EXCHANGE NATIONAL BANCSHARES INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to
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Commission File Number: 0-23636

EXCHANGE NATIONAL BANCSHARES, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)

MISSOURI 43-1626350
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

132 EAST HIGH STREET, JEFFERSON CITY, MISSOURI 65101
----------------------------------------------------
(Address of principal executive offices) (Zip Code)

(573) 761-6100
---------------------------------------------------
(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since
last report.)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No

As of August 9, 2002, the registrant had 2,834,145 shares of common stock,
par value $1.00 per share, outstanding.

Page 1 of 36 pages
Index to Exhibits located on page 34

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

Continued on next page

2

EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

3

EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

4

EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Continued on next page

5

EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

6

EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Six Months Ended June 30, 2002 and 2001

Exchange National Bancshares, Inc. ("Bancshares" or the "Company") is a
bank holding company registered under the Bank Holding Company Act of 1956.
Bancshares' activities currently are limited to ownership of the outstanding
capital stock of The Exchange National Bank of Jefferson City (ENB), Union State
Bancshares, Inc. (Union) which owns 100% of Citizens Union State Bank and Trust
of Clinton (CUSB) and Mid Central Bancorp, Inc. (Mid Central) which owns 100% of
Osage Valley Bank of Warsaw (OVB). Bancshares acquired ENB on April 7, 1993,
Union on November 3, 1997 and Mid Central on January 3, 2000. In addition,
Bancshares acquired Calhoun Bancshares, Inc. (Calhoun) and its wholly owned
subsidiary, Citizens State Bank of Calhoun on May 4, 2000. Immediately upon
acquisition, Calhoun Bancshares, Inc. was dissolved and Citizens State Bank was
merged with Union State Bank and Trust with the surviving institution being
renamed Citizens Union State Bank and Trust of Clinton (CUSB). On June 16, 2000
Bancshares acquired CNS Bancorp, Inc. (CNS) and its wholly owned subsidiary,
City National Savings Bank, FSB. Immediately upon acquisition, CNS Bancorp, Inc.
was dissolved and City National Savings Bank, FSB was merged with ENB. All
acquisitions were accounted for as purchase transactions.

The accompanying unaudited condensed consolidated financial statements
include all adjustments, which in the opinion of management are necessary in
order to make those statements not misleading. Certain amounts in the 2001
condensed consolidated financial statements have been reclassified to conform to
the 2002 condensed consolidated presentation. Such reclassifications have no
effect on previously reported net income or stockholders' equity. Operating
results for the period ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002.

It is suggested that these unaudited condensed consolidated interim
financial statements be read in conjunction with the Company's audited
consolidated financial statements included in its 2001 Annual Report to
Shareholders under the caption "Consolidated Financial Statements" and
incorporated by reference into its Annual Report on Form 10-K for the year ended
December 31, 2001 as Exhibit 13.

The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. Certain information and note disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United State of America have been condensed and
omitted. The Company believes that these financial statements contain all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the Company's consolidated financial position as of June 30, 2002,
consolidated statements of earnings for the three and six month periods ended
June 30, 2002 and 2001 and cash flows for the six months ended June 30, 2002 and
2001.

7

The following table reflects, for the three-month and six-month periods
ended June 30, 2002 and 2002, the numerators (net income) and denominators
(average shares outstanding) for the basic and diluted net income per share
computations:

For the three-month and six-month periods ended June 30, 2002 and 2001,
unrealized holding gains and losses on investment in debt and equity securities
available-for-sale were Bancshares' only other comprehensive income component.
Comprehensive income for the three-month and six-month periods ended June 30,
2002 and 2001 is summarized as follows:

8

Through the respective branch network, ENB, CUSB and OVB provide
similar products and services in three defined geographic areas. The products
and services offered include a broad range of commercial and personal banking
services, including certificates of deposit, individual retirement and other
time deposit accounts, checking and other demand deposit accounts, interest
checking accounts, savings accounts, and money market accounts. Loans include
real estate, commercial, installment, and other consumer loans. Other financial
services include automatic teller machines, trust services, credit related
insurance, and safe deposit boxes. The revenues generated by each business
segment consist primarily of interest income, generated from the loan and debt
and equity security portfolios, and service charges and fees, generated from the
deposit products and services. The geographic areas are defined to be
communities surrounding Jefferson City, Clinton and Warsaw, Missouri. The
products and services are offered to customers primarily within their respective
geographical areas. The business segment results that follow are consistent with
our Company's internal reporting system which is consistent, in all material
respects, with accounting principles generally accepted in the United Sates of
America and practices prevalent in the banking industry.

