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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________.
Commission file number: 0-23636
EXCHANGE NATIONAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1626350
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
132 EAST HIGH STREET, JEFFERSON CITY, MISSOURI 65101
(Address of principal executive offices) (Zip Code)
(573) 761-6100
(Registrant's telephone number)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
Title of Each Class Name of Each Exchange 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)
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. YES [X] NO[ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT 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-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE ACT). YES [X] NO[ ]
THE AGGREGATE MARKET VALUE OF THE 2,145,771 SHARES OF VOTING STOCK OF THE
REGISTRANT HELD BY NON-AFFILIATES COMPUTED BY REFERENCE TO THE $42.90 CLOSING
PRICE OF SUCH STOCK ON MARCH 14, 2003, WAS $92,053,576. THE AGGREGATE MARKET
VALUE OF THE 2,231,994 SHARES OF VOTING STOCK OF THE ISSUER HELD BY
NON-AFFILIATES COMPUTED BY REFERENCE TO THE $31.08 CLOSING PRICE OF SUCH STOCK
ON JUNE 28, 2002, THE LAST BUSINESS DAY OF THE REGISTRANT'S MOST RECENTLY
COMPLETED SECOND FISCAL QUARTER, WAS $69,370,374. AS OF MARCH 14, 2003, THE
REGISTRANT HAD 2,865,601 SHARES OF COMMON STOCK, PAR VALUE $1.00 PER SHARE,
ISSUED AND 2,778,921 SHARES OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into
the indicated parts of this report: (1) 2002 Annual Report to Shareholders -
Part II and (2) definitive Proxy Statement for the 2003 Annual Meeting of
Shareholders to be filed with the Commission pursuant to Regulation 14A - Part
III.
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PART I
ITEM 1. BUSINESS.
GENERAL
Our Company, Exchange National Bancshares, Inc., is a bank holding
company registered under the Bank Holding Company Act of 1956, as amended.
Exchange was incorporated under the laws of the State of Missouri on October 23,
1992, and on April 7, 1993 it acquired all of the issued and outstanding capital
stock of The Exchange National Bank of Jefferson City, a national banking
association, pursuant to a corporate reorganization involving an exchange of
shares. On November 3, 1997, our Company acquired Union State Bancshares, Inc.,
and Union's wholly-owned subsidiary, Union State Bank and Trust of Clinton.
Following the May 4, 2000 acquisition of Calhoun Bancshares, Inc. by Union State
Bank. Calhoun Bancshares' wholly-owned subsidiary, Citizens State Bank of
Calhoun, merged into Union State Bank. The surviving bank in this merger is
called Citizens Union State Bank & Trust. On January 3, 2000, our Company
acquired Mid Central Bancorp, Inc., and Mid Central's wholly-owned subsidiary,
Osage Valley Bank. On October 25, 1999, Exchange established ENB Holdings, Inc.
as a wholly-owned subsidiary for the sole purpose of effecting the June 16, 2000
merger with CNS Bancorp, Inc. and its subsidiary, City National Savings Bank,
FSB. City National subsequently was merged into Exchange National Bank. ENB
Holdings owns 27.4% of Exchange National Bank with the balance owned by
Exchange. On October 17, 2001, Exchange and Union each received approval from
the Federal Reserve and elected to become a financial holding company.
Our 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 "Exchange"
or our "Company" include Exchange and its consolidated subsidiaries, and
references herein to our "Banks" refer to Exchange National Bank, Citizens Union
State Bank and Osage Valley Bank.
DESCRIPTION OF BUSINESS
EXCHANGE. Exchange is a bank holding company registered under the Bank
Holding Company Act that has elected to become a financial holding company. Our
Company's activities currently are limited to ownership, directly or indirectly
through subsidiaries, of the outstanding capital stock of Exchange National
Bank, Citizens Union State Bank and Osage Valley Bank. In addition to ownership
of its subsidiaries, Exchange may seek expansion through acquisition and may
engage in those activities (such as investments in banks or operations that are
financial in nature) in which it is permitted to engage under applicable law. It
is not currently anticipated that Exchange will engage in any business other
than that directly related to its ownership of its banking subsidiaries or other
financial institutions.
UNION. Union is a bank holding company registered under the Bank
Holding Company Act that has elected to become a financial holding company.
Union's activities currently are limited to ownership of the outstanding capital
stock of Citizens Union State Bank. It is not currently anticipated that Union
will engage in any business other than that directly related to its ownership of
Citizens Union State Bank.
MID CENTRAL BANCORP. Mid Central Bancorp is a bank holding company
registered under the Bank Holding Company Act. Mid Central Bancorp's activities
currently are limited to ownership of the outstanding capital stock of Osage
Valley Bank. It is not currently anticipated that Mid Central Bancorp will
engage in any business other than that directly related to its ownership of
Osage Valley Bank.
ENB HOLDINGS. ENB Holdings is a bank holding company registered under
the Bank Holding Company Act. ENB Holdings' activities currently are limited to
the ownership of 27.4% of the outstanding
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capital stock of Exchange National Bank. It is not currently anticipated that
ENB Holdings will engage in any business other than that directly related to its
minority ownership of Exchange National Bank.
EXCHANGE NATIONAL BANK. Exchange National Bank, located in Jefferson
City, Missouri, was founded in 1865. Exchange National Bank is the oldest bank
in Cole County, and became a national bank in 1927. Exchange National Bank has
seven banking offices, including its principal office at 132 East High Street in
Jefferson City's central business district, three Jefferson City branch
facilities and a branch facility in each of the Missouri communities of Tipton,
California and St. Robert. See "Item 2. Properties".
Exchange National Bank is a full service bank conducting a general
banking and trust business, offering its customers checking and savings
accounts, electronic cash management services, internet banking, debit cards,
certificates of deposit, trust services, brokerage 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.
Exchange National Bank'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. Exchange National Bank'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 Exchange National Bank
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 Exchange National Bank's common stock. See "Regulation
Applicable to Bank Holding Companies" and "Regulation Applicable to our Banks".
CITIZENS UNION STATE BANK. Citizens Union State Bank was founded in
1932 as a Missouri bank known as Union State Bank of Clinton. Union State Bank
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. On May 4, 2000,
Union State Bank merged with Citizens State Bank of Calhoun and changed its name
to Citizens Union State Bank and Trust. Citizens Union State Bank has eight
banking offices, including its principal office at 102 North Second Street in
Clinton, Missouri, four Clinton branch facilities, and a branch facility in each
of the Missouri communities of Collins, Osceola and Windsor. See "Item 2.
