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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, 2003
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________.
Commission file number: 0-23636
EXCHANGE NATIONAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1626350
(State or other jurisdiction of (I.R.S. Employer 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, including area code)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
None N/A
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE 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. | |
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 3,256,655 shares of voting stock of the
registrant held by non-affiliates computed by reference to the $35.77 closing
price of such stock on March 1, 2004, was $116,490,549. The aggregate market
value of the 3,255,002 shares of voting stock of the issuer held by
non-affiliates computed by reference to the $37.31 closing price of such stock
on June 30, 2003, the last business day of the registrant's most recently
completed second fiscal quarter, was $121,444,125. As of March 1, 2004, the
registrant had 4,298,353 shares of common stock, par value $1.00 per share,
issued and 4,169,847 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
indicated parts of this report: (1) 2003 Annual Report to Shareholders - Part II
and (2) definitive Proxy Statement for the 2004 Annual Meeting of Shareholders
to be filed with the Commission pursuant to Regulation 14A - Part III.
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.
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.
RECENT DEVELOPMENTS
ISSUANCE OF TRUST PREFERRED SECURITIES. Our Company is in the process of
completing a private placement of $25,000,000 in 30-year floating rate trust
preferred securities (TPS). The interest rate on the TPS will be a floating rate
based on a specified margin above three-month LIBOR. It is expected that the
placement will be closed on or about March 17, 2004. Based on the LIBOR rate as
of March 8, 2004, the initial interest rate would be 3.81%. The TPS can be
prepaid without penalty at any time after five years from the issuance date.
The TPS represent preferred interests in a special purpose subsidiary
trust organized by our Company. Our Company will invest approximately $750,000
in common interests in the trust and the purchaser in the private placement will
purchase $25,000,000 in preferred interests. The proceeds will be used to
purchase from our Company its 30-year deeply subordinated debentures whose terms
mirror those stated above for the TPS. The debentures are guaranteed by our
Company pursuant to a subordinated guarantee. The trustee for the TPS holders
will be U.S. Bank, N.A. The trustee will not have the power to take enforcement
action in the event of a default under the TPS for five years from the date of
default. In the event of default, however, our Company would be precluded from
paying dividends until the default is cured.
The proceeds of the TPS placement will be used by our Company to pay down
and eliminate a loan in the amount of $11,000,000 under its line of credit, to
enable our Company to repurchase shares of its outstanding common stock, to
provide additional capital to one of its subsidiary banks to facilitate
expansion into two new markets and for general corporate purposes.
Currently, Federal Reserve Regulations allow TPS to be counted for up to
25% of total core capital elements. Because of a change in accounting practices
which do not permit TPS to be included in capital, the Federal Reserve Board is
considering whether to modify or eliminate Tier 1 capital treatment for TPS. In
the
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event the Federal Reserve Board would eliminate Tier 1 capital treatment for TPS
without providing grandfather rights to issues outstanding prior to the change
in treatment, our Company's ability to use the proceeds for share repurchases
and expansion would be inhibited, but not eliminated.
LEE'S SUMMIT AND BRANSON, MISSOURI BRANCHES. In the first quarter of 2004,
our Company announced its intention to expand into the Lee's Summit and Branson,
Missouri markets. Subject to regulatory approval, we intend to open a de novo
branch facility in each of those communities during the second quarter of 2004.
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 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
3
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 nine
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 Springfield, 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 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, 2003, Exchange and its subsidiaries had approximately
245 full-time and 35 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
4
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 deposits) 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, Springfield, 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, six other banks in nearby
communities. Based on publicly available information, management believes that
Citizens Union State Bank is the largest (in terms of deposits) 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 largest (in terms of deposits) of the
five banks within Benton County.
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;
5
- 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 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
6
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).
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, 2003, Exchange was in compliance with all of the FRB's
capital adequacy guidelines. Exchange's capital ratios on December 31, 2003 are
shown below:
Total Risk-Based
Tier 1 Risk-Based Capital Ratio (8%
Leverage Ratio (4% Capital Ratio (4% minimum
minimum requirement) minimum requirement) requirement)
-------------------- -------------------- -----------------
Exchange 7.18% 9.78% 10.98%
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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.
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
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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, 2003, 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, 2003 is shown on the
following chart.
Tier 1 Total
Risk-Based Risk-Based
Leverage Ratio Capital Ratio Capital Ratio Classification
-------------- ------------- ------------- ----------------
Exchange National Bank 9.17% 11.94% 13.19% Well-Capitalized
Citizens Union State Bank 7.44% 10.24% 11.39% Well-Capitalized
Osage Valley Bank 6.76% 12.12% 13.10% 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
9
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 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
10
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 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
The address of our principal executive offices is 132 East High Street,
Jefferson City, MO 65101 and our telephone number at this location is (573)
761-6100. Our common stock trades on the Nasdaq national market under the symbol
"EXJF".
11
We electronically file certain documents with the Securities and Exchange
Commission (SEC). We file annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K (as appropriate), along with any related
amendments and supplements. From time-to-time, we also may file registration and
related statements pertaining to equity or debt offerings. You may read and
download our SEC filings over the internet from several commercial document
retrieval services as well as at the SEC's internet website (www.sec.gov). You
may also read and copy our SEC filings at the SEC's public reference room
located at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC 1-800-SEC-0330 for further information concerning the public
reference room and any applicable copy charges.
