UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
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.
(Name of small business issuer in its charter)
Missouri 43-1626350
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
132 EAST HIGH STREET, JEFFERSON CITY, MISSOURI 65101
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (573) 761-6100
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
None N/A
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, par value $1.00 per share
(Title of Class)
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO
BE FILED BY SECTION 13 OR 15(D) OF THE EXCHANGE ACT DURING THE
PAST 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. YES [X] NO[ ]
CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT FILERS IN
RESPONSE TO ITEM 405 OF REGULATION S-B CONTAINED IN THIS FORM,
AND NO DISCLOSURE WILL BE CONTAINED, TO THE BEST OF REGISTRANT'S
KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB OR ANY
AMENDMENT TO THIS FORM 10-KSB. [ ]
STATE ISSUER'S REVENUES FOR ITS MOST RECENT FISCAL YEAR:
$34,884,576.
THE AGGREGATE MARKET VALUE OF THE 530,737 SHARES OF VOTING
STOCK OF THE ISSUER HELD BY NON-AFFILIATES COMPUTED BY REFERENCE
TO THE AVERAGE BID AND ASKED PRICES OF SUCH STOCK ON MARCH 16,
1999, IS $29,190,535. AS OF MARCH 16, 1999, THE ISSUER HAD
718,511 SHARES OF COMMON STOCK, PAR VALUE $1.00 PER SHARE,
OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by
reference into the indicated parts of this report: (1) 1998
Annual Report to Shareholders - Part II and (2) definitive Proxy
Statement for the 1999 Annual Meeting of Shareholders to be filed
with the Commission pursuant to Regulation 14A - Part III.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: YES [ ] NO [X]
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Exchange National Bancshares, Inc. ("Bancshares" or the
"Company") is a bank holding company registered under the Bank
Holding Company Act of 1956, as amended (the "BHC Act").
Although Bancshares was incorporated under the laws of the State
of Missouri on October 23, 1992, it did not engage in any
business activity until April 7, 1993. On that date, it acquired
all of the issued and outstanding capital stock of The Exchange
National Bank of Jefferson City, a national banking association
("ENB") pursuant to a corporate reorganization involving an
exchange of shares. In addition to its acquisition of ENB, on
November 3, 1997 the Company acquired Union State Bancshares,
Inc., a bank holding company registered under the BHC Act
("Union"), and Union's wholly-owned subsidiary, Union State Bank
and Trust of Clinton, a Missouri trust company ("USB").
The Company's principal executive offices are located at 132
East High Street, Jefferson City, Missouri 65101, and its
telephone number is (573) 761-6100. Except as otherwise provided
herein, references herein to "Bancshares" or the "Company"
include Bancshares and its consolidated subsidiaries, and
references herein to the "Banks" refer to ENB and USB.
DESCRIPTION OF BUSINESS
BANCSHARES. Bancshares is a bank holding company registered
under the BHC Act. The Company's activities currently are
limited to ownership of the outstanding capital stock of ENB and
Union, which in turn owns the outstanding capital stock of USB.
In addition to ownership of its subsidiaries, Bancshares could
seek expansion through acquisition and may engage in those
activities (such as investments in banks or operations closely
related to banking) in which it is permitted to engage under
applicable law. It is not currently anticipated that Bancshares
will engage in any business other than that directly related to
its ownership of ENB, Union, USB or other financial institutions.
On November 3, 1997, the Company acquired all of the issued
and outstanding capital stock of Union. Union was incorporated
under the laws of the State of Missouri on July 22, 1976 and owns
all of the issued and outstanding capital stock of USB. The
Company's acquisition of Union was effected through the merger of
a wholly-owned acquisition subsidiary of the Company with and
into Union, with Union thereupon becoming a wholly-owned
subsidiary of the Company. As a result of the Company's direct
ownership of ENB and its indirect ownership of USB, through
Union, the Company is a two-bank holding company.
UNION. Union is a bank holding company registered under the
BHC Act. Union's activities currently are limited to ownership
of the outstanding capital stock of USB. It is not currently
anticipated that Union will engage in any business other than
that directly related to its ownership of USB.
<PAGE>
ENB. ENB, located in Jefferson City, Missouri, was founded
in 1865. ENB is the oldest bank in Cole County, and became a
national bank in 1927. ENB has four banking offices: its
principal office at 132 East High Street in Jefferson City's
central business district; a facility at 217 West Dunklin near
the city's south side business district; a facility at 3701 West
Truman Boulevard adjacent to the Capitol Mall Shopping Center;
and a facility at 800 Eastland Drive near the city's east side
business district. See "Item 2. Description of Property".
ENB is a full service bank conducting a general banking and
trust business, offering its customers checking and savings
accounts, debit cards, certificates of deposit, trust services,
safety deposit boxes and a wide range of lending services,
including credit card accounts, commercial and industrial loans,
single payment personal loans, installment loans and commercial
and residential real estate loans. To broaden its product
offering and in response to customer demand, ENB began providing
brokerage services to its customers in 1998.
ENB's deposit accounts are insured by the Federal Deposit
Insurance Corporation (the "FDIC") to the extent provided by law,
and it is a member of the Federal Reserve System. ENB's
operations are supervised and regulated by the Office of the
Comptroller of the Currency (the "OCC"), the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board") and
the FDIC. A periodic examination of ENB is conducted by
representatives of the OCC. Such regulations, supervision and
examinations are principally for the benefit of depositors,
rather than for the benefit of the holders of ENB's common stock.
See "Regulation Applicable to Bancshares and Union" and
"Regulation Applicable to the Banks".
USB. USB was founded in 1932 as a Missouri bank known as
Union State Bank of Clinton. USB converted from a Missouri bank
to a Missouri trust company on August 16, 1989, changing its name
to Union State Bank and Trust of Clinton. USB has six banking
offices: its principal office at 102 North Second Street in
Clinton, Missouri; a downtown Clinton facility located at 115
North Main Street; a facility at 1603 East Ohio in Clinton; a
facility inside the Clinton Wal-Mart located at 1712 East Ohio in
Clinton; a facility located at 4th and Chestnut in Osceola,
Missouri; and a facility located on Route 54 in Collins,
Missouri. See "Item 2. Description of Property".
USB is a full service bank conducting a general banking and
trust business, offering its customers checking and savings
accounts, debit cards, certificates of deposit, trust services,
safety deposit boxes and a wide range of lending services,
including credit card accounts, commercial and industrial loans,
single payment personal loans, installment loans and commercial
and residential real estate loans. USB also began offering
brokerage services to its customers in 1998.
USB's deposit accounts are insured by the FDIC to the extent
provided by law. USB's operations are supervised and regulated
by the FDIC and the Missouri Division of Finance. Periodic
examinations of USB are conducted by representatives of the FDIC
and the Missouri Division of Finance. Such regulations,
supervision and examinations are principally for the benefit of
depositors, rather than for the benefit of the holders of USB's
common stock. See "Regulation Applicable to Bancshares and
Union" and "Regulation Applicable to the Banks".
<PAGE>
EMPLOYEES
As of December 31, 1998, Bancshares and its subsidiaries had
approximately 150 full-time and 25 part-time employees. None of
its employees is presently represented by any union or collective
bargaining group, and the Company considers its employee
relations to be satisfactory.
COMPETITION
Bank holding companies and their subsidiaries and affiliates
encounter intense competition from nonbanking as well as banking
sources in all of their activities. The Banks' competitors
include other commercial banks, savings and loan associations,
savings banks, credit unions and money market mutual funds.
Savings and loan associations and credit unions now have the
authority to offer checking accounts and to make corporate and
agricultural loans and were granted expanded investment authority
by recent federal regulations. As a result, these thrift
institutions are expected to continue to offer increased
competition to commercial banks in the future. In addition,
large national and multinational corporations have in recent
years become increasingly visible in offering a broad range of
financial services to all types of commercial and consumer
customers. In the Banks' respective service areas, new
competitors, as well as the expanding operations of existing
competitors, have had, and are expected to continue to have, an
adverse impact on the Banks' market share of deposits and loans
in such service areas.
ENB experiences substantial competition for deposits and
loans within both its primary service area of Jefferson City and
its secondary service area of the nearby communities in Cole
County. ENB's principal competition for deposits and loans comes
from four other banks within its primary service area of
Jefferson City and, to an increasing extent, six other banks in
nearby communities. Based on publicly available information,
management believes that ENB is the second largest (in terms of
assets) of the banks within Cole County. The main competition
for ENB's trust services is from other commercial banks.
The areas in which USB competes for deposits and loans are
its primary service areas of Clinton, Collins and Osceola,
Missouri and its secondary service area of the nearby communities
in Henry and St. Clair counties. USB's principal competition for
deposits and loans comes from eight other banks within its
primary service area and, to an increasing extent, ten other
banks in nearby communities. Based on publicly available
information, management believes that USB is the largest (in
terms of assets) of the banks within Henry and St. Clair
counties. The main competition for USB's trust services is from
the trust departments of other commercial banks in the Kansas
City area.
REGULATION APPLICABLE TO BANCSHARES AND UNION
GENERAL. Each of Bancshares and Union is a registered bank
holding company within the meaning of the BHC Act, subject to the
supervision of the Federal Reserve Board. Each of Bancshares and
Union is required to file with the Federal Reserve Board an
annual report and such other additional information as the
Federal Reserve Board may require pursuant to the BHC Act. Also,
the Federal Reserve Board periodically examines both Bancshares
and Union. The Federal Reserve Board has authority to issue
cease and desist orders against bank holding companies if it
determines that their actions represent unsafe and unsound
practices or violations <PAGE> of law. In addition, the Federal Reserve
Board is empowered to impose substantial civil money penalties
for violations of certain banking statutes and regulations.
Regulation by the Federal Reserve Board is intended to protect
depositors of the Banks, not shareholders of Bancshares or of
Union.
SOURCE OF STRENGTH. Federal Reserve Board policy requires a
bank holding company to serve as a source of financial and
managerial strength to its subsidiary banks. Under this policy,
a bank holding company is expected to stand ready to use its
available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity,
and to maintain resources and the capacity to raise capital which
it can commit to its subsidiary banks. It is the Federal Reserve
Board's position that the failure of a bank holding company to
serve as a source of strength to a distressed subsidiary bank is
an unsafe and unsound banking practice. This has become known as
the "source of strength doctrine." It is not clear whether the
source of strength doctrine is legally enforceable by the Federal
Reserve Board.
LIMITATION ON ACQUISITIONS. The BHC Act requires every bank
holding company to obtain the prior approval of the Federal
Reserve Board before (i) taking any action that causes a bank to
become a controlled subsidiary of the bank holding company, (ii)
acquiring direct or indirect ownership or control of voting
shares of any bank or bank holding company, if the acquisition
results in the acquiring bank holding company having control of
more than 5% of the outstanding shares of any class of voting
securities of such bank or holding company and such bank or bank
holding company is not majority-owned by the acquiring bank
holding company prior to the acquisition, (iii) the acquisition
by a bank holding company or any nonbank subsidiary thereof of
all or substantially all of the assets of a bank, or (iv) a
merger or consolidation with another bank holding company.
In determining whether to approve a proposed acquisition,
merger or consolidation, the Federal Reserve Board is required to
take into account the competitive effects of the proposed
acquisition, the convenience and needs of the community to be
served, and the financial and managerial resources and future
prospects of the bank holding companies and banks concerned. If
a proposed acquisition, merger or consolidation might have the
effect in any section of the United States to substantially
lessen competition or to tend to create a monopoly, or if such
proposed acquisition, merger, or consolidation otherwise would be
in restraint of trade, then the Federal Reserve Board may not
approve it unless it finds that the anticompetitive effects are
clearly outweighed in the public interest by the probable effect
of the proposed transaction in meeting the convenience and needs
of the community to be served. Bancshares and Union may from
time to time acquire an interest in the voting stock or assets of
other banks or financial institutions.
LIMITATION ON CERTAIN ACTIVITIES. The BHC Act also
prohibits a bank holding company, with certain exceptions, from
engaging in, and from acquiring direct or indirect ownership or
control of the voting shares or assets of any company engaged in,
any activity other than banking or managing or controlling banks,
and any activity which the Federal Reserve Board determines to be
so closely related to banking, or managing or controlling banks,
as to be a proper incident thereto. In acting on an application
to engage in such an activity, the Federal Reserve Board is
required to weigh the expected benefits to the public, such as
greater convenience, increased competition or gains in
efficiency, against the risks of possible adverse effects, such
as undue <PAGE> concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices.
This consideration includes an evaluation of the financial and
managerial resources of the applicant, including its
subsidiaries, and any company to be acquired, and the effect of
the proposed transaction on those resources.
To date, the Federal Reserve Board, by regulation, has
determined that, subject to expressed limitations, certain
activities are permissible for bank holding companies and their
subsidiaries and may be engaged in upon notice to the Federal
Reserve Board without prior approval. These permissible
activities include furnishing or providing services for the
internal operations of the bank holding company and its
subsidiaries, operating a safe deposit business, making and
servicing loans, operating an industrial bank, performing certain
trust company functions, acting as an investment or financial
advisor in certain capacities, leasing certain real or personal
property, making certain investments to promote community
development, providing certain data processing services,
performing certain insurance agency and underwriting functions,
owning, controlling and operating a savings association,
providing specified courier services, providing management
consulting advice to nonaffiliated banks and nonbank depository
institutions, selling certain money orders, United States savings
bonds and traveler's checks, performing appraisals of real and
personal property, arranging certain commercial real estate
equity financing, providing securities brokerage services,
underwriting and dealing in certain government obligations and
money market instruments, providing foreign exchange advisory and
transactional services, acting as a futures commission merchant,
providing investment advice on financial futures and options on
futures, providing consumer financial counseling, providing tax
planning and preparation services, providing certain check
guaranty services, operating a collection agency and operating a
credit bureau.
The Federal Reserve Board also has determined that certain
other activities, including real estate brokerage and
syndication, land development, property management, management
consulting, underwriting of life insurance not sold in connection
with a credit transaction, and insurance premium funding, are
improper activities for bank holding companies and their
subsidiaries. In the future the Federal Reserve Board may take
additional actions, adding and refusing to add particular
activities to the list of activities that the Federal Reserve
Board deems to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Certain
bank holding companies and their subsidiaries possess
"grandfather rights" giving them authority to engage in one or
more of the activities which are not generally permissible
because they were engaged in such activities prior to the
adoption of legislation restricting such activities.
Under cross-guaranty provisions of the Federal Deposit
Insurance Act (the "FDIA"), bank subsidiaries of a bank holding
company are liable for any loss incurred (or reasonably
anticipated to be incurred) by the Bank Insurance Fund (the
"BIF"), the federal deposit insurance fund for banks, in
connection with the failure of any other bank subsidiary of the
bank holding company. Liability under such cross-guaranty would
be junior to deposit liabilities and most secured obligations,
but senior to obligations to shareholders and most obligations to
affiliates. The FDIC has authority to prospectively waive the
cross-guaranty provision. Currently ENB and USB are the only
bank subsidiaries of Bancshares.
<PAGE>
A bank holding company and its subsidiaries are prohibited
from engaging in certain tie-in arrangements in connection with
the extension of credit or the lease or sale of any property or
the furnishing of services. Subsidiary banks of a bank holding
company are also subject to certain restrictions imposed by the
Federal Reserve Act on any extensions of credit to the bank
holding company or any of its subsidiaries, or investment in the
stock or other securities thereof, and on the taking of such
stocks or securities as collateral for loans.
REGULATORY CAPITAL REQUIREMENTS. The Federal Reserve Board
has promulgated "capital adequacy guidelines" for use in its
examination and supervision of bank holding companies. A holding
company's ability to pay dividends and expand its business
through the acquisition of new banking subsidiaries can be
restricted if its capital falls below levels established by these
guidelines. In addition, holding companies whose capital falls
below specified levels can be required to implement a plan to
increase capital.
The Federal Reserve Board's capital adequacy guidelines
provide for the following types of capital: Tier 1 capital (also
referred to as core capital), Tier 2 capital (also referred to as
supplementary capital), Tier 3 capital (consisting of short-term
subordinated debt that meets certain conditions and used only in
the measure of market risk, as discussed below) and Total
capital. A bank holding company's Tier 1 capital generally
includes the following elements: common shareholders' equity,
qualifying noncumulative perpetual preferred stock and related
surplus, qualifying cumulative perpetual preferred stock and
related surplus (limited to a maximum of 25% of Tier 1 capital
elements) and minority interests in the equity accounts of
consolidated subsidiaries. Goodwill is generally excluded from
Tier 1 capital. Most intangible assets are also deducted from
Tier 1 capital. A bank holding company's Tier 2 capital
generally includes allowances for loan and lease losses (limited
to 1.25% of risk-weighted assets), most perpetual preferred stock
and any related surplus (noncumulative and cumulative, without
percentage limits), certain hybrid capital instruments, perpetual
debt and mandatory convertible debt securities, and certain
intermediate-term preferred stock and intermediate-term
subordinated debt instruments (to a maximum of 50% of Tier 1
capital excluding goodwill, but phased-out as the instrument
matures). The maximum amount of supplementary capital that
qualifies as Tier 2 capital is limited to 100% of Tier 1 capital
(net of goodwill). For purposes of calculating the total risk-
based capital ratio, Total capital generally includes Tier 1
capital, plus qualifying Tier 2 capital, minus investments in
unconsolidated subsidiaries, reciprocal holdings of bank holding
company capital securities, certain deferred tax assets and other
deductions as determined by the Federal Reserve Board.
The Federal Reserve Board recently issued a regulation
effective on October 1, 1998 which increases the amount of
intangible assets which may be included in Tier 1 capital. Under
the regulation, mortgage servicing rights ("MSRs"), non-mortgage
servicing assets ("NMSAs") and purchased credit card
relationships ("PCCRs") are included in Tier 1 capital to the
extent that, in the aggregate, they do not exceed 100% of Tier 1
capital and, to the further extent that PCCRs and NMSAs, in the
aggregate, do not exceed 25% of Tier 1 capital. MSRs and PCCRs
in excess of these limits, as well as core deposit intangibles
("CDI") and all other identified intangible assets, must be
deducted in determining Tier 1 capital. As of December 31, 1998,
neither Bancshares nor Union had MSRs, NMSAs or PCCRs. As of
December 31, 1998, Bancshares had $1,476,000 of CDIs, $8,563,000
of goodwill and $725,000 of other identified intangible assets.
<PAGE>
Effective October 1, 1998, the Federal Reserve Board amended
its capital adequacy guidelines to permit bank holding companies
to include as part of Tier 2 capital up to 45 percent of the
pretax net unrealized holding gains on available-for-sale equity
securities.
The Federal Reserve Board's capital adequacy guidelines
require a bank holding company to satisfy a Tier 1 Leverage
Ratio, a total risk-based capital ratio and a Tier 1 risk-based
capital ratio. Under the Tier 1 Leverage Ratio capital
guideline, a bank holding company must have and maintain Tier 1
capital in an amount equal to at least 3.0% of its average total
consolidated assets. In general, average total consolidated
assets means the quarterly average total assets (net of the
allowance for loan and lease losses) reported on a bank holding
company's Consolidated Financial Statements (FR Y-9C Report),
minus goodwill and any other intangible assets or investments in
subsidiaries which are deducted from Tier 1 capital. The 3.0%
minimum Tier 1 Leverage Ratio is considered the absolute minimum
amount of Tier 1 capital which the most highly rated bank holding
companies (those rated composite 1 under the BOPEC rating system
for bank holding companies) or those bank holding companies that
have implemented the risk-based capital market risk measure set
forth in the Federal Reserve Board's capital adequacy guidelines
are required to maintain. All other bank holding companies must
maintain a minimum Tier 1 Leverage Ratio of 4.0%.
Under the Federal Reserve Board's capital adequacy
guidelines, a bank holding company must have and maintain a ratio
of Total capital to risk-weighted assets of 8.00%, and a ratio of
Tier 1 capital to risk-weighted assets of 4%. The amount of a
bank holding company's risk-weighted assets is determined by
multiplying the balance sheet amount of each of the bank holding
company's consolidated assets by a specified risk-weight factor
of 0%, 20%, 50% or 100%, in accordance with the relative risk
level of the asset. In determining risk-weighted assets, off-
balance sheet items, such as standby letters of credit, are
converted to an on-balance sheet credit equivalent amount by
multiplying the face amount of the off-balance sheet item by a
credit conversion factor of 0%, 20%, 50% or 100%, in accordance
with the probability that the off-balance sheet item will become
a credit extended by the bank holding company. In general,
intangible assets and other assets which are deducted in
determining Tier 1 capital and Total capital may also be excluded
from risk-weighted assets.
The Federal Reserve Board has proposed to permit portions of
claims (including repurchase agreements) collateralized by cash
on deposit with the lending institution or by securities issued
or guaranteed by the U.S. Treasury, U.S. government agencies, or
the central governments in other OECD countries to be eligible
for a zero percent risk weight. The effect of this proposal is
to allow banks and bank holding companies to hold less capital
for these types of collateralized transactions.
Under the Federal Reserve Board's market risk rules, an
institution with significant trading activities must measure and
hold capital for exposure to general market risk arising from
fluctuations in interest rates, equity prices, foreign exchange
rates and commodity prices and exposure to specific risk
associated with debt and equity positions in the trading
portfolio. This regulation applies to any bank holding company
(i) whose trading activity equals 10% or more of its total assets
or (ii) whose trading activity equals $1 billion or more.
General market risk refers to changes in the market value of on-
balance sheet assets and off-balance sheet items resulting from
broad market movements. Specific risk refers to changes in the
market value of individual <PAGE> positions due to factors other than
broad market movements and includes such risks as the credit risk
of an instrument's issuer. Under the Federal Reserve Board's
rules, an institution must measure its general market risk using
its internal risk measurement model to calculate a "value-at-risk"
based capital charge. An institution must also measure its
specific risk either through a valid internal model or by a so-
called standardized approach. The standardized approach for the
measurement of specific risk uses a risk-weighing process
developed by the Federal Reserve which categorizes individual
instruments and then assesses a fixed capital charge. Until
September, 1997, an institution that used an internal model to
measure specific risk, rather than the standardized approach, was
required to hold capital for specific risk at least equal to 50
percent of the specific risk charge calculated when using the
standardized approach (the minimum specific risk charge). If
that portion of an institution's "value-at-risk" capital charge
which was attributable to specific risk did not equal the minimum
specific risk charge, the institution was subject to additional
charges to make up for such difference. As of September, 1997,
the Federal Reserve has eliminated the use of the minimum
specific risk charge and consequently, the need for a dual
calculation if an institution uses its internal model to measure
specific risk. Therefore, an institution using a valid internal
model to measure specific risk may use the "value-at-risk"
measures generated by its model without being required to compare
the model-generated risk charge to the minimum specific risk
charge as calculated under the standardized approach.
