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, 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
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 November 9, 2006, the registrant had 4,169,847 shares of common stock, par
value $1.00 per share, outstanding.
Page 1 of 52 pages
Index to Exhibits located on page 48
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2006 2005
-------------- --------------
ASSETS
Loans: $ 820,550,139 $ 813,534,876
Less allowance for loan losses 9,381,333 9,084,774
-------------- --------------
Loans, net 811,168,806 804,450,102
Investments in available for sale debt
securities, at fair value 179,041,365 173,389,101
Investments in equity securities, at cost 6,568,875 6,302,725
Federal funds sold 26,535,273 12,447,981
Cash and due from banks 30,421,093 35,282,568
Premises and equipment 33,455,374 32,890,908
Accrued interest receivable 8,388,281 7,772,573
Mortgage servicing rights 1,414,954 1,536,331
Goodwill 40,323,775 40,323,775
Core deposit intangible 4,003,246 4,786,460
Cash surrender value - life insurance 1,730,508 1,682,836
Other assets 5,464,115 5,605,116
-------------- --------------
Total assets $1,148,515,665 $1,126,470,476
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Demand deposits $ 137,593,549 $ 134,364,788
Time deposits 754,142,882 747,090,418
-------------- --------------
Total deposits 891,736,431 881,455,206
Federal funds purchased and securities
sold under agreements to repurchase 41,544,194 36,995,735
Interest-bearing demand notes to U.S. Treasury 1,889,472 1,098,337
Subordinated notes 49,486,000 49,486,000
Other borrowed money 50,610,683 52,179,661
Accrued interest payable 4,352,048 3,139,130
Other liabilities 5,889,052 5,383,542
-------------- --------------
Total liabilities 1,045,507,880 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 22,192,815 22,030,074
Retained earnings 79,982,390 74,129,117
Accumulated other comprehensive loss, net of tax (813,264) (1,072,170)
Treasury stock, 128,506 shares at cost (2,652,509) (2,652,509)
-------------- --------------
Total stockholders' equity 103,007,785 96,732,865
-------------- --------------
Total liabilities and stockholders' equity $1,148,515,665 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Interest income:
Interest and fees on loans $16,064,823 $13,577,646 $46,545,816 $35,140,273
Interest on debt securities:
Taxable 1,444,437 1,493,402 4,220,388 3,959,616
Nontaxable 481,074 412,270 1,442,210 1,160,712
Interest on federal funds sold 221,387 314,308 528,547 800,468
Interest on interest-bearing deposits 19,492 7,952 76,492 28,454
Dividends on equity securities 83,252 57,105 223,699 187,801
----------- ----------- ----------- -----------
Total interest income 18,314,465 15,862,683 53,037,152 41,277,324
----------- ----------- ----------- -----------
Interest Expense:
NOW accounts 322,507 559,041 1,104,083 1,344,402
Savings 73,324 84,307 226,983 236,196
Money market accounts 1,377,511 1,017,955 3,769,533 2,488,617
Certificates of deposit:
$100,000 and over 1,420,547 920,511 3,685,900 2,352,206
Other time deposits 3,262,639 2,396,624 8,969,634 6,167,131
Federal funds purchased and securities sold
under agreements to repurchase 461,640 434,293 1,458,591 1,018,112
Subordinated notes 912,438 772,307 2,628,177 1,921,916
Advances from Federal Home Loan Bank 750,026 516,008 2,153,965 1,415,560
Other borrowed money 8,830 5,591 22,188 13,870
----------- ----------- ----------- -----------
Total interest expense 8,589,462 6,706,637 24,019,054 16,958,010
----------- ----------- ----------- -----------
Net interest income 9,725,003 9,156,046 29,018,098 24,319,314
Provision for loan losses 300,000 260,500 928,000 733,667
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 9,425,003 8,895,546 28,090,098 23,585,647
Continued on next page
3
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------------------
2006 2005 2006 2005
---------- ---------- ----------- -----------
Noninterest income:
Service charges on deposit accounts $1,461,703 $1,251,632 $ 4,339,408 $ 2,951,310
Trust department income 214,472 165,376 622,551 595,341
Loss on sales and calls of debt securities -- -- (18,351) --
Mortgage loan servicing fees, net 102,370 101,159 326,646 317,958
Gain on sale of mortgage loans 126,686 200,936 328,520 507,523
Other 311,342 292,084 892,890 767,590
---------- ---------- ----------- -----------
Total noninterest income 2,216,573 2,011,187 6,491,664 5,139,722
---------- ---------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 4,254,272 3,899,655 12,942,420 10,220,156
Occupancy expense 499,840 431,801 1,400,006 1,107,907
Furniture and equipment expense 591,482 545,208 1,653,967 1,591,436
Advertising and promotion 234,298 216,586 621,636 574,254
Postage, printing and supplies 277,290 287,863 861,209 706,885
Legal, examination, and professional fees 333,575 400,997 946,664 985,241
Amortization of intangible assets 249,369 329,893 783,214 531,199
Processing expense 261,202 223,671 776,222 508,097
Other 780,591 733,081 2,265,640 2,079,695
---------- ---------- ----------- -----------
Total noninterest expense 7,481,919 7,068,755 22,250,978 18,304,870
---------- ---------- ----------- -----------
Income before income taxes 4,159,657 3,837,978 12,330,784 10,420,499
Income taxes 1,301,172 1,186,307 3,850,507 3,186,411
---------- ---------- ----------- -----------
Net income $2,858,485 $2,651,671 $ 8,480,277 $ 7,234,088
========== ========== =========== ===========
Basic earning per share $ 0.69 $ 0.64 $ 2.03 $ 1.73
Diluted earnings per share $ 0.68 $ 0.63 $ 2.02 $ 1.72
Weighed average shares of common stock outstanding
Basic 4,169,847 4,169,847 4,169,847 4,169,847
Diluted 4,202,485 4,196,929 4,202,762 4,198,179
Dividends per share:
Declared $ 0.21 $ 0.18 $ 0.63 $ 0.54
Paid $ 0.21 $ 0.18 $ 0.63 $ 0.54
See accompanying notes to unaudited condensed consolidated financial statements.
