1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------- ---------------- Commission File Number: 0-23636 EXCHANGE NATIONAL BANCSHARES, INC. ----------------------------------- (Exact name of registrant as specified in its charter) MISSOURI 43-1626350 ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 132 EAST HIGH STREET, JEFFERSON CITY, MISSOURI 65101 ----------------------------------------------------- (Address of principal executive offices) (Zip Code) (573) 761-6100 ----------------------------------------------------- (Registrant's telephone number, including area code) --------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No As of May 1, 2001, the registrant had 2,863,493 shares of common stock, par value $1.00 per share, outstanding. Page 1 of 26 pages Index to Exhibits located on page 26 1
2 PART I - FINANCIAL Item 1. Financial Statements EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> MARCH 31, 2001 DECEMBER 31, 2000 ----------------- -------------------- <S> <C> <C> ASSETS - ------ Loans: Commercial $149,191,703 $151,329,889 Real estate - construction 19,852,000 20,500,000 Real estate - mortgage 239,239,854 238,157,787 Consumer 55,315,052 58,483,757 ------------ ------------ 463,598,609 468,471,433 Less allowance for loan losses 7,077,161 6,939,991 ------------ ------------ Loans, net 456,521,448 461,531,442 Investment in debt and equity securities: Available-for-sale, at fair value 159,526,947 133,453,720 Held-to-maturity, fair value of $22,675,700 at December 31, 2000 - 22,463,180 ------------ ------------ Total investment in debt and equity securities 159,526,947 155,916,900 ------------ ------------ Federal funds sold 50,208,384 23,550,366 Cash and due from banks 22,115,258 25,374,115 Premises and equipment 14,713,121 15,791,222 Accrued interest receivable 6,157,128 6,795,268 Intangible assets 24,952,162 25,334,262 Other assets 5,179,660 5,309,771 ------------ ------------ Total assets $739,374,108 $719,603,346 ============ ============ </TABLE> Continued on next page 2
3 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) (Unaudited) <TABLE> <CAPTION> MARCH 31, 2001 DECEMBER 31, 2000 ------------------ -------------------- <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Demand deposits $ 63,232,886 $ 68,722,835 Time deposits 515,003,245 507,540,052 ------------ ------------ Total deposits 578,236,131 576,262,887 Federal funds purchased and securities sold under agreements to repurchase 32,825,857 16,398,484 Interest-bearing demand notes to U.S. Treasury 244,937 543,667 Other borrowed money 40,643,430 42,377,787 Accrued interest payable 4,655,544 4,420,054 Other liabilities 6,848,446 6,016,730 ------------ ------------ Total liabilities 663,454,345 646,019,609 ------------ ------------ Stockholders' equity: Common stock - $1 par value; 15,000,000 shares authorized; 2,863,493 issued and outstanding 2,863,493 2,863,493 Surplus 21,955,275 21,955,275 Retained earnings 49,323,914 48,106,530 Accumulated other comprehensive income 1,777,081 658,439 ------------ ------------ Total stockholders' equity 75,919,763 73,583,737 ------------ ------------ Total liabilities and stockholders' equity $739,374,108 $719,603,346 ============ ============ </TABLE> See accompanying notes to unaudited condensed consolidated financial statements. 3
4 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ---------------------------------- 2001 2000 ---------------- -------------- <S> <C> <C> Interest income $13,252,930 $ 9,467,540 Interest expense 7,323,740 4,739,646 ----------- ----------- Net interest income 5,929,190 4,727,894 Provision for loan losses 248,000 258,000 ----------- ----------- Net interest income after provision for loan losses 5,681,190 4,469,894 Noninterest income 1,074,217 826,811 Noninterest expense 4,107,702 3,367,995 ----------- ----------- Income before income taxes 2,647,705 1,928,710 Income taxes 886,258 584,439 ----------- ----------- Net income $ 1,761,447 $ 1,344,271 =========== =========== Basic and diluted earnings per share $ 0.62 $ 0.55 ======= ======= Dividends per share: Declared $ 0.19 $ 0.19 ======= ======= Paid $ 0.19 $ 0.19 ======= ======= </TABLE> See accompanying notes to unaudited condensed consolidated financial statements. 4
5 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ------------------------------- 2001 2000 -------------- ------------ <S> <C> <C> Cash flows from operating activities: Net income $ 1,761,447 $ 1,344,271 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 248,000 258,000 Depreciation expense 320,966 274,765 Net (accretion) amortization of debt securities premiums and discounts (471,673) 13,270 Amortization of intangible assets 375,977 233,475 Decrease in accrued interest receivable 638,140 18,972 Increase in other assets (464,534) (386,690) Increase (decrease) in accrued interest payable 235,490 (164,815) Increase in other liabilities 831,716 512,045 Net loss on sales of debt securities - 27,710 Other, net 6,122 (48,186) Origination of mortgage loans for sale (16,586,431) (4,596,576) Proceeds from the sale of mortgage loans held for sale 16,820,943 4,666,503 Gain on sale of mortgage loans (234,512) (69,927) ------------ ------------ Net cash provided by operating activities 3,481,651 2,082,817 ------------ ------------ Cash flows from investing activities: Net increase (decrease) in loans 4,540,266 (4,078,670) Purchases of available-for-sale debt securities (41,173,429) (34,715,878) Purchases of held-to-maturity debt securities - (261,231) Proceeds from sales of available-for-sale debt securities - 978,878 Proceeds from maturities of debt securities: Available-for-sale 27,745,000 36,129,941 Held-to-maturity - 2,660,911 Proceeds from calls of debt securities: Available-for-sale 11,995,420 - Held-to-maturity - 110,000 Purchase of subsidiaries, net of cash and cash equivalents acquired - (3,490,642) Purchases of premises and equipment (599,157) (110,412) Proceeds from dispositions of premises and equipment 1,356,292 8,547 Proceeds from sales of other real estate owned and repossessions 229,650 203,183 ------------ ------------ Net cash provided (used) in investing activities 4,094,042 (2,565,373) ------------ ------------ </TABLE> Continued on next page 5