9

11

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS MADE IN
THIS REPORT ON FORM 10-Q ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE WORDS "SHOULD", "EXPECT", "ANTICIPATE", "BELIEVE", "INTEND",
"MAY", "HOPE", "FORECAST" AND SIMILAR EXPRESSIONS MAY IDENTIFY FORWARD LOOKING
STATEMENTS. IN PARTICULAR, STATEMENTS THAT THE PERIODIC REVIEW OF OUR LOAN
PORTFOLIO KEEPS MANAGEMENT INFORMED OF POSSIBLE LOAN PROBLEMS AND THAT THE
ALLOWANCE FOR LOAN LOSSES ADEQUATELY COVERS ANY EXPOSURE ON SPECIFIC CREDITS ARE
ALL FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS, FINANCIAL
CONDITION, OR BUSINESS COULD DIFFER MATERIALLY FROM ITS HISTORICAL RESULTS,
FINANCIAL CONDITION, OR BUSINESS, OR THE RESULTS OF OPERATIONS, FINANCIAL
CONDITION, OR BUSINESS CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS
THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY
THE FORWARD LOOKING STATEMENTS HEREIN INCLUDE MARKET CONDITIONS AS WELL AS
CONDITIONS SPECIFICALLY AFFECTING THE BANKING INDUSTRY GENERALLY AND FACTORS
HAVING A SPECIFIC IMPACT ON BANCSHARES INCLUDING, BUT NOT LIMITED TO,
FLUCTUATIONS IN INTEREST RATES AND IN THE ECONOMY; THE IMPACT OF LAWS AND
REGULATIONS APPLICABLE TO BANCSHARES AND CHANGES THEREIN; COMPETITIVE CONDITIONS
IN THE MARKETS IN WHICH BANCSHARES CONDUCTS ITS OPERATIONS, INCLUDING
COMPETITION FROM BANKING AND NON-BANKING COMPANIES WITH SUBSTANTIALLY GREATER
RESOURCES THAN BANCSHARES, SOME OF WHICH MAY OFFER AND DEVELOP PRODUCTS AND
SERVICES NOT OFFERED BY BANCSHARES; AND THE ABILITY OF BANCSHARES TO RESPOND TO
CHANGES IN TECHNOLOGY. ADDITIONAL FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES WERE DISCUSSED UNDER THE CAPTION "FACTORS THAT MAY AFFECT FUTURE
RESULTS OF OPERATIONS, FINANCIAL CONDITION, OR BUSINESS," IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001, AS WELL AS
THOSE DISCUSSED ELSEWHERE IN THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.

12

Net income for the three months ended June 30, 2002 of $1,998,000
increased $329,000 when compared to the second quarter of 2001. Earnings per
diluted share for the second quarter of 2002 of $0.70 increased 12 cents or
20.7% when compared to the second quarter of 2001. Net income for the six months
ended June 30, 2002 of $3,926,000 increased $496,000 when compared to the first
six months of 2001. Earnings per diluted share for the six months ended June 30,
2000 of $1.38 increased 18 cents or 15.0% when compared to the first six months
of 2001. On January 1, 2002 our Company adopted Statement of Financial
Accounting Standard No. 142, Goodwill and Other Intangible Assets (SFAS 142).
Under SFAS 142 goodwill is no longer amortized. The amount of goodwill
amortization included in net income for the three and six months periods ended
June 30, 2001 was approximately $299,000, or $0.10 per diluted share, and
$597,000, or $0.21 per diluted share, respectively.

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.