As of the date of this report, we do not maintain an internet website on
which we make available our public filings with the SEC, including 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 is
presently working to establish a website to make such filings and reports
available. We anticipate having the site operational during the 2nd quarter of
2004. 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. Please note that any internet addresses provided in this report are for
information purposes only and are not intended to be hyperlinks. Accordingly, no
information found and/or provided at such internet addresses is intended or
deemed to be incorporated by reference herein.
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.
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.
12
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 eight branch banking facilities, of
which seven 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 Springfield,
Missouri branch banking facility located at 321 West Battlefield. The facility
is a two-story building constructed in 1986 which has approximately 12,500
square feet of usable office space. The entire upper level (6,600 square feet)
is leased to a non-affiliate with the remaining usable office space used for
Citizens Union State Bank operations. 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.
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, 2003.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
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 our Company's 2003 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.
OUR PURCHASES OF EQUITY SECURITIES
The following table summarizes the purchases made by or on behalf of our
Company or certain affiliated purchasers of shares of our common stock during
the fourth quarter of the year ended December 31, 2003:
(d) Maximum Number
(or Approximate
(b) (c) Total Number of Dollar Value) of
(a) Total Average Shares (or Units) Shares (or Units)
Number of Price Purchased as Part that May Yet Be
Shares (or Paid per of Publicly Purchased Under
Units) Share Announced Plans or the Plans or
Period Purchased (or Unit) Programs * Programs *
- ------------------- ---------- --------- ------------------- ------------------
October 1-31, 2003 0 -- -- --
November 1-30, 2003 0 -- -- --
December 1-31, 2003 0 -- -- --
Total 0 -- -- --
- ----------
* On August 22, 2001, our Company announced that our Board of Directors
authorized the purchase, through open market transactions, of up to
$2,000,000 market value of our Company's common stock. Management was
given discretion to determine the number and pricing of the shares to be
purchased, as well as, the timing of any such purchases. On November 26,
2002, our Company announced that our Board of Directors authorized an
additional $2,000,000 for the purchase of our Company's stock through open
market transactions.
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 2003 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 2003 Annual Report to Shareholders.
14
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,
- 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:
15
- 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 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
16
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 PROBABLE 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 probable 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 probable 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.
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
17
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.
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, 2003, the rate shock
scenario models indicated that annual net interest income could change by as
much as 5.82% 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 2003 Annual Report to Shareholders.
18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Our Company's management has evaluated, with the participation of our
principal executive and principal financial officers, the effectiveness of our
disclosure controls and procedures as of December 31, 2003. Based upon and as of
the date of that evaluation, our principal executive and principal financial
officers concluded that our disclosure controls and procedures were effective to
ensure that information required to be disclosed in the reports we file and
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported as and when required. It should be noted that any system
of disclosure controls and procedures, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system are met. In addition, the design of any system of disclosure controls and
procedures is based in part upon assumptions about the likelihood of future
events. Because of these and other inherent limitations of any such system,
there can be no assurance that any design will always succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.
There has been no change in our company's internal control over financial
reporting that occurred during the fiscal quarter ended December 31, 2003 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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, other than that referred to below, 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," (iv) the information under the caption
"Election of Directors--Meetings of the Board and Committees," and (v) the
information under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance," in each case, in Exchange's definitive Proxy Statement for its 2004
Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.
CODE OF ETHICS
Our Company has adopted a Code of Business Conduct and Ethics for
directors, officers (including our principal executive officer, principal
financial officer, principal accounting officer, controller and persons
performing similar functions) and employees. A copy of this Code of Business
Conduct and Ethics has been filed as an exhibit to this Annual Report on Form
10-K for the year ended December 31, 2003.
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--
19
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--Smith Employment Agreement," (xi) the information under the caption
"Executive Compensation and Other Information--Change of Control Agreement,"
(xii) the information under the caption "Executive Compensation and Other
Information--Company Performance," and (xiii) the information under the caption
"Election of Directors--Compensation of Directors", in each case, in Exchange's
definitive Proxy Statement for its 2004 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
Exchange's definitive Proxy Statement for its 2004 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 15 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, 2003:
Number of Number of securities
securities to be remaining available
issued upon Weighted-average for future issuance
exercise of exercise price under equity
outstanding of outstanding compensation plans
options, options, (excluding securities
warrants and warrants and reflected in column
Plan category rights rights (a))
- --------------------- ---------------- ----------------- ---------------------
(a) (b) (c)
Equity compensation
plans approved by
security holders 98,891* $20.27 329,717
Equity compensation
plans not approved by
security holders -- -- --
Total 98,891* $20.27 329,717
- --------------
* 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
20
Officers" in Exchange's definitive Proxy Statement for its 2004 Annual Meeting
of Shareholders to be filed pursuant to Regulation 14A.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
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 captions (i) "Ratification of Selection of Independent
Auditors--Independent Auditors' Fees" and (ii) "Ratification of Selection of
Independent Auditors--Audit Committee Pre-Approval of Audit and Permissible
Non-Audit Services", in each case, in Exchange's definitive Proxy Statement for
its 2004 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.
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, 2003 under the caption
"Consolidated Financial Statements", are incorporated herