UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003 or | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_________________to Commission File Number: 0-23636 EXCHANGE NATIONAL BANCSHARES, INC. (Exact name of registrant as specified in its charter) MISSOURI 43-1626350 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 132 EAST HIGH STREET, JEFFERSON CITY, MISSOURI 65101 (Address of principal executive offices) (Zip Code) (573) 761-6100 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes | | No Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act). |X| Yes | | No As of May 1, 2003, the registrant had 2,779,930 shares of common stock, par value $1.00 per share, outstanding. Page 1 of 35 pages Index to Exhibits located on page 33 1
PART I - FINANCIAL INFORMATION Item 1. Financial Statements EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> MARCH 31, 2003 DECEMBER 31, 2002 -------------- ----------------- <S> <C> <C> ASSETS Loans: Commercial $158,014,006 $147,850,348 Real estate - construction 42,942,831 41,437,000 Real estate - mortgage 263,006,002 250,318,539 Consumer 44,336,978 46,958,417 ------------ ------------ 508,299,817 486,564,304 Less allowance for loan losses 7,369,224 7,121,114 ------------ ------------ Loans, net 500,930,593 479,443,190 Investments in available for sale debt and equity securities, at fair value 179,838,658 186,724,362 Federal funds sold 45,224,608 49,669,213 Cash and due from banks 32,606,455 27,742,030 Premises and equipment 16,229,884 16,586,332 Accrued interest receivable 5,369,146 5,539,661 Goodwill 23,407,734 23,407,734 Intangible assets 780,470 855,140 Other assets 4,765,280 4,450,250 ------------ ------------ Total assets $809,152,828 $794,417,912 ============ ============ </TABLE> Continued on next page 2
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) (Unaudited) <TABLE> <CAPTION> MARCH 31, 2003 DECEMBER 31, 2002 -------------- ----------------- <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Demand deposits $ 79,553,839 $ 77,474,471 Time deposits 525,150,252 513,716,181 ------------- ------------- Total deposits 604,704,091 591,190,652 Federal funds purchased and securities sold under agreements to repurchase 69,507,545 67,359,199 Interest-bearing demand notes to U.S. Treasury 460,899 3,061,503 Other borrowed money 40,655,580 41,795,016 Accrued interest payable 1,801,321 1,984,745 Other liabilities 7,361,564 6,199,677 ------------- ------------- Total liabilities 724,491,000 711,590,792 ------------- ------------- Stockholders' equity: Common stock - $1 par value; 15,000,000 shares authorized; 2,865,601 issued and outstanding 2,865,601 2,865,601 Surplus 21,998,617 21,983,467 Retained earnings 60,162,723 58,363,271 Accumulated other comprehensive income, net of tax 2,314,577 2,294,471 Treasury stock; 86,680 shares at cost (2,679,690) (2,679,690) ------------- ------------- Total stockholders' equity 84,661,828 82,827,120 ------------- ------------- Total liabilities and stockholders' equity $ 809,152,828 $ 794,417,912 ============= ============= </TABLE> See accompanying notes to unaudited condensed consolidated financial statements. 3
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 2003 2002 ---------- ----------- <S> <C> <C> Interest income $9,431,647 $10,293,328 Interest expense 3,282,475 4,388,398 ---------- ----------- Net interest income 6,149,172 5,904,930 Provision for loan losses 235,500 234,000 ---------- ----------- Net interest income after provision for loan losses 5,913,672 5,670,930 Noninterest income 1,972,003 1,304,600 Noninterest expense 4,500,340 4,220,710 ---------- ----------- Income before income taxes 3,385,335 2,754,820 Income taxes 1,030,098 826,164 ---------- ----------- Net income $2,355,237 $ 1,928,656 ========== =========== Basic earning per share $ 0.85 $ 0.68 Diluted earnings per share $ 0.84 $ 0.68 Weighted average shares of common stock outstanding Basic 2,778,921 2,834,145 Diluted 2,794,919 2,834,604 Dividend per share: Declared $ 0.20 $ 0.19 Paid $ 0.20 $ 0.19 </TABLE> See accompanying notes to unaudited condensed consolidated financial statements. 4
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, --------------------------------- 2003 2002 ------------ ------------ <S> <C> <C> Cash flow from operating activities: Net income $ 2,355,237 $ 1,928,656 Adjustments to reconcile net income to net cash cash provided by operating activities: Provision for loan losses 235,500 234,000 Depreciation expense 425,366 292,568 Net amortization of debt securities premiums and discounts 305,206 206,213 Amortization of intangible assets 74,670 74,670 Decrease in accrued interest receivable 170,515 360,130 Increase in other assets (261,197) (191,556) Decrease in accrued interest payable (183,424) (400,220) Increase (decrease) in other liabilities 1,161,887 (109,916) Gain on sales and calls of debt securities (53,235) -- Origination of mortgage loans for sale (30,973,004) (22,471,951) Proceeds from the sale of mortgage loans held for sale 31,664,320 22,769,528 Gain on sale of mortgage loans (691,316) (297,577) Loss on disposition of premises and equipment 1,079 298 Other, net 14,856 15,153 ------------ ------------ Net cash provided by operating activities 4,246,460 2,409,996 Cash flow from investing activities: Net increase in loans (21,908,229) (1,582,236) Purchase of available-for-sale debt securities (66,116,574) (26,091,373) Proceeds from maturities of available-for-sale debt securities 51,812,535 15,516,654 Proceeds from calls of available-for-sale debt securities 19,415,000 11,135,000 Proceeds from sales of available-for-sale debt securities 1,553,235 -- Purchase of premises and equipment (69,997) (887,762) Proceeds from sales of other real estate owned and repossessions 121,136 148,672 ------------ ------------ Net cash used in investing activities (15,192,894) (1,761,045) ------------ ------------ </TABLE> Continued on next page 5