6 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ----------------------------------- 2001 2000 --------------- --------------- <S> <C> <C> Cash flows from financing activities: Net decrease in demand deposits (5,489,949) (3,062,483) Net increase (decrease) in interest-bearing transaction accounts 5,702,322 (943,082) Net increase in time deposits 1,760,872 4,747,533 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase 16,427,373 (7,659,043) Net decrease in interest-bearing demand notes to U.S. Treasury (298,730) (1,927,497) Proceeds from Federal Home Loan Bank borrowings - 5,000,000 Repayment of Federal Home Loan Bank borrowings (734,357) (217,450) Repayment of other borrowed money (1,000,000) - Cash dividends paid (544,063) (398,758) ------------ ------------ Net cash provided (used) in financing activities 15,823,468 (4,460,780) ------------ ------------ Net increase (decrease) in cash and cash equivalents 23,399,161 (4,943,336) ------------ ------------ Cash and cash equivalents, beginning of period 48,924,481 32,601,208 ------------ ------------ Cash and cash equivalents, end of period $ 72,323,642 $ 27,657,872 ============ ============ Supplemental disclosure of cash flow information- Cash paid (received) during period for: Interest $ 7,156,952 4,904,461 Income taxes (139,380) (19,865) Supplemental schedule of noncash investing activities- Other real estate and repossessions acquired in settlement of loans 221,728 237,982 Transfer of securities from held-to-maturity to available-for-sale 22,675,700 - </TABLE> See accompanying notes to unaudited condensed consolidated financial statements 6
7 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Three Months Ended March 31, 2001 and 2000 Exchange National Bancshares, Inc. ("Bancshares" or the "Company") is a bank holding company registered under the Bank Holding Company Act of 1956. Bancshares' activities currently are limited to ownership of the outstanding capital stock of The Exchange National Bank of Jefferson City (ENB), Union State Bancshares, Inc. (Union), which owns 100% of Citizens Union State Bank and Trust of Clinton (CUSB), and Mid Central Bancorp, Inc. (Mid Central), which owns 100% of Osage Valley Bank of Warsaw (OVB). Bancshares acquired ENB on April 7, 1993, Union on November 3, 1997 and Mid Central on January 3, 2000. In addition, Bancshares acquired Calhoun Bancshares, Inc. (Calhoun) and its wholly owned subsidiary, Citizens State Bank of Calhoun on May 4, 2000. Immediately upon acquisition, Calhoun Bancshares, Inc. was dissolved and Citizens State Bank was merged with Union State Bank and Trust with the surviving institution being renamed Citizens Union State Bank and Trust of Clinton (CUSB). On June 16, 2000 Bancshares acquired CNS Bancorp, Inc. (CNS) and its wholly owned subsidiary, City National Savings Bank, FSB. Immediately upon acquisition, CNS Bancorp, Inc. was dissolved and City National Savings Bank, FSB was merged with ENB. All acquisitions were accounted for as purchase transactions. Accordingly, the results of operations of the acquired companies have been included in the condensed consolidated financial statements since dates of acquisition. A summary of unaudited pro forma combined financial information for the three months ended March 31, 2000 for Bancshares and acquisitions as if the transactions had occurred on January 1, 2000 follows. These pro forma presentations do not include any anticipated expense reductions that may result from the mergers discussed above. <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 2000 ------------------------ <S> <C> NET INTEREST INCOME $ 4,727,894 NET INCOME $ 1,262,709 EARNINGS PER SHARE $ 0.44 </TABLE> The accompanying unaudited condensed consolidated financial statements include all adjustments which in the opinion of management are necessary in order to make those statements not misleading. Certain amounts in the 2000 condensed consolidated financial statements have been reclassified to conform to the 2001 condensed consolidated presentation. Such reclassifications have no effect on previously reported net income. Operating results for the period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. It is suggested that these unaudited condensed consolidated interim financial statements be read in conjunction with the Company's audited consolidated financial statements included in its 7
8 2000 Annual Report to Shareholders under the caption "Consolidated Financial Statements" and incorporated by reference into its Annual Report on Form 10-K for the year ended December 31, 2000 as Exhibit 13. The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United State of America have been condensed and omitted. The Company believes that these financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's consolidated financial position as of March 31, 2001 and December 31, 2000 and the consolidated statements of earnings and cash flows for the three months ended March 31, 2001 and 2000. Earnings per share is computed by dividing net income by 2,863,493 and 2,438,050, the weighted average number of common shares outstanding during the three month periods ended March 31, 2001 and 2000 respectively. Stock options are the only dilutive potential common shares. At March 31, 2001, 34,929 stock options were not included in the calculation of diluted earnings per share because