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 June 30, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- --------------- Commission File Number: 0-23636 EXCHANGE NATIONAL BANCSHARES, INC. ----------------------------------- (Exact name of registrant as specified in its charter) MISSOURI 43-1626350 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 132 EAST HIGH STREET, JEFFERSON CITY, MISSOURI 65101 ---------------------------------------------------- (Address of principal executive offices) (Zip Code) (573) 761-6100 -------------------------------------------------------------------------- (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed sincelast 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 August 10, 2001, the registrant had 2,863,493 shares of common stock, par value $1.00 per share, outstanding. Page 1 of 35 pages Index to Exhibits located on page 35 1
2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 2001 2000 ------------ ----------- <S> <C> <C> ASSETS Loans: Commercial $144,579,173 $151,329,889 Real estate -- construction 20,883,000 20,500,000 Real estate -- mortgage 245,737,910 238,157,787 Consumer 52,955,631 58,483,757 ------------ ------------ 464,155,714 468,471,433 Less allowance for loan losses 7,178,837 6,939,991 ------------ ------------ Loans, net 456,976,877 461,531,442 ------------ ------------ Investment in debt and equity securities: Available-for-sale, at fair value 148,174,166 133,453,720 Held-to-maturity, fair value of $22,675,700 at December 31, 2000 -- 22,463,180 ------------ ------------ Total investment in debt and equity securities 148,174,166 155,916,900 ------------ ------------ Federal funds sold 62,410,131 23,550,366 Cash and due from banks 21,045,439 25,374,115 Premises and equipment 14,867,598 15,791,222 Accrued interest receivable 6,413,445 6,795,268 Intangible assets 25,339,903 26,099,648 Other assets 4,654,209 4,544,385 ------------ ------------ $739,881,768 $719,603,346 ============ ============ </TABLE> Continued on next page 2
3 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) (Unaudited) <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 2001 2000 ------------ ------------ <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Demand deposits $ 72,650,817 68,722,835 Time deposits 513,077,776 507,540,052 ------------ ------------ Total deposits 585,728,593 576,262,887 Federal funds purchased and securities sold under agreements to repurchase 22,431,122 16,398,484 Interest-bearing demand notes to U.S. Treasury 1,723,712 543,667 Other borrowed money 40,124,799 42,377,787 Accrued interest payable 3,764,372 4,420,054 Other liabilities 9,108,644 6,016,730 ------------ ------------ Total liabilities 662,881,242 646,019,609 ------------ ------------ Stockholders' equity: Common Stock - $1 par value; 15,000,000 shares authorized; 2,863,493 shares issued and outstanding 2,863,493 2,863,493 Surplus 21,955,275 21,955,275 Retained earnings 50,448,806 48,106,530 Accumulated other comprehensive income 1,732,952 658,439 ------------ ------------ Total stockholders' equity 77,000,526 73,583,737 ------------ ------------ $739,881,768 $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 SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Interest income $12,586,823 $11,318,998 $25,839,752 $20,786,538 Interest expense 6,790,265 5,926,205 14,114,006 10,665,852 ----------- ----------- ----------- ----------- Net interest income 5,796,558 5,392,793 11,725,746 10,120,686 Provision for loan losses 231,000 308,000 479,000 566,000 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 5,565,558 5,084,793 11,246,746 9,554,686 Noninterest income 1,211,393 839,092 2,285,611 1,674,753 Noninterest expense 4,215,543 3,871,466 8,323,244 7,248,310 ----------- ----------- ----------- ----------- Income before income taxes 2,561,408 2,052,419 5,209,113 3,981,129 Income taxes 892,451 638,736 1,778,709 1,223,175 ----------- ----------- ----------- ----------- Net income $ 1,668,957 $1,413,683 $3,430,404 $2,757,954 =========== =========== =========== =========== Basic and diluted earnings per share $0.58 $0.56 $1.20 $1.12 ===== ===== ===== ===== Weighted average shares of common stock outstanding 2,863,493 2,508,177 2,863,493 2,473,114 Dividends per share: Declared $0.19 $0.19 $0.38 $0.38 ===== ===== ===== ===== Paid $0.19 $0.19 $0.38 $0.35 ===== ===== ===== ===== </TABLE> See accompanying notes to condensed consolidated financial statements. 4
5 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, -------------------------- 2001 2000 ----------- ----------- <S> <C> <C> Cash flows from operating activities: Net income $ 3,430,404 2,757,954 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 479,000 566,000 Depreciation expense 640,546 562,554 Net accretion of debt securities premiums and discounts (601,798) (15,067) Amortization of intangible assets 753,623 548,818 Decrease (increase) in accrued interest receivable 381,823 (884,047) Decrease (increase) in other assets (493,378) 625,912 Decrease in accrued interest payable (655,682) (6,482) Increase in other liabilities 3,091,914 474,957 Net securities losses -- 27,710 Other, net 6,122 (67,679) Origination of mortgage loans for sale (39,902,291) (11,764,897) Proceeds from the sale of mortgage loans held for sale 40,470,194 11,923,204 Gain on sale of mortgage loans (567,903) (158,307) ----------- ----------- Net cash provided by operating activities 7,032,574 4,590,630 ----------- ----------- Cash flows from investing activities: Net decrease (increase) in loans 3,456,298 (27,513,070) Purchases of available-for-sale debt securities (80,962,120) (53,122,501) Purchases of held-to-maturity debt securities -- (466,231) Proceeds from sales of available-for-sale debt securities -- 978,878 Proceeds from maturities of debt securities: Available-for-sale 50,790,188 47,674,751 Held-to-maturity -- 3,202,937 Proceeds from calls of debt securities: Available-for-sale 40,150,000 -- Held-to-maturity -- 710,000 Purchase of subsidiaries, net of cash and cash equivalents acquired -- (7,812,299) Purchases of premises and equipment (1,185,244) (552,026) Proceed from dispositions of premises and equipment 1,468,322 49,647 Proceeds from sales of other real estate owned and repossessions 443,798 382,853 ----------- ----------- Net cash provided (used) in investing activities 14,161,242 (36,467,061) ----------- ----------- </TABLE> Continued on next page 5
