,279)
Increase (decrease) in other liabilities 1,927,354 (2,651,493) (741,630)
Loss (gain) on sales and calls of debt securities 25,416 7,612 (37,689)
Origination of mortgage loans for sale (38,767,565) (48,988,687) (112,759,003)
Proceeds from the sale of mortgage loans 39,444,231 49,785,282 115,264,685
Gain on sale of mortgage loans, net (676,666) (796,595) (2,505,682)
Gain on sales of premises and equipment (60,068) (1,367) (1,796)
Other, net (109,916) 15,180 (179,931)
------------- ------------ ------------
Net cash provided by operating activities 16,891,676 10,328,930 12,639,776
------------- ------------ ------------
Cash flows from investing activities:
Net increase in loans (49,456,777) (55,009,895) (70,328,755)
Purchase of available-for-sale debt securities (504,908,407) (290,617,546) (182,219,699)
Proceeds from maturities of available-for-sale debt securities 494,396,760 244,729,581 111,290,416
Proceeds from calls of available-for-sale debt securities 21,482,500 49,996,925 55,962,300
Proceeds from sales of available-for-sale debt securities 3,199,925 10,304,331 9,929,230
Acquisition of subsidiary, net of cash and cash equivalents acquired (21,800,539) -- --
Purchase of branch, net of cash and cash equivalents acquired -- -- (814,572)
Purchases of premises and equipment (6,387,156) (5,127,948) (1,073,041)
Proceeds from sales of premises and equipment 171,304 14,000 34,320
Proceeds from sales of other real estate owned and repossessions 1,853,174 625,936 754,172
------------- ------------ ------------
Net cash used in investing activities (61,449,216) (45,084,616) (76,465,629)
------------- ------------ ------------
Cash flows from financing activities:
Net increase in demand deposits 11,948,224 8,941,942 8,175,593
Net increase (decrease) in interest-bearing transaction accounts (11,603,004) 53,394,065 19,127,427
Net increase (decrease) increase in time deposits 4,849,825 (948,496) 16,031,896
Net increase (decrease) in federal funds purchased and securities sold
under agreements to repurchase 1,474,489 (38,468,100) 5,624,224
Net increase (decrease) in interest-bearing demand notes to U.S. Treasury 179,898 208,492 (2,372,525)
Proceeds from Federal Home Loan Bank advances 14,500,000 17,000,000 3,000,000
Repayment of bank debt and Federal Home Loan Bank advances (15,104,177) (19,105,146) (3,165,123)
Proceeds from exercise of stock options -- -- 28,251
Proceeds from subordinated notes 23,712,000 25,774,000 --
Cash dividends paid (3,377,576) (3,377,576) (2,987,715)
Purchase of common stock -- -- (2,503)
------------- ------------ ------------
Net cash provided by financing activities 26,579,679 43,419,181 43,459,525
------------- ------------ ------------
Net (decrease) increase in cash and cash equivalents (17,977,861) 8,663,495 (20,366,328)
Cash and cash equivalents, beginning of year 65,708,410 57,044,915 77,411,243
------------- ------------ ------------
Cash and cash equivalents, end of year $ 47,730,549 65,708,410 57,044,915
============= ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 22,541,876 13,241,936 13,194,620
Income taxes 3,645,000 6,302,761 5,838,657
Supplemental schedule of noncash investing and financing activities:
Other real estate and repossessions acquired in settlement of loans 3,348,616 578,645 643,020
Acquisition of Bank 10:
Increase in loans 130,522,517 -- --
Increase in deposits 149,610,685 -- --
See accompanying notes to consolidated financial statements.
39
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Exchange National Bancshares, Inc. (the Company) provides a full range of
banking services to individual and corporate customers through The Exchange
National Bank of Jefferson City, Citizens Union State Bank and Trust of
Clinton, Osage Valley Bank of Warsaw, and as of May 2, 2005, Bank 10 of
Belton (the Banks) located within the communities surrounding Jefferson
City, Clinton, Warsaw, and Belton, Missouri. The Banks are subject to
competition from other financial and nonfinancial institutions providing
financial products. Additionally, the Company and its subsidiaries are
subject to the regulations of certain regulatory agencies and undergo
periodic examinations by those regulatory agencies.
The consolidated financial statements of the Company have been prepared in
conformity with U.S. generally accepted accounting principles and conform
to predominant practices within the banking industry. The preparation of
the consolidated financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions, including the determination of the allowance for loan losses
and the valuation of real estate acquired in connection with foreclosure or
in satisfaction of loans, that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
The significant accounting policies used by the Company in the preparation
of the consolidated financial statements are summarized below:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company; The Exchange National Bank of Jefferson City; Union State
Bancshares, Inc. (USB) and its wholly owned subsidiary, Citizens Union
State Bank and Trust of Clinton; Mid Central Bancorp, Inc. and its
wholly owned subsidiary, Osage Valley Bank of Warsaw; and Bank 10 of
Belton. All significant intercompany accounts and transactions have
been eliminated in consolidation.
LOANS
Loans are stated at unpaid principal balance amount less unearned
income and the allowance for loan losses. Income on loans is accrued
on a simple-interest basis.
Loans are placed on nonaccrual status when management believes that
the borrower's financial condition, after consideration of business
conditions and collection efforts, is such that collection of interest
is doubtful. Interest accrued in the current year is reversed against
interest income. 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.
Loan origination fees and certain direct costs are deferred and
recognized over the life of the loan as an adjustment to yield.
(Continued)
40
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
The Exchange National Bank of Jefferson City originates certain loans
which are sold in the secondary mortgage market to the Federal Home
Loan Mortgage Corporation (Freddie Mac). These long-term, fixed-rate
loans are sold on a note-by-note basis. Immediately upon locking in an
interest rate, the Company enters into an agreement to sell the
mortgage loan to Freddie Mac without recourse, thereby eliminating the
Company's exposure to interest rate fluctuations. At December 31, 2005
and 2004, no mortgage loans were held for sale. Mortgage loan
servicing fees earned on loans sold to Freddie Mac are reported as
income when the related loan payments are collected net of mortgage
servicing right amortization. Operational costs to service such loans
are charged to expense as incurred.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased by provisions charged to
expense and is reduced by loan charge-offs, net of recoveries.
Management utilizes a systematic, documented approach in determining
an adequate allowance for loan losses. Management's approach, which
provides for general and specific valuation allowances, is based on
current economic conditions, past losses, collection experience, risk
characteristics of the portfolio, assessment of collateral values by
obtaining independent appraisals for significant properties, and such
other factors, which, in management's judgment, deserve current
recognition in estimating loan losses.
Management believes the allowance for loan losses is adequate to
absorb probable losses in the loan portfolio. While management uses
available information to recognize loan losses, future additions to
the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the allowance
for loan losses. Such agencies may require the Banks to increase the
allowance for loan losses based on their judgment about information
available to them at the time of their examination.
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. When
measuring impairment, the expected future cash flows of an impaired
loan are discounted at the loan's effective interest rate.
Alternatively, impairment is measured by reference to an observable
market price, if one exists, or the fair value of the collateral for a
collateral-dependent loan. Regardless of the historical measurement
method used, the Company measures impairment based on the fair value
of the collateral when foreclosure is probable. Additionally,
impairment of a restructured loan is measured by discounting the total
expected future cash flows at the loan's effective rate of interest as
stated in the original loan agreement. The Company follows its
nonaccrual method for recognizing interest income on impaired loans.
INVESTMENT IN DEBT AND EQUITY SECURITIES
At the time of purchase, debt securities are classified into one of
two categories: available-for-sale or held-to-maturity.
Held-to-maturity securities are those securities which the Company has
the ability and positive intent to hold until maturity. All equity
securities and debt securities not classified as held-to-maturity, are
classified as available-for-sale.
(Continued)
41
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
Available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted
for the amortization of premiums or discounts. Unrealized gains and
losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and reported as accumulated
other comprehensive income, a separate component of stockholders'
equity, until realized.
Premiums and discounts are amortized using the interest method over
the lives of the respective securities, with consideration of
historical and estimated prepayment rates for mortgage-backed
securities, as an adjustment to yield. Dividend and interest income
are recognized when earned. Realized gains and losses for securities
classified as available-for-sale are included in earnings based on the
specific identification method for determining the cost of securities
sold.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary results in a charge to earnings and the establishment of a
new cost basis for the security. To determine whether an impairment is
other-than-temporary, the Company considers whether it has the ability
and intent to hold the investment until a market price recovery and
considers whether evidence indicating the cost of the investment is
recoverable outweighs evidence to the contrary. Evidence considered in
this assessment includes the reasons for the impairment, the severity
and duration of the impairment, changes in value subsequent to
year-end, and forecasted performance of the investee.
The Banks, as members of the Federal Home Loan Bank System
administered by the Federal Housing Finance Board, are required to
maintain an investment in the capital stock of the Federal Home Loan
Bank of Des Moines (FHLB) in an amount equal to 0.12% of each bank's
total assets plus 4.45% of advances from the FHLB to each bank.
Additionally, The Exchange National Bank of Jefferson City is required
to maintain an investment in the capital stock of the Federal Reserve
Bank. These investments are recorded at cost, which represents
redemption value.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation applicable to buildings and improvements
and furniture and equipment is charged to expense using straight-line
and accelerated methods over the estimated useful lives of the assets.
Such lives are estimated to be 5 to 55 years for buildings and
improvements and 3 to 15 years for furniture and equipment.