4
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
2006 2005
------------- -------------
Cash flow from operating activities:
Net income $ 8,480,277 $ 7,234,088
Adjustments to reconcile net income to net cash
cash provided by operating activities:
Provision for loan losses 928,000 733,667
Depreciation expense 1,360,457 1,274,082
Net amortization of debt securities premiums and discounts 34,945 562,590
Amortization of intangible assets 783,214 531,199
Non-cash compensation expense for stock based compensation 162,741 --
Increase in accrued interest receivable (615,708) (647,165)
Increase in cash surrender value - life insurance (47,672) (27,240)
Increase in other assets (36,151) (287,743)
Increase in accrued interest payable 1,212,918 1,053,988
Increase in other liabilities 505,510 405,951
Loss on sales and calls of debt securities 18,351 --
Origination of mortgage loans for sale (15,247,120) (30,243,789)
Proceeds from the sale of mortgage loans held for sale 15,575,640 30,751,312
Gain on sale of mortgage loans (328,520) (507,523)
Loss on disposition of premises and equipment 25,952 924
Other, net -- 15,180
------------- -------------
Net cash provided by operating activities 12,812,834 10,849,521
------------- -------------
Cash flow from investing activities:
Net increase in loans (8,136,202) (33,112,348)
Purchase of available-for-sale debt securities (117,945,571) (480,397,119)
Proceeds from maturities of available-for-sale debt securities 109,781,262 443,369,982
Proceeds from calls of available-for-sale debt securities 950,038 20,272,500
Proceeds from sales of available-for-sale debt securities 1,985,020 1,071,803
Purchase of equity securities (1,008,150) (844,950)
Proceeds from sales of equity securities 742,000 95,800
Acquisition of subsidiary, net of cash and cash equivalents acquired -- (21,800,539)
Purchase of premises and equipment (2,020,077) (5,012,950)
Proceeds from dispositions of premises and equipment 69,202 --
Proceeds from sales of other real estate owned and repossessions 570,624 1,760,374
------------- -------------
Net cash used in investing activities (15,011,854) (74,597,447)
------------- -------------
Continued on next page
5
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
2006 2005
------------- -------------
Cash flow from financing activities:
Net increase in demand deposits $ 3,228,761 $ 12,409,368
Net increase (decrease) in interest-bearing transaction accounts (19,314,069) 12,400,805
Net increase in time deposits 26,366,533 8,413,174
Net increase in federal funds purchased and securities
sold under agreements to repurchase 4,548,459 28,691,634
Net increase in interest-bearing demand notes to U.S. Treasury 791,135 513,351
Proceeds from issuance of subordinated notes -- 23,712,000
Proceeds from Federal Home Loan Bank borrowings 176,355,627 3,500,000
Repayment of Federal Home Loan Bank borrowings (177,924,605) (4,067,012)
Cash dividends paid (2,627,004) (2,251,717)
------------- -------------
Net cash provided by financing activities 11,424,837 83,321,603
------------- -------------
Net increase in cash and cash equivalents 9,225,817 19,573,677
Cash and cash equivalents, beginning of period 47,730,549 65,708,410
------------- -------------
Cash and cash equivalents, end of period $ 56,956,366 $ 85,282,087
============= =============
Supplemental disclosure of cash flow information -
Cash paid during period for:
Interest $ 22,806,136 $ 15,904,022
Income taxes 4,135,000 2,620,000
Supplemental schedule of noncash investing activities -
Other real estate and repossessions
acquired in settlement of loans $ 489,498 $ 3,265,115
See accompanying notes to unaudited condensed consolidated financial statements.
6
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three and Nine Months Ended September 30, 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 periods ended September 30, 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 September 30, 2006
and December 31, 2005 and the consolidated statements of earnings for the three
and nine month periods ended September 30, 2006 and 2005 and cash flows for the
nine months ended September 30, 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
nine-month period ended September 30, 2005 for our Company and Bank 10 as if the
transaction had occurred on January 1, 2005 is as follows:
Nine Months
Ended
September 30, 2005
------------------
Net interest income $26,052,171
Net income 7,478,232
Basic earnings per share $ 1.79
Diluted earnings per share 1.78
EARNINGS PER SHARE
The following table reflects, for the three-month and nine-month periods
ended September 30, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Net income, basic and diluted $2,858,485 $2,651,671 $8,480,277 $7,234,088
========== ========== ========== ==========
Average shares outstanding 4,169,847 4,169,847 4,169,847 4,169,847
Effect of dilutive stock options 32,638 27,082 32,915 28,332
---------- ---------- ---------- ----------
Average shares outstanding
including dilutive stock options 4,202,485 4,196,929 4,202,762 4,198,179
========== ========== ========== ==========
Basic earning per share $ 0.69 $ 0.64 $ 2.03 $ 1.73
Diluted earnings per share $ 0.68 $ 0.63 $ 2.02 $ 1.72
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
compensation be recognized as an expense in the financial statements and that
such cost be measured 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 nine months
ended September 30, 2006, there were no stock options exercised.
Total stock-based compensation expense for the three-month and nine-month
periods ended September 30, 2006 was $60,000 ($40,000 after tax) and $163,000
($107,000 after tax). As of September 30, 2006, the total unrecognized
compensation expense related to non-vested stock awards was $467,000 and the
related weighted average period over which it is expected to be recognized is
approximately 1.8 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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2005
------------------ ------------------
Net income, as reported $2,651,671 $7,234,088
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 (35,700) (107,099)
---------- ----------
Pro forma net income $2,615,971 $7,126,989
========== ==========
Pro forma earnings per common share:
As reported basic $ 0.64 $ 1.73
Pro forma basic 0.63 1.71
As reported diluted 0.63 1.72
Pro forma diluted 0.62 1.70
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 seven 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
nine-month period ended September 30, 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, September 30, 2006 207,189 25.75 $1,091 7.0
======= ======
Exercisable, September 30, 2006 112,137 21.90 993 5.8
11
The weighted average grant date fair values of stock options granted during
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.
COMPREHENSIVE INCOME
For the three-month and nine-month periods ended September 30, 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 and nine-month periods ended
September 30, 2006 and 2005 is summarized as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2006 2005 2006 2005
---------- ----------- ---------- ----------
Net income $2,858,485 $2,651,671 $8,480,277 $7,234,088
Other comprehensive income (loss):
Net unrealized holding gains (losses) on
investments in debt and equity securities
available-for-sale, net of taxes 1,339,440 (434,674) 246,978 (762,151)
Adjustment for net securities losses realized in net
income, net of applicable income taxes -- -- 11,928 --
---------- ---------- ---------- ----------
Total other comprehensive income (loss) 1,339,440 (434,674) 258,906 (762,151)
---------- ---------- ---------- ----------
Comprehensive income $4,197,925 $2,216,997 $8,739,183 $6,471,937
========== ========== ========== ==========
12
INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization of our Company's
amortizable core deposit intangible assets as of September 30, 2006 and December
31, 2005 is as follows:
SEPTEMBER 30, 2006 DECEMBER 31, 2005
----------------------------- -----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized intangible assets:
Core deposit intangible $7,060,224 (3,056,978) 7,060,224 (2,273,764)
========== ========== ========= ==========
The aggregate amortization expense of core deposit intangible subject to
amortization for the three-month and nine-month period ended September 30, 2006
and 2005 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2006 2005 2006 2005
-------- ------- -------- -------
Aggregate amortization expense $249,369 329,893 $783,214 531,199
======== ======= ======== =======
The estimated amortization expense for the next five years is as follows:
Estimated amortization expense:
For the three months ended December 31, 2006 $249,369
For year ending 2007 922,337
For year ending 2008 701,443
For year ending 2009 626,111
For year ending 2010 526,477
13
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:
SEPTEMBER 30,
--------------------------
2006 2005
------------ -----------
Balance, beginning of period $ 1,536,331 1,605,930
Originated mortgage servicing rights 192,849 294,888
Amortization (314,226) (340,412)
------------ -----------
Balance, end of period $ 1,414,954 1,560,406
============ ===========
Mortgage loans serviced $219,160,535 219,336,200
============ ===========
Mortgage servicing rights as a
percentage of loans serviced 0.65% 0.71%
============ ===========
The estimated amortization expense for mortgage servicing rights for the
next five years is as follows:
Estimated amortization expense:
For the three months ended December 31, 2006 $ 95,000
For year ending 2007 347,000
For year ending 2008 296,000
For year ending 2009 219,000
For year ending 2010 144,000
14
Our Company's goodwill associated with the purchase of subsidiaries by
reporting segments as of September 30, 2006 and December 31, 2005 is summarized
as follows:
CITIZENS UNION
THE EXCHANGE STATE BANK AND OSAGE VALLEY
NATIONAL BANK OF TRUST OF BANK OF
JEFFERSON CITY 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
========== ========== ========= ========== ==========
15
DEFINED BENEFIT RETIREMENT PLAN
Our Company provides a noncontributory defined benefit pension plan in
which all full-time employees become participants upon the later of the
completion of one year of qualified service or the attainment of age 21, and in
which they continue to participate as long as they continue to be full-time
employees, until their retirement, death, or termination of employment prior to
normal retirement date. The normal retirement benefits provided under the plan
vary depending upon the participant's rate of compensation, length of
employment, and social security benefits. 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 and nine-month periods ended September 30, 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 September 30 (actual) $ 166,760 $ 97,844
========= =========
Net periodic pension cost - nine months
ended September 30 (actual) $ 500,279 $ 293,531
========= =========
Our Company does not expect to make any contribution to the plan during
2006.