their effect was antidilutive. For the three-month periods ended March 31, 2001 and 2000, unrealized holding gains and losses on investments in debt and equity securities available-for-sale were Bancshares' only other comprehensive income component. Comprehensive income for the three-month periods ended March 31, 2001 and 2000 is summarized as follows: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ------------------------------- 2001 2000 -------------- -------------- <S> <C> <C> Net income $ 1,761,447 $ 1,344,271 Other comprehensive income (loss): Net unrealized holding gains (losses) on investments in debt and equity securities available-for-sale, net of taxes 1,118,642 (19,250) Adjustment for net securities losses realized in net income, net of applicable income taxes - 18,287 ----------- ----------- Total other comprehensive income (loss) 1,118,642 (963) ----------- ----------- Comprehensive income $ 2,880,089 $ 1,343,308 =========== =========== </TABLE> 8
9 Through the respective branch network, ENB, CUSB and OVB provide similar products and services in two defined geographic areas. The products and services offered include a broad range of commercial and personal banking services, including certificates of deposit, individual retirement and other time deposit accounts, checking and other demand deposit accounts, interest checking accounts, savings accounts and money market accounts. Loans include real estate, commercial, installment and other consumer loans. Other financial services include automatic teller machines, trust services, credit related insurance, and safe deposit boxes. The revenues generated by each business segment consist primarily of interest income, generated from the loan and debt and equity security portfolios, and service charges and fees, generated from the deposit products and services. The geographic areas are defined to be communities surrounding Jefferson City, Clinton and Warsaw, Missouri. The products and services offered to customers primarily within their respective geographical areas. The business segments results which 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 State of America and practices prevalent in the banking industry. <TABLE> <CAPTION> MARCH 31, 2001 CITIZENS OSAGE THE EXCHANGE UNION STATE VALLEY NATIONAL BANK BANK AND BANK OF JEFFERSON TRUST OF OF CORPORATE CITY CLINTON WARSAW AND OTHER TOTAL ----------------- --------------- ------------ -------------- --------------- <S> <C> <C> <C> <C> <C> Balance sheet information: Loans, net of allowance for loan losses $302,261,106 $122,686,414 $31,573,928 - $456,521,448 Debt and equity securities 78,144,834 54,975,972 26,406,141 - 159,526,947 Total assets 429,932,805 241,065,073 68,261,906 114,324 739,374,108 Deposits 334,090,926 190,243,429 56,579,082 (2,677,306) 578,236,131 Stockholders' equity 47,779,754 35,331,466 9,510,757 (16,702,214) 75,919,763 ============ ============ =========== =========== ============ <CAPTION> DECEMBER 31, 2000 CITIZENS OSAGE THE EXCHANGE UNION STATE VALLEY NATIONAL BANK BANK AND BANK OF JEFFERSON TRUST OF OF CORPORATE CITY CLINTON WARSAW AND OTHER TOTAL ---------------- -------------- ------------- ------------- -------------- <S> <C> <C> <C> <C> <C> Balance sheet information: Loans, net of allowance for loan losses $307,896,826 $124,074,520 $29,560,096 - $461,531,442 Debt and equity securities 59,926,441 68,896,826 27,093,633 - 155,916,900 Total assets 411,937,825 241,626,885 65,006,410 1,032,226 719,603,346 Deposits 331,374,737 194,121,199 53,974,652 (3,207,701) 576,262,887 Stockholders' equity 46,953,624 34,422,578 9,079,936 (16,872,401) 73,583,737 ============ ============ =========== =========== ============ </TABLE> 9
10 <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 2001 CITIZENS OSAGE THE EXCHANGE UNION STATE VALLEY NATIONAL BANK BANK AND BANK OF JEFFERSON TRUST OF OF CORPORATE CITY CLINTON WARSAW AND OTHER TOTAL --------------- --------------- -------------- -------------- ------------- <S> <C> <C> <C> <C> <C> Statement of earnings: Total interest income $ 7,822,664 $ 4,009,931 $1,414,625 5,710 $13,252,930 Total interest expense 4,118,607 2,229,208 622,323 353,602 7,323,740 ----------- ----------- ---------- --------- ----------- Net interest income 3,704,057 1,780,723 792,302 (347,892) 5,929,190 Provision for loan losses 150,000 75,000 23,000 -- 248,000 Noninterest income 836,337 186,868 51,012 -- 1,074,217 Noninterest expense 2,467,703 1,215,842 343,000 81,157 4,107,702 Income taxes 616,870 259,263 153,425 (143,300) 886,258 ----------- ----------- ---------- -------- ----------- Net income (loss) 1,305,821 417,486 323,889 (285,749) 1,761,447 =========== =========== ========== ======== =========== <CAPTION> THREE MONTHS ENDED MARCH 31, 2000 CITIZENS OSAGE THE EXCHANGE UNION STATE VALLEY NATIONAL BANK BANK AND BANK OF JEFFERSON TRUST OF OF CORPORATE CITY CLINTON WARSAW AND OTHER TOTAL ----------------- --------------- ----------- ------------ ------------ <S> <C> <C> <C> <C> <C> Statement of earnings: Total interest income $ 5,980,518 $ 2,492,712 $ 986,220 8,090 $9,467,540 Total interest expense 2,807,967 1,214,945 499,830 216,904 4,739,646 ------------ ----------- --------- --------- ---------- Net interest income 3,172,551 1,277,767 486,390 (208,814) 4,727,894 Provision for loan losses 225,000 30,000 3,000 -- 258,000 Noninterest income 628,528 145,738 52,545 -- 826,811 Noninterest expense 2,026,520 891,039 325,544 124,892 3,367,995 Income taxes 456,000 170,167 69,172 (110,900) 584,439 ------------ ----------- --------- --------- ---------- Net income (loss) 1,093,559 332,299 141,219 (222,806) 1,344,271 ============ =========== ========= ========= ========== </TABLE> 10