The regulation supplements the existing credit risk-based
capital standards by requiring an affected institution to adjust
its risk-based capital ratio to reflect market risk. In
measuring market risk, institutions may use Tier 3 capital to
meet the market risk capital requirements. Tier 3 capital is
subordinated debt that is unsecured, fully paid up, has an
original maturity of at least 2 years, is not redeemable before
maturity without the prior approval of the institution's
supervisor, is subject to a lock-in clause that prevents the
issuer from repaying the debt even at maturity if the issuer's
capital ratio is, or with repayment, would become, less than the
minimum 8% risk-based capital ratio, and does not contain and is
not covered by any covenants, terms or restrictions that may be
inconsistent with safe and sound banking practices.
On December 31, 1998, Bancshares was in compliance with all
of the Federal Reserve Board's capital guidelines. On such date,
Bancshares had a Tier 1 leverage ratio of 7.87% (compared with a
minimum requirement of 3%), a ratio of total capital to risk-
weighted assets of 12.94% (compared with a minimum requirement of
8%) and a ratio of Tier 1 capital to risk-weighted assets of
11.69% (compared with a minimum requirement of 4%).
INTERSTATE BANKING AND BRANCHING. Under the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the
"Riegle-Neal Act"), bank holding companies are permitted to
acquire the stock or substantially all of the assets of banks
located in any state regardless of whether such transaction is
prohibited under the laws of any state. The Federal Reserve
Board, however, may not approve an interstate acquisition if as a
result of the acquisition the bank holding company would control
more than 10% of the total amount of insured deposits in the
United States or would control more than 30% of the insured
deposits in the home state of the acquired bank. The 30% of
insured deposits state limit does not apply if the acquisition is
the initial entry into a state by a bank holding company or if
the home state waives such limit.
Under the Riegle-Neal Act, individual states may restrict
interstate acquisitions in two ways. First, a state may prohibit
an out-of-state bank holding company from acquiring a bank
<PAGE>
located in the state unless the target bank has been in existence
for a specified minimum period of time (not to exceed five
years). Second, a state may establish limits on the total amount
of insured deposits within the state which are controlled by a
single bank holding company (a "deposit cap"), provided that such
deposit limit does not discriminate against out-of-state bank
holding companies. In 1995, Missouri enacted legislation that
provides that a bank holding company whose bank subsidiaries were
conducting business in states other than the state of Missouri as
of January 1, 1995, may not charter de novo a bank or trust
company under Missouri law or a national bank located in
Missouri, and such bank holding company may not acquire any such
bank or trust company or a national bank located in Missouri that
has been in continuous existence for less than five years. This
provision was enacted to implement a state option permitting bank
charter age requirements under the Riegle-Neal Act. Missouri
currently has a statewide deposit cap of 13%.
The Riegle-Neal Act now permits affiliated banks in
different states to act as agents for each other for purposes of
receiving deposits, renewing time deposits, closing loans,
servicing loans and receiving payments on loans and other
obligations. A bank acting as an agent for an affiliated bank is
not considered a branch of the affiliated bank.
Beginning on June 1, 1997, the Riegle-Neal Act authorized
interstate branching by a merger of banks with different home
states which results in a single bank with branches in both
states. The Riegle-Neal Act gave states the right to "opt out"
and prohibit interstate mergers by passing legislation before
June 1, 1997 that expressly prohibits all merger transactions
with out-of-state banks. The Riegle-Neal Act also gave states
the right to "opt in" and authorize early interstate mergers by
passing legislation that expressly permits interstate merger
transactions with all out-of-state banks. The Riegle-Neal Act
authorized banks to establish and operate de novo branches in a
state (other than the bank's home state) only if the host state
"opts in" to authorize de novo interstate banking by passing
legislation that expressly permits all out-of-state banks to
establish de novo branches in the state. As of June 1, 1997,
approximately 44 states acted on the Riegle-Neal Act. Only two
states, Texas and Montana, opted out. Seven states contiguous
with Missouri's borders, Arkansas, Illinois, Iowa, Kentucky,
Nebraska, Oklahoma and Tennessee, affirmatively "opted-in."
Neither Missouri nor Kansas acted by June 1, 1997 to "opt-in" or
"opt-out." Therefore, interstate branching of banks by merger is
now permitted in Missouri and its contiguous states.
Effective October 10, 1997, the Riegle-Neal Act prohibits
any bank from establishing or acquiring a branch or branches
outside its home state primarily for the purpose of deposit
production. An interstate branch must reasonably help meet the
credit needs of the communities served as determined by a loan-to-
deposit ratio screen. The FDIC and other banking agencies,
under the final rule, will determine a bank's total loan-to-
deposit ratio for all branches opened in a particular state one
year or more after the bank has established an interstate branch.
If the ratio is 50 percent of the average loan-to-deposit ratio
for all banks headquartered in that state, the banking regulators
will try to determine whether the branches are making a
"reasonable" effort to meet the needs of the community served in
that state by using six mitigating factors. The agencies may
impose sanctions on institutions found not to meet the community
credit needs. The regulators may require the bank to close
branches in the state where it has a low loan-to deposit ratio,
and may prohibit the bank from opening any new branches unless
the institution assures the agencies that it will attempt to meet
those credit needs.
<PAGE>
MISSOURI BHC REGULATION. Under Missouri law, a bank holding
company is prohibited from acquiring control over a bank, savings
association or trust company which has its principal banking
office in Missouri if such acquisition would cause the aggregate
deposits held by all banks, savings associations and trust
companies in which such bank holding company has an interest to
exceed 13% of the total deposits of banking and savings
institutions in Missouri. Further, an acquisition by a bank
holding company of control of a bank or trust company which has
its principal banking office in Missouri requires approval of the
Missouri Director of Finance. Neither such limitation applies,
however, in situations where the acquisition was requested by the
Missouri Director of Finance, the FDIC or the Federal Reserve
Board in order to protect the public interest against the failure
or probable failure of a bank or trust company.
REGULATION APPLICABLE TO THE BANKS
GENERAL. As a national bank, ENB is subject to regulation
and examination primarily by the OCC. ENB is also regulated by
the Federal Reserve Board and the FDIC. As a Missouri state non-
member bank, USB is subject to regulation and examination by the
Missouri Division of Finance and the FDIC. Regulation by these
agencies is designed to protect depositors of ENB and USB rather
than shareholders of Bancshares. Each of the OCC and the FDIC
has the authority to issue cease and desist orders if it
determines that activities of ENB or USB, respectively, represent
unsafe and unsound banking practices or violations of law. In
addition, the OCC and FDIC are empowered to impose substantial
civil money penalties for violations of banking statutes and
regulations.
REGULATORY CAPITAL REQUIREMENTS. The OCC and the FDIC have
adopted minimum capital requirements applicable to national banks
and state non-member banks, respectively, which are substantially
similar to the capital adequacy guidelines established by the
Federal Reserve Board for bank holding companies. There are,
however, technical differences in the methodologies used to
calculate the capital ratios.
On December 31, 1998, ENB was in compliance with all of the
OCC's minimum capital requirements. On such date ENB had a Tier
1 Leverage Ratio of 11.32% (compared with a minimum requirement
of 3%), a ratio of Total capital to risk-weighted assets of
17.08% (compared with a minimum requirement of 8%), and a ratio
of Tier 1 capital to risk-weighted assets of 15.83% (compared
with a minimum requirement of 4%).
On December 31, 1998, USB was in compliance with all of the
FDIC's minimum capital requirements. On such date USB had a Tier
1 Leverage Ratio of 8.41% (compared with a minimum requirement of
3%), a ratio of Total capital to risk-weighted assets of 16.50%
(compared with a minimum requirement of 8%), and a ratio of Tier
1 capital to risk-weighted assets of 15.25% (compared with a
minimum requirement of 4%).
CLASSIFICATION OF BANKS. Federal banking laws classify
financial institutions in one of the following five categories,
depending upon the amount of their capital: well-capitalized,
adequately capitalized, undercapitalized, significantly
undercapitalized or critically undercapitalized. Under OCC and
FDIC regulations, a bank is deemed to be (i) "well capitalized"
if it has a total risk-based capital ratio of 10% or greater, a
<PAGE>
Tier 1 risk-based capital ratio of 6% or greater and a Tier 1
leverage ratio of 5% or greater (and is not subject to any order
or written directive specifying any higher capital ratio), (ii)
"adequately capitalized" if it has a total risk-based capital
ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4%
or greater and a Tier 1 leverage ratio of 4% or greater (or a
Tier 1 leverage ratio of 3% or greater, if the bank has a CAMEL
rating of 1), (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8%, a Tier 1
risk-based capital ratio that is less than 4% or a Tier 1
leverage ratio that is less than 4% (or a Tier 1 leverage ratio
that is less than 3%, if the bank has a CAMEL rating of 1), (iv)
"significantly undercapitalized" if it has a total risk-based
capital ratio that is less than 6%, a Tier 1 risk based capital
ratio that is less than 3% or a Tier 1 leverage ratio that is
less than 3%, and (v) "critically undercapitalized" if it has a
Tier 1 leverage ratio that is equal to or less than 2%. Federal
banking laws require the federal regulatory agencies to take
prompt corrective action against undercapitalized financial
institutions. Under OCC regulations, ENB was a well capitalized
institution as of December 31, 1998, and under FDIC regulations,
USB was a well capitalized institution as of December 31, 1998.
Federal banking laws provide that if an insured depository
institution receives a less than satisfactory examination rating
for asset quality, management, earnings or liquidity, the
examining agency may deem such financial institution to be
engaging in an unsafe or unsound practice. The potential
consequences of being found to have engaged in an unsafe or
unsound practice are significant, because the appropriate federal
regulatory agency may: (i) if the financial institution is
well-capitalized, reclassify the financial institution as
adequately capitalized; (ii) if the financial institution is
adequately capitalized, take any of the prompt corrective actions
authorized for undercapitalized financial institutions and impose
restrictions on capital distributions and management fees; and
(iii) if the financial institution is undercapitalized, take any
of the prompt corrective actions authorized for significantly
undercapitalized financial institutions.
DEPOSIT INSURANCE AND ASSESSMENTS. The deposits of ENB and
USB are insured by the BIF administered by the FDIC, in general,
to a maximum of $100,000 per insured depositor. Under federal
banking regulations, ENB and USB are required to pay semi-annual
assessments to the FDIC for deposit insurance. The FDIC has
adopted a risk-based assessment system. Under the risk-based
assessment system, BIF members pay varying assessment rates
depending upon the level of the institution's capital and the
degree of supervisory concern over the institution. The
assessment rates are set by the FDIC semiannually. The FDIC's
assessment rates range from zero (0) cents to 27 cents per $100
of insured deposits. Institutions qualifying for the $0
assessment rate are no longer required to pay the minimum deposit
premium payment of $2,000 annually. As of January 1, 1999, both
ENB's and USB's assessment rate was zero cents per $100 of
insured deposits. The FDIC has authority to increase the annual
assessment rate if it determines that a higher assessment rate is
necessary to increase BIF's reserve ratio. There is no cap on
the annual assessment rate which the FDIC may impose.
In addition to any assessments that may be imposed by the
FDIC as described above, the Deposit Insurance Funds Act of 1996
provides for the imposition of annual assessments by the
Financing Corporation on Savings Association Insurance Fund-
assessable ("SAIF-assessable") deposits and BIF-assessable
deposits. Generally speaking, until December 31, 1999, the
assessment rate imposed by Financing Corporation with respect to
BIF-assessable deposits will be at a rate equal to one-fifth
(1/5) of the assessment rate for SAIF-assessable deposits. As
of January 1, 1999, the annual assessment rate for BIF-assessable
deposits was 1.22 basis points of <PAGE> assessable deposits and the
annual assessment rate for SAIF-assessable deposits was 6.10
basis points of assessable deposits. As of January 1, 1999, ENB
and USB only had BIF-assessable deposits, and their annual
assessment rate was 1.22 basis points. Beginning on January 1,
2000, BIF-assessable deposits and SAIF-assessable deposits will
be assessed by Financing Corporation at the same rate. This is
likely to result in ENB and USB receiving an increased annual
assessment from Financing Corporation.
INTEREST RATES. The rate of interest a bank may charge on
certain classes of loans is limited by state and federal law. At
certain times in the past, these limitations, in conjunction with
national monetary and fiscal policies that affect the interest
rates paid by banks on deposits and borrowings, have resulted in
reductions of net interest margins on certain classes of loans.
Such circumstances may recur in the future, although the trend of
recent federal and state legislation has been to eliminate
restrictions on the rates of interest which may be charged on
some types of loans and to allow maximum rates on other types of
loans to be determined by market factors.
LOANS TO ONE BORROWER. In addition to limiting the rate of
interest chargeable by banks on certain loans, federal law
imposes additional restrictions on a national bank's lending
activities. For example, under federal law the maximum amount
that a national bank may lend to one borrower (and certain
related entities of such borrower) generally is limited to 15% of
the bank's unimpaired capital and unimpaired surplus, plus an
additional 10% for loans fully secured by readily marketable
collateral. There are certain exceptions to the general rule
including loans fully secured by government securities or deposit
accounts in the bank. As of December 31, 1998, ENB's lending
limit under this regulation was approximately $5,619,000, and its
current largest loan to one borrower (aggregate loans to the
borrower and its related entities) was approximately $4,800,000.
Missouri banking law imposes restrictions on a state-
chartered bank's lending activities. According to Missouri law,
the maximum amount that a bank may lend to any one person or
entity is limited to 15% of the unimpaired capital of the bank
located in a city having a population of 100,000 or more, 20% of
the unimpaired capital of the bank located in a city having a
population of less than 100,000 and over 7,000, and 25% of the
unimpaired capital of the bank if located elsewhere in the state.
These restrictions have some exceptions. As of December 31,
1998, USB's lending limit under this law was approximately
$2,421,000, and its current largest loan to one borrower was
approximately $1,537,000.
PAYMENT OF DIVIDENDS. The National Bank Act restricts the
payment of dividends by a national bank as follows: (i) no
dividends may be paid if the bank has no undivided profits or
retained earnings then on hand; (ii) until the surplus fund of
the bank is equal to its capital stock, no dividends may be
declared unless there has been carried to the surplus fund not
less than one-tenth of the bank's net profits of the preceding
half-year period in the case of quarterly or semiannual
dividends, or not less than one-tenth of the net profits of the
preceding two consecutive half-year periods in the case of annual
dividends; and (iii) the approval of the OCC is required if
dividends declared by the bank in any year would exceed the total
of net profits for that year combined with retained net profits
for the preceding two years, less any required transfers to
surplus. These laws and related regulations are applicable to
ENB. ENB has obtained approval from the OCC to pay up to
$3,230,700 in dividends to Bancshares in 1999, although no
assurances can be given that such dividends will be declared.
<PAGE>
USB, as a state non-member bank, is subject to the dividend
restrictions set forth by Missouri law and the FDIC. Under the
FDIA, a FDIC-insured institution may not pay any dividend if
payment would cause it to become undercapitalized or while it is
undercapitalized. Missouri banking law prohibits the declaration
of a dividend if the bank has not made good any existing
impairment of its capital. These laws and related regulations
are not expected to have a material effect upon USB's current
dividend policies.
COMMUNITY REINVESTMENT ACT. On May 4, 1995, the Federal
Reserve Board, the FDIC and the OCC adopted regulations relating
to the Community Reinvestment Act (the "CRA"). The purpose of
the CRA regulations is to establish the framework and criteria by
which the bank regulatory agencies assess an institution's record
of helping to meet the credit needs of its community, including
low- and moderate-income neighborhoods, and to provide that the
agencies' assessment shall be taken into account in reviewing
certain applications. The regulations seek to emphasize an
institution's performance rather than the process, to promote
consistency in evaluation of institutions, and to eliminate
unnecessary reporting burdens. The regulations replace the
previous twelve assessment factors for large banks with three
tests: (i) a lending test, (ii) a service test, and (iii) an
investment test. While documentation requirements have been
substantially reduced, the safe harbors from CRA protest have
also been eliminated.
OTHER REGULATORY LIMITATIONS. Bancshares, Union and the
Banks are "affiliates" within the meaning of the Federal Reserve
Act. As such, the amount of loans or extensions of credit which
ENB or USB may make to Bancshares, Union or to third parties,
secured by securities or obligations of Bancshares or Union, are
substantially limited by the Federal Reserve Act and the FDIA.
Such acts further restrict the range of permissible transactions
between a bank and an affiliated company. A bank and its
subsidiaries may engage in certain transactions, including loans
and purchases of assets, with an affiliated company only if the
terms and conditions of the transaction, including credit
standards, are substantially the same as, or at least as
favorable to the bank as, those prevailing at the time for
comparable transactions with non-affiliated companies or, in the
absence of comparable transactions, on terms and conditions that
would be offered to non-affiliated companies.
Each of ENB and USB is also authorized to invest in a
service corporation that can offer the same services as the
banking related services that bank holding companies are
authorized to provide. However, regulatory approval must
generally be obtained prior to making such an investment or the
performance of such services.
BANKING ACTIVITIES. The investments and activities of ENB
are subject to substantial regulation by the OCC, the Federal
Reserve Board and the FDIC, including without limitation
investments in subsidiaries, investments for their own account
(including limitations on investments in junk bonds and equity
securities), investments in loans, loans to officers, directors
and affiliates, security requirements, truth-in-lending, the
types of interest bearing deposit accounts which it can offer,
trust department operations, brokered deposits, audit
requirements, issuance of securities, branching and mergers and
acquisitions.
The Missouri Division of Finance and the FDIC regulate or
monitor all areas of USB's operations, including capital
requirements; issuance of stock; declaration of dividends;
interest rates; deposits; record keeping; establishment of
branches; acquisitions; mergers; loans; <PAGE> investments; borrowing;
security requirements, devices and procedures; employee
responsibility and conduct; and directors and affiliates. The
Missouri Division of Finance also limits the issuing of capital
notes or debentures, holding of real estate and personal property
and requires USB to maintain a certain ratio of reserves against
deposits.
YEAR 2000 SAFETY AND SOUNDNESS STANDARDS. On October 15,
1998, the Federal Reserve Board, the FDIC and the OCC adopted
guidelines which establish the minimum safety and soundness
standards for banks with respect to the Year 2000 readiness of
their computer systems. The guidelines require that each bank,
in writing, (i) identify all internal and external mission-
critical computer systems that are not Year 2000 ready; (ii)
establish the priorities for accomplishing work and allocating
resources to renovating internal mission-critical systems; (iii)
identify the resource requirements and individuals assigned to
the Year 2000 project on internal mission critical systems; (iv)
establish reasonable deadlines for commencing and completing the
renovation of such internal mission-critical systems; (v) develop
and adopt a project plan that addresses the bank's Year 2000
renovation, testing, contingency planning, and management
oversight process; and (vi) develop a due diligence process to
monitor and evaluate the efforts of external third party
suppliers to achieve Year 2000 readiness. Each bank was required
to substantially complete the testing of the renovation of all
internal mission-critical systems by December 1, 1998. The
guidelines also require that each bank determine the ability of
external third party suppliers to renovate external mission-
critical systems that are not Year 2000 ready and to complete the
renovation in sufficient time to substantially complete the
testing of all external mission-critical systems by March 31,
1999. Furthermore, the guidelines require that each bank must
complete the testing of all mission-critical systems by June 30,
1999.
For additional information on the Year 2000 readiness of ENB
and USB, see "Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000."
MONETARY POLICY AND ECONOMIC CONDITIONS
The principal sources of funds essential to the business of
banks and bank holding companies are deposits, shareholders'
equity and borrowed funds. The availability of these various
sources of funds and other potential sources such as preferred
stock or commercial paper, and the extent to which they are
utilized, depends on many factors, the most important of which
are the monetary policies of the Federal Reserve Board and the
relative costs of different types of funds.
An important function of the Federal Reserve Board is to
regulate the national supply of bank credit in order to combat
recession and curb inflationary pressures. Among the instruments
of monetary policy used by the Federal Reserve Board to implement
these objectives are open market operations in United States
government securities, changes in the discount rate on bank
borrowings and changes in reserve requirements against bank
deposits.
ENB and USB are subject to regulations issued by the Federal
Reserve Board which require depository institutions to maintain
non-interest bearing reserves against their transaction accounts
and non-personal time deposits. These regulations require
depository institutions to maintain reserves equal to 3% of
transaction accounts up to $46.5 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) of
the total over $46.5 million. In addition, reserves, subject to
<PAGE>
adjustment by the Federal Reserve Board between 0% and 9%, must
be maintained on non-personal time deposits. This reserve
percentage is currently 0%. Depository institutions may
designate and exempt up to $4.9 million of reservable liabilities
from the above reserve requirements. Because these reserves must
generally be maintained in cash or non-interest-bearing accounts,
the effect of the reserve requirements is to increase the cost of
funds to depository institutions. As of December 31, 1998, ENB
was required to maintain a reserve balance of $2,552,000, and USB
was required to maintain a reserve balance of $1,042,000.
Substantially all of the restrictions on the maximum
interest rates banks are permitted to pay on deposits have been
removed, although banks are still prohibited from paying interest
on demand deposits. Consequently, banks and thrift organizations
are substantially free to pay interest at any rate. Deregulation
has increased competition among such institutions for attracting
deposits and has resulted in an overall increase in such
institutions' cost of funds.
The monetary policies of the Federal Reserve Board have had
a significant effect on the operating results of commercial banks
in the past and are expected to continue to do so in the future.
In view of the continuing changes in regulations affecting
commercial banks and other actions and proposed actions by the
Federal government and its monetary and fiscal authorities,
including proposed changes in the structure of banking in the
United States and general economic conditions, no prediction can
be made as to future changes in interest rates, credit
availability, deposit levels, loan demand or the overall
performance of banks generally and ENB, USB, Union and Bancshares
in particular.