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ---------------------------- 2003 2002 ------------ ------------ <S> <C> <C> Cash flow from financing activities: Net increase (decrease) in demand deposits 2,079,368 (9,682,077) Net increase (decrease) in interest-bearing transaction accounts 5,799,702 (3,960,278) Net increase in time deposits 5,634,369 4,304,893 Net increase in federal funds purchased and securities sold under agreements to repurchase 2,148,346 4,922,840 Net (decrease) increase in interest-bearing demand notes to U.S. Treasury (2,600,604) 1,525,761 Repayment of Federal Home Loan Bank borrowings (139,436) (333,412) Repayment of other borrowed money (1,000,000) -- Cash dividends paid (555,491) (538,487) ------------ ------------ Net cash provided by (used) in financing activities 11,366,254 (3,760,760) ------------ ------------ Net increase (decrease) in cash and cash equivalents 419,820 (3,111,809) ------------ ------------ Cash and cash equivalents, beginning of period 77,411,243 85,609,147 ------------ ------------ Cash and cash equivalents, end of period $ 77,831,063 $ 82,497,338 ============ ============ Supplemental disclosure of cash flow information - Cash paid (received) during period for: Interest $ 3,465,899 $ 4,788,618 Income taxes (122,079) -- Supplemental schedule of noncash investing activities - Other real estate and repossessions acquired in settlement of loans 185,326 111,515 </TABLE> See accompanying notes to unaudited condensed consolidated financial statements. 6
EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Three Months Ended March 31, 2003 and 2002 Exchange National Bancshares, Inc. ("Bancshares" or the "Company") is a bank holding company registered under the Bank Holding Company Act of 1956. Bancshares' activities currently are limited to ownership of the outstanding capital stock of The Exchange National Bank of Jefferson City (ENB), Union State Bancshares, Inc. (Union), which owns 100% of Citizens Union State Bank and Trust of Clinton (CUSB), and Mid Central Bancorp, Inc. (Mid Central), which owns 100% of Osage Valley Bank of Warsaw (OVB). Bancshares acquired ENB on April 7, 1993, Union on November 3, 1997 and Mid Central on January 3, 2000. In addition, Bancshares acquired Calhoun Bancshares, Inc. (Calhoun) and its wholly owned subsidiary, Citizens State Bank of Calhoun on May 4, 2000. Immediately upon acquisition, Calhoun Bancshares, Inc. was dissolved and Citizens State Bank was merged with Union State Bank and Trust with the surviving institution being renamed Citizens Union State Bank and Trust of Clinton (CUSB). On June 16, 2000 Bancshares acquired CNS Bancorp, Inc. (CNS) and its wholly owned subsidiary, City National Savings Bank, FSB. Immediately upon acquisition, CNS Bancorp, Inc. was dissolved and City National Savings Bank, FSB was merged with ENB. All acquisitions were accounted for as purchase transactions. On April 11, 2003 our Company signed a definitive agreement with Trustcorp Financial, Inc. for the acquisition of Trustcorp's branch of Missouri State Bank in Springfield, Missouri. Our Company will receive approximately $30 million in loans and $34 million in deposits as well as the real estate and tangible assets of the branch. Total cost of the transaction is approximately $4 million and will be financed with cash on hand. Upon completion of the transaction the branch will be merged with and operated as a branch of CUSB. 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 2002 condensed consolidated financial statements have been reclassified to conform to the 2003 condensed consolidated presentation. Such reclassifications have no effect on previously reported net income or stockholders' equity. Operating results for the period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. It is suggested that these unaudited condensed consolidated interim financial statements be read in conjunction with Bancshares' audited consolidated financial statements included in its 2002 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, 2002 as Exhibit 13. The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United State of America have 7
been condensed and omitted. Bancshares believes that these financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Bancshares' consolidated financial position as of March 31, 2003 and December 31, 2002 and the consolidated statements of earnings and cash flows for the three months ended March 31, 2003 and 2002. The following table reflects, for the three-month periods ended March 31, 2003 and 2002, the numerators (net income) and denominators (average shares outstanding) for the basic and diluted net income per share computations: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ----------------------- 2003 2002 ---------- ---------- <S> <C> <C> Net income, basic and diluted $2,355,237 $1,928,656 ========== ========== Average shares outstanding 2,778,921 2,834,145 Effect of dilutive stock options 15,998 3,459 ---------- ---------- Average shares outstanding including dilutive stock options 2,794,919 2,837,604 Net income per share, basic $ 0.85 $ 0.68 ========== ========== Net income per share, diluted $ 0.84 $ 0.68 ========== ========== </TABLE> 8
Our Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Our Company provides pro forma net income and pro forma net income per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123, Accounting for Stock-Based Compensation, had been applied. The following table illustrates, for the three-month periods ended March 31, 20023 and 2002, the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each period: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ---------------------------- 2003 2002 ------------ ------------ <S> <C> <C> Net income: As reported $ 2,355,237 $ 1,928,656 Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards, net of tax (22,887) (15,277) ------------ ------------ Pro forma net income $ 2,332,350 $ 1,913,379 ============ ============ Pro forma earnings per common share: As reported basic $ 0.85 $ 0.68 Pro forma basic 0.84 0.68 As reported diluted 0.84 0.68 Pro forma diluted 0.83 0.67 </TABLE> 9
For the three-month periods ended March 31, 2003 and 2002, unrealized holding gains and losses on investments in debt and equity securities available-for-sale were Bancshares' only other comprehensive income component. Comprehensive income for the three-month periods ended March 31, 2003 and 2002 is summarized as follows: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ----------- ----------- 2003 2002 <S> <C> <C> Net income $ 2,355,237 $ 1,928,656 Other compreshensive income (loss): Net unrealized holding gains (losses) on investments in debt and equity securities available-for-sale, net of taxes 55,241 (448,266) Adjustment for net securities gains realized in net income, net of applicable income taxes (35,135) -- ----------- ----------- Total other comprehensive (loss) income 20,106 (448,266) ----------- ----------- Comprehensive income $ 2,375,343 $ 1,480,390 =========== =========== </TABLE> 10
