UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 November 9, 2001, the registrant had 2,854,145 shares of common stock, par value $1.00 per share, outstanding. Page 1 of 34 pages Index to Exhibits located on page 34 1
PART I - FINANCIAL INFORMATION Item 1. Financial Statements EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES --------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------ ------------ <S> <C> <C> ASSETS Loans: Commercial $140,656,317 $151,329,889 Real estate -- construction 23,529,000 20,500,000 Real estate -- mortgage 247,596,854 238,157,787 Consumer 50,227,034 58,483,757 ------------ ------------ 462,009,205 468,471,433 Less allowance for loan losses 7,303,354 6,939,991 ------------ ------------ Loans, net 454,705,851 461,531,442 ------------ ------------ Investment in debt and equity securities: Available-for-sale, at fair value 184,056,225 133,453,720 Held-to-maturity, fair value of $22,675,700 at December 31, 2000 -- 22,463,180 ------------ ------------ Total investment in debt and equity securities 184,056,225 155,916,900 ------------ ------------ Federal funds sold 56,922,011 23,550,366 Cash and due from banks 20,090,501 25,374,115 Premises and equipment 14,937,383 15,791,222 Accrued interest receivable 6,173,427 6,795,268 Intangible assets 24,950,728 26,099,648 Other assets 4,223,649 4,544,385 ------------ ------------ $766,059,775 $719,603,346 ============ ============ </TABLE> Continued on next page 2
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES --------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) (Unaudited) <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------ ------------ <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Demand deposits $ 65,942,178 $ 68,722,835 Time deposits 503,187,021 507,540,052 ------------ ------------ Total deposits 569,129,199 576,262,887 Federal funds purchased and securities sold under agreements to repurchase 63,218,351 16,398,484 Interest-bearing demand notes to U.S. Treasury 1,272,567 543,667 Other borrowed money 40,831,205 42,377,787 Accrued interest payable 3,309,074 4,420,054 Other liabilities 9,817,812 6,016,730 ------------ ------------ Total liabilities 687,578,208 646,019,609 ------------ ------------ Stockholders' equity: Common Stock - $1 par value; 15,000,000 shares authorized; 2,863,493 shares issued 2,863,493 2,863,493 Surplus 21,970,425 21,955,275 Retained earnings 51,671,703 48,106,530 Accumulated other comprehensive income 2,227,645 658,439 Treasury stock; 9,348 shares at cost (251,699) -- ------------ ------------ Total stockholders' equity 78,481,567 73,583,737 ------------ ------------ $766,059,775 $719,603,346 ============ ============ </TABLE> See accompanying notes to unaudited condensed consolidated financial statements. 3
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES --------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ------------------------ 2001 2000 2001 2000 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Interest income $12,196,884 $12,963,234 $38,036,636 $33,749,772 Interest expense 6,163,441 7,210,067 20,277,447 17,875,919 ----------- ----------- ----------- ----------- Net interest income 6,033,443 5,753,167 17,759,189 15,873,853 Provision for loan losses 231,000 273,000 710,000 839,000 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 5,802,443 5,480,167 17,049,189 15,034,853 Noninterest income 1,289,655 910,295 3,597,258 2,585,049 Noninterest expense 4,402,571 4,111,909 12,747,807 11,360,220 ----------- ----------- ----------- ----------- Income before income taxes 2,689,527 2,278,553 7,898,640 6,259,682 Income taxes 924,343 727,426 2,703,052 1,950,601 ----------- ----------- ----------- ----------- Net income $ 1,765,184 $1,551,127 $5,195,588 $4,309,081 =========== =========== =========== =========== Basic earnings per share $0.62 $0.54 $1.81 $1.65 ===== ===== ===== ===== Diluted earnings per share $0.62 $0.54 $1.81 $1.65 ===== ===== ===== ===== Weighted average shares of common stock outstanding: Basic 2,860,851 2,863,493 2,862,603 2,604,190 Diluted 2,861,034 2,863,493 2,862,603 2,604,190 Dividends per share: Declared $0.19 $0.19 $0.57 $0.57 ===== ===== ===== ===== Paid $0.19 $0.19 $0.57 $0.57 ===== ===== ===== ===== </TABLE> See accompanying notes to unaudited condensed consolidated financial statements. 4
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES --------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 2001 2000 ------------- ------------ <S> <C> <C> Cash flows from operating activities: Net income $ 5,195,588 $ 4,309,081 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 710,000 839,000 Depreciation expense 937,698 892,111 Net accretion of debt securities premiums and discounts (594,300) (275,902) Amortization of intangible assets 1,142,798 935,642 Decrease (increase) in accrued interest receivable 621,841 (1,068,362) Decrease (increase) in other assets (451,566) 353,437 Decrease (increase) in accrued interest payable (1,110,980) 647,569 Increase in other liabilities 3,801,082 1,584,962 Net securities losses -- 27,710 Other, net 21,276 (118,387) Origination of mortgage loans for sale (65,574,504) (18,860,925) Proceeds from the sale of mortgage loans held for sale 66,467,894 19,148,997 Gain on dispositions of premises and equipment (127,379) -- Gain on sale of mortgage loans (893,390) (288,072) ------------- ------------ Net cash provided by operating activities 10,146,058 8,126,861 ------------- ------------ Cash flows from investing activities: Net decrease (increase) in loans 5,321,192 (24,265,861) Purchases of available-for-sale debt securities (174,988,707) (75,026,185) 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 105,007,558 74,349,802 Held-to-maturity -- 4,279,884 Proceeds from calls of debt securities: Available-for-sale 44,835,000 -- Held-to-maturity -- 710,000 Purchase of subsidiaries, net of cash and cash equivalents acquired -- (7,886,356) Purchases of premises and equipment (1,595,526) (1,239,894) Proceeds from dispositions of premises and equipment 1,639,043 50,156 Proceeds from sales of other real estate owned and repossessions 737,030 592,245 ------------- ------------ Net cash used in investing activities (19,044,410) (27,923,562) ------------- ------------ </TABLE> Continued on next page 5
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES --------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 2001 2000 ----------- ------------ <S> <C> <C> Cash flows from financing activities: Net decrease in demand deposits (2,780,657) (19,915,038) Net increase (decrease) in interest-bearing transaction accounts (4,955,497) 2,579,653 Net increase in time deposits 602,466 31,213,380 Net increase in federal funds purchased and securities sold under agreements to repurchase 46,819,867 (6,964,827) Net increase (decrease) in interest-bearing demand notes to U.S. Treasury 728,900 (1,721,319) Proceeds from Federal Home Loan Bank borrowings 1,000,000 12,000,000 Repayment of Federal Home Loan Bank borrowings (1,046,582) (7,512,551) Proceeds from other borrowed money -- 12,000,000 Repayment of other borrowed money (1,500,000) (2,000,000) Purchase of common stock (251,699) -- Cash dividends paid (1,630,415) (1,313,026) ----------- ----------- Net cash provided by financing activities 36,986,383 18,366,272 ----------- ----------- Net increase (decrease) in cash and cash equivalents 28,088,031 (1,430,429) Cash and cash equivalents, beginning of period 48,924,481 32,601,208 ----------- ----------- Cash and cash equivalents, end of period $77,012,512 $31,170,779 =========== =========== Supplemental schedule of cash flow information- Cash paid during period for: Interest $21,388,427 $16,307,136 Income taxes 203,960 555,135 Supplemental schedule of noncash investing activities- Other real estate and repossessions acquired in settlement of loans 794,399 659,239 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
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES --------------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Nine Months Ended September 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 their respective dates of acquisition. A summary of unaudited pro forma combined financial information for the nine months ended September 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> NINE MONTHS ENDED SEPTEMBER 30, ------------------- 2000 ------------------- <S> <C> NET INTEREST INCOME $17,155,040 NET INCOME $ 4,060,017 EARNINGS PER SHARE $1.56 </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 September 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 our 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
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. Bancshares believes that these financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly our company's consolidated financial position as of September 30, 2001 and December 31, 2000, consolidated statements of earnings for the three and nine month periods ended September 30, 2001 and 2000 and cash flows for the nine months ended September 30, 2001 and 2000. The following table reflects, for the three and nine months periods ended September 30, 2001 and 2000, the numerators (net income) and denominators (average shares outstanding) for the basic and diluted net income per share computations: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ---------------------- 2001 2000 2001 2000 ---------- ---------- --------- ---------- <S> <C> <C> <C> <C> Net income, basic and diluted $1,765,184 $1,551,127 $5,195,588 $4,309,081 Average shares outstanding 2,860,851 2,863,493 2,862,603 2,604,190 Effect of dilutive securities 183 -- -- -- ---------- ---------- ---------- ---------- Average shares outstanding including dilutive securities 2,861,034 2,863,493 2,862,603 2,604,190 Net income per share, basic $0.62 $0.54 $1.81 $1.65 ===== ===== ===== ===== Net income per share, diluted $0.62 $0.54 $1.81 $1.65 ===== ===== ===== ===== </TABLE> 8
For the three-month and nine-month periods ended September 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 nine-month periods ended September 30, 2001 and 2000 is summarized as follows: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ------------------------ 2001 2000 2001 2000 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net income $1,765,184 $1,551,127 $5,195,588 $4,309,081 Other comprehensive income: Net unrealized holding gains on investments in debt and equity securities available-for-sale, net of taxes 494,693 778,310 1,569,206 746,441 Adjustment for net securities losses realized in net income, net of applicable income taxes -- -- -- 18,287 ---------- ---------- ---------- ---------- Total other comprehensive income 494,693 778,310 1,569,206 764,728 ---------- ---------- ---------- ---------- Comprehensive income $2,259,877 $2,329,437 $6,764,794 $5,073,809 ========== ========== ========== ========== </TABLE> 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 Our 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