The references in the foregoing discussion to various
aspects of statutes and regulation are merely summaries which do
not purport to be complete and which are qualified in their
entirety by reference to the actual statutes and regulations.
ITEM 2. DESCRIPTION OF PROPERTY.
Neither Bancshares nor Union owns or leases any property.
The principal offices of Bancshares and ENB are located at
132 East High Street in the central business district of
Jefferson City, Missouri. The building, which is owned by the
Bank, is a three-story structure constructed in 1927. A recently
completed renovation and expansion project increased usable
office space from 14,000 square feet to approximately 33,000
square feet. All of this office space is currently used by
Bancshares and ENB. Management believes that this facility is
adequately covered by insurance.
ENB also owns a branch banking facility at 3701 West Truman
Boulevard in Jefferson City. This facility has approximately
21,000 square feet of usable office space, all of which is used
for ENB operations, and has full drive-in facilities. ENB owns a
second branch banking facility, which is located at 217 West
Dunklin Street in Jefferson City. This facility is a one-story
building which has approximately 2,400 square feet of usable
office space, all of which is used for ENB operations. In
addition, ENB has established a branch banking facility at 800
Eastland Drive in Jefferson City with approximately 4,100 square
feet of usable office space. Management <PAGE> believes that the
condition of these banking facilities presently is adequate for
ENB's business and that these facilities are adequately covered
by insurance.
The principal offices of Union and USB are located at 102
North Second Street in Clinton, Missouri. The bank building,
which is owned by USB, is a one-story structure constructed in
1972. It has approximately 5,000 square feet of usable office
space, all of which is currently used for UBS's operations. USB
also operates five branch banking facilities, of which four are
owned by it. USB owns its downtown Clinton branch, which is
located at 115 North Main Street. This facility has
approximately 1,500 square feet of usable office space, all of
which is used in USB operations. USB owns a second branch
banking facility, which is located at 1603 East Ohio in Clinton.
This facility is a one-story building which has approximately
5,760 square feet of usable office space, all of which is used
for USB operations. USB leases its third Clinton branch banking
facility, which is located inside the Wal-Mart store at 1712 East
Ohio. USB leases approximately 600 square feet of space at this
facility under a five-year lease expiring in January 2004, with
two five-year renewal options granted to USB. USB owns one
Osceola, Missouri branch banking facility located at 4th and
Chestnut. This facility is a one-story building which has
approximately 1,580 square feet of usable office space, all of
which is used for USB operations. Finally, USB owns an
approximately 1,500 square foot branch banking facility located
at the intersection of Highways 13 and 54 in Collins, Missouri.
Management believes that the condition of these banking
facilities presently is adequate for USB's business and that
these facilities are adequately covered by insurance.
The Banks invest in all types of real estate mortgages,
including mortgages on single family dwellings, multi-family
dwellings, office buildings, unimproved land and land development
loans. The limits of the Banks' investment in real estate
mortgages is directed by guidelines contained in the respective
Bank's loan policy. Changes in this policy do not require a vote
of the security holders. It is the policy of each of the Banks
to invest in real estate mortgages primarily for income. In
regard to investment in real estate mortgages, the Banks intend
to originate and service real estate mortgages but do not intend
to warehouse those mortgages for possible capital gains. The
turnover of the respective real estate mortgage portfolios of the
Banks is greatly dependent upon interest rate trends but
generally turns at a moderate level.
ITEM 3. LEGAL PROCEEDINGS.
None of Bancshares, Union or the Banks is involved in any
material pending legal proceedings, other than routine litigation
incidental to their business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the holders of the
Company's Common Stock during the fourth quarter of the year
ended December 31, 1998.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Pursuant to General Instruction E(2) to Form 10-KSB, the
information required by this Item is incorporated herein by
reference to the information under the caption "Market Price of
and Dividends on Equity Securities and Related Matters" in
Bancshares' 1998 Annual Report to Shareholders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS.
Pursuant to General Instruction E(2) to Form 10-KSB, the
information required by this Item is incorporated herein by
reference to the information under the captions "Selected
Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in
Bancshares' 1998 Annual Report to Shareholders.
STATEMENTS MADE IN THIS REPORT THAT ARE NOT HISTORICAL IN
NATURE, OR THAT STATE THE COMPANY'S, OR MANAGEMENT'S INTENTIONS,
HOPES, BELIEFS, EXPECTATIONS, OR PREDICTIONS OF THE FUTURE, ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 21E OF
THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, AND INVOLVE
RISKS AND UNCERTAINTIES. IT IS IMPORTANT TO NOTE THAT ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED BELOW UNDER THE CAPTION "FACTORS THAT MAY AFFECT
FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS,"
AS WELL AS THOSE DISCUSSED ELSEWHERE IN THE COMPANY'S REPORTS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FROM TIME TO
TIME.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL
CONDITION OR BUSINESS
In order to take advantage of the safe harbor provisions for
forward-looking statements contained in Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, added to those Acts
by the Private Securities Litigation Reform Act of 1995, the
Company is hereby identifying important risks and uncertainties
that could affect the Company's actual results of operations,
financial condition or business and that could cause the
Company's actual results of operations, financial condition or
business to differ materially from its historical results of
operations, financial condition or business, or the results of
operations, financial condition or business contemplated by
forward-looking statements made herein or elsewhere, orally or in
writing, by, or on behalf of, the Company. Factors that could
cause or contribute to such differences include, but are not
limited to, those factors described below.
PROFITABILITY DEPENDS ON ECONOMIC CONDITIONS IN THE
COMPANY'S PRIMARY MARKET AREA. The profitability of the Company
is dependant on the profitability of its banking <PAGE> subsidiaries,
The Exchange National Bank of Jefferson City and Union State Bank
and Trust of Clinton, which are banks operating out of central
Missouri. The Banks' financial conditions are affected by
fluctuations in the economic conditions prevailing in that
portion of Missouri in which the Banks' banking operations are
located. Accordingly, the financial conditions of both the
Banks and the Company would be adversely affected by
deterioration in the general economic and real estate climate in
the State of Missouri. The Banks' business is also subject to
fluctuations in interest rates, national and local economic
conditions, monetary and regulatory policies and consumer and
institutional confidence in the Banks. The fluctuations are
neither predictable nor controllable and may have materially
adverse consequences upon the operations and financial condition
of the Banks and the Company in the future even if other
favorable events occur.
IMPORTANCE OF NET INTEREST INCOME AND SUSCEPTIBILITY TO
CHANGES IN INTEREST RATES. The primary source of earnings for
the Banks and the Company is net interest income, which is the
difference between interest and fees earned on loans and other
interest-earning assets, and the interest paid on deposits and
other interest-bearing liabilities. There may be a difference
between the amount of interest-earning assets scheduled to
reprice in any given period and the amount of interest-bearing
liabilities scheduled to reprice over the same time. Any
difference can create a lag between the time it takes the rate
the bank earns interest to respond to market fluctuations and the
time it takes the rate the bank incurs interest costs to respond
to market fluctuations, and vice-versa. Because of these
"interest sensitivity gaps," the amount of net interest income
may be affected by fluctuations in the interest rate.
ASSET QUALITY AND LENDING RISKS. Success in the banking
industry largely depends on the quality of loans and other
assets. The Banks' loan officers are actively encouraged to
identify deteriorating loans. Loans are also monitored and
categorized through an analysis of their payment status. The
Banks' failure to timely and accurately monitor the quality of
its loans and other assets could have a materially adverse effect
on the operations and financial condition of the Banks and the
Company. There is a degree of credit risk associated with any
lending activity. The Company attempts to minimize its credit
risk through loan diversification. Although the Company's loan
portfolio is varied, with no undue concentration in any one
industry, substantially all of the loans in the portfolio have
been made to borrowers in central Missouri. Therefore, the loan
portfolio is susceptible to factors affecting the central
Missouri area and the level of non-performing assets is heavily
dependant upon local conditions. See "Economic Conditions in the
Company's Primary Market Area." There can be no assurance that
the level of the Company's non-performing assets will not
increase above current levels. High levels of non-performing
assets could have a materially adverse effect on the operations
and financial condition of the Banks and the Company.
PROVISIONS FOR POSSIBLE LOAN LOSSES. The Company makes a
provision for loan losses based upon management's analysis of
potential losses in the loan portfolio and consideration of
prevailing economic conditions. The Company may need to increase
the provision for loan losses through additional provisions in
the future if the financial condition of any of its borrowers
deteriorates or if real estate values decline. See "Asset
Quality and Lending Risks." Furthermore, various regulatory
agencies, as an integral part of their examination process,
periodically review the Company's loan portfolio, provision for
loan losses, and real estate acquired by foreclosure. Such
agencies may require the Company to recognize additions to the
provision for loan losses based on their judgments of information
available to them at the time of the examination. Any <PAGE> additional
provisions for possible loan losses, whether required as a result
of regulatory review or initiated by the Company itself, may
materially alter the financial outlook of the Banks and the
Company.
COMPETITION IN THE COMPANY'S MARKET AREA. The Banks
experience substantial competition for deposits and loans within
the Banks' service areas. The Banks' competitors include other
commercial banks, savings and loan associations, savings banks,
credit unions and money market mutual funds. Savings and loan
associations and credit unions now have the authority to offer
checking accounts and to make corporate and agricultural loans
and were granted expanded investment authority by recent federal
regulations. As a result, these thrift institutions are expected
to continue to offer increased competition to commercial banks in
the future. In addition, large national and multinational
corporations have in recent years become increasingly visible in
offering a broad range of financial services to all types of
commercial and consumer customers. Competition from larger
institutions may increase due to an acceleration of bank mergers
and consolidations in Missouri and the rest of the nation. An
increase in the intensity of competition from other banks in the
central Missouri market could have a materially adverse impact on
the operations and financial condition of the Banks and the
Company. Moreover, new competitors, as well as the expanding
operations of existing competitors, have had, and are expected to
continue to have, an adverse impact on the Banks' market share of
deposits and loans in the Banks' respective service areas.
REGULATION. Banks and bank holding companies such as the
Company are subject to regulation by both federal and state bank
regulatory agencies. The regulations, which are designed to
protect borrowers and promote certain social policies, include
limitations on the operations of banks and bank holding
companies, such as minimum capital requirements and restrictions
on dividend payments. These regulations are not necessarily
designed to maximize the profitability of banking institutions.
Future changes in the banking laws and regulations could have a
materially adverse effect on the operations and financial
condition of the Banks and the Company.
IMPORTANCE OF EXECUTIVE OFFICERS. The success of the Banks
and the Company has been largely dependant on the efforts of
Donald Campbell, James Smith and David Turner and the other
executive officers. These individuals are expected to continue
to perform their services. However, the loss of the services of
Messrs. Campbell, Smith or Turner, or any of the other key
executive officers could have a materially adverse effect on the
Banks and the Company.
YEAR 2000 COMPLIANCE. Each Bank's Year 2000 committee has
developed and presented to its respective Board of Directors its
action plan for Year 2000 compliance with the objective of
insuring that all computerized systems and software programs are
capable of functioning in the next century. The Company
anticipates that the incremental cost of ensuring that its
computer systems are Year 2000 compliant may be significant but
is not anticipated to be material to its business, financial
condition or results of operations. However, if such
modifications and conversions are not made, or are not completed
timely, the Year 2000 issue could have a materially adverse
effect on the Banks and the Company.
<PAGE>
ADDITIONAL FACTORS. Additional risks and uncertainties that
may affect the future results of operations, financial condition
or business of the Banks and the Company include, but are not
limited to: (i) the ability to keep pace with technological
change including developing and implementing technological
advances timely and cost-effectively in order to provide better
service and remain competitive; (ii) adverse publicity, news
coverage by the media, or negative reports by brokerage firms,
industry and financial analysts regarding the Banks or the
Company; and (iii) changes in accounting policies and practices.
ITEM 7. FINANCIAL STATEMENTS.
Pursuant to General Instruction E(2) to Form 10-KSB, the
information required by this Item is incorporated herein by
reference to the report of the independent auditors and the
information under the caption "Consolidated Financial Statements"
in Bancshares' 1998 Annual Report to Shareholders.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT.
Pursuant to General Instruction E(3) to Form 10-KSB, the
information required by this Item is incorporated herein by
reference to (i) the information under the caption "Election of
Directors--The Board of Directors," (ii) the information under
the caption "Election of Directors--Nominees and Directors
Continuing in Office," (iii) the information under the caption
"Executive Officers and Compensation--Executive Officers," and
(iv) the information under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance," in each case, in the
Registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders to be filed pursuant to Regulation 14A.
ITEM 10. EXECUTIVE COMPENSATION.
Pursuant to General Instruction E(3) to Form 10-KSB, the
information required by this Item is incorporated herein by
reference to (i) the information under the caption "Executive
Officers and Compensation--Executive Compensation," (ii) the
information under the caption "Executive Officers and
Compensation--Profit-Sharing Trust," (iii) the information under
the caption "Executive Officers and Compensation--Pension Plan,"
and (iv) the information under the caption "Election of
Directors--Compensation of Directors", in each case, in the
Registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders to be filed pursuant to Regulation 14A.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Pursuant to General Instruction E(3) to Form 10-KSB, the
information required by this Item is incorporated herein by
reference to the information under the caption "Ownership of
Common Stock" in the Registrant's definitive Proxy Statement for
its 1999 Annual Meeting of Shareholders to be filed pursuant to
Regulation 14A.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction E(3) to Form 10-KSB, the
information required by this Item is incorporated herein by
reference to the information under the caption "Transactions with
Directors and Officers" in the Registrant's definitive Proxy
Statement for its 1999 Annual Meeting of Shareholders to be filed
pursuant to Regulation 14A.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
1. The following consolidated financial statements of the
Company and reports of the Company's independent
auditors, included in the Registrant's Annual Report to
Shareholders for the year ended December 31, 1998 under
the caption "Consolidated Financial Statements", are
incorporated by reference in Item 7 to this report:
Independent Auditors' Report.
Consolidated Balance Sheets as of December
31, 1998 and 1997.
Consolidated Statements of Income for each of
the years ended December 31, 1998 1997, and
1996.
Consolidated Statements of Stockholders'
Equity and Comprehensive Income for each of
the years ended December 31, 1998, 1997, and
1996.
Consolidated Statements of Cash Flows for
each of the years ended December 31, 1998,
1997, and 1996.
Notes to Consolidated Financial Statements.
<PAGE>
2. Exhibits:
Exhibit No. Description
3.1 Articles of Incorporation of the Company (filed as
Exhibit 3(a) to the Company's Registration
Statement on Form S-4 (Registration No. 33-54166)
and incorporated herein by reference).
3.2 Bylaws of the Company (filed with the Registrant's
Annual Report on Form 10-KSB for the year ended
December 31, 1997 as Exhibit 3.2 and incorporated
herein by reference).
4 Specimen certificate representing shares of the
Company's $1.00 par value common stock (filed as
Exhibit 4 to the Company's Registration Statement
on Form S-4 (Registration No. 33-54166) and
incorporated herein by reference).
10.1 Employment Agreement, dated November 3, 1997,
between the Registrant and James E. Smith (filed
with the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1997 as Exhibit
10.4 and incorporated herein by reference).*
13 The Registrant's 1998 Annual Report to
Shareholders (only those portions of this Annual
Report to Shareholders which are specifically
incorporated by reference into this Annual Report
on Form 10-KSB shall be deemed to be filed with
the Commission).
21 List of Subsidiaries (filed with the Registrant's
Annual Report on Form 10-KSB for the year ended
December 31, 1997 as Exhibit 21 and incorporated
herein by reference).
27 Financial Data Schedule.
_______________________
* Management contracts or compensatory plans or arrangements
required to be identified by Item 13(a).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during
the three month period ended December 31, 1998.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
EXCHANGE NATIONAL BANCSHARES, INC.
Dated: March 29, 1999 By /s/ Donald L. Campbell
Donald L. Campbell, President
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Date Signature and Title
March 29, 1999 /s/ Donald L. Campbell
Donald L. Campbell, President and
Chairman of the Board of Directors
(Principal Executive Officer)
March 17, 1999 /s/ Richard G. Rose
Richard G. Rose, Treasurer (Principal
Financial Officer and Principal
Accounting Officer)
March 17, 1999 /s/ David T. Turner
David T. Turner, Director
March 17, 1999 /s/ James R. Loyd
James R. Loyd, Director
March 29, 1999 /s/ Charles G. Dudenhoeffer, Jr.
Charles G. Dudenhoeffer, Jr., Director
March 29, 1999 /s/ David R. Goller
David R. Goller, Director
March 29, 1999 /s/ Philip D. Freeman
Philip D. Freeman, Director
March 17, 1999 /s/ Kevin L. Riley
Kevin L. Riley, Director
March 29, 1999 /s/ James E. Smith
James E. Smith, Director
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page No.
3.1 Articles of Incorporation of the Company **
(filed as Exhibit 3(a) to the Company's
Registration on Form S-4 (Registration No.
33-54166) and incorporated herein
by reference).
3.2 Bylaws of the Company (filed with the **
Registrant's Annual Report on Form 10-KSB for the
year ended December 31, 1997 as Exhibit 3.2 and
incorporated herein by reference).
4 Specimen certificate representing shares of the **
Company's $1.00 par value common stock (filed as
Exhibit 4 to the Company's Registration Statement
on Form S-4 (Registration No. 33-054166 and
incorporated herein by reference).
10.1 Employment Agreement, dated November 3, 1997, **
between the Registrant and James E. Smith (filed
with the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1997 as Exhibit
10.4 and incorporated herein by reference).*
13 The Registrant's 1998 Annual Report to Shareholders __
(only those portions of this Annual Report to
Shareholders which are specifically incorporated
by reference into this Annual Report on Form 10-
KSB shall be deemed to be filed with the
Commission)
21 List of Subsidiaries (filed with the Registrant's **
Annual Report on Form 10-KSB for the year ended
December 31, 1997 as Exhibit 21 and incorporated
herein by reference).
27 Financial Data Schedule. __
_______________________
* Management contracts or compensatory plans or
arrangements required to be identified by Item 13(a).
** Incorporated by reference from previous filings.
1998
ANNUAL REPORT
TO
SHAREHOLDERS
EXCHANGE NATIONAL BANCSHARES, INC.
Jefferson City, Missouri
<PAGE>
EXCHANGE NATIONAL BANCSHARES, INC.
Jefferson City, Missouri
March 29, 1999
To Our Shareholders:
1998 was quite a year for financial organizations across the
country! We became accustomed to opening the morning newspaper
and reading about yet another mega merger. 1998 was also marked
with the continued entrance of non-traditional financial
companies into the banking arena. I am sure you have noticed
large, multi-regional banking organizations comparing themselves
to locally owned community banks. This comparison is made as
your company has an obvious competitive advantage by having local
ownership and management.
As I have stated before, a central component of your
company's strategic plan is to enhance shareholder value through
growth without negatively impacting earnings or asset quality.
As part of this growth plan, your company opened full service
brokerage departments in its affiliate banks in mid-1998. We
have seen considerable activity in this new area.
In reference to 1998 financial highlights, your Board of
Directors and management are pleased to report that Exchange
National Bancshares' net income for 1998 increased 69 cents per
share of common stock to $6.06, an increase of 12.85% over the
$5.37 reported for 1997. Sustained growth in average loan volume
was the primary contributor to the increase.
Shareholders received dividends totaling $2.24 per share of
common stock during 1998, an increase of 12 cents or 5.66% over
the amount received during 1997. Quarterly dividends of 50 cents
per share of common stock were paid January 1, April 1, July 1
and October 1, 1998. A special dividend of 24 cents per share of
common stock was paid December 1, 1998.
Your company's earnings performance expressed in terms of
net income before amortization of intangible assets divided by
average total assets (return on assets) was 1.12% for 1998
compared to 1.27% for 1997, and return on average total
stockholders' equity before amortization of intangible assets was
11.11% for 1998 compared to 9.52% for 1997.
Capitalization of your company expressed in terms of tier
one capital to adjusted total assets (leverage ratio) was 7.87%
at December 31, 1998 compared to 8.14% at December 31, 1997.
This increased leveraging results from repaying a portion of the
debt associated with the acquisition of Union State Bank and
Trust of Clinton, Missouri. Your company's total capital to
risk-weighted assets ratio was 12.94% at December 31, 1998
compared to 12.25% at December 31, 1997. These ratios continue
to exceed the Federal Reserve Board's minimum required ratios at
both dates.
In closing, your Board of Directors is pleased with the
completion of the renovation and expansion of Exchange Bank's
main banking facility located at 132 East High Street in
Jefferson City, Missouri. Please join the Board of Directors,
officers and employees at an open house on Sunday, May 23, 1999.
Once again, we appreciate the opportunity to serve you, our
shareholders, as well as our customers. We look forward to the
opportunities that await us in 1999.
Very truly yours,
DONALD L. CAMPBELL
Chairman of the Board and President
<PAGE>
EXCHANGE NATIONAL BANCSHARES, INC.
DESCRIPTION OF BUSINESS
Exchange National Bancshares, Inc. ("Bancshares" or the
"Company") is a bank holding company registered under the Bank
Holding Company Act of 1956, as amended (the "BHC Act").
Although Bancshares was incorporated under the laws of the State
of Missouri on October 23, 1992, it did not engage in any
business activity until April 7, 1993. On that date, it acquired
all of the issued and outstanding capital stock of The Exchange
National Bank of Jefferson City, a national banking association
("ENB") pursuant to a corporate reorganization involving an
exchange of shares. In addition to its acquisition of ENB, on
November 3, 1997 the Company acquired Union State Bancshares,
Inc., a bank holding company registered under the BHC Act
("Union"), and Union's wholly-owned subsidiary, Union State Bank
and Trust of Clinton, a Missouri trust company ("USB"). The
Company's activities currently are limited to ownership of the
outstanding capital stock of ENB and Union, which in turn owns
the outstanding capital stock of USB. In addition to ownership
of its subsidiaries, Bancshares could seek expansion through
acquisition and may engage in those activities (such as
investments in banks or operations closely related to banking) in
which it is permitted to engage under applicable law. It is not
currently anticipated that Bancshares will engage in any business
other than that directly related to its ownership of ENB, Union,
USB or other financial institutions. Similarly, it is not
currently anticipated that Union will engage in any business
other than that directly related to its ownership of USB. Except
as otherwise provided herein, references herein to "Bancshares"
or the "Company" include Bancshares and its consolidated
subsidiaries.
