UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006
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
of incorporation or organization) Identification No.)
132 EAST HIGH STREET, JEFFERSON CITY, MISSOURI 65101
(Address of principal executive offices) (Zip Code)
(573) 761-6100
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
rule 12b-2 of the Exchange Act). [ ] Yes [X] No
As of May 10, 2006, the registrant had 4,169,847 shares of common stock, par
value $1.00 per share, outstanding.
Page 1 of 43 pages
Index to Exhibits located on page 39
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
MARCH 31, 2006 DECEMBER 31, 2005
-------------- -----------------
ASSETS
Loans: $ 826,693,351 $ 813,534,876
Less allowance for loan losses 9,384,783 9,084,774
-------------- --------------
Loans, net 817,308,568 804,450,102
Investments in available for sale debt
and equity securities, at fair value 200,595,384 179,691,826
Federal funds sold 16,358,933 12,447,981
Cash and due from banks 31,451,426 35,282,568
Premises and equipment 33,059,785 32,890,908
Accrued interest receivable 7,647,176 7,772,573
Mortgage servicing rights 1,486,547 1,536,331
Goodwill 40,323,775 40,323,775
Core deposit intangible 4,510,763 4,786,460
Cash surrender value - life insurance 1,699,559 1,682,836
Other assets 5,622,359 5,605,116
-------------- --------------
Total assets $1,160,064,275 $1,126,470,476
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Demand deposits $ 133,647,595 $ 134,364,788
Time deposits 743,818,277 747,090,418
-------------- --------------
Total deposits 877,465,872 881,455,206
Federal funds purchased and securities
sold under agreements to repurchase 56,027,169 36,995,735
Interest-bearing demand notes to U.S. Treasury 372,179 1,098,337
Subordinated notes 49,486,000 49,486,000
Advances from Federal Home Loan Bank 69,303,472 52,179,661
Accrued interest payable 3,351,299 3,124,365
Other liabilities 5,745,973 5,398,307
-------------- --------------
Total liabilities 1,061,751,964 1,029,737,611
Stockholders' equity:
Common stock - $1 par value; 15,000,000 shares
authorized; 4,298,353 issued 4,298,353 4,298,353
Surplus 22,072,467 22,030,074
Retained earnings 75,942,056 74,129,117
Accumulated other comprehensive income (loss),
net of tax (1,348,056) (1,072,170)
Treasury stock, 128,506 shares at cost (2,652,509) (2,652,509)
-------------- --------------
Total stockholders' equity 98,312,311 96,732,865
-------------- --------------
Total liabilities and stockholders' equity $1,160,064,275 $1,126,470,476
============== ==============
See accompanying notes to unaudited condensed consolidated financial statements.
2
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2006 2005
----------- -----------
Interest income:
Interest and fees on loans $14,724,479 $ 9,736,094
Interest on debt securities:
Taxable 1,400,870 1,121,606
Nontaxable 484,133 342,914
Interest on federal funds sold 93,554 252,652
Interest on interest-bearing deposits 26,291 15,922
Dividends on equity securities 63,539 58,190
----------- -----------
Total interest income 16,792,866 11,527,378
----------- -----------
Interest Expense:
NOW accounts 390,569 355,545
Savings 77,774 71,245
Money market accounts 1,134,006 644,726
Certificates of deposit:
$100,000 and over 1,058,128 620,082
Other time deposits 2,714,061 1,659,442
Federal funds purchased and securities sold
under agreements to repurchase 510,861 268,122
Subordinated notes 841,739 403,065
Advances from Federal Home Loan Bank 602,523 414,690
Other borrowed money 4,659 3,350
----------- -----------
Total interest expense 7,334,320 4,440,267
----------- -----------
Net interest income 9,458,546 7,087,111
Provision for loan losses 317,500 235,500
----------- -----------
Net interest income after provision for loan losses 9,141,046 6,851,611
Continued on next page
3
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2006 2005
---------- ----------
Noninterest income:
Service charges on deposit accounts $1,360,830 $ 680,509
Trust department income 179,710 182,011
Loss on sales and calls of debt securities (18,351) --
Mortgage loan servicing fees, net 114,682 112,767
Gain on sale of mortgage loans 112,234 129,696
Other 276,806 226,361
---------- ----------
Total noninterest income 2,025,911 1,331,344
---------- ----------
Noninterest expense:
Salaries and employee benefits 4,345,246 2,885,789
Occupancy expense 452,342 289,770
Furniture and equipment expense 519,627 504,229
Postage, printing and supplies 292,373 164,151
Legal, examination, and professional fees 294,223 251,096
Amortization of intangible assets 275,697 53,778
Processing expense 212,783 89,247
Other 919,301 737,198
---------- ----------
Total noninterest expense 7,311,592 4,975,258
---------- ----------
Income before income taxes 3,855,365 3,207,697
Income taxes 1,166,758 970,083
---------- ----------
Net income $2,688,607 $2,237,614
========== ==========
Basic earning per share $ 0.64 $ 0.54
Diluted earnings per share $ 0.64 $ 0.53
Weighed average shares of common stock outstanding
Basic 4,169,847 4,169,847
Diluted 4,203,607 4,199,268
Dividends per share:
Declared $ 0.21 $ 0.18
Paid $ 0.21 $ 0.18
See accompanying notes to unaudited condensed consolidated financial statements.
4
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2006 2005
------------ ------------
Cash flow from operating activities:
Net income $ 2,688,607 $ 2,237,614
Adjustments to reconcile net income to net cash
cash provided by operating activities:
Provision for loan losses 317,500 235,500
Depreciation expense 435,333 396,814
Net amortization of debt securities premiums and discounts 31,553 233,672
Amortization of intangible assets 275,697 53,778
Non-cash compensation expense for stock option grants 42,393 --
(Increase) decrease in accrued interest receivable 125,397 (430,211)
Increase in cash surrender value - life insurance (16,723) --
(Increase) decrease in other assets 94,323 (285,952)
Increase in accrued interest payable 226,934 249,097
Increase in other liabilities 347,666 727,262
Loss on sales and calls of debt securities 18,351 --
Origination of mortgage loans for sale (6,138,550) (9,117,814)
Proceeds from the sale of mortgage loans held for sale 6,250,784 9,247,510
Gain on sale of mortgage loans (112,234) (129,696)
Loss on disposition of premises and equipment -- 674
Other, net -- 15,180
------------ ------------
Net cash provided by operating activities 4,587,031 3,433,428
Cash flow from investing activities:
Net increase in loans (13,175,966) (5,053,259)
Purchase of available-for-sale debt securities (36,981,708) (81,885,227)
Proceeds from maturities of available-for-sale debt securities 13,003,919 18,998,012
Proceeds from calls of available-for-sale debt securities 610,038 7,872,500
Proceeds from sales of available-for-sale debt securities 1,993,120 1,071,803
Purchase of premises and equipment (613,549) (1,405,439)
Proceeds from dispositions of premises and equipment 9,339 --
Proceeds from sales of other real estate owned and repossessions 83,501 67,037
------------ ------------
Net cash used in investing activities (35,071,306) (60,334,573)
------------ ------------
Continued on next page
5
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2006 2005
------------ ------------
Cash flow from financing activities:
Net decrease in demand deposits $ (717,193) $ (3,014,731)
Net increase (decrease) in interest-bearing transaction accounts (4,091,822) 14,110,187
Net increase in time deposits 819,681 183,869
Net increase in federal funds purchased and securities sold under
agreements to repurchase 19,031,434 16,772,714
Net decrease in interest-bearing demand notes to U.S. Treasury (726,158) (191,745)
Proceeds from subordinated notes -- 23,712,000
Proceeds from Federal Home Loan Bank borrowings 47,409,734 --
Repayment of Federal Home Loan Bank borrowings (30,285,923) (270,848)
Cash dividends paid (875,668) (750,573)
------------ ------------
Net cash provided by financing activities 30,564,085 50,550,873
Net increase (decrease) in cash and cash equivalents 79,810 (6,350,272)
Cash and cash equivalents, beginning of period 47,730,549 65,708,410
------------ ------------
Cash and cash equivalents, end of period $ 47,810,359 $ 59,358,138
============ ============
Supplemental disclosure of cash flow information - Cash paid during
period for:
Interest $ 7,107,386 $ 4,191,170
Income taxes 225,000 70,000
Supplemental schedule of noncash investing activities -
Other real estate and repossessions acquired in settlement of loans $ -- $ 385,821
See accompanying notes to unaudited condensed consolidated financial statements.