Properties".
Citizens Union State Bank is a full service bank conducting a general
banking and trust business, offering its customers checking and savings
accounts, internet banking, debit cards, certificates of deposit, trust
services, brokerage services, safety deposit boxes and a wide range of lending
services, including commercial and industrial loans, single payment personal
loans, installment loans and commercial and residential real estate loans.
Citizens Union State Bank's deposit accounts are insured by the FDIC to
the extent provided by law. Citizens Union State Bank's operations are
supervised and regulated by the FDIC and the Missouri Division of Finance.
Periodic examinations of Citizens Union State Bank 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 Citizens Union State
Bank's common stock. See "Regulation Applicable to Bank Holding Companies " and
"Regulation Applicable to our Banks".
OSAGE VALLEY BANK. Osage Valley Bank was founded in 1891 as a Missouri
state bank. Osage Valley Bank has two banking offices, including its principal
office at 200 Main Street in Warsaw, Missouri and a branch facility in Warsaw,
Missouri. See "Item 2. Properties".
Osage Valley Bank is a full service bank conducting a general banking
business, offering its customers checking and savings accounts, internet
banking, debit cards, certificates of deposit, safety deposit
3
boxes and a wide range of lending services, including commercial and industrial
loans, single payment personal loans, installment loans and commercial and
residential real estate loans.
Osage Valley Bank's deposit accounts are insured by the FDIC to the
extent provided by law. Osage Valley Bank's operations are supervised and
regulated by the FDIC and the Missouri Division of Finance. Periodic
examinations of Osage Valley Bank 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 Osage Valley Bank's common stock. See "Regulation
Applicable to Bank Holding Companies " and "Regulation Applicable to our Banks".
EMPLOYEES
As of December 31, 2002, Exchange and its subsidiaries had
approximately 236 full-time and 32 part-time employees. None of its employees is
presently represented by any union or collective bargaining group, and our
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. Our 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 our 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 our Banks' market share of deposits and
loans in such service areas.
Exchange National Bank 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 and Moniteau Counties.
Exchange National Bank's principal competition for deposits and loans comes from
eight other banks and fourteen credit unions within its primary service area of
Jefferson City and, to an increasing extent, four other banks in nearby
communities. Based on publicly available information, management believes that
Exchange National Bank is the second largest (in terms of assets) of the banks
within Cole County. The main competition for Exchange National Bank's trust
services is from other commercial banks.
The areas in which Citizens Union State Bank competes for deposits and
loans are its primary service areas of Clinton, Collins, Windsor and Osceola,
Missouri and its secondary service area of the nearby communities in Henry and
St. Clair counties. Citizens Union State Bank's principal competition for
deposits and loans comes from four other banks within its primary service area
and, to an increasing extent, four other banks in nearby communities. Based on
publicly available information, management believes that Citizens Union State
Bank is the largest (in terms of assets) of the banks within Henry and St. Clair
counties. The main competition for Citizens Union State Bank's trust services is
from the trust departments of other commercial banks in the Kansas City area.
Osage Valley Bank competes for deposits and loans in its primary
service area of Warsaw, Missouri and its secondary service area of the nearby
communities in Benton County. Osage Valley Bank's principal competition for
deposits and loans comes from banks within its primary service area of Warsaw
and in nearby communities. Based on publicly available information, management
believes that Osage Valley Bank is the
4
second largest (in terms of assets) of the banks within Benton County; however,
Osage Valley Bank and three of the four other banks in Benton County are
comparable in size.
REGULATION APPLICABLE TO BANK HOLDING COMPANIES
GENERAL. As a registered bank holding company and a financial holding
company under the Bank Holding Company Act (the "BHC Act") and the
Gramm-Leach-Bliley Act (the "GLB Act"), Exchange is subject to supervision and
examination by the Federal Reserve Board (the "FRB"). The FRB 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 of law.
In addition, the FRB is empowered to impose civil money penalties for violations
of banking statutes and regulations. Regulation by the FRB is intended to
protect depositors of our Banks, not the shareholders of Exchange.
LIMITATION ON ACQUISITIONS. The BHC Act requires a bank holding company
to obtain prior approval of the FRB before:
- taking any action that causes a bank to become a controlled
subsidiary of the bank holding company;
- 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 bank holding company, and such bank or bank holding
company is not majority-owned by the acquiring bank holding
company prior to the acquisition;
- acquiring substantially all of the assets of a bank; or
- merging or consolidating with another bank holding company.
LIMITATION ON ACTIVITIES. The activities of bank holding companies are
generally limited to the business of banking, managing or controlling banks, and
other activities that the FRB has determined to be so closely related to banking
or managing or controlling banks as to be a proper incident thereto. In
addition, under the GLB Act, a bank holding company, all of whose controlled
depository institutions are "well capitalized" and "well managed" (as defined in
federal banking regulations) and which obtains "satisfactory" Community
Reinvestment Act ratings, may declare itself to be a "financial holding company"
and engage in a broader range of activities.
A financial holding company may affiliate with securities firms and
insurance companies and engage in other activities that are financial in nature
or incidental or complementary to activities that are financial in nature.
"Financial in nature" activities include:
- securities underwriting, dealing and market making;
- sponsoring mutual funds and investment companies;
- insurance underwriting and insurance agency activities;
- merchant banking; and
- activities that the FRB determines to be financial in nature or
incidental to a financial activity; or which is complementary to a
financial activity and does not pose a safety and soundness risk.
A financial holding company that desires to engage in activities that
are financial in nature or incidental to a financial activity but not previously
authorized by the FRB must obtain approval from the FRB before engaging in such
activity. Also, a financial holding company may seek FRB approval to engage in
an
5
activity that is complementary to a financial activity, if it shows that the
activity does not pose a substantial risk to the safety and soundness of insured
depository institutions or the financial system.
A financial holding company may acquire a company (other than a bank
holding company, bank or savings association) engaged in activities that are
financial in nature or incidental to activities that are financial in nature
without prior approval from the FRB. Prior FRB approval is required, however,
before the financial holding company may acquire control of more than 5% of the
voting shares or substantially all of the assets of a bank holding company, bank
or savings association. In addition, under the FRB's merchant banking
regulations, a financial holding company is authorized to invest in companies
that engage in activities that are not financial in nature, as long as the
financial holding company makes its investment with the intention of limiting
the duration of the investment, does not manage the company on a day-to-day
basis, and the company does not cross-market its products or services with any
of the financial holding company's controlled depository institutions.