ENB, located in Jefferson City, Missouri, was founded in
1865. ENB is the oldest bank in Cole County, and became a
national bank in 1927. ENB has four banking offices; its
principal office at 132 East High Street in Jefferson City's
central business district, a facility at 217 West Dunklin near
the city's south side business district, a facility at 3701 West
Truman Boulevard adjacent to the Capitol Mall Shopping Center,
and a facility at 800 Eastland Drive near the city's east side
business district.
USB was founded in 1932 as a Missouri bank known as Union
State Bank of Clinton. USB converted from a Missouri bank to a
Missouri trust company on August 16, 1989, changing its name to
Union State Bank and Trust of Clinton. USB has six banking
offices: its principal office at 102 North Second Street in
Clinton, Missouri; a downtown Clinton facility located at 115
North Main Street; a facility at 1603 East Ohio in Clinton; a
facility located at 4th and Chestnut in Osceola, Missouri; a
facility located at the intersection of Highways 13 and 54 in
Collins, Missouri; and a facility located inside the Wal-Mart
store at 1712 East Ohio.
ENB and USB each is a full service bank conducting a general
banking and trust business, offering its customers checking and
savings accounts, debit cards, certificates of deposit, trust
services, safety deposit boxes and a wide range of lending
services, including credit card accounts, commercial and
industrial loans, single payment personal loans, installment
loans and commercial and residential real estate loans.
The deposit accounts of ENB and USB are insured by the
Federal Deposit Insurance Corporation (the "FDIC") to the extent
provided by law. ENB is a member of the Federal Reserve System,
and its operations are supervised and regulated by the Office of
the Comptroller of the Currency (the "OCC"), the Board of
Governors of the Federal Reserve System (the "Federal Reserve
Board") and the FDIC. USB's operations are supervised and
regulated by the FDIC and the Missouri Division of Finance. A
periodic examination of ENB is conducted by representatives of
the OCC, and periodic examinations of USB are conducted by
representatives of the FDIC and the Missouri Division of Finance.
Such regulations, supervision and examinations are principally
for the benefit of depositors, rather than for the benefit of the
holders of ENB's or USB's common stock. Bancshares and Union
are subject to supervision by the Federal Reserve Board.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial
information for the Company as of and for each of the years in
the five-year period ended December 31, 1998. The selected
consolidated financial data should be read in conjunction with
the Consolidated Financial Statements of the Company, including
the related notes, presented elsewhere herein.
(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
_________________________________________________
1998 1997 1996 1995 1994
INCOME STATEMENT
DATA
Interest income $32,180 23,435 20,179 18,628 16,062
Interest expense 17,197 11,645 9,784 8,649 6,847
________ ________ _______ ________ ______
Net interest
income 14,983 11,790 10,395 9,979 9,215
Provision for
loan losses 702 865 395 265 139
________ ________ _______ ________ ______
Net interest
income after
provision for
loan losses 14,281 10,925 10,000 9,714 9,076
________ ________ _______ ________ ______
Security gains
(losses), net 6 (7) -- 4 8
Other noninterest
income 2,698 2,045 1,890 1,745 1,749
________ ________ _______ ________ ______
Total noninterest
income 2,704 2,038 1,890 1,749 1,757
Noninterest
expense 10,515 7,265 6,185 6,002 6,095
________ ________ _______ ________ ______
Income before
income taxes 6,470 5,698 5,705 5,461 4,738
Income taxes 2,117 1,842 1,862 1,772 1,474
________ ________ _______ ________ ______
Net income $4,353 3,856 3,843 3,689 3,264
DIVIDENDS
Declared on
common stock $1,609 1,566 1,365 1,200 1,092
Paid on common
stock 1,609 1,523 1,322 1,164 1,092
Ratio of total
dividends
declared to
net income 36.96% 40.61 35.52 32.53 33.46
PER SHARE DATA
Basic and
diluted earnings
per common share $6.06 5.37 5.35 5.13 4.54
Weighted average
shares of
common stock
outstanding 718,511 718,511 718,511 718,511 718,511
<PAGE>
YEAR ENDED DECEMBER 31,
___________________________________________
1998 1997 1996 1995 1994
BALANCE SHEET DATA
(AT PERIOD END)
Investment securities $101,066 116,157 80,623 68,507 79,882
Loans 288,218 278,700 173,309 154,339 144,162
Total assets 458,703 450,692 284,079 257,340 262,839
Total deposits 373,522 360,387 228,024 206,815 207,021
Securities sold under
agreements to repurchase
and other short term
borrowed funds 17,667 25,157 13,338 10,416 19,575
Other borrowed money 17,151 17,604 -- -- --
Total stockholders'
equity 46,113 43,108 40,681 38,355 34,665
EARNINGS RATIOS
Return on average
total assets 0.96% 1.22 1.39 1.42 1.24
Return on average
stockholders' equity 9.73 9.15 9.76 10.06 9.49
ASSET QUALITY RATIOS
Allowance for loan losses
to loans 1.53 1.40 1.33 1.41 1.35
Nonperforming loans
to loans /1/ 0.28 0.40 0.63 0.54 0.49
Allowance for loan losses
to nonperforming
loans /1/ 544.81 350.40 211.26 260.02 275.21
Nonperforming assets to
loans and foreclosed
assets /2/ 0.34 0.54 0.70 0.59 0.56
Net loan charge-offs to
average loans 0.07 0.29 0.16 0.02 0.05
CAPITAL RATIOS
Average stockholders' equity to
total assets 9.83 13.29 14.28 14.15 13.09
Total risk-based
capital ratio 12.94 12.25 23.14 23.66 23.10
Leverage ratio 7.87 8.14 14.45 14.98 13.70
________
/1/ Nonperforming loans consist of nonaccrual loans and loans contractually
past due 90 days or more and still accruing.
/2/ Nonperforming assets consist of nonperforming loans plus foreclosed
assets.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
STATEMENTS MADE IN THIS ANNUAL REPORT THAT ARE NOT
HISTORICAL IN NATURE, OR THAT STATE THE COMPANY'S, OR
MANAGEMENT'S INTENTIONS, HOPES, BELIEFS, EXPECTATIONS, OR
PREDICTIONS OF THE FUTURE, ARE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES AND EXCHANGE
ACT OF 1934, AS AMENDED, AND INVOLVE RISKS AND UNCERTAINTIES. IT
IS IMPORTANT TO NOTE THAT ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT
ARE NOT LIMITED TO, THOSE DISCUSSED BELOW UNDER THE CAPTION
"FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL
CONDITION OR BUSINESS" IN THE COMPANY'S ANNUAL REPORT ON FORM 10-
KSB FOR THE YEAR ENDED DECEMBER 31, 1997, AS WELL AS THOSE
DISCUSSED ELSEWHERE IN THE COMPANY'S REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION FROM TIME TO TIME.
GENERAL
Bancshares was organized on October 23, 1992, and on
April 7, 1993, it acquired The Exchange National Bank of
Jefferson City (ENB). The acquisition of ENB represented a
combination of entities under common control and, accordingly,
was accounted for in a manner similar to a pooling of interests.
On November 3, 1997, Bancshares acquired Union State Bancshares,
Inc. (Union) which owns 100% of Union State Bank and Trust of
Clinton (USB). The acquisition of Union was accounted for as a
purchase transaction.
Bancshares' consolidated net income for 1998 increased
$497,000 or 12.9% over 1997 and followed a $13,000 or 0.3%
increase for 1997 compared to 1996. Basic and diluted earnings
per common share increased from $5.35 for 1996 to $5.37 for 1997
and to $6.06 for 1998. Return on average total assets decreased
from 1.39% for 1996 to 1.22% for 1997 and to 0.96% for 1998.
Return on average total stockholders' equity decreased from 9.76%
for 1996 to 9.15% for 1997 and increased to 9.73% for 1998.
Average investment securities and federal funds sold
increased $41,173,000 or 42.3% to $138,517,000 for 1998 compared
to $97,344,000 for 1997 and followed a $1,462,000 or 1.5%
increase for 1997 compared to 1996. The acquisition of Union
increased average investments and fedeal funds sold for 1998 by
approximately $42,545,000.
Average loan volume, excluding bankers acceptances' and
commercial paper (money market loans) increased $80,371,000 or
40.3% to $279,679,000 for 1998 compared to $199,308,000 for 1997
and followed a $36,284,000 or 22.3% increase for 1997 compared to
1996. The acquisition of Union increased average total loans for
1998 by approximately $69,270,000. Average commercial loan
volume at ENB increased $4,641,000 or 10.4% for 1998 compared to
1997 and followed a $5,458,000 or 13.9% increase for 1997
compared to 1996. Average real estate loan volume at ENB
increased $3,505,000 or 3.3% for 1998 compared to 1997 and
followed an $14,975,000 or 16.5% increase for 1997 compared to
1996.
The increase in both commercial and real estate loan volumes
over the last two years reflected several factors. These factors
include the benefits of a growing local economy and stable
interest rates which continued to fuel increased loan demand.
Average consumer loan volume at ENB increased $2,887,000 or
8.0% for 1998 compared to 1997 and followed a $3,035,000 or 9.2%
increase for 1997 compared to 1996.
Average total time deposits increased $99,465,000 or 46.0%
to $315,571,00 for 1998 compared to $216,106,000 for 1997 and
followed a $30,048,000 or 16.1% increase for 1997 compared to
1996. The acquisition of Union increased average total time
deposits for 1998 by approximately $91,661,000. The increase in
average total time <PAGE>deposits at ENB for 1996 primarily reflected
an increase in rates paid in order to attract additional funds,
while the increase for 1997 primarily reflected a continuation of
the rate increases instituted in 1996.
Average securities sold under agreements to repurchase
increased $7,602,000 or 41.9% to $25,754,000 for 1998 compared to
$18,152,000 for 1997 and followed a $1,640,000 or 9.9% increase
for 1997 compared to 1996. Those variances reflected competition
for institutional funds awarded based upon competitive bids.
Average interest-bearing liabilities for 1998 include
$5,662,000 of Federal Home Loan Bank advances and other short-
term borrowed funds and $12,209,000 of other borrowed money.
Both of those categories primarily reflect liabilities associated
with the acquisition of Union.
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)
YEAR ENDED DECEMBER 31,
1998 1997 1996
Interest income $32,180 23,435 20,179
Fully taxable equivalent
(FTE) adjustment 576 433 366
Interest income (FTE basis) 32,756 23,868 20,545
Interest expense 17,197 11,645 9,784
Net interest income (FTE basis) 15,559 12,223 10,761
Provision for loan losses 702 865 395
Net interest income after provision
for loan losses (FTE Basis) 14,857 11,358 10,366
Noninterest income 2,704 2,038 1,890
Noninterest expense 10,515 7,265 6,185
Income before income taxes
(FTE basis) 7,046 6,131 6,071
Income taxes 2,117 1,842 1,862
FTE adjustment 576 433 366
Income taxes (FTE basis) 2,693 2,275 2,228
Net income $4,353 3,856 3,843
Average total earning assets $418,437 297,614 261,183
Net interest margin 3.72% 4.11 4.12
The 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 $3,336,000 or 27.3% to $15,559,000 for 1998
compared to $12,223,000 for 1997, and followed a $1,462,000 or
13.6% increase for 1997 compared to 1996. Measured as a
percentage of average earning assets, the net interest margin
(expressed on a fully taxable equivalent basis) decreased from
4.12% for 1996 to <PAGE> 4.11% for 1997 and to 3.72% for 1998. The
decline in net interest margin is the result of competitive
pressures on both loan and deposit rates.
The provision for loan losses decreased $163,000 or 18.8% to
$702,000 for 1998 compared to $865,000 for 1997 and followed a
$470,000 or 119.0% increase for 1997 compared to 1996. The
allowance for loan losses totaled $4,413,000 or 1.53% of loans
outstanding at December 31, 1998 compared to $3,914,000 or 1.40%
of loans outstanding at December 31, 1997 and $2,307,000 or 1.33%
of loans outstanding at December 31, 1996. The allowance for
loan losses expressed as a percentage of nonperforming loans was
211.26% at December 31, 1996; 350.40% at December 31, 1997; and
544.81% at December 31, 1998.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
The Company's net income increased by $497,000 or 12.9% to
$4,353,000 for the year ended December 31, 1998 compared to
$3,856,000 for 1997. Net interest income on a fully taxable
equivalent basis increased to $15,559,000 or 3.72% of average
earning assets for 1998 compared to $12,223,000 or 4.11% for
1997. The provision for loan losses for 1998 was $702,000
compared to $865,000 for 1997. Net loans charged off for 1998
were $204,000 compared to $573,000 for 1997.
Noninterest income and noninterest expense for the years
ended December 31, 1998 and 1997 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
YEAR ENDED
DECEMBER 31, INCREASE(DECREASE)
1998 1997 AMOUNT %
NONINTEREST INCOME
Service charges on deposit accounts $1,079 765 314 41.1%
Trust department income 498 291 207 71.1
Mortgage loan servicing fees 421 323 98 30.3
Gain on sales of mortgage loans 316 142 174 122.5
Gain (loss) on sales and calls of
debt securities 6 (7) 13 --
Credit card fees 112 290 (178) (61.4)
Other 272 234 38 16.2
_______ ______ _____
$ 2,704 2,038 666 32.7%
NONINTEREST EXPENSE
Salaries and employee benefits $5,376 3,787 1,589 42.0%
Occupancy expense, net 532 359 173 48.2
Furniture and equipment expense 910 572 338 169.2
FDIC insurance assessment 69 35 34 97.1
Advertising and promotion 364 359 5 1.4
Postage, printing, and supplies 568 371 197 53.1
Legal, examination, and professional
fees 307 342 (35) 89.8
Credit card expenses 74 245 (171) (69.8)
Credit investigation and loan
collection 185 191 (6) 3.1
Amortization of intangible assets 794 179 615 343.6
Other 1,336 825 511 61.9
$10,515 7,265 3,250 44.7%
<PAGE>
Noninterest income increased $666,000 or 32.7% to $2,704,000
for 1998 compared to $2,038,000 for 1997. The inclusion of
Union's results accounted for approximately $428,000 or 64.3% of
the increase, primarily in the areas of service charges on
deposit accounts and other noninterest income. The increase in
trust department income reflected a large estate distribution fee
as well as fees on other partial distributions and other closed
trust accounts at ENB. Mortgage loan servicing fees increased
$98,000 and reflected the fact that average loans serviced during
1998 increased to approximately $95,300,000 compared to
$79,700,000 for 1997. Gains on sales of mortgage loans increased
$174,000. Total loans originated and sold to the secondary
market (including refinances of existing loans previously sold)
during 1998 increased to approximately $65,540,000 compared to
$24,150,000 for 1997. Credit card fees decreased $178,000 due to
a change during the fourth quarter of 1997 in ENB's service
provider for merchant credit card processing, which resulted in
the elimination of both gross merchant income and the related
expense for processing.
Noninterest expense increased $3,250,000 or 44.7% to
$10,515,000 for 1998 compared to $7,265,000 for 1997. The
inclusion of Union's results accounted for approximately
$2,640,000 or 81.2% of the increase spread among the following
categories: salaries and employee benefits - $1,144,000;
occupancy expense - $119,000; furniture and equipment expense -
$253,000; postage, printing and supplies - $164,000; legal,
examination, and professional fees - $48,000; amortization of
intangible assets - $519,000; and all other categories -
$393,000. The remaining $610,000 increase in noninterest expense
related to ENB and Bancshares primarily reflected increases in
the following categories: salaries and employee benefits -
$445,000; occupancy expense - $54,000; furniture and equipment
expense - $85,000; and amortization of intangibles - $96,000.
All other categories of expense decreased $70,000. The increase
in salaries and benefits resulted from ENB's establishment of an
executive incentive program and the adjustment of management
salaries to market levels. The increase in occupancy expense
reflected increased depreciation expense and taxes on ENB's East
facility, while the increase in furniture and equipment expense
reflected depreciation on a new core processing system at ENB.
Amortization of intangible assets increased $93,000 which
represents the Company's amortization of consulting/noncompete
agreements associated with the acquisition of Union.
YEARS ENDED DECEMBER 31, 1997 AND 1996
The Company's net income increased by $13,000 or 0.3% to
$3,856,000 for the year ended December 31, 1997 compared to
$3,843,000 for 1996. Net interest income on a fully taxable
equivalent basis increased to $12,223,000 or 4.11% of average
earning assets for 1997 compared to $10,761,000 or 4.12% for
1996. The provision for loan losses for 1997 was $865,000
compared to $395,000 for 1996. Net loans charged off for 1997
were $573,000 compared to $267,000 for 1996.
Noninterest income and noninterest expense for the years
ended December 31, 1997 and 1996 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
YEAR ENDED
DECEMBER 31, INCREASE(DECREASE)
1997 1996 AMOUNT %
NONINTEREST INCOME
Service charges on deposit accounts $ 765 701 64 9.1%
Trust department income 291 286 5 1.8
Mortgage loan servicing fees 323 297 26 8.8
Gain on sales of mortgage loans 142 113 29 25.7
Loss on calls of debt securities (7) -- (7) --
Credit card fees 290 345 (55) (15.9)
Other 234 148 86 58.1
_______ ___ ___
$ 2,038 1,890 148 7.8%
<PAGE>
YEAR ENDED
DECEMBER 31, INCREASE(DECREASE)
1998 1997 AMOUNT %
NONINTEREST EXPENSE
Salaries and employee benefits $ 3,787 3,368 419 12.4 %
Occupancy expense, net 359 295 64 21.7
Furniture and equipment expense 572 442 130 29.4
FDIC insurance assessment 35 2 33 1,650.0
Advertising and promotion 359 348 11 3.2
Postage, printing, and supplies 371 349 22 6.3
Legal, examination, and professional
fees 342 217 125 57.6
Credit card expenses 245 299 (54) 81.9
Credit investigation and loan
collection 191 116 75 64.7
Amortization of intangible assets 179 43 136 316.3
Other 825 706 119 16.9
$ 7,265 6,185 1,080 17.5 %
Noninterest income increased $148,000 or 7.8% to $2,038,000
for 1997 compared to $1,890,000 for 1996. The acquisition of
Union accounted for approximately $128,000 of the increase,
primarily in the areas of service charges on deposit accounts and
other noninterest income. Mortgage loan servicing fees increased
$26,000 and reflected the fact that average loans serviced during
1997 increased to approximately $79,700,000 compared to
$70,900,000 for 1996. Gains on sales of mortgage loans increased
$29,000. Total loans originated and sold to the secondary market
(including refinances of existing loans previously sold) during
1997 increased to approximately $24,150,000 compared to
$21,435,000 for 1996. Credit card fees decreased $55,000 due to
a change during the fourth quarter in ENB's service provider for
merchant credit card processing, which resulted in the
elimination of both gross merchant income and the related expense
for processing.
Noninterest expense increased $1,080,000 or 17.5% to
$7,265,000 for 1997 compared to $6,185,000 for 1996. The
acquisition of Union accounted for approximately $591,000 of the
increase spread among the following categories: salaries and
employee benefits - $215,000; occupancy expense - $31,000;
furniture and equipment expense - $61,000; legal, examination,
and professional fees - $41,000; amortization of intangible
assets - $136,000; and all other categories - $107,000. The
remaining $489,000 increase in noninterest expense related to ENB
and Bancshares primarily reflected increases in the following
categories: salaries and employee benefits - $204,000; occupancy
expense - $33,000; furniture and equipment expense - $69,000;
legal, examination, and professional fees - $84,000; credit
investigation loan and collection - $75,000; and all other
categories - $24,000. The $204,000 increase in salaries and
benefits reflects $125,000 of executive bonuses approved by the
Board of Directors. The increase in occupancy expense reflected
depreciation and other costs associated with ENB's new East
Branch, while the increase in furniture and equipment expense
reflected increased maintenance agreement costs, increased
depreciation and the write-off of remaining items related to the
old East Branch. The increase in legal, examination, and
professional fees primarily reflected consulting fees for a
compensation study and legal and accounting costs associated with
unsuccessful bids to purchase additional facilities being sold by
a competitor. The increase in credit investigation and loan
collection expense reflected increased consumer and commercial
loan collection expenses plus approximately $32,000 in expense
related to other real estate owned.
NET INTEREST INCOME
The inclusion of Union's results accounted for the entire
increase of $3,336,000 in fully taxable equivalent net interest
income for 1998 compared to 1997. Union's fully taxable
equivalent net interest income increased $4,048,000 which was
partially offset by the increase in the Company's interest
expense on acquisition debt. The Company's net interest margin
continued to decline from previous levels due to competitive
pressures in the local markets.
<PAGE>
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 each of the years in the three-year period
ended December 31, 1998.
(Dollars expressed in thousands)
YEAR ENDED DECEMBER 31,
1998
INTEREST RATE
AVERAGE INCOME/ EARNED/
BALANCE EXPENSE/1/ PAID/1
ASSETS
Loans: /2/
Commercial 94,441 8,326 8.82%
Real estate 140,397 11,977 8.53
Consumer 44,841 3,970 8.85
Money market /3/ -- -- --
Investment in debt and
equity securities: /4/
U.S. Treasury and U.S.
Government agencies 82,365 4,967 6.03
State and municipal 27,480 1,971 7.17
Other 1,506 99 6.57
Federal funds sold 27,166 1,433 5.28
Interest bearing
deposits in other
financial institutions 241 13 5.81
Total interest
earning assets 418,437 32,756 7.83
All other assets 41,048
Allowance for loan
losses (4,178)
Total assets $455,307
YEAR ENDED DECEMBER 31,
1997
INTEREST RATE
AVERAGE INCOME/ EARNED/
BALANCE EXPENSE/1/ PAID/1
ASSETS
Loans: /2/
Commercial $ 51,337 4,616 8.99%
Real estate 111,024 9,722 8.76
Consumer 36,947 3,351 9.07
Money market /3/ 867 47 5.42
Investment in debt and
equity securities: /4/
U.S. Treasury and U.S.