16
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.
17
SEPTEMBER 30, 2006
-----------------------------------------------------------------------------------------
THE
EXCHANGE CITIZENS
NATIONAL UNION
BANK OF STATE BANK OSAGE VALLEY
JEFFERSON AND TRUST BANK BANK 10 CORPORATE
CITY OF CLINTON OF WARSAW OF BELTON AND OTHER TOTAL
------------ ------------ ------------ ------------ ------------ --------------
Balance sheet information:
Loans, net of allowance
for loan losses $352,740,225 $246,499,562 $ 57,639,778 $154,289,241 $ -- $ 811,168,806
Debt and equity securities 80,585,591 40,124,189 35,362,805 28,051,655 1,486,000 185,610,240
Goodwill 4,382,098 16,701,762 4,112,876 15,127,039 -- 40,323,775
Intangible assets -- 421,686 -- 3,581,560 -- 4,003,246
Total assets 490,298,882 329,623,906 105,795,923 220,688,819 2,108,135 1,148,515,665
Deposits 386,196,451 263,260,991 90,297,456 160,891,525 (8,909,992) 891,736,431
Stockholders' equity $ 50,857,765 $ 45,241,431 $ 9,833,809 $ 36,542,765 $(39,467,985) $ 103,007,785
============ ============ ============ ============ ============ ==============
DECEMBER 31, 2005
-----------------------------------------------------------------------------------------
THE
EXCHANGE CITIZENS
NATIONAL UNION
BANK OF STATE BANK OSAGE VALLEY
JEFFERSON AND TRUST BANK BANK 10 CORPORATE
CITY OF CLINTON OF WARSAW OF BELTON AND OTHER TOTAL
------------ ------------ ------------ ------------ ------------ --------------
Balance sheet information
Loans, net of allowance
for loan losses $374,467,039 $238,347,946 $ 53,132,834 $138,502,283 $ -- $ 804,450,102
Debt and equity securities 71,830,503 42,305,412 34,234,784 29,835,127 1,486,000 179,691,826
Goodwill 4,382,098 16,701,762 4,112,876 15,127,039 -- 40,323,775
Intangible assets -- 583,020 -- 4,203,440 -- 4,786,460
Total assets 487,322,716 329,366,100 102,071,064 205,092,903 2,617,693 1,126,470,476
Deposits 391,682,694 265,370,183 84,823,313 148,430,696 (8,851,680) 881,455,206
Stockholders' equity $ 49,732,241 $ 42,602,916 $ 9,415,739 $ 34,410,079 $(39,428,110) $ 96,732,865
============ ============ ============ ============ ============ ==============
18
THREE MONTHS ENDED SEPTEMBER 30, 2006
------------------------------------------------------------------------------------
THE EXCHANGE CITIZENS UNION
NATIONAL BANK STATE BANK AND OSAGE VALLEY CORPORATE
OF JEFFERSON TRUST OF BANK OF AND
CITY CLINTON WARSAW BANK 10 OTHER TOTAL
------------- -------------- ------------ ---------- --------- -----------
Statement of earnings:
Total interest income $8,209,775 $5,038,137 $1,344,040 $3,695,461 $ 27,052 $18,314,465
Total interest expense 3,430,944 1,976,669 799,159 1,490,285 892,405 8,589,462
---------- ---------- ---------- ---------- --------- -----------
Net interest income 4,778,831 3,061,468 544,881 2,205,176 (865,353) 9,725,003
Provision for loan losses 225,000 75,000 -- -- -- 300,000
Noninterest income 1,069,554 473,053 171,838 522,957 (20,829) 2,216,573
Noninterest expense 2,824,360 2,270,624 565,491 1,633,168 188,276 7,481,919
Income taxes 903,100 353,481 26,880 364,891 (347,180) 1,301,172
---------- ---------- ---------- ---------- --------- -----------
Net income (loss) $1,895,925 $ 835,416 $ 124,348 $ 730,074 $(727,278) $ 2,858,485
========== ========== ========== ========== ========= ===========
THREE MONTHS ENDED SEPTEMBER 30, 2005
------------------------------------------------------------------------------------
THE EXCHANGE CITIZENS UNION
NATIONAL BANK STATE BANK AND OSAGE VALLEY CORPORATE
OF JEFFERSON TRUST OF BANK OF BANK 10 AND
CITY CLINTON WARSAW OF BELTON OTHER TOTAL
------------- -------------- ------------ ---------- --------- -----------
Statement of earnings:
Total interest income $7,385,816 $4,253,749 $1,189,612 $3,010,549 $ 22,957 $15,862,683
Total interest expense 3,038,120 1,535,350 566,348 806,968 759,851 6,706,637
---------- ---------- ---------- ---------- --------- -----------
Net interest income 4,347,696 2,718,399 623,264 2,203,581 (736,894) 9,156,046
Provision for loan losses 150,000 100,000 10,500 -- -- 260,500
Noninterest income 962,434 471,212 142,425 456,897 (21,781) 2,011,187
Noninterest expense 2,804,965 1,980,370 468,353 1,711,758 103,309 7,068,755
Income taxes 751,300 336,846 74,228 318,873 (294,940) 1,186,307
---------- ---------- ---------- ---------- --------- -----------
Net income (loss) $1,603,865 $ 772,395 $ 212,608 $ 629,847 $(567,044) $ 2,651,671
========== ========== ========== ========== ========= ===========
19
NINE MONTHS ENDED SEPTEMBER 30, 2006
---------------------------------------------------------------------------------------
THE EXCHANGE CITIZENS UNION
NATIONAL BANK STATE BANK AND OSAGE VALLEY CORPORATE
OF JEFFERSON TRUST OF BANK OF AND
CITY CLINTON WARSAW BANK 10 OTHER TOTAL
------------- -------------- ------------ ---------- ----------- -----------
Statement of earnings:
Total interest income $24,040,166 $14,780,543 $3,885,715 $10,252,155 $ 78,573 $53,037,152
Total interest expense 9,805,051 5,605,566 2,230,915 3,808,407 2,569,115 24,019,054
----------- ----------- ---------- ----------- ----------- -----------
Net interest income 14,235,115 9,174,977 1,654,800 6,443,748 (2,490,542) 29,018,098
Provision for loan losses 675,000 225,000 21,000 7,000 -- 928,000
Noninterest income 3,151,596 1,353,083 470,521 1,574,213 (57,749) 6,491,664
Noninterest expense 8,583,106 6,601,466 1,613,003 4,931,112 522,291 22,250,978
Income taxes 2,618,700 1,115,223 98,021 1,013,533 (994,970) 3,850,507
----------- ----------- ---------- ----------- ----------- -----------
Net income (loss) $ 5,509,905 $ 2,586,371 $ 393,297 $ 2,066,316 $(2,075,612) $ 8,480,277
=========== =========== ========== =========== =========== ===========
NINE MONTHS ENDED SEPTEMBER 30, 2005
---------------------------------------------------------------------------------------
THE EXCHANGE CITIZENS UNION
NATIONAL BANK STATE BANK AND OSAGE VALLEY CORPORATE
OF JEFFERSON TRUST OF BANK OF BANK 10 AND
CITY CLINTON WARSAW OF BELTON OTHER TOTAL
------------- -------------- ------------ ---------- ----------- -----------
Statement of earnings:
Total interest income $20,939,384 $12,054,443 $3,507,457 $4,719,373 $ 56,667 $41,277,324
Total interest expense 8,107,399 4,078,417 1,570,217 1,406,170 1,795,807 16,958,010
----------- ----------- ---------- ---------- ----------- -----------
Net interest income 12,831,985 7,976,026 1,937,240 3,313,203 (1,739,140) 24,319,314