Maintenance and repairs are charged to expense as incurred.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of costs over fair value of net assets
of businesses acquired. Goodwill and intangible assets acquired in a
purchase business combination and determined to have an indefinite
useful life are not amortized, but instead are tested for impairment
at least annually. Intangible assets with estimable useful lives are
also amortized over their respective estimated useful lives. and
reviewed for impairment in accordance with SFAS No. 144, Accounting
for Impairment or Disposal of Long-Lived Assets.
(Continued)
42
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
The Company performs an annual review of intangible assets for
impairment to determine whether the carrying value of underlying
assets may not be recoverable. The Company measures recoverability
based upon the future cash flows expected to result from the use of
the underlying asset and its eventual disposition. If the sum of the
expected future cash flows (undiscounted and without interest charges)
is less than the carrying value of the underlying asset, the Company
recognizes an impairment loss. The impairment loss recognized
represents the amount by which the carrying value of the underlying
asset exceeds the fair value of the underlying asset. As such
adjustments become necessary, they are reflected in the results of
operations in the periods in which they become known.
The core deposit intangibles established in the acquisitions of USB
and the Springfield branch discussed in Note 2 is being amortized over
ten-year and seven-year periods, respectively, on a straight-line
method of amortization. The core deposit intangible established in the
acquisition of Bank 10 is being amortized over an eight-period on an
accelerated method of amortization. Other intangible assets are
amortized over periods up to six years.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, such as property, plant, and equipment, and
purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to estimated undiscounted future cash
flows expected to be generated by the asset. If the carrying amount of
an asset exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of would be
separately presented in the balance sheet and reported at the lower of
the carrying amount or fair value less costs to sell, and are no
longer depreciated. The assets and liabilities of a disposed group
classified as held for sale would be presented separately in the
appropriate asset and liability sections of the balance sheet.
Goodwill and intangible assets not subject to amortization are tested
annually for impairment, and are tested for impairment more frequently
if events and circumstances indicate that the asset might be impaired.
An impairment loss is recognized to the extent that the carrying
amount exceeds the asset's fair value.
OTHER REAL ESTATE
Other real estate, included in other assets in the accompanying
consolidated balance sheets, is recorded at fair value, less estimated
selling costs. If the fair value of other real estate declines
subsequent to foreclosure, the difference is recorded as a valuation
allowance through a charge to expense. Subsequent increases in fair
value are recorded through a reversal of the valuation allowance.
Expenses incurred in maintaining the properties are charged to
expense.
(Continued)
43
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
TRUST DEPARTMENT
Property held by the Banks in fiduciary or agency capacities for
customers is not included in the accompanying consolidated balance
sheets, since such items are not assets of the Company. Trust
department income is recognized on the accrual basis.
EARNINGS PER SHARE
Earnings per share was computed as follows:
2005 2004 2003
---------- --------- ---------
Net income, basic and diluted $9,915,278 8,304,980 9,043,914
Average shares outstanding 4,169,847 4,169,847 4,169,432
Effect of dilutive stock options 29,012 34,905 39,840
---------- --------- ---------
Average shares outstanding including
dilutive stock options 4,198,859 4,204,752 4,209,272
========== ========= =========
Net income per share, basic $ 2.38 1.99 2.17
Net income per share, diluted 2.36 1.98 2.15
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the purpose of the consolidated statements of cash flows, cash and
cash equivalents consist of federal funds sold, cash, and due from
banks.
STOCK OPTIONS
The Company accounts for it 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, establishes accounting and
disclosure requirements using a fair-value based method of accounting
for stock-based employee compensation plans. As permitted by existing
accounting standards, the Company has elected to continue to apply
(Continued)
44
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
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.
The following table illustrates the effect on net income if the
fair-value-based method had been applied to all outstanding and
unvested awards in each period:
2005 2004 2003
---------- --------- ---------
Net income:
As reported $9,915,278 8,304,980 9,043,914
Deduct total stock-based employee
compensation expense determined
under fair-value based method for
all awards, net of tax (142,799) (136,228) (93,673)
---------- --------- ---------
Pro forma $9,772,479 8,168,752 8,950,241
========== ========= =========
Pro forma earnings per common share:
As reported basic $ 2.38 1.99 2.17
Pro forma basic 2.34 1.96 2.15
As reported diluted 2.36 1.98 2.15
Pro forma diluted 2.33 1.94 2.13
TREASURY STOCK
The purchase of the Company's common stock is recorded at cost. Upon
subsequent reissuance, the treasury stock account is reduced by the
average cost basis of such stock.
COMPREHENSIVE INCOME
The Company reports comprehensive income in the consolidated
statements of stockholders' equity and comprehensive income (loss).
SEGMENT INFORMATION
The Company has defined its business segments to be the Banks, which
is consistent with the management structure of the Company and the
internal reporting system that monitors performance.
RECENTLY ISSUED ACCOUNTING STANDARDS
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 or 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
(Continued)
45
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
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. No loans acquired in the
acquisition of Bank 10 were within the scope of SOP 03-3 and,
accordingly, SOP 03-3 did not have an effect on the Company's
financial statements.
In March 2004, the Emerging Issues Task Force, (EITF) came to a
consensus regarding EITF 03-1. Securities in scope are those subject
to SFAS 115. 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 December 2004, the FASB issued SFAS 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 interim
or annual reporting period that begins after January 1, 2006. It is
anticipated that the application of the requirements of this statement
to the Company's existing share-based transactions will result in the
recognition of additional compensation expense of approximately
$110,000, after taxes, or approximately 2.6 cents per share.
In March 2005, the FASB issued FASB Interpretation No. 47 (Fin 47),
Accounting for Conditional Asset Retirement Obligations, which
requires conditional asset retirement obligations to be recognized if
a legal obligation exists to perform asset retirement activities and a
reasonable estimate of the fair value of the obligation can be made.
FIN 47 also provides guidance as to when an entity would have
sufficient information to reasonably estimate the fair value of an
asset retirement obligation. The Company adopted the provisions of FIN
47 on December 31, 2005. No conditional
(Continued)
46
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
asset retirement obligations were recognized, and accordingly, the
adoption of FIN 47 had no effect on the Company's financial
statements.
In May 2005, the FASB issued FASB Statement No. 154, Accounting
Changes and Error Corrections. FASB Statement No. 154 establishes,
unless impracticable, retrospective application as the required method
for reporting a change in accounting principle in the absence of
explicit transition requirements specific to a newly adopted
accounting principle. This statement will be effective for the Company
for all accounting changes and any error corrections occurring after
January 1, 2006.
RECLASSIFICATIONS
Certain prior year information has been reclassified to conform to the
current year presentation.
(2) ACQUISITIONS
On June 26, 2003, the Company acquired Trustcorp Financial, Inc.'s branch
of Missouri State Bank in Springfield, Missouri. Immediately upon
acquisition, the branch was merged with and is operated as a branch of
Citizens Union State Bank and Trust. The Company received approximately
$27,615,000 in loans and $30,736,000 in deposits, as well as the real
estate and tangible assets of the branch. Total cost of the transaction was
approximately $4,000,000 and was financed with cash on hand. The
transaction generated approximately $1,789,000 of goodwill, and $465,000 of
core deposit intangibles which are being amortized on a straight-line basis
over seven years. The results of operations of the acquired branch are
included with the Company's from June 26, 2003 forward.
On May 2, 2005 the 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.
The purchase price paid to Drexel Bancshares, Inc. for Bank 10 was cash
amounting to $34,020,000. Of that amount, $23,000,000 was provided from the
issuance of subordinated notes with the balance being paid from cash and
liquid assets on hand.
(Continued)
47
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition of Bank 10.
Cash and cash equivalents $ 12,219,465
Loans, net 130,522,517
Investments in available for sale debt
and equity securities 26,080,340
Premises and equipment 7,119,297
Core deposit intangible 4,795,224
Goodwill 15,127,039
Other assets 2,773,923
------------
Total assets acquired 198,637,805
Deposits 149,610,685
Securities sold under agreements
to repurchase 1,005,923
Other borrwed money 13,280,060
Other liabilities 721,133
------------
Total liabilities acquired 164,617,801
------------
Net assets acquired $ 34,020,004
============
The core deposit intangible has been assigned an 8 year useful life. The
goodwill is expected to be deductible for income tax purposes.
(Continued)
48
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
A summary of unaudited pro forma combined financial information for the years
ended December 31, 2005 and 2004 for the Company and Bank 10 as if the
transaction had occurred on January 1, 2004 follows:
DECEMBER 31,
-------------------------
2005 2004
----------- -----------
Net interest income $35,399,301 $33,537,965
Net income 10,109,876 9,212,975
Basic earnings per share $ 2.42 $ 2.21
Diluted earnings per share $ 2.41 $ 2.19
(3) CAPITAL REQUIREMENTS
The Company and the Banks are subject to various regulatory capital
requirements administered by federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Company's
consolidated financial statements. Under capital adequacy guidelines, the
Company and the Banks must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital
amounts and classification of the Company and the Banks are subject to
qualitative judgments by the regulators about components, risk-weightings,
and other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and ratios
(set forth in the following table) of total and Tier I capital to
risk-weighted assets, and of Tier I capital to adjusted-average assets.
Management believes, as of December 31, 2005 and 2004, the Company and the
Banks meet all capital adequacy requirements to which they are subject.
As of December 31, 2005, the most recent notification from the regulatory
authorities categorized the banks as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are
no conditions or events since the notifications that management believes
have changed the Banks' categories.