Government agencies 67,561 4,046 5.99
State and municipal 19,097 1,477 7.73
Other 1,601 105 6.56
Federal funds sold 9,085 501 5.51
Interest bearing
deposits in other
financial institutions 95 3 3.16
Total interest
earning assets 297,614 23,868 8.02
All other assets 21,992
Allowance for loan
losses (2,596)
Total assets $317,010
YEAR ENDED DECEMBER 31,
1996
INTEREST RATE
AVERAGE INCOME/ EARNED/
BALANCE EXPENSE/1/ PAID/1
ASSETS
Loans: /2/
Commercial $ 39,380 3,553 9.02%
Real estate 90,685 8,024 8.85
Consumer 32,959 3,064 9.30
Money market /3/ 2,246 123 5.48
Investment in debt and
equity securities: /4/
U.S. Treasury and U.S.
Government agencies 58,960 3,395 5.76
State and municipal 15,740 1,222 7.76
Other 3,186 205 6.43
Federal funds sold 17,996 958 5.32
Interest bearing
deposits in other
financial institutions 31 1 3.23
Total interest
earning assets 261,183 20,545 7.87
All other assets 16,680
Allowance for loan
losses (2,278)
Total assets $275,585
Continued on next page
<PAGE>
YEAR ENDED DECEMBER 31,
1998
INTEREST RATE
AVERAGE INCOME/ EARNED/
BALANCE EXPENSE/1/ PAID/1
LIABILITIES AND
STOCKHOLDERS' EQUITY
NOW accounts $ 54,557 1,357 2.49%
Savings 35,109 1,243 3.54
Money market 39,131 1,527 3.90
Time deposits of
$100,000 and over 27,366 1,496 5.47
Other time deposits 159,408 8,890 5.58
Total time deposits 315,571 14,513 4.60
Securities sold under
agreements to
repurchase 25,754 1,433 5.56
Interest-bearing demand
notes to U.S. Treasury 837 47 5.62
Federal Home Loan Bank
advances and other
short-term borrowed
funds 5,662 364 6.11
Other borrowed money 12,209 858 7.03
Total interest-
bearing liabilities 360,033 17,197 4.78
Demand deposits 46,186
Other liabilities 4,353
Total liabilities 410,572
Stockholders' equity 44,735
Total liabilities and
stockholders' equity $455,307
Net interest income $15,559
Net interest margin 3.72%
YEAR ENDED DECEMBER 31,
1997
INTEREST RATE
AVERAGE INCOME/ EARNED/
BALANCE EXPENSE/1/ PAID/1
LIABILITIES AND
STOCKHOLDERS' EQUITY
NOW accounts $ 32,165 846 2.63%
Savings 24,563 953 3.88
Money market 33,350 1,376 4.13
Time deposits of
$100,000 and over 15,961 864 5.41
Other time deposits 110,067 6,312 5.73
Total time deposits 216,106 10,351 4.79
Securities sold under
agreements to
repurchase 18,152 986 5.43
Interest-bearing demand
notes to U.S. Treasury 1,087 53 4.88
Federal Home Loan Bank
advances and other
short-term borrowed
funds 563 38 6.75
Other borrowed money 2,981 217 7.28
Total interest-
bearing liabilities 238,889 11,645 4.87
Demand deposits 33,664
Other liabilities 2,334
Total liabilities 274,887
Stockholders' equity 42,123
Total liabilities and
stockholders' equity $317,010
Net interest income $12,223
Net interest margin 4.11%
YEAR ENDED DECEMBER 31,
1996
INTEREST RATE
AVERAGE INCOME/ EARNED/
BALANCE EXPENSE/1/ PAID/1
LIABILITIES AND
STOCKHOLDERS' EQUITY
NOW accounts $ 27,975 748 2.67%
Savings 22,191 876 3.95
Money market 31,615 1,323 4.18
Time deposits of
$100,000 and over 9,914 541 5.46
Other time deposits 94,363 5,489 5.82
Total time deposits 186,058 8,977 4.82
Securities sold under
agreements to
repurchase 16,512 767 4.65
Interest-bearing demand
notes to U.S. Treasury 760 40 5.26
Federal Home Loan Bank
advances and other
short-term borrowed
funds -- -- --
Other borrowed money -- -- --
Total interest-
bearing liabilities 203,330 9,784 4.81
Demand deposits 31,072
Other liabilities 1,826
Total liabilities 236,228
Stockholders' equity 39,357
Total liabilities and
stockholders' equity $275,585
Net interest income $10,761
Net interest margin 4.12%
/1/ Interest income and yields are presented on a fully taxable
equivalent basis using the Federal statutory income tax rate
of 34%, net of nondeductible interest expense. Such
adjustments totaled $576,000, $433,000, and $366,000 for the
years ended December 31, 1998, 1997, and 1996, respectively.
/2/ Nonaccruing loans are included in the average amounts
outstanding.
/3/ Includes banker's acceptances and commercial paper.
/4/ Average balances based on amortized cost.
<PAGE>
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)
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
COMPARED TO COMPARED TO
DECEMBER 31, 1997 DECEMBER 31, 1996
TOTAL CHANGE DUE TO TOTAL CHANGE DUE TO
CHANGE VOLUME RATE CHANGE VOLUME RATE
INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS:
Loans: /1/
Commercial 3,710 3,799 (89) $1,063 1,075 (12)
Real estate /2/ 2,255 2,512 (257) 1,698 1,782 (84)
Consumer 619 701 (82) 287 364 (77)
Money market (47) (47) -- (76) (75) (1)
Investment in debt and
equity securities:
U.S. Treasury and
U.S. Government
agencies 921 893 28 651 511 140
State and
municipal/2/ 494 608 (114) 255 260 (5)
Other (6) (6) -- (100) (104) 4
Federal funds
sold 932 955 (23) (457) (490) 33
Interest bearing deposits
in other financial
institutions 10 7 3 2 2 --
Total interest
income 8,888 9,422 (534) 3,323 3,325 (2)
Continued on next page
<PAGE>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
COMPARED TO COMPARED TO
DECEMBER 31, 1997 DECEMBER 31, 1996
TOTAL CHANGE DUE TO TOTAL CHANGE DUE TO
CHANGE VOLUME RATE CHANGE VOLUME RATE
INTEREST EXPENSE:
NOW accounts 511 559 (48) 98 110 (12)
Savings 290 379 (89) 77 92 (15)
Money market 151 229 (78) 53 72 (19)
Time deposits of
$100,000 and
over 632 623 9 323 327 (4)
Other time
deposits 2,578 2,757 (179) 823 902 (79)
Securities sold
under agreements
to repurchase 447 422 25 219 81 138
Interest-bearing
demand notes to
U.S. Treasury (6) (13) 7 13 16 (3)
Federal Home Loan Bank
advances and other
short-term borrowed
funds 308 312 (4) 38 38 --
Other borrowed
money 641 649 (8) 217 217 --
Total interest
expense 5,552 5,917 (365) 1,861 1,855 6
NET INTEREST
INCOME ON A
FULLY TAXABLE
EQUIVALENT
BASIS $3,336 3,505 (169) $1,462 1,470 (8)
__________
/1/ Nonaccruing loans are included in the average amounts outstanding.
/2/ Interest income and yields are presented on a fully taxable equivalent
basis using the federal statutory income tax rate of 34%, net of
nondeductible interest expense. Such adjustments totaled $576,000,
$433,000, and $366,000 for the years ended December 31, 1998, 1997, and
1996, respectively.
LENDING AND CREDIT MANAGEMENT
Interest earned on the loan portfolio is a primary source of
interest income for the Company. Net loans represented 63.0% of
total assets as of December 31, 1998. Total loans increased
steadily from December 31, 1994 through December 31, 1998 due to
a stable local economy and reasonable interest rates. Growth in
volume of installment loans to individuals historically has
depended upon the purchase of non-recourse contracts from
automobile dealers.
Lending activities are conducted pursuant to written loan
policies approved by the Banks' Board of Directors. Larger
credits are reviewed by the Banks' Discount Committees. These
committees are comprised of members of senior management.
<PAGE>
The following table shows the composition of the loan
portfolio by major category and each category as a percentage of
the total portfolio as of the dates indicated.
<TABLE>
<PAGE>
(DOLLARS EXPRESSED IN THOUSANDS)
<CAPTION>
DECEMBER 31,
1998 1997 1996 1995 1994
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural 98,298 34.1% $ 90,543 32.5% $ 40,208 23.2% $ 38,355 24.9% $ 32,912 22.8%
Real estate --
construction 9,414 6.7 33,947 12.2 22,737 13.1 11,740 7.6 11,136 7.8
Real estate --
mortgage 123,534 42.8 110,012 39.5 76,071 43.9 73,029 47.3 68,940 47.8
Installment loans
to individuals 46,972 16.3 44,198 15.8 34,293 19.8 31,215 20.2 31,174 21.6
Total loans $288,218 100.0% $278,700 100.0% $173,309 100.0% $154,339 100.0% $144,162 100.0%
Loans at December 31, 1998 mature as follows:
</TABLE>
(DOLLARS EXPRESSED IN THOUSANDS)
OVER ONE YEAR
THROUGH FIVE
YEARS
FLOAT OVER FIVE YEARS
ONE YEAR FIXED ING FIXED FLOATING
OR LESS RATE RATE RATE RATE TOTAL
Commercial,
financial,
and
agricultural $ 64,164 27,885 1,987 4,262 -- 98,298
Real estate
- construction 19,414 -- -- -- -- 19,414
Real estate
- mortgage 41,915 51,950 14,442 15,227 -- 123,534
Installment
loans to
individuals 12,331 34,344 -- 297 -- 46,972
Total loans $137,824 114,179 16,429 19,786 -- 288,218
The 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 the
Company has a non-recourse purchase commitment from the secondary
market at a predetermined price. At December 31, 1998 the
Company was servicing approximately $107,722,000 of loans sold to
the secondary market.
Mortgage loans retained in the 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 was increased in 1995 due primarily to loan
growth, and in 1996 and 1997 due to a combination of loan growth
and increases in net loans charged off. The decrease in the
provision in 1998 was primarily due to the decrease in net loans
charged off.
<PAGE>
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. 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 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 estimated losses inherent
in the loan portfolio.
<PAGE>
The following table summarizes loan loss experience for the
periods indicated:
(DOLLARS EXPRESSED IN THOUSANDS)
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
Analysis of allowance for loan losses:
Balance beginning of period $ 3,914 2,307 2,179 1,943 1,870
Allowance for loan losses of Union
State Bank and Trust of Clinton
at date of acquisition -- 1,315 -- -- --
Charge-offs:
Commercial, financial, and
agricultural 90 120 37 7 --
Real estate -- construction -- 230 -- -- 72
Real estate -- mortgage 32 17 -- -- --
Installment loans to individuals 325 373 355 153 259
447 740 392 160 331
Recoveries:
Commercial, financial, and
agricultural 111 11 5 23 128
Real estate -- construction -- -- -- -- --
Real estate -- mortgage -- 14 -- -- --
Installment loans to individuals 133 142 120 108 137
244 167 125 131 265
Net charge-offs 203 573 267 29 66
Provision for loan losses 702 865 395 265 139
Balance at end of period $ 4,413 3,914 2,307 2,179 1,943
Loans outstanding:
Average $279,679 200,175 165,270 147,993 136,941
End of period 288,218 278,700 173,309 154,339 144,162
Ratio of allowance for loan
losses to loans outstanding:
Average 1.58% 1.96 1.40 1.47 1.42
End of period 1.53 1.40 1.33 1.41 1.35
Ratio of net charge-offs
to average loans outstanding 0.07 0.29 0.16 0.02 0.05
<PAGE>
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
Allocation of allowance for
loan losses at end of period:
Commercial, financial, and
agricultural $ 935 877 827 940 500
Real estate -- construction 496 554 253 84 85
Real estate -- mortgage 1,265 1,063 401 354 337
Installment loans to
individuals 413 419 423 215 272
Unallocated 1,304 1,001 403 586 749
Total $4,413 3,914 2,307 2,179 1,943
Percent of categories to total loans:
Commercial, financial,
and agricultural 34.1% 32.5 23.2 24.9 22.8
Real estate -- construction 6.7 12.2 13.1 7.6 7.8
Real estate -- mortgage 42.9 39.5 43.9 47.3 47.8
Installment loans to individuals 16.3 15.8 19.8 20.2 21.6
Total 100.0% 100.0 100.0 100.0 100.0
The following table summarizes the Company's nonperforming
assets for the periods indicated:
(DOLLARS EXPRESSED IN THOUSANDS)
DECEMBER 31,
1998 1997 1996 1995 1994
Nonaccrual loans:
Commercial, financial,
and agricultural $102 111 42 75 49
Real estate -- construction 274 385 327 354 385
Real estate -- mortgage 272 274 268 272 140
Installment loans to individuals 59 57 61 20 6
Total nonaccrual loans 707 827 698 721 580
<PAGE>
December 31,
1998 1997 1996 1995 1994
Loans contractually
past-due 90 days or
more and still accruing:
Commercial, financial,
and agricultural -- 48 59 -- 75
Real estate
-- construction -- -- 122 -- --
Real estate
-- mortgage -- 112 186 110 43
Installment loans
to individuals 18 30 27 7 8
Total loans
contractually
past-due 90
days or more
andd still
accruing 18 190 394 117 126
Restructured loans 85 100 -- -- --
Total nonperforming
loans 810 1,117 1,092 838 706
Other real estate 85 295 22 -- 5
Repossessions 93 101 106 70 96
Total nonperforming
assets $ 988 1,513 1,220 908 807
Loans $288,218 278,700 173,309 154,339 144,162
Allowance for loan losses to
loans 1.53% 1.40 1.33 1.41 1.35
Nonperforming loans to
loans 0.28 0.40 0.63 0.54 0.49
Allowance for loan losses to
nonperforming loans 544.81 350.40 211.26 260.02 275.21
Nonperforming assets to
loans and foreclosed
assets 0.34 0.54 0.70 0.59 0.56
It is the Company's policy to discontinue the accrual of
interest income on loans when the full collection of principal or
interest is in doubt, or when the payment of principal or
interest has become contractually 90 days past due unless the
obligation is both well secured and in the process of collection.
Interest on year-end nonaccrual loans, which would have been
recorded under the original terms of the loans, was approximately
$53,000, $59,000 and $68,000 for the year ended December 31,
1998, 1997, and 1996, respectively. Approximately $8,000,
$16,000 and $22,000 was actually recorded as interest income on
such loans for the year ended December 31, 1998, 1997, and 1996,
respectively.
On January 1, 1995 the Company adopted the provisions of
Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan" (SFAS 114), as amended by
Statement of Financial Accounting Standards No. 118, "Accounting
by Creditors for Impairment of a Loan - Income Recognition and
Disclosures" (SFAS 118). A loan is considered impaired when it
is probable a creditor will be unable to collect all amounts due
- - both principal and interest - according to the contractual
terms of the loan agreement. In addition to nonaccrual loans at
December 31, 1998 included in the table above, which were
considered "impaired", management has identified additional loans
totaling approximately $5,942,000 which are not included in the
nonaccrual table above but are considered by management to be
"impaired". Management believes that the loans are well secured
and all of them performed according to their contractual terms
during 1998. The $5,942,000 of loans identified by management as
being "impaired" reflected various commercial, commercial real
estate, real estate, and consumer loans ranging in size from
approximately $5,000 to approximately $3,100,00.
Impairment reserves for the Company's "impaired" loans were
determined based on the fair value of the collateral securing
those loans, or in the case of loans guaranteed by the Small
Business Administration, the amount of <PAGE> that guarantee. At
December 31, 1998 $554,000 of the Company's allowance for loan
losses related to "impaired" loans.
As of December 31, 1998 and 1997 approximately $2,457,000
and $2,928,000, respectively, of loans not included in the
nonaccrual table above or identified by management as being
"impaired" were classified by management as having potential
credit problems which raised doubts as to the ability of the
borrower to comply with present loan repayment terms. In
addition to the "classified list", the 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 in the portfolio. Loans may be
added to this list for reasons which 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 a loan is placed on the 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 in its entirety is available
to absorb loan losses regardless of the category of loan to be
charged off. However, as a part of management's evaluation of
the adequacy of the allowance for loan losses, an allocation of
the allowance by loan category is made. At December 31, 1998,
management allocated $3,109,000 of the $4,413,000 total allowance
for loan losses to specific loan categories and $1,304,000 was
unallocated. Considering the size of several of the Company's
lending relationships and the loan portfolio in total, management
believes that the December 31, 1998 allowance for loan losses is
adequate.
The Company does not lend funds for the type of transactions
defined as "highly leveraged" by bank regulatory authorities or
for foreign loans. Additionally, the Company does not have any
concentrations of loans exceeding 10% of total loans which are
not otherwise disclosed in the loan portfolio composition table.
The 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.
The following table sets forth the amount of the Company's
outstanding loan and similar commitments, by type, as of the end
of each of the last two fiscal years:
DECEMBER 31,
TYPE OF COMMITMENT 1998 1997
Commercial Loans $27,048,083 $21,587,231
Real Estate Loans 17,091,618 12,497,290
MasterCard/Visa Credit Lines 9,738,636 6,178,600
Other 10,279,242 7,287,373
Total Commitments /1/ $64,157,579 $47,550,494
/1/ Of the commitments shown as outstanding at December 31,
1998, management considers approximately $58,656,000 to
be "firm," and estimates that approximately $39,181,000
will be exercised in 1999.
<PAGE>
Of the commitments shown in the foregoing table
approximately $29,756,000 represents fixed-rate loan commitments.
The remaining commitments provide that the interest rates to be
charged on amounts borrowed thereunder will be determined by
market conditions at the time of borrowing.
INVESTMENT PORTFOLIO
The Company classifies its debt and equity securities into
one of the following two categories:
Held-to-Maturity - includes investments in debt securities
which the Company has the positive intent and ability to hold
until maturity.
Available-for-Sale - includes investments in debt and equity
securities not classified as held to maturity or trading (i.e.,
investments which the Company has no present plans to sell in the
near-term but may be sold in the future under different
circumstances).
Debt securities classified as held-to-maturity are carried
at amortized cost, while debt and equity securities classified as
trading or available-for-sale are carried at estimated market
value. Unrealized holding gains and losses from
available-for-sale securities are excluded from earnings and
reported as a net amount as a separate component of stockholders'
equity until realized, net of applicable taxes, if any.
The Company does not engage in trading activities and
accordingly does not have any debt or equity securities
classified as trading securities. Historically the Company's
practice had been to purchase and hold debt instruments until
maturity unless special circumstances exist. However, since the
investment portfolio's major function is to provide liquidity and
to balance the Company's interest rate sensitivity position,
certain debt securities along with stock of the Federal Home Loan
Bank and the Federal Reserve Bank are classified as
available-for-sale.
At December 31, 1998 debt securities classified as
held-to-maturity represented 6.7% of total consolidated assets
and debt and equity securities classified as available-for-sale
represented 15.3% of total consolidated assets. Future levels of
held-to-maturity and available-for-sale investment securities can
be expected to vary depending upon liquidity and interest
sensitivity needs as well as other factors.
<PAGE>
<TABLE>
<PAGE>
The following table presents the composition of the investment portfolio by major category.
(DOLLARS EXPRESSED IN THOUSANDS)
<CAPTION>
DECEMBER 31,
1998 1997 1996
AVAILABLE- HELD-TO- AVAILABLE- HELD-TO- AVAILABLE- HELD-TO-
FOR-SALE MATURITY TOTAL FOR-SALE MATURITY TOTAL FOR-SALE MATURITY TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $13,990 2,269 16,259 25,892 2,831 28,723 19,025 1,030 20,055
U.S. Government agencies
and corporations:
Mortgage-backed 6,771 1,311 8,082 7,261 1,945 9,206 7,140 1,064 8,204
Other 35,982 11,300 47,282 34,431 14,991 49,422 19,462 13,631 33,093
States and political
subdivisions 12,153 15,869 28,022 9,507 17,767 27,274 4,533 12,289 16,822
Other debt securities -- -- -- -- 200 200 -- 1,585 1,585
Total debt securities 68,896 30,749 99,645 77,091 37,734 114,825 50,160 29,599 79,759
Federal Home Loan Bank
stock 1,351 -- 1,351 1,272 -- 1,272 804 -- 804
Federal Reserve Bank
stock 60 -- 60 60 -- 60 60 -- 60
Federal Agricultural
Mortgage Corporation 10 -- 10 -- -- -- -- -- --
Total investments $70,317 30,749 101,066 78,423 37,734 116,157 51,024 29,599 80,623
As of December 31, 1998, the maturity of debt securities in the investment portfolio was as follows:
</TABLE>
(DOLLARS EXPRESSED IN THOUSANDS)
OVER ONE OVER FIVE OVER WEIGHTED
ONE YEAR THROUGH THROUGH TEN AVERAGE
OR LESS FIVE YEARS TEN YEARS YEARS YIELD/1/
AVAILABLE-FOR-SALE
U.S. Treasury securities $10,897 3,093 -- -- 5.76%
U.S. Government agencies
and corporations:
Mortgage-backed /2/ 321 915 1,743 3,792 6.14
Other 22,325 13,657 -- -- 5.94
Total U.S. Government
agencies 22,646 14,572 1,743 3,792 5.97
States and political
subdivisions /3/ 2,296 6,686 3,171 -- 6.81
Total available-for-sale
debt securities $35,839 24,351 4,914 3,792 6.07%
Weighted average yield /1/ 5.95% 6.11% 6.63% 6.35%
<PAGE>
OVER ONE OVER FIVE OVER WEIGHTED
ONE YEAR THROUGH THROUGH TEN AVERAGE
OR LESS FIVE YEARS TEN YEARS YEARS YIELD /1/
HELD-TO-MATURITY
U.S. Treasury securities $ 2,269 -- -- -- 4.68%
U.S. Government agencies
and corporations:
Mortgage-backed /2/ 9 988 16 298 6.41
Other 7,260 4,040 -- -- 6.27
Total U.S. Government
agencies 7,269 5,028 16 298 6.29
States and political
subdivisions /3/ 2,275 10,943 2,253 398 7.33
Total held-to-maturity
debt securities $11,813 15,971 2,269 696 6.71%
Weighted average
yield /1/ 6.26% 6.94% 7.61% 6.76%
/1/ Weighted average yield is based on amortized cost for both
available-for-sale and held-to-maturity securities.
/2/ Mortgage-backed securities issued by U.S. Government agencies and
corporations have been included using historic repayment speeds.