6 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, -------------------------- 2001 2000 ----------- ----------- <S> <C> <C> Cash flows from financing activities: Net increase (decrease) in demand deposits 3,927,982 (16,594,574) Net increase in interest-bearing transaction accounts 9,030,218 10,903,651 Net increase (decrease) in time deposits (3,492,494) 14,757,289 Net increase in federal funds purchased and securities sold under agreements to repurchase 6,032,638 20,996 Net increase (decrease) in interest-bearing demand notes to U.S. Treasury 1,180,045 (913,559) Proceeds from Federal Home Loan Bank borrowings -- 12,000,000 Repayment of Federal Home Loan Bank borrowings (752,988) (237,488) Proceeds from other borrowed money -- 12,000,000 Repayment of other borrowed money (1,500,000) -- Cash dividends paid (1,088,128) (849,797) ----------- ----------- Net cash provided by financing activities 13,337,273 31,086,518 ----------- ----------- Net increase (decrease) in cash and cash equivalents 34,531,089 (789,913) Cash and cash equivalents, beginning of period 48,924,481 32,601,208 ----------- ----------- Cash and cash equivalents, end of period $83,455,570 $31,811,295 =========== =========== Supplemental schedule of cash flow information- Cash paid during period for: Interest $14,769,688 $9,751,121 Income taxes 309,475 555,135 Supplemental schedule of noncash investing activities- Other real estate and repossessions acquired in settlement of loans 619,267 735,194 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) Six Months Ended June 30, 2001 and 2000 Exchange National Bancshares, Inc. ("Bancshares" or the "Company") is a bank holding company registered under the Bank Holding Company Act of 1956. Bancshares' activities currently are limited to ownership of the outstanding capital stock of The Exchange National Bank of Jefferson City (ENB), Union State Bancshares, Inc. (Union) which owns 100% of Citizens Union State Bank and Trust of Clinton (CUSB) and Mid Central Bancorp, Inc. (Mid Central) which owns 100% of Osage Valley Bank of Warsaw (OVB). Bancshares acquired ENB on April 7, 1993, Union on November 3, 1997 and Mid Central on January 3, 2000. In addition, Bancshares acquired Calhoun Bancshares, Inc. (Calhoun) and its wholly owned subsidiary, Citizens State Bank of Calhoun on May 4, 2000. Immediately upon acquisition, Calhoun Bancshares, Inc. was dissolved and Citizens State Bank was merged with Union State Bank and Trust with the surviving institution being renamed Citizens Union State Bank and Trust of Clinton (CUSB). On June 16, 2000 Bancshares acquired CNS Bancorp, Inc. (CNS) and its wholly owned subsidiary, City National Savings Bank, FSB. Immediately upon acquisition, CNS Bancorp, Inc. was dissolved and City National Savings Bank, FSB was merged with ENB. All acquisitions were accounted for as purchase transactions. Accordingly, the results of operations of the acquired companies have been included in the condensed consolidated financial statements since dates of acquisition. A summary of unaudited pro forma combined financial information for the three months and six months ended June 30, 2000 for Bancshares and acquisitions as if the transactions had occurred on January 1, 2000 follows. These pro forma presentations do not include any expense reductions that resulted from the mergers discussed above. <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTH ENDED JUNE 30, JUNE 30, ------------------- --------------- 2000 2000 ------------------- --------------- <S> <C> <C> NET INTEREST INCOME $ 5,802,716 $ 11,401,879 NET INCOME $ 1,307,122 $ 2,508,890 EARNINGS PER SHARE $0.52 $1.01 </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 with the 2001 condensed consolidated presentation. Such reclassifications have no effect on previously reported net income. Operating results for the period ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. It is suggested that these unaudited condensed consolidated interim financial statements be read in conjunction with the Company's audited consolidated financial statements included in its 2000 Annual Report to Shareholders under the caption "Consolidated Financial Statements" and incorporated by reference into its Annual Report on Form 10-K for the year ended December 31, 2000 as Exhibit 13. 7
8 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 June 30, 2001 and December 31, 2000, consolidated statements of earnings for the three and six month periods ended June 30, 2001 and 2000 and cash flows for the six months ended June 30, 2001 and 2000. Stock options are the only dilutive potential common shares. At June 30, 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 and six-month periods ended June 30, 2001 and 2000, unrealized holding gains and losses on investment in debt and equity securities available-for-sale were Bancshares' only other comprehensive income component. Comprehensive income for the three-month and six-month periods ended June 30, 2001 and 2000 is summarized as follows: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------------------------------------- 2001 2000 2001 2000 ----------- ---------- --------- --------- <S> <C> <C> <C> <C> Net income $ 1,668,957 1,413,683 3,430,404 2,757,954 Other comprehensive income (loss): Net unrealized holding gains (losses) on investments in debt and equity securities available-for-sale, net of taxes (44,129) (12,619) 1,074,513 (31,869) Adjustment for net securities losses realized in net income, net of applicable income taxes -- -- -- 18,287 Total other comprehensive ----------- ---------- --------- --------- Income (loss) (44,129) (12,619) 1,074,513 (13,582) ----------- ---------- --------- --------- Comprehensive income $ 1,624,828 1,401,064 4,504,917 2,744,372 =========== ========== ========= ========= </TABLE> 8
9 Through the respective branch network, ENB, CUSB and OVB provide similar products and services in three defined geographic areas. The products and services offered include a broad range of commercial and personal banking services, including certificates of deposit, individual retirement and other time deposit accounts, checking and other demand deposit accounts, interest checking accounts, savings accounts, and money market accounts. Loans include real estate, commercial, installment, and other consumer loans. Other financial services include automatic teller machines, trust services, credit related insurance, and safe deposit boxes. The revenues generated by each business segment consist primarily of interest income, generated from the loan and debt and equity security portfolios, and service charges and fees, generated from the deposit products and services. The geographic areas are defined to be communities surrounding Jefferson City, Clinton and Warsaw, Missouri. The products and services are offered to customers primarily within their respective geographical areas. The business segment results that follow are consistent with the Company's internal reporting system which is consistent, in all material respects, with accounting principles generally accepted in the United Sates of America and practices prevalent in the banking industry. 9
10 <TABLE> <CAPTION> JUNE 30, 2001 ------------- THE EXCHANGE CITIZENS UNION OSAGE NATIONAL BANK STATE BANK VALLEY BANK OF JEFFERSON AND TRUST OF OF CORPORATE CITY CLINTON WARSAW AND OTHER TOTAL ------------- -------------- ----------- ------------ ------------ <S> <C> <C> <C> <C> <C> Balance sheet information: Loans, net of allowance for loan losses $304,111,515 $118,218,973 $34,646,389 -- $456,976,877 Debt and equity securities 66,773,542 53,623,628 27,776,996 -- 148,174,166 Total assets 427,446,395 242,782,010 69,568,866 84,497 739,881,768 Deposits 339,661,690 191,520,196 57,597,474 (3,050,767) 585,728,593 Stockholders' equity 48,179,168 35,274,619 9,359,109 (15,812,370) 77,000,526 ============ ============ =========== ============ ============ </TABLE> <TABLE> <CAPTION> DECEMBER 30, 2001 ----------------- THE EXCHANGE CITIZENS UNION OSAGE NATIONAL BANK STATE BANK VALLEY BANK OF JEFFERSON AND TRUST OF OF CORPORATE CITY CLINTON WARSAW AND OTHER TOTAL ------------- -------------- ----------- ------------ ------------ <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> <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, 2001 -------------------------------- THE EXCHANGE CITIZENS UNION OSAGE NATIONAL BANK STATE BANK VALLEY BANK OF JEFFERSON AND TRUST OF OF CORPORATE CITY CLINTON WARSAW AND OTHER TOTAL ------------- -------------- ----------- ------------ ------------ <S> <C> <C> <C> <C> <C> Statement of earnings information: Total interest income $7,523,340 $3,804,960 $1,258,523 -- $12,586,823 Total interest expense 3,805,761 2,081,567 584,704 318,233 6,790,265 ---------- ---------- ---------- -------- ----------- Net interest income 3,717,579 1,723,393 673,819 (318,233) 5,796,558 Provision for loan losses 150,000 75,000 6,000 -- 231,000 Noninterest income 966,880 188,722 55,791 -- 1,211,393 Noninterest expense 2,516,343 1,235,690 382,553 80,957 4,215,543 Income taxes 646,800 236,872 141,879 (133,100) 892,451 ---------- ---------- ---------- -------- ----------- Net income (loss) 1,371,316 364,553 199,178 (266,090) 1,668,957 ========== ========== ========== ======== =========== </TABLE> <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, 2000 -------------------------------- THE EXCHANGE CITIZENS UNION OSAGE NATIONAL BANK STATE BANK VALLEY BANK OF JEFFERSON AND TRUST OF OF CORPORATE CITY CLINTON WARSAW AND OTHER TOTAL ------------- -------------- ----------- ------------ ------------ <S> <C> <C> <C> <C> <C> Statement of earnings information: Total interest income $6,816,700 $3,477,679 $1,013,598 $ 11,021 $11,318,998 Total interest expense 3,305,331 1,752,733 503,061 365,080 5,926,205 ---------- ---------- ---------- --------- ----------- Net interest income 3,511,369 1,724,946 510,537 (354,059) 5,392,793 Provision for loan losses 225,000 80,000 3,000 -- 308,000 Noninterest income 621,435 168,091 49,566 -- 839,092 Noninterest expense 2,237,447 1,144,455 334,108 155,456 3,871,466 Income taxes 515,000 222,476 71,860 (170,600) 638,736 ---------- ---------- ---------- --------- ----------- Net income (loss) 1,155,357 446,106 151,135 (338,915) 1,413,683 ========== ========== ========== ========= =========== </TABLE> 10
11 <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 2001 ------------------------------ THE EXCHANGE CITIZENS UNION OSAGE NATIONAL BANK STATE BANK VALLEY BANK OF JEFFERSON AND TRUST OF OF CORPORATE CITY CLINTON WARSAW AND OTHER TOTAL ------------- -------------- ----------- ------------ ------------ <S> <C> <C> <C> <C> <C> Statement of earnings information: Total interest income $15,346,003 $7,814,891 $2,673,148 $ 5,710 $25,839,752 Total interest expense 7,924,369 4,310,775 1,207,027 671,835 14,114,006 ----------- ---------- ---------- --------- ----------- Net interest income 7,421,634 3,504,116 1,466,121 (666,125) 11,725,746 Provision for loan losses 300,000 150,000 29,000 -- 479,000 Noninterest income 1,803,218 375,590 106,803 -- 2,285,611 Noninterest expense 4,984,045 2,451,532 725,553 162,114 8,323,244 Income taxes 1,263,670 496,135 295,304 (276,400) 1,778,709 ----------- ---------- ---------- --------- ----------- Net income (loss) 2,677,137 782,039 523,067 (551,839) 3,430,404 =========== ========== ========== ========= =========== </TABLE> <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 2000 ------------------------------ THE EXCHANGE CITIZENS UNION OSAGE NATIONAL BANK STATE BANK VALLEY BANK OF JEFFERSON AND TRUST OF OF CORPORATE CITY CLINTON WARSAW AND OTHER TOTAL ------------- -------------- ----------- ------------ ------------ <S> <C> <C> <C> <C> <C> Statement of earnings information: Total interest income $12,797,218 $5,970,391 $1,999,818 19,111 $20,786,538 Total interest expense 6,113,298 2,967,678 1,002,891 581,985 10,665,852 ----------- ---------- ---------- -------- ----------- Net interest income 6,683,920 3,002,713 996,927 (562,874) 10,120,686 Provision for loan losses 450,000 110,000 6,000 -- 566,000 Noninterest income 1,258,813 313,829 102,111 -- 1,674,753 Noninterest expense 4,272,817 2,035,494 659,651 280,348 7,248,310 Income taxes 971,000 392,643 141,032 (281,500) 1,223,175 ----------- ---------- ---------- -------- ----------- Net income (loss) 2,248,916 778,405 292,355 (561,722) 2,757,954 =========== ========== ========== ======== =========== </TABLE> 11
12 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. 12
13 Net income for the three months ended June 30, 2001 of $1,669,000 increased $255,000 when compared to the second quarter of 2000. Earnings per common share for the second quarter of 2001 of $0.58 increased 2 cents or 3.6% when compared to the second quarter of 2000. Net income for the six months ended June 30, 2001 of $3,430,000 increased $672,000 when compared to the first six months of 2000. The following table provides a comparison of fully taxable equivalent earnings, including adjustments to interest income and tax expense for interest on tax-exempt loans and investments. (DOLLARS EXPRESSED IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ---------------- ----------------- 2001 2000 2001 2000 ------- ------- ------- ------- <S> <C> <C> <C> <C> Interest income $12,587 11,319 25,840 20,786 Fully taxable equivalent (FTE) adjustment 206 131 414 344 ------- ------- ------- ------- Interest income (FTE basis) 12,793 11,450 26,254 21,130 Interest expense 6,790 5,926 14,114 10,666 ------- ------- ------- ------- Net interest income (FTE basis) 6,003 5,524 12,140 10,464 Provision for loan losses 231 308 479 566 ------- ------- ------- ------- Net interest income after provision for loan losses (FTE basis) 5,772 5,216 11,661 9,898 Noninterest income 1,211 839 2,285 1,675 Noninterest expense 4,216 3,871 8,323 7,248 ------- ------- ------- ------- Earnings before income taxes (FTE basis) 2,767 2,184 5,623 4,325 ------- ------- ------- ------- Income taxes 892 639 1,779 1,223 FTE adjustment 206 131 414 344 ------- ------- ------- ------- Income taxes (FTE basis) 1,098 770 2,193 1,567 ------- ------- ------- ------- Net income $ 1,669 1,414 3,430 2,758 ======= ======= ======= ======= </TABLE> 13
14 THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000 Net interest income on a fully taxable equivalent basis increased $479,000 or 8.7% to $6,003,000 or 3.59% of average earning assets for the second quarter of 2001 compared to $5,524,000 or 3.93% of average earning assets for the same period of 2000. The provision for loan losses for the three months ended June 30, 2001 was $231,000 compared to $308,000 for the same period of 2000. Noninterest income and noninterest expense for the three month periods ended June 30, 2001 and 2000 were as follows: (DOLLARS EXPRESSED IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, INCREASE(DECREASE) ---------------- ------------------ 2001 2000 AMOUNT % ------- ------- -------- -------- <S> <C> <C> <C> <C> NONINTEREST INCOME Service charges on deposit accounts $ 469 393 76 19.3 % Trust department income 110 94 16 17.0 Brokerage income 20 20 -- -- Mortgage loan servicing fees 127 126 1 0.8 Gain on sales of mortgage loans 333 88 245 278.4 Credit card fees 38 35 3 8.6 Other 114 83 31 37.3 ------- ------- ------- $ 1,211 839 372 44.3 % ======= ======= ======= NONINTEREST EXPENSE Salaries and employee benefits $ 2,101 1,778 323 18.2 % Occupancy expense, net 244 209 35 16.7 Furniture and equipment expense 385 368 17 4.6 FDIC insurance assessment 35 33 2 6.1 Advertising and promotion 118 82 36 43.9 Postage, printing, and supplies 227 176 51 29.0 Legal, examination, and professional fees 102 150 (48) (32.0) Credit card expenses 24 24 -- -- Credit investigation and loan collection expenses 56 39 17 43.6 Amortization of intangible assets 378 315 63 20.0 Other 546 697 (151) (21.7) ------- ------- ------- $ 4,216 3,871 345 8.9 % ======= ======= ======= </TABLE> Noninterest income increased $372,000 or 44.3% to $1,211,000 for the second quarter of 2001 compared to $839,000 for the same period of 2000. Service charges on deposit accounts increased $76,000 or 19.3% due primarily to the institution of a new overdraft program at ENB. This program has generated an increase of $85,000 in insufficient fund (NSF) fees collected this year compared to the same period last year. Gains on sales of mortgage loans increased $245,000 or 278.4% due to an increase in volume of loans originated and sold to the secondary market from approximately $7,168,000 in the second quarter of 2000 to approximately $23,316,000 for the second quarter of 2001. The increase in volume of loans sold is a result of increased refinancing activity and new mortgage lending as a result of lower mortgage rates in effect during 2001 compared to those in effect during 2000. Noninterest expense increased $345,000 or 8.9% to $4,216,000 for the second quarter of 2001 compared to $3,871,000 for the second quarter of 2000. Approximately $265,000 of this increase was related to the acquisitions of CNS and Calhoun. Excluding the increases associated with the acquisitions, 14
15 salaries and benefits increased $150,000 or 8.4%. The $35,000 or 16.7% increase in occupancy expense and the $17,000 or 4.6% increase in furniture and equipment expense are also primarily related to the acquisitions. The $36,000 or 43.9% increase in advertising and promotion is due in part to additional product advertising at ENB related to trust services and internet banking. The $51,000 or 29.0% increase in postage, printing and supplies reflects costs incurred by the banks' for compliance with the privacy provisions of the Gramm-Leach-Bliley act. The entire increase in amortization of intangible assets is related to the acquisitions. The $151,000 or 21.7% decrease in other non-interest expense reflects approximately $108,000 of expenses in the second quarter of 2000 related to the merger of Citizens Bank and Union State Bank and Trust and the subsequent name change of the combined institutions. These expenses included costs associated with public relation functions, promotional items, and stationery and supplies expenses. Income taxes as a percentage of earnings before income taxes as reported in the condensed consolidated financial statements was 34.8% for the second quarter of 2001 compared to 31.1% for the second quarter of 2000. After adding a fully taxable equivalent adjustment to both income taxes and earnings before income taxes for tax-exempt income on loans and investment securities, the fully taxable equivalent ratios of income taxes as a percentage of earnings before income taxes were 39.7% for the second quarter of 2001 and 35.3% for the second quarter of 2000. The increase in the effective income tax rate reflects a reduction in the tax-exempt portion of the investment portfolio. SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 Net interest income on a fully taxable equivalent basis increased $1,676,000 or 16.0% to $12,140,000 or 3.66% of average earning assets for the first six months of 2001 compared to $10,464,000 or 3.98% of average earning assets for the same period of 2000. The provision for loan losses for the six months ended June 30, 2001 was $479,000 compared to $566,000 for the same period of 2000. 15
16 Noninterest income and noninterest expense for the six month periods ended June 30, 2001 and 2000 were as follows: (DOLLARS EXPRESSED IN THOUSANDS) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, INCREASE(DECREASE) ---------------- ------------------ 2001 2000 AMOUNT % ------- ------- -------- -------- <S> <C> <C> <C> <C> NONINTEREST INCOME Service charges on deposit accounts $ 924 721 203 28.2 % Trust department income 219 314 (95) (30.3) Brokerage income 44 48 (4) (8.3) Mortgage loan servicing fees 240 242 (2) (0.8) Gain on sales of mortgage loans 568 158 410 259.5 Net loss on sales and calls of debt securities -- (28) 28 100.0 Credit card fees 75 72 3 4.2 Other 216 148 68 45.9 ------- ------- ------- $ 2,286 1,675 611 36.5 % ======= ======= ======= NONINTEREST EXPENSE Salaries and employee benefits $ 4,202 3,531 671 19.0 % Occupancy expense, net 491 411 80 19.5 Furniture and equipment expense 752 717 35 4.9 FDIC insurance assessment 69 57 12 21.1 Advertising and promotion 194 140 54 38.6 Postage, printing, and supplies 390 317 73 23.0 Legal, examination, and professional fees 226 281 (55) (19.6) Credit card expenses 48 50 (2) (4.0) Credit investigation and loan collection expenses 102 80 22 27.5 Amortization of intangible assets 754 549 205 37.3 Other 1,095 1,115 (20) (1.8) ------- ------- ------- $ 8,323 7,248 1,075 14.8 % ======= ======= ======= </TABLE> Noninterest income increased $611,000 or 36.5% to $2,286,000 for the first six months of 2001 compared to $1,675,000 for the same period of 2000. Service charges on deposit accounts increased $203,000 or 28.2% primarily due to the institution of a new overdraft program at ENB. This program has generated an increase of $164,000 in NSF fees collected during the first six months of this year compared to the same period last year. The balance of the increase in service charge income is mainly attributed to the acquisitions made during the second quarter of the prior year. Gains on sales of mortgage loans increased $410,000 or 259.5% due to an increase in volume of loans originated and sold to the secondary market from approximately $11,765,000 during the first six months of 2000 to approximately $39,902,000 during the same period in 2001. The increase in volume of loans sold is a result of increased refinancing activity and new mortgage lending as a result of lower mortgage rates in effect during 2001 compared to those in effect during 2000. Noninterest expense increased $1,075,000 or 14.8% to $8,323,000 for the first six months of 2001 compared to $7,248,000 for the first six months of 2000. Approximately $747,000 of this increase was related to the acquisitions of CNS and Mid Central. Excluding the increases associated with the acquisitions, salaries and benefits increased $219,000 or 6.2%. The $80,000 or 19.5% increase in occupancy expense and the $35,000 or 4.9% increase in furniture and equipment expense are also primarily related to the acquisitions. The $54,000 or 38.6% increase in advertising and promotion is due in part to additional product advertising at ENB related to trust services and internet banking. The $73,000 or 23.0% increase in postage, printing and supplies reflects costs incurred by the banks' for compliance with the privacy 16
17 provisions of the Gramm-Leach-Bliley act. The entire increase in amortization of intangible assets is related to the acquisitions. Income taxes as a percentage of earnings before income taxes as reported in the condensed consolidated financial statements was 34.1% for the first six months of 2001 compared to 30.7% for the first six months of 2000. After adding a fully taxable equivalent adjustment to both income taxes and earnings before income taxes for tax exempt income on loans and investment securities, the fully taxable equivalent ratios of income taxes as a percentage of earnings before income taxes were 39.0% for the first six months of 2001 and 36.2% for the first six months of 2000. The increase in the effective income tax rate reflects a reduction in the tax-exempt portion of the investment portfolio. NET INTEREST INCOME Fully taxable equivalent net interest income increased $479,000 or 8.7% and $1,676,000 or 16.0% respectively for the three month and six month periods ended June 30, 2001 compared to the corresponding periods in 2000. Even though the net interest margins decreased during both periods, net interest income increased due to increased net earning assets during the respective periods. In addition, approximately $114,000 and $476,000 of the increases for the respective periods reflects income recognized from accelerated discount accretion on called securities during the first and second quarters of 2001. The following table presents average balance sheets, net interest income, average yields of earning assets, and average costs of interest bearing liabilities on a fully taxable equivalent basis for the three and six month periods ended June 30, 2001 and 2000. 17
18 (DOLLARS EXPRESSED IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED THREE MONTHS ENDED JUNE 30, 2001 JUNE 30, 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 $148,180 $3,089 8.36% $133,014 $2,973 8.96% Real estate 259,735 5,334 8.24 208,702 4,568 8.78 Consumer 52,735 1,218 9.26 58,161 1,249 8.61 Investment securities:/3/ U.S. Treasury and U.S. Government agencies 112,494 1,817 6.48 108,493 1,798 6.65 State and municipal 38,009 667 7.04 39,294 618 6.31 Other 5,052 75 5.95 3,052 50 6.57 Federal funds sold 52,886 570 4.32 10,693 165 6.19 Interest-bearing deposits 1,958 23 4.71 2,479 29 4.69 -------- ------ -------- ------ Total interest earning assets 671,049 12,793 7.65 563,888 11,450 8.14 All other assets 73,104 58,568 Allowance for loan losses (7,109) (5,825) -------- -------- Total assets $737,044 $616,631 ======== ======== </TABLE> Continued on next page 18
19 <TABLE> <CAPTION> THREE MONTHS ENDED THREE MONTHS ENDED JUNE 30, 2001 JUNE 30, 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 $ 89,474 $ 558 2.50% $ 84,518 $ 594 2.82% Savings 47,430 296 2.50 42,753 298 2.80 Money market 59,076 491 3.33 52,717 518 3.94 Deposits of $100,000 and over 32,216 528 6.57 31,830 438 5.52 Other time deposits 284,076 3,991 5.64 211,322 2,983 5.66 -------- ------ -------- ------ Total time deposits 512,272 5,864 4.59 423,140 4,831 4.58 Federal funds purchased and securities sold under agreements to repurchase 30,329 285 3.77 21,348 317 5.96 Interest-bearing demand notes to U.S. Treasury 735 7 3.82 1,418 20 5.66 Other borrowed money 40,142 634 6.33 46,910 758 6.48 -------- ------ -------- ------ Total interest- bearing liabilities 583,478 6,790 4.67 492,816 5,926 4.82 ------ ------ Demand deposits 64,464 62,760 Other liabilities 12,341 5,326 -------- -------- Total liabilities 660,283 560,902 Stockholders' equity 76,761 55,729 -------- -------- Total liabilities and stockholders' equity $737,044 $616,631 ======== ======== Net interest income $6,003 $5,524 ====== ====== Net interest margin/4/ 3.59% 3.93% ==== ==== </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 $206,000 in 2001 and $131,000 in 2000. /2/ Non-accruing loans are included in the average amounts outstanding. /3/ Average balances based on amortized cost. /4/ Net interest income divided by average total interest earning assets. 19
20 <TABLE> <CAPTION> SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2001 JUNE 30, 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 $148,371 $6,336 8.61% $124,610 $5,456 8.83% Real estate 259,570 10,721 8.33 196,052 8,339 8.58 Consumer 54,305 2,472 9.18 55,770 2,378 8.60 Investment securities:/3/ U.S. Treasury and U.S. Government agencies 116,923 4,147 7.15 100,814 3,255 6.51 State and municipal 38,513 1,363 7.14 37,155 1,262 6.85 Other 4,554 120 5.31 4,136 124 6.05 Federal funds sold 43,936 1,029 4.72 8,193 243 5.98 Interest-bearing deposits 2,657 66 5.01 2,816 73 5.23 -------- ------ -------- ------ Total interest earning assets 668,829 26,254 7.92 529,546 21,130 8.05 All other assets 72,833 56,037 Allowance for loan losses (7,046) (5,472) -------- -------- Total assets $734,616 $580,111 ======== ======== </TABLE> Continued on next page 20
21 <TABLE> <CAPTION> SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2001 JUNE 30, 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 $ 90,485 $ 1,206 2.69% $ 82,758 $ 1,151 2.80% Savings 46,031 603 2.64 40,795 568 2.81 Money market 58,905 1,075 3.68 48,851 944 3.90 Deposits of $100,000 and over 34,094 1,095 6.48 30,449 813 5.38 Other time deposits 285,068 8,183 5.79 196,504 5,337 5.48 -------- ------ -------- ------ Total time deposits 514,583 12,162 4.77 399,357 8,813 4.45 Federal funds purchased and securities sold under agreements to repurchase 29,550 648 4.42 21,238 590 5.60 Interest-bearing demand notes to U.S. Treasury 762 18 4.76 1,156 35 6.11 Other borrowed money 40,775 1,286 6.36 38,624 1,228 6.41 -------- ------ -------- ------ Total interest- bearing liabilities 585,670 14,114 4.86 460,375 10,666 4.67 ------ ------ Demand deposits 61,566 58,737 Other liabilities 11,734 4,550 -------- -------- Total liabilities 658,970 523,662 Stockholders' equity 75,646 56,449 -------- -------- Total liabilities and stockholders' equity $734,616 $580,111 ======== ======== Net interest income $12,140 $10,464 ======= ======= Net interest margin/4/ 3.66% 3.98% ==== ==== </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 $414,000 in 2001 and $344,000 in 2000. /2/ Non-accruing loans are included in the average amounts outstanding. /3/ Average balances based on amortized cost. /4/ Net interest income divided by average total interest earning assets. 21
22 The following tables present, on a fully taxable equivalent basis, an analysis of changes in net interest income resulting from changes in average volumes of earning assets and interest bearing liabilities and average rates earned and paid. The change in interest due to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of change in each. (DOLLARS EXPRESSED IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000 -------------------------------- CHANGE DUE TO TOTAL ------------- CHANGE VOLUME RATE -------- -------- --------- <S> <C> <C> <C> INTEREST INCOME ON A FULLY TAXABLE EQUIVALENT BASIS: Loans: /1/ Commercial $ 116 324 (208) Real estate /2/ 766 1,062 (296) Consumer (31) (121) 90 Investment securities: U.S. Treasury and U.S. Government agencies 19 66 (47) State and municipal /2/ 49 (20) 69 Other 25 30 (5) Federal funds sold 405 469 (64) Interest-bearing deposits (6) (6) 0 ------- ------- -------- Total interest income 1,343 1,804 (461) INTEREST EXPENSE: NOW accounts (36) 34 (70) Savings (2) 31 (33) Money market (27) 58 (85) Deposits of $100,000 and over 90 5 85 Other time deposits 1,008 1,022 (14) Federal funds purchased and securities sold under agreements to repurchase (32) 107 (139) Interest-bearing demand notes to U.S. Treasury (13) (8) (5) Other borrowed money (124) (107) (17) ------- ------- -------- Total interest expense 864 1,142 (278) ------- ------- -------- NET INTEREST INCOME ON A FULLY TAXABLE EQUIVALENT BASIS $ 479 662 (183) ======= ======= ======== </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 $206,000 in 2001 and $131,000 in 2000. 22
23 (DOLLARS EXPRESSED IN THOUSANDS) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 20, 2000 ------------------------------ CHANGE DUE TO TOTAL ------------- CHANGE VOLUME RATE -------- -------- --------- <S> <C> <C> <C> INTEREST INCOME ON A FULLY TAXABLE EQUIVALENT BASIS: Loans: /1/ Commercial $ 880 1,019 (139) Real estate /2/ 2,382 2,630 (248) Consumer 94 (63) 157 Investment securities: U.S. Treasury and U.S. Government agencies 892 552 340 State and municipal /2/ 101 47 54 Other (4) 12 (16) Federal funds sold 786 847 (61) Interest-bearing deposits (7) (4) (3) ------- ------- -------- Total interest income 5,124 5,040 84 INTEREST EXPENSE: NOW accounts 55 104 (49) Savings 35 70 (35) Money market 131 185 (54) Deposits of $100,000 and over 282 104 178 Other time deposits 2,846 2,527 319 Federal funds purchased and securities sold under agreements to repurchase 58 199 (141) Interest-bearing demand notes to U.S. Treasury (17) (10) (7) Other borrowed money 58 68 (10) ------- ------- -------- Total interest expense 3,448 3,247 201 ------- ------- -------- NET INTEREST INCOME ON A FULLY TAXABLE EQUIVALENT BASIS $ 1,676 1,793 (117) ======= ======= ======== </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 $414,000 in 2001 and $344,000 in 2000. 23
24 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 and $129,000 for the second quarter of 2001. That compares to net loan recoveries of $7,000 for the first quarter of 2000 and $131,000 for the second 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 and $231,000 for the second quarter of 2001. That compares to $258,000 for the first quarter of 2000 and $308,000 for the second quarter of 2000. The balance of the allowance for loan losses was $7,179,000 at June 30, 2001 compared to $6,940,000 at December 31, 2000 and $6,612,000 at June 30, 2000. The allowance for loan losses as a percent of outstanding loans was 1.55% at June 30, 2001 compared to 1.48% at December 31, 2000 and 1.39% at June 30, 2000. FINANCIAL CONDITION Total assets increased $20,279,000 or 2.8% to $739,882,000 at June 30, 2001 compared to $719,603,000 at December 31, 2000. Total liabilities increased $16,862,000 or 2.6% to $662,881,000. Stockholders' equity increased $3,417,000 or 4.6% to $77,001,000. Loans decreased $4,315,000 or 0.9% to $464,156,000 at June 30, 2001 compared to $468,471,000 at December 31, 2000. Commercial loans decreased $6,751,000; real estate construction loans increased $383,000; real estate mortgage loans increased $7,580,000; and consumer loans decreased $5,528,000. The increase in real estate mortgage loans reflects increased activity due to favorable rates that currently exist in the markets. Of the $7,580,000 increase in mortgage loans, approximately $3,177,000 reflects loans that will be sold in the secondary market. The decreases in commercial and consumer loans are reflective of lower rates in the markets that the Company is unwilling to match, primarily in the area of automobile financing. 24
25 Nonperforming loans, defined as loans on nonaccrual status, loans 90 days or more past due, and restructured loans totaled $7,402,000 or 1.60% of total loans at June 30, 2001 compared to $8,082,000 or 1.73% of total loans at December 31, 2000. Detail of those balances plus repossessions is as follows: (DOLLARS EXPRESSED IN THOUSANDS) <TABLE> <CAPTION> JUNE 30, 2001 DECEMBER 31, 2000 ----------------- ----------------- % OF % OF GROSS GROSS BALANCE LOANS BALANCE LOANS ------- ----- ------- ----- <S> <C> <C> <C> <C> Nonaccrual loans: Commercial $2,666 .58% $2,648 .57% Real Estate: Construction 689 .15 1,006 .22 Mortgage 3,622 .78 3,584 .77 Consumer 108 .02 453 .09 ------ ---- ------ ---- 7,085 1.53 7,691 1.65 ------ ---- ------ ---- Loans contractually past-due 90 days or more and still accruing: Commercial -- -- -- -- Real Estate: Construction -- -- -- -- Mortgage 274 .06 237 .05 Consumer 43 .01 154 .03 ------ ---- ------ ---- 317 .07 391 .08 ------ ---- ------ ---- Restructured loans -- -- -- -- ------ ---- ------ ---- Total nonperforming loans 7,402 1.60% 8,082 1.73% ==== ==== Other real estate 135 36 Repossessions 220 143 ------ ------ Total nonperforming assets $7,757 $8,261 ====== ====== </TABLE> The allowance for loan losses was 97.00% of nonperforming loans at June 30, 2001 compared to 85.87% of nonperforming loans at December 31, 2000. The Company has allocated $1,097,000 of the allowance for loan losses at June 30, 2001 which it believes adequately covers any exposure on these specific credits. 25
26 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 June 30, 2001 and 2000, which would have been recorded under the original terms those loans, was approximately $385,000 and $237,000 for the six months ended June 30, 2001 and 2000, respectively. Approximately $47,000 and $159,000 was actually recorded as interest income on such loans for the six months ended June 30, 2001 and 2000, respectively. A loan is considered "impaired" when it is probable a creditor will be unable to collect all amounts due - both principal and interest - according to the contractual terms of the loan agreement. In addition to nonaccrual loans at June 30, 2001 included in the table above, which were considered "impaired", management has identified additional loans totaling approximately $2,107,000 which are not included in the table above but are considered by management to be "impaired". The $2,107,000 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 six months of 2001 was approximately $9,223,000. At June 30, 2001 the allowance for loan losses on impaired loans was $1,614,000 compared to $1,565,000 at December 31, 2000. As of June 30, 2001 and December 31, 2000 approximately $8,642,000 and $5,098,000, respectively, of loans not included in the nonaccrual table above or identified by management as being "impaired" were classified by management as having more than normal risk. In addition to the classified list, our Company also maintains an internal loan watch list of loans which for various reasons, not all related to credit quality, management is monitoring more closely than the average loan portfolio. Loans may be added to this list for reasons that are temporary and correctable, such as the absence of current financial statements of the borrower, or a deficiency in loan documentation. Other loans are added as soon as any problem is detected which might affect the scheduled loan payment, a deterioration in the borrower's financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment within which the borrower operates. Once the loan is placed on our Company's watch list, its condition is monitored closely. Any further deterioration in the condition of the loan is evaluated to determine if the loan should be assigned a higher risk category. Investment in debt and equity securities classified as available-for-sale increased $14,720,000 or 11.0% to $148,174,000 at June 30, 2001 compared to $133,454,000 at December 31, 2000. As allowed upon adoption of SFAS 133, the Company transferred its held-to-maturity portfolio to its available-for-sale portfolio. This transfer was made effective January 1, 2001. At the time of transfer the amortized cost of the securities transferred was $22,463,000 and the fair value was $22,676,000. Investments classified as available-for-sale are carried at fair value. During 2001, the market valuation account was increased $1,661,000 to $2,695,000 to reflect the fair value of available-for-sale investments at June 30, 2001 and the net after tax increase resulting from the change in the market valuation adjustment of $1,075,000 increased the stockholders' equity component to $1,733,000 at June 30, 2001. At December 31, 2000 the market valuation account for the available-for-sale investments of $1,035,000 increased the amortized cost of those investments to their fair value on that date and the net after tax increase resulting from the market valuation adjustment of $658,000 was reflected as a separate positive component of stockholders' equity. 26