(Continued)
49
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
The actual and required capital amounts and ratios for the Company and the
Banks as of December 31, 2005 and 2004 are as follows (dollars in
thousands):
2005
-----------------------------------------------------------------
TO BE WELL CAPITALIZED
UNDER PROMPT CORRECTIVE
ACTUAL CAPITAL REQUIREMENTS ACTION PROVISION
---------------- -------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- --------- -------- ---------- ----------
Total capital (to risk-weighted
assets):
Company $109,838 12.70% 86,337 8.00% -- --
The Exchange National
Bank of Jefferson City 50,643 12.88 38,882 8.00 48,602 10.00%
Citizens Union State
Bank and Trust of Clinton 28,127 10.73 24,842 8.00 31,053 10.00
Osage Valley Bank 6,573 11.43 7,634 8.00 9,543 10.00
Bank 10 of Belton 16,458 10.85 14,810 8.00 18,512 10.00
Tier I capital (to risk-weighted
assets):
Company 85,016 9.83 43,168 4.00 -- --
The Exchange National
Bank of Jefferson City 45,726 11.63 19,441 4.00 29,161 6.00
Citizens Union State
Bank and Trust of Clinton 25,738 9.82 12,421 4.00 18,632 6.00
Osage Valley Bank 6,024 10.48 3,817 4.00 5,726 6.00
Bank 10 of Belton 15,247 10.05 7,405 4.00 11,107 6.00
Tier I capital (to adjusted average
assets):
Company 85,016 7.88 25,946 3.00 -- --
The Exchange National Bank
of Jefferson City 45,726 9.41 11,800 3.00 19,666 5.00
Citizens Union State Bank
and Trust of Clinton 25,738 8.29 7,867 3.00 13,111 5.00
Osage Valley Bank 6,024 6.31 1,725 3.00 2,875 5.00
Bank 10 of Belton 15,247 8.24 4,550 3.00 7,583 5.00
(Continued)
50
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
2004
----------------------------------------------------------------
TO BE WELL CAPITALIZED
UNDER PROMPT CORRECTIVE
ACTUAL CAPITAL REQUIREMENTS ACTION PROVISION
--------------- -------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------ ----- ------ -----
Total capital (to risk-weighted assets):
Company $98,465 14.58% 54,044 8.00% -- --
The Exchange National
Bank of Jefferson City 49,780 12.84 31,020 8.00 38,775 10.00%
Citizens Union State
Bank and Trust of Clinton 24,898 10.68 18,651 8.00 23,314 10.00
Osage Valley Bank 6,268 11.47 4,375 8.00 5,465 10.00
Tier I capital (to risk-weighted assets):
Company 90,969 13.47 27,022 4.00 -- --
The Exchange National
Bank of Jefferson City 45,215 11.66 15,510 4.00 23,265 6.00
Citizens Union State
Bank and Trust of Clinton 22,474 9.64 9,326 4.00 13,989 6.00
Osage Valley Bank 5,761 10.54 2,186 4.00 3,279 6.00
Tier I capital (to adjusted average assets):
Company 90,969 10.39 26,279 3.00 -- --
The Exchange National Bank
of Jefferson City 45,215 8.98 15,106 3.00 25,177 5.00
Citizens Union State Bank
and Trust of Clinton 22,474 8.19 8,235 3.00 13,724 5.00
Osage Valley Bank 5,761 6.28 2,754 3.00 4,590 5.00
Bank dividends are the principal source of funds for payment of dividends
by the Company to its stockholders. The Banks are subject to regulations
which require the maintenance of minimum capital requirements. At December
31, 2005, unappropriated retained earnings of approximately $13,367,000
were available for the declaration of dividends to the Company without
prior approval from regulatory authorities.
(Continued)
51
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
(4) LOANS
A summary of loans, by classification, at December 31, 2005 and 2004 is as
follows:
2005 2004
------------ -----------
Commercial $154,868,139 141,151,314
Real estate - construction 139,315,924 65,075,185
Real estate - mortgage 480,530,518 392,655,580
Installment and other consumer 39,276,070 37,985,508
Unamortized loan origination fees and costs, net (455,775) (230,957)
------------ -----------
813,534,876 636,636,630
Less allowance for loan losses 9,084,774 7,495,594
------------ -----------
$804,450,102 629,141,036
============ ===========
The Banks grant real estate, commercial, installment, and other consumer
loans to customers located within the communities surrounding Jefferson
City, Clinton, Warsaw and Belton, Missouri. As such, the Banks are
susceptible to changes in the economic environment in these communities.
The Banks do not have a concentration of credit in any one economic sector.
Installment and other consumer loans consist primarily of the financing of
vehicles.
Following is a summary of activity in 2005 of loans made by the Banks to
executive officers and directors or to entities in which such individuals
had a beneficial interest. Such loans were made in the normal course of
business on substantially the same terms, including interest rates and
collateral requirements, as those prevailing at the same time for
comparable transactions with other persons, and did not involve more than
the normal risk of collectibility or present unfavorable features.
Balance at December 31, 2004 $14,618,119
New loans 2,905,186
Transfers of officers to executive category 1,194,559
Payments received (2,808,009)
-----------
Balance at December 31, 2005 $15,909,855
===========
(Continued)
52
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
Changes in the allowance for loan losses for 2005, 2004 and 2003 are as
follows:
2005 2004 2003
----------- ---------- ---------
Balance, beginning of year $ 7,495,594 8,267,380 7,121,114
Allowance for loan losses of acquired:
Subsidiary at date of acquisition 1,418,084 -- --
Branch at date of acquisition -- -- 212,000
Provision for loan losses 1,321,612 942,000 1,092,000
Charge-offs (1,321,154) (1,858,989) (484,131)
Recoveries of loans previously charged off 170,638 145,203 326,397
----------- ---------- ---------
Balance, end of year $ 9,084,774 7,495,594 8,267,380
=========== ========== =========
A summary of nonaccrual and other impaired loans at December 31, 2005 and
2004 is as follows:
2005 2004
----------- ----------
Nonaccrual loans $ 8,611,431 5,489,246
Impaired loans continuing to accrue interest 2,369,472 4,757,180
----------- ----------
Total impaired loans $10,980,903 10,246,426
=========== ==========
Allowance for loan losses on impaired loans $ 2,391,814 2,907,142
Impaired loans with no specific allowance for loan losses 1,217,130 --
Loans past due 90 days or more continuing to accrue interest $ 439,681 602,325
The average balance of impaired loans during 2005, 2004, and 2003 was
$9,367,000, $7,263,000, and $2,814,000, respectively. Impaired loans
continuing to accrue interest, allowance for loan losses on impaired loans,
and impaired loans with no specific allowance for loan losses at December
31, 2004 have been revised and reported in accordance with FASB Statement
No. 114, Accounting by Creditors for Impairment of a Loan.
(Continued)
53
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
A summary of interest income on nonaccrual and other impaired loans for
2005, 2004, and 2003 is as follows:
IMPAIRED
LOANS
NONACCRUAL CONTINUING TO
LOANS ACCRUE INTEREST TOTAL
---------- --------------- -------
2005:
Income recognized $252,901 136,467 389,368
Interest income had interest accrued 766,693 136,467 903,160
2004:
Income recognized 134,208 1,034 135,242
Interest income had interest accrued 546,850 1,034 547,884
2003:
Income recognized 55,989 3,300 59,289
Interest income had interest accrued 226,797 3,300 230,097
(Continued)
54
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
(5) INVESTMENT IN DEBT AND EQUITY SECURITIES
The amortized cost and fair value of debt and equity securities classified
as available-for-sale at December 31, 2005 and 2004 are as follows:
2005
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ---------- ---------- ------------
U.S. government agencies $114,540,016 5,052 1,539,953 113,005,115
Asset-backed securities 6,346,814 4,427 101,034 6,250,207
Obligations of states and political
subdivisions 53,430,317 434,331 439,019 53,425,629
Other debt securities 2,197,283 -- 3,133 2,194,150
------------ ------- --------- ------------
Total debt securities 176,514,430 443,810 2,083,139 174,875,101
Federal Home Loan Bank of
Des Moines stock 3,904,325 -- -- 3,904,325
Federal Reserve Bank stock 751,650 -- -- 751,650
Midwest Independent Bank stock 150,625 -- -- 150,625
Federal Agricultural Mortgage
Corporation stock 10,125 -- -- 10,125
------------ ------- --------- ------------
$181,331,155 443,810 2,083,139 179,691,826
============ ======= ========= ============
2004
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ---------- ---------- -----------
U.S. government agencies $128,678,648 196,542 494,627 128,380,563
Asset-backed securities 4,477,899 33,944 42,059 4,469,784
Obligations of states and political
subdivisions 32,409,614 968,969 57,530 33,321,053
Other debt securities 1,763,388 932 735 1,763,585
------------ --------- ------- -----------
Total debt securities 167,329,549 1,200,387 594,951 167,934,985
Federal Home Loan Bank of
Des Moines stock 3,021,325 -- -- 3,021,325
Federal Reserve Bank stock 751,200 -- -- 751,200
Federal Agricultural Mortgage
Corporation stock 10,125 -- -- 10,125
------------ --------- ------- -----------
$171,112,199 1,200,387 594,951 171,717,635
============ ========= ======= ===========
(Continued)
55
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
The amortized cost and fair value of debt securities classified as
available-for-sale at December 31, 2005, by contractual maturity are shown
below. Expected maturities may differ from contractual maturities because
borrowers have the right to call or prepay obligations with or without
prepayment penalties.
AMORTIZED FAIR
COST VALUE
------------ -----------
Due in one year or less $ 45,348,577 45,107,534
Due after one year through five years 81,201,623 80,080,769
Due after five years through ten years 30,126,242 29,994,021
Due after ten years 13,491,174 13,442,570
------------ -----------
170,167,616 168,624,894
Asset-backed securities 6,346,814 6,250,207
------------ -----------
$176,514,430 174,875,101
============ ===========
Debt securities with carrying values aggregating approximately $109,790,000
and $114,813,000 at December 31, 2005 and 2004, respectively, were pledged
to secure public funds, securities sold under agreements to repurchase, and
for other purposes as required or permitted by law.
Proceeds of $3,200,000 and gross losses of $25,416 were recorded on the
sales of debt securities in 2005. Proceeds of $10,304,000 and gross losses
of $7,612 were recorded on the sales of debt securities in 2004. Proceeds
of $9,929,000 and gross gains of $37,689 were recorded on the sales of debt
securities in 2003.
Gross unrealized losses on investment securities and the fair value of the
related securities, aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss
position, at December 31, 2005, were as follows:
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
------------------------- ----------------------- NUMBER OF ------------------------
FAIR UNREALIZED FAIR UNREALIZED INVESTMENT FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES POSITIONS VALUE LOSSES
------------ ---------- ---------- ---------- ---------- ----------- ----------
U.S. government agencies $ 68,488,260 (898,092) 40,010,104 (641,861) 118 108,498,364 (1,539,953)
Asset-backed securities 4,331,281 (40,989) 1,517,597 (60,045) 21 5,848,878 (101,034)
Obligations of states and
political subdivisons 29,324,864 (305,809) 5,455,065 (133,210) 143 34,779,929 (439,019)
Corporate notes -- -- 708,150 (3,133) 3 708,150 (3,133)
------------ ---------- ---------- -------- --- ----------- ----------
$102,144,405 (1,244,890) 47,690,916 (838,249) 285 149,835,321 (2,083,139)
============ ========== ========== ======== === =========== ==========
U.S. government agencies: The unrealized losses on investments in U.S.
government agencies were caused by interest rate increases. The contractual
terms of these investments do not permit the issuer to settle the
securities at a price less than the amortized cost of the investment.
Because the Company has the ability and intent to hold these investments
until a market price recovery or maturity, these investments are not
considered other-than-temporarily impaired.
(Continued)
56
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
Asset-backed securities: The unrealized losses on asset-backed securities
were caused by interest rate increases. The contractual cash flows of these
securities are guaranteed by various government or government sponsored
agencies. It is expected that the securities would not be settled at a
price less than the amortized cost of the investment. Because the decline
in fair value is attributable to changes in interest rates and not credit
quality, and because the Company has the ability and intent to hold these
investments until a market price recovery or maturity, these investments
are not considered other-than-temporarily impaired.
Obligations of states and political subdivisions: The unrealized losses on
investments in obligations of states and political subdivisions were caused
by interest rate increases. The contractual terms of these investments do
not permit the issuer to settle the securities at a price less than the
amortized cost of the investment. Because the Company has the ability and
intent to hold these investments until a market price recovery or maturity,
these investments are not considered other-than-temporarily impaired.
(6) PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 2005 and 2004 is as
follows:
2005 2004
----------- ----------
Land $ 9,727,590 7,521,375
Buildings and improvements 23,731,572 13,125,820
Furniture and equipment 11,080,564 9,303,780
Construction in progress 305,885 1,686,678
----------- ----------
44,845,611 31,637,653
Less accumulated depreciation 11,954,703 10,361,266
----------- ----------
$32,890,908 21,276,387
=========== ==========
(7) GOODWILL AND OTHER INTANGIBLE ASSETS
A summary of goodwill and other intangible assets at December 31, 2005 and
2004 is as follows:
2005 2004
----------- ----------
Goodwill $40,323,775 25,196,736
Core deposit intangible 4,786,460 798,132
----------- ----------
$45,110,235 25,994,868
=========== ==========
(Continued)
57
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
The gross carrying amount and accumulated amortization of the Company's
amortized intangible assets for the years ended December 31, 2005 and 2004
are as follows:
DECEMBER 31, 2005 DECEMBER 31, 2004
------------------------- ------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
---------- ------------ --------- ------------
Amortized intangible assets:
Core deposit intangible $7,060,224 (2,273,764) 2,265,000 (1,466,868)
---------- ---------- --------- ----------
$7,060,224 (2,273,764) 2,265,000 (1,466,868)
========== ========== ========= ==========
The aggregate amortization expense of intangible assets subject to
amortization for the past three years is as follows:
YEAR ENDED
DECEMBER 31,
----------------------------
2005 2004 2003
-------- ------- -------
Aggregate amortization expense $806,896 215,112 306,896
The estimated amortization expense for the next five years is as follows:
For the year ending:
- --------------------
2006 $1,032,583
2007 922,337
2008 701,443
2009 626,111
2010 526,477
(Continued)
58
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
The Company's goodwill associated with the purchase of subsidiaries by
reporting segments at December 31, 2005, 2004, and 2003 is summarized as
follows:
THE EXCHANGE CITIZENS UNION
NATIONAL BANK STATE BANK AND OSAGE
OF JEFFERSON TRUST OF VALLEY BANK BANK 10
CITY CLINTON OF WARSAW OF BELTON TOTAL
------------- -------------- ----------- ---------- ----------
2005 $4,382,098 16,701,762 4,112,876 15,127,039 40,323,775
2004 4,382,098 16,701,762 4,112,876 -- 25,196,736
2003 4,382,098 16,701,762 4,112,876 -- 25,196,736
(8) MORTGAGE SERVICING RIGHTS
Mortgage loans serviced for others totaled approximately $220,127,000 and
$214,516,000 at December 31, 2005 and 2004, respectively. Mortgage
servicing rights totaled approximately $1,536,000 and $1,606,000 at
December 31, 2005 and 2004, respectively.
Changes in the balance of servicing assets related to the loans serviced by
The Exchange National Bank of Jefferson City for the years ended December
31, 2005 and 2004 are as follows:
Balance at December 31, 2003 $1,591,289
Additions 451,850
Amortization (437,209)
----------
Balance at December 31, 2004 1,605,930
Additions 386,203
Amortization (455,802)
----------
Balance at December 31, 2005 $1,536,331
==========
The Company's mortgage servicing rights are amortized in proportion to the
related estimated net servicing income on a straight line basis over the
estimated lives of the related mortgages which is seven years. The
estimated amortization expense for the next five years is as follows:
For the year ended:
2006 $437,000
2007 370,000
2008 315,000
2009 235,000
2010 157,000
(Continued)
59
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
(9) DEPOSITS
The scheduled maturities of time deposits are as follows (in thousands):
2005 2004
-------- -------
Due within:
One year $275,517 214,451
Two years 92,945 59,037
Three years 26,017 36,551
Four years 9,739 16,169
Five years 18,217 16,095
Thereafter 832 324
-------- -------
$423,267 342,627
======== =======
(10) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information relating to securities sold under agreements to repurchase is
as follows:
2005 2004 2003
----------- ---------- ----------
Average daily balance $45,832,211 57,950,027 67,597,201
Maximum balance at month-end 63,482,233 85,162,798 72,920,590
Year end balance 33,292,735 34,515,323 66,774,423
Weighted average interest rate at year-end 3.30% 1.73% 0.87%
Weighted average interest rate for the year 2.70% 1.15% 0.95%
The securities underlying the agreements to repurchase are under the
control of the Banks.
Unused agreements with unaffiliated banks to sell and repurchase securities
on which The Exchange National Bank of Jefferson City may draw totaled
$10,000,000 at December 31, 2005. Additionally, under agreements with
unaffiliated banks, The Banks may borrow up to $45,000,000 in federal funds
on an unsecured basis at December 31, 2005.
(11) SUBORDINATED NOTES
On March 17, 2005, Exchange Statutory Trust II, a newly formed business
trust and subsidiary of the Company issued $23,000,000 of 30-year floating
rate Trust Preferred Securities (TPS) to a Trust Preferred Securities Pool.
The interest rate on the TPS is a fixed rate at 6.30% for five years then
converting to a floating rate. The floating rate will be based on a
specific margin above three-month LIBOR. The TPS can be prepaid without
penalty at any time after five years from the issuance date.
(Continued)
60
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
The TPS represent preferred interests in a special purpose subsidiary trust
organized by the Company. The Company invested approximately $712,000 in
common interests in the trust and the purchaser in the private placement
purchased $23,000,000 in preferred interests. The proceeds were used to
purchase from the Company its 30-year deeply subordinated debentures whose
terms mirror those stated above for the TPS. The debentures are guaranteed
by the Company pursuant to a subordinated guarantee. Distributions on the
TPS are payable quarterly on March 17, June 17, September 17, and December
17 of each year that the TPS are outstanding. The trustee for the TPS
holders is U.S. Bank, N.A. The trustee does not have the power to take
enforcement action in the event of a default under the TPS for five years
from the date of default. In the event of default, however, the Company
would be precluded from paying dividends until the default is cured.
The proceeds of the private placement TPS were used by the Company to
facilitate the Bank 10 acquisition as described in Note 2.