Repayment speeds were determined from actual portfolio experience during
the twelve months ended December 31, 9998 calculated separately for each
mortgage-backed security. These repayment speeds are not necessarily
indicative of future repayment speeds and are subject to change based on
changing mortgage interest rates.
/3/ Rates on obligations of states and political subdivisions have been
adjusted to fully taxable equivalent rates using the statutory Federal
income tax rate of 34%.
At December 31, 1998 $2,738,000 of debt securities
classified as available-for-sale in the table above had variable
rate provisions with adjustment periods ranging from one to
twelve months.
INTEREST SENSITIVITY AND LIQUIDITY
The concept of interest sensitivity attempts to gauge
exposure of the Company's net interest income to adverse changes
in market-driven interest rates by measuring the amount of
interest sensitive assets and interest sensitive liabilities
maturing or subject to repricing within a specified time period.
Liquidity represents the ability of the Company to meet the
day-to-day withdrawal demands of its deposit customers balanced
against the fact that those deposits are invested in assets with
varying maturities. The Company must also be prepared to fulfill
the needs of credit customers for loans with various types of
maturities and other financing arrangements. The Company
monitors its interest sensitivity and liquidity through the use
of static gap reports which measure the difference between
assets and liabilities maturing or repricing within specified
time periods.
At December 31, 1998 ENB and USB each independently
monitored their static gap reports with their goals being to
limit each bank's potential change in net interest income due to
changes in interest rates to acceptable limits. Interest rate
changes used by the individual banks ranged from 1.50% to 2.00%
and the resulting net interest income changes ranged from
approximately 3.00% to 3.50%.
<PAGE>
The following table presents the Company's consolidated
(including Parent Company debt) static gap position at December
31, 1998 for the next twelve months and the potential impact on
net interest income for 1998 of an immediate 2.00% increase in
interest rates.
(DOLLARS EXPRESSED IN THOUSANDS)
CUMULATIVE
ONE THROUGH
TWELVE
MONTH
PERIOD
Assets maturing or repricing within one year $ 207,633
Liabilities maturing or repricing within one year 232,326
GAP (24,693)
Ratio of assets maturing or repricing to
Liabilities maturing or repricing 89%
Impact on net interest income of an immediate
2.00% increase in interest rates $ (494)
Net interest income for 1998 14,983
Percentage change in 1998 net interest
income due to an immediate 2.00% increase in
interest rates (3.30)%
In addition to managing interest sensitivity and liquidity
through the use of gap reports, ENB has provided for emergency
liquidity situations with informal agreements with correspondent
banks which permit it to borrow up to $30,000,000 in federal
funds on an unsecured basis and formal agreements to sell and
repurchase securities on which it may draw up to $27,000,000.
Both ENB and USB are members of the Federal Home Loan Bank which
may be used to provide a funding source for fixed rate real
estate loans and/or additional liquidity.
At December 31, 1998 and 1997, the Company had certificates
and other time deposits in denominations of $100,000 or more
which mature as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
DECEMBER 31,
1998 1997
Three months or less 7,668 $ 8,076
Over three months through
six months 7,244 8,572
Over six months through
twelve months 7,015 5,897
Over twelve months 5,155 6,958
$ 27,082 $ 29,503
<PAGE>
Securities sold under agreements to repurchase generally
mature the next business day; however, certain agreements with
local political subdivisions and select businesses are fixed rate
agreements with original maturities generally ranging from 30 to
120 days. Information relating to securities sold under
agreements to repurchase is as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
AT END OF PERIOD FOR THE PERIOD ENDING
WEIGHTED WEIGHTED
AVERAGE MAXIMUM AVERAGE
INTEREST MONTH-END AVERAGE INTEREST
BALANCE RATE BALANCE BALANCE RATE
December 31, 1998 $16,991 5.10% $36,923 $25,754 5.56%
December 31, 1997 21,494 6.39 22,409 18,152 5.43
December 31, 1996 12,303 4.51 25,167 16,512 4.65
CAPITAL
Risk-based capital guidelines for financial institutions
were adopted by regulatory authorities effective January 1, 1991.
These guidelines are designed to relate regulatory capital
requirements to the risk profiles of the specific institutions
and to provide more uniform requirements among the various
regulators. The Company is required to maintain a minimum
risk-based capital to risk-weighted assets ratio of 8.00%, with
at least 4.00% being "Tier 1" capital. In addition, a minimum
leverage ratio, Tier 1 capital to adjusted total assets, of 3.00%
must be maintained. However, for all but the most highly rated
financial institutions, a leverage ratio of 3.00% plus an
additional cushion of 100 to 200 basis points is expected.
Detail concerning the Company's capital ratios at December
31, 1998 is included in note 3 of the Company's consolidated
financial statements included elsewhere in this report.
EFFECTS OF INFLATION
The effects of inflation on financial institutions are
different from the effects on other commercial enterprises since
financial institutions make few significant capital or inventory
expenditures which are directly affected by changing prices.
Because bank assets and liabilities are virtually all monetary in
nature, inflation does not affect a financial institution as much
as do changes in interest rates. The general level of inflation
does underlie the general level of most interest rates, but
interest rates do not increase at the rate of inflation as do
prices of goods and services. Rather, interest rates react more
to changes in the expected rate of inflation and to changes in
monetary and fiscal policy.
Inflation does have an impact on the growth of total assets
in the banking industry, often resulting in a need to increase
capital at higher than normal rates to maintain an appropriate
capital to asset ratio. In the opinion of management, inflation
did not have a significant effect on the Company's operations for
the three years ended December 31, 1998.
FINANCIAL INSTRUMENT MARKET VALUES
As disclosed in note 15 of the Company's consolidated
financial statements, the fair values of financial instrument
assets and liabilities included in the balance sheet as of
December 31, 1998 reflect fair values of approximately $5,991,000
and $1,479,000, respectively, higher than the amounts recorded on
the consolidated balance sheet. Such increases reflect the
effects of a decreasing rate environment, the effects of which
are partially offset by the effectiveness of the Company's
asset/liability and credit risk management programs.
<PAGE>
YEAR 2000 COMPLIANCE
Bancshares is committed to taking the necessary steps to
enable both new and existing systems, applications and equipment
to effectively process transactions up to and beyond Year 2000.
To that end, Bancshares is well underway with its Year 2000
readiness program, having spent approximately $500,000 to date.
The total cost of the program is currently estimated at $750,000,
comprised of capital improvements of $650,000 and direct expense
of $100,000. The capital improvements will be charged to expense
in the form of depreciation expense or lease expense, generally
over a period of 60 months. Because of such ongoing readiness
efforts, Year 2000 processing issues and risks are not expected
to have a material adverse impact on the ability of Bancshares to
continue its general business operations.
Currently, Bancshares and its subsidiaries have
substantially completed the following Year 2000 program
initiatives:
. Completed a comprehensive analysis of current functions
which might be impacted by Year 2000 issues and documented
the results in a Year 2000 Assessment Report
. Developed and implemented a detailed plan to address Year
2000 issues as identified, particularly as they pertain to
software and hardware applications
. Surveyed outside vendors to determine the degree of
preparedness for the Year 2000 to uncover potential issues
arising from such business counter parties
. Raised organizational awareness not only with top
management, but also at the staff level, and involved
business group leaders in reaching solutions
. Implemented an ongoing purchase/procurement plan which is
responsive to Year 2000 concerns.
The risk of failures of computer applications, systems and
networks due to improper Year 2000 data processing are
substantial, not only for users of information technologies, but
also for any entities and individuals which interact with them.
Moreover, when aggregated, multiple individual malfunctions and
failures relating to Year 2000 issues can potentially cause
broader, systemic disruptions across industries and economies.
The risks arising from Year 2000 issues which face many
companies, including Bancshares, include the potential diminished
ability to respond to the needs and expectations of customers in
a timely manner, the potential for inaccurate processing
information. In recognition of these risks, Bancshares is
focusing on mission critical applications in order that
programming changes and equipment upgrades were well underway by
December 31, 1998. The only major system that had not been
upgraded by December 31, 1998 was ENB's teller system and that
system is anticipated to be replaced and tested by the end of
second quarter 1999.
In addition, Bancshares has begun developing contingency
plans to complement the Year 2000 readiness efforts already in
progress, including backup and offsite processing of certain
information and functions and securing contingency funding
sources. Bancshares anticipated that such contingency plans will
provide an additional level of security to its Year 2000 efforts
already underway.
The foregoing discussion of Year 2000 issues is based on
current estimates of the management of Bancshares as to the
amount of time and costs necessary to remediate and test the
computer systems of Bancshares. Such estimates are based on the
facts and circumstances existing at this time, and were derived
utilizing multiple assumptions of future events, including, but
not limited to, the continued availability of certain resources,
third-party modification plans and implementation success, and
other factors. However, there can be no guarantee that these
estimates will be achieved, and actual costs and results could
differ materially from the costs and results currently
anticipated by Bancshares. Specific factors that might cause
such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer code, the
planning and modification success attained by the business
counter parties of Bancshares, and similar uncertainties.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of the
Company and reports of the Company's independent auditors appear
on the pages indicated.
Page
Independent Auditors' Report. 27
Consolidated Balance Sheets as of December 31,
1998 and 1997. 28
Consolidated Statements of Income for each of
the years ended December 31, 1998, 1997,
and 1996. 29
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for each of the years
ended December 31, 1998, 1997, and 1996. 30
Consolidated Statements of Cash Flows for each of
the years ended December 31, 1998, 1997,
and 1996. 31
Notes to Consolidated Financial Statements. 32
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Exchange National Bancshares, Inc.
Jefferson City, Missouri:
We have audited the accompanying consolidated balance sheets of
Exchange National Bancshares, Inc. and subsidiaries (the Company)
as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Exchange National Bancshares, Inc. and subsidiaries
as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
St. Louis, Missouri
January 29, 1999
/s/ KMPG, LLP
<PAGE>
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
ASSETS 1998 1997
Loans, net of allowance for loan
losses of $4,412,921 and $3,914,383
at December 31, 1998 and 1997,
respectively $283,804,584 274,785,516
Investment in debt and equity securities:
Available-for-sale, at fair value 70,316,733 78,423,285
Held-to-maturity, at cost,
fair value of $31,390,916
and $38,046,500 at December 31,
1998 and 1997, respectively 30,748,943 37,733,903
Total investment in debt and
equity securities 101,065,676 116,157,188
Federal funds sold 26,400,000 17,175,000
Cash and due from banks 19,803,744 17,177,050
Premises and equipment 12,064,252 8,654,712
Accrued interest receivable 3,794,092 4,067,232
Intangible assets 10,763,915 11,508,482
Other assets 1,007,111 1,167,014
$458,703,374 450,692,194
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 54,765,805 50,139,102
NOW 55,548,918 53,766,106
Savings 36,288,729 33,675,913
Money market 39,556,011 37,326,945
Time deposits $100,000 and over 27,082,396 29,502,946
Other time deposits 160,279,927 155,975,783
Total deposits 373,521,786 360,386,795
Securities sold under agreements to
repurchase 16,990,911 21,493,587
Interest-bearing demand notes to
U.S. Treasury 675,941 3,663,581
Other borrowed money 17,150,568 17,603,568
Accrued interest payable 2,166,955 2,410,635
Other liabilities 2,084,031 2,026,426
Total liabilities 412,590,192 407,584,592
Commitments and contingent liabilities
Stockholders' equity:
Common stock $1 par value;
1,500,000 shares authorized,
718,511 shares issued and
outstanding 718,511 718,511
Surplus 1,281,489 1,281,489
Retained earnings 43,730,026 40,986,755
Accumulated other comprehensive income 383,156 120,847
Total stockholders' equity 46,113,182 43,107,602
$458,703,374 450,692,194
<PAGE>
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
Interest income:
Interest and fees on loans $24,241,383 17,707,139 14,728,837
Interest and dividends on debt
and equity securities:
U.S. Treasury securities 1,159,787 1,214,299 957,326
Securities of U.S. government
agencies 3,807,090 2,831,231 2,437,734
Obligations of states and
political subdivisions 1,426,862 1,072,331 890,505
Other securities 99,234 105,273 205,192
Interest on federal funds sold 1,432,582 501,140 957,598
Interest on time deposits with
other banks 13,575 3,307 1,323
32,180,513 23,434,720 20,178,515
Interest expense on:
NOW accounts 1,356,678 846,274 747,952
Savings accounts 1,242,534 952,494 876,239
Money market accounts 1,527,405 1,376,048 1,322,543
Time deposit accounts $100,000
and over 1,496,777 864,126 540,455
Other time deposit accounts 8,890,200 6,311,606 5,489,355
Securities sold under
agreements to repurchase 1,432,526 985,848 767,154
Interest-bearing demand notes
to U.S. Treasury 47,350 52,611 39,856
Other borrowed money 1,203,835 255,698 --
17,197,305 11,644,705 9,783,554
Net interest income 14,983,208 11,790,015 10,394,961
Provision for loan losses 702,500 865,000 395,000
Net interest income after
provision for loan losses 14,280,708 10,925,015 9,999,961
Noninterest income:
Service charges on deposit
accounts 1,079,494 765,186 701,378
Trust department income 498,204 290,853 286,317
Mortgage loan servicing fees 420,591 322,697 297,273
Gain on sales of mortgage loans 316,164 142,491 112,403
Gain (loss) on sales and calls
of debt securities 6,491 (7,041) --
Credit card fees 112,118 290,514 345,339
Other 271,001 233,707 147,476
2,704,063 2,038,407 1,890,186
Noninterest expense:
Salaries and employee
benefits 5,375,712 3,786,773 3,368,169
Occupancy expense, net 531,739 359,261 295,521
Furniture and equipment
expense 910,497 571,800 441,587
FDIC insurance assessment 68,888 34,881 2,000
Advertising and promotion 363,854 358,482 347,550
Credit card expenses 74,287 244,513 299,033
Amortization of intangible
assets 794,029 178,590 42,668
Other 2,396,254 1,730,986 1,389,028
10,515,260 7,265,286 6,185,556
Income before income taxes 6,469,511 5,698,136 5,704,591
Income taxes 2,116,775 1,842,000 1,862,000
Net income $ 4,352,736 3,856,136 3,842,591
Basic and diluted earnings
per share $ 6.06 5.37 5.35
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 1998, 1997, and 1996
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPRE- STOCK-
COMMON RETAINED HENSIVE HOLDERS'
STOCK SURPLUS EARNINGS INCOME EQUITY
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $718,511 1,281,489 36,219,553 135,633 38,355,186
Comprehensive income:
Net income -- -- 3,842,591 -- 3,842,591
Other comprehensive income --
unrealized holding losses
on debt and equity securities
available-for-sale, net of tax -- -- -- (151,304) (151,304)
Total comprehensive income 3,691,287
Cash dividends declared, $1.90
per share -- -- (1,365,171) -- (1,365,171)
Balance, December 31, 1996 718,511 1,281,489 38,696,973 (15,671) 40,681,302
Comprehensive income:
Net income -- -- 3,856,136 -- 3,856,136
Other comprehensive income:
Unrealized holding gains
on debt and equity
securities available-
for-sale, net of tax -- -- -- 132,082 132,082
Adjustment for loss on
sales and calls of debt
and equity securities,
net of tax -- -- -- 4,436 4,436
Total other comprehensive
income 136,518
Total comprehensive
income 3,992,654
Cash dividends declared, $2.18
per share -- -- (1,566,354) -- (1,566,354)
Balance, December 31, 1997 718,511 1,281,489 40,986,755 120,847 43,107,602
Comprehensive income:
Net income -- -- 4,352,736 -- 4,352,736
Other comprehensive income:
Unrealized holding gains
on debt and equity
securities available-
for-sale, net of tax -- -- -- 266,398 266,398
Adjustment for gain on
sales and calls of debt
and equity securities,
net of tax -- -- -- (4,089) (4,089)
Total other comprehensive
income 262,309
Total comprehensive income 4,615,045
Cash dividends declared, $2.24
per share -- -- (1,609,465) -- (1,609,465)
Balance, December 31, 1998 $718,511 1,281,489 43,730,026 383,156 46,113,182
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
Cash flows from operating activities:
Net income $4,352,736 3,856,136 3,842,591
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan losses 702,500 865,000 395,000
Depreciation expense 585,623 363,839 303,679
Net amortization of debt
securities premiums and
discounts 299,957 120,676 121,242
Amortization of intangible
assets 794,029 178,590 42,668
(Increase) decrease in
accrued interest
receivable 273,140 (11,888) (215,798)
(Increase) decrease in
other assets (55,097) (478,763) 406,152
Increase (decrease) in
accrued interest payable (243,680) 320,584 98,316
Increase (decrease) in
other liabilities (96,450) (114,391) 184,326
(Gain) loss on sales and
calls of debt securities (6,491) 7,041 --
Other, net (86,837) (36,816) (107,643)
Origination of mortgage loans
for sale (65,540,609) (24,147,802) (21,435,514)
Proceeds from the sale of
mortgage loans 65,540,609 24,147,802 21,435,514
Net cash provided by
operating activities 6,519,430 5,070,008 5,070,533
Cash flows from investing activities:
Net increase in loans (11,074,244) (32,236,191) (20,838,529)
Purchases of debt securities:
Available-for-sale (30,945,944) (17,463,713) (43,984,364)
Held-to-maturity (43,829,363) (7,406,950) (16,371,850)
Proceeds from maturities of
debt securities:
Available-for-sale 27,842,273 13,770,449 39,724,343
Held-to-maturity 49,013,339 4,290,105 6,453,990
Proceeds from calls of
debt securities:
Available-for-sale 11,455,029 3,245,000 1,500,000
Held-to-maturity 1,679,076 2,200,000 200,000
Proceeds from sales of
debt securities:
Available-for-sale -- 5,072,832 --
Held-to-maturity -- 350,000 --
Purchase of Union State
Bancshares, Inc., net of
cash and cash equivalents
acquired (215,000) (4,888,677) --
Purchases of premises and
equipment (3,829,625) (3,221,793) (1,073,284)
Proceeds from sales of premises
and equipment -- 41,500 7,547
Proceeds from sales of other
real estate owned and
repossessions 1,654,513 1,690,056 1,617,438
Net cash provided by
(used in) investing
activities 1,750,054 (34,557,382) (32,764,709)
Cash flows from financing activities:
Net increase in demand
deposits 4,626,703 4,324,323 801,378
Net increase in interest-bearing
transaction accounts 6,624,694 2,907,255 4,102,103
Net increase in time
deposits 1,883,594 6,636,535 16,304,978
Net increase (decrease) in
securities sold under
agreements to repurchase (4,502,676) 9,190,196 2,165,522
Net increase (decrease) in
interest-bearing demand notes
to U.S. Treasury (2,987,640) 2,629,149 756,420
Proceeds from bank debt 450,000 8,507,932 --
Proceeds from Federal Home
Loan Bank advances 2,350,000 -- --
Proceeds from notes payable -- 11,995,636 --
Repayment of bank debt (3,253,000) (6,000,000) --
Cash dividends paid (1,609,465) (1,523,243) (1,322,060)
Net cash provided by
financing activities 3,582,210 38,667,783 22,808,341
Net increase (decrease) in
cash and cash equivalents 11,851,694 9,180,409 (4,885,835)
Cash and cash equivalents,
beginning of year 34,352,050 25,171,641 30,057,476
Cash and cash equivalents,
end of year $46,203,744 34,352,050 25,171,641
Supplemental disclosure of
cash flow information --
cash paid during the year for:
Interest $17,440,985 11,324,121 9,685,238
Income taxes 2,399,623 2,184,243 1,839,138
Supplemental schedule of noncash
investing activities -- other
real estate and repossessions
acquired in settlement of
loans 1,654,513 1,961,610 1,675,520
See accompanying notes to consolidated financial statements.
<PAGE>
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Exchange National Bancshares, Inc. (the Company) provides a
full range of banking services to individual and corporate
customers through The Exchange National Bank of Jefferson
City and Union State Bank and Trust of Clinton (the Banks)
located within the communities surrounding Jefferson City
and Clinton, Missouri. The Banks are subject to competition
from other financial and nonfinancial institutions providing
financial products. Additionally, the Company and its
subsidiaries are subject to the regulations of certain
regulatory agencies and undergo periodic examinations by
those regulatory agencies.
The consolidated financial statements of the Company have
been prepared in conformity with generally accepted
accounting principles and conform to predominant practices
within the banking industry. The preparation of the
consolidated financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions, including the
determination of the allowance for loan losses and the
valuation of real estate acquired in connection with
foreclosure or in satisfaction of loans, that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The significant accounting policies used by the Company in
the preparation of the consolidated financial statements are
summarized below:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts
of the Company, The Exchange National Bank of Jefferson
City, Union State Bancshares, Inc. (USB), and its wholly
owned subsidiary, Union State Bank and Trust of Clinton. All
significant intercompany accounts and transactions have been
eliminated.
LOANS
Loans are stated at face amount less unearned income and the
allowance for loan losses. Income on loans is accrued on a
simple-interest basis.
Loans are placed on nonaccrual status when management
believes that the borrower's financial condition, after
consideration of business conditions and collection efforts,
is such that collection of interest is doubtful. Interest
accrued in the current year is reversed against interest
income, and prior years' interest is charged to the
allowance for loan losses. 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.
Loan origination fees and costs are deferred and recognized
over the life of the loan as an adjustment to yield.
<PAGE>
The Exchange National Bank of Jefferson City originates
certain loans which are sold in the secondary mortgage
market to the Federal Home Loan Mortgage Corporation
(Freddie Mac). These long-term, fixed-rate loans are sold on
a note-by-note basis. Immediately upon locking in an
interest rate, the Company enters into an agreement to sell
the mortgage loan to Freddie Mac without recourse. The
Company allocates the entire cost of loans originated to the
mortgage loans, with no cost being allocated to the mortgage
servicing rights. At December 31, 1998 and 1997, no mortgage
loans were held for sale. Mortgage loan servicing fees
earned on loans sold to Freddie Mac are reported as income
when the related loan payments are collected. Operational
costs to service such loans are charged to expense as
incurred.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased by provisions
charged to expense and is reduced by loan charge-offs, net
of recoveries. Management utilizes a systematic, documented
approach in determining the appropriate level of the
allowance for loan losses. Management's approach, which
provides for general and specific valuation allowances, is
based on current economic conditions, past losses,
collection experience, risk characteristics of the
portfolio, assessment of collateral values by obtaining
independent appraisals for significant properties, and such
other factors which, in management's judgment, deserve
current recognition in estimating loan losses.