If any subsidiary bank of a financial holding company ceases to be
"well-capitalized" or "well-managed," the FRB has authority to order the
financial holding company to divest its subsidiary banks. Alternatively, the
financial holding company may elect to limit its activities and the activities
of its subsidiaries to those permissible for a bank holding company that is not
a financial holding company. If any subsidiary bank of a financial holding
company receives a rating under the Community Reinvestment Act of less than
"satisfactory", then the financial holding company is prohibited from engaging
in new activities or acquiring companies other than bank holding companies,
banks or savings associations until the rating is raised to "satisfactory" or
better.
REGULATORY CAPITAL REQUIREMENTS. The FRB has promulgated capital
adequacy guidelines for use in its examination and supervision of bank holding
companies. If a bank holding company's capital falls below minimum required
levels, then the bank holding company must implement a plan to increase its
capital, and its ability to pay dividends and make acquisitions of new bank
subsidiaries is restricted.
The FRB's capital adequacy guidelines provide for the following types
of capital:
- Tier 1 capital, also referred to as core capital, which includes:
- 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 excluded from Tier 1 capital. Most intangible
assets are also deducted from Tier 1 capital.
- Tier 2 capital, also referred to as supplementary capital, which
includes:
- allowances for loan and lease losses (limited to 1.25% of
risk-weighted assets);
- most perpetual preferred stock and any related surplus;
- certain hybrid capital instruments, perpetual debt and
mandatory convertible debt securities; and
- intermediate-term preferred stock and intermediate-term
subordinated debt instruments (subject to limitations).
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The maximum amount of supplementary capital that qualifies as
Tier 2 capital is limited to 100% of Tier 1 capital.
- Total capital, which includes:
- Tier 1 capital;
- plus, qualifying Tier 2 capital;
- minus, investments in unconsolidated subsidiaries,
reciprocal holdings of bank holding company capital
securities, and deferred tax assets and other deductions.
The FRB's capital adequacy guidelines require that a bank holding
company maintain a Tier 1 leverage ratio equal to at least 4% of its average
total consolidated assets, a Tier 1 risk-based capital ratio equal to 4% of its
risk-weighted assets and a total risk-based capital ratio equal to 8% of its
risk-weighted assets.
On December 31, 2002, Exchange was in compliance with all of the FRB's
capital adequacy guidelines. Exchange's capital ratios on December 31, 2002 are
shown below:
Tier 1 Risk-Based Total Risk-Based Capital
Leverage Ratio (4% Capital Ratio (4% Ratio (8% minimum
minimum requirement) minimum requirement) requirement)
-------------------- -------------------- -----------
Exchange 7.36% 10.88% 12.10%
INTERSTATE BANKING AND BRANCHING. Under the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"), a bank
holding company is 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 FRB will 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. The Riegle-Neal Act also authorizes banks
to merge across state lines, thereby creating interstate branches. Banks are
also permitted to acquire and to establish de novo branches in other states
where authorized under the laws of those states.
Under the Riegle-Neal Act, individual states may restrict interstate
acquisitions in two ways. A state may prohibit an out-of-state bank holding
company from acquiring a bank located in the state unless the target bank has
been in existence for a specified minimum period of time (not to exceed five
years). A state may also establish limits on the total amount of insured
deposits within the state which are controlled by a single bank holding company,
provided that such deposit limit does not discriminate against out-of-state bank
holding companies.
SOURCE OF STRENGTH. FRB policy requires a bank holding company to serve
as a source of financial and managerial strength to its subsidiary banks. Under
this "source of strength doctrine," 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. Furthermore, the FRB has the right to order a bank holding
company to terminate any activity that the FRB believes is a serious risk to the
financial safety, soundness or stability of any subsidiary bank.
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LIABILITY OF COMMONLY CONTROLLED INSTITUTIONS. 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 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.
MISSOURI BANK HOLDING COMPANY REGULATION. Missouri prohibits any bank
holding company from acquiring ownership or control of, any bank or Missouri
depository trust company that has Missouri deposits if, after such acquisition,
the bank holding company would hold or control more than 13% of total Missouri
deposits. Because of this restriction, a bank holding company, prior to
acquiring control of a bank or depository trust company that has deposits in
Missouri, must receive the approval of the Missouri Division of Finance.
REGULATION APPLICABLE TO OUR BANKS
GENERAL. Exchange National Bank, a national bank, is subject to
regulation and examination by the OCC and the FDIC. Citizens Union State Bank, a
Missouri state non-member depository trust company, is subject to the regulation
of the Missouri Division of Finance and the FDIC. Osage Valley Bank, a Missouri
state non-member bank, is subject to the regulation of the Missouri Division of
Finance and the FDIC. Each of the OCC and the FDIC is empowered to issue cease
and desist orders against our Banks if it determines that activities of any of
our Banks represents unsafe and unsound banking practices or violations of law.
In addition, the OCC and the FDIC have the power to impose civil money penalties
for violations of banking statutes and regulations. Regulation by these agencies
is designed to protect the depositors of the bank, not shareholders of Exchange.
BANK 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 similar to the capital adequacy guidelines
established by the FRB for bank holding companies. Federal banking laws classify
an insured financial institution in one of the following five categories,
depending upon the amount of its regulatory capital:
- "well-capitalized" if it has a total Tier 1 leverage ratio of 5%
or greater, a Tier 1 risk-based capital ratio of 6% or greater and
a total risk-based capital ratio of 10% or greater (and is not
subject to any order or written directive specifying any higher
capital ratio);
- "adequately capitalized" if it has a total Tier 1 leverage ratio
of 4% or greater (or a Tier 1 leverage ratio of 3% or greater, if
the bank has a CAMELS rating of 1), a Tier 1 risk-based capital
ratio of 4% or greater and a total risk-based capital ratio of 8%
or greater;
- "undercapitalized" if it has a total 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 CAMELS rating of 1), a Tier 1 risk-based capital
ratio that is less than 4% or a total risk-based capital ratio
that is less than 8%;
- "significantly undercapitalized" if it has a total Tier 1 leverage
ratio that is less than 3%, a Tier 1 risk based capital ratio that
is less than 3% or a total risk-based capital ratio that is less
than 6%; and
- "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.