13

THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001

Net interest income on a fully taxable equivalent basis increased
$236,000 or 3.9% to $6,239,000 or 3.53% of average earning assets for the second
quarter of 2002 compared to $6,003,000 or 3.59% of average earning assets for
the same period of 2001. The provision for loan losses for the three months
ended June 30, 2002 was $234,000 compared to $231,000 for the same period of
2001.

Noninterest income and noninterest expense for the three months periods
ended June 30, 2002 and 2001 were as follows:

Noninterest income increased $139,000 or 11.4% to $1,354,000 for the
second quarter of 2002 compared to $1,215,000 for the same period of 2001.

14

Service charges on deposit accounts increased $188,000 or 40.1% due primarily to
a new overdraft program at ENB and CUSB. This program has generated an increase
of $129,000 in insufficient fund fees collected this year compared to the same
period last year. Gains on sales of mortgage loans decreased $160,000 or 48.0%
due to a decrease in volume of loans originated and sold to the secondary market
from approximately $23,316,000 in the second quarter of 2001 to approximately
$13,319,000 for the second quarter of 2002. The Company also recognized gains on
sales of securities of $134,000 during the second quarter of 2002.

Noninterest expense increased $180,000 or 4.3% to $4,400,000 for the
second quarter of 2002 compared to $4,220,000 for the second quarter of 2001.
Salaries and benefits increased $241,000 or 11.5%. This increase is due to
normal salary increases and higher health insurance premiums. The $33,000 or
13.5% increase in occupancy expense reflects higher real estate taxes on bank
premises. The $92,000 or 65.7% increase in legal, examination, and professional
fees reflects consulting fees paid for services related to the Company's
conversion to a single data processing system as well as consulting fees related
to the new overdraft programs. The $299,000 or 100.0% decrease in amortization
of goodwill reflects the discontinuance of goodwill amortization as required by
SFAS 142. The periodic amortization of goodwill has been replaced by an annual
impairment test. The $123,000 or 24.2% increase in other noninterest expense
reflects increases in various categories including travel, data processing
expense, and training.

Income taxes as a percentage of earnings before income taxes as
reported in the condensed consolidated financial statements was 27.6% for the
second quarter of 2002 compared to 34.8% for the second quarter of 2001. After
adding a fully taxable equivalent adjustment to both income taxes and earnings
before income taxes for tax-exempt income on loans and investment securities,
the fully taxable equivalent ratios of income taxes as a percentage of earnings
before income taxes were 32.5% for the second quarter of 2002 and 39.7% for the
second quarter of 2001. The decrease in the effective income tax rate is due to
tax-exempt income making up a larger portion of our Company's income in 2002
versus 2001. In addition, the Company reduced its taxes by $57,000 in credits
received on community housing partnerships it participates in.

SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001

Net interest income on a fully taxable equivalent basis increased
$212,000 or 1.7% to $12,352,000 or 3.54% of average earning assets for the first
six months of 2002 compared to $12,140,000 or 3.66% of average earning assets
for the same period of 2001. The provision for loan losses for the six months
ended June 30, 2002 was $468,000 compared to $479,000 for the same period of
2001.

15

Noninterest income and noninterest expense for the six months periods
ended June 30, 2002 and 2001 were as follows:

Noninterest income increased $351,000 or 15.2% to $2,659,000 for the
first six months of 2002 compared to $2,308,000 for the same period of 2001.
Service charges on deposit accounts increased $342,000 or 37.0% due primarily to
a new overdraft program at ENB and CUSB. This program has generated an increase
of $263,000 in insufficient fund fees collected this year compared to the same
period last year. The $26,000 or 59.1% decrease in brokerage income is the
result of smaller sales volume in 2002. Gains on sales of mortgage loans
decreased $97,000 or 17.1% due to a decrease in volume of loans originated and
sold to the secondary market from approximately $39,902,000 during the first six
months of 2001 to approximately $35,791,000 during the same period in 2002. The
Company recognized $134,000 in gains on sales of securities during the first six
months of 2002.