Management believes the allowance for loan losses is
adequate to absorb possible losses in the loan portfolio.
While management uses available information to recognize
loan losses, future additions to the allowance may be
necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part
of their examination process, periodically review the
allowance for loan losses. Such agencies may require the
Banks to increase the allowance for loan losses based on
their judgment about information available to them at the
time of their examination.
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. When measuring impairment, the expected future
cash flows of an impaired loan are discounted at the loan's
effective interest rate. Alternatively, impairment is
measured by reference to an observable market price, if one
exists, or the fair value of the collateral for a
collateral-dependent loan. Regardless of the historical
measurement method used, the Company measures impairment
based on the fair value of the collateral when foreclosure
is probable. Additionally, impairment of a restructured loan
is measured by discounting the total expected future cash
flows at the loan's effective rate of interest as stated in
the original loan agreement. The Company continues to use
its existing nonaccrual methods for recognizing interest
income on impaired loans.
INVESTMENT IN DEBT AND EQUITY SECURITIES
At the time of purchase, debt securities are classified into
one of two categories: available-for-sale or held-to-maturity.
Held-to-maturity securities are those securities which the
Company has the ability and intent to hold until maturity. All
equity securities, and debt securities not classified as held-
to-maturity, are classified as available-for-sale.
<PAGE>
Available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost,
adjusted for the amortization of premiums or discounts.
Unrealized gains and losses, net of the related tax effect,
on available-for-sale securities are excluded from earnings
and reported as accumulated other comprehensive income, a
separate component of stockholders' equity, until realized.
Premiums and discounts are amortized using the interest
method over the lives of the respective securities, with
consideration of historical and estimated prepayment rates
for mortgage-backed securities, as an adjustment to yield.
Dividend and interest income are recognized when earned.
Realized gains and losses for securities classified as
available-for-sale are included in earnings based on the
specific identification method for determining the cost of
securities sold.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other
than temporary results in a charge to earnings and the
establishment of a new cost basis for the security.
The Banks, as members of the Federal Home Loan Bank System
administered by the Federal Housing Finance Board, are
required to maintain an investment in the capital stock of
the Federal Home Loan Bank (FHLB) in an amount equal to the
greater of 1% of each bank's total mortgage-related assets
at the beginning of each year, 0.3% of each bank's total
assets at the beginning of each year, or 5% of advances from
the FHLB to each bank. Additionally, The Exchange National
Bank of Jefferson City is required to maintain an investment
in the capital stock of the Federal Reserve Bank. These
investments are recorded at cost which represents redemption
value.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation applicable to buildings and
improvements and furniture and equipment is charged to
expense using straight-line and accelerated methods over the
estimated useful lives of the assets. Such lives are
estimated to be 5 to 55 years for buildings and improvements
and 3 to 15 years for furniture and equipment. Maintenance
and repairs are charged to expense as incurred.
INTANGIBLE ASSETS
The excess of cost over the fair value of net assets
acquired in the acquisition of USB is being amortized using
the straight-line method over an estimated life of 25 years.
The core deposit intangible established in the acquisition
is being amortized over a 10-year period on an accelerated
method of amortization. Other intangible assets are
amortized over periods up to six years.
Periodically, the Company reviews its intangible assets for
events or changes in circumstances that may indicate that
the carrying amount of the assets may not be recoverable.
Based on those reviews, adjustments of recorded amounts have
not been required.
<PAGE>
OTHER REAL ESTATE
Other real estate, included in other assets in the
accompanying consolidated balance sheets, is recorded at
fair value. If the fair value of other real estate declines
subsequent to foreclosure, the difference is recorded as a
valuation allowance through a charge to expense. Subsequent
increases in fair value are recorded through a reversal of
the valuation allowance. Expenses incurred in maintaining
the properties are charged to expense.
INCOME TAXES
The Company and its subsidiaries file a consolidated federal
income tax return.
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the
period that includes the enactment date.
TRUST DEPARTMENTS
Property held by the Banks in fiduciary or agency capacities
for customers is not included in the accompanying
consolidated balance sheets, since such items are not assets
of the Company. Trust department income is recognized on the
accrual basis.
EARNINGS PER SHARE
Earnings per share is computed by dividing net income by
718,511, the weighted average number of common shares
outstanding during 1998, 1997, and 1996. Due to the fact the
Company has no dilutive instruments, basic earnings per
share and diluted earnings per share are equal.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the purpose of the consolidated statements of cash
flows, cash and cash equivalents consist of federal funds
sold, cash, and due from banks.
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, Reporting
Comprehensive Income (SFAS 130), which established standards
for reporting and displaying comprehensive income and its
components (revenues, expenses, gains, and losses) in a full
set of general purpose financial statements. The Company
reports comprehensive income in the consolidated statements
of stockholders' equity and comprehensive income.
<PAGE>
SEGMENT INFORMATION
In 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of
an Enterprise and Related Information (SFAS 131), which
established standards for the way that public enterprises
report information about operating segments in annual
financial statements. The Company has defined its business
segments to be the Banks, which is consistent with the
management structure of the Company and the internal
reporting system that monitors performance.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133), which
establishes standards for derivative instruments,
including certain derivative instruments embedded in
other contracts, and for hedging activities. SFAS 133
requires an entity to recognize all derivatives as
either assets or liabilities in the statement of
financial position and measure those instruments at
fair value. SFAS 133 is effective for all fiscal
periods beginning after June 15, 1999. Earlier
application of SFAS 133 is encouraged but should not be
applied retroactively to financial statements of prior
periods. The Company does not believe the adoption of
SFAS 133 will have a material effect on its financial
condition or results of operations.
(2) ACQUISITION OF UNION STATE BANCSHARES, INC.
On November 3, 1997, the Company acquired 100% of the
outstanding shares of common stock of USB, a one-bank
holding company located in Clinton, Missouri. At the date of
acquisition, USB had consolidated total assets and deposits
of $144.0 million and $118.5 million, respectively. The
transaction had a total value of approximately $21.0
million, and was accounted for under the purchase method of
accounting. Accordingly, the results of operations of USB
have been included in the consolidated financial statements
of the Company since the date of acquisition. Under this
method of accounting, the purchase price is allocated to the
respective assets acquired and liabilities assumed based on
their estimated fair values, net of applicable income tax
effects. Intangible assets of approximately $11.6 million,
including $8.8 million and $2.0 million of excess of cost
over fair value of net assets acquired and core deposit
intangibles, respectively, were recorded in this
transaction.
A summary of unaudited pro forma consolidated financial
information for the years ended December 31, 1997 and 1996
for the Company and USB as if the transaction had occurred
on January 1, 1996 is as follows:
1997 1996
Net interest income $ 14,247,000 12,988,000
Net income 4,065,000 3,376,000
Basic and diluted
earnings per share 5.66 4.70
<PAGE>
(3) CAPITAL REQUIREMENTS
The Company and the Banks are subject to various regulatory
capital requirements administered by federal and state
banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the
Company's consolidated financial statements. Under capital
adequacy guidelines, the Company and the Banks must meet
specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting
practices. The capital amounts and classification of the
Company and the Banks are subject to qualitative judgments
by the regulators about components, risk-weightings, and
other factors.
Quantitative measures established by regulations to ensure
capital adequacy require the Company and the Banks to
maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital to risk-weighted
assets, and of Tier I capital to adjusted average
assets. Management believes, as of December 31, 1998, the
Company and the Banks meet all capital adequacy requirements
to which they are subject.
The Banks are also subject to the regulatory framework for
prompt corrective action. The Exchange National Bank of
Jefferson City's most recent notification from the Office of
the Comptroller of the Currency, dated December 7, 1998, and
Union State Bank and Trust of Clinton's most recent
notification from the Federal Deposit Insurance Corporation,
dated March 23, 1998, categorized them as well capitalized
under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Banks must
maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the table. There are
no conditions or events since the notifications that
management believes have changed the Banks' categories.
<PAGE>
The actual and required capital amounts and ratios for the
Company and the Banks as of December 31, 1998 and 1997 are
as follows (dollars in thousands):
1998
TO BE WELL CAPITALIZED
CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL REQUIREMENTS ACTION PROVISION
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
Total capital (to
risk-weighted assets):
Company $38,714 12.94% $23,936 8.00% $ -- --%
The Exchange
National Bank of
Jefferson City 36,949 17.08 17,301 8.00 21,627 10.00
Union State Bank
and Trust of Clinton 12,944 16.50 6,274 8.00 7,842 10.00
Tier I capital (to
risk-weighted assets):
Company 34,966 11.69 11,968 4.00 -- --
The Exchange
National Bank
of Jefferson City 34,342 15.83 8,651 4.00 12,976 6.00
Union State Bank
and Trust of Clinton 11,958 15.25 3,137 4.00 4,706 6.00
Tier I capital (to
adjusted average assets):
Company 34,966 7.87 13,331 3.00 -- --
The Exchange
National Bank of
Jefferson City 34,242 11.32 9,074 3.00 15,124 5.00
Union State Bank
and Trust of Clinton 11,958 8.41 4,267 3.00 7,112 5.00
<PAGE>
1997
TO BE WELL CAPITALIZED
CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL REQUIREMENTS ACTION PROVISION
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
Total capital (to
risk-weighted assets):
Company $35,062 12.25% $22,904 8.00% $ -- --%
The Exchange
National Bank of
Jefferson City 38,523 17.90 17,220 8.00 21,525 10.00
Union State Bank
and Trust of Clinton 10,824 14.85 5,830 8.00 7,287 10.00
Tier I capital (to
risk-weighted assets):
Company 31,479 11.00 11,452 4.00 -- --
The Exchange
National Bank
of Jefferson City 35,934 16.69 8,610 4.00 12,915 6.00
Union State Bank
and Trust of Clinton 9,908 13.60 2,915 4.00 4,372 6.00
Tier I capital (to
adjusted average assets):
Company 31,479 8.14 11,603 3.00 -- --
The Exchange
National Bank of
Jefferson City 35,934 11.88 9,074 3.00 15,124 5.00
Union State Bank
and Trust of Clinton 9,908 7.65 3,885 3.00 6,476 5.00
Bank dividends are the principal source of funds for payment
of dividends by the Company to its stockholders. The Banks
are subject to regulations which require the maintenance of
minimum capital requirements. At December 31, 1998,
unappropriated retained earnings of approximately $2,138,000
were available for the declaration of dividends to the
Company without prior approval from regulatory authorities.
<PAGE>
(4) LOANS
A summary of loans, by classification, at December 31, 1998
and 1997 is as follows:
1998 1997
Real estate $142,948,055 143,958,844
Commercial 98,298,265 90,543,151
Installment and
other consumer 46,971,185 44,197,904
288,217,505 278,699,899
Less allowance for
loan losses 4,412,921 3,914,383
$283,804,584 274,785,516
The Banks grant real estate, commercial, and installment and
other consumer loans to customers located within the
communities surrounding Jefferson City and Clinton,
Missouri. As such, the Banks are susceptible to changes in
the economic environment in these communities. The Banks do
not have a concentration of credit in any one economic
sector. Installment and other consumer loans consist
primarily of the financing of vehicles.
Following is a summary of activity in 1998 of loans made by
the Banks to executive officers and directors or to entities
in which such individuals had a beneficial interest. Such
loans were made in the normal course of business on
substantially the same terms, including interest rates and
collateral requirements, as those prevailing at the same
time for comparable transactions with other persons, and did
not involve more than the normal risk of collectibility or
present unfavorable features.
Balance at December 31, 1997 $ 7,978,522
Changes in executive officers
and directors 39,086
New loans 610,362
Payments received (2,556,834)
Balance at December 31, 1998 $ 6,071,036
Loans serviced for others totaled approximately $111,882,000
and $91,221,000 at December 31, 1998 and 1997, respectively.
<PAGE>
Changes in the allowance for loan losses for 1998, 1997, and
1996 are as follows:
1998 1997 1996
Balance, beginning of year $3,914,383 2,307,068 2,179,009
Allowance for loan losses of
Union State Bank and Trust
of Clinton at date of
acquisition -- 1,314,817 --
Provision charged to expense 702,500 865,000 395,000
Charge-offs (447,547) (740,195) (391,813)
Recoveries of loans previously
charged off 243,585 167,693 124,872
Balance, end of year $4,412,921 3,914,383 2,307,068
A summary of nonaccrual and other impaired loans at December 31, 1998
and 1997 is as follows:
1998 1997
Nonaccrual loans $ 706,638 827,145
Impaired loans continuing to
accrue interest 5,941,684 7,134,397
Total impaired loans $6,648,322 7,961,542
Allowance for loan losses
on impaired loans $ 553,614 224,949
Impaired loans with no related
allowance for loan losses $5,511,933 7,018,672
The average balance of impaired loans during 1998, 1997, and 1996 was
$6,929,000, $5,852,000, and $2,995,000, respectively.
<PAGE>
A summary of interest income on nonaccrual and other impaired loans for
1998, 1997, and 1996 is as follows:
IMPAIRED LOANS
CONTINUING TO
NONACCRUAL ACCRUE
LOANS INTEREST TOTAL
1998:
Income recognized $ 7,940 457,864 465,804
Interest income had
interest accrued 53,395 457,864 511,259
1997:
Income recognized $16,196 677,422 693,618
Interest income had
interest accrued 59,080 677,422 736,502
1996:
Income recognized $22,123 380,539 402,662
Interest income had
interest accrued 68,477 380,539 449,016
(5) INVESTMENT IN DEBT AND EQUITY SECURITIES
The amortized cost and fair value of debt and equity
securities classified as available-for-sale at December 31,
1998 and 1997 are as follows:
1998
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
U.S. Treasury securities $13,809,560 180,762 -- 13,990,322
Securities of U.S.
government agencies 42,627,345 214,379 89,801 42,751,923
Obligations of states
and political
subdivisions 11,850,219 305,209 2,365 12,153,063
Total debt securities 68,287,124 700,350 92,166 68,895,308
Federal Home Loan
Bank stock 1,351,300 -- -- 1,351,300
Federal Reserve Bank stock 60,000 -- -- 60,000
Federal Agricultural Mortgage
Corporation stock 10,125 -- -- 10,125
$69,708,549 700,350 92,166 70,316,733
<PAGE>
1997
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
U.S. Treasury
securities $25,838,457 60,692 6,946 25,892,203
Securities of U.S.
government agencies 41,639,559 104,333 51,957 41,691,935
Obligations of states
and political
subdivisions 9,421,749 94,104 8,406 9,507,447
Total debt
securities 76,899,765 259,129 67,309 77,091,585
Federal Home Loan
Bank stock 1,271,700 -- -- 1,271,700
Federal Reserve
Bank stock 60,000 -- -- 60,000
$78,231,465 259,129 67,309 78,423,285
The amortized cost and fair value of debt securities
classified as available-for-sale at December 31, 1998 and
1997, by contractual maturity or call date, are shown below.
Expected maturities may differ from contractual maturities
because borrowers have the right to prepay obligations with or
without prepayment penalties.
1998 1997
Amortized Fair Amortized Fair
cost value cost value
Due in one year
or less $35,390,020 35,517,664 23,320,357 23,336,575
Due after one
year through
five years 23,067,036 23,436,039 39,173,857 39,330,012
Due after five
years through
ten years 3,067,300 3,170,815 5,910,985 5,951,169
Due after ten
years -- -- 1,211,911 1,213,113
61,524,356 62,124,518 69,617,110 69,830,869
Mortgage-backed
securities 6,762,768 6,770,790 7,282,655 7,260,716
$68,287,124 68,895,308 76,899,765 77,091,585
<PAGE>
The amortized cost and fair values of debt securities
classified as held-to-maturity at December 31, 1998 and 1997
are as follows:
1998
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
U.S. Treasury
securities $ 2,269,270 10,112 -- 2,279,382
Securities of U.S.
government
agencies 12,611,030 123,358 3,006 12,731,382
Obligations of states
and political
subdivisions 15,868,643 511,840 331 16,380,152
$30,748,943 645,310 3,337 31,390,916
1997
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
U.S. Treasury
securities $ 2,830,699 1,322 35 2,831,986
Securities of U.S.
government agencies 16,936,362 69,288 8,025 16,997,625
Obligations of states
and political
subdivisions 17,766,842 298,860 49,393 18,016,309
Other debt securities 200,000 580 -- 200,580
$37,733,903 370,050 57,453 38,046,500
<PAGE>
The amortized cost and fair value of debt securities
classified as held-to-maturity at December 31, 1998 and 1997,
by contractual maturity or call date, are shown below.
Expected maturities may differ from contractual maturities
because borrowers have the right to prepay obligations with or
without prepayment penalties.
1998 1997
Amortized Fair Amortized Fair
cost value cost value
Due in one year
or less $11,804,042 11,874,633 7,807,018 7,806,453
Due after one
year through
five years 14,982,843 15,389,044 17,156,855 17,279,359
Due after five
years through
ten years 2,253,246 2,385,368 8,060,878 8,230,178
Due after
ten years 397,780 421,166 2,763,737 2,780,164
29,437,911 30,070,211 35,788,488 36,096,154
Mortgage-backed
securities 1,311,032 1,320,705 1,945,415 1,950,346
$30,748,943 31,390,916 37,733,903 38,046,500
Interest and dividends on debt and equity securities that
are exempt from federal income taxes was $1,469,839,
$1,067,883, and $890,505 for 1998, 1997, and 1996,
respectively.
Debt securities with carrying values aggregating
approximately $56,119,000 and $63,956,000 at December 31,
1998 and 1997, respectively, were pledged to secure public
funds, securities sold under agreements to repurchase, and
for other purposes as required or permitted by law.
Gross gains of $7,993 and $-0- and gross losses of $1,502
and $3,657 were recorded on the calls of debt securities in
1998 and 1997, respectively. Gross gains of $4,150 and gross
losses of $7,534 were recorded on the sales of debt
securities classified as available-for-sale in 1997. No gain
or loss resulted from the sale of a debt security classified
as held-to-maturity in 1997. Such was inadvertently sold due
to confusion about its classification, resulting from the
conversion of the investment accounting system. No debt
securities were sold during 1998 or 1996.
(6) PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1998 and
1997 is as follows:
1998 1997
Land $ 2,370,347 2,288,631
Buildings and improvements 6,074,412 5,900,314
Furniture and equipment 5,746,930 5,248,142
Construction in process 5,077,222 1,905,386
19,268,911 15,342,473
Less accumulated depreciation 7,204,659 6,687,761
$12,064,252 8,654,712
Construction in progress at December 31, 1998 and 1997
relates to an addition to, and remodeling of, the main
office of The Exchange National Bank of Jefferson City,
which is scheduled to be completed in March 1999.
<PAGE>
(7) INTANGIBLE ASSETS
A summary of intangible assets at December 31, 1998 and 1997
is as follows:
1998 1997
Excess of cost over the
fair value of net assets
acquired $8,562,920 8,658,982
Core deposit intangible 1,475,995 1,963,833
Consulting/noncompete
agreements 725,000 875,000
Organizational costs -- 10,667
$10,763,915 11,508,482
(8) DEPOSITS
The scheduled maturities of time deposits are as follows (in
thousands):
1998 1997
Due within:
One year $138,061 132,472
Two years 33,713 31,260
Three years 7,999 13,923
Four years 3,006 2,151
Five years 4,297 2,404
Thereafter 286 3,269
$187,362 185,479
(9) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information relating to securities sold under agreements to
repurchase is as follows:
1998 1997 1996
Average daily balance $25,754,091 18,152,000 16,512,000
Maximum balance at month-end
(March 1998, September 1997,
and February 1996) 36,923,247 22,408,559 25,166,520
Weighted average interest rate
at year-end 5.10% 6.39 4.51
Weighted average interest rate
for the year 5.56 5.43 4.65
The securities underlying the agreements to repurchase are
under the control of the Banks.
Unused agreements with unaffiliated banks to sell and
repurchase securities on which The Exchange National Bank of
Jefferson City may draw totaled $27,000,000 at December 31,
1998. Additionally, under agreements with unaffiliated
banks, The Exchange National Bank of Jefferson City may
borrow up to $30,000,000 in federal funds on an unsecured
basis at December 31, 1998.
<PAGE>
(10) OTHER BORROWED MONEY
Other borrowed money at December 31, 1998 and 1997 is
summarized as follows:
1998 1997
The Company:
Bank debt -- revolving credit
facility, variable rate of
interest (interest rate of
7.5% at December 31, 1997),
matures November 3, 1999 $ -- 2,507,932
Notes payable, 7.00%, due
November 2002, interest only
until maturity 11,700,568 11,700,568
The Exchange National Bank
of Jefferson City -- note
payable, 5.35%, due February
1998 -- 295,068
Union State Bank and Trust of Clinton:
Federal Home Loan Bank advances,
weighted average rate of 6.07%
and 6.75% at December 31, 1998
and 1997, respectively, due at
various dates through 2008 5,450,000 3,100,000
$17,150,568 17,603,568
The Company may borrow up to $10,000,000 under the revolving
credit facility, which is secured by all issued and
outstanding shares of common stock of The Exchange National
Bank of Jefferson City. The rate of interest on the
revolving credit facility is the lower of the prime rate of
interest minus 1.00%, or the Federal Funds Base Rate plus
2.00%. Under the revolving credit agreement, the Company is
subject to certain covenants which require, among other
things, The Exchange National Bank of Jefferson City to
maintain certain levels of capital, allowance for loan
losses to loans, and earnings to average assets.
Additionally, the revolving credit agreement limits the
amount of cash dividends that can be declared by the Company
to 65% of its net income in the preceding year.
In conjunction with the acquisition of USB, the Company
issued notes payable totaling $11,700,568 to the former
stockholders of USB. The notes payable are secured by all
issued and outstanding shares of common stock of Union State
Bank and Trust of Clinton.
The advances from the Federal Home Loan Bank are secured
under a blanket agreement which assigns all investment in
Federal Home Loan Bank stock as well as mortgage loans equal
to 130% of the outstanding advance balance to secure amounts
borrowed.