Through the respective branch network, ENB, CUSB and OVB provide similar products and services in three defined geographic areas. The products and services offered include a broad range of commercial and personal banking services, including certificates of deposit, individual retirement and other time deposit accounts, checking and other demand deposit accounts, interest checking accounts, savings accounts and money market accounts. Loans include real estate, commercial, installment and other consumer loans. Other financial services include automatic teller machines, trust services, credit related insurance, and safe deposit boxes. The revenues generated by each business segment consist primarily of interest income, generated from the loan and debt and equity security portfolios, and service charges and fees, generated from the deposit products and services. The geographic areas are defined to be communities surrounding Jefferson City, Clinton and Warsaw, Missouri. The products and services offered to customers primarily within their respective geographical areas. The business segments results that follow are consistent with Bancshares'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. <TABLE> <CAPTION> MARCH 31, 2003 CITIZENS THE EXCHANGE UNION STATE OSAGE NATIONAL BANK BANK AND VALLEY BANK OF JEFFERSON TRUST OF OF CORPORATE CITY CLINTON WARSAW AND OTHER TOTAL ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Balance sheet information: Loans, net of allowance for loan losses $330,786,310 $129,793,422 $ 40,350,861 $ -- $500,930,593 Debt and equity securities 101,974,881 48,691,909 29,171,868 -- 179,838,658 Goodwill 4,382,098 14,912,760 4,112,876 -- 23,407,734 Intangible assets -- 692,970 -- 87,500 780,470 Total assets 478,319,349 248,624,453 82,687,299 (478,273) 809,152,828 Deposits 349,183,780 194,254,935 67,894,030 (6,628,654) 604,704,091 Stockholders' equity 49,792,223 35,986,257 10,211,333 (11,327,985) 84,661,828 ============ ============ ============ ============ ============ </TABLE> <TABLE> <CAPTION> DECEMBER 31, 2002 CITIZENS THE EXCHANGE UNION STATE OSAGE NATIONAL BANK BANK AND VALLEY BANK OF JEFFERSON TRUST OF OF CORPORATE CITY CLINTON WARSAW AND OTHER TOTAL ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Balance sheet information: Loans, net of allowance for loan losses $316,680,812 $123,679,641 $ 39,082,737 $ -- $479,443,190 Debt and equity securities 102,210,874 55,259,879 29,253,609 -- 186,724,362 Goodwill 4,382,098 14,912,760 4,112,876 -- 23,407,734 Intangible assets -- 730,140 -- 125,000 855,140 Total assets 472,806,720 240,869,039 81,209,370 (467,217) 794,417,912 Deposits 344,375,565 187,796,880 66,553,127 (7,534,920) 591,190,652 Stockholders' equity 48,956,217 35,513,162 9,979,001 (11,621,260) 82,827,120 ============ ============ ============ ============ ============ </TABLE> 11
<TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 2003 CITIZENS THE EXCHANGE UNION STATE OSAGE NATIONAL BANK BANK AND VALLEY BANK OF JEFFERSON TRUST OF OF CORPORATE CITY CLINTON WARSAW AND OTHER TOTAL ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Statement of earnings: Total interest income $ 5,566,926 $ 2,831,730 $ 1,032,991 $ -- $ 9,431,647 Total interest expense 1,821,744 910,153 428,747 121,831 3,282,475 ------------ ------------ ------------ ------------ ------------ Net interest income 3,745,182 1,921,577 604,244 (121,831) 6,149,172 Provision for loan losses 150,000 75,000 10,500 -- 235,500 Noninterest income 1,576,134 334,044 82,849 (21,024) 1,972,003 Noninterest expense 2,722,923 1,306,870 384,662 85,885 4,500,340 Income taxes 775,100 253,632 79,166 (77,800) 1,030,098 ------------ ------------ ------------ ------------ ------------ Net income (loss) $ 1,673,293 $ 620,119 $ 212,765 $ (150,940) $ 2,355,237 ============ ============ ============ ============ ============ </TABLE> <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 2002 CITIZENS THE EXCHANGE UNION STATE OSAGE NATIONAL BANK BANK AND VALLEY BANK OF JEFFERSON TRUST OF OF CORPORATE CITY CLINTON WARSAW AND OTHER TOTAL ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Statement of earnings: Total interest income $ 6,152,237 $ 3,025,081 $ 1,116,010 $ -- $ 10,293,328 Total interest expense 2,360,702 1,262,455 500,221 265,020 4,388,398 ------------ ------------ ------------ ------------ ------------ Net interest income 3,791,535 1,762,626 615,789 (265,020) 5,904,930 Provision for loan losses 150,000 75,000 9,000 -- 234,000 Noninterest income 965,399 283,580 55,621 -- 1,304,600 Noninterest expense 2,470,097 1,283,319 343,340 123,954 4,220,710 Income taxes 671,150 189,791 97,523 (132,300) 826,164 ------------ ------------ ------------ ------------ ------------ Net income (loss) $ 1,465,687 $ 498,096 $ 221,547 $ (256,674) $ 1,928,656 ============ ============ ============ ============ ============ </TABLE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS MADE IN THIS REPORT ON FORM 10-Q ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE WORDS "SHOULD", "EXPECT", "ANTICIPATE", "BELIEVE", "INTEND", "MAY", "HOPE", "FORECAST" AND SIMILAR EXPRESSIONS MAY IDENTIFY FORWARD LOOKING STATEMENTS. IN PARTICULAR, STATEMENTS 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 THE RESULTS OF OPERATIONS, FINANCIAL CONDITION, OR BUSINESS CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY THE FORWARD LOOKING STATEMENTS HEREIN INCLUDE MARKET CONDITIONS AS WELL AS CONDITIONS SPECIFICALLY AFFECTING THE BANKING INDUSTRY GENERALLY AND FACTORS HAVING A SPECIFIC IMPACT ON BANCSHARES INCLUDING, BUT NOT LIMITED TO, FLUCTUATIONS IN INTEREST RATES AND IN THE ECONOMY; THE IMPACT OF LAWS AND REGULATIONS APPLICABLE TO BANCSHARES AND CHANGES THEREIN; COMPETITIVE CONDITIONS IN THE MARKETS IN WHICH BANCSHARES CONDUCTS ITS OPERATIONS, INCLUDING COMPETITION FROM BANKING AND NON-BANKING COMPANIES WITH SUBSTANTIALLY GREATER RESOURCES THAN BANCSHARES, SOME OF WHICH MAY OFFER AND DEVELOP PRODUCTS AND SERVICES NOT OFFERED BY BANCSHARES; AND THE ABILITY OF BANCSHARES TO RESPOND TO CHANGES IN TECHNOLOGY. ADDITIONAL FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES WERE DISCUSSED UNDER THE CAPTION "FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION, OR BUSINESS," IN OUR COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002, AS WELL AS THOSE DISCUSSED ELSEWHERE IN OUR COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. 13