11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS MADE IN THIS REPORT ON FORM 10-Q ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE WORDS "SHOULD", "EXPECT", "ANTICIPATE", "BELIEVE", "INTEND", "MAY", "HOPE", "FORECAST" AND SIMILAR EXPRESSIONS MAY IDENTIFY FORWARD LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS, FINANCIAL CONDITION, OR BUSINESS COULD DIFFER MATERIALLY FROM ITS HISTORICAL RESULTS, FINANCIAL CONDITION, OR BUSINESS, OR THE RESULTS OF OPERATIONS, FINANCIAL CONDITION, OR BUSINESS CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY THE FORWARD LOOKING STATEMENTS HEREIN INCLUDE MARKET CONDITIONS AS WELL AS CONDITIONS SPECIFICALLY AFFECTING THE BANKING INDUSTRY GENERALLY AND FACTORS HAVING A SPECIFIC IMPACT ON BANCSHARES INCLUDING, BUT NOT LIMITED TO, FLUCTUATIONS IN INTEREST RATES AND IN THE ECONOMY; THE IMPACT OF LAWS AND REGULATIONS APPLICABLE TO BANCSHARES AND CHANGES THEREIN; COMPETITIVE CONDITIONS IN THE MARKETS IN WHICH BANCSHARES CONDUCTS ITS OPERATIONS, INCLUDING COMPETITION FROM BANKING AND NON-BANKING COMPANIES WITH SUBSTANTIALLY GREATER RESOURCES THAN BANCSHARES, SOME OF WHICH MAY OFFER AND DEVELOP PRODUCTS AND SERVICES NOT OFFERED BY BANCSHARES; AND THE ABILITY OF BANCSHARES TO RESPOND TO CHANGES IN TECHNOLOGY. ADDITIONAL FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES WERE DISCUSSED UNDER THE CAPTION "FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION, OR BUSINESS," IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. 11
12 Net income for the three months ended March 31, 2001 of $1,761,000 increased $417,000 when compared to the first quarter of 2000. Earnings per common share for the first quarter of 2001 of $0.62 increased 7 cents or 12.7% when compared to the first quarter of 2000. The following table provides a comparison of fully taxable equivalent earnings, including adjustments to interest income and tax expense for interest on tax-exempt loans and investments. (DOLLARS EXPRESSED IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, --------------------------------- 2001 2000 -------------- -------------- <S> <C> <C> Interest income $ 13,253 $ 9,467 Fully taxable equivalent (FTE) adjustment 208 213 -------------- -------------- Interest income (FTE basis) 13,461 9,680 Interest expense 7,324 4,740 -------------- -------------- Net interest income (FTE basis) 6,137 4,940 Provision for loan losses 248 258 -------------- -------------- Net interest income after provision for loan losses (FTE basis) 5,889 4,682 Noninterest income 1,074 827 Noninterest expense 4,108 3,368 -------------- -------------- Earnings before income taxes (FTE basis) 2,855 2,141 -------------- -------------- Income taxes 886 584 FTE adjustment 208 213 -------------- -------------- Income taxes (FTE basis) 1,094 797 -------------- -------------- Net income $ 1,761 $ 1,344 ============== ============== </TABLE> Net interest income on a fully taxable equivalent basis increased $1,197,000 or 24.2% to $6,137,000 or 3.73% of average earning assets for the first quarter of 2001 compared to $4,940,000 or 4.05% of average earning assets for the same period of 2000. The provision for loan losses for the three months ended March 31, 2001 was $248,000 compared to $258,000 for the same period of 2000. 12
13 Noninterest income and noninterest expense for the three-month periods ended March 31, 2001 and 2000 were as follows: (DOLLARS EXPRESSED IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, INCREASE (DECREASE) ---------------------------------- --------------------------------- 2001 2000 AMOUNT % --------------- --------------- -------------- --------------- <S> <C> <C> <C> <C> NONINTEREST INCOME Service charges on deposit accounts $ 456 $ 328 $ 128 39.0% Trust department income 109 220 (111) (50.5) Brokerage income 23 28 (5) (17.9) Mortgage loan servicing fees 114 107 7 6.5 Gain on sales of mortgage loans 235 70 165 235.7 Net loss on sales of debt securities -- (28) 28 100.0 Credit card fees 37 37 -- -- Other 100 65 35 53.9 --------------- --------------- -------------- $ 1,074 $ 827 $ 247 29.9% =============== =============== ============== NONINTEREST EXPENSE Salaries and employee benefits $ 2,101 $ 1,753 $ 348 19.9% Occupancy expense 246 202 44 21.8 Furniture and equipment expense 367 348 19 5.5 FDIC insurance assessment 34 24 10 41.7 Advertising and promotion 76 57 19 33.3 Postage, printing and supplies 162 142 20 14.1 Legal, examination, and professional fees 124 131 (7) (5.3) Credit card expenses 24 26 (2) (7.7) Credit investigation and loan collection expenses 46 41 5 12.2 Amortization of intangible assets 376 233 143 61.4 Other 552 411 141 34.3 --------------- --------------- -------------- $ 4,108 $ 3,368 $ 740 22.0% =============== =============== ============== </TABLE> Noninterest income increased $247,000 or 29.9% to $1,074,000 for the first quarter of 2001 compared to $827,000 for the same period of 2000. Service charges on deposit accounts increased $128,000 or 39.0% due to both the acquisitions of CNS and Mid Central, as well as the institution of a new overdraft program at ENB. This program has generated an increase of $80,000 in NSF fees collected this year compared to the same period last year. Gains on sales of mortgage loans increased $165,000 or 235.7% due to an increase in volume of loans originated and sold to the secondary market from approximately $4,597,000 in the first quarter of 2000 to approximately $16,586,000 for the first quarter of 2001. Trust department income declined $111,000 or 50.5%. This decline reflects a high amount of trust distribution fees collected during the first quarter of 2000. 13