The scheduled principal reduction of other borrowed money at
December 31, 1998 was as follows:
1999 $ 450,000
2000 450,000
2001 450,000
2002 12,000,568
2003 400,000
2004 and thereafter 3,400,000
$17,150,568
At December 31, 1998 and 1997, $2,000,000 of the amount
included in other borrowed money is owed to a member of the
Company's Board of Directors.
<PAGE>
(11) RESERVE REQUIREMENTS AND COMPENSATING BALANCES
The Federal Reserve Bank required the Banks to maintain a
balance of $3,594,000 and $2,658,000 at December 31, 1998
and 1997, respectively, to satisfy reserve requirements.
Average compensating balances held at correspondent banks
were $2,658,882 and $2,698,846 during December 1998 and
1997, respectively. The Banks maintain such compensating
balances with correspondent banks to offset charges for
services rendered by those banks.
(12) INCOME TAXES
The composition of income tax expense for 1998, 1997, and
1996 is as follows:
1998 1997 1996
Current:
Federal $2,268,085 1,755,020 1,673,216
State 305,599 229,856 235,539
Total current 2,573,684 1,984,876 1,908,755
Deferred:
Federal (422,344) (131,523) (42,964)
State (34,565) (11,353) (3,791)
Total deferred (456,909) (142,876) (46,755)
Total income
tax expense $2,116,775 1,842,000 1,862,000
Applicable income taxes for financial reporting purposes
differ from the amount computed by applying the statutory
federal income tax rate of 34% for the reasons noted in the
table below:
1998 1997 1996
Tax at statutory federal
income tax rate $2,199,634 1,937,366 1,939,561
Decrease in tax resulting
from tax-exempt
income (380,396) (286,312) (241,574)
Amortization of
nondeductible intangibles 105,181 37,713 --
State income tax, net of
federal tax benefit 178,882 153,950 151,520
Other, net 13,474 (717) 12,493
$2,116,775 1,842,000 1,862,000
The components of deferred tax assets and deferred tax
liabilities at December 31, 1998 and 1997 are as follows:
1998 1997
Deferred tax assets:
Allowance for loan losses $1,318,627 1,102,030
Nonaccrual loan interest 19,997 15,710
Mortgage servicing rights 226,312 148,770
Other 9,795 --
Total deferred tax assets 1,574,731 1,266,510
<PAGE>
Deferred tax liabilities:
Available-for-sale securities 225,028 70,973
Purchase accounting adjustment
to securities 93,932 130,896
Premises and equipment 619,301 515,185
Core deposit intangible 546,118 726,618
Prepaid pension expense 29,506 28,759
Loan origination costs 47,332 45,552
Other -- 37,867
Total deferred tax
liabilities 1,561,217 1,555,850
Net deferred tax
asset (liability) $ 13,514 (289,340)
The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the
periods in which those temporary differences become
deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections
for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it
is more likely than not the Company will realize the
benefits of these temporary differences at December 31, 1998
and, therefore, has not established a valuation reserve.
(13) PENSION AND RETIREMENT PLANS
The Exchange National Bank of Jefferson City provides a
noncontributory defined benefit pension plan in which all
full-time employees become participants upon the later of
the completion of one year of qualified service or the
attainment of age 21, and in which they continue to
participate as long as they continue to be full-time
employees, until their retirement, death, or termination of
employment prior to normal retirement date. The normal
retirement benefits provided under the plan vary depending
upon the participant's rate of compensation, length of
employment, and social security benefits. Retirement
benefits are payable for life, but not less than 10 years.
Plan assets consist of U.S. Treasury and government agency
securities, corporate common stocks and bonds, real estate
mortgages, and demand deposits. Pension expense (benefit)
for the plan for 1998, 1997, and 1996 is as follows:
1998 1997 1996
Service cost -- benefits
earned during the year $ 103,619 93,205 99,979
Interest costs on
projected benefit
obligations 188,557 183,939 171,276
Return on plan assets (821,044) (670,883) (459,934)
Net amortization and
deferral 526,852 396,865 202,005
Pension expense (benefit) $ (2,016) 3,126 13,326
A summary of the activity in the plan's benefit obligation,
assets, funded status, and amounts recognized in the
Company's consolidated balance sheets at December 31, 1998,
1997, and 1996 are as follows
<PAGE>
1998 1997 1996
Benefit obligation:
Balance, January 1 $3,064,197 2,797,934 2,715,301
Service cost 103,619 93,205 99,979
Interest cost 188,557 183,939 171,276
Actuarial loss
(gain) 318,548 94,279 (110,396)
Benefits paid (142,465) (105,160) (78,226)
Balance,
December 31 $3,532,456 3,064,197 2,797,934
<PAGE>
1998 1997 1996
Plan assets:
Fair value,
January 1 $ 4,339,279 3,773,556 3,391,848
Actual return 821,044 670,883 459,934
Benefits paid (142,465) (105,160) (78,226)
Fair value,
December 31 $ 5,017,858 4,339,279 3,773,556
Funded status:
Excess of plan
assets over
benefit
obligation $ 1,485,402 1,275,082 975,622
Unrecognized net
gains (1,405,657) (1,197,353) (894,767)
Prepaid pension
expense included
in other assets $ 79,745 77,729 80,855
Rates utilized for the plan years ended December 31, 1998,
1997, and 1996 are as follows:
1998 1997 1996
Assumed discount rate for net
periodic pension cost 6.30% 6.70 6.40
Discount rate for the funded status 5.50 6.30 6.70
Weighted average rate of
compensation increase used
to measure the projected
benefit obligation 6.00 6.00 6.00
Expected long-term rate of
return on plan assets 7.00 7.00 7.00
In addition to the pension plan described above, The
Exchange National Bank of Jefferson City has a profit
sharing plan which covers all full-time employees. The
Exchange National Bank of Jefferson City makes annual
contributions in an amount equal to 6% of income before
income taxes and before contributions to the profit sharing
and pension plans for all participants, limited to the
maximum amount deductible for federal income tax purposes.
Contributions to the profit sharing plan for 1998, 1997, and
1996 were $344,758, $365,266, and $349,132, respectively. At
December 31, 1998, the profit sharing plan held 58,688
shares of the common stock of the Company.
Union State Bank and Trust of Clinton has a profit sharing
plan which covers all full-time employees. Eligible
employees may defer up to 8% of his or her salary each year.
Union State Bank and Trust of Clinton matches 1/3 of each
employee's deferral. In addition, a discretionary
contribution may be made each year by Union State Bank and
Trust of Clinton. Contributions to the profit sharing plan
for 1998 and the period from November 3, 1997 to December
31, 1997 were $79,677 and $12,503, respectively.
<PAGE>
(14) SEGMENT INFORMATION
Through the respective branch network, the Banks provide
similar products and services in two 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, and installment and other consumer. 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 and Clinton, Missouri. The products and
services are offered to customers primarily within their
respective geographic areas. The business segments results
which follow are consistent with the Company's internal
reporting system which is consistent, in all material
respects, with generally accepted accounting principles and
practices prevalent in the banking industry.
1998
The Exchange Union
National State Bank
Bank of and Trust Corporate
Jefferson City of Clinton and other Total
Balance sheet information:
Loans, net of allowance
for loan losses $201,929,359 81,875,225 -- 283,804,584
Debt and equity
securities 64,721,489 36,344,187 -- 101,065,676
Total assets 304,838,954 153,830,907 33,513 458,703,374
Deposits 250,661,815 124,471,279 (1,611,308) 373,521,786
Stockholders'
equity 34,473,970 22,058,347 (10,419,135) 46,113,182
Statement of income information:
Total interest
income $22,389,676 9,790,837 -- 32,180,513
Total interest
expense 11,244,379 5,095,222 857,704 17,197,305
Net interest
income 11,145,297 4,695,615 (857,704) 14,983,208
Provision for
loan losses 600,000 102,500 -- 702,500
Noninterest
income 2,148,412 555,651 -- 2,704,063
Noninterest
expense 7,074,541 3,171,269 269,450 10,515,260
Income taxes 1,764,350 722,525 (370,100) 2,116,775
Net income
(loss) $3,854,818 1,254,972 (757,054) 4,352,736
Capital
expenditures $3,702,546 127,079 -- 3,829,625
<PAGE>
1997
The Exchange Union
National State BanK
Bank of and Trust Corporate
Jefferson City of Clinton and other Total
Balance sheet information:
Loans, net of allowance
for loan losses $197,700,017 77,085,499 -- 274,785,516
Debt and equity
securities 79,102,259 37,054,929 -- 116,157,188
Total assets 305,747,198 144,659,810 285,186 450,692,194
Deposits 242,509,149 118,917,642 (1,039,996) 360,386,795
Stockholders'
equity 35,998,686 20,493,174 (13,384,258) 43,107,602
Statement of income information:
Total interest
income $21,861,560 1,573,160 -- 23,434,720
Total interest
expense 10,618,141 809,339 217,225 11,644,705
Net interest
income 11,243,419 763,821 (217,225) 11,790,015
Provision for
loan losses 850,000 15,000 -- 865,000
Noninterest
income 1,910,688 127,719 -- 2,038,407
Noninterest
expense 6,584,739 531,045 149,502 7,265,286
Income taxes 1,834,000 132,000 (124,000) 1,842,000
Net income
(loss) $ 3,885,368 213,495 (242,727) 3,856,136
Capital
expenditures $ 3,184,720 37,073 -- 3,221,793
<PAGE>
1996
The Exchange
National Corporate
Bank of and
Jefferson City other Total
Balance sheet information:
Loans, net of allowance
for loan losses $171,001,657 -- 171,001,657
Debt and equity securities 80,623,371 -- 80,623,371
Total assets 284,026,089 53,346 284,079,435
Deposits 228,023,772 -- 228,023,772
Stockholders' equity 40,548,757 132,545 40,681,302
Statement of income information:
Total interest income $ 20,178,515 -- 20,178,515
Total interest expense 9,783,554 -- 9,783,554
Net interest income 10,394,961 -- 10,394,961
Provision for loan losses 395,000 -- 395,000
Noninterest income 1,890,186 -- 1,890,186
Noninterest expense 6,125,960 59,596 6,185,556
Income taxes 1,882,000 (20,000) 1,862,000
Net income (loss) $ 3,882,187 (39,596) 3,842,591
Capital expenditures $ 1,073,284 -- 1,073,284
<PAGE>
(15) CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
The condensed balance sheets as of December 31, 1998 and
1997 and the related condensed schedules of income and cash
flows for the years ended December 31, 1998, 1997, and 1996
of the Company are as follows:
CONDENSED BALANCE SHEETS
ASSETS 1998 1997
Cash $ 1,610,338 1,039,041
Investment in subsidiaries 56,622,318 56,586,552
Consulting/noncompete
agreements 725,000 875,000
Other assets 35,700 57,796
Total assets $58,993,356 58,558,389
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank debt $ -- 2,507,932
Notes payable 11,700,568 11,700,568
Consulting/noncompete
agreements 600,000 750,000
Dividends payable 359,256 359,256
Other liabilities 220,350 133,031
Stockholders' equity 46,113,182 43,107,602
Total liabilities
and stockholders'
equity $58,993,356 58,558,389
<PAGE>
CONDENSED SCHEDULES OF INCOME
1998 1997 1996
Revenue -- dividends received
from subsidiaries $ 5,546,640 8,515,980 1,379,400
Expenses:
Interest on bank debt 38,664 87,076 --
Interest on notes payable 819,040 130,149 --
Amortization of intangible
assets 160,667 67,668 42,668
Other 104,091 81,007 16,928
1,122,462 365,900 59,596
Income before income tax benefit and
equity in undistributed income
(dividends distributed in excess
of income) of subsidiaries 4,424,178 8,150,080 1,319,804
Income tax benefit 370,100 124,000 20,000
Equity in undistributed income
(dividends distributed in excess
of income) of subsidiaries (441,542) (4,417,944) 2,502,787
Net income $4,352,736 3,856,136 3,842,591
<PAGE>
CONDENSED SCHEDULES OF CASH FLOWS
1998 1997 1996
Cash flows from operating activities:
Net income $4,352,736 3,856,136 3,842,591
Adjustments to reconcile net
income to net cash provided by
operating activities:
Dividends distributed in excess of
income (equity in undistributed
income) of subsidiaries 441,542 4,417,944 (2,502,787)
Other, net 259,416 151,752 42,980
Net cash provided by operating
activities 5,053,694 8,425,832 1,382,784
Cash flows from investing activities:
Purchase of Union State
Bancshares, Inc. (215,000) (20,319,220) --
Other (150,000) (150,000) --
Net cash used in investing
activities (365,000) (20,469,220) --
Cash flows from financing activities:
Proceeds from bank debt -- 8,507,932 --
Proceeds from notes payable -- 11,700,568 --
Repayment of bank debt (2,507,932) (6,000,000) --
Cash dividends paid (1,609,465) (1,523,243) (1,322,060)
Net cash provided by (used in)
financing activities (4,117,397) 12,685,257 (1,322,060)
Net increase in cash 571,297 641,869 60,724
Cash at beginning of year 1,039,041 397,172 336,448
Cash at end of year $1,610,338 1,039,041 397,172
(16) DISCLOSURES ABOUT FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-
balance sheet risk in the normal course of business to meet
the financing needs of its customers. These financial
instruments include commitments to extend credit and
commercial and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the
consolidated balance sheets.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial
instrument for commitments to extend credit and commercial
and standby letters of credit is represented by the
contractual amount of those instruments. The Company uses
the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet
instruments.
<PAGE>
Off-balance sheet financial instruments whose contractual
amounts represent credit risk at December 31, 1998 and 1997
are as follows:
1998 1997
Commitments to extend credit $58,655,994 44,680,693
Standby letters of credit 5,501,585 2,869,801
Commitments to extend credit are agreements to lend to a
customer as long as there is not a violation of any
condition established in the contract. Of the total
commitments to extend credit, approximately $29,756,000 and
$17,215,000 represent fixed-rate loan commitments at
December 31, 1998 and 1997, respectively. Commitments
generally have fixed expiration dates or other termination
clauses. Since many of the commitments are expected to
expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash
requirements.
Standby and commercial letters of credit are conditional
commitments issued by the Company to guarantee the
performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to
customers.
The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained if
deemed necessary by the Company upon extension of credit is
based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable;
inventory; property, plant, and equipment; and income-
producing commercial properties.
<PAGE>
A summary of the carrying amounts and fair values of the
Company's financial instruments at December 31, 1998 and
1997 is as follows:
1998 1997
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
Assets:
Loans $283,804,584 289,154,000 274,785,516 278,222,000
Investment in
debt and
equity
securities 101,065,676 101,707,649 116,157,188 116,469,785
Federal funds
sold 26,400,000 26,400,000 17,175,000 17,175,000
Cash and due
from banks 19,803,744 19,803,744 17,177,050 17,177,050
Accrued interest
receivable 3,794,092 3,794,092 4,067,232 4,067,232
$434,868,096 440,859,485 429,361,986 433,111,067
Liabilities:
Deposits:
Demand $ 54,765,805 54,765,805 50,139,102 50,139,102
NOW 55,548,918 55,548,918 53,766,106 53,766,106
Savings 36,288,729 36,288,729 33,675,913 33,675,913
Money market 39,556,011 39,556,011 37,326,945 37,326,945
Time 187,362,323 188,841,000 185,478,729 185,724,000
Securities sold
under agreements
to repurchase 16,990,911 16,990,911 21,493,587 21,793,587
Interest-bearing
demand notes to
U.S. Treasury 675,941 675,941 3,663,581 3,663,581
Other borrowed
money 17,150,568 17,151,000 17,603,568 17,686,000
Accrued interest
payable 2,166,955 2,166,955 2,410,635 2,410,635
$410,506,161 411,985,270 405,558,166 406,185,869
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate such value:
LOANS
Fair values are estimated for portfolios of loans with
similar financial characteristics. Loans are segregated by
type, such as real estate, installment and other consumer,
commercial, and bankers' acceptances. Each loan category is
further segmented into fixed and adjustable interest rate
terms and by performing and nonperforming categories.
The fair value of performing loans is calculated by
discounting scheduled cash flows through estimated maturity
using estimated market discount rates that reflect the
credit and interest rate risk inherent in the loan. The
estimate of maturity is based on the Company's historical
experience with repayments for each loan classification,
modified, as required, by an estimate of the effect of
current economic and lending conditions.
The fair value for significant nonperforming loans is based
on recent external appraisals. If appraisals are not
available, estimated cash flows are discounted using a rate
commensurate with the risk associated with the estimated
cash flows. Assumptions regarding credit risk, cash flows,
and discount rates are judgmentally determined using
available market and specific borrower information.
<PAGE>
INVESTMENT IN DEBT AND EQUITY SECURITIES
Fair values are based on quoted market prices or dealer
quotes.
FEDERAL FUNDS SOLD, CASH, AND DUE FROM BANKS
For federal funds sold, cash, and due from banks, the
carrying amount is a reasonable estimate of fair value, as
such instruments reprice in a short time period.
ACCRUED INTEREST RECEIVABLE AND PAYABLE
For accrued interest receivable and payable, the carrying
amount is a reasonable estimate of fair value because of the
short maturity for these financial instruments.
DEPOSITS
The fair value of deposits with no stated maturity, such as
noninterest-bearing demand, NOW accounts, savings, and money
market, is equal to the amount payable on demand. The fair
value of time deposits is based on the discounted value of
contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar
remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER
BORROWED MONEY
The fair value of securities sold under agreements to
repurchase and other borrowed money is based on the
discounted value of contractual cash flows. The discount
rate is estimated using the rates currently offered for
securities sold under agreements to repurchase and other
borrowed money of similar remaining maturities.
INTEREST-BEARING DEMAND NOTES TO U.S. TREASURY
For interest-bearing demand notes to U.S. Treasury, the
carrying amount is a reasonable estimate of fair value, as
such instruments reprice in a short time period.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit and standby
letters of credit are estimated using the fees currently
charged to enter into similar agreements, taking into
account the remaining terms of the agreements, the
likelihood of the counterparties drawing on such financial
instruments, and the present creditworthiness of such
counterparties. The Company believes such commitments have
been made on terms which are competitive in the markets in
which it operates.
The fair value estimates provided are made at a point in
time based on market information and information about the
financial instruments. Because no market exists for a
portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected
loss experience, current economic conditions, risk
characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment
and, therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the fair value
estimates.
<PAGE>
(17) LITIGATION
Various legal claims have arisen in the normal course of
business, which, in the opinion of management of the
Company, will not result in any material liability to the
Company.
MARKET PRICE OF AND DIVIDENDS ON EQUITY SECURITIES
AND RELATED MATTERS
While there has been some trading activity in the Company's
common stock since April 7, 1993 (the date on which Bancshares
became a publicly held company), there is no established market
for the shares. The following table sets forth the range of high
and low bid prices of the Company's common stock by quarter for
each quarter in 1998 and 1997 in which the stock was traded, as
reported by a local broker-dealer.
1998 High Low
Fourth Quarter $52.50 52.50
Third Quarter 52.50 52.50
Second Quarter 52.50 52.50
First Quarter 52.50 50.00
1997 High Low
Fourth Quarter $50.00 50.00
Third Quarter 50.00 47.00
Second Quarter 47.00 47.00
First Quarter 47.00 47.00
As of March 16, 1999, the Company had issued and outstanding
718,511 shares of common stock, which were held of record by
approximately 570 persons. The common stock is the only class of
equity security which the Company has outstanding and the shares
are not listed on any securities exchange.
<PAGE>
The following table sets forth information on dividends paid
by the Company in 1998 and 1997.
MONTH PAID DIVIDENDS PAID
PER SHARE
January, 1998 $0.50
April, 1998 0.50
July, 1998 0.50
October, 1998 0.50
December, 1998 0.24
Total for 1998 2.24
January, 1997 $0.44
April, 1997 0.44
July, 1997 0.50
October, 1997 0.50
December, 1997 0.24
Total for 1997 $2.12
The Company's Board of Directors intends that the Company
will continue to pay quarterly dividends at least at the current
rate. In addition, the Board of Directors intends, to the extent
appropriate, that the Company will continue to pay an additional
special dividend. The actual amount of quarterly dividends and
the payment, as well as amount, of any special dividend
ultimately will depend upon the payment of sufficient dividends
by ENB and USB to the Company. The payment by ENB and USB of
dividends to the Company will depend upon such factors as ENB's
and USB's respective financial condition, results of operations
and current and anticipated cash needs, including capital
requirements.
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Position with Position with Position with Principal
Name Bancshares ENB USB Occupation
Donald L.
Campbell President, Chairman of Director Position with
Chairman of the Board Banchshares
the Board and Director ENB and USB
and Director-
Class III
David T.
Turner Vice President Position with
Chairman and Director Bancshares
and Director- and ENB
Class III
Charles G. Senior Vice Senior Vice Position with
Dudenhoeffer, President and President, Bancshares
Jr. Director Trust Officer and ENB
-Class I and Director
Philip D.
Freeman Director Director Owner/Manager,
-Class I Freeman Mortuary,
Jefferson City,
Missouri
James E.
Smith Vice Chairman President Position with USB
and Director and
-Class I Director
David R.
Goller Director Director Attorney with the
-Class II law firm of
Goller, Gardner &
Feather, P.C.,
Jefferson City,
Missouri
James R.
Loyd Director Director Retired
-Class II
Kevin L.
Riley Director Director Co-owner, Riley
-Class III Chevrolet, Inc.
and Riley
Oldsmobile,
Cadillac, Inc.,
Jefferson City,
Missouri
Richard G.
Rose Treasurer Senior Vice Position with
President and Bancshares
Controller and ENB
Kathleen L.
Bruegenhemke Senior Vice Position with
President Bancshares
and Secretary
<PAGE>
ANNUAL REPORT ON FORM 10-KSB
A copy of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1998, as filed with the Securities and
Exchange Commission, excluding exhibits, will be furnished
without charge to shareholders entitled to vote at the 1999
annual meeting of shareholders upon written request to Donald L.
Campbell, President, Exchange National Bancshares, Inc., 132 East
High Street, Jefferson City, Missouri 65101. The Company will
provide a copy of any exhibit to the Form 10-KSB to any such
person upon written request and the payment of the Company's
reasonable expenses in furnishing such exhibits.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000893847
<NAME> EXCHANGE NATIONAL BANCSHARES, INC.
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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