Net income for the three months ended March 31, 2003 of $2,355,000 increased $426,000 when compared to the first quarter of 2002. Diluted earnings per common share for the first quarter of 2003 of $0.84 increased 16 cents or 23.5% when compared to the first quarter of 2002. The following table provides a comparison of fully taxable equivalent earnings, including adjustments to interest income and tax expense for interest on tax-exempt loans and investments. (DOLLARS EXPRESSED IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, --------------------- 2003 2002 -------- -------- <S> <C> <C> Interest income $ 9,431 $ 10,293 Fully taxable equivalent (FTE) adjustment 185 209 -------- -------- Interest income (FTE basis) 9,616 10,502 Interest expense 3,282 4,388 -------- -------- Net interest income (FTE basis) 6,334 6,114 Provision for loan losses 236 234 -------- -------- Net interest income after provision for loan losses (FTE basis) 6,098 5,880 Noninterest income 1,972 1,305 Noninterest expense 4,500 4,221 -------- -------- Earning before income taxes (FTE basis) 3,570 2,964 -------- -------- Income taxes 1,030 826 FTE adjustment 185 209 -------- -------- Income taxes (FTE basis) 1,215 1,035 -------- -------- Net Income $ 2,355 $ 1,929 ======== ======== </TABLE> Net interest income on a fully taxable equivalent basis increased $220,000 or 3.6% to $6,334,000 or 3.53% of average earning assets for the first quarter of 2003 compared to $6,114,000 or 3.54% of average earning assets for the same period of 2002. The provision for loan losses for the three months ended March 31, 2003 was $236,000 compared to $234,000 for the same period of 2002. 14
Noninterest income and noninterest expense for the three-month periods ended March 31, 2003 and 2002 were as follows: (DOLLARS EXPRESSED IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, INCREASE (DECREASE) ------------------ -------------------- NONINTEREST INCOME 2003 2002 AMOUNT % ------- ------ ------ ------- <S> <C> <C> <C> <C> Service charges on deposit accounts $ 621 $ 610 $ 11 1.8% Trust department income 334 121 213 176.0 Brokerage income 13 3 10 333.3 Mortgage loan servicing fees 113 102 11 10.8 Net gains on sale of debt securities 53 -- 53 100.0 Gain on sale of mortgage loans 691 298 393 131.9 Credit card fees 38 35 3 8.6 Other 109 136 (27) (19.9) ------ ------ ------ $1,972 $1,305 667 51.1% ====== ====== ====== NONINTEREST EXPENSE Salaries and employee benefits 2,455 2,303 $ 152 6.6% Occupancy expense 261 256 5 2.0 Furniture and equipment expense 526 433 93 21.5 FDIC insurance assessment 24 29 (5) (17.2) Advertising and promotion 132 89 43 48.3 Postage, printing and supplies 206 202 4 2.0 Legal, examination, and -- professional fees 180 220 (40) (18.2) Credit card expenses 23 23 -- -- Credit investigation and loan -- collection expenses 24 29 (5) (17.2) Amortization of intangible assets 75 75 -- -- Other 594 562 32 5.7 ------ ------ ------ $4,500 $4,221 $ 279 6.6% ====== ====== ====== </TABLE> Noninterest income increased $667,000 or 51.1% to $1,972,000 for the first quarter of 2003 compared to $1,305,000 for the same period of 2002. Trust department income increased $213,000 or 176.0% due primarily to the collection of distribution fees on two large trusts. Brokerage income increased $10,000 or 333.3% due to increased sales volumes in 2003. Our Company recognized net gains of $53,000 from the sale of debt securities during the first quarter of 2003. Gain on sales of mortgage loans increased $393,000 or 131.9% due to an increase in volume of loans originated and sold to the secondary market from approximately $22,472,000 in the first quarter of 2002 to approximately $30,973,000 for the first quarter of 2003. The $27,000 15
or 19.1% decrease in other noninterest income reflects the 2002 receipt of funds from the demutualization of an insurance vendor that our Company had previously used for services. Noninterest expense increased $279,000 or 6.6% to $4,500,000 for the first quarter of 2003 compared to $4,221,000 for the first quarter of 2002. Salaries and benefits increased $152,000 or 6.6%. This increase is due to normal salary increases and higher health insurance premiums. The $93,000 or 21.5% increase in furniture and equipment expense is primarily the result of increased depreciation and amortization expense for equipment and software purchased during our Company's core data processing conversion during 2002 as well as furnishings purchased for a new branch. The $43,000 or 48.3% increase in advertising and promotion reflects initial startup costs with a new advertising agency and the cost of a marketing survey. The $40,000 or 18.2% decrease in legal and professional fees reflects consulting fees paid in 2002 for project management related to a core data processing conversion project at the three banks. The $32,000 or 5.7% increase in other noninterest expense represents losses recorded on low income housing partnerships that our Company participates in with other financial institutions. Income taxes as a percentage of earnings before income taxes as reported in the condensed consolidated financial statements was 30.4% for the first quarter of 2003 compared to 30.0% for the first quarter of 2002. NET INTEREST INCOME Fully taxable equivalent net interest income decreased $220,000 or 3.6% for the three-month period ended March 31, 2003 compared to the same period in 2002. The following table presents average balance sheets, net interest income, average yields of earning assets, and average costs of interest bearing liabilities on a fully taxable equivalent basis for the three month periods ended March 31, 2003 and 2002. 16