14 Noninterest expense increased $740,000 or 22.0% to $4,108,000 for the first quarter of 2001 compared to $3,368,000 for the first quarter of 2000. Approximately $482,000 of this increase was related to the acquisitions of CNS and Mid Central. Excluding the increases associated with the acquisitions, salaries and benefits increased $68,000 or 3.9%. The entire increase in amortization of intangible assets is related to the acquisitions. The increase in other noninterest expense is primarily the result of increased consulting fees related to an operational consulting project at ENB. Income taxes as a percentage of earnings before income taxes as reported in the condensed consolidated financial statements was 33.5% for the first quarter of 2001 compared to 30.3% for the first quarter of 2000. After adding a fully taxable equivalent adjustment to both income taxes and earnings before income taxes for tax-exempt income on loans and investment securities, the fully taxable equivalent ratios of income taxes as a percentage of earnings before income taxes were 38.3% for the first quarter of 2001 and 37.2% for the first quarter of 2000. NET INTEREST INCOME Fully taxable equivalent net interest income increased $1,197,000 or 24.2% for the three-month period ended March 31, 2001 compared to the same period in 2000. Of this increase, approximately $348,000 reflects income recognized from accelerated discount accretion on called U.S government agencies securities during the first quarter of 2001. The following table presents average balance sheets, net interest income, average yields of earning assets, and average costs of interest bearing liabilities on a fully taxable equivalent basis for the three month periods ended March 31, 2001 and 2000. 14
15 (DOLLARS EXPRESSED IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 2001 MARCH 31, 2000 ------------------------------------------ ----------------------------------------- Interest Rate Interest Rate Average Income/ Earned/ Average Income/ Earned/ Balance Expense/1/ Paid/1/ Balance Expense/1/ Paid/1/ ------------ ------------- --------- ------------ ------------ --------- <S> <C> <C> <C> <C> <C> <C> ASSETS Loans:/2/ Commercial $ 148,563 $ 3,251 8.87% $116,207 $ 2,482 8.66% Real estate 259,404 5,383 8.42 183,379 3,770 8.34 Consumer 55,893 1,254 9.10 53,400 1,129 8.57 Investment securities/3/ U.S. Treasury and U.S. Gov't Agencies 121,401 2,330 7.78 93,136 1,457 6.34 State and municipal 39,022 696 7.23 35,015 644 7.46 Other 4,051 45 4.51 5,220 75 5.83 Federal funds sold 34,886 458 5.32 5,694 78 5.56 Interest-bearing deposits 3,364 44 5.30 3,153 45 5.79 ------------ ------------- --------- ------------ ------------ --------- Total interest earning assets 666,584 13,461 8.19 495,204 9,680 7.93 All other assets 72,560 53,508 Allowance for loan losses (6,983) (5,120) ------------ ------------ Total assets $732,161 $543,592 ============ ============ </TABLE> Continued on next page 15
16 <TABLE> <CAPTION> THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 2001 MARCH 31, 2000 ----------------------------------------- ----------------------------------------- Interest Rate Interest Rate Average Income/ Earned/ Average Income/ Earned/ Balance Expense/1/ Paid/1/ Balance Expense/1/ Paid/1/ ----------- ------------- --------- ------------ ------------ --------- <S> <C> <C> <C> <C> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY NOW accounts $ 91,507 $ 648 2.87% $ 81,000 $ 557 2.79% Savings 44,617 307 2.79 38,838 270 2.82 Money market 58,732 583 4.03 44,984 426 3.84 Deposits of $100,000 and over 52,585 823 6.35 29,068 375 5.23 Other time deposits 269,479 3,937 5.93 181,684 2,354 5.25 ----------- ------------- ------------ ------------ Total time deposits 516,920 6,298 4.94 375,574 3,982 4.30 Federal funds purchased and securities sold under agreements to repurchase 28,763 363 5.12 21,127 273 5.24 Interest-bearing demand notes to US Treasury 790 11 5.65 894 16 6.27 Other borrowed money 41,414 652 6.38 30,339 469 7.26 ----------- ------------- ------------ ------------ Total interest-bearing liabilities 587,887 7,324 5.05 427,934 4,740 4.49 ------------- ------------ Demand deposits 58,636 54,714 Other liabilities 11,120 3,775 ----------- ------------ Total liabilities 657,643 486,423 Stockholders' equity 74,518 57,169 ----------- ------------ Total liabilities and stockholders' equity $732,161 $543,592 =========== ============ Net interest income $ 6,137 $ 4,940 ============= ============ Net interest margin/4/ 3.73% 4.05% ========= ========= </TABLE> /1/ Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate of 34%. Such adjustments were $208,000 in 2001 and $213,000 in 2000. /2/ Non-accruing loans are included in the average amounts outstanding. /3/ Average balances based on amortized cost. /4/ Net interest income divided by average total interest earning assets. 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. 16
17 (DOLLARS EXPRESSED IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 -------------------------------------------------- CHANGE DUE TO TOTAL -------------------------------- CHANGE VOLUME RATE -------------- -------------- -------------- <S> <C> <C> <C> INTEREST INCOME ON A FULLY TAXABLE EQUIVALENT BASIS: Loans: /1/ Commercial $ 769 $ 708 61 Real estate /2/ 1,613 1,579 34 Consumer 125 54 71 Investment securities: U.S. Treasury and U.S. Government agencies 873 499 374 State and municipal /2/ 52 71 (19) Other (30) (15) (15) Federal funds sold 380 383 (3) Interest-bearing deposits (1) 3 (4) -------------- -------------- -------------- Total interest income 3,781 3,282 499 INTEREST EXPENSE: NOW accounts 91 74 17 Savings 37 40 (3) Money market 157 135 22 Deposits of $100,000 and over 448 354 94 Other time deposits 1,583 1,253 330 Federal funds purchased and securities sold under agreements to repurchase 90 96 (6) Interest-bearing demand notes to U.S. Treasury (5) (2) (3) Other borrowed money 183 174 9 -------------- -------------- -------------- Total interest expense 2,584 2,124 460 -------------- -------------- -------------- NET INTEREST INCOME ON A FULLY TAXABLE EQUIVALENT BASIS $ 1,197 1,158 39 ============== ============== ============== </TABLE> /1/ Non-accruing loans are included in the average amounts outstanding. /2/ Interest income and yields are presented on a fully taxable equivalent basis using the federal statutory income tax rate of 34%. Such adjustments totaled $208,000 in 2001 and $213,000 in 2000. 17
18 PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses is based on management's evaluation of the loan portfolio in light of national and local economic conditions, changes in the composition and volume of the loan portfolio, changes in the volume of past due and nonaccrual loans, and other relevant factors. The allowance for loan losses, which is reported as a deduction from loans, is available for loan charge-offs. The allowance is increased by the provision charged to expense and is reduced by loan charge-offs, net of loan recoveries. Management formally reviews all loans in excess of certain dollar amounts (periodically established) at least annually. In addition, on a monthly basis, management reviews past due, "classified", and "watch list" loans in order to classify or reclassify loans as "loans requiring attention," "substandard," "doubtful," or "loss". During that review, management also determines what loans should be considered to be "impaired". Management believes, but there can be no assurance, that these procedures keep management informed of possible problem loans. Based upon these procedures, both the allowance and provision for loan losses are adjusted to maintain the allowance at a level considered adequate by management for probable losses inherent in the loan portfolio. See additional discussion concerning nonperforming loans under "Financial Condition." The allowance for loan losses was decreased by net loan charge-offs of $111,000 for the first quarter of 2001 compared to net recoveries of $7,000 for the first quarter of 2000. The allowance for loan losses was increased by a provision charged to expense of $248,000 for the first quarter of 2001 compared to $258,000 for the first quarter of 2000. The balance of the allowance for loan losses was $7,077,000 at March 31, 2001 compared to $6,940,000 at December 31, 2000 and $5,312,000 at March 31, 2000. The allowance for loan losses as a percent of outstanding loans was 1.53% at March 31, 2001 compared to 1.48% at December 31, 2000 and 1.49% at March 31, 2000. FINANCIAL CONDITION Total assets increased $19,771,000 or 2.8% to $739,374,000 at March 31, 2001 compared to $719,603,000 at December 31, 2000. Total liabilities increased $17,435,000 or 2.7% to $663,454,000. Stockholders' equity increased $2,336,000 or 3.2% to $75,920,000. Loans decreased $4,873,000 or 1.0% to $463,599,000 at March 31, 2001 compared to $468,471,000 at December 31, 2000. Commercial loans decreased $2,138,000; real estate construction loans decreased $648,000; real estate mortgage loans increased $1,082,000; and consumer loans decreased $3,169,000. The increase in real estate mortgage loans reflects increased activity due to favorable rates that currently exist in the markets. The decreases in commercial and consumer loans are reflective of lower rates in the markets that the Company is unwilling to match, primarily in the area of automobile financing. 18
19 Nonperforming loans, defined as loans on nonaccrual status, loans 90 days or more past due and still accruing, and restructured loans totaled $7,832,000 or 1.69% of total loans at March 31, 2001 compared to $8,082,000 or 1.73% of total loans at December 31, 2000. Detail of those balances plus other real estate and repossessions is as follows: (DOLLARS EXPRESSED IN THOUSANDS) <TABLE> <CAPTION> MARCH 31, 2001 DECEMBER 31, 2000 ---------------------------------- --------------------------------- % OF % OF BALANCE GROSS LOANS BALANCE GROSS LOANS --------------- --------------- --------------- --------------- <S> <C> <C> <C> <C> Nonaccrual loans: Commercial $ 2,846 .61% $ 2,648 .57% Real estate: Construction 689 .15 1,006 .22 Mortgage 3,666 .79 3,584 .77 Consumer 132 .03 453 .09 --------------- --------------- --------------- --------------- 7,333 1.58 7,691 1.65 --------------- --------------- --------------- --------------- Loans contractually past-due 90 days or more and still accruing: Commercial ---- ---- ---- ---- Real estate: Construction ---- ---- ---- ---- Mortgage 436 .10 237 .05 Consumer 63 .01 154 .03 --------------- --------------- --------------- --------------- 499 .11 391 .08 --------------- --------------- --------------- --------------- Restructured loans ---- ---- ---- ---- --------------- --------------- --------------- --------------- Total nonperforming loans 7,832 1.69% 8,082 1.73% =============== =============== Other real estate 10 36 Repossessions 161 143 --------------- --------------- Total nonperforming assets $ 8,003 $ 8,261 =============== =============== </TABLE> The allowance for loan losses was 90.36% of nonperforming loans at March 31, 2001 compared to 85.87% of nonperforming loans at December 31, 2000. 19