16

Noninterest expense increased $276,000 or 3.3% to $8,621,000 for the
first six months of 2002 compared to $8,345,000 for the first six months of
2001. Salaries and benefits increased $443,000 or 10.5%. Of the $443,000
increase, salaries increased $279,000, or 8.3%; health insurance increased
$56,000, or 20.7%; and pension and profit sharing expense increased $67,000, or
24.8%. The $111,000 or 33.3% increase in legal, examination, and professional
fees reflects consulting fees paid for services related to the Company's
conversion to a single data processing system as well as consulting fees related
to the new overdraft programs. The $597,000 or 100.0% decrease in amortization
of goodwill reflects the discontinuance of goodwill amortization as required by
SFAS 142. The periodic amortization of goodwill has been replaced by an annual
impairment test. The $205,000 or 20.7% increase in other noninterest expense
reflects increases in various categories including travel, data processing
expense, and training.

Income taxes as a percentage of earnings before income taxes as
reported in the condensed consolidated financial statements was 28.8% for the
first six months of 2002 compared to 34.1% for the first six months of 2001.
After adding a fully taxable equivalent adjustment to both income taxes and
earnings before income taxes for tax exempt income on loans and investment
securities, the fully taxable equivalent ratios of income taxes as a percentage
of earnings before income taxes were 33.7% for the first six months of 2002 and
39.0% for the first six months of 2001. The decrease in the effective income tax
rate is due to tax-exempt income making up a larger portion of our Company's
income in 2002 versus 2001. In addition, the Company reduced its taxes by
$57,000 in credits received on community housing partnerships it participates
in.

NET INTEREST INCOME

Fully taxable equivalent net interest income increased $236,000 or 3.9%
and $212,000 or 1.7% respectively for the three month and six month periods
ended June 30, 2002 compared to the corresponding periods in 2001. Even though
the net interest margins decreased during both periods, net interest income
increased due to increased net earning assets during the respective periods.

The following table presents average balance sheets, net interest
income, average yields of earning assets, and average costs of interest bearing
liabilities on a fully taxable equivalent basis for the three and six month
periods ended June 30, 2002 and 2001.

17

Continued on next page

18

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(1) Interest income and yields are presented on a fully taxable equivalent basis
using the Federal statutory income tax rate of 34%. Such adjustments were
$199,000 in 2002 and $206,000 in 2001.

(2) Non-accruing loans are included in the average amounts outstanding.

(3) Average balances based on amortized cost.

(4) Net interest income divided by average total interest earning assets.

19

Continued on next page

20

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(1) Interest income and yields are presented on a fully taxable equivalent basis
using the Federal statutory income tax rate. Such adjustments were $408,000
in 2002 and $414,000 in 2001.

(2) Non-accruing loans are included in the average amounts outstanding.

(3) Average balances based on amortized cost.

(4) Net interest income divided by average total interest earning assets.

21

The following tables present, on a fully taxable equivalent basis, an
analysis of changes in net interest income resulting from changes in average
volumes of earning assets and interest bearing liabilities and average rates
earned and paid. The change in interest due to the combined rate/volume variance
has been allocated to rate and volume changes in proportion to the absolute
dollar amounts of change in each.

- ---------
(1) Non-accruing loans are included in the average amounts outstanding.

(2) Interest income and yields are presented on a fully taxable equivalent basis
using the federal statutory income tax rate. Such adjustments totaled
$199,000 in 2002 and $206,000 in 2001.

22

- ---------
(1) Non-accruing loans are included in the average amounts outstanding

(2) Interest income and yields are presented on a fully taxable equivalent basis
using the federal statutory income tax rate of 34%. Such adjustments
totaled $408,000 in 2002 and $414,000 in 2001.

23

PROVISION AND ALLOWANCE FOR LOAN LOSSES

The provision for loan losses is based on management's evaluation of
the loan portfolio in light of national and local economic conditions, changes
in the composition and volume of the loan portfolio, changes in the volume of
past due and nonaccrual loans, and other relevant factors. The allowance for
loan losses, which is reported as a deduction from loans, is available for loan
charge-offs. The allowance is increased by the provision charged to expense and
is reduced by loan charge-offs, net of loan recoveries.