6
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2006 and 2005
The accompanying unaudited condensed consolidated financial statements
include all adjustments that in the opinion of management are necessary in order
to make those statements not misleading. Certain amounts in the 2005 condensed
consolidated financial statements have been reclassified to conform to the 2006
condensed consolidated presentation. Such reclassifications have no effect on
previously reported net income or stockholders' equity. Operating results for
the period ended March 31, 2006 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2006.
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 2005 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, 2005 as Exhibit 13.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. Certain information and note disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed and
omitted. Our Company believes that these financial statements contain all
adjustments (consisting of normal recurring accruals) necessary to present
fairly our Company's consolidated financial position as of March 31, 2006 and
December 31, 2005 and the consolidated statements of earnings for the three
months ended March 31, 2006 and 2005 and cash flows for the three months ended
March 31, 2006 and 2005.
ACQUISITION
On May 2, 2005 our Company acquired 100 percent of the outstanding common
shares of Bank 10 from Drexel Bancshares, Inc. of Belton, Missouri. Accordingly,
the results of operations of Bank 10 have been included in the condensed
consolidated financial statements since the date of acquisition. Bank 10 has
branches in Belton, Drexel, Independence, Harrisonville, and Raymore, Missouri.
As a result of this acquisition our Company expanded our presence in the Kansas
City, Missouri metropolitan market.
7
A summary of unaudited pro forma combined financial information for the
three-month period ended March 31, 2005 for our Company and Bank 10 as if the
transaction had occurred on January 1, 2005 follows.
Three Months
Ended
March 31, 2005
--------------
Net interest income $8,533,579
Net income 2,389,523
Basic earnings per share $ 0.57
Diluted earnings per share 0.57
EARNINGS PER SHARE
The following table reflects, for the three-month periods ended March 31,
2006 and 2005, the numerators (net income) and denominators (average shares
outstanding) for the basic and diluted net income per share computations:
THREE MONTHS ENDED
MARCH 31,
-----------------------
2006 2005
---------- ----------
Net income, basic and diluted $2,688,607 $2,237,614
========== ==========
Average shares outstanding 4,169,847 4,169,847
Effect of dilutive stock options 33,760 29,421
---------- ----------
Average shares outstanding
including dilutive stock options 4,203,607 4,199,268
========== ==========
Basic earning per share $ 0.64 $ 0.54
Diluted earnings per share $ 0.64 $ 0.53
8
SHARE-BASED COMPENSATION
Our Company maintains a stock-based incentive program which is discussed in
more detail in the "Stock Option Plans" section which follows. Prior to 2006,
our Company applied the intrinsic value-based method, as outlined in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
("APB No. 25") and related interpretations, in accounting for stock options
granted under these programs. Under the intrinsic value-based method, no
compensation expense was recognized if the exercise price of our Company's
employee stock options equaled the market price of the underlying stock on the
date of the grant. Accordingly, prior to 2006, no compensation cost was
recognized in the consolidated statements of income for stock options granted to
employees, since all options granted under our Company's share incentive
programs had an exercise price equal to the fair value of the underlying common
stock on the date of the grant.
Effective January 1, 2006, our Company adopted Statement of Financial
Accounting Standards No. 123(R) (SFAS No.123(R)) Share-Based Payment. This
statement replaces SFAS No. 123 Accounting for Stock-Based Compensation and
supersedes APB No. 25. SFAS No. 123(R) requires that all stock-based
compensationbe recognized as an expense in the financial statements and that
such cost bemeasured at the fair value of the award. This statement was adopted
using the modified prospective method of application, which requires our
Company to recognize compensation expense on a prospective basis. Therefore,
prior period financial statements have not been restated. Under this method, in
addition to reflecting compensation expense for new share-based awards, expense
is also recognized to reflect the remaining service period of awards that had
been included in pro forma disclosures in prior periods. SFAS No. 123(R) also
requires that excess tax benefits related to stock option exercises be reflected
as financing cash inflows instead of operating cash inflows. For the three
months ended March 31, 2006, there were no stock options exercised.
Total stock-based compensation expense in the first quarter of 2006 was
$42,000 ($28,000 after tax), or $0.01 for basic and diluted earnings per share,
respectively. As of March 31, 2006, the total unrecognized compensation expense
related to non-vested stock awards was $588,000 and the related weighted average
period over which it is expected to be recognized is approximately 2.3 years.
9
The following table illustrates the effect on net income and earnings per
share if the fair value recognition provisions of SFAS No. 123(R) had been
applied in 2005:
THREE MONTHS
ENDED
MARCH 31, 2005
--------------
Net income, as reported $2,237,614
Add: share-based compensation expense
included in reported net income,
net of related tax effects --
Less: total share-based employee compensation
expense associated with stock options
determined under fair value method for all
option awards, net of related tax effects (26,501)
----------
Pro forma net income $2,211,113
==========
Pro forma earnings per common share:
As reported basic $ 0.54
Pro forma basic 0.53
As reported diluted 0.53
Pro forma diluted 0.53
10
STOCK OPTION PLANS
On December 4, 2000, the Incentive Stock Option Committee of the board of
directors (the "Committee") approved our Company's stock option plan, which
provides for the grant of options to purchase up to 450,000 shares of our
Company's common stock to officers and other key employees of our Company and
its subsidiaries. Terms and conditions (including price, exercise date, and
number of shares to which the option relates) are determined by the Committee.
All options granted to date have been granted at an exercise price equal to fair
value of the underlying shares at the grant date and vest over periods ranging
from one to five years except for options granted with respect to 4,821 shares
in 2002 that vested immediately.
The following table summarizes our Company's stock option activity for the three
months ended March 31, 2006:
WEIGHTED
WEIGHTED AGGREGATE AVERAGE
AVERAGE INTRINSIC CONTRACTUAL
EXERCISE VALUE TERM
OPTIONS PRICE (000) (IN YEARS)
------- -------- --------- -----------
Outstanding, January 1, 2006 160,809 $24.54
Granted 46,380 29.95
Exercised -- --
Expired -- --
Forfeited -- --
-------
Outstanding, March 31, 2006 207,189 25.75 $974 7.5
=======
Exercisable, March 31, 2006 112,137 21.90 919 6.3
The weighted average remaining contractual life of options outstanding at
March 31, 2006 was approximately 7.5 years.
The weighted average grant date fair values of stock options granted during
the quarter ended March 31, 2006 and the weighted average significant
assumptions used to determine those fair values, using the Black-Scholes
option-pricing model are as follows:
Options granted during 2006:
Grant date fair value per share $6.13
Significant assumptions:
Risk-free interest rate at grant date 4.61%
Expected annual rate of
quarterly dividends 2.80
Expected stock price volatility 20
Expected life to exercise (years) 6.25
Compensation expense associated with stock option grants is amortized on a
straight-line basis over the vesting period of each option, which is generally
four years.
11
COMPREHENSIVE INCOME
For the three-month periods ended March 31, 2006 and 2005, unrealized
holding gains and losses on investments in debt and equity securities
available-for-sale were our Company's only other comprehensive income component.