(DOLLARS EXPRESSED IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 2003 MARCH 31, 2002 ----------------------------------------- ----------------------------------------- Interest Rate Interest Rate Average Income/ Earned/ Average Income/ Earned/ Balance Expense(1) Paid(1) Balance Expense(1) Paid(1) ------------ ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> <C> ASSETS Loans:(2) Commercial $ 153,112 $ 2,269 6.01% $ 139,291 $ 2,266 6.60% Real estate 299,613 4,563 6.18 280,661 4,905 7.09 Consumer 43,955 874 8.06 44,652 970 8.81 Investment securities:(3) U.S Treasury and U.S. Gov't Agencies 143,653 1,143 3.23 136,370 1,394 4.15 State and municpal 34,257 588 6.96 38,669 666 6.98 Other 5,414 49 3.67 4,959 52 4.25 Federal funds sold 41,926 114 1.10 53,604 231 1.75 Interest-bearing deposits 5,673 16 1.14 2,359 18 3.09 ------------ ------------ ------------ ------------ Total interest earning assets 727,603 9,616 5.36 700,565 10,502 6.08 All other assets 71,512 70,724 Allowance for loan losses (7,235) (6,736) ------------ ------------ Total assets $ 791,880 $ 764,553 ============ ============ </TABLE> Continued on next page 17
<TABLE> <CAPTION> THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 2003 MARCH 31, 2002 ----------------------------------------- ---------------------------------------- Interest Rate Interest Rate Average Income/ Earned/ Average Income/ Earned/ Balance Expense(1) Paid(1) Balance Expense(1) Paid(1) ------------ ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY NOW accounts $ 94,983 $ 182 0.78% $ 89,244 $ 241 1.10% Savings 51,232 105 0.83 48,994 128 1.06 Money market 63,517 152 0.97 61,318 212 1.40 Deposits of $100,000 and over 68,086 446 2.66 45,557 443 3.94 Other time deposits 240,717 1,787 3.01 254,721 2,520 4.01 ------------ ------------ ------------ ------------ Total time deposits 518,535 2,672 2.09 499,834 3,544 2.88 Federal funds purchased and securities sold under agreements to repurchase 68,241 177 1.05 63,314 257 1.65 Interest-bearing demand notes to US Treasury 468 1 0.87 1,008 4 1.61 Other borrowed money 40,769 432 4.30 42,893 583 5.51 ------------ ------------ ------------ ------------ Total interest-bearing liabilities 628,013 3,282 2.12 607,049 4,388 2.93 ------------ ------------ Demand deposits 71,772 66,789 Other liabilities 7,895 11,455 ------------ ------------ Total liabilities 707,680 685,293 Stockholders' equity 84,200 79,260 ------------ ------------ Total liabilities and Stockholders' equity $ 791,880 764,553 ============ ============ Net interest income $ 6,334 $ 6,114 ============ ============ Net interest margin(4) 3.53% 3.54% ==== ==== </TABLE> (1) Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate. Such adjustments were $185,000 in 2003 and $209,000 in 2002. (2) Non-accruing loans are included in the average amounts outstanding. (3) Average balances based on amortized cost. (4) Net interest income divided by average total interest earning assets. The following table presents, on a fully taxable equivalent basis, an analysis of changes in net interest income resulting from changes in average volumes of earning assets and interest bearing liabilities and average rates earned and paid. The change in interest due to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of change in each. 18
(DOLLARS EXPRESSED IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002 --------------------------------- CHANGE DUE TO TOTAL ---------------------- CHANGE VOLUME RATE -------- -------- -------- <S> <C> <C> <C> INTEREST INCOME ON A FULLY TAXABLE EQUIVALENT BASIS: Loans: (1) Commercial $ 3 215 (212) Real estate (2) (342) 316 (658) Consumer (96) (15) (81) Investment securities: U.S Treasury and U.S. Governement agencies (251) 71 (322) State and municipal (2) (78) (76) (2) Other (3) 5 (8) Federal funds sold (117) (43) (74) Interest-bearing deposits (2) 14 (16) -------- -------- -------- Total interest income (886) 487 (1,373) INTEREST EXPENSE: NOW accounts (59) 14 (73) Savings (23) 6 (29) Money market (60) 8 (68) Deposits of $100,000 and over 3 176 (173) Other time deposits (733) (133) (600) Federal funds purchased and securities sold under agreements to repurchase (80) 19 (99) Interest-bearing demand notes of U.S. Treasury (3) (1) (2) Other borrowed money (151) (28) (123) -------- -------- -------- Total interest expense (1,106) 61 (1,167) -------- -------- -------- NET INTEREST INCOME ON A FULLY TAXABLE EQUIVALENT BASIS $ 220 426 (206) ======== ======== ======== </TABLE> (1) Non-accruing loans are included in the average amounts outstanding. (2) Interest income and yields are presented on a fully taxable equivalent basis using the federal statutory income tax rate. Such adjustments totaled $185,000 in 2003 and $209,000 in 2002. 19
PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses is based on management's evaluation of the loan portfolio in light of national and local economic conditions, changes in the composition and volume of the loan portfolio, changes in the volume of past due and nonaccrual loans, and other relevant factors. The allowance for loan losses, which is reported as a deduction from loans, is available for loan charge-offs. The allowance is increased by the provision charged to expense and is reduced by loan charge-offs, net of loan recoveries. Management formally reviews all loans in excess of certain dollar amounts (periodically established) at least annually. In addition, on a monthly basis, management reviews past due, "classified", and "watch list" loans in order to classify or reclassify loans as "loans requiring attention," "substandard," "doubtful," or "loss". During that review, management also determines what loans should be considered to be "impaired". Management believes, but there can be no assurance, that these procedures keep management informed of possible problem loans. Based upon these procedures, both the allowance and provision for loan losses are adjusted to maintain the allowance at a level considered adequate by management for probable losses inherent in the loan portfolio. See additional discussion concerning nonperforming loans under "Financial Condition." The allowance for loan losses was increased by net loan recoveries of $13,000 for the first quarter of 2003 compared to net charge-offs of $57,000 for the first quarter of 2002. The allowance for loan losses was increased by a provision charged to expense of $236,000 for the first quarter of 2003 compared to $234,000 for the first quarter of 2002. The balance of the allowance for loan losses was $7,369,000 at March 31, 2003 compared to $7,121,000 at December 31, 2002 and $6,850,000 at March 31, 2002. The allowance