<TABLE> <CAPTION> SEPTEMBER 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 $300,449,190 $117,379,647 $36,877,014 $ -- $454,705,851 Debt and equity securities 103,613,518 53,611,808 26,830,899 -- 184,056,225 Total assets 456,213,565 238,573,954 71,445,963 (173,707) 766,059,775 Deposits 327,354,006 187,050,122 58,763,566 (4,038,495) 569,129,199 Stockholders' equity 48,793,205 35,834,189 9,738,489 (15,884,316) 78,481,567 ============ ============ =========== ============ ============ </TABLE> <TABLE> <CAPTION> DECEMBER 31, 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> 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 SEPTEMBER 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 $ 7,421,416 $ 3,567,832 $ 1,207,636 -- $ 12,196,884 Total interest expense 3,439,257 1,868,382 550,396 305,406 6,163,441 ------------ ------------ ----------- ------------ ------------ Net interest income 3,982,159 1,699,450 657,240 (305,406) 6,033,443 Provision for loan losses 150,000 75,000 6,000 -- 231,000 Noninterest income 931,422 195,658 57,188 -- 1,184,268 Noninterest expense 2,520,938 1,297,097 367,199 111,950 4,297,184 Income taxes 727,200 212,990 123,553 (139,400) 924,343 ------------ ------------ ----------- ------------ ------------ Net income (loss) $ 1,515,443 $ 310,021 $ 217,676 $ (277,956) $ 1,765,184 ============ ============ =========== ============ ============ </TABLE> <TABLE> <CAPTION> THREE MONTHS ENDED SEPTEMBER 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 $ 7,910,417 $ 3,976,547 $ 1,069,495 $ 6,775 $ 12,963,234 Total interest expense 4,119,041 2,096,362 564,873 429,791 7,210,067 ------------ ------------ ----------- ------------ ------------ Net interest income 3,791,376 1,880,185 504,622 (423,016) 5,753,167 Provision for loan losses 225,000 45,000 3,000 -- 273,000 Noninterest income 681,828 176,817 51,650 -- 910,295 Noninterest expense 2,457,661 1,199,238 338,312 116,698 4,111,909 Income taxes 556,900 281,288 70,238 (181,000) 727,426 ------------ ------------ ----------- ------------ ------------ Net income (loss) $ 1,233,643 $ 531,476 $ 144,722 $ (358,714) $ 1,551,127 ============ ============ =========== ============ ============ </TABLE> 10
<TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 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 $ 22,767,419 $ 11,382,723 $ 3,880,784 $ 5,710 $ 38,036,636 Total interest expense 11,363,626 6,179,157 1,757,423 977,241 20,277,447 ------------ ------------ ----------- ------------ ------------ Net interest income 11,403,793 5,203,566 2,123,361 (971,531) 17,759,189 Provision for loan losses 450,000 225,000 35,000 -- 710,000 Noninterest income 2,734,640 571,248 163,992 -- 3,469,880 Noninterest expense 7,504,983 3,748,629 1,092,753 274,064 12,620,429 Income taxes 1,990,870 709,125 418,857 (415,800) 2,703,052 ------------ ------------ ----------- ------------ ------------ Net income (loss) $ 4,192,580 $ 1,092,060 $ 740,743 $ (829,795) $ 5,195,588 ============ ============ =========== ============ ============ </TABLE> <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 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 $ 20,707,635 $ 9,946,938 $ 3,069,313 $ 25,886 $ 33,749,772 Total interest expense 10,232,339 5,064,040 1,567,765 1,011,775 17,875,919 ------------ ------------ ----------- ------------ ------------ Net interest income 10,475,296 4,882,898 1,501,548 (985,889) 15,873,853 Provision for loan losses 675,000 155,000 9,000 -- 839,000 Noninterest income 1,940,642 490,646 153,761 -- 2,585,049 Noninterest expense 6,730,478 3,234,732 997,963 397,047 11,360,220 Income taxes 1,527,900 673,931 211,270 (462,500) 1,950,601 ------------ ------------ ----------- ------------ ------------ Net income (loss) $ 3,482,560 $ 1,309,881 $ 437,076 $ (920,436) $ 4,309,081 ============ ============ =========== ============ ============ </TABLE> 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. IN PARTICULAR, STATEMENTS THAT THE PERIODIC REVIEW OF OUR LOAN PORTFOLIO KEEPS MANAGEMENT INFORMED OF POSSIBLE LOAN PROBLEMS, THAT THE ALLOWANCE FOR LOAN LOSSES ADEQUATELY COVERS ANY EXPOSURE ON SPECIFIC CREDITS, AND THAT SPECIFIED LEVELS OF UNAMORTIZED GOODWILL, UNAMORTIZED IDENTIFIABLE INTANGIBLE ASSETS AND NEGATIVE GOODWILL ARE EXPECTED AS A RESULT OF THE IMPLEMENTATION OF FASB STATEMENTS 141 AND 142 ARE ALL FORWARD-LOOKING STATEMENTS. OUR COMPANY'S ACTUAL RESULTS, FINANCIAL CONDITION, OR BUSINESS COULD DIFFER MATERIALLY FROM ITS HISTORICAL RESULTS, FINANCIAL CONDITION, OR BUSINESS, OR THE RESULTS OF OPERATIONS, FINANCIAL CONDITION, OR BUSINESS CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY THE FORWARD LOOKING STATEMENTS HEREIN INCLUDE MARKET CONDITIONS AS WELL AS CONDITIONS SPECIFICALLY AFFECTING THE BANKING INDUSTRY GENERALLY AND FACTORS HAVING A SPECIFIC IMPACT ON BANCSHARES INCLUDING, BUT NOT LIMITED TO, FLUCTUATIONS IN INTEREST RATES AND IN THE ECONOMY; THE IMPACT OF LAWS AND REGULATIONS APPLICABLE TO BANCSHARES AND CHANGES THEREIN; COMPETITIVE CONDITIONS IN THE MARKETS IN WHICH BANCSHARES CONDUCTS ITS OPERATIONS, INCLUDING COMPETITION FROM BANKING AND NON-BANKING COMPANIES WITH SUBSTANTIALLY GREATER RESOURCES THAN BANCSHARES, SOME OF WHICH MAY OFFER AND DEVELOP PRODUCTS AND SERVICES NOT OFFERED BY BANCSHARES; AND THE ABILITY OF BANCSHARES TO RESPOND TO CHANGES IN TECHNOLOGY. ADDITIONAL FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES WERE DISCUSSED UNDER THE CAPTION "FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION, OR BUSINESS," IN OUR COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000, AS WELL AS THOSE DISCUSSED ELSEWHERE IN OUR COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. 12
Net income for the three months ended September 30, 2001 of $1,765,000 increased $214,000 when compared to the third quarter of 2000. Earnings per common share for the third quarter of 2001 of $0.62 increased 8 cents or 14.8% when compared to the third quarter of 2000. Net income for the nine months ended September 30, 2001 of $5,196,000 increased $887,000 when compared to the first nine months of 2000. Earnings per common share for the nine months ended September 30, 2001 of $1.81 increased 16 cents or 9.7% when compared to the first nine 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 NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------- ---------------- 2001 2000 2001 2000 ------- ------- ------- ------- <S> <C> <C> <C> <C> Interest income $12,196 $12,963 $38,037 $33,750 Fully taxable equivalent (FTE) adjustment 202 268 617 614 ------- ------- ------- ------- Interest income (FTE basis) 12,398 13,231 38,654 34,364 Interest expense 6,163 7,210 20,277 17,876 ------- ------- ------- ------- Net interest income (FTE basis) 6,235 6,021 18,377 16,488 Provision for loan losses 231 273 710 839 ------- ------- ------- ------- Net interest income after provision for loan losses (FTE basis) 6,004 5,748 17,667 15,649 Noninterest income 1,290 910 3,597 2,585 Noninterest expense 4,403 4,112 12,748 11,360 ------- ------- ------- ------- Earnings before income taxes (FTE basis) 2,891 2,546 8,516 6,874 ------- ------- ------- ------- Income taxes 924 727 2,703 1,951 FTE adjustment 202 268 617 614 ------- ------- ------- ------- Income taxes (FTE basis) 1,126 995 3,320 2,565 ------- ------- ------- ------- Net income $ 1,765 $ 1,551 $ 5,196 $ 4,309 ======= ======= ======= ======= </TABLE> 13
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 Net interest income on a fully taxable equivalent basis increased $214,000 or 3.6% to $6,235,000 or 3.68% of average earning assets for the third quarter of 2001 compared to $6,021,000 or 3.70% of average earning assets for the same period of 2000. The provision for loan losses for the three months ended September 30, 2001 was $231,000 compared to $273,000 for the same period of 2000. Noninterest income and noninterest expense for the three month periods ended September 30, 2001 and 2000 were as follows: (DOLLARS EXPRESSED IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED SEPTEMBER 30, INCREASE(DECREASE) ---------------- ------------------ 2001 2000 AMOUNT % ------- ------ ------- ------- <S> <C> <C> <C> <C> NONINTEREST INCOME Service charges on deposit accounts $ 505 $ 412 $ 93 22.6 % Trust department income 94 104 (10) (9.6) Brokerage income 21 20 1 5.0 Mortgage loan servicing fees 81 136 (55) (40.4) Gain on sales of mortgage loans 325 130 195 150.0 Credit card fees 39 36 3 8.3 Other 225 72 153 212.5 ------ ------ ------ $1,290 $ 910 $ 380 41.8 % ====== ====== ====== NONINTEREST EXPENSE Salaries and employee benefits $2,168 $1,960 $ 208 10.6 % Occupancy expense, net 289 268 21 7.8 Furniture and equipment expense 379 405 (26) (0.6) FDIC insurance assessment 33 36 (3) (8.3) Advertising and promotion 106 107 (1) (0.9) Postage, printing, and supplies 197 195 2 1.0 Legal, examination, and professional fees 211 161 50 31.1 Credit card expenses 22 26 (4) 15.4 Credit investigation and loan collection expenses 59 77 (18) (23.4) Amortization of intangible assets 389 387 2 0.5 Other 550 490 60 12.2 ------ ------ ------ $4,403 $4,112 $ 291 7.1 % ====== ====== ====== </TABLE> Noninterest income increased $380,000 or 41.8% to $1,290,000 for the third quarter of 2001 compared to $910,000 for the same period of 2000. Service charges on deposit accounts increased $93,000 or 22.6% due primarily to the institution of a new overdraft program at ENB. This program has generated an increase of $80,000 in insufficient fund fees collected this year compared to the same period last year. Gains on sales of mortgage loans increased $195,000 or 150.0% due to an increase in volume of loans originated and sold to the secondary market from approximately $7,384,000 in the third quarter of 2000 to approximately $25,672,000 for the third quarter of 2001. 14
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. The decrease in mortgage servicing fees of $55,000 reflects the write-down of $53,000 of Bancshares' mortgage servicing rights to their fair value at September 30, 2001. This write-down is reflective of the high refinancing activity that our company has experienced in its servicing portfolio during the second and third quarters of 2001. The $153,000 or 212.5% increase in other noninterest income is primarily the result of a gain of $109,000 recognized on the sale of property obtained in one of the prior acquisitions. This property was not being used as a banking branch. The balance of the increase is spread across various categories of other noninterest income including ATM surcharge fees, safe deposit box rental income and miscellaneous fee income. Noninterest expense increased $291,000 or 7.1% to $4,403,000 for the third quarter of 2001 compared to $4,112,000 for the third quarter of 2000. Salaries and benefits increased $208,000 or 10.6%. This increase represents normal salary adjustments, increased insurance benefit costs, and additional hires. The $50,000 or 31.1% increase in legal, examination and professional fees is primarily the result of consulting fees paid in the third quarter for tax and technology related issues. Approximately $25,000 of the $60,000 or 12.2% increase in other noninterest expense represents an increase in forgery and fraud losses experienced by the banks compared to the same period last year. Income taxes as a percentage of earnings before income taxes as reported in the condensed consolidated financial statements was 34.4% for the third quarter of 2001 compared to 31.9% for the third 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 39.0% for the third quarter of 2001 and 39.1% for the third quarter of 2000. NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 Net interest income on a fully taxable equivalent basis increased $1,888,000 or 11.5% to $18,376,000 or 3.67% of average earning assets for the first nine months of 2001 compared to $16,488,000 or 3.88% of average earning assets for the same period of 2000. The provision for loan losses for the nine months ended September 30, 2001 was $710,000 compared to $839,000 for the same period of 2000. 15