On December 31, 2002, each of our Banks was in compliance with its
federal banking agency's minimum capital requirements. The capital ratios and
classifications of each of our Banks as of December 31, 2002 is shown on the
following chart.
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Tier 1 Risk-Based Total Risk-Based
Leverage Ratio Capital Ratio Capital Ratio Classification
-------------- ------------- ------------- --------------
Exchange
National Bank 9.52% 12.89% 14.14% Well-Capitalized
Citizens Union
State Bank 8.39% 13.48% 14.68% Well-Capitalized
Osage Valley Bank 7.53% 13.63% 14.65% Well-Capitalized
All of our Banks must be well-capitalized for Exchange to remain a
financial holding company.
DEPOSIT INSURANCE AND ASSESSMENTS. The deposits of our Banks are
insured by the Bank Insurance Fund (the "BIF") administered by the FDIC, in
general up to a maximum of $100,000 per insured depositor. Under federal banking
regulations, insured banks are required to pay semi-annual assessments to the
FDIC for deposit insurance. The FDIC's risk-based assessment system requires
that 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 FDIC's assessment rates range from zero cents to 27 cents per
$100 of insured deposits. The FDIC has authority to increase the annual
assessment rate and there is no cap on the annual assessment rate which the FDIC
may impose.
LIMITATIONS ON INTEREST RATES AND LOANS TO ONE BORROWER. 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 have resulted in
reductions of net interest margins on certain classes of loans. Federal and
state laws impose additional restrictions on the lending activities of banks.
The maximum amount that a Missouri state-chartered bank may lend to any one
person or entity is generally 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.
PAYMENT OF DIVIDENDS. Our Banks are subject to federal and state laws
limiting the payment of dividends. Under the FDIA, an FDIC-insured institution
may not pay dividends if payment would cause it to become undercapitalized or
while it is undercapitalized. The National Bank Act and Missouri banking law
also prohibit the declaration of a dividend out of the capital and surplus of
the bank. These laws and regulations are not expected to have a material effect
upon the current dividend policies of our Banks.
COMMUNITY REINVESTMENT ACT. Our Banks are subject to the Community
Reinvestment Act (the "CRA") and implementing regulations. CRA regulations
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. CRA ratings are
taken into account by regulators in reviewing certain applications made by
Exchange and its banking subsidiaries.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Exchange and its non-bank
subsidiaries are "affiliates" within the meaning of the Federal Reserve Act. The
amount of loans or extensions of credit which our Banks may make to non-bank
affiliates, or to third parties secured by securities or obligations of the
non-bank affiliates, 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 subsidiaries of a bank 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
9
companies or, in the absence of comparable transactions, on terms and conditions
that would be offered to non-affiliated companies.
OTHER BANKING ACTIVITIES. The investments and activities of our Banks
are also subject to regulation by federal banking agencies, regarding
investments in subsidiaries, investments for their own account (including
limitations on investments in junk bonds and equity securities), loans to
officers, directors and their affiliates, security requirements, anti-tying
limitations, anti-money laundering, financial privacy and customer identity
verification 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.
CHANGES IN LAWS AND MONETARY POLICIES
RECENT LEGISLATION. On July 30, 2002, President Bush signed into law
the Sarbanes-Oxley Act of 2002. The stated goals of the Sarbanes-Oxley Act are
to increase corporate responsibility, to provide the enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures made pursuant to the securities laws. The proposed changes are
intended to allow shareholders to monitor the performance of companies and
directors more easily and efficiently.
The Sarbanes-Oxley Act generally applies to all companies that file or
are required to file periodic reports with the SEC under the Securities and
Exchange Act of 1934. Further, the Sarbanes-Oxley Act includes very specified
additional disclosure requirements and new corporate governance rules, requires
the SEC, securities exchanges and the NASDAQ Stock Market to adopt extensive
additional disclosure, corporate governance and other related rules and mandates
further studies of certain issues by the SEC and the Comptroller General. Given
the extensive SEC role in implementing rules relating to many of the
Sarbanes-Oxley Act's new requirements, the final scope of these requirements
remains to be determined.
This Sarbanes-Oxley Act addresses, among other matters: audit
committees; certification of financial statements by the chief executive officer
and the chief financial officer; the forfeiture of bonuses and profits made by
directors and senior officers in the twelve month period covered by restated
financial statements; a prohibition on insider trading during pension plan black
out periods; disclosure of off-balance sheet transactions; a prohibition on
personal loans to directors and officers (excluding Federally insured financial
institutions); expedited filing requirements for stock transaction reports by
officers and directors; the formation of a public accounting oversight board;
auditor independence; and various increased criminal penalties for violations of
securities laws.
Management has taken various measures to comply with the requirements
of the Sarbanes-Oxley Act. However, given the extensive role of the SEC in
implementing rules relating to many of the Act's new requirements, the final
scope of these requirements remains to be determined.
FUTURE LEGISLATION. Various pieces of legislation, including proposals
to change substantially the financial institution regulatory system, are from
time to time introduced and considered by the Missouri state legislature and the
United States Congress. This legislation may change banking statutes and the
operating environment of Exchange in substantial and unpredictable ways. If
enacted, this legislation could increase or decrease the cost of doing business,
limit or expand permissible activities or affect the competitive balance among
banks, savings associations, credit unions and other financial institutions.
Exchange cannot predict whether any of this potential legislation will be
enacted and, if enacted, the effect that it, or any implementing regulations,
could have on Exchange's business, results of operations or financial condition.
FISCAL MONETARY POLICIES. Exchange's business and earnings are effected
significantly by the fiscal and monetary policies of the federal government and
its agencies. Exchange is particularly affected by the
10
policies of the FRB, which regulates the supply of money and credit in the
United States. Among the instruments of monetary policy available to the FRB
are:
- conducting open market operations in United States government
securities;
- changing the discount rates of borrowings of depository
institutions;
- imposing or changing reserve requirements against depository
institutions' deposits; and
- imposing or changing reserve requirements against certain
borrowings by bank and their affiliates.
These methods are used in varying degrees and combinations to directly
effect the availability of bank loans and deposits, as well as the interest
rates charged on loans and paid on deposits. The policies of the FRB have a
material effect on Exchange's business, results of operations and financial
condition.
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.
AVAILABLE INFORMATION
As of the date of this report, we do not have an internet website on
which we could make available our Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K, or any amendments to those reports
filed or furnished to the SEC pursuant to Section 13(a) of the Securities
Exchange Act of 1934. Our Company will provide a copy of any of our public
filings, excluding exhibits, free of charge upon written request made to
Kathleen L. Bruegenhemke, Exchange National Bancshares, Inc., 132 East High
Street, Jefferson City, MO 65101. In addition, our public filings are available
to the public at the SEC's Internet website (www.sec.gov).
ITEM 2. PROPERTIES.
None of Exchange, Union, Mid Central Bancorp or ENB Holdings owns or
leases any property.
The principal offices of Exchange, ENB Holdings and Exchange National
Bank are located at 132 East High Street in the central business district of
Jefferson City, Missouri. The building, which is owned by Exchange National
Bank, is a three-story structure constructed in 1927. A 1998 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
Exchange and Exchange National Bank. Management believes that this facility is
adequately covered by insurance.
Exchange National Bank 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 Exchange National
Bank operations, and has full drive-in facilities. Exchange National Bank 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 Exchange
National Bank operations. In addition, Exchange National Bank has established a
branch banking facility at 800 Eastland Drive in Jefferson City with
approximately 4,100 square feet of usable office space, all of which is used for
Exchange National Bank's operations. In 2001, Exchange National Bank renovated
1,800 square feet of office space at 128 East High Street in Jefferson City for
use as additional operations. Management believes that the condition of these
banking facilities presently is adequate for Exchange National Bank's business
and that these facilities are adequately covered by insurance.
11
Exchange National Bank also owns a branch in each of the California,
Tipton and St. Robert communities. The California branch located at 1000 West
Buchanan Street was constructed in 2002 and it is a single story structure with
2,270 square feet of usable office space. All of the California branch's office
space is used for Exchange National Bank's operations. The Tipton branch which
is located at 445 South Moreau is a single story structure with 1,962 square
feet of usable office space all of which is used for Exchange National Bank's
operations. The Tipton branch was constructed in the mid 1970's. The St. Robert
branch located at 595 Missouri Avenue is a single story structure with 2,236
square feet of usable office space. The St. Robert branch was constructed in the
late 1960's. All of the St. Robert office space is used for Exchange National
Bank's operations.
The principal offices of Union and Citizens Union State Bank are
located at 102 North Second Street in Clinton, Missouri. The bank building,
which is owned by Citizens Union State Bank, 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 Union's and Citizens Union State
Bank's operations. Citizens Union State Bank also operates seven branch banking
facilities, of which six are owned by it. Citizens Union State Bank 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 Citizens Union State Bank operations. Citizens Union State Bank
owns a second branch banking facility, which is located at 1603 East Ohio in
Clinton. This facility is a two-story building which has approximately 5,760
square feet of usable office space, all of which is used for Citizens Union
State Bank operations. Citizens Union State Bank owns its third branch banking
facility, which is located at 608 East Ohio Street in Clinton. This facility is
a one-story building which has approximately 3,500 square feet of usable office
space, all of which is used for Citizens Union State Bank's operations. Citizens
Union State Bank leases its fourth Clinton branch banking facility, which is
located inside the Wal-Mart store at 1712 East Ohio. Citizens Union State Bank
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
Citizens Union State Bank. Citizens Union State Bank 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 Citizens Union State Bank operations. Citizens
Union State Bank owns a 1,500 square foot branch banking facility located at the
intersection of Highways 13 and 54 in Collins, Missouri. In addition to its
existing facilities, Citizens Union State Bank has a new branch facility at 125
South Main in Windsor, Missouri. This facility has 3,600 square feet of office
space of which 2,800 square feet is used for operations of Citizens Union State
Bank. Management believes that the condition of these banking facilities
presently is adequate for Citizens Union State Bank's business and that these
facilities are adequately covered by insurance.
The principal offices of Mid Central Bancorp and Osage Valley Bank are
located at 200 Main Street in Warsaw, Missouri. The bank building, which is
owned by Osage Valley Bank, is a two-story structure constructed in 1891. It has
approximately 8,900 square feet of usable office space, all of which is
currently used for Osage Valley Bank's operations. Osage Valley Bank also
operates one branch banking facility, which is owned by it. Osage Valley Bank's
branch facility is a one-story structure located at 2102 Long View Drive in
Warsaw, Missouri, and it has approximately 1,000 square feet of usable office
space, all of which is used for Osage Valley Bank operations. Management
believes that the condition of these banking facilities presently is adequate
for Osage Valley Bank's business and that these facilities are adequately
covered by insurance.
12
ITEM 3. LEGAL PROCEEDINGS.
None of Exchange or its subsidiaries 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 our Company's
common stock during the fourth quarter of the year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Pursuant to General Instruction G(2) to Form 10-K, the information
required by this Item, other than that referred to below, is incorporated herein
by reference to the information under the caption "Market Price of and Dividends
on Equity Securities and Related Matters" in Exchange's 2002 Annual Report to
Shareholders.
We refer you to Item 12 of this report under the caption "Securities
Authorized For Issuance Under Equity Compensation Plans" for certain equity plan
information.
ITEM 6. SELECTED FINANCIAL DATA.
Pursuant to General Instruction G(2) to Form 10-K, the information
required by this Item is incorporated herein by reference to the report of the
independent auditors and the information under the caption "Selected
Consolidated Financial Data" in Exchange's 2002 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
Pursuant to General Instruction G(2) to Form 10-K, certain information
required by this Item is incorporated herein by reference to the information
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Exchange's 2002 Annual Report to Shareholders.
FORWARD-LOOKING STATEMENTS
This report, including information included or incorporated by
reference in this report, contains certain forward-looking statements with
respect to the financial condition, results of operations, plans, objectives,
future performance and business of our Company and its subsidiaries, including,
without limitation:
- statements that are not historical in nature, and
- statements preceded by, followed by or that include the words
"believes," "expects," "may," "will," "should," "could,"
"anticipates," "estimates," "intends" or similar expressions.