for loan losses as a percent of outstanding loans was 1.45% at March 31, 2003 compared to 1.46% at December 31, 2002 and 1.47% at March 31, 2002. FINANCIAL CONDITION Total assets increased $14,735,000 or 1.9% to $809,153,000 at March 31, 2003 compared to $794,418,000 at December 31, 2002. Total liabilities increased $12,900,000 or 1.8% to $724,491,000. Stockholders' equity increased $1,835,000 or 2.2% to $84,662,000. Loans increased $21,736,000 or 4.5% to $508,300,000 at March 31, 2003 compared to $486,564,000 at December 31, 2002. Commercial loans increased $10,164,000; real estate construction loans increased $1,506,000; real estate mortgage loans increased $12,687,000; and consumer loans decreased $2,621,000. The increases in commercial, real estate construction and real estate mortgage loans reflects the continuing strong loan demand that our Company is experiencing in its market areas. The increase in commercial loans represents a broad variety of loans. The increase in real estate mortgage loans primarily reflects commercial real estate loans. The decrease in consumer loans is reflective of lower rates in the markets that our Company is unwilling to match, primarily in the area of automobile financing. 20
Nonperforming loans, defined as loans on nonaccrual status, loans 90 days or more past due and still accruing, and restructured loans totaled $3,017,000 or 0.59% of total loans at March 31, 2003 compared to $3,009,000 or 0.62% of total loans at December 31, 2002. Detail of those balances plus other real estate and repossessions is as follows: (DOLLARS EXPRESSED IN THOUSANDS) <TABLE> <CAPTION> MARCH 31, 2003 DECEMBER 31, 2002 ------------------------ ------------------------ % OF % OF BALANCE GROSS LOANS BALANCE GROSS LOANS ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Nonaccrual loans: Commercial $ 1,292 0.25% $ 1,179 0.24% Real estate: Construction 18 -- 69 0.01 Mortgage 1,115 0.22 1,152 0.24 Consumer 68 0.01 81 0.02 ----------- ----------- ----------- ----------- 2,493 0.48 2,481 0.51 ----------- ----------- ----------- ----------- Loans contractually past-due 90 days or more and still accruing: Commercial 141 0.03 85 0.02 Real estate: Construction -- -- 169 0.03 Mortgage 361 0.07 254 0.05 Consumer 22 0.01 20 0.01 ----------- ----------- ----------- ----------- 524 0.11 528 0.11 ----------- ----------- ----------- ----------- Restructured loans -- -- -- -- ----------- ----------- ----------- ----------- Total nonperforming loans 3,017 0.59% 3,009 0.62% =========== =========== Other real estate 241 116 Repossessions 54 115 ----------- ----------- Total noperforming assets $ 3,312 $ 3,240 =========== =========== </TABLE> The allowance for loan losses was 244.25% of nonperforming loans at March 31, 2003 compared to 236.66% of nonperforming loans at December 31, 2002. 21
It is our Company's policy to discontinue the accrual of interest income on loans when the full collection of interest or principal is in doubt, or when the payment of interest or principal has become contractually 90 days past due unless the obligation is both well secured and in the process of collection. A loan remains on nonaccrual status until the loan is current as to payment of both principal and interest and/or the borrower demonstrates the ability to pay and remain current. Interest on loans on nonaccrual status at March 31, 2003 and 2002, which would have been recorded under the original terms of those loans, was approximately $98,000 and $171,000 for the three months ended March 31, 2003 and 2002, respectively. Approximately $13,000 and $9,000 was actually recorded as interest income on such loans for the three months ended March 31, 2003 and 2002, respectively. A loan is considered "impaired" when it is probable a creditor will be unable to collect all amounts due - both principal and interest - according to the contractual terms of the loan agreement. In addition to nonaccrual loans included in the table above, which were considered "impaired", management has identified additional loans totaling approximately $10,105,000 and $9,137,000 at March 31, 2003 and December 31, 2002, respectively, which are not included in the nonaccrual table above but are considered by management to be "impaired". The $10,105,000 of loans identified by management as being "impaired" reflected various commercial, commercial real estate, real estate, and consumer loans ranging in size from approximately $1,000 to approximately $2,457,000. The average balance of nonaccrual and other "impaired" loans for the first three months of 2003 was approximately $11,763,000. At March 31, 2003 the portion of the allowance for loan losses allocated to impaired loans was $1,799,000 compared to $1,352,000 at December 31, 2002. As of March 31, 2003 and December 31, 2002 approximately $3,489,000 and $2,697,000 of loans not included in the nonaccrual table above or identified by management as being "impaired" were classified by management as having more than normal risk. In addition to the classified list, our Company also maintains an internal loan watch list of loans, which for various reasons, not all related to credit quality, management is monitoring more closely than the average loan portfolio. Loans may be added to this list for reasons that are temporary and correctable, such as the absence of current financial statements of the borrower, or a deficiency in loan documentation. Other loans are added as soon as any problem is detected which might affect the borrower's ability to meet the terms of the loan. This could be initiated by the delinquency of a scheduled loan payment, a deterioration in the borrower's financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment within which the borrower operates. Once the loan is placed on our Company's watch list, its condition is monitored closely. Any further deterioration in the condition of the loan is evaluated to determine if the loan should be assigned to a higher risk category. Investment in debt and equity securities classified as available-for-sale decreased $6,885,000 or 3.7% to $179,839,000 at March 31, 2003 compared to $186,724,000 at December 31, 2002. Investments classified as available-for-sale are carried at fair value. During 2003 the market valuation account was increased $31,000 to $3,507,000 to reflect the fair value of available-for-sale investments at March 31, 2003 and the net after tax decrease resulting from the change in the market valuation adjustment of $20,000 decreased the stockholders' equity component to $2,315,000 at March 31, 2003. 22