Management formally reviews all loans in excess of certain dollar
amounts (periodically established) at least annually. In addition, on a monthly
basis, management reviews past due, "classified", and "watch list" loans in
order to classify or reclassify loans as "loans requiring attention,"
"substandard," "doubtful," or "loss". During that review, management also
determines what loans should be considered to be "impaired". Management
believes, but there can be no assurance, that these procedures keep management
informed of possible problem loans. Based upon these procedures, both the
allowance and provision for loan losses are adjusted to maintain the allowance
at a level considered adequate by management for probable losses inherent in the
loan portfolio. See additional discussion concerning nonperforming loans under
"Financial Condition."

The allowance for loan losses was decreased by net loan charge-offs of
$57,000 for the first quarter of 2002 and $112,000 for the second quarter of
2002. That compares to net loan charge-offs of $111,000 for the first quarter of
2001 and $129,000 for the second quarter of 2001. The allowance for loan losses
was increased by a provision charged to expense of $234,000 for the first
quarter of 2002 and $234,000 for the second quarter of 2002. That compares to
$248,000 for the first quarter of 2001 and $231,000 for the second quarter of
2001.

The balance of the allowance for loan losses was $6,972,000 at June 30,
2002 compared to $6,674,000 at December 31, 2001 and $7,179,000 at June 30,
2001. The allowance for loan losses as a percent of outstanding loans was 1.47%
at June 30, 2002 compared to 1.44% at December 31, 2001 and 1.55% at June 30,
2001.

FINANCIAL CONDITION

Total assets increased $3,644,000 or 0.5% to $779,469,000 at June 30,
2002 compared to $775,825,000 at December 31, 2001. Total liabilities increased
$414,000 or 0.1% to $697,887,000. Stockholders' equity increased $3,229,000 or
4.1% to $81,582,000.

Loans increased $10,900,000 or 2.3% to $475,264,000 at June 30, 2002
compared to $464,364,000 at December 31, 2001. Commercial loans increased
$5,821,000; real estate construction loans increased $4,000,000; real estate
mortgage loans decreased $350,000; and consumer loans increased $1,429,000. The
increase in commercial loans reflects use of seasonal credit lines. The increase
in real estate construction loans reflects financing for additional commercial
real estate construction projects. The slight decrease in real estate mortgage
loans reflects borrowers switching from variable rate mortgages to fixed rate
mortgages due to low fixed rate financing rates available in the market. The
Company primarily only holds variable rate mortgages in its loan portfolio and
sells long term fixed rate loans in the secondary market. The increase in
consumer loans reflects increased consumer auto financing.

24

Nonperforming loans, defined as loans on nonaccrual status, loans 90
days or more past due and still accruing, and restructured loans totaled
$3,404,000 or 0.72% of total loans at June 30, 2002 compared to $3,997,000 or
0.86% of total loans at December 31, 2001. Detail of those balances plus
repossessions is as follows:

The allowance for loan losses was 204.82% of nonperforming loans at
June 30, 2002 compared to 166.98% of nonperforming loans at December 31, 2001.

25

It is the Company's policy to discontinue the accrual of interest
income on loans when the full collection of interest or principal is in doubt,
or when the payment of interest or principal has become contractually 90 days
past due unless the obligation is both well secured and in the process of
collection. A loan remains on nonaccrual status until the loan is current as to
payment of both principal and interest and/or the borrower demonstrates the
ability to pay and remain current. Interest on loans on nonaccrual status at
June 30, 2002 and 2001, which would have been recorded under the original terms
of those loans, was approximately $222,000 and $385,000 for the six months ended
June 30, 2002 and 2001, respectively. Approximately $19,000 and $47,000 was
actually recorded as interest income on such loans for the six months ended June
30, 2002 and 2001, respectively.