27 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 June 30, 2001 compared to $22,463,000 at December 31, 2000. Investments classified as held-to-maturity are carried at amortized cost. At December 31, 2000 the aggregate fair value of 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 $34,532,000 or 70.6% to $83,456,000 at June 30 2001 compared to $48,924,000 at December 31, 2000. Most of this increase reflects funds received from securities called prior to maturity that have not been reinvested and are being held in federal funds sold. Premises and equipment decreased $923,000 or 5.8% to $14,868,000 at June 30, 2001 compared to $15,791,000 at December 31, 2000. The decrease reflects sales and retirements of premises and equipment of $1,468,000 and depreciation expense of $640,000, offset by purchases for premises and equipment of $1,185,000. Total deposits increased $9,466,000 or 1.6% to $585,729,000 at June 30, 2001 compared to $576,263,000 at December 31, 2000. Most of this increase is attributed to increased public fund balances. Federal funds purchased and securities sold under agreements to repurchase increased $6,033,000 or 36.8% to $22,431,000 at June 30, 2001 compared to $16,398,000 at December 31, 2000. The increase is primarily due increased public funds at ENB. The increase in stockholders' equity reflects net income of $3,430,000 less dividends declared of $1,088,000 and a $1,075,000 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. 27
28 IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS In September 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 establishes standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In September 1999, the FASB issued Statement of Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No. 133, which defers the effective date of SFAS 133 from fiscal years beginning after September 15, 1999 to fiscal years beginning after September 15, 2000. In September 2000, the FASB issued Statement of Financial Accounting Standards No. 138 - Accounting for Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133 (SFAS 138), which addresses a limited number of issues causing implementation difficulties for numerous entities that apply SFAS 133, as amended. SFAS 138 amends the accounting and reporting standards of SFAS 133, as amended, for certain derivative instruments, certain hedging activities, and for decisions made by the FASB relating to the Derivative Implementation Group (DIG) process. 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. 28
29 The implementation of this Statement did not have a material effect on the Company's consolidated financial statements. In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company is required to adopt the provisions of Statement 141 immediately and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142. Statement 141 will require upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of it assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be 29
30 recognized as the cumulative effect of a change in accounting principle in the Company's statement of earnings. And finally, any unamortized negative goodwill existing at the date Statement 142 is adopted must be written off as the cumulative effect of a change in accounting principle. As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $24,287,000, unamortized identifiable intangible assets in the amount of $275,000, and no negative goodwill, all of which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $1,169,000 and $679,000 for the year ended December 31, 2000 and the six months ended June 30, 2001, respectively. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company's financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. 30
31 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 June 30, 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. 31
32 PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. At the annual meeting of the shareholders of Exchange National Bancshares, Inc. held on June 13, 2001, the shareholders elected three Class III Directors, namely, Donald L. Campbell, David T. Turner, and Kevin L. Riley to serve terms expiring at the annual meeting of shareholders in 2004 and ratified the Board of Directors selection of KPMG LLP as the Company's independent auditors for the year ending December 31, 2001. Class I Directors, namely, Charles G. Dudenhoeffer, Jr., Phillip D. Freeman, and James E. Smith, and Class II Directors, namely, David R. Goller, James R. Loyd, and Gus S. Wetzel, II, continue to serve terms expiring at the annual meetings of shareholders in 2002 and 2003, respectively. The following is a summary of votes cast. No broker non-votes were received. <TABLE> <CAPTION> Withhold Authority/ For Against Abstentions --------- ------------ ----------- <S> <C> <C> <C> Election of Directors: Donald L. Campbell 2,486,767 7,711 N/A David T. Turner 2,480,002 14,476 N/A Kevin I. Riley 2,479,428 15,050 N/A Ratification of KPMG LLP as independent auditors 2,485,027 1,349 8,102 </TABLE> Item 5. Other Information None 32
33 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 be reference). (b) Reports on Form 8-K. No reports were filed on Form 8-K for the three month period ended June 30, 2001. 33
34 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 August 10, 2001 Principal Executive Officer By /s/ Richard G. Rose ----------------------------------- Richard G. Rose, Treasurer August 10, 2001 34
35 EXCHANGE NATIONAL BANCSHARES, INC. INDEX TO EXHIBITS June 30, 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, 1999 (Commission file number 0-23636) and incorporated herein by reference). ** ** Incorporated by reference. 35