On March 17, 2004, Exchange Statutory Trust I, a newly formed Delaware
business trust and subsidiary of the Company issued $25,000,000 of floating
TPS to a Trust Preferred Securities Pool. The floating rate is equal to the
three-month LIBOR rate plus 2.70% and reprices quarterly. The TPS are
fully, irrevocably, and unconditionally guaranteed on a subordinated basis
by the Company. The proceeds of the TPS were invested in junior
subordinated debentures of the Company. The net proceeds to the Company
from the sale of the junior subordinated debentures, after deducting
underwriting commissions and estimated offering expenses, were
approximately $25,000,000. Distributions on the TPS are payable quarterly
on March 17, June 17, September 17, and December 17 of each year that the
TPS are outstanding. The TPS mature on March 17, 2034. That maturity date
may be shortened to a date not earlier than March 17, 2009 if certain
conditions are met. A portion of the proceeds from the offering were used
to repay $11,000,000 of previously outstanding indebtedness with the
remaining available for cash operating reserves at the holding company
level.
The Exchange Statutory Trusts are not consolidated in the Company's
financial statements. Accordingly, the Company does not report the
securities issued by the Exchange Statutory Trusts as liabilities, and
instead reports the subordinated notes issued by the Company and held by
the Exchange Statutory Trusts as liabilities. The amount of the
subordinated notes as of December 31, 2005 and 2004 were $49,486,000 and
$25,774,000, respectively. The Company recorded the investments in the
common securities issued by the Exchange Statutory Trusts and corresponding
obligations of the subordinated notes, as well as interest income and
interest expense on the investments and obligations.
(Continued)
61
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
(12) OTHER BORROWED MONEY
Other borrowed money at December 31, 2005 and 2004 is summarized as
follows:
2005 2004
----------- ----------
The Exchange National Bank of Jefferson City:
Federal Home Loan Bank of Des Moines advances,
weighted average rates of 4.54% and 4.19% at
December 31, 2005 and 2004, respectively,
due at various dates through 2010 $25,000,000 30,000,000
Citizens Union State Bank and Trust of Clinton:
Federal Home Loan Bank of Des Moines advances,
weighted average rates of 5.40% and 5.40% at
at December 31, 2005 and 2004, respectively,
due at various dates through 2008 3,100,000 3,100,000
Osage Valley Bank of Warsaw:
Federal Home Loan Bank of Des Moines advances, weighted average rates of
3.66% and 3.70% at December 31, 2005 and 2004, respectively,
due at various dates through 2013 5,332,388 6,424,747
Bank 10 of Belton:
Federal Home Loan Bank of Des Moines advances, weighted average rates of
4.04% at December 31, 2005,
due at various dates through 2009 18,747,273 --
----------- ----------
$52,179,661 39,524,747
=========== ==========
The US Bank line of credit was renewed in January 2006 and is now due
December 2006. There was no outstanding balance on the line of credit at
December 31, 2005.
The advances from the Federal Home Loan Bank of Des Moines are secured
under a blanket agreement which assigns all investment in Federal Home Loan
Bank of Des Moines stock, as well as mortgage loans equal to 119% of the
outstanding advance balance, to secure amounts borrowed at The Exchange
National Bank of Jefferson City and Osage Valley Bank of Warsaw, 134% at
Citizens Union State Bank and Trust of Clinton, and 158% at Bank 10 of
Belton. The Exchange National Bank of Jefferson City has $5,000,000 and
$10,000,000 of FHLB advances callable on March 3, 2006 and February 27,
2006, respectively. Citizens Union State Bank and Trust of Clinton has
$3,000,000 callable on January 23, 2006.
Based upon the collateral pledged to the Federal Home Loan Bank of Des
Moines at December 31, 2005, the Banks' had combined credit lines of
$124,686,000, of which $72,506,000 was available for additional borrowings.
(Continued)
62
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
The scheduled principal reduction of other borrowed money at December 31,
2005 is as follows:
2006 $42,351,189
2007 2,617,182
2008 1,597,035
2009 2,047,273
2010 683,857
2011 and thereafter 2,883,125
-----------
$52,179,661
===========
(13) RESERVE REQUIREMENTS AND COMPENSATING BALANCES
The Federal Reserve Bank required the Banks to maintain cash or balances of
$5,973,000 and $5,394,000 at December 31, 2005 and 2004, respectively, to
satisfy reserve requirements.
Average compensating balances held at correspondent banks were $3,503,000
and $2,023,000 at December 31, 2005 and 2004, respectively. The Banks
maintain such compensating balances with correspondent banks to offset
charges for services rendered by those banks.
(Continued)
63
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
(14) INCOME TAXES
The composition of income tax expense (benefit) for 2005, 2004, and 2003 is
as follows:
2005 2004 2003
---------- --------- ---------
Current:
Federal $4,326,338 3,449,464 4,717,263
State 142,234 109,688 58,960
---------- --------- ---------
Total current 4,468,572 3,559,152 4,776,223
Deferred (141,872) 247,404 (620,358)
---------- --------- ---------
Total income tax expense $4,326,700 3,806,556 4,155,865
========== ========= =========
Applicable income taxes for financial reporting purposes differ from the
amount computed by applying the statutory Federal income tax rate for the
reasons noted in the table below:
2005 2004 2003
---------- --------- ---------
Tax at statutory Federal income tax
rate $4,884,692 4,139,038 4,519,923
Tax-exempt income (599,641) (450,431) (457,039)
State income tax, net of Federal tax
benefit 92,452 71,297 38,324
Other, net (50,803) 46,652 54,657
---------- --------- ---------
$4,326,700 3,806,556 4,155,865
========== ========= =========
(Continued)
64
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
The components of deferred tax assets and deferred tax liabilities at
December 31, 2005 and 2004 are as follows:
2005 2004
---------- ---------
Deferred tax assets:
Allowance for loan losses $2,683,342 2,623,458
Nonaccrual loan interest 330,283 301,298
Core deposit intangible 68,692 --
Available-for-sale securities 567,160 --
Accrued pension expense 100,030 --
Deferred compensation 83,584 79,716
Other 143,500 205,509
---------- ---------
Total deferred tax assets 3,976,591 3,209,981
---------- ---------
Deferred tax liabilities:
Available-for-sale securities -- 211,902
Premises and equipment 850,260 947,850
Core deposit intangible -- 132,871
Prepaid pension expense -- 33,867
Mortgage servicing rights 121,473 138,689
FHLB stock dividend 92,365 95,653
Intangible assets 401,502 129,395
Other 121,911 51,607
---------- ---------
Total deferred tax liabilities 1,587,511 1,741,834
---------- ---------
Net deferred tax asset $2,389,080 1,468,147
========== =========
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over
the periods in which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits
of these temporary differences at December 31, 2005 and, therefore, has not
established a valuation reserve.
At December 31, 2005, the accumulation of prior years' earnings
representing tax bad debt deductions of The Exchange National Bank of
Jefferson City were $2,931,503. If these tax bad debt reserves were charged
for losses other than bad debt losses, The Exchange National Bank of
Jefferson City would be required to recognize taxable income in the amount
of the charge. It is not contemplated that such tax-restricted retained
earnings will be used in a manner that would create federal income tax
liabilities.
(Continued)
65
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
(15) PENSION AND RETIREMENT PLANS
The Company provides a noncontributory defined benefit pension plan in
which all full-time employees become participants upon the later of the
completion of one year of qualified service or the attainment of age 21,
and in which they continue to participate as long as they continue to be
full-time employees, until their retirement, death, or termination of
employment prior to normal retirement date. The normal retirement benefits
provided under the plan vary depending upon the participant's rate of
compensation, length of employment, and social security benefits.
Retirement benefits are payable for life, but not less than ten years. Plan
assets consist of U.S. Treasury and government agency securities, corporate
common stocks and bonds, real estate mortgages, and demand deposits.
The measurement date used to determine pension benefit measures for the
pension plan is November 1.
Pension expense for the plan for 2005, 2004, and 2003 is as follows:
2005 2004 2003
--------- -------- --------
Service cost--benefits earned
during the year $ 471,319 292,059 257,103
Interest costs on projected
benefit obligations 276,245 242,384 231,253
Expected return on plan assets (368,873) (374,586) (373,976)
Net amortization and deferral (26,632) (35,512) (35,512)
Amortization of prior service cost 39,315
Amortization of net gains -- (6,695) (29,916)
--------- -------- --------
Pension expense $ 391,374 117,650 48,952
========= ======== ========
A summary of the activity in the Plan's benefit obligation, assets, funded
status, and amounts recognized in the Company's consolidated balance sheets
at December 31, 2005, 2004, and 2003 are as follows:
2005 2004 2003
---------- --------- ---------
Benefit obligation:
Balance, January 1 $4,785,746 4,526,595 4,052,111
Service cost 471,319 292,059 257,103
Interest cost 276,245 242,384 231,253
Plan amendments * 1,203,000 -- --
Actuarial (gain) loss (301,104) (36,053) 217,913
Benefits paid (250,883) (239,239) (231,785)
---------- --------- ---------
Balance, December 31 $6,184,323 4,785,746 4,526,595
========== ========= =========
* Plan amendments consist of adding affiliated banks who adopted the Plan
effective July 1, 2005.