Comprehensive income for the three-month periods ended March 31, 2006 and 2005
is summarized as follows:
THREE MONTHS ENDED
MARCH 31,
------------------------
2006 2005
---------- -----------
Net income $2,688,607 $ 2,237,614
Other comprehensive loss:
Net unrealized holding losses on
investments in debt and equity securities
available-for-sale, net of taxes (287,814) (1,066,741)
Adjustment for net securities losses realized in net
income, net of applicable income taxes 11,928 --
---------- -----------
Total other comprehensive loss (275,886) (1,066,741)
---------- -----------
Comprehensive income $2,412,721 $ 1,170,873
========== ===========
INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization of our Company's
amortizable core deposit intangible assets as of March 31, 2006 and December 31,
2005 is as follows:
MARCH 31, 2006 DECEMBER 31, 2005
------------------------------ -----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized intangible assets:
Core deposit intangible $7,060,224 (2,549,461) 7,060,224 (2,273,764)
========== ========== ========= ==========
The aggregate amortization expense of core deposit intangible subject to
amortization for the three-month period ended March 31, 2006 and 2005 is as
follows:
THREE MONTHS
ENDED MARCH 31,
-----------------
2006 2005
-------- ------
Aggregate amortization expense $275,697 53,778
======== ======
12
The estimated amortization expense for the next five years is as follows:
Estimated amortization expense:
For year ending 2006 $1,032,583
For year ending 2007 922,337
For year ending 2008 701,443
For year ending 2009 626,111
For year ending 2010 526,477
Our Company's mortgage servicing rights are amortized in proportion to the
related estimated net servicing income over the estimated lives of the related
mortgages, which is seven years. Changes in mortgage servicing rights, net of
amortization, for the periods indicated were as follows:
MARCH 31,
--------------------------
2006 2005
------------ -----------
Balance, beginning of period $ 1,536,331 1,605,930
Originated mortgage servicing rights 53,745 83,551
Amortization (103,529) (101,189)
------------ -----------
Balance, end of period $ 1,486,547 1,588,292
============ ===========
Mortgage loans serviced $219,697,000 215,881,000
============ ===========
Mortgage servicing rights as a
percentage of loans serviced 0.68% 0.74%
============ ===========
The estimated amortization expense of mortgage servicing rights for the
next five years is as follows:
Estimated amortization expense:
For year ending 2006 $427,000
For year ending 2007 362,000
For year ending 2008 309,000
For year ending 2009 229,000
For year ending 2010 153,000
13
Our Company's goodwill associated with the purchase of subsidiaries by
reporting segments as of March 31, 2006 and December 31, 2005 is summarized as
follows:
THE EXCHANGE CITIZENS UNION OSAGE
NATIONAL BANK STATE BANK VALLEY
OF AND TRUST BANK OF
JEFFERSON CITY OF CLINTON WARSAW BANK 10 TOTAL
-------------- -------------- --------- ---------- ----------
Goodwill associated with the
purchase of subsidiaries $4,382,098 16,701,762 4,112,876 15,127,039 40,323,775
========== ========== ========= ========== ==========
14
DEFINED BENEFIT RETIREMENT PLAN
The Exchange National Bank of Jefferson City provides a noncontributory
defined benefit pension plan in which all full-time employees become
participants upon the later of the completion of one year of qualified service
or the attainment of age 21, and in which they continue to participate as long
as they continue to be full-time employees, until their retirement, death, or
termination of employment prior to normal retirement date. The normal retirement
benefits provided under the plan vary depending upon the participant's rate of
compensation, length of employment, and social security benefits. Monthly
retirement benefits are payable for life with payments guaranteed for the first
ten years. Plan assets consist of U.S. Treasury and government agency
securities, corporate common stocks and bonds, real estate mortgages, and demand
deposits. Disclosure information is based on a measurement date of November 1
for the corresponding year.
The following table represents the components of the net periodic pension
costs for the three month periods ended March 31, 2006 and 2005, respectively:
ESTIMATED ACTUAL
2006 2005
--------- ---------
Service cost - benefits earned during the year $ 615,293 $ 471,319
Interest cost on projected benefit obligations 317,852 276,245
Expected return on plan assets (342,134) (368,873)
Net amortization and deferral -- (26,632)
Amortization of prior service cost 78,628 39,315
Amortization of net gains (2,601) --
--------- ---------
Net periodic pension cost - annual $ 667,038 $ 391,374
========= =========
Net periodic pension cost - three months
ended March 31 (actual) $ 167,202 $ 97,844
========= =========
Our Company does not expect to make any contribution to the plan during
2006.
15
SEGMENTS
Through the respective branch network, Exchange National Bank, Citizens
Union State Bank, Osage Valley Bank, and Bank 10 provide similar products and
services in four defined geographic areas. The products and services offered
include a broad range of commercial and personal banking services, including
certificates of deposit, individual retirement and other time deposit accounts,
checking and other demand deposit accounts, interest checking accounts, savings
accounts and money market accounts. Loans include real estate, commercial,
installment and other consumer loans. Other financial services include automatic
teller machines, trust services, credit related insurance, and safe deposit
boxes. The revenues generated by each business segment consist primarily of
interest income, generated from the loan and debt and equity security
portfolios, and service charges and fees, generated from the deposit products
and services. The geographic areas are defined to be communities surrounding
Jefferson City, Clinton, Warsaw and Belton, Missouri. The products and services
are offered to customers primarily within their respective geographical areas.
The business segments results that follow are consistent with our Company's
internal reporting system which is consistent, in all material respects, with
accounting principles generally accepted in the United States of America and
practices prevalent in the banking industry.
16
MARCH 31, 2006
-----------------------------------------------------------------------------------------
CITIZENS
THE EXCHANGE UNION
NATIONAL STATE BANK OSAGE
BANK OF AND VALLEY
JEFFERSON TRUST OF BANK OF BANK 10 OF CORPORATE
CITY CLINTON WARSAW BELTON AND OTHER TOTAL
------------ ------------ ------------ ------------ ------------ --------------
Balance sheet information:
Loans, net of allowance
for loan losses $377,748,517 $242,180,691 $ 54,421,057 $142,958,303 $ -- $ 817,308,568
Debt and equity securities 92,761,103 43,508,901 33,666,649 29,172,731 1,486,000 200,595,384
Goodwill 4,382,098 16,701,762 4,112,876 15,127,039 -- 40,323,775
Intangible assets -- 529,242 -- 3,981,521 -- 4,510,763
Total assets 515,092,502 331,620,864 100,849,682 210,224,056 2,277,171 1,160,064,275
Deposits 388,656,001 266,883,889 85,087,844 145,226,684 (8,388,546) 877,465,872
Stockholders' equity $ 49,934,170 $ 43,323,462 $ 9,485,153 $ 34,973,771 $(39,404,245) $ 98,312,311
============ ============ ============ ============ ============ ==============
DECEMBER 31, 2005
-----------------------------------------------------------------------------------------
CITIZENS
THE EXCHANGE UNION
NATIONAL STATE BANK OSAGE
BANK OF AND VALLEY
JEFFERSON TRUST OF BANK OF BANK 10 OF CORPORATE
CITY CLINTON WARSAW BELTON AND OTHER TOTAL
------------ ------------ ------------ ------------ ------------ --------------
Balance sheet information
Loans, net of allowance
for loan losses $374,467,039 $238,347,946 $ 53,132,834 $138,502,283 $ -- $ 804,450,102
Debt and equity securities 71,830,503 42,305,412 34,234,784 29,835,127 1,486,000 179,691,826
Goodwill 4,382,098 16,701,762 4,112,876 15,127,039 -- 40,323,775
Intangible assets -- 583,020 -- 4,203,440 -- 4,786,460
Total assets 487,322,716 329,366,100 102,071,064 205,092,903 2,617,693 1,126,470,476
Deposits 391,682,694 265,370,183 84,823,313 148,430,696 (8,851,680) 881,455,206
Stockholders' equity $ 49,732,241 $ 42,602,916 $ 9,415,739 $ 34,410,079 $(39,428,110) $ 96,732,865
============ ============ ============ ============ ============ ==============
17
THREE MONTHS ENDED MARCH 31, 2006
-----------------------------------------------------------------------------
CITIZENS
THE EXCHANGE UNION
NATIONAL STATE BANK OSAGE
BANK OF AND VALLEY
JEFFERSON TRUST OF BANK OF BANK 10 OF CORPORATE
CITY CLINTON WARSAW BELTON AND OTHER TOTAL
------------ ---------- ---------- ---------- --------- -----------
Statement of earnings:
Total interest income $7,741,073 $4,646,317 $1,249,550 $3,130,650 $ 25,276 $16,792,866
Total interest expense 3,054,113 1,739,422 676,420 1,041,914 822,451 7,334,320