A loan is considered "impaired" when it is probable a creditor will be
unable to collect all amounts due - both principal and interest - according to
the contractual terms of the loan agreement. In addition to nonaccrual loans at
June 30, 2002 included in the table above, which were considered "impaired",
management has identified additional loans totaling approximately $7,861,000 and
$9,527,000 at June 30, 2002 and December 31, 2001, respectively, which are not
included in the table above but are considered by management to be "impaired".
The $7,861,000 of loans identified by management as being "impaired" reflected
various commercial, commercial real estate, real estate, and consumer loans
ranging in size from approximately $3,000 to approximately $2,800,000. The
average balance of nonaccrual and other "impaired" loans for the first six
months of 2002 was approximately $13,183,000. At June 30, 2002 the allowance for
loan losses on impaired loans was $1,840,000 compared to $1,218,000 at December
31, 2001.

As of June 30, 2002 and December 31, 2001 approximately $6,310,000 and
$7,541,000, respectively, of loans not included in the nonaccrual table above or
identified by management as being "impaired" were classified by management as
having more than normal risk. In addition to the classified list, our Company
also maintains an internal loan watch list of loans, which for various reasons,
not all related to credit quality, management is monitoring more closely than
the average loan portfolio. Loans may be added to this list for reasons that are
temporary and correctable, such as the absence of current financial statements
of the borrower, or a deficiency in loan documentation. Other loans are added as
soon as any problem is detected which might affect the scheduled loan payment, a
deterioration in the borrower's financial condition identified in a review of
periodic financial statements, a decrease in the value of the collateral
securing the loan, or a change in the economic environment within which the
borrower operates. Once the loan is placed on our Company's watch list, its
condition is monitored closely. Any further deterioration in the condition of
the loan is evaluated to determine if the loan should be assigned a higher risk
category.

Investment in debt and equity securities classified as
available-for-sale increased $5,936,000 or 3.3% to $187,585,000 at June 30, 2002
compared to $181,649,000 at December 31, 2001. Investments classified as
available-for-sale are carried at fair value. During 2002, the market valuation
account increased $595,000 to $2,932,000 to reflect the fair value of
available-for-sale investments at June 30, 2002, and the net after tax increase
resulting from the change in the market valuation adjustment of $393,000
increased the stockholders' equity component to $1,935,000 at June 30, 2002.

At December 31, 2001 the market valuation account for the
available-for-sale investments of $2,337,000 increased the amortized cost of
those investments to their fair value on that date, and the net after tax
increase

26

resulting from the market valuation adjustment of $1,542,000 was reflected as a
separate positive component of stockholders' equity.

Cash and cash equivalents, which consist of cash and due from banks and
Federal funds sold, decreased $14,213,000 or 16.6% to $71,396,000 at June 30
2002 compared to $85,609,000 at December 31, 2001.

Premises and equipment increased $1,504,000 or 9.9% to $16,697,000 at
June 30, 2002 compared to $15,193,000 at December 31, 2001. The increase
reflects purchase of premises and equipment of $2,107,000, offset by
depreciation expense of $583,000 and sales and retirements of premises and
equipment of $19,000.

Total deposits decreased $1,045,000 or 0.2% to $578,749,000 at June 30,
2002 compared to $579,794,000 at December 31, 2001.

Federal funds purchased and securities sold under agreements to
repurchase increased $2,847,000 or 4.6% to $64,492,000 at June 30, 2002 compared
to $61,645,000 at December 31, 2001. The increase is primarily due increased
public funds at ENB.

The increase in stockholders' equity reflects net income of $3,926,000
less dividends declared of $1,105,000 and a $393,000 change in unrealized
holding gains, net of taxes, on investment in debt and equity securities
available-for-sale.

No material changes in the Company's liquidity or capital resources
have occurred since December 31, 2001.

27

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, FASB issued Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS 142. SFAS 142 also required that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. The amortization of goodwill ceases
upon adoption of SFAS 142, which for calendar year-end companies was January 1,
2001.

On January 1, 2002, our Company adopted SFAS 142. At the date of
adoption, our Company had unamortized goodwill of $23,408,000, core deposit
intangibles of $879,000 and consulting/noncompete agreements of $275,000, all of
which were subject to the transition provisions of SFAS 142. Under SFAS 142, our
Company will continue to amortize, on an accelerated basis, its core deposit
intangibles associated with the purchase of Citizens Union State Bank and Trust.
Goodwill associated with the purchase of subsidiaries will no longer be
amortized, but instead, will be tested annually for impairment following our
Company's existing methods of measuring and recording impairment losses. Our
Company has completed the transitional goodwill impairment test required under
SFAS 142 to determine the potential impact, if any, on the consolidated
financial statements. Our Company does not believe the results of the
transitional goodwill impairment testing identified any significant impairment
losses or has a material effect on the consolidated financial statements.