Provision for loan losses 450,000 250,000 31,500 2,167 -- 733,667
Noninterest income 2,848,791 1,233,627 363,541 754,117 (60,354) 5,139,722
Noninterest expense 8,207,836 5,706,328 1,347,651 2,712,541 330,514 18,304,870
Income taxes 2,242,100 986,869 248,423 438,109 (729,090) 3,186,411
----------- ----------- ---------- ---------- ----------- -----------
Net income (loss) $ 4,780,840 $ 2,266,456 $ 673,207 $ 914,503 $(1,400,918) $ 7,234,088
=========== =========== ========== ========== =========== ===========
20
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, CONCERNING OUR INTENT
AND ABILITY TO HOLD SECURITIES UNTIL MATURITY, 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.
21
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
22
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.
23
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 2006 of $2,858,000
increased $207,000 when compared to the second quarter of 2005. Diluted earnings
per common share for the third quarter of 2006 of $0.68 increased 5 cents or
7.9% when compared to the third quarter of 2005.
Net income for the nine months ended September 30, 2006 of $8,480,000
increased $1,246,000 when compared to the third quarter of 2005. Diluted
earnings per common share for the third quarter of 2006 of $2.02 increased 30
cents or 17.4% when compared to the third quarter of 2005.
Net interest income (on a tax equivalent basis) was $9,973,000, or 3.83% of
average earning assets, for the three months ended September 30, 2006, compared
to $9,399,000, or 3.53% of average earning assets, for the same period in 2005.
The increase in net interest income was primarily the result of an increase in
net interest margin.
Net interest income (on a tax equivalent basis) was $29,769,000, or 3.85%
of average earning assets, for the nine months ended September 30, 2006,
compared to $24,947,000, or 3.41% of average earning assets, for the same period
in 2005. 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 September 30,
2006 were $1,032,105,000, a decrease of $22,887,000 or 2.2%, compared to average
interest-earning assets of $1,054,992,000 for the same period of 2005. Average
loans outstanding increased approximately $38,304,000 while other earning assets
decreased $61,191,000.
The yield on average interest-earning assets increased to 7.1% for the
three month period ended September 30, 2006 compared to 6.0% for the same period
in 2005. The rate paid on interest-bearing liabilities also increased to 3.8% in
2006 compared to 2.9% in 2005. The increase in rates reflects the general
increases in market rates as a result of the Federal Reserve Bank's rate
activity over the last year.
Average interest-earning assets for the nine months ended September 30,
2006 were $1,032,936,000, an increase of $55,453,000 or 5.7%, compared to
average interest-earning assets of $977,483,000 for the same period of 2005.
Average loans outstanding increased approximately $104,279,000 while other
earning assets decreased $48,826,000.
The yield on average interest-earning assets increased to 7.0% for the nine
month period ended September 30, 2006 compared to 5.7% for the same period in
2005. The rate paid on interest-bearing liabilities also increased to 3.5% in
2006 compared to 2.7% in 2005. The increase in rates reflects the general
increases in market rates as a result of the Federal Reserve Bank's rate
activity over the last year.
24
NET INTEREST INCOME
Fully taxable equivalent net interest income increased $574,000 or 6.1% and
$4,822,000 or 19.3% respectively for the three and nine month periods ended
September 30, 2006 compared to the same period in 2005. The increase in net
interest income for the periods ended September 30, 2006 compared to the periods
ended September 30, 2005 was the result of both increased earning assets and net
interest 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 September 30, 2006 and 2005.
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2006 SEPTEMBER 30, 2005
--------------------------------- ---------------------------------
INTEREST RATE INTEREST RATE
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE/1/ PAID/1/ BALANCE EXPENSE/1/ PAID/1/
---------- ---------- ------- ---------- ---------- -------
ASSETS
Loans:/2/ $ 828,848 $16,101 7.71% $ 790,544 $13,607 6.83%
Investment securities:/3/
U.S Treasury and
U.S. Gov't Agencies 125,463 1,420 4.49 170,148 1,419 3.31
State and municipal 52,924 718 5.38 51,690 700 5.37
Other 6,650 83 4.95 7,227 57 3.13
Federal funds sold 16,613 221 5.28 34,345 314 3.63
Interest-bearing deposits 1,607 19 4.69 1,038 8 3.06
---------- ------- ---------- -------
Total interest earning assets 1,032,105 18,562 7.14 1,054,992 16,105 6.06
All other assets 124,628 119,875
Allowance for loan losses (9,321) (9,260)
---------- ----------
Total assets $1,147,412 $1,165,607
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
NOW accounts $ 102,521 $ 323 1.25% $ 134,709 $ 559 1.65%
Savings 50,779 73 0.57 58,658 84 0.57
Money market 158,797 1,378 3.44 154,386 1,018 2.62
Deposits of $100 and over 126,220 1,420 4.46 114,478 920 3.19
Other time deposits 317,542 3,262 4.08 313,517 2,397 3.03
---------- ------- ---------- -------
Total time deposits 755,859 6,456 3.39 775,748 4,978 2.55
Federal funds purchased and
securities sold under
agreements to repurchase 40,304 462 4.55 54,525 434 3.16
Interest-bearing demand
notes to US Treasury 763 9 4.68 677 6 3.52
Subordinated notes 49,486 912 7.31 49,486 772 6.19
Advances from Federal Home Loan Bank 55,468 750 5.36 52,396 516 3.91
---------- ------- ---------- -------
Total interest-bearing liabilities 901,880 8,589 3.78 932,832 6,706 2.85
Demand deposits 134,539 129,622
Other liabilities 9,656 7,184
---------- ----------
Total liabilities 1,046,075 1,069,638
Stockholders' equity 101,337 95,969
---------- ----------
Total liabilities and
stockholders' equity $1,147,412 $1,165,607
========== ==========
Net interest income $ 9,973 $ 9,399
======= =======
Net interest margin/4/ 3.83% 3.53%
==== ====
/1/ Interest income and yields are presented on a fully taxable equivalent
basis using the Federal statutory income tax rate. Such adjustments were
$248,000 in 2006 and $243,000 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 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 nine month periods ended
September 30, 2006 and 2005.