---------- ---------- ---------- ---------- --------- -----------
Net interest income 4,686,960 2,906,895 573,130 2,088,736 (797,175) 9,458,546
Provision for loan losses 225,000 75,000 10,500 7,000 -- 317,500
Noninterest income 979,511 425,616 141,109 498,581 (18,906) 2,025,911
Noninterest expense 2,863,097 2,085,538 509,768 1,691,910 161,279 7,311,592
Income taxes 827,400 347,891 41,743 284,224 (334,500) 1,166,758
---------- ---------- ---------- ---------- --------- -----------
Net income (loss) $1,750,974 $ 824,082 $ 152,228 $ 604,183 $(642,860) $ 2,688,607
========== ========== ========== ========== ========= ===========
THREE MONTHS ENDED MARCH 31, 2005
----------------------------------------------------------------
CITIZENS
THE EXCHANGE UNION
NATIONAL STATE BANK OSAGE
BANK OF AND VALLEY
JEFFERSON TRUST OF BANK OF CORPORATE
CITY CLINTON WARSAW AND OTHER TOTAL
------------ ---------- ---------- --------- -----------
Statement of earnings:
Total interest income $6,576,008 $3,794,507 $1,144,759 $ 12,104 $11,527,378
Total interest expense 2,411,675 1,201,629 485,623 341,340 4,440,267
---------- ---------- ---------- --------- -----------
Net interest income 4,164,333 2,592,878 659,136 (329,236) 7,087,111
Provision for loan losses 150,000 75,000 10,500 -- 235,500
Noninterest income 869,074 383,572 95,375 (16,677) 1,331,344
Noninterest expense 2,683,542 1,736,459 430,591 124,666 4,975,258
Income taxes 695,400 349,685 86,128 (161,130) 970,083
---------- ---------- ---------- --------- -----------
Net income (loss) $1,504,465 $ 815,306 $ 227,292 $(309,449) $ 2,237,614
========== ========== ========== ========= ===========
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS MADE IN
THIS REPORT ON FORM 10-Q ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE WORDS "SHOULD", "EXPECT", "ANTICIPATE", "BELIEVE", "INTEND",
"MAY", "HOPE", "FORECAST" AND SIMILAR EXPRESSIONS MAY IDENTIFY FORWARD LOOKING
STATEMENTS. IN PARTICULAR, STATEMENTS CONCERNING OUR COMPANY'S ABILITY TO EXPAND
ITS PRESENCE IN THE KANSAS CITY, MISSOURI METROPOLITAN MARKET, CONCERNING OUR
EXPECTED CONTRIBUTIONS TO ANY OF OUR BANK'S BENEFIT PLANS, CONCERNING OUR
AMORTIZATION OF CORE DEPOSIT INTANGIBLES OR OTHER ASSETS, THAT THE PERIODIC
REVIEW OF OUR LOAN PORTFOLIO KEEPS MANAGEMENT INFORMED OF POSSIBLE LOAN PROBLEMS
AND THAT THE ALLOWANCE FOR LOAN LOSSES ADEQUATELY COVERS ANY EXPOSURE ON
SPECIFIC CREDITS ARE ALL FORWARD-LOOKING STATEMENTS. OUR COMPANY'S ACTUAL
RESULTS, FINANCIAL CONDITION, OR BUSINESS COULD DIFFER MATERIALLY FROM ITS
HISTORICAL RESULTS, FINANCIAL CONDITION, OR BUSINESS, OR FROM THE RESULTS OF
OPERATIONS, FINANCIAL CONDITION, OR BUSINESS CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE CONTEMPLATED BY THE FORWARD LOOKING STATEMENTS HEREIN
INCLUDE MARKET CONDITIONS AS WELL AS CONDITIONS SPECIFICALLY AFFECTING THE
BANKING INDUSTRY GENERALLY AND FACTORS HAVING A SPECIFIC IMPACT ON OUR COMPANY
INCLUDING, BUT NOT LIMITED TO, FLUCTUATIONS IN INTEREST RATES AND IN THE
ECONOMY; THE IMPACT OF LAWS AND REGULATIONS APPLICABLE TO OUR COMPANY AND
CHANGES THEREIN; COMPETITIVE CONDITIONS IN THE MARKETS IN WHICH OUR COMPANY
CONDUCTS ITS OPERATIONS, INCLUDING COMPETITION FROM BANKING AND NON-BANKING
COMPANIES WITH SUBSTANTIALLY GREATER RESOURCES THAN OUR COMPANY, SOME OF WHICH
MAY OFFER AND DEVELOP PRODUCTS AND SERVICES NOT OFFERED BY OUR COMPANY; AND THE
ABILITY OF OUR COMPANY TO RESPOND TO CHANGES IN TECHNOLOGY. ADDITIONAL FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES WERE DISCUSSED UNDER THE
CAPTION "FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL
CONDITION, OR BUSINESS," IN OUR COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 2005, AS WELL AS THOSE DISCUSSED ELSEWHERE IN OUR
COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
19
OVERVIEW
This overview of management's discussion and analysis highlights selected
information in this report and may not contain all of the information that is
important to you. For a more complete understanding of trends, events,
commitments, uncertainties, liquidity, capital resources and critical accounting
estimates, you should carefully read this entire report. These have an impact on
our Company's financial condition and results of operation.
BUSINESS STRATEGY: In 1865, The Exchange National Bank of Jefferson City
opened for business serving the loan and deposit needs of citizens living in
Missouri's State Capitol of Jefferson City. Leveraging off of its strong equity
position, Exchange National Bank's Board of Directors established Exchange
National Bancshares, Inc., a multi-bank holding company on October 23, 1992. On
April 7, 1993, Exchange National Bancshares, Inc. acquired The Exchange National
Bank of Jefferson City. On November 3, 1997, our Company acquired Union State
Bancshares, Inc. and its wholly-owned subsidiary, Union State Bank and Trust of
Clinton, Missouri. Following the May 4, 2000 acquisition of Calhoun Bancshares,
Inc. by Union State Bank, Calhoun Bancshares' wholly-owned subsidiary, Citizens
State Bank of Calhoun, merged into Union State Bank. The surviving bank in this
merger is called Citizens Union State Bank & Trust. On January 3, 2000, our
Company acquired Mid Central Bancorp, Inc., and Mid Central's wholly-owned
subsidiary, Osage Valley Bank of Warsaw, Missouri. On June 16, 2000, our Company
acquired CNS Bancorp, Inc. and its subsidiary, City National Savings Bank, FSB,
Jefferson City, Missouri. City National subsequently was merged into Exchange
National Bank. On June 26, 2003 our Company purchased the Springfield, Missouri
branch of Missouri State Bank. Following the purchase, this branch was merged
into Citizens Union State Bank and Trust. Finally, on May 2, 2005, our Company
acquired Bank 10 of Belton, Missouri.
MATERIAL CHALLENGES AND RISKS: Our Company may experience difficulties
managing growth and effectively integrating newly established branches. As part
of our general strategy, our Company may continue to acquire banks and establish
de novo branches that we believe provide a strategic fit. To the extent that our
Company does grow, there can be no assurances that we will be able to adequately
and profitably manage such growth. The successes of our Company's growth
strategy will depend primarily on the ability of our banking subsidiaries to
generate an increasing level of loans and deposits at acceptable risk levels and
on acceptable terms without significant increases in non-interest expenses
relative to revenues generated. Our Company's financial performance also
depends, in part, on our ability to manage various portfolios and to
successfully introduce additional financial products and services. Furthermore,
the success of our Company's growth strategy will depend on our ability to
maintain sufficient regulatory capital levels and on general economic conditions
that are beyond our control.
REVENUE SOURCE: Through the respective branch network, Exchange National
Bank of Jefferson City, Citizens Union State Bank and Trust of Clinton, Osage
Valley Bank of Warsaw, and Bank 10 of Belton provide similar products and
services in four defined geographic areas. The products and services offered
include a broad range of commercial and personal banking services, including
certificates of deposit, individual retirement and other time deposit accounts,
checking and other demand deposit accounts, interest checking accounts, savings
accounts, and
20
money market accounts. Loans include real estate, commercial, installment, and
other consumer loans. Other financial services include automatic teller
machines, trust services, credit related insurance, and safe deposit boxes. The
revenues generated by each business segment consist primarily of interest
income, generated primarily from the loan and debt and equity security
portfolios, and service charges and fees, generated from the deposit products
and services. The geographic areas are defined to be communities surrounding
Jefferson City, Clinton, Warsaw, and Belton, Missouri. The products and services
are offered to customers primarily within their respective geographical areas.
The business segment results are consistent with our Company's internal
reporting system which is consistent, in all material respects, with generally
accepted accounting principles and practices prevalent in the banking industry.
Much of our Company's business is commercial, commercial real estate
development, and mortgage lending. Our Company has experienced continued strong
loan demand in the communities within which we operate even during economic
slowdowns. Our Company's income from mortgage brokerage activities is directly
dependent on mortgage rates and the level of home purchases and refinancing.
Our Company's primary source of revenue is net interest income derived
primarily from lending and deposit taking activities. A secondary source of
revenue is investment income. Our Company also derives income from trust,
brokerage, credit card and mortgage banking activities and service charge
income.