(Continued)
66
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
2005 2004 2003
---------- --------- ---------
Plan assets:
Fair value, January 1 $5,284,974 5,079,194 4,482,116
Actual return 550,347 445,019 828,863
Benefits paid (250,883) (239,239) (231,785)
---------- --------- ---------
Fair value, December 31 $5,584,438 5,284,974 5,079,194
========== ========= =========
Funded status:
Plan assets, in excess (less than)
benefit obligation $ (599,885) 499,228 552,599
Unamortized prior service cost * 1,163,685 -- --
Unrecognized net gains (849,600) (393,654) (329,375)
---------- --------- ---------
Prepaid pension (accrued) cost
included in other assets (liabilities) $ (285,800) 105,574 223,224
========== ========= =========
* Prior service cost in the amount of $1,203,000 is being amortized over 15.3
years.
Weighted average rates utilized to determine benefit obligations for the Plan
years ended December 31, 2005, 2004, and 2003 are as follows:
2005 2004 2003
---- ---- ----
Discount rate 5.25% 5.25% 5.50%
Annual rate of compensation increase 5.00% 6.00% 6.00%
Weighted average rates utilized to determine net cost for Plan years ended
December 31, 2005, 2004, and 2003 are as follows:
2005 2004 2003
---- ---- ----
Discount rate for the service cost 5.25% 5.50% 5.88%
Annual rate of assumed compensation increase 6.00% 6.00% 6.00%
Expected long-term rate of return
on plan assets 7.00% 7.00% 7.00%
The Company's overall expected long-term rate of return on assets is 7.00
percent. The expected long-term rate of return is based on the portfolio as a
whole and not on the sum of the returns on individual asset categories. The
return is based exclusively on historical returns, without adjustments.
(Continued)
67
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
The weighted-average asset allocation of the plan's assets at December 31,
2005, 2004, and 2003 were as follows:
PENSION PLAN ASSETS
AT DECEMBER 31
------------------------
2005 2004 2003
------ ------ ------
Asset category:
Equity scecurties 83.49% 81.35% 75.62%
Debt securities 12.90% 17.16% 19.82%
Other 3.61% 1.49% 4.56%
------ ------ ------
Total 100.00% 100.00% 100.00%
====== ====== ======
The Company's investment goals are to invest the assets in a manner that
they benefit both the current beneficiaries and the future beneficiaries on
the pension plan, while minimizing the risk to the overall portfolio. The
Company addresses these issues by diversifying the assets through
investments in domestic and international fixed income securities and
domestic and international equity securities. These assets are readily
marketable and can be sold to fund benefit payment obligations as they
become payable.
The Company does not expect to make a contribution to the pension plan in
2006.
The benefits expected to be paid in the years 2006 to 2010 are $260,000,
$257,000, $260,000, $250,000, and $278,000, respectively. The aggregate
benefits to be paid in the five years from 2011 to 2015 are $1,658,000. The
expected benefits are based on the same assumptions used to measure the
Company's benefit obligations at November 1, 2005 and include future
employee service.
In addition to the pension plan described above, the Company provides a
profit-sharing plan which covers all full-time employees. Prior to 2004,
The Exchange National Bank of Jefferson City was the only participant in
the plan. Beginning with 2004, Citizens Union State Bank and Trust of
Clinton and Osage Valley Bank of Warsaw discontinued their individual
profit-sharing plans and became participants in the consolidated
profit-sharing plan. In 2006, Bank 10 of Belton will become a participant
in the consolidated profit sharing plan. The Company makes annual
contributions in an amount equal to 6% of income before income taxes and
before contributions to the profit-sharing and pension plans for all
participants, limited to the maximum amount deductible for Federal income
tax purposes. Contributions to the profit-sharing plan for 2005, 2004, and
2003 were $864,096, $787,274, and $590,135, respectively.
Prior to joining the Company's consolidated profit-sharing plan in 2004,
Citizens Union State Bank and Trust of Clinton had a profit-sharing plan
which covered all full-time employees. Eligible employees could defer up to
8% of the participant's salary each year. Citizens Union State Bank and
Trust of Clinton matched 1/3 of each employee's deferral. In addition, a
discretionary contribution could be made each year by Citizens Union State
Bank and Trust of Clinton. Contributions to the profit-sharing plan for
2003 were $126,365.
(Continued)
68
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
Prior to joining the Company's consolidated profit-sharing plan in 2004,
Osage Valley Bank of Warsaw had a profit-sharing plan and a 401k employer
match plan covering all full-time employees. Osage Valley Bank of Warsaw
made a contribution to the profit-sharing plan using a graduated
contribution scale that was based on the bank's return on assets. Under the
401k plan, Osage Valley Bank of Warsaw matched 1/2 of each employee's first
6% of salary deferral. Contributions to the profit sharing and 401k plans
for 2003 were $43,715.
In 2005, Bank 10 of Belton had a 401k employer match plan covering all
eligible employees. Contributions to the 401k plan for 2005 were $98,490.
(16) STOCK OPTION PLANS
On December 4, 2000, the Incentive Stock Option Committee of the board of
directors (the Committee) approved the Company's stock plan, which provides
for the grant of options to purchase up to 450,000 shares of the Company's
common stock to officers and other key employees of the Company and its
subsidiaries. Terms and conditions (including price, exercise date, and
number of shares) are determined by the Committee. All options were granted
at fair value and vest over periods ranging from four to five years, except
for 4,821 options issued in 2002 that vested immediately.
The following table summarizes the Company's stock option activity:
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
DECEMBER 31 DECEMBER 31
--------------------------- ----------------------
2005 2004 2003 2005 2004 2003
------- ------- ------- ------ ----- -----
Outstanding, beginning of year 125,391 98,891 76,654 $23.44 20.27 17.53
Granted 36,165 26,500 30,493 28.45 35.25 26.57
Exercised -- -- (1,513) -- -- 18.67
Canceled -- -- (6,743) -- -- 17.91
------- ------- -------
Outstanding, end of year 161,556 125,391 98,891 24.56 23.44 20.27
======= ======= =======
Exercisable, end of year 77,361 57,970 34,658 19.92 18.10 16.89
The weighted average remaining contractual life of options outstanding at
December 31, 2005 was approximately seven years.
(Continued)
69
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
The Company applies APB Opinion No. 25 in accounting for the stock options
and, accordingly, no compensation cost has been recognized in the
consolidated financial statements. The weighted average grant-date fair
values of stock options granted during the following years and the weighted
average significant assumptions used to determine those fair values, using
the Black-Scholes option-pricing model, are as follows:
2005 2004 2003
----- ---- ----
Options issued during:
Grant date fair value per share $6.30 9.73 6.47
Significant assumptions:
Risk-free interest rate at grant date 3.86% 4.05% 3.82%
Expected annual rate of
quarterly dividends 2.30 2.30 2.30
Expected stock price volatility 22 23 20
Expected life to exercise (years) 6.25 10 10
(Continued)
70
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
(17) SEGMENT INFORMATION
Through the respective branch network, the Banks 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, and installment and other consumer. 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 geographic areas. The business
segments results that follow are consistent with the Company's internal
reporting system, which is consistent, in all material respects, with
accounting principles generally accepted in the United States of America
and practices prevalent in the banking industry.