(DOLLARS EXPRESSED IN THOUSANDS)
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2006 SEPTEMBER 30, 2005
--------------------------------- ---------------------------------
INTEREST RATE INTEREST RATE
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE/1/ PAID/1/ BALANCE EXPENSE/1/ PAID/1/
---------- ---------- ------- ---------- ---------- -------
ASSETS
Loans:/2/ $ 826,644 $46,654 7.55% $ 722,365 $35,229 6.52%
Investment securities:/3/
U.S Treasury and
U.S. Gov't Agencies 129,766 4,139 4.26 168,682 3,886 3.08
State and municipal 53,042 2,159 5.44 42,669 1,774 5.56
Other 6,968 231 4.43 6,613 188 3.80
Federal funds sold 14,204 529 4.98 35,565 800 3.01
Interest-bearing deposits 2,312 76 4.40 1,589 28 2.36
---------- ------- ---------- -------
Total interest earning assets 1,032,936 53,788 6.96 977,483 41,905 5.73
All other assets 123,901 101,138
Allowance for loan losses (9,285) (8,547)
---------- ----------
Total assets $1,147,552 $1,070,074
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW accounts $ 109,034 $ 1,104 1.35% $ 130,778 $ 1,344 1.37%
Savings 53,113 227 0.57 55,323 236 0.57
Money market 156,701 3,770 3.22 140,555 2,489 2.37
Deposits of $100 and over 119,487 3,686 4.12 103,412 2,352 3.04
Other time deposits 313,533 8,969 3.82 286,226 6,167 2.88
---------- ------- ---------- -------
Total time deposits 751,868 17,756 3.16 716,294 12,588 2.35
Federal funds purchased and
securities sold under
agreements to repurchase 45,885 1,459 4.25 50,368 1,018 2.70
Interest-bearing demand
notes to US Treasury 655 22 4.49 700 14 2.67
Subordinated notes 49,486 2,628 7.10 42,972 1,922 5.98
Advances from Federal Home Loan Bank 59,270 2,154 4.86 46,626 1,416 4.06
---------- ------- ---------- -------
Total interest-bearing liabilities 907,164 24,019 3.54 856,960 16,958 2.65
Demand deposits 131,872 112,934
Other liabilities 8,823 6,178
---------- ----------
Total liabilities 1,047,859 976,072
Stockholders' equity 99,693 94,002
---------- ----------
Total liabilities and stockholders' equity $1,147,552 $1,070,074
========== ==========
Net interest income $29,769 $24,947
======= =======
Net interest margin/4/ 3.85% 3.41%
==== ====
/1/ Interest income and yields are presented on a fully taxable equivalent
basis using the Federal statutory income tax rate. Such adjustments were
$751,000 in 2006 and $628,000 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.
27
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 SEPTEMBER
30, 2006 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2005
-------------------------------
CHANGE DUE TO
TOTAL ---------------------
CHANGE VOLUME /3/ RATE /4/
------ ---------- --------
INTEREST INCOME ON A FULLY TAXABLE
EQUIVALENT BASIS:
Loans:/1/ $2,494 682 1,812
Investment securities:/3/
U.S Treasury and
U.S. Gov't Agencies 1 (429) 430
State and municipal /2/ 18 17 1
Other 26 (5) 31
Federal funds sold (93) (201) 108
Interest-bearing deposits 11 5 6
------ ---- -----
Total interest income 2,457 69 2,388
INTEREST EXPENSE:
NOW accounts $ (236) (118) (118)
Savings (11) (11) --
Money market 360 30 330
Deposits of $100 and over 500 102 398
Other time deposits 865 31 834
Federal funds purchased and securities
sold under agreements to repurchase 28 (132) 160
Interest-bearing demand notes of U.S.
Treasury 3 1 2
Subordinated debentures 140 -- 140
Other borrowed money 234 31 203
------ ---- -----
Total interest expense 1,883 (66) 1,949
------ ---- -----
Net interest income on a fully taxable
equivalent basis $ 574 135 439
====== ==== =====
/1/ Interest income and yields are presented on a fully taxable equivalent
basis using the Federal statutory income tax rate. Such adjustments were
$248,000 in 2006 and $243,000 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.
28
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)
NINE MONTHS ENDED
SEPTEMBER 30, 2006
COMPARED TO
NINE MONTHS ENDED
SEPTEMBER 30, 2005
-------------------------------
CHANGE DUE TO
TOTAL ---------------------
CHANGE VOLUME /3/ RATE /4/
------- ---------- --------
INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS:
Loans:/1/ $11,425 5,468 5,957
Investment securities:/3/
U.S Treasury and
U.S. Gov't Agencies 253 (1,026) 1,279
State and municipal /2/ 385 423 (38)
Other 43 10 33
Federal funds sold (271) (630) 359
Interest-bearing deposits 48 17 31
------- ------ -----
Total interest income 11,883 4,262 7,621
INTEREST EXPENSE:
NOW accounts $ (240) (220) (20)
Savings (9) (9) --
Money market 1,281 311 970
Deposits of $100 and over 1,334 406 928
Other time deposits 2,802 631 2,171
Federal funds purchased and
securities sold under
agreements to repurchase 441 (98) 539
Interest-bearing demand notes
of U.S. Treasury 8 (1) 9
Subordinated debentures 706 316 390
Other borrowed money 738 428 310
------- ------ -----
Total interest expense 7,061 1,764 5,297
------- ------ -----
Net interest income on a fully
taxable equivalent basis $ 4,822 2,498 2,324
======= ====== =====
/1/ Interest income and yields are presented on a fully taxable equivalent
basis using the Federal statutory income tax rate. Such adjustments were
$751,000 in 2006 and $628,000 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.
29
THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 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 $574,000 or 6.1% to $9,973,000 or 3.8% of
average earning assets for the third quarter of 2006 compared to $9,399,000 or
3.5% of average earning assets for the same period of 2005. The provision for
loan losses was $300,000 and $260,000 for the three months ended September 30,
2006 and 2005 respectively. Net charge-offs were $253,000 for the third quarter
of 2006 compared to $804,000 for the third quarter of 2005. Even though
charge-offs were less for third quarter of 2006 compared to third quarter 2005,
management felt it prudent to increase the provision for loan losses as a result
of continued growth in the loan portfolio as well as concern about general
economic conditions as they relate to borrowers' abilities to service existing
debt. See Lending and Credit Management in this report for further discussion of
third quarter 2006 charge-offs.
30
Noninterest income and noninterest expense for the three-month periods
ended September 30, 2006 and 2005 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
THREE MONTHS
ENDED INCREASE
SEPTEMBER 30, (DECREASE)
--------------- --------------
2006 2005 AMOUNT %
------ ------ ------ -----
NONINTEREST INCOME
Service charges on deposit accounts $1,462 $1,252 $210 16.8%
Trust department income 215 165 50 30.3
Mortgage loan servicing fees, net 102 101 1 1.0
Gain on sale of mortgage loans 127 201 (74) (36.8)
Other 311 292 19 6.5
------ ------ ---- -----
$2,217 $2,011 $206 10.2%
====== ====== ==== =====
NONINTEREST EXPENSE
Salaries and employee benefits $4,254 $3,900 $354 9.1%
Occupancy expense 500 432 68 15.7
Furniture and equipment expense 592 545 47 8.6
Advertising and promotion 234 216 18 8.3
Postage, printing and supplies 277 288 (11) (3.8)
Legal, examination, and professional fees 334 401 (67) (16.7)
Amortization - CDI 249 330 (81) (24.5)
Processing expense 261 224 37 16.5
Other 781 733 48 6.5
------ ------ ---- -----
$7,482 $7,069 $413 5.8%
====== ====== ==== =====
Noninterest income increased $206,000 or 10.2% to $2,217,000 for the third
quarter of 2006 compared to $2,011,000 for the same period of 2005. Service
charges on deposit accounts increased $210,000 or 16.8% as a result of increased
overdraft and insufficient check fee income, ATM fee income, debit card fee
income. Trust department income increased due to the collection of additional
trust distribution fees. Gain on sale of mortgage loans decreased $74,000 or
36.8% due to a decrease in volume of loans originated and sold to the secondary
market from approximately $11,000,000 in the third quarter of 2005 to
approximately $4,415,000 for the third quarter of 2006.
31
Noninterest expense increased $413,000 or 5.8% to $7,482,000 for the third
quarter of 2006 compared to $7,069,000 for the third quarter of 2005. Salaries
and benefits increased $354,000 or 9.1%, occupancy expense increased $68,000 or
15.7%, advertising and promotion expense increased $18,000 or 8.3%, and
processing expense increased $48,000 or 6.5%. In addition to the increase in
salaries and employees benefits represented by normal salary increases and
additional hires, $60,000 of the increase reflects share-based compensation
expense recorded as a result of the adoption of SFAS No. 123R, $76,000 reflects
increased pension expense, and $12,000 represents increased profit sharing
expense. The $68,000 of the increase in occupancy expense reflects additional
costs associated with three new branch facilities. The $18,000 increase in
advertising and promotion expense reflects additional advertising and promotion
in new market areas. The $48,000 increase in processing expense reflects higher
costs associated with the various data processing systems utilized by our
Company.
Income taxes as a percentage of earnings before income taxes as reported in
the condensed consolidated financial statements were 31.3% for the third quarter
of 2006 compared to 30.9% for the third quarter of 2005.
NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2005
Net interest income on a fully taxable equivalent basis increased
$4,822,000 or 19.3% to $29,769,000 or 3.9% of average earning assets for the
first nine months of 2006 compared to $24,947,000 or 3.4% of average earning
assets for the same period of 2005. The provision for loan losses was $928,000
and $734,000 for the nine months ended September 30, 2006 and 2005 respectively.
Net charge-offs were $631,000 for the first nine months of 2006 compared to
$854,000 for the same period in 2005. Even though charge-offs were less for the
nine-month period of 2006 compared to the same period in 2005, management felt
it prudent to increase the provision for loan losses as a result of continued
growth in the loan portfolio as well as concern about general economic
conditions as they relate to borrowers' abilities to service existing debt. See
Lending and Credit Management in this report for further discussion of 2006
charge-offs.
32
Noninterest income and noninterest expense for the nine-month periods ended
September 30, 2006 and 2005 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30, INCREASE (DECREASE)
----------------- -------------------
2006 2005 AMOUNT %
------- ------- ------ -----
NONINTEREST INCOME
Service charges on deposit accounts $ 4,339 $ 2,951 $1,388 47.0%
Trust department income 623 595 28 4.7
Net loss on sales of calls of debt securities (18) -- (18) NM
Mortgage loan servicing fees, net 327 318 9 2.8
Gain on sale of mortgage loans 328 508 (180) (35.4)
Other 893 768 125 16.3
------- ------- ------ -----
$ 6,492 $ 5,140 $1,352 26.3%
======= ======= ====== =====
NONINTEREST EXPENSE
Salaries and employee benefits $12,942 $10,220 $2,722 26.6%
Occupancy expense 1,400 1,108 292 26.4
Furniture and equipment expense 1,654 1,592 62 3.9
Advertising and promotion 622 574 48 8.4
Postage, printing and supplies 861 707 154 21.8
Legal, examination, and professional fees 947 985 (38) (3.9)
Amortization - CDI 783 531 252 47.5
Processing expense 776 508 268 52.8
Other 2,266 2,080 186 8.9
------- ------- ------ -----
$22,251 $18,305 $3,946 21.6%
======= ======= ====== =====
Noninterest income increased $1,352,000 or 26.3% to $6,492,000 for the
first nine months of 2006 compared to $5,140,000 for the same period of 2005.
The acquisition of Bank 10 contributed an additional $666,000 of noninterest
income. Bank 10 contributed nine months of noninterest income during the first
three quarters of 2006 versus five months during the same period in 2005.
Excluding the additional noninterest income contributed by Bank 10, service
charges on deposit accounts increased $789,000 or 26.7% as a result of increased
overdraft and insufficient check fee income, ATM fee income, debit card fee
income. Gain on sale of mortgage loans decreased $180,000 or 35.4% due to a
decrease in volume of loans originated and sold to the secondary market from
approximately $30,244,000 in the first nine months of 2005 to approximately
$15,247,000 for the first nine months of 2006.
33
Noninterest expense increased $3,946,000 or 21.6% to $22,251,000 for the
first nine months of 2006 compared to $18,305,000 for the same period in 2005.
The acquisition of Bank 10 contributed an additional $2,218,000 to noninterest
expense. Bank 10 contributed nine months of noninterest expense during the first
three quarters of 2006 versus five months during the same period in 2005.
Excluding the impact of the Bank 10 acquisition, salaries and benefits increased
$1,460,000 or 14.3%, occupancy expense increased $155,000 or 14.0%, postage,
printing, and supplies increased $61,000 or 8.6%, legal, examination and
professional fees decreased $94,000 or 9.5%, and processing expense increased
$141,000 or 27.8%. In addition to the increase in salaries and employees
benefits represented by normal salary increases and additional hires, $162,000
of the increase reflects share-based compensation expense recorded as a result
of the adoption of SFAS No. 123R, $252,000 reflects increased pension expense,
and $185,000 represents increased profit sharing expense. The $155,000 increase
in occupancy expense reflects additional costs associated with three new branch
facilities. The $61,000 increase in postage, printing, and supplies reflects
both higher postage rates and additional mail volume. The $94,000 decrease in
legal, examination, and professional fees reflects lower costs associated with
Sarbanes-Oxley compliance and outsourced internal audits projects. The $141,000
increase in processing expense reflects higher costs associated with the various
data processing systems utilized by our Company.
Income taxes as a percentage of earnings before income taxes as reported in
the condensed consolidated financial statements were 31.2% for the first nine
months of 2006 compared to 30.6% for the same period in 2005. The increase in
the effective tax rate is due to a higher level of state taxable income as a
result of the Bank 10 acquisition.
34
LENDING AND CREDIT MANAGEMENT
Interest earned on the loan portfolio is a primary source of interest
income for our Company. Net loans represented 70.6% of total assets as of
September 30, 2006 compared to 71.4% as of December 31, 2005 and 66.8% as of
September 30, 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 September 30, 2006, our Company
was servicing approximately $219,160,000 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.
35
The allowance for loan losses was decreased by net loan charge-offs of
$17,000 and $361,000, and $253,000 respectively for the first, second and third
quarters of 2006 compared to $2,000, $48,000, and $804,000 respectively for the
first, second and third quarters of 2005. The allowance for loan losses was
increased by a provision charged to expense of $318,000 for the first quarter of
2006, $310,000 for the second quarter, and $300,000 for the third quarter of
2006. That compares to a provision of $236,000 for the first quarter of 2005,
$237,000 for the second quarter of 2005 and $261,000 for the third quarter of
2006.
The balance of the allowance for loan losses was $9,381,000 at September
30, 2006 compared to $9,085,000 at December 31, 2005 and $8,793,000 at September
30, 2005. The allowance for loan losses as a percent of outstanding loans was
1.14% at September 30, 2006 compared to 1.12% at December 31, 2005 and 1.10% at
September 30, 2005. In light of current economic conditions which are impacting
borrowers' abilities to service debt and as a result of growth in the loan
portfolio management believes it is necessary to increase the level of the
provision for loan losses.
36
Nonperforming loans, defined as loans on nonaccrual status, loans 90 days
or more past due and still accruing, and restructured loans totaled $6,626,000
or 0.81% of total loans at September 30, 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)
SEPTEMBER 30, 2006 DECEMBER 31, 2005
-------------------- --------------------
% OF GROSS % OF GROSS
BALANCE LOANS BALANCE LOANS
------- ---------- ------- ----------
Nonaccrual loans:
Commercial $2,513 0.31% $ 5,705 0.70%
Real estate:
Construction 1,448 0.18 1,760 0.22
Mortgage 2,424 0.30 1,090 0.13
Consumer 39 -- 56 0.01
------ ---- ------- ----
6,424 0.79 8,611 1.06
------ ---- ------- ----
Loans contractually past-due 90 days
or more and still accruing:
Commercial 4 -- 238 0.03
Real estate:
Construction -- -- -- --
Mortgage 116 0.01 187 0.02
Consumer 82 0.01 14 --
------ ---- ------- ----
202 0.02 439 0.05
------ ---- ------- ----
Restructured loans -- -- -- --
------ ---- ------- ----
Total nonperforming loans 6,626 0.81% 9,050 1.11%
==== ====
Other real estate 1,471 1,568
Repossessions 15 --
------ -------
Total nonperforming assets $8,112 $10,618
====== =======
The allowance for loan losses was 141.6% of nonperforming loans at
September 30, 2006 compared to 100.4% of nonperforming loans at December 31,
2005. The decrease in nonaccrual loans is primarily represented by the payoff of
two large commercial credits. The decrease in commercial nonaccrual loans is
partially offset by a $1,334,000 increase in nonaccrual mortgage loans since
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 $764,000 and
$489,000 for the nine months ended September 30, 2006 and 2005, respectively.
Approximately $35,000 and $43,000 was recorded as interest income on such loans
for the nine months ended September 30, 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
37
agreement. In addition to nonaccrual loans included in the table above, which
were considered impaired, management has identified approximately $2,382,000 of
additional loans as being impaired at September 30, 2006. The average balance of
nonaccrual and other impaired loans for the first nine months of 2006 was
approximately $11,005,000. At September 30, 2006 the portion of the allowance
for loan losses allocated (both asset-specific and percentage) to impaired loans
was $2,012,000 compared to $2,392,000 at December 31, 2005. The balance of
impaired loans with no specific loan loss allocations was approximately
$1,418,000 at September 30, 2006 compared to approximately $1,217,000 at
December 31, 2005.
As of September 30, 2006 and December 31, 2005 approximately $11,518,000
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 decrease in loans
having more than normal risk is primarily represented by one large commercial
real estate credit which has paid down approximately $4,885,000 since the 2005
year-end. 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
38
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 September 30, 2006, management allocated $7,431,000 of the $9,335,000
total allowance for loan losses to specific loans and loan categories and
$1,950,000 was unallocated. 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. Due to continued growth in
the loan portfolio and current economic conditions that may impact our
borrowers' ability to service their loans, management believes the increase in
the unallocated portion of the allowance for loan losses is appropriate.
Considering the size of several of our Company's lending relationships and the
loan portfolio in total, management believes that the September 30, 2006 overall
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 $22,045,000 or 2.0% to $1,148,516,000 at September
30, 2006 compared to $1,126,470,000 at December 31, 2005. Total liabilities
increased $15,770,000 or 1.5% to $1,045,508,000 compared to $1,029,738,000 at
December 31, 2005. Stockholders' equity increased $6,275,000 or 6.5% to
$103,008,000 compared to $96,733,000 at December 31, 2005. 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 $7,015,000 to $820,550,000 at September 30, 2006 compared
to $813,535,000 at December 31, 2005. Commercial loans decreased $7,977,000;
real estate construction loans increased $529,000; real estate mortgage loans
increased $18,379,000; and consumer loans decreased $3,916,000. The decrease in
commercial loans primarily reflects the repayments of several large commercial
credits in the Jefferson City market. The increase in real estate mortgage loans
reflects strong loan demand in the Kansas City market. 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
39
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.
Investment in debt securities classified as available-for-sale increased
$5,652,000 or 3.3% to $179,041,000 at September 30, 2006 compared to
$173,389,000 at December 31, 2005. Investments classified as available-for-sale
are carried at fair value. During 2006 the market valuation account decreased
$476,000 to ($1,163,000) to reflect the fair value of available-for-sale
investments at September 30, 2006 and the net after tax decrease resulting from
the change in the market valuation adjustment of $259,000 increased the
stockholders' equity component to ($813,000) at September 30, 2006.
Investment in equity securities increased $266,000 or 4.2% to $6,569,000 at
September 30, 2006 compared to $6,303,000 at December 31, 2005. The increase
reflects additional purchases of Federal Home Loan Bank stock due to additional
Federal Home Loan Bank borrowings.
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.
Although all securities are classified as available-for-sale and have on
occasion been sold prior to maturity to meet liquidity needs or to improve
portfolio yields, management has the ability and intent to hold securities until
maturity and expects that the securities will be redeemed at par. Therefore
management does not consider any of the securities to be other than temporarily
impaired.
Cash and cash equivalents, which consist of cash due from banks and Federal
funds sold, increased $9,226,000 or 19.3% to $56,956,000 at September 30, 2006
compared to $47,730,000 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 $564,000 or 1.7% to $33,455,000 at
September 30, 2006 compared to $32,891,000 at December 31, 2005. The increase
reflects purchases of premises and equipment of $2,020,000 offset by
depreciation expense of $1,360,000.