Our Company has prepared the unaudited condensed consolidated financial
statements in this report in accordance with accounting principles generally
accepted in the United States of America (U.S. GAAP). In preparing the
consolidated financial statements in accordance with U.S. GAAP, our Company
makes estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses during
the reporting period. There can be no assurances that actual results will not
differ from those estimates.
We have identified the accounting policy related to the allowance for loan
losses as critical to the understanding of our Company's results of operations,
since the application of this policy requires significant management assumptions
and estimates that could result in materially different amounts being reported
if conditions or underlying circumstances were to change. The impact and any
associated risks related to these policies on our business operations are
discussed in the "Lending and Credit Management" section below.
21
RESULTS OF OPERATIONS
Net income for the three months ended March 31, 2006 of $2,689,000
increased $451,000 when compared to the first quarter of 2005. Diluted earnings
per common share for the first quarter of 2006 of $0.64 increased 11 cents or
20.8% when compared to the first quarter of 2005.
Net interest income (on a tax equivalent basis) was $9,723,000, or 3.83% of
average earning assets, for the three months ended March 31, 2006, compared to
$7,270,000, or 3.34% of average earning assets, for the same period in 2005.
Approximately, $2,089,000 of the $2,453,000 increase in net interest income for
the three months ended March 31, 2006 is related to the acquisition of Bank 10.
The balance of the increase in net interest income was the result of an increase
in average interest-earning assets and an increase in net interest margin.
Average interest-earning assets for the three months ended March 31, 2006
were $1,030,315,000, an increase of $148,633,000 or 16.9%, compared to average
interest-earning assets of $881,682,000 for the same period of 2005. The
acquisition of Bank 10 represents approximately $171,896,000 of the increase in
interest-earning assets. In addition to the increase due to the acquisition of
Bank 10, average loans outstanding increased approximately $39,611,000 while
other earning assets decreased $62,874,000. The decrease in other earning assets
reflects the use of excess liquidity to fund loan growth and the purchase of
Bank 10.
The yield on average interest-earning assets increased to 6.71% for the
three month period ended March 31, 2006 compared to 5.39% for the same period in
2005. The rate paid on interest-bearing liabilities also increased to 3.27% in
2006 compared to 2.36% in 2005. These increased in rates reflect the general
increases in market rates as a result of the Federal Reserve Bank's rate
activity over the last year.
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31, 2005
Our Company's primary source of earnings is net interest income, which is
the difference between the interest earned on interest earning assets and the
interest paid on interest bearing liabilities. Net interest income on a fully
taxable equivalent basis increased $2,453,000 or 33.7% to $9,723,000 or 3.83% of
average earning assets for the first quarter of 2006 compared to $7,270,000 or
3.34% of average earning assets for the same period of 2005. The provision for
loan losses was $318,000 and $236,000 for the three months ended March 31, 2006
and 2005 respectively. The increase in the provision for loan losses reflects a
higher level of charge-offs during the first quarter of 2006 compared to 2005 as
well as an increase in loan balances. Net charge-offs were $17,000 for the first
quarter of 2006 compared to $2,000 for the first quarter of 2005. See Lending
and Credit Management in this report for further discussion of first quarter
2006 charge-offs.
22
Noninterest income and noninterest expense for the three-month periods
ended March 31, 2006 and 2005 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31, INCREASE (DECREASE)
------------------ -------------------
NONINTEREST INCOME 2006 2005 AMOUNT %
------------------ --------- ------ ------ -----
Service charges on deposit accounts $1,361 $ 681 $ 680 99.9%
Trust department income 180 182 (2) (1.1)
Net gain (loss) on sales of calls of debt securities (18) 0 (18) NM
Mortgage loan servicing fees, net 114 113 1 0.9
Gain on sale of mortgage loans 112 130 (18) (13.8)
Other 277 225 52 23.1
------ ------ ------ -----
$2,026 $1,331 $ 695 52.2%
====== ====== ====== =====
NONINTEREST EXPENSE
Salaries and employee benefits $4,345 $2,886 $1,459 50.6%
Occupancy expense 452 290 162 55.9
Furniture and equipment expense 520 504 16 3.2
Postage, printing and supplies 292 164 128 78.0
Legal, examination, and professional fees 294 251 43 17.1
Amortization - CDI 276 54 222 411.1
Processing expense 213 89 124 139.3
Other 919 737 182 24.7
------ ------ ------ -----
$7,311 $4,975 $2,336 47.0%
====== ====== ====== =====
Noninterest income increased $695,000 or 52.2% to $2,026,000 for the first
quarter of 2006 compared to $1,331,000 for the same period of 2005. The
acquisition of Bank 10 contributed $499,000 to the increase in noninterest
income during the first quarter. Excluding income due to the acquisition,
service charges on deposit accounts increased $230,000 or 33.8% as a result of
increased overdraft and insufficient check fee income, ATM fee income, and debit
card fee income. Gain on sale of mortgage loans decreased $18,000 or 13.8% due
to a decrease in volume of loans originated and sold to the secondary market
from approximately $9,118,000 in the first quarter of 2005 to approximately
$6,139,000 for the first quarter of 2006.
23
Noninterest expense increased $2,336,000 or 47.0% to $7,311,000 for the
first quarter of 2006 compared to $4,975,000 for the first quarter of 2005.
Approximately $1,692,000 of the increase in noninterest expense is attributed to
the acquisition of Bank 10. Excluding costs associated with the acquisition,
salaries and benefits increased $491,000 or 17.2%, occupancy expense increased
$58,000 or 20.0%, postage, printing, and supplies increased $56,000 or 34.1%,
processing expense increased $28,000 or 31.5% and other noninterest expense
increased $62,000 or 8.4%. In addition to the increase in salaries and employees
benefits represented by normal salary increases and additional hires, $42,000 of
the increase reflects share-based compensation expense recorded as a result of
the adoption of SFAS No. 123R, $103,000 reflects increased pension expense and
$72,000 represents increased profit sharing expense. The increase in occupancy
expense reflects additional costs associated with three new branch facilities.
The increase in postage, printing, and supplies reflects both higher postage
rates and additional mail volume. The increase in processing expense generally
reflects higher costs associated with the various data processing systems
utilized by our Company. The increase in other noninterest expense reflects
higher expenses in various other categories including, but not limited to,
telephone and communications expense, correspondent bank charges, corporate
dues, education, and miscellaneous charge-offs.
Income taxes as a percentage of earnings before income taxes as reported in
the condensed consolidated financial statements were 30.3% for the first quarter
of 2006 compared to 30.2% for the first quarter of 2005.
24
NET INTEREST INCOME
Fully taxable equivalent net interest income increased $2,453,000 or 33.7%
for the three month period ended March 31, 2006 compared to the same period in
2005. The increase in net interest income for the period ended March 31, 2006
compared to the period ended March 31, 2005 was the result of increased earning
assets and margin.
25
The following table presents average balance sheets, net interest income,
average yields of earning assets, and average costs of interest bearing
liabilities on a fully taxable equivalent basis for the three month periods
ended March 31, 2006 and 2005.
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2006 MARCH 31, 2005
--------------------------------- -------------------------------
INTEREST RATE INTEREST RATE
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE/1/ PAID/1/ BALANCE EXPENSE/1/ PAID/1/
---------- ---------- ------- -------- ---------- -------
ASSETS
Loans:/2/ $ 821,412 $14,762 7.29% $640,104 $ 9,768 6.19%
Investment securities:/3/
U.S Treasury and
U.S. Gov't Agencies 136,913 1,370 4.06 158,942 1,122 2.86
State and municipal 53,585 736 5.57 34,048 493 5.87
Other 7,169 69 3.90 5,668 58 4.15
Federal funds sold 8,571 94 4.45 39,929 253 2.57
Interest-bearing deposits 2,665 26 3.96 2,991 16 2.17
---------- ------- -------- -------
Total interest earning assets 1,030,315 17,057 6.71 881,682 11,710 5.39
All other assets 123,069 78,763
Allowance for loan losses (9,248) (7,609)
---------- --------
Total assets $1,144,136 $952,836
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW accounts $ 113,049 $ 391 1.40% $125,645 $ 356 1.15%
Savings 55,112 78 0.57 50,428 71 0.57
Money market 157,184 1,134 2.93 125,227 645 2.09
Deposits of $100 and over 115,460 1,059 3.72 90,540 620 2.78
Other time deposits 310,519 2,713 3.54 252,180 1,659 2.67
---------- ------- -------- -------
Total time deposits 751,324 5,375 2.90 644,020 3,351 2.11
Federal funds purchased and
securities sold under
agreements to repurchase 52,021 511 3.98 48,969 268 2.22
Interest-bearing demand
notes to US Treasury 480 4 3.38 662 3 1.84
Subordinated notes 49,486 842 6.90 29,726 403 5.50
Advances from Federal Home Loan Bank 57,122 602 4.27 39,432 415 4.27
---------- ------- -------- -------
Total interest-bearing liabilities 910,433 7,334 3.27 762,809 4,440 2.36
Demand deposits 127,499 92,280
Other liabilities 8,305 5,034
---------- --------
Total liabilities 1,046,237 860,123
Stockholders' equity 97,899 92,713
---------- --------
Total liabilities and
stockholders' equity $1,144,136 $952,836
========== ========
Net interest income $ 9,723 $ 7,270
======= =======
Net interest margin/4/ 3.83% 3.34%
==== ====
/1/ Interest income and yields are presented on a fully taxable equivalent
basis using the Federal statutory income tax rate. Such adjustments were
$265,000 in 2006 and $182,000 in 2005.
/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.
26
The following table presents, on a fully taxable equivalent basis, an
analysis of changes in net interest income resulting from changes in average
volumes of earning assets and interest bearing liabilities and average rates
earned and paid. The change in interest due to the combined rate/volume variance
has been allocated to rate and volume changes in proportion to the absolute
dollar amounts of change in each.
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 2006
COMPARED TO
THREE MONTHS ENDED MARCH 31, 2005
---------------------------------
CHANGE DUE TO
TOTAL ---------------------
CHANGE VOLUME /3/ RATE /4/
------ ---------- --------
INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS:
Loans:/1/ $4,994 3,069 1,925
Investment securities:/3/
U.S Treasury and
U.S. Gov't Agencies 248 (172) 420
State and municipal /2/ 243 269 (26)
Other 11 14 (3)
Federal funds sold (159) (274) 115
Interest-bearing deposits 10 (2) 12
------ ------ ------
Total interest income 5,347 2,904 2,443
INTEREST EXPENSE:
NOW accounts $ 35 (39) 74
Savings 7 7 --
Money market 489 191 298
Deposits of $100 and over 439 197 242
Other time deposits 1,054 436 618
Federal funds purchased and
securities sold under
agreements to repurchase 243 18 225
Interest-bearing demand notes
of U.S. Treasury 1 (1) 2
Subordinated debentures 439 317 122
Other borrowed money 187 186 1
------ ------ ------
Total interest expense 2,894 1,312 1,582
------ ------ ------
Net interest income on a fully
taxable equivalent basis $2,453 1,592 861
====== ====== ======
/1/ Interest income and yields are presented on a fully taxable equivalent
basis using the Federal statutory income tax rate. Such adjustments were
$265,000 in 2006 and $182,000 in 2005.
/2/ Non-accruing loans are included in the average amounts outstanding.
/3/ Change in volume multiplied by yield/rate of prior period.
/4/ Change in yield/rate multiplied by volume of prior period.
27
LENDING AND CREDIT MANAGEMENT
Interest earned on the loan portfolio is a primary source of interest
income for our Company. Net loans represented 70.4% of total assets as of March
31, 2006 compared to 71.4% as of December 31, 2005 and 64.9% as of March 31,
2005.
Lending activities are conducted pursuant to written loan policies approved
by our Banks' Boards of Directors. Larger credits are reviewed by our Banks'
Discount Committees. These committees are comprised of members of senior
management.
Our Company generally does not retain long-term fixed rate residential
mortgage loans in its portfolio. Fixed rate loans conforming to standards
required by the secondary market are offered to qualified borrowers, but are not
funded until our Company has a non-recourse purchase commitment from the
secondary market at a predetermined price. At March 31, 2006, our Company was
servicing approximately $219,697,000 of loans sold to the secondary market.
Mortgage loans retained in our Company's portfolio generally include
provisions for rate adjustments at one to three year intervals. Commercial loans
and real estate construction loans generally have maturities of less than one
year. Installment loans to individuals are primarily fixed rate loans with
maturities from one to five years.
The provision for loan losses is based on management's evaluation of the
loan portfolio in light of national and local economic conditions, changes in
the composition and volume of the loan portfolio, changes in the volume of past
due and nonaccrual loans, value of underlying collateral and other relevant
factors. The allowance for loan losses which is reported as a deduction from
loans is available for loan charge-offs. This allowance is increased by the
provision charged to expense and is reduced by loan charge-offs net of loan
recoveries. Management formally reviews all loans in excess of certain dollar
amounts (periodically established) at least annually. In addition, on a monthly
basis, management reviews past due, "classified", and "watch list" loans in
order to classify or reclassify loans as "loans requiring attention,"
"substandard," "doubtful," or "loss". During that review, management also
determines which loans should be considered to be "impaired". Management follows
the guidance provided in Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan, (SFAS 114) in identifying and
measuring loan impairment. If management determines that it is probable that all
amounts due on a loan will not be collected under the original terms of the loan
agreement, the loan is considered to be impaired. Once a loan has been
identified as impaired management generally measures impairment based upon the
fair value of the underlying collateral. Management believes, but there can be
no assurance, that these procedures keep management informed of possible problem
loans. Based upon these procedures, both the allowance and provision for loan
losses are adjusted to maintain the allowance at a level considered adequate by
management for probable losses inherent in the loan portfolio.
28
The allowance for loan losses was decreased by net loan charge-offs of
$17,000 for the first quarter of 2006 compared to $2,000 for the first quarter
of 2005. The allowance for loan losses was increased by a provision charged to
expense of $318,000 for the first quarter of 2005. That compares to a provision
of $236,000 for the first quarter of 2005.
The balance of the allowance for loan losses was $9,385,000 at March 31,
2006 compared to $9,085,000 at December 31, 2005 and $7,729,000 at March 31,
2005. $1,216,000 of the increase in the allowance for loan losses from March 31,
2005 to 2006 represents the balance of Bank 10's allowance acquired in the
acquisition. The allowance for loan losses as a percent of outstanding loans was
1.14% at March 31, 2006 compared to 1.12% at December 31, 2005 and 1.21% at
March 31, 2005. The decrease in the allowances for loan losses as a percent of
outstanding loans reflects both the increase in loan balances as a result of the
Bank 10 acquisition as well as the charge-off of loans for which management had
made previous provisions in the allowance.
29
Nonperforming loans, defined as loans on nonaccrual status, loans 90 days
or more past due and still accruing, and restructured loans totaled $8,624,000
or 1.04% of total loans at March 31, 2006 compared to $9,050,000 or 1.11% of
total loans at December 31, 2005. Detail of those balances plus other real
estate and repossessions is as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
MARCH 31, 2006 DECEMBER 31, 2005
--------------------- ---------------------
% OF % OF
BALANCE GROSS LOANS BALANCE GROSS LOANS
------- ----------- ------- -----------
Nonaccrual loans:
Commercial $ 5,386 0.65% $ 5,705 0.70%
Real estate:
Construction 1,803 0.22 1,760 0.22
Mortgage 849 0.10 1,090 0.13
Consumer 55 0.01 56 0.01
------- ---- ------- ----
8,093 0.98 8,611 1.06
------- ---- ------- ----
Loans contractually past-due 90 days
or more and still accruing:
Commercial -- -- 238 0.03
Real estate:
Construction -- -- -- --
Mortgage 517 0.06 187 0.02
Consumer 14 -- 14 --
------- ---- ------- ----
531 0.06 439 0.05
------- ---- ------- ----
Restructured loans -- -- -- --
------- ---- ------- ----
Total nonperforming loans 8,624 1.04% 9,050 1.11%
==== ====
Other real estate 1,484 1,568
Repossessions -- --
------- -------
Total nonperforming assets $10,108 $10,618
======= =======
The allowance for loan losses was 108.82% of nonperforming loans at March
31, 2006 compared to 100.39% of nonperforming loans at December 31, 2005. There
has been no material change in the overall level of nonperforming assets since
the prior year-end.