28

The gross carrying amount and accumulated amortization of the Company's
amortized intangible assets for the periods ended June 30, 2002 and December 31,
2001 are as follows:

The aggregate amortization expense of intangible assets subject to
amortization for the three and six months periods ended June 30, 2002 and 2001,
respectively, is as follows:

The estimated amortization expense for the next five years is as
follows:

Estimated amortization expense:
For year ended 2003 273,680
For year ended 2004 148,680
For year ended 2005 148,680
For year ended 2006 148,680
For year ended 2007 135,420

The Company's goodwill associated with the purchase of subsidiaries by
reporting segments for the periods ended June 30, 2002 and December 31, 2001 is
summarized as follows:

29

The following is a reconciliation of reported net income to net income
adjusted to reflect the adoption of SFAS 142:

(DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our Company's exposure to market risk is reviewed on a regular basis by
the Banks' Asset/Liability Committees and Boards of Directors. Interest rate
risk is the potential of economic losses due to future interest rate changes.
These economic losses can be reflected as a loss of future net interest income
and/or a loss of current fair market values. The objective is to measure the
effect on net interest income and to adjust the balance sheet to minimize the
inherent risk while at the same time maximizing income. Management realizes
certain risks are inherent and that the goal is to identify and minimize those
risks. Tools used by the Banks' management include the standard GAP report
subject to different rate shock scenarios. At June 30, 2002, the rate shock
scenario models indicated that annual net interest income could decrease or
increase by as much as 8% should interest rates rise or fall, respectively,
within 200 basis points from their current level over a one year period compared
to as much as 7% at December 31, 2001.

30

PART II - OTHER INFORMATION

Item 1. Legal Proceedings None

Item 2. Changes in Securities None

Item 3. Defaults Upon Senior Securities None

Item 4. At the annual meeting of the shareholders of Exchange National
Bancshares, Inc. held on June 12, 2002, the shareholders elected three
Class I Directors, namely, Charles G. Dudenhoeffer, Jr., Phillip D.
Freeman, and James E. Smith to serve terms expiring at the annual
meeting of shareholders in 2005 and ratified the Board of Directors
selection of KPMG LLP as the Company's independent auditors for the
year ending December 31, 2002. Class II Directors, namely, David R.
Goller, James R. Loyd, and Gus S. Wetzel, II, and Class III Directors,
namely, David T. Turner and Kevin L. Riley, continue to serve terms
expiring at the annual meetings of shareholders in 2003 and 2004,
respectively.

The following is a summary of votes cast. No broker non-votes
were received.

Item 5. Other Information None

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Item 6. Exhibits and Reports on Form 8-K.

a) 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 as Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 2001 (Commission file number 0-23636) and incorporated
herein by reference).

4 Specimen certificate representing shares of the Company's
$1.00 par value common stock (filed as Exhibit 4 to the
Company's Annual Report on Form 10-K For the fiscal year ended
December 31, 1999 (Commission File number 0-23636) and
incorporated herein be reference).

99.1 Certificate of the Chief Executive Officer of the Company
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2 Certificate of the Chief Financial Officer of the Company
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K.

No reports were filed on Form 8-K for the three month period ended
June 30, 2002.

32

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

EXCHANGE NATIONAL BANCSHARES, INC.

Date By /s/ James E. Smith
---- ------------------
August 9, 2002 James E. Smith, Chairman of the
Board and Chief Executive Officer
(Principal Executive Officer)

By /s/ Richard G. Rose
-------------------
August 9, 2002 Richard G. Rose, Treasurer
(Principal Financial Officer and
Principal Accounting Officer)

33

EXCHANGE NATIONAL BANCSHARES, INC.

INDEX TO EXHIBITS

June 30, 2002 Form 10-Q

** Incorporated by reference.

34