20 It is the Company's policy to discontinue the accrual of interest income on loans when the full collection of interest or principal is in doubt, or when the payment of interest or principal has become contractually 90 days past due unless the obligation is both well secured and in the process of collection. A loan remains on nonaccrual status until the loan is current as to payment of both principal and interest and/or the borrower demonstrates the ability to pay and remain current. Interest on loans on nonaccrual status at March 31, 2001 and 2000, which would have been recorded under the original terms those loans, was approximately $233,000 and $122,000 for the three months ended March 31, 2001 and 2000, respectively. Approximately $23,000 and $86,000 was actually recorded as interest income on such loans for the three months ended March 31, 2001 and 2000, respectively. A loan is considered "impaired" when it is probable a creditor will be unable to collect all amounts due - both principal and interest - according to the contractual terms of the loan agreement. In addition to nonaccrual loans at March 31, 2001 included in the table above, which were considered "impaired", management has identified additional loans totaling approximately $2,061,000 which are not included in the nonaccrual table above but are considered by management to be "impaired". The $2,061,000 of loans identified by management as being "impaired" reflected various commercial, commercial real estate, real estate, and consumer loans ranging in size from approximately $3,000 to approximately $200,000. The average balance of nonaccrual and other "impaired" loans for the first three months of 2001 was approximately $7,121,000. At March 31, 2001 the portion of the allowance for loan losses allocated to impaired loans was $1,500,000 compared to $1,565,000 at December 31, 2000. As of March 31, 2001 and December 31, 2000 approximately $6,503,000 and $5,098,000 of loans not included in the nonaccrual table above or identified by management as being "impaired" were classified by management as having more than normal risk. In addition to the classified list, our Company also maintains an internal loan watch list of loans which for various reasons, not all related to credit quality, management is monitoring more closely than the average loan portfolio. Loans may be added to this list for reasons that are temporary and correctable, such as the absence of current financial statements of the borrower, or a deficiency in loan documentation. Other loans are added as soon as any problem is detected which might affect the borrower's ability to meet the terms of the loan. This could be initiated by the delinquency of a scheduled loan payment, a deterioration in the borrower's financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment within which the borrower operates. Once the loan is placed on our Company's watch list, its condition is monitored closely. Any further deterioration in the condition of the loan is evaluated to determine if the loan should be assigned to a higher risk category. Investment in debt and equity securities classified as available-for-sale increased $26,073,000 or 19.5% to $159,527,000 at March 31, 2001 compared to $133,454,000 at December 31, 2000. As allowed upon adoption of SFAS 133, the Company took advantage of the opportunity to transfer its held-to-maturity portfolio to its available-for-sale portfolio. This transfer was made effective January 1, 2001. At the time of transfer the amortized cost of the securities transferred was $22,463,000 and the fair value was $22,676,000. Investments classified as available-for-sale are carried at fair value. During 2001, the market valuation account was increased $1,705,000 to $2,740,000 to reflect the fair value of available-for-sale investments at March 31, 20
21 2001 and the net after tax increase resulting from the change in the market valuation adjustment of $1,119,000 increased the stockholders' equity component to $1,777,000 at March 31, 2001. At December 31, 2000 the market valuation account for the available-for-sale investments of $1,035,000 increased the amortized cost of those investments to their fair value on that date and the net after tax increase resulting from the market valuation adjustment of $658,000 was reflected as a separate positive component of stockholders' equity. As a result of the transfer of securities previously discussed, investments in debt securities classified as held-to-maturity decreased $22,463,000 or 100.0% to zero at March 31, 2001 compared to $22,463,000 at December 31, 2000. Investments classified as held-to-maturity are carried at amortized cost. At December 31, 2000 the aggregate fair value of the Company's held-to-maturity investment portfolio was approximately $213,000 more than its aggregate carrying value. Cash and cash equivalents, which consist of cash and due from banks and Federal funds sold, increased $23,400,000 or 47.8% to $72,324,000 at March 31, 2001 compared to $48,924,000 at December 31, 2000. Most of this increase reflects funds received from called securities that have not been reinvested and are being held in federal funds sold. Premises and equipment decreased $1,078,000 or 6.8% to $14,713,000 at March 31, 2001 compared to $15,791,000 at December 31, 2000. The decrease reflects sales and retirements of premises and equipment of $1,356,000 and depreciation expense of $321,000, offset by purchases for premises and equipment of $599,000. Total deposits increased $1,973,000 or 0.3% to $578,236,000 at March 31, 2001 compared to $576,263,000 at December 31, 2000. Federal funds purchased and securities sold under agreements to repurchase increased $16,428,000 or 100.2% to $32,826,000 at March 31, 2001 compared to $16,398,000 at December 31, 2000 due primarily to the award of a large public fund account at ENB. The increase in stockholders' equity reflects net income of $1,761,000 less dividends declared of $544,000 and $1,119,000 change in unrealized holding gains, net of taxes, on investment in debt and equity securities available-for-sale. No material changes in the Company's liquidity or capital resources have occurred since December 31, 2000. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS In September 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 establishes standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In September 1999, the FASB issued Statement of Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, an 21