It is our Company's policy to discontinue the accrual of interest income on
loans when the full collection of interest or principal is in doubt, or when the
payment of interest or principal has become contractually 90 days past due
unless the obligation is both well secured and in the process of collection. A
loan remains on nonaccrual status until the loan is current as to payment of
both principal and interest and/or the borrower demonstrates the ability to pay
and remain current. Interest on loans on nonaccrual status which would have been
recorded under the original terms of those loans, was approximately $540,000 and
$267,000 for the three months ended March 31, 2006 and 2005, respectively.
Approximately $8,000 and $3,000 was actually recorded as interest income on such
loans for the three months ended March 31, 2006 and 2005, 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
included in the table above, which were considered impaired, management has
identified approximately $1,894,000 of additional loans as being
30
impaired at March 31, 2006. The average balance of nonaccrual and other impaired
loans for the first three months of 2006 was approximately $10,333,000. At March
31, 2006 the portion of the allowance for loan losses allocated (both
asset-specific and percentage) to impaired loans was $2,382,000 compared to
$2,392,000 at December 31, 2005. The balance of impaired loans with no specific
loan loss allocations was approximately $1,369,000 at March 31, 2006 compared to
approximately $1,217,000 at December 31, 2005.
As of March 31, 2006 and December 31, 2005 approximately $17,631,000 and
$16,387,000 of loans not included in the nonaccrual table above or identified by
management as being impaired were classified by management as having more than
normal risk which raised doubts as to the ability of the borrower to comply with
present loan repayment terms. The increase in loans having more than normal risk
is primarily represented by two large commercial real estate credits. These two
credits had documentation exceptions causing them to be classified by regulatory
authorities as substandard and special mention. The loans are well secured and
performing in accordance with the terms of the loan agreements. In addition to
the classified list, our Company also maintains an internal watch list of loans,
which for various reasons, not all related to credit quality, management is
monitoring more closely than the average loan in the portfolio. Loans may be
added to this list for reasons that are temporary and correctable, such as the
absence of current financial statements of the borrower, or a deficiency in loan
documentation. Other loans are added as soon as any problem is detected which
might affect the borrower's ability to meet the terms of the loan. This could be
initiated by the delinquency of a scheduled loan payment, a deterioration in the
borrower's financial condition identified in a review of periodic financial
statements, a decrease in the value of the collateral securing the loan, or a
change in the economic environment within which the borrower operates. Once the
loan is placed on our Company's watch list, its condition is monitored closely.
Any further deterioration in the condition of the loan is evaluated to determine
if the loan should be assigned to a higher risk category.
The allowance for loan losses is available to absorb probable loan losses
regardless of the category of loan to be charged off. The allowance for loan
losses consists of three components: asset-specific reserves, reserves based on
expected loss estimates, and unallocated reserves. The asset-specific component
applies to loans evaluated individually for impairment and is based on
management's best estimate of discounted cash repayments and proceeds from
liquidating collateral. The actual timing and amount of repayments and the
ultimate realizable value of the collateral may differ from management's
estimate.
The expected loss component is generally determined by applying percentages
to pools of loans by asset type. These pre-established percentages are based
upon standard bank regulatory classification percentages as well as average
historical loss percentages. These expected loss estimates are sensitive to
changes in delinquency status, realizable value of collateral, and other risk
factors.
The unallocated portion of the allowance is based on management's
evaluation of conditions that are not directly reflected in the determination of
the asset-specific component and the expected loss component discussed above.
The evaluation of inherent loss with respect to these conditions is subject to a
higher degree of uncertainty because they may not be identified
31
with specific problem credits or portfolio segments. Conditions evaluated in
connection with the unallocated portion of the allowance include general
economic and business conditions affecting our key lending areas, credit quality
trends (including trends in substandard loans expected to result from existing
conditions), collateral values, specific industry conditions within portfolio
segments, bank regulatory examination results, and findings of our internal loan
review department.
The underlying assumptions, estimates and assessments used by management to
determine these components are continually evaluated and updated to reflect
management's current view of overall economic conditions and relevant factors
impacting credit quality and inherent losses. Changes in such estimates could
significantly impact the allowance and provision for credit losses. Our Company
could experience credit losses that are different from the current estimates
made by management.
At March 31, 2006, management allocated $8,624,000 of the $9,385,000 total
allowance for loan losses to specific loans and loan categories and $761,000 was
unallocated. This is in comparison to at December 31, 2005, management allocated
$8,062,000 of the $9,085,000 total allowance for loan losses to specific loans
and loan categories and $1,023,000 was unallocated. Considering the size of
several of our Company's lending relationships and the loan portfolio in total,
management believes that the March 31, 2006 allowance for loan losses is
adequate. Our Company does not lend funds for the type of transactions defined
as "highly leveraged" by bank regulatory authorities or for foreign loans. Our
Company does not have any interest-earning assets which would have been included
in nonaccrual, past due, or restructured loans if such assets were loans.
FINANCIAL CONDITION
Total assets increased $33,594,000 or 3.0% to $1,160,064,000 at March 31,
2006 compared to $1,126,470,000 at December 31, 2005. Total liabilities
increased $32,014,000 or 3.1% to $1,061,752,000. Stockholders' equity increased
$1,579,000 or 1.6% to $98,312,000. The increase in assets reflects growth in
both the loan portfolio and the investment portfolio. The increase in
liabilities reflects increases in securities sold under agreements to repurchase
and other borrowed funds.
Loans increased $13,158,000 to $826,693,000 at March 31, 2006 compared to
$813,535,000 at December 31, 2005. Commercial loans increased $1,235,000; real
estate construction loans increased $18,685,000; real estate mortgage loans
decreased $3,055,000; and consumer loans decreased $3,707,000. The increase in
commercial loans and real estate construction loans represents continued strong
loan demand in all our market areas. The decrease in real estate mortgage loans
reflects generally higher mortgage rates in the market since year-end. The
decrease in consumer loans reflects the low rates that existed in the consumer
auto market that was fueled by manufacturers' financing programs which generally
tend to offer more favorable financing rates than our Company. Our Company chose
to not aggressively pursue consumer auto loans during the periods presented and
as such this portion of the loan portfolio declined in balance.
32
Investment in debt securities classified as available-for-sale increased
$20,903,000 or 11.6% to $200,595,000 at March 31, 2006 compared to $179,692,000
at December 31, 2005. Investments classified as available-for-sale are carried
at fair value. During 2006 the market valuation account decreased $421,000 to
($2,060,000) to reflect the fair value of available-for-sale investments at
March 31, 2006 and the net after tax decrease resulting from the change in the
market valuation adjustment of $276,000 decreased the stockholders' equity
component to ($1,348,000) at March 31, 2006. The increase in debt securities
represents securities purchased as collateral for increased public funds.
At December 31, 2005 the market valuation account for the
available-for-sale investments of ($1,639,000) decreased 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 ($1,072,000) was
reflected as a separate component of stockholders' equity.
Cash and cash equivalents, which consist of cash and due from banks and
Federal funds sold, increased $80,000 or 0.2% to $47,810,000 at March 31, 2006
compared to $47,731,000 at December 31, 2005. Further discussion of this
increase may be found in the section of this report titled "Sources and Uses of
Funds".
Premises and equipment increased $169,000 or 0.5% to $33,060,000 at March
31, 2006 compared to $32,891,000 at December 31, 2005. The increase reflects
purchases of premises and equipment $614,000 offset by depreciation expense of
$435,000.
Total deposits decreased $3,989,000 or .45% to $877,466,000 at March 31,
2006 compared to $881,455,000 at December 31, 2005.
Federal funds purchased and securities sold under agreements to repurchase
increased $19,031,000 or 51.4% to $56,027,000 at March 31, 2006 compared to
$36,996,000 at December 31, 2005. The balance represents an increase in public
fund repurchase agreements.
Other borrowed money increased $17,124,000 or 32.8% to $69,303,000 at March
31, 2006 compared to $52,179,000 at December 31, 2005. The increase reflects new
borrowings of $47,000,000 reduced by repayments of $30,286,000. $8,000,000 of
the net increase reflects an advance funding of a future maturity in order to
lock in a lower funding rate. The balance of the net increases reflects funding
of loan growth.
The increase in stockholders' equity reflects net income of $2,688,000 less
dividends declared of $875,000 and ($276,000) change in unrealized holding
losses, net of taxes, on investment in debt and equity securities
available-for-sale.
No material changes in our Company's liquidity or capital resources have
occurred since December 31, 2005.