Noninterest income and noninterest expense for the nine month periods ended September 30, 2001 and 2000 were as follows: (DOLLARS EXPRESSED IN THOUSANDS) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, INCREASE(DECREASE) ----------------- ------------------ 2001 2000 AMOUNT % ------- ------- ------- ------ <S> <C> <C> <C> <C> NONINTEREST INCOME Service charges on deposit accounts $ 1,428 $ 1,112 $ 316 28.4 % Trust department income 313 418 (105) (25.1) Brokerage income 64 68 (4) (5.9) Mortgage loan servicing fees 321 378 (57) (15.1) Gain on sales of mortgage loans 893 288 605 210.1 Net loss on sales and calls of debt securities -- (28) 28 100.0 Credit card fees 114 108 6 5.6 Other 464 241 223 92.5 ------- ------- ------ $ 3,597 $ 2,585 $1,012 39.1 % ======= ======= ====== NONINTEREST EXPENSE Salaries and employee benefits $ 6,370 $ 5,490 $ 880 16.0 % Occupancy expense, net 760 679 81 11.9 Furniture and equipment expense 1,173 1,121 52 4.6 FDIC insurance assessment 102 93 9 9.7 Advertising and promotion 301 247 54 21.9 Postage, printing, and supplies 586 513 73 14.2 Legal, examination, and professional fees 544 580 (36) (6.2) Credit card expenses 70 75 (5) (6.7) Credit investigation and loan collection expenses 162 157 5 3.2 Amortization of intangible assets 1,143 936 207 22.1 Other 1,537 1,469 68 4.6 ------- ------- ------ $12,748 $11,360 $1,388 12.2 % ======= ======= ====== </TABLE> Noninterest income increased $1,012,000 or 39.1% to $3,597,000 for the first nine months of 2001 compared to $2,585,000 for the same period of 2000. Service charges on deposit accounts increased $316,000 or 28.4% primarily due to the institution of a new overdraft program at ENB. This program has generated an increase of $245,000 in insufficient fund fees collected during the first nine 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. The decrease in trust department income reflects lower trust distribution fees collected this year compared to the same period last year. Gains on sales of mortgage loans increased $605,000 or 210.1% due to an increase in volume of loans originated and sold to the secondary market from approximately $18,861,000 during the first nine months of 2000 to approximately $65,575,000 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. The decrease in mortgage servicing fees of $57,000 reflects the write-down of $53,000 of Bancshares' mortgage servicing rights to their fair 16
value at September 30, 2001. This write-down is reflective of the high refinancing activity that our company has experienced in its servicing portfolio during the second and third quarters of 2001. $127,000 of the $223,000 or 92.5% increase in other noninterest income reflects gains recognized on the sales of properties obtained in previous acquisitions. The balance of the increase is spread across various categories of other income including ATM surcharge fees, safe deposit box rental income and miscellaneous fee income. Noninterest expense increased $1,388,000 or 12.2% to $12,748,000 for the first nine months of 2001 compared to $11,360,000 for the first nine 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 $427,000 or 6.7% and reflects normal salary adjustments, increased insurance benefit costs, and additional hires. The $81,000 or 11.9% increase in occupancy expense and the $52,000 or 4.6% increase in furniture and equipment expense are primarily related to increased costs associated with the acquisitions made in the prior year. The $54,000 or 21.9% 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 14.2% increase in postage, printing and supplies reflects costs incurred by our 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 $68,000 or 4.6% increase in other noninterest expense is primarily related increased telephone and communication charges as a result of the additional locations added in the prior year's acquisitions. Income taxes as a percentage of earnings before income taxes as reported in the condensed consolidated financial statements was 34.2% for the first nine months of 2001 compared to 31.2% for the first nine 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 nine months of 2001 and 37.3% for the first nine 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 $214,000 or 3.4% and $1,888,000 or 11.5% respectively for the three month and nine month periods ended September 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 $71,000 and $547,000 of the increases for the respective periods reflect income recognized from accelerated discount accretion on called securities during the first and third quarters of 2001. Our company also collected approximately $269,000 of interest on nonaccrual loans during the third 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 and nine month periods ended September 30, 2001 and 2000. 17
(DOLLARS EXPRESSED IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, 2001 SEPTEMBER 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 $142,454 $2,797 7.79% $145,641 $3,335 9.08% Real estate 267,753 5,618 8.32 266,995 5,558 8.26 Consumer 50,329 1,166 9.19 61,191 1,366 8.86 Investment securities:/3/ U.S. Treasury and U.S. Government agencies 112,151 1,627 5.76 119,512 1,996 6.63 State and municipal 40,226 679 6.70 41,216 779 7.50 Other 4,938 53 4.26 3,672 64 6.91 Federal funds sold 52,885 443 3.32 5,541 92 6.59 Interest-bearing deposits 1,953 15 3.05 1,969 41 8.26 -------- ------ -------- ------ Total interest earning assets 672,689 12,398 7.31 645,737 13,231 8.13 All other assets 71,729 71,572 Allowance for loan losses (7,231) (6,646) -------- -------- Total assets $737,187 $710,663 ======== ======== </TABLE> Continued on next page 18
<TABLE> <CAPTION> THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, 2001 SEPTEMBER 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 $ 86,282 $ 486 2.23% $ 84,329 $ 629 2.96% Savings 48,263 286 2.35 47,167 334 2.81 Money market 59,768 436 2.89 58,547 600 4.07 Deposits of $100,000 and over 46,775 608 5.16 47,797 742 6.16 Other time deposits 264,876 3,491 5.23 264,995 3,795 5.68 -------- ------ -------- ------ Total time deposits 505,964 5,307 4.16 502,835 6,100 4.81 Federal funds purchased and securities sold under agreements to repurchase 32,054 239 2.96 21,904 327 5.92 Interest-bearing demand notes to U.S. Treasury 660 6 3.61 735 14 7.56 Other borrowed money 40,788 611 5.94 45,964 769 6.64 -------- ------ -------- ------ Total interest- bearing liabilities 579,466 6,163 4.22 571,438 7,210 5.01 ------ ------ Demand deposits 66,740 61,958 Other liabilities 12,903 6,095 -------- -------- Total liabilities 659,109 639,491 Stockholders' equity 78,078 71,172 -------- -------- Total liabilities and stockholders' equity $737,187 $710,663 ======== ======== Net interest income $6,235 $6,021 ====== ====== Net interest margin/4/ 3.68% 3.70% ==== ==== </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 $202,000 in 2001 and $268,000 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
<TABLE> <CAPTION> NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2001 SEPTEMBER 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 $146,377 $9,133 8.34% $131,672 $ 8,791 8.93% Real estate 262,328 16,338 8.33 219,869 13,897 8.45 Consumer 52,966 3,638 9.18 57,593 3,744 8.69 Investment securities:/3/ U.S. Treasury and U.S. Government agencies 115,315 5,774 6.69 107,092 5,250 6.55 State and municipal 39,090 2,043 6.99 38,518 2,043 7.09 Other 4,683 173 4.94 3,980 189 6.35 Federal funds sold 46,951 1,472 4.19 7,303 336 6.15 Interest-bearing deposits 2,420 82 4.53 2,532 114 6.02 -------- ------ -------- ------ Total interest earning assets 670,130 38,653 7.71 568,559 34,364 8.08 All other assets 72,461 61,254 Allowance for loan losses (7,108) (5,867) -------- -------- Total assets $735,483 $623,946 ======== ======== </TABLE> Continued on next page 20
<TABLE> <CAPTION> NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2001 SEPTEMBER 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 $ 89,068 $ 1,692 2.54% $ 83,286 $ 1,779 2.86% Savings 46,783 890 2.54 42,935 901 2.81 Money market 59,196 1,510 3.41 52,106 1,544 3.96 Deposits of $100,000 and over 49,304 2,204 5.98 36,274 1,556 5.74 Other time deposits 267,327 11,173 5.59 219,501 9,133 5.56 -------- ------- -------- ------- Total time deposits 511,678 17,469 4.56 434,102 14,913 4.59 Federal funds purchased and securities sold under agreements to repurchase 30,394 909 4.00 21,461 919 5.73 Interest-bearing demand notes to U.S. Treasury 728 23 4.22 1,014 49 6.46 Other borrowed money 40,779 1,876 6.15 41,089 1,995 6.49 -------- ------- -------- ------- Total interest- bearing liabilities 583,579 20,277 4.65 497,666 17,876 4.80 ------- ------- Demand deposits 63,310 59,819 Other liabilities 12,128 5,069 -------- -------- Total liabilities 659,017 562,554 Stockholders' equity 76,466 61,392 -------- -------- Total liabilities and stockholders' equity $735,483 $623,946 ======== ======== Net interest income $18,376 $16,488 ======= ======= Net interest margin/4/ 3.67% 3.88% ==== ==== </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 $617,000 in 2001 and $614,000 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
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 SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 ------------------------------------- CHANGE DUE TO TOTAL ------------------------ CHANGE VOLUME RATE -------- --------- ------ <S> <C> <C> <C> INTEREST INCOME ON A FULLY TAXABLE EQUIVALENT BASIS: Loans: /1/ Commercial $ (538) (72) (466) Real estate /2/ 60 16 44 Consumer (200) (250) 50 Investment securities: U.S. Treasury and U.S. Government agencies (369) (118) (251) State and municipal /2/ (100) (19) (81) Other (11) 18 (29) Federal funds sold 351 419 (68) Interest-bearing deposits (26) 0 (26) ------- ---- ------ Total interest income (833) (6) (827) INTEREST EXPENSE: NOW accounts (143) 15 (158) Savings (48) 8 (56) Money market (164) 13 (177) Deposits of $100,000 and over (134) (16) (118) Other time deposits (304) (2) (302) Federal funds purchased and securities sold under agreements to repurchase (88) 115 (203) Interest-bearing demand notes to U.S. Treasury (8) (2) (6) Other borrowed money (158) (82) (76) ------- ---- ------ Total interest expense (1,047) 49 (1,096) ------- ---- ------ NET INTEREST INCOME ON A FULLY TAXABLE EQUIVALENT BASIS $ 214 (55) 269 ======= ==== ====== </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 $202,000 in 2001 and $268,000 in 2000. 22
(DOLLARS EXPRESSED IN THOUSANDS) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 20, 2000 ------------------------------------ CHANGE DUE TO TOTAL ---------------------- CHANGE VOLUME RATE -------- -------- ---- <S> <C> <C> <C> INTEREST INCOME ON A FULLY TAXABLE EQUIVALENT BASIS: Loans: /1/ Commercial $ 342 944 (602) Real estate /2/ 2,441 2,647 (206) Consumer (106) (311) 205 Investment securities: U.S. Treasury and U.S. Government agencies 524 410 114 State and municipal /2/ 0 30 (30) Other (16) 30 (46) Federal funds sold 1,136 1,275 (139) Interest-bearing deposits (32) (5) (27) ------ ----- ---- Total interest income 4,289 5,020 (731) INTEREST EXPENSE: NOW accounts (87) 119 (206) Savings (11) 77 (88) Money market (34) 196 (230) Deposits of $100,000 and over 648 579 69 Other time deposits 2,040 1,999 41 Federal funds purchased and securities sold under agreements to repurchase (10) 315 (325) Interest-bearing demand notes to U.S. Treasury (26) (12) (14) Other borrowed money (119) (15) (104) ------ ----- ---- Total interest expense 2,401 3,258 (857) ------ ----- ---- NET INTEREST INCOME ON A FULLY TAXABLE EQUIVALENT BASIS $1,888 1,762 (126) ====== ===== ==== </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 $617,000 in 2001 and $614,000 in 2000. 23
PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses is based on management's evaluation of the loan portfolio in light of perceived 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 factors deemed by management to be relevant. 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, $129,000 for the second quarter of 2001 and $107,000 for the third quarter of 2001. That compares to net loan recoveries of $7,000 for the first quarter of 2000, $131,000 for the second quarter of 2000 and net loan charge-offs of $137,000 for the third 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, $231,000 for the second quarter of 2001 and $231,000 for the third quarter of 2001. That compares to $258,000 for the first quarter of 2000, $308,000 for the second quarter of 2000 and $273,000 for the third quarter of 2000. The balance of the allowance for loan losses was $7,303,000 at September 30, 2001 compared to $6,940,000 at December 31, 2000 and $6,748,000 at September 30, 2000. The allowance for loan losses as a percent of outstanding loans was 1.58% at September 30, 2001 compared to 1.48% at December 31, 2000 and 1.43% at September 30, 2000. FINANCIAL CONDITION Total assets increased $46,457,000 or 6.5% to $766,060,000 at September 30, 2001 compared to $719,603,000 at December 31, 2000. Total liabilities increased $41,558,000 or 6.4% to $687,578,000. Stockholders' equity increased $4,898,000 or 6.7% to $78,482,000. Loans decreased $6,462,000 or 1.4% to $462,009,000 at September 30, 2001 compared to $468,471,000 at December 31, 2000. Commercial loans decreased $10,674,000; real estate construction loans increased $3,029,000; real estate mortgage loans increased $9,439,000; and consumer loans decreased $8,257,000. The increase in real estate mortgage loans reflects increased activity due to lower rates that currently exist in the markets. Of the $9,438,000 increase in mortgage loans, approximately $2,853,000 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 our company is unwilling to match, primarily in the area of automobile financing. 24
Nonperforming loans, defined as loans on nonaccrual status, loans 90 days or more past due, and restructured loans totaled $5,415,000 or 1.17% of total loans at September 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> SEPTEMBER 30, 2001 DECEMBER 31, 2000 ------------------ ----------------- % OF % OF GROSS GROSS BALANCE LOANS BALANCE LOANS ------- ----- ------- ----- <S> <C> <C> <C> <C> Nonaccrual loans: Commercial $2,989 .65% $2,648 .57% Real Estate: Construction 821 .18 1,006 .22 Mortgage 1,027 .22 3,584 .77 Consumer 56 .01 453 .09 ------ ---- ------ ---- 4,893 1.06 7,691 1.65 ------ ---- ------ ---- Loans contractually past-due 90 days or more and still accruing: Commercial 34 .01 -- -- Real Estate: Construction -- -- -- -- Mortgage 446 .09 237 .05 Consumer 42 .01 154 .03 ------ ---- ------ ---- 522 .11 391 .08 ------ ---- ------ ---- Restructured loans -- -- -- -- ------ ---- ------ ---- Total nonperforming loans 5,415 1.17% 8,082 1.73% ==== ==== Other real estate 10 36 Repossessions 227 143 ------ ------ Total nonperforming assets $5,652 $8,261 ====== ====== </TABLE> The allowance for loan losses was 134.87% of nonperforming loans at September 30, 2001 compared to 85.87% of nonperforming loans at December 31, 2000. Our company has allocated $1,034,000 of the allowance for loan losses at September 30, 2001 which it believes adequately covers any exposure on these specific credits. The $2,667,000 decrease in nonperforming loans is primarily the result of one large credit at ENB which is now current on interest and performing as of the date of this report. 25
It is our company's policy to discontinue the accrual of interest income on loans when the full collection of interest or principal is in doubt, or when the payment of interest or principal has become contractually 90 days past due unless the obligation is both well secured and in the process of collection. A loan remains on nonaccrual status until the loan is current as to payment of both principal and interest and/or the borrower demonstrates the ability to pay and remain current. Interest on loans on nonaccrual status at September 30, 2001 and 2000, which would have been recorded under the original terms those loans, was approximately $512,000 and $237,000 for the nine months ended September 30, 2001 and 2000, respectively. Approximately $238,000 and $159,000 was actually recorded as interest income on such loans for the nine months ended September 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 September 30, 2001 included in the table above, which were considered "impaired", management has identified additional loans totaling approximately $5,676,000 which are not included in the table above but are considered by management to be "impaired". The $5,676,000 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 $3,000,000. The average balance of nonaccrual and other "impaired" loans for the first nine months of 2001 was approximately $8,772,000. At September 30, 2001 the allowance for loan losses on impaired loans was $1,452,000 compared to $1,565,000 at December 31, 2000. As of September 30, 2001 and December 31, 2000 approximately $5,284,000 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 perceived 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 $50,602,000 or 37.9% to $184,056,000 at September 30, 2001 compared to $133,454,000 at December 31, 2000. As allowed upon adoption of SFAS 133, Bancshares 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. The remainder of the increase represents securities purchased to use as collateral for a large public fund repurchase agreement awarded to ENB during the third quarter. Investments classified as available-for-sale are carried at fair value. 26