22 Amendment of FASB Statement No. 133, which defers the effective date of SFAS 133 from fiscal years beginning after September 15, 1999 to fiscal years beginning after September 15, 2000. In September 2000, the FASB issued Statement of Financial Accounting Standards No. 138 - Accounting for Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133 (SFAS 138), which addresses a limited number of issues causing implementation difficulties for numerous entities that apply SFAS 133, as amended. SFAS 138 amends the accounting and reporting standards of SFAS 133, as amended, for certain derivative instruments, certain hedging activities, and for decisions made by the FASB relating to the Derivative Implementation Group (DIG) process. The Company has adopted SFAS 133 as amended effective January 1, 2001, but since the Company does not participate in any derivative or hedging activities, SFAS 133, as amended, had no impact on the Company's consolidated financial position and results of operations, except for the transfer of all held-to-maturity securities into available-for-sale securities as of January 1, 2001 as permitted by SFAS 133. At the time of the transfer the amortized cost of the securities transferred was $22,463,000 and the fair value was $22,676,000. The difference was an unrealized gain recorded net of tax as other comprehensive income. In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities that replaces SFAS No. 125. This Statement provides consistent standards for distinguishing transfers of financial assets that are sales, from transfers that are secured borrowings. The standards are based on the consistent application of the financial components approach, where after a transfer, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, and derecognizes financial liabilities when extinguished. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. This Statement was effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 31, 2000. A transfer of financial assets in which the transferor surrenders control is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. This Statement requires that liabilities and derivatives transferred be initially measured at fair value, if practicable. Servicing assets and other retained interest in the transferred assets are to be measured by allocating the previous carrying amount between the assets and retained interests sold, if any, based on their relative fair values on the date of transfer. This Statement requires that servicing assets and liabilities be subsequently measured by amortization in proportion to and over the period estimated net servicing income or loss, and assessment for asset impairment or increased obligation based on fair value. This Statement requires that a liability be derecognized if the debtor pays the creditor and is relieved of its obligation for the liability, or the debtor is legally released from being the primary obligor under the liability either judicially or by the creditor. The implementation of this Statement did not have a material effect on the Company's consolidated financial statements. 22
23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our Company's exposure to market risk is reviewed on a regular basis by the Banks' Asset/Liability Committees and Boards of Directors. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Management realizes certain risks are inherent and that the goal is to identify and minimize those risks. Tools used by the Banks' management include the standard GAP report subject to different rate shock scenarios. At March 31, 2001, the rate shock scenario models indicated that annual net interest income could decrease or increase by as much as 1 to 2% should interest rates rise or fall, respectively, within 200 basis points from their current level over a one year period compared to as much as 2% at December 31, 2000. 23
24 PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit No. Description - ----------- ------------ 3.1 Articles of Incorporation of the Company (filed as Exhibit 3(a) to the Company's Registration Statement on Form S-4 (Registration No. 33-54166) and incorporated herein by reference). 3.2 Bylaws of the Company (filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (Commission file number 0-23636) and incorporated herein by reference). 4 Specimen certificate representing shares of the Company's $1.00 par value common stock (filed as Exhibit 4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (Commission File number 0-23636) and incorporated herein by reference). (b) Reports on Form 8-K. No reports were filed on Form 8-K for the three month period ended March 31, 2001. 24
25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EXCHANGE NATIONAL BANCSHARES, INC. Date By /s/ Donald L. Campbell ---- ----------------------------------- Donald L. Campbell, Chairman of the Board of Directors, President and May 10, 2001 Principal Executive Officer By /s/ Richard G. Rose ----------------------------------- Richard G. Rose, Treasurer May 10, 2001 25
26 EXCHANGE NATIONAL BANCSHARES, INC. INDEX TO EXHIBITS March 31, 2001 Form 10-Q Exhibit No. Description Page No. - ----------- ----------- -------- 3.1 Articles of Incorporation of the Company (filed as Exhibit 3(a) to the Company's Registration Statement on Form S-4 (Registration No. 33-54166) and incorporated herein by reference). ** 3.2 Bylaws of the Company (filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (Commission file number 0-23636) and incorporated herein by reference). ** 4 Specimen certificate representing shares of the Company's $1.00 par value common stock (filed as Exhibit 4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (Commission file number 0-23636) and incorporated herein by reference). ** ** Incorporated by reference. 26