33
LIQUIDITY
The role of liquidity management is to ensure funds are available to meet
depositors' withdrawal and borrowers' credit demands while at the same time
maximizing profitability. This is accomplished by balancing changes in demand
for funds with changes in the supply of those funds. Liquidity to meet the
demands is provided by maturing assets, short-term liquid assets that can be
converted to cash and the ability to attract funds from external sources,
principally depositors. Due to the nature of services offered by our Company,
management prefers to focus on transaction accounts and full service
relationships with customers. Management believes it has the ability to increase
deposits at any time by offering rates slightly higher than the market rate.
Our Banks' Asset/Liability Committees (ALCO), primarily made up of senior
management, have direct oversight responsibility for our Company's liquidity
position and profile. A combination of daily, weekly and monthly reports
provided to management detail the following: internal liquidity metrics,
composition and level of the liquid asset portfolio, timing differences in
short-term cash flow obligations, available pricing and market access to the
financial markets for capital and exposure to contingent draws on our Company's
liquidity.
Our Company has a number of sources of funds to meet liquidity needs on a
daily basis. The deposit base, consisting of consumer and commercial deposits
and large dollar denomination ($100,000 and over) certificates of deposit, is a
source of funds.
Other sources of funds available to meet daily needs include the sales of
securities under agreements to repurchase and funds made available under a
treasury tax and loan note agreement with the federal government. Also, the
Banks are members of the Federal Home Loan Bank of Des Moines (FHLB). As members
of the FHLB, the Banks have access to credit products of the FHLB. At March 31,
2006, the amounts of available credit from the FHLB totaled $58,874,000. As of
March 31, 2006, the Banks had $69,303,000 in outstanding borrowings with the
FHLB. The Banks have federal funds purchased lines with correspondent banks
totaling $45,000,000 and agreements with unaffiliated banks to sell and
repurchase securities of $10,000,000. Finally, our Company has a $20,000,000
line of credit with a correspondent bank. This line of credit had no balance in
use as of March 31, 2006.
SOURCES AND USES OF FUNDS
For the three months ended March 31, 2006 and 2005, net cash provided by
operating activities was $4,587,000 and $3,433,000, respectively. $451,000 of
the increase in net cash provided by operating activities reflects a higher
level of net income. Approximately $556,000 represents the change in accrued
interest receivable.
Net cash used in investing activities was $35,071,000 in 2006 versus
$60,335,000 in 2005. The primary decrease in cash used in investing activities
reflects lower purchases of debt securities during the first quarter of 2006
versus the same period in 2005.
34
Net cash provided by financing activities was $30,564,000 in 2006 versus
$50,551,000 in 2005. The decrease in cash proved by financing activities in 2006
compared to 2005 is primarily represented by a $23,712,000 issuance of
subordinated notes in the first quarter of 2005 to partially fund the purchase
of Bank 10. In addition, an increase in interest-bearing transaction accounts
provided approximately $14,110,000 of cash during the first quarter of 2005
compared to a decrease in interest-bearing accounts of approximately $4,000,000
during the first quarter of 2006.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets an amendment of FASB Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
("SFAS No. 156"). SFAS No. 156 requires all separately recognized servicing
assets and liabilities to be initially measured at fair value. In addition,
entities are permitted to choose to either subsequently measure servicing rights
at fair value and report changes in fair value in earnings, or amortize
servicing rights in proportion to and over the estimated net servicing income or
loss and assess the rights for impairment. Beginning with fiscal year in which
an entity adopts SFAS No. 156, it may elect to subsequently measure a class of
servicing assets and liabilities at fair value. Post adoption, an entity may
make this election as of the beginning of any fiscal year. An entity that elects
to subsequently measure a class of servicing assets and liabilities at fair
value should apply that election to all new and existing recognized servicing
assets and liabilities within that class. The effect of remeasuring an existing
class of servicing assets and liabilities at fair value is to be reported as a
cumulative-effect adjustment to retained earnings as of the beginning of the
period of adoption. SFAS No. 156 is effective as of the beginning of an entity's
first fiscal year that begins after September 15, 2006. The statement also
requires additional disclosures. Our Company is currently evaluating the impact
of the adoption of SFAS No. 156; however, it is not expected to have a material
impact on our Company's financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our Company's exposure to market risk is reviewed on a regular basis by our
Banks' Asset/Liability Committees and Boards of Directors. Interest rate risk is
the potential of economic losses due to future interest rate changes. These
economic losses can be reflected as a loss of future net interest income and/or
a loss of current fair market values. The objective is to measure the effect on
net interest income and to adjust the balance sheet to minimize the inherent
risk while at the same time maximizing income. Management realizes certain risks
are inherent and that the goal is to identify and minimize those risks. Tools
used by our Banks' management include the standard GAP report subject to
different rate shock scenarios. At March 31, 2006, the rate shock scenario
models indicated that annual net interest income could decrease or increase by
as much as 4.5% should interest rates rise or fall, respectively, within 200
basis points from their current level over a one year period compared to 8.3% at
December 31, 2005. However there are no assurances that the change will not be
more or less than this estimate. Management further believes this is an
acceptable level of risk.
35
ITEM 4. CONTROLS AND PROCEDURES
Our Company's management has evaluated, with the participation of our
principal executive and principal financial officers, the effectiveness of our
disclosure controls and procedures as of March 31, 2006. Based upon and as of
the date of that evaluation, our principal executive and principal financial
officers concluded that our disclosure controls and procedures were effective to
ensure that information required to be disclosed in the reports we file and
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported as and when required. It should be noted that any system
of disclosure controls and procedures, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system are met. In addition, the design of any system of disclosure controls and
procedures is based in part upon assumptions about the likelihood of future
events. Because of these and other inherent limitations of any such system,
there can be no assurance that any design will always succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.
There has been no change in our Company's internal control over financial
reporting that occurred during the fiscal quarter ended March 31, 2006 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
36
PART II - OTHER INFORMATION
Item 1. Legal Proceedings NONE
Item 1A. Risk Factors NONE
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds NONE
ITEM 3. Defaults Upon Senior Securities NONE
ITEM 4. Submission of Matters to a Vote of Security Holders NONE
Item 5. Other Information NONE
Item 6. Exhibits
Exhibit No. Description
----------- -----------
3.1 Articles of Incorporation of our Company (filed as Exhibit 3(a) to
our Company's Registration Statement on Form S-4 (Registration No.
33-54166) and incorporated herein by reference).
3.2 Bylaws of our Company (filed as Exhibit 3.2 to our Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
2002 (Commission file number 0-23636) and incorporated herein by
reference).
4 Specimen certificate representing shares of our Company's $1.00
par value common stock (filed as Exhibit 4 to our Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999
(Commission file number 0-23636) and incorporated herein by
reference).
31.1 Certificate of the Chief Executive Officer of our Company pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certificate of the Chief Financial Officer of our Company pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certificate of the Chief Executive Officer of our Company pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certificate of the Chief Financial Officer of our Company pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXCHANGE NATIONAL BANCSHARES, INC.
Date
----
/s/ James E. Smith
----------------------------------------
May 10, 2006 James E. Smith, Chairman of the Board
and Chief Executive Officer (Principal
Executive Officer)
/s/ Richard G. Rose
----------------------------------------
May 10, 2006 Richard G. Rose, Treasurer (Principal
Financial Officer and Principal
Accounting Officer)
38
EXCHANGE NATIONAL BANCSHARES, INC.
INDEX TO EXHIBITS
March 31, 2006 Form 10-Q
Exhibit No. Description PAGE NO.
----------- ----------- --------
3.1 Articles of Incorporation of our Company (filed as **
Exhibit 3(a) to our Company's Registration Statement on
Form S-4 (Registration No. 33-54166) and incorporated
herein by reference).
3.2 Bylaws of our Company (filed as Exhibit 3.2 to our **
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2002 (Commission file number
0-23636) and incorporated herein by reference).
4 Specimen certificate representing shares of our **
Company's $1.00 par value common stock (filed as
Exhibit 4 to our Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999 (Commission
file number 0-23636) and incorporated herein by
reference).
31.1 Certificate of the Chief Executive Officer of our 40
Company pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certificate of the Chief Financial Officer of our 41
Company pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certificate of the Chief Executive Officer of our 42
Company pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certificate of the Chief Financial Officer of our 43
Company pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
----------
** Incorporated by reference.
39