Total deposits increased $10,281,000 or 1.2% to $891,736,000 at September
30, 2006 compared to $881,455,000 at December 31, 2005. This increase in
deposits primarily reflects growth in our banks in the Kansas City market.
Federal funds purchased and securities sold under agreements to repurchase
increased $4,548,000 or 12.3% to $41,544,000 at September 30, 2006 compared to
$36,996,000 at December 31, 2005. The increase primarily reflects additional
public funds placed with our Company during the period.
40
Other borrowed money decreased $1,569,000 or 3.0% to $50,611,000 at
September 30, 2006 compared to $52,179,000 at December 31, 2005. The decrease
reflects net repayment of Federal Home Loan Bank advances.
The increase in stockholders' equity reflects net income of $8,480,000 less
dividends declared of $2,627,000, a $259,000 change in unrealized holding
losses, net of taxes, on investment in debt and equity securities
available-for-sale, and a $163,000 increase, net of taxes, related to stock
option compensation expense.
No material changes in our Company's liquidity or capital resources have
occurred since December 31, 2005.
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 September
30, 2006, the amounts of available credit from the FHLB totaled $79,967,000. As
of September 30, 2006, the Banks had $50,611,000 in outstanding borrowings with
the FHLB. The Banks have federal funds purchased lines with correspondent banks
totaling $44,000,000. 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 September
30, 2006.
41
SOURCES AND USES OF FUNDS
For the nine months ended September 30, 2006 and 2005, net cash provided by
operating activities was $12,813,000 and $10,849,000, respectively. $1,246,000
of the increase in net cash provided by operating activities reflects a higher
level of net income.
Net cash used in investing activities was $15,012,000 in 2006 versus
$74,597,000 in 2005. The primary decrease in cash used in investing activities
reflects lower purchases of debt securities during the first nine months of 2006
versus the same period in 2005 as well as cash used for the purchase of Bank 10
in 2005.
Net cash provided by financing activities was $11,425,000 in 2006 versus
$83,322,000 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 $12,401,000 of cash during the first nine months of 2005
compared to a decrease in interest-bearing accounts of approximately $19,314,000
during the same period in 2006. Approximately $28,692,000 of cash was provided
by an increase in federal funds purchased and securities sold under agreements
to repurchase in 2005 compared to $4,548,000 of cash provided by an increase in
such items for 2006. Our Company experienced a $26,367,000 increase in time
deposits in 2006 compared to an $8,413,000 increase during the same period of
2005.
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.
42
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation 48, "Accounting for Uncertainty in Income Taxes", an
Interpretation of FAS No. 109, Accounting for Income Taxes. The Interpretation
defines the threshold for recognizing the financial impact of uncertain tax
provisions in accordance with FAS 109. An enterprise would be required to
recognize, in its financial statements, the best estimate of the impact of a tax
position only if that position is "more-likely-than-not" of being sustained on
audit based solely on the technical merits of the position on the reporting
date. In evaluating whether the probable recognition threshold has been met, the
Interpretation would require the presumption that the tax position will be
evaluated during an audit by taxing authorities. The term "more-likely-than-not"
is defined as a likelihood of more than 50 percent. Individual tax positions
that fail to meet the recognition threshold will generally result in either (a)
a reduction in the deferred tax asset or an increase in a deferred tax liability
or (b) an increase in a liability for income taxes payable or the reduction of
an income tax refund receivable. The impact may also include both (a) and (b).
This Interpretation also provides guidance on disclosure, accrual of interest
and penalties, accounting in interim periods, and transition. The Interpretation
is effective for reporting periods after December 15, 2006. Our Company is
evaluating the Interpretation and is presently unable to determine its overall
impact on our consolidated financial statements or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (GAAP), and
expands disclosures about fair value measurements. This statement does not
require any new fair value measurements, but rather, it provides enhanced
guidance to other pronouncements that require or permit assets or liabilities to
be measured at fair value. The changes to current practice resulting from the
application of this statement relates to the definition of fair value, the
methods used to estimate fair value, and the requirements for expanded
disclosures about estimates of fair value. SFAS No. 157 is effective as of the
beginning of an entity's first fiscal year that begins after November 15, 2007.
Our Company is currently evaluating the impact of the adoption of SFAS No. 157;
however, it is not expected to have a material impact on our Company's financial
position or results of operations.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106, and 132(R) (SFAS No. 158). SFAS No. 158 requires an
employer to recognize the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability
in its statement of financial position and to recognize changes in the funded
status in the year in which the changes occur through comprehensive income of a
business entity or changes in unrestricted net assets of a not-for-profit
organization. This statement also improves financial reporting by requiring an
employer to measure the funded status of a plan as of the date of its year-end
statement of financial position, with limited exceptions. SFAS No. 158 will be
effective for our Company for the current fiscal year ending December 31, 2006.
Based upon the December 31, 2005 actuarial information, we would record a pretax
charge to other comprehensive income of approximately $600,000 in the fourth
quarter of 2006. By the time of adoption, plan performance and actuarial
assumptions could have a significant impact on the actual amounts recorded.
43
In September, 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, Considering the Effects of Prior year Misstatements
when Quantifying Misstatements in Current Year Financial Statements (SAB No.
108). SAB No. 108 requires an entity to consider the effects of prior year
misstatements when quantifying misstatements in current year financial
statements for purposes of determining materiality. SAB No. 108 is effective for
an entity's first interim period of the first fiscal year ending after November
15, 2006. Application of SAB No. 108 is not expected to have a material impact
on our Company's financial position or results of operations.
In September 2006, the Emerging Issues Task Force Issue 06-4, Accounting
for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements, was ratified. This EITF Issue
addresses accounting for separate agreements which split life insurance policy
benefits between an employer and employee. The Issue requires the employer to
recognize a liability for future benefits payable to the employee under these
agreements. The effects of applying this Issue must be recognized through either
a change in accounting principle through an adjustment to equity or through the
retrospective application to all prior periods. For calendar year companies, the
Issue is effective beginning January 1, 2008. Early adoption is permitted as of
January 1, 2007. Our Company does not expect the adoption of the Issue to have a
material effect on our Company's consolidated financial statements.
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 September 30, 2006, the rate shock scenario
models indicated that annual net interest income could decrease or increase by
as much as 1.7% 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.
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 September 30, 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,
44
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 September 30, 2006 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
45
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
46
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
----------------------------------------
November 9, 2006 James E. Smith, Chairman of the Board
and Chief Executive Officer (Principal
Executive Officer)
/s/ Richard G. Rose
----------------------------------------
November 9, 2006 Richard G. Rose, Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
47
EXCHANGE NATIONAL BANCSHARES, INC.
INDEX TO EXHIBITS
September 30, 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 Company pursuant 49
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certificate of the Chief Financial Officer of our Company pursuant 50
to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certificate of the Chief Executive Officer of our Company pursuant 51
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certificate of the Chief Financial Officer of our Company pursuant 52
to Section 906 of the Sarbanes-Oxley Act of 2002
----------
** Incorporated by reference.
48