Forward-looking statements are not guarantees of future performance or
results. They involve risks, uncertainties and assumptions. Actual results may
differ materially from those contemplated by the forward-looking statements due
to, among others, the following factors:
- competitive pressures among financial services companies may
increase significantly,
13
- costs or difficulties related to the integration of the business
of Exchange and its acquisition targets may be greater than
expected,
- changes in the interest rate environment may reduce interest
margins,
- general economic conditions, either nationally or in Missouri, may
be less favorable than expected,
- legislative or regulatory changes may adversely affect the
business in which Exchange and its subsidiaries are engaged,
- technological changes may be more difficult or expensive than
anticipated, and
- changes may occur in the securities markets.
We have described under "Factors That May Affect Future Results of Operations,
Financial Condition or Business" additional factors that could cause actual
results to be materially different from those described in the forward-looking
statements. Other factors that we have not identified in this report could also
have this effect. You are cautioned not to put undue reliance on any
forward-looking statement, which speak only as of the date they were made.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR
BUSINESS
We are identifying important risks and uncertainties that could affect
our Company's results of operations, financial condition or business and that
could cause them to differ materially from our Company's historical results of
operations, financial condition or business, or those contemplated by
forward-looking statements made herein or elsewhere, by, or on behalf of, our
Company. Factors that could cause or contribute to such differences include, but
are not limited to, those factors described below.
BECAUSE EXCHANGE PRIMARILY SERVES MISSOURI, A DECLINE IN THE LOCAL
ECONOMIC CONDITIONS COULD LOWER EXCHANGE'S PROFITABILITY. The profitability of
Exchange is dependant on the profitability of its banking subsidiaries, which
operate out of central Missouri. The financial condition of these banks is
affected by fluctuations in the economic conditions prevailing in the portion of
Missouri in which their operations are located. Accordingly, the financial
conditions of both Exchange and its banking subsidiaries would be adversely
affected by deterioration in the general economic and real estate climate in
Missouri.
An increase in unemployment, a decrease in profitability of regional
businesses or real estate values or an increase in interest rates are among the
factors that could weaken the local economy. With a weaker local economy:
- customers may not want or need the products and services of
Exchange's banking subsidiaries,
- borrowers may be unable to repay their loans,
- the value of the collateral security of our banks' loans to
borrowers may decline, and
- the overall quality of our banks' loan portfolio may decline.
Making mortgage loans and consumer loans is a significant source of
profits for Exchange's banking subsidiaries. If individual customers in the
local area do not want these loans, profits may decrease. Although our banks
could make other investments, our banks may earn less revenue on these
investments than on loans. Also, our banks' losses on loans may increase if
borrowers are unable to make payments on their loans.
INTEREST RATE CHANGES MAY REDUCE THE PROFITABILITY OF EXCHANGE AND ITS
BANKING SUBSIDIARIES. The primary source of earnings for Exchange's banking
subsidiaries is net interest income. To
14
be profitable, our banks have to earn more money in interest and fees on loans
and other interest-earning assets than they pay as interest on deposits and
other interest-bearing liabilities and as other expenses. If prevailing interest
rates decrease, as has already happened on several occasions since January 2001,
the amount of interest our banks earn on loans and investment securities may
decrease more rapidly than the amount of interest our banks have to pay on
deposits and other interest-bearing liabilities. This would result in a decrease
in the profitability of Exchange and its banking subsidiaries, other factors
remaining equal.
Changes in the level or structure of interest rates also affect
- our banks' ability to originate loans,
- the value of our banks' loan and securities portfolios,
- our banks' ability to realize gains from the sale of loans and
securities,
- the average life of our banks' deposits, and
- our banks' ability to obtain deposits.
Fluctuations in interest rates will ultimately affect both the level of
income and expense recorded on a large portion of our banks' assets and
liabilities, and the market value of all interest-earning assets, other than
interest-earning assets that mature in the short term. Our banks' interest rate
management strategy is designed to stabilize net interest income and preserve
capital over a broad range of interest rate movements by matching the interest
rate sensitivity of assets and liabilities. Although Exchange believes that its
banks' current mix of loans, mortgage-backed securities, investment securities
and deposits is reasonable, significant fluctuations in interest rates may have
a negative effect on the profitability of our banks.
THE PROFITABILITY OF EXCHANGE'S BANKING SUBSIDIARIES DEPENDS ON THEIR
ASSET QUALITY AND LENDING RISKS. Success in the banking industry largely depends
on the quality of loans and other assets. The loan officers of Exchange's
banking subsidiaries are actively encouraged to identify deteriorating loans.
Loans are also monitored and categorized through an analysis of their payment
status. Our banks' failure to timely and accurately monitor the quality of their
loans and other assets could have a materially adverse effect on the operations
and financial condition of Exchange and its banking subsidiaries. There is a
degree of credit risk associated with any lending activity. Our banks attempt to
minimize their credit risk through loan diversification. Although our banks'
loan portfolios are varied, with no undue concentration in any one industry,
substantially all of the loans in the portfolios have been made to borrowers in
central and west central Missouri. Therefore, the loan portfolios are
susceptible to factors affecting the central and west central Missouri area and
the level of non-performing assets is heavily dependant upon local conditions.
There can be no assurance that the level of our banks' 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 Exchange and its banking subsidiaries.
THE PROVISIONS FOR POSSIBLE LOAN LOSSES OF EXCHANGE'S BANKING
SUBSIDIARIES MAY NEED TO BE INCREASED. Each of Exchange's banking subsidiaries
make a provision for loan losses based upon management's analysis of potential
losses in the loan portfolio and consideration of prevailing economic
conditions. Each of our banks 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. Furthermore,
various regulatory agencies, as an integral part of their examination process,
periodically review the loan portfolio, provision for loan losses, and real
estate acquired by foreclosure of each of our banks. Such agencies may require
our banks to recognize additions to the provisions for loan losses based on
their judgments of information available to them at the time of the examination.
Any additional provisions for possible loan losses, whether required as a result
of regulatory review or initiated by Exchange itself, may materially alter the
financial outlook of Exchange and its banking subsidiaries.