During 2001, the market valuation account was increased $2,399,000 to $3,434,000 to reflect the fair value of available-for-sale investments at September 30, 2001 and the net after tax increase resulting from the change in the market valuation adjustment of $1,570,000 increased the stockholders' equity component to $2,228,000 at September 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. 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 September 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 our 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 $28,089,000 or 57.4% to $77,013,000 at September 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 $854,000 or 5.4% to $14,937,000 at September 30, 2001 compared to $15,791,000 at December 31, 2000. The decrease reflects sales and retirements of premises and equipment of $1,512,000 and depreciation expense of $938,000, offset by purchases for premises and equipment of $1,596,000. Total deposits decreased $7,134,000 or 1.2% to $569,129,000 at September 30, 2001 compared to $576,263,000 at December 31, 2000. Most of this decrease is attributed to decreased public fund balances. Federal funds purchased and securities sold under agreements to repurchase increased $46,820,000 or 285.5% to $63,218,000 at September 30, 2001 compared to $16,398,000 at December 31, 2000. The increase is primarily due increased public fund repurchase agreements at ENB. The increase in stockholders' equity reflects net income of $5,196,000 less dividends declared of $1,630,000, purchase of treasury stock of $252,000 and a $1,570,000 change in unrealized holding gains, net of taxes, on investment in debt and equity securities available-for-sale. No material changes in our company's liquidity or capital resources have occurred since December 31, 2000. 27
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. Bancshares has adopted SFAS 133 as amended effective January 1, 2001, but since our company does not participate in any derivative or hedging activities, SFAS 133, as amended, had no impact on our 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. 28
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 our 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 September 30, 2001 as well as all purchase method business combinations completed after September 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. Our 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 September 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 our 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, our 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, our 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 our company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of 29
adoption. To accomplish this our 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. Our 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 our company must perform the second step of the transitional impairment test. In the second step, our 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 recognized as the cumulative effect of a change in accounting principle in our 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, our company expects to have unamortized goodwill in the amount of $23,408,000, unamortized identifiable intangible assets in the amount of $1,154,000, 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 $973,000 and $908,000 for the year ended December 31, 2000 and the nine months ended September 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 our 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
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Bancshares' 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 our banks' management include the standard GAP report subject to different rate shock scenarios. At September 30, 2001, the rate shock scenario models indicated that annual net interest income could decrease or increase by as much as 4 to 5% 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
PART II - OTHER INFORMATION <TABLE> <S> <C> <C> Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None </TABLE> Item 6. Exhibits and Reports on Form 8-K. a) Exhibits <TABLE> <CAPTION> Exhibit No. Description - ----------- ----------- <S> <C> 3.1 Articles of Incorporation of our company (filed as Exhibit 3(a) to our company's Registration Statement on Form S-4 (Registration No. 33-54166) and incorporated herein by reference). 3.2 Bylaws of our company (filed as Exhibit 3.2 to our company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (Commission file number 0-23636) and incorporated herein by reference). 4 Specimen certificate representing shares of our company's $1.00 par value common stock (filed as Exhibit 4 to our company's Annual Report on Form 10-K For the fiscal year ended December 31, 1999 (Commission File number 0-23636) and incorporated herein be reference). </TABLE> (b) Reports on Form 8-K. A report on Form 8-K was filed on August 23, 2001 announcing that Bancshares' Board of Directors authorized the purchases, through open market transactions, of up to $2 million market value of our company's common stock. 32
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 November 9, 2001 Principal Executive Officer By /s/ Richard G. Rose ----------------------------------- Richard G. Rose, Treasurer November 9, 2001 33
EXCHANGE NATIONAL BANCSHARES, INC. ---------------------------------- INDEX TO EXHIBITS September 30, 2001 Form 10-Q <TABLE> <CAPTION> Exhibit No. Description Page No. - ----------- ----------- -------- <S> <C> <C> 3.1 Articles of Incorporation of our company (filed as Exhibit 3(a) to our company's Registration Statement on Form S-4 (Registration No. 33-54166) and incorporated herein by reference). ** 3.2 Bylaws of our company (filed as Exhibit 3.2 to our company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (Commission file number 0-23636) and incorporated herein by reference). ** 4 Specimen certificate representing shares of our company's $1.00 par value common stock (filed as Exhibit 4 to our company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (Commission file number 0-23636) and incorporated herein by reference). ** </TABLE> ** Incorporated by reference. 34