At December 31, 2002 the market valuation account for the available-for-sale investments of $3,476,000 increased the amortized cost of those investments to their fair value on that date and the net after tax increase resulting from the market valuation adjustment of $2,294,000 was reflected as a separate positive component of stockholders' equity. Cash and cash equivalents, which consist of cash and due from banks and Federal funds sold, increased $420,000 or 0.5% to $77,831,000 at March 31, 2003 compared to $77,411,000 at December 31, 2002. Premises and equipment decreased $356,000 or 2.1% to $16,230,000 at March 31, 2003 compared to $16,586,000 at December 31, 2002. The decrease reflects depreciation expense of $425,000 and dispositions of premises and equipment of $1,000 offset by purchases of premises and equipment of $70,000. Total deposits increased $13,513,000 or 2.3% to $604,704,000 at March 31, 2003 compared to $591,191,000 at December 31, 2002. This increase primarily reflects increased public funds as well as approximately $3,500,000 of brokered time deposits. Federal funds purchased and securities sold under agreements to repurchase increased $2,148,000 or 3.2% to $69,508,000 at March 31, 2003 compared to $67,359,000 at December 31, 2002. This increase is due primarily to higher levels of public fund balances at March 31, 2003. The increase in stockholders' equity reflects net income of $2,355,000 less dividends declared of $556,000 and $20,000 change in unrealized holding losses, net of taxes, on investment in debt and equity securities available-for-sale. No material changes in our Company's liquidity or capital resources have occurred since December 31, 2002. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS On January 1, 2002, our Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). At the date of adoption, our Company had unamortized goodwill of $23,408,000, core deposit intangibles of $879,000,consulting/noncompete agreements of $275,000, and mortgage servicing rights of $1,134,000, all of which were subject to the transition provisions of SFAS 142. Under SFAS 142, our Company will continue to amortize, on an accelerated basis, its core deposit intangibles associated with the purchase of Citizens Union State Bank and Trust. Consulting/noncompete agreements will continue to amortize on a straight-line basis. Goodwill associated with the purchase of subsidiaries will no longer be amortized, but instead, will be tested annually for impairment following our Company's existing methods of measuring and recording impairment losses. Our Company has completed the transitional goodwill impairment test required under SFAS 142 to determine the potential impact, if any, on the consolidated financial statements. Our Company does not believe the results of the transitional goodwill impairment testing identified any impairment losses. 23
The gross carrying amount and accumulated amortization of our Company's amortized intangible assets for the periods ended March 31, 2003 and December 31, 2002 are as follows: <TABLE> <CAPTION> March 31, 2003 December 31, 2002 --------------------------------- --------------------------------- Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization -------------- ------------ -------------- ------------ <S> <C> <C> <C> <C> Amortized intangible asset: Core deposit intangible $ 1,800,000 (1,107,030) 1,800,000 (1,069,860) Consulting/Noncompete agreements 900,000 (812,500) 900,000 (775,000) ----------- ---------- ---------- ---------- $ 2,700,000 (1,919,530) 2,700,000 (1,844,860) =========== ========== ========== ========== </TABLE> The aggregate amortization expense of intangible assets subject to amortization for the three months periods ended March 31, 2003 and 2002 is as follows: <TABLE> <CAPTION> Three Months Ended March 31, March 31, 2003 2002 ---------- ---------- <S> <C> <C> Aggregate amortization expense $ 74,670 74,670 ========== ========== </TABLE> The estimated amortization expense for the next five years is as follows: <TABLE> <CAPTION> Estimated amortization expense: <S> <C> For year ended 2003 $ 273,680 For year ended 2004 148,680 For year ended 2005 148,680 For year ended 2006 148,680 For year ended 2007 135,420 </TABLE> 24
Our Company's mortgage servicing rights are amortized in proportion to the related estimated net servicing income on a straight line basis 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: <TABLE> <CAPTION> Three Months Ended March 31, ------------------------------ 2003 2002 ----------- ---------- <S> <C> <C> Balance, beginning of period $ 1,515,848 1,134,234 Originated mortgage servicing rights 325,912 180,028 Amortization (99,287) (59,226) ----------- ---------- Balance, end of period $ 1,742,473 1,255,036 =========== ========== </TABLE> The estimated amortization expense for the next five years is as follows: <TABLE> <CAPTION> Estimated amortization expense: <S> <C> For year ended 2003 $ 375,800 For year ended 2004 334,300 For year ended 2005 333,100 For year ended 2006 329,200 For year ended 2007 329,200 </TABLE> Our Company's goodwill associated with the purchase of subsidiaries by reporting segments for the periods ended March 31, 2003 and December 31, 2002 is summarized as follows: <TABLE> <CAPTION> The Exchange Citizens Union National Bank State Bank and Osage of Jefferson Trust of Valley Bank City Clinton of Warsaw Total --------------- --------------- ----------- ----------- <S> <C> <C> <C> <C> Goodwill associated with the purchase of subsidiaries $ 4,382,098 14,912,760 4,112,876 23,407,734 =============== =============== =========== =========== </TABLE> In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS 146 on January 1, 2003 did not have a material effect on our Company's consolidated financial statements. 25