15
IF EXCHANGE AND ITS BANKS ARE UNABLE TO SUCCESSFULLY COMPETE FOR
CUSTOMERS IN EXCHANGE'S MARKET AREA, THEIR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS COULD BE ADVERSELY AFFECTED. Exchange's banking subsidiaries face
substantial competition in making loans, attracting deposits and providing other
financial products and services. Our banks have numerous competitors for
customers in their market area. Such competition for loans comes principally
from:
- other commercial banks - mortgage banking companies
- savings banks - finance companies
- savings and loan associations - credit unions
Competition for deposits comes principally from:
- other commercial banks - brokerage firms
- savings banks - insurance companies
- savings and loan associations - money market mutual funds
- credit unions - mutual funds (such as
corporate and government
securities funds)
Many of these competitors have greater financial resources and name
recognition, more locations, more advanced technology and more financial
products to offer than our banks. Competition from larger institutions may
increase due to an acceleration of bank mergers and consolidations in Missouri
and the rest of the nation. In addition, the recently enacted Gramm-Leach-Bliley
Act removes many of the remaining restrictions in federal banking law against
cross-ownership between banks and other financial institutions, such as
insurance companies and securities firms. The new law will likely increase the
number and financial strength of companies that compete directly with our banks.
The profitability of our banks depends of their continued ability to attract new
customers and compete in Missouri. New competitors, as well as the expanding
operations of existing competitors, have had, and are expected to continue to
have, an adverse impact on our banks' market share of deposits and loans in our
banks' respective service areas. If our banks are unable to successfully
compete, their financial condition and results of operations will be adversely
affected.
EXCHANGE AND ITS BANKING SUBSIDIARIES MAY BE ADVERSELY AFFECTED BY
CHANGES IN LAWS AND REGULATIONS AFFECTING THE FINANCIAL SERVICES INDUSTRY. Banks
and bank holding companies such as Exchange 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. The regulatory authorities
have extensive discretion in connection with their supervision and enforcement
activities and their examination policies, including the imposition of
restrictions on the operation of a bank, the classification of assets by an
institution and requiring an increase in a bank's allowance for loan losses.
These regulations are not necessarily designed to maximize the profitability of
banking institutions. Future changes in the banking laws and regulations could
have a material adverse effect on the operations and financial condition of
Exchange and its banking subsidiaries.
THE SUCCESS OF EXCHANGE AND ITS BANKS LARGELY DEPENDS ON THE EFFORTS OF
THEIR EXECUTIVE OFFICERS. The success of Exchange and its banking subsidiaries
has been largely dependant on the efforts of 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. Smith or
Turner, or any of the other key executive officers could have a materially
adverse effect on Exchange and its banks.
16
EXCHANGE CANNOT PREDICT HOW CHANGES IN TECHNOLOGY WILL AFFECT ITS
BUSINESS. The financial services market, including banking services, is
increasingly affected by advances in technology, including developments in:
- telecommunications - Internet-based banking
- data processing - telebanking
- automation - debit cards and so-called
"smart cards"
The ability of Exchange's banking subsidiaries to compete successfully
in the future will depend on whether they can anticipate and respond to
technological changes. To develop these and other new technologies our banks
will likely have to make additional capital investments. Although our banks
continually invest in new technology, there can be no assurance that our banks
will have sufficient resources or access to the necessary proprietary technology
to remain competitive in the future
ADDITIONAL FACTORS. Additional risks and uncertainties that may affect
the future results of operations, financial condition or business of our Company
and its banking subsidiaries include, but are not limited to: (i) adverse
publicity, news coverage by the media, or negative reports by brokerage firms,
industry and financial analysts regarding our Banks or our Company; and (ii)
changes in accounting policies and practices.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our Company's exposure to market risk is reviewed on a regular basis by
our Banks' Asset/Liability Committees and Boards of Directors. Interest rate
risk is the potential of economic losses due to future interest rate changes.
These economic losses can be reflected as a loss of future net interest income
and/or a loss of current fair market values. The objective is to measure the
effect on net interest income and to adjust the balance sheet to minimize the
inherent risk while at the same time maximizing income. Management realizes
certain risks are inherent and that the goal is to identify and minimize those
risks. Tools used by our Bank's management include the standard GAP report
subject to different rate shock scenarios. At December 31, 2002, the rate shock
scenario models indicated that annual net interest income could change by as
much as 9% should interest rates rise or fall within 200 basis points from their
current level over a one year period. However there are no assurances that the
change will not be more or less than this estimate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Pursuant to General Instruction G(2) to Form 10-K, 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 Exchange's 2002 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to General Instruction G(3) to Form 10-K, 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
Compensation and Other Information--Executive Officers," and (iv) the
information under the caption "Section 16(a) Beneficial Ownership
17
Reporting Compliance," in each case, in Exchange's definitive Proxy Statement
for its 2003 Annual Meeting of Shareholders to be filed pursuant to Regulation
14A.
ITEM 11. EXECUTIVE COMPENSATION.
Pursuant to General Instruction G(3) to Form 10-K, the information
required by this Item is incorporated herein by reference to (i) the information
under the caption "Executive Compensation and Other Information--Report on
Executive Compensation," (ii) the information under the caption "Executive
Compensation and Other Information--Compensation Committee Interlocks and
Insider Participation," (iii) the information under the caption "Executive
Compensation and Other Information--Executive Compensation," (iv) the
information under the caption "Executive Compensation and Other
Information--Option Grants," (v) the information under the caption "Executive
Compensation and Other Information--Option Exercises and Holdings," (vi) the
information under the caption "Executive Compensation and Other
Information--Exchange National Bank Profit-Sharing Trust," (vii) the information
under the caption "Executive Compensation and Other Information--Citizens Union
State Bank Profit-Sharing Plan," (viii) the information under the caption
"Executive Compensation and Other Information--Stock Option Plan," (ix) the
information under the caption "Executive Compensation and Other
Information--Pension Plan," (x) the information under the caption "Executive
Compensation and Other Information--Campbell Retention/Asset Growth Incentive
Agreement," (xi) the information under the caption "Executive Compensation and
Other Information--Smith Employment Agreement," (xii) the information under the
caption "Executive Compensation and Other Information--Change of Control
Agreement," (xiii) the information under the caption "Executive Compensation and
Other Information--Company Performance," and (xiv) the information under the
caption "Election of Directors--Compensation of Directors", in each case, in
Exchange's definitive Proxy Statement for its 2003 Annual Meeting of
Shareholders to be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Pursuant to General Instruction G(3) to Form 10-K, the information
required by this Item, other than that presented below, is incorporated herein
by reference to the information under the caption "Ownership of Common Stock" in
Exchanges definitive Proxy Statement for its 2003 Annual Meeting of Shareholders
to be filed pursuant to Regulation 14A.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Our Company has only one equity compensation plan for its employees
pursuant to which options, rights or warrants may be granted. See Note 14 to the
Consolidated Financial Statements for further information on the material terms
of this plan. The following is a summary of the shares reserved for issuance
pursuant to outstanding options, rights or warrants granted under equity
compensation plans as of December 31, 2002:
Number of securities
Number of securities remaining available for future
to be issued upon Weighted-average issuance under equity
exercise of exercise price of compensation plans
outstanding options, outstanding options, (excluding securities reflected
Plan category warrants and rights warrants and rights in column (a))
- -----------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
Equity compensation plans 51,104* $26.30 235,643
approved by security holders
18
Equity compensation -- -- --
plans not approved by
security holders
Total 51,104* $26.30 235,643
- -------------------
* Consists of shares reserved for issuance pursuant to outstanding stock
option grants under our Company's Incentive Stock Option Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction G(3) to Form 10-K, the information
required by this Item is incorporated herein by reference to the information
under the caption "Transactions with Directors and Officers" in Exchange's
definitive Proxy Statement for its 2003 Annual Meeting of Shareholders to be
filed pursuant to Regulation 14A.