2005
---------------------------------------------------------------------------------------
CITIZENS
THE EXCHANGE UNION
NATIONAL STATE BANK OSAGE VALLEY
BANK OF AND TRUST BANK BANK 10 CORPORATE
JEFFERSON CITY OF CLINTON OF WARSAW OF BELTON AND OTHER TOTAL
-------------- ----------- ------------ ----------- ----------- -------------
Balance sheet information:
Loans, net of allowance
for loan losses $374,467,039 238,347,946 53,132,834 138,502,283 -- 804,450,102
Debt and equity securities 71,830,503 42,305,412 34,234,784 29,835,127 1,486,000 179,691,826
Goodwill 4,382,098 16,701,762 4,112,876 15,127,039 -- 40,323,775
Intangible assets -- 583,020 -- 4,203,440 -- 4,786,460
Total assets 487,322,716 329,366,100 102,071,064 205,092,903 2,617,693 1,126,470,476
Deposits 391,682,694 265,370,183 84,823,313 148,430,696 (8,851,680) 881,455,206
Stockholders' equity 49,732,241 42,602,916 9,415,739 34,410,079 (39,428,110) 96,732,865
Statement of income information:
Total interest income $ 28,266,336 16,517,644 4,720,339 7,754,331 81,384 57,340,034
Total interest expense 10,840,544 5,712,821 2,191,408 2,319,968 2,608,849 23,673,590
------------ ----------- ----------- ----------- ----------- -------------
Net interest income 17,425,792 10,804,823 2,528,931 5,434,363 (2,527,465) 33,666,444
Provision for loan losses 875,000 400,000 42,000 4,612 -- 1,321,612
Noninterest income 3,842,239 1,742,060 574,036 1,187,809 (80,848) 7,265,296
Noninterest expense 10,837,795 7,828,933 1,899,109 4,332,782 469,531 25,368,150
Income taxes 3,058,800 1,295,533 298,520 727,177 (1,053,330) 4,326,700
------------ ----------- ----------- ----------- ----------- -------------
Net income (loss) $ 6,496,436 3,022,417 863,338 1,557,601 (2,024,514) 9,915,278
============ =========== =========== =========== =========== =============
Capital expenditures $ 347,324 4,103,289 1,866,885 69,658 -- 6,387,156
(Continued)
71
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
2004
-----------------------------------------------------------------------
CITIZENS
THE EXCHANGE UNION
NATIONAL STATE BANK OSAGE VALLEY
BANK OF AND TRUST BANK CORPORATE
JEFFERSON CITY OF CLINTON OF WARSAW AND 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
Statement of income information:
Total interest income $ 23,333,071 13,411,203 4,352,837 (6,515) 41,090,596
Total interest expense 7,406,286 3,514,735 1,667,972 797,918 13,386,911
------------ ----------- ---------- ----------- -----------
Net interest income 15,926,785 9,896,468 2,684,865 (804,433) 27,703,685
Provision for loan losses 600,000 300,000 42,000 -- 942,000
Noninterest income 3,848,193 1,585,141 386,263 (87,040) 5,732,557
Noninterest expense 11,111,109 7,027,428 1,744,620 499,549 20,382,706
Income taxes 2,609,100 1,326,168 357,788 (486,500) 3,806,556
------------ ----------- ---------- ----------- -----------
Net income (loss) $ 5,454,769 2,828,013 926,720 (904,522) 8,304,980
============ =========== ========== =========== ===========
Capital expenditures $ 1,213,520 3,455,979 458,449 -- 5,127,948
(Continued)
72
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
2003
----------------------------------------------------------------------
CITIZENS
THE EXCHANGE UNION
NATIONAL STATE BANK OSAGE VALLEY
BANK OF AND TRUST BANK CORPORATE
JEFFERSON CITY OF CLINTON OF WARSAW AND OTHER TOTAL
-------------- ----------- ------------ ---------- -----------
Balance sheet information:
Loans, net of allowance
for loan losses $356,157,080 174,415,896 45,078,810 -- 575,651,786
Debt and equity securities 110,422,665 45,520,374 33,012,793 -- 188,955,832
Goodwill 4,382,098 16,701,762 4,112,876 -- 25,196,736
Intangible assets -- 1,013,244 -- -- 1,013,244
Total assets 502,800,863 281,534,651 91,417,739 (157,261) 875,595,992
Deposits 370,806,600 228,706,626 74,414,622 (8,665,883) 665,261,965
Stockholders' equity 50,025,363 37,444,782 9,911,423 (9,598,824) 87,782,744
Statement of income information:
Total interest income $ 22,626,953 12,061,252 4,233,909 -- 38,922,114
Total interest expense 6,911,788 3,710,899 1,681,014 494,640 12,798,341
------------ ----------- ---------- ---------- -----------
Net interest income 15,715,165 8,350,353 2,552,895 (494,640) 26,123,773
Provision for loan losses 750,000 300,000 42,000 -- 1,092,000
Noninterest income 5,091,980 1,336,216 361,831 (86,014) 6,704,013
Noninterest expense 10,860,654 5,705,513 1,595,778 374,062 18,536,007
Income taxes 2,998,600 1,131,416 360,049 (334,200) 4,155,865
------------ ----------- ---------- ---------- -----------
Net income (loss) $ 6,197,891 2,549,640 916,899 (620,516) 9,043,914
============ =========== ========== ========== ===========
Capital expenditures $ 280,160 241,423 551,458 -- 1,073,041
(Continued)
73
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
(18) CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY
The condensed balance sheets as of December 31, 2005 and 2004 and the
related condensed statements of income and cash flows for the years ended
December 31, 2005, 2004 and 2003 of the Company are as follows:
CONDENSED BALANCE SHEETS
2005 2004
------------ -----------
ASSETS
Cash and due from banks $ 8,792,405 17,517,127
Investment securities 1,486,000 774,000
Investment in subsidiaries 136,706,007 99,796,737
Other assets 248,231 265,449
------------ -----------
Total assets $147,232,643 118,353,313
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Subordinated notes $ 49,486,000 25,774,000
Dividends payable 875,668 750,572
Other liabilities 138,110 57,958
Stockholders' equity 96,732,865 91,770,783
------------ -----------
Total liabilities and stockholders' equity $147,232,643 118,353,313
============ ===========
(Continued)
74
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
CONDENSED STATEMENTS OF INCOME
2005 2004 2003
---------- --------- ---------
Revenue:
Dividends received from subsidiaries $7,600,000 6,400,000 6,660,477
Interest 219,828 142,179 --
Other 3,811 308 499
---------- --------- ---------
Total revenue 7,823,639 6,542,487 6,660,976
---------- --------- ---------
Expenses:
Interest on bank debt -- 60,288 208,305
Interest on notes payable -- -- 286,335
Interest on subordinated notes 2,747,293 886,324 --
Amortization of intangible assets -- -- 125,000
Other 554,190 586,897 335,575
---------- --------- ---------
Total expenses 3,301,483 1,533,509 955,215
---------- --------- ---------
Income before income tax benefit and
equity in undistributed income
of subsidiaries 4,522,156 5,008,978 5,705,761
Income tax benefit 1,053,330 486,500 334,200
Equity in undistributed income
of subsidiaries 4,339,792 2,809,502 3,003,953
---------- --------- ---------
Net income $9,915,278 8,304,980 9,043,914
========== ========= =========
(Continued)
75
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
CONDENSED STATEMENTS OF CASH FLOWS
2005 2004 2003
------------ ----------- ----------
Cash flows from operating activities:
Net income $ 9,915,278 8,304,980 9,043,914
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed
income of subsidiaries (4,339,792) (2,809,502) (3,003,953)
Other, net 97,372 (95,210) (93,580)
------------ ----------- ----------
Net cash provided by
operating activities 5,672,858 5,400,268 5,946,381
------------ ----------- ----------
Cash flows from investing activities:
Acquisition of subsidiary, net of cash acquired (34,020,004) -- --
------------ ----------- ----------
Net cash used in investing activities (34,020,004) -- --
------------ ----------- ----------
Cash flows from financing activities:
Purchase of available for sale securities (712,000) (774,000) --
Proceeds from issuance of subordinated notes 23,712,000 25,774,000 --
Repayment of bank debt -- (17,950,568) (1,000,000)
Cash dividends paid (3,377,576) (3,377,576) (2,987,715)
Proceeds from exercise of stock options -- -- 28,251
Purchases of common stock -- -- (2,503)
------------ ----------- ----------
Net cash provided by (used in)
financing activities 19,622,424 3,671,856 (3,961,967)
------------ ----------- ----------
Net increase (decrease) in cash (8,724,722) 9,072,124 1,984,414
Cash and due from banks at beginning of year 17,517,127 8,445,003 6,460,589
------------ ----------- ----------
Cash and due from banks at end of year $ 8,792,405 17,517,127 8,445,003
============ =========== ==========
(19) DISCLOSURES ABOUT FINANCIAL INSTRUMENTS
The Company issues financial instruments with off-balance-sheet risk in the
normal course of business of meeting the financing needs of its customers.
These financial instruments include commitments to extend credit and
standby letters of credit. These instruments may involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the consolidated balance sheets.
(Continued)
76
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
The Company's extent of involvement and maximum potential exposure to
credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit and standby letters
of credit is represented by the contractual amount of these instruments.
The Company uses the same credit policies in making commitments and
conditional obligations as it does for financial instruments included on
its consolidated balance sheets. At December 31, 2005, no amounts have been
accrued for any estimated losses for these financial instruments.
The contractual amount of off-balance-sheet financial instruments as of
December 31, 2005 and 2004 is as follows:
2005 2004
------------ -----------
Commitments to extend credit $142,489,989 122,166,519
Standby letters of credit 4,756,712 3,080,429
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Of the total commitments to
extend credit at December 31, 2005, approximately $105,481,000 represents
fixed-rate loan commitments. Of the total commitments to extend credit at
December 31, 2004, approximately $90,186,000 represents fixed-rate loan
commitments. Since certain of the commitments and letters of credit are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Company
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
customer. Collateral held varies, but may include accounts receivable,
inventory, furniture and equipment, and real estate.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. These standby
letters of credit are primarily issued to support contractual obligations
of the Company's customers. The credit risk involved in issuing letters of
credit is essentially the same as the risk involved in extending loans to
customers. The approximate remaining term of standby letters of credit
range from one month to ten years at December 31, 2005.
(Continued)
77
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
A summary of the carrying amounts and fair values of the Company's
financial instruments at December 31, 2005 and 2004 is as follows:
2005 2004
------------------------------ -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------- ------------- ----------- -----------
Assets:
Loans $ 804,450,102 803,460,000 629,141,036 635,556,000
Investment in debt and
equity securities 179,691,826 179,691,826 171,717,635 171,717,635
Federal fund sold and
securities purchased under
agreements to resell 12,447,981 12,447,981 41,603,952 41,603,952
Cash and due from banks 35,282,568 35,282,568 24,104,458 24,104,458
Accrued interest receivable 7,772,573 7,772,573 5,289,083 5,289,083
-------------- ------------- ----------- -----------
$1,039,645,050 1,038,654,948 871,856,164 878,271,128
============== ============= =========== ===========
Liabilities:
Deposits:
Demand $ 134,364,788 134,364,788 98,156,124 98,156,124
NOW 110,338,554 110,338,554 117,822,197 117,822,197
Savings 56,213,747 56,213,747 50,918,443 50,918,443
Money market 157,271,050 157,271,050 117,125,302 117,125,302
Time 423,267,067 423,490,000 342,627,410 344,160,000
Federal funds purchased and
securities sold under
agreements to repurchase 36,995,735 36,995,735 34,515,323 34,515,323
Interest-bearing demand
notes to U.S. Treasury 1,098,337 1,098,337 897,470 897,470
Subordinated notes 49,486,000 49,486,000 25,774,000 25,774,000
Other borrowed money 52,179,661 52,461,000 39,524,747 39,241,000
Accrued interest payable 3,124,365 3,124,365 1,795,267 1,795,267
-------------- ------------- ----------- -----------
$1,024,339,304 1,024,843,576 829,156,283 830,405,126
============== ============= =========== ===========
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate such value:
LOANS
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type, such as real
estate, installment and other consumer, commercial, and bankers'
acceptances. Each loan category is further segmented into fixed and
adjustable interest rate terms and by performing and nonperforming
categories.
(Continued)
78
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
The fair value of performing loans is calculated by discounting scheduled
cash flows through estimated maturity using estimated market discount rates
that reflect the credit and interest rate risk inherent in the loan. The
estimate of maturity is based on the Company's historical experience with
repayments for each loan classification, modified, as required, by an
estimate of the effect of current economic and lending conditions.
The fair value for significant nonperforming loans is based on recent
external appraisals. If appraisals are not available, estimated cash flows
are discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows, and
discount rates are judgmentally determined using available market and
specific borrower information.
INVESTMENT IN DEBT AND EQUITY SECURITIES
Fair values are based on quoted market prices or dealer quotes.
FEDERAL FUNDS SOLD, CASH, AND DUE FROM BANKS
For federal funds sold, cash, and due from banks, the carrying amount is a
reasonable estimate of fair value, as such instruments reprice in a short
time period.
ACCRUED INTEREST RECEIVABLE AND PAYABLE
For accrued interest receivable and payable, the carrying amount is a
reasonable estimate of fair value because of the short maturity for these
financial instruments.
DEPOSITS
The fair value of deposits with no stated maturity, such as
noninterest-bearing demand, NOW accounts, savings, and money market, is
equal to the amount payable on demand. The fair value of time deposits is
based on the discounted value of contractual cash flows. The discount rate
is estimated using the rates currently offered for deposits of similar
remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND INTEREST-BEARING DEMAND
NOTES TO U.S. TREASURY
For securities sold under agreements to repurchase and interest-bearing
demand notes to U.S. Treasury, the carrying amount is a reasonable estimate
of fair value, as such instruments reprice in a short time period.
SUBORDINATED NOTES
For subordinated notes, the carrying value is a reasonable estimate of fair
value, as such instruments reprice in a short time period.
(Continued)
79
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
OTHER BORROWED MONEY
The fair value of other borrowed money is based on the discounted
value of contractual cash flows. The discount rate is estimated using
the rates currently offered for other borrowed money of similar
remaining maturities.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit and standby letters of
credit are estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements, the likelihood of the counterparties drawing on such
financial instruments, and the present creditworthiness of such
counterparties. The Company believes such commitments have been made
on terms, which are competitive in the markets in which it operates.
The fair value estimates provided are made at a point in time based on
market information and information about the financial instruments.
Because no market exists for a portion of the Company's financial
instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined
with precision. Changes in assumptions could significantly affect the
fair value estimates.
(20) LITIGATION
Various legal claims have arisen in the normal course of business, which,
in the opinion of management of the Company, will not result in any
material liability to the Company.
(Continued)
80
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
(21) QUARTERLY FINANCIAL INFORMATION
(unaudited)
(In thousands, except per share data)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR-TO-DATE
------- ------- ------- ------- ------------
2005
----------------------------------------------------
Interest income $11,527 13,887 15,863 16,063 57,340
Interest expense 4,440 5,811 6,707 6,715 23,673
------- ------ ------ ------ ------
Net interest income $ 7,087 8,076 9,156 9,348 33,667
======= ====== ====== ====== ======
Provision for loan losses $ 235 238 260 589 1,322
Noninterest income 1,331 1,797 2,011 2,126 7,265
Noninterest expense 4,975 6,261 7,069 7,063 25,368
Income taxes 970 1,030 1,186 1,141 4,327
Net income 2,238 2,344 2,652 2,681 9,915
Net income per share:
Basic earnings per share 0.54 0.56 0.64 0.64 2.38
Diluted earnings per share 0.53 0.56 0.63 0.64 2.36
2004
----------------------------------------------------
Interest income $ 9,762 9,984 10,404 10,941 41,091
Interest expense 2,954 3,181 3,459 3,793 13,387
------- ----- ------ ------ ------
Net interest income $ 6,808 6,803 6,945 7,148 27,704
======= ===== ====== ====== ======
Provision for loan losses $ 236 210 160 336 942
Noninterest income 1,447 1,551 1,371 1,364 5,733
Noninterest expense 4,672 4,991 5,177 5,543 20,383
Income taxes 1,053 1,024 923 807 3,807
Net income 2,294 2,129 2,056 1,826 8,305
Net income per share:
Basic earnings per share 0.55 0.51 0.49 0.44 1.99
Diluted earnings per share 0.54 0.51 0.49 0.43 1.98
81
MARKET PRICE OF AND DIVIDENDS ON EQUITY SECURITIES AND RELATED MATTERS
Since June 19, 2000 our Company's common stock has been traded on Nasdaq's
national market under the stock symbol of "EXJF." The following table sets forth
the range of high and low bid prices of our Company's common stock by quarter
for each quarter in 2005 and 2004 in which the stock was traded.
2005 HIGH LOW
- -------------- ----- -----
First Quarter 30.06 28.50
Second Quarter 30.25 26.74
Third Quarter 29.46 26.00
Fourth Quarter 30.88 27.02
2004 HIGH LOW
- -------------- ----- -----
First Quarter 37.00 30.47
Second Quarter 34.56 28.01
Third Quarter 30.98 28.00
Fourth Quarter 31.53 27.83
As of March 1, 2006, our Company had issued 4,298,353 shares of common
stock, of which 4,169,847 shares were outstanding. The outstanding shares were
held of record by approximately 1,470 persons. The common stock is the only
class of equity security which our Company has outstanding.
The following table sets forth information on dividends paid by our Company
in 2005 and 2004.
DIVIDENDS PAID
MONTH PAID PER SHARE
- -------------- --------------
January, 2005 $0.18
April, 2005 0.18
July, 2005 0.18
October, 2005 0.18
December, 2005 0.09
-----
Total for 2005 $0.81
=====
January, 2004 $0.18
April, 2004 0.18
July, 2004 0.18
October, 2004 0.18
December, 2004 0.09
-----
Total for 2004 $0.81
=====
Our Board of Directors intends that our Company will continue to pay
quarterly dividends at least at the current rate. Beginning January 1, 2006,
higher quarterly dividends are replacing the year-end special dividend. Because
the special dividend has been made for nineteen consecutive years, our Board of
Directors incorporated the special dividend into the regular quarterly dividend
rate beginning January 1, 2006. The actual amount of quarterly dividends will
depend upon the payment of sufficient dividends by our subsidiary Banks to our
Company. The payment by our Banks of dividends to our Company will depend upon
such factors as our Banks' financial condition, results of operations and
current and anticipated cash needs, including capital requirements. As discussed
in Note 3 to our Company's consolidated financial statements, the Banks may pay
up to $13,367,000 in dividends to our Company without regulatory approval
subject to the ongoing capital requirements of the Banks.
82
DIRECTORS AND EXECUTIVE OFFICERS OF OUR COMPANY
Name Position with Our Company Position with Subsidiary Banks Principal Occupation
- ---- ------------------------- ------------------------------ --------------------
James E. Smith Chairman, Chief Executive Chairman, Chief Executive Position with Exchange,
Officer and Director-Class I Officer, and Director of Citizens Citizens Union State Bank,
Union State Bank, Vice Chairman Osage Valley Bank, and Bank
and Director of Osage Valley 10
Bank, Director of Exchange
National Bank, Chairman and
Director of Bank 10
David T. Turner President and Director-Class III Chairman, President, Chief Position with Exchange and
Executive Officer and Director of Exchange National Bank
Exchange National Bank, Director
of Citizens Union State Bank
Charles G. Dudenhoeffer, Jr. Director-Class I Director of Exchange National Retired
Bank
Philip D. Freeman Director-Class I Director of Exchange National Owner/Manager, Freeman
Bank Mortuary, Jefferson City,
Missouri
David R. Goller Director-Class II Director of Exchange National Attorney with the law firm
Bank of Goller, Gardner &
Feather, P.C., Jefferson
City, Missouri
James R. Loyd Director-Class II Director of Exchange National Retired
Bank
Kevin L. Riley Director-Class III Director of Exchange National Co-owner, Riley Chevrolet,
Bank Inc. and Riley Toyota,
Scion, Cadillac, Inc.,
Jefferson City, Missouri
Gus S. Wetzel, II Director-Class II Director of Citizens Union State Physician
Bank
Richard G. Rose Treasurer Senior Vice President and Position with Exchange and
Controller of Exchange National Exchange National Bank
Bank
Kathleen L. Bruegenhemke Senior Vice President and Position with Exchange
Secretary
James H. Taylor Senior Vice President and Position with Exchange
Senior Credit Officer
ANNUAL REPORT ON FORM 10-K
A copy of our Company's Annual Report on Form 10-K for the year ended
December 31, 2005, as filed with the Securities and Exchange Commission,
excluding exhibits, will be furnished without charge to shareholders
entitled to vote at the 2006 annual meeting of shareholders upon written
request to Kathleen L. Bruegenhemke, Secretary, Exchange National
Bancshares, Inc., 132 East High Street, Jefferson City, Missouri 65101. Our
Company will provide a copy of any exhibit to the Form 10-K to any such
person upon written request and the payment of our Company's reasonable
expenses in furnishing such exhibits.
83