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB interpretation No. 34. This Interpretation elaborated on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. Historically, the guarantor has not recorded guarantees until it was probable that a payment would be required under the guarantee. The new accounting requirements now require a guarantor to record a liability at its fair value at the time the guarantee is made. Certain guarantees are subject to the disclosure requirements of FIN 45, but not its recognition provisions. These guarantees include, but are limited to, guarantees treated as derivatives under SFAS 133, guarantees that are considered contingent consideration in a business combination, and guarantees issued between parent corporations and their subsidiaries or between entities under common control. The new disclosure requirements require a guarantor to disclose the following about each guarantee: the overall details of the guarantee, the maximum potential amount of future payments that could be required, the carrying amount of the guarantor's obligation under the guarantee, the fair value of the liability included in the statement of financial position, and the nature and extent of recourse provisions and collateral related to the guarantee and the extent of any potential amounts that the guarantor may recover from third parties as a result of payments made under the guarantee. The initial recognition and measurement provisions of the Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and did not have a material effect on our Company's consolidated financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002. We have implemented the requirements of FASB Interpretation No. 45 and determined they did not have a material effect on our Company's consolidated financial statements other than the additional disclosure requirements. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123, (SFAS 148). This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosures modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements. In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. This Statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The provisions of this Statement are applied prospectively. 26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our Company's exposure to market risk is reviewed on a regular basis by the Banks' Asset/Liability Committees and Boards of Directors. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Management realizes certain risks are inherent and that the goal is to identify and minimize those risks. Tools used by the Banks' management include the standard GAP report subject to different rate shock scenarios. At March 31, 2003, the rate shock scenario models indicated that annual net interest income could decrease or increase by as much as 6% should interest rates rise or fall, respectively, within 200 basis points from their current level over a one year period compared to as much as 9% at December 31, 2002. ITEM 4. CONTROLS AND PROCEDURES Our Company's Chief Executive Officer and Chief Financial Officer have reviewed and evaluated our Company's disclosure controls and procedures within 90 days of the filing of this report, and have concluded that our Company's disclosure controls and procedures were adequate and effective to ensure that information required to be disclosed is recorded, processed, summarized, and reported in a timely manner. There were no significant changes in our Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the Chief Executive Officer's and Chief Financial Officer's evaluation, nor were there any significant deficiencies or material weaknesses in the controls which required corrective action. 27
PART II - OTHER INFORMATION <TABLE> <S> <C> Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K </TABLE> (a) Exhibits Exhibit No. Description - ----------- ----------- 3.1 Articles of Incorporation of Bancshares (filed as Exhibit 3(a) to Bancshares's Registration Statement on Form S-4 (Registration No. 33-54166) and incorporated herein by reference). 3.2 Bylaws of Bancshares (filed as Exhibit 3.2 to the 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 the Company's $1.00 par value common stock (filed as Exhibit 4 to Bancshares'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). 99.1 Certificate of the Chief Executive Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certificate of the Chief Financial Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K. 28
No reports were filed on Form 8-K for the three-month period ended March 31, 2003, except for a report on Form 8-K filed with the SEC on March 19, 2003 to report the certifications made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 29
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EXCHANGE NATIONAL BANCSHARES, INC. Date By /s/ James E. Smith ----------------------------------- May 14, 2003 James E. Smith, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) By /s/ Richard G. Rose ------------------------------------ May 14, 2003 Richard G. Rose, Treasurer (Principal Financial Officer and Principal Accounting Officer) 30
CERTIFICATIONS I, James E. Smith, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Exchange National Bancshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ James E. Smith ----------------------- James E. Smith Chairman of the Board and Chief Executive Officer 31
CERTIFICATIONS I, Richard G. Rose, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Exchange National Bancshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ Richard G. Rose --------------------- Richard G. Rose Treasurer 32
EXCHANGE NATIONAL BANCSHARES, INC. INDEX TO EXHIBITS March 31, 2003 Form 10-Q <TABLE> <CAPTION> Exhibit No. Description Page No. - ----------- ----------- -------- <S> <C> <C> 3.1 Articles of Incorporation of Bancshares (filed as Exhibit 3(a) to Bancshares's Registration Statement on Form S-4 (Registration No. 33-54166) and incorporated herein by reference). ** 3.2 Bylaws of Bancshares (filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000(Commission file number 0-23636) and incorporated herein by reference). ** 4 Specimen certificate representing shares of the Company's $1.00 par value common stock (filed as Exhibit 4 to Bancshares's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (Commission file number 0-23636) and incorporated herein by reference). ** 99.1 Certificate of the Chief Executive Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 31 99.2 Certificate of the Chief Financial Officer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32 </TABLE> ** Incorporated by reference. 33