ITEM 14. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures. Within 90
days prior to the filing of this report, our Company's senior management,
including our Chief Executive Officer and our Chief Financial Officer, carried
out an evaluation of the effectiveness of the design and operation of our
Company's disclosure controls and procedures. Our Company's disclosure controls
and procedures are designed to ensure that information we are required to
disclose in our periodic filings with the Securities and Exchange Commission,
including annual reports such as this report, is reported accurately and
suitably within the time periods specified in the SEC's rules and forms. Based
upon that evaluation, senior management concluded that our Company's disclosure
controls and procedures are effective in causing material information related to
our Company (including our consolidated subsidiaries) to be recorded, processed,
summarized and reported on a timely basis and to ensure that the quality and
timeliness of our public disclosures comply with applicable disclosure
obligations.
(b) Changes in internal controls. There were no significant
changes in our internal controls or in other factors that in management's
estimation could significantly affect our disclosure controls and procedures
after the date of our Company's most recent evaluation.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits, Financial Statements and Financial Statement
Schedules:
1. Financial Statements:
The following consolidated financial statements of our Company and
reports of our Company's independent auditors, included in our Annual Report to
Shareholders for the year ended December 31, 2002 under the caption
"Consolidated Financial Statements", are incorporated herein by reference:
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 2002 and 2001.
Consolidated Statements of Income for the years ended December
31, 2002, 2001 and 2000.
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the years ended December 31, 2002,
2001 and 2000.
19
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules:
Financial statement schedules have been omitted because they either are
not required or are not applicable or because equivalent information has been
included in the financial statements, the notes thereto or elsewhere herein.
3. Exhibits:
Exhibit No. Description
- ----------- -----------
3.1 Articles of Incorporation of our Company (filed as Exhibit 3(a) to our
Company's Registration Statement on Form S-4 (Registration No.
33-54166) and incorporated herein by reference).
3.2 Bylaws of our Company (filed with our Company's Annual Report on Form
10-K for the year ended December 31, 2000 as Exhibit 3.2 and
incorporated herein by reference).
4 Specimen certificate representing shares of our Company's $1.00 par
value common stock (filed with our Company's Annual Report on Form 10-K
for the year ended December 31, 1999 as Exhibit 4 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-K for the year ended December 31, 1997 as Exhibit 10.4 and
incorporated herein by reference).*
10.2 Exchange National Bancshares, Inc. Incentive Stock Option Plan (filed
with our Company's Annual Report on Form 10-K for the year ended
December 31, 1999 as Exhibit 10.2 and incorporated herein by
reference).
10.3 Form of Change of Control Agreement and schedule of parties thereto
(filed with our Company's Annual Report on Form 10-K for the year ended
December 31, 2000 as Exhibit 10.3 and incorporated herein by
reference).*
13 The Registrant's 2002 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-K shall be
deemed to be filed with the Commission).
21 List of Subsidiaries (filed with our Company's Annual Report on Form
10-K for the year ended December 31, 2000 as Exhibit 21 and
incorporated herein by reference).
23 Consent of Independent Auditors
- ----------------------
* Management contracts or compensatory plans or arrangements required to be
identified by Item 14(a).
(b) Reports on Form 8-K.
20
No reports on Form 8-K were filed by our Company during the
three month period ended December 31, 2002, except for a
report on Form 8-K filed with the SEC on November 13, 2002 to
report the certifications made pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(c) Exhibits.
See exhibits identified above under Item 14(a)3.
(d) Financial Statement Schedules.
See financial statement schedules identified above under Item
14(a)2, if any.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 21, 2003 By /s/ James E. Smith
-------------------------------
James E. Smith, Chairman
of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
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 21, 2003 /s/ James E. Smith
------------------------------------
James E. Smith, Chairman of the Board and
Chief Executive Officer (Principal Executive
Officer)
March 21, 2003 /s/ Richard G. Rose
-----------------------------------
Richard G. Rose, Treasurer (Principal
Financial Officer and Principal Accounting
Officer)
March 21, 2003 /s/ David T. Turner
------------------------------------
David T. Turner, Director
March 21, 2003 /s/ James R. Loyd
-----------------------------------
James R. Loyd, Director
March 21, 2003 /s/ Charles G. Dudenhoeffer, Jr.
------------------------------------
Charles G. Dudenhoeffer, Jr., Director
March 21, 2003 /s/ David R. Goller
------------------------------------
David R. Goller, Director
March 21, 2003 /s/ Philip D. Freeman
------------------------------------
Philip D. Freeman, Director
March 21, 2003 /s/ Kevin L. Riley
------------------------------------
Kevin L. Riley, Director
March 21, 2003 /s/ Gus S. Wetzel, II
------------------------------------
Gus S. Wetzel, II, Director
22
CERTIFICATIONS
I, James E. Smith, certify that:
1. I have reviewed this annual report on Form 10-K of Exchange National
Bancshares, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 21, 2003
/s/ James E. Smith
--------------------------------
James E. Smith,
Chairman of the
Board and Chief Executive Officer
23
CERTIFICATIONS
I, Richard G. Rose, certify that:
1. I have reviewed this annual report on Form 10-K of Exchange National
Bancshares, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 21, 2003
/s/ Richard G. Rose
--------------------
Richard G. Rose
Treasurer
24
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
13 The Registrant's 2002 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-K shall be deemed to be filed with
the Commission)
23 Consent of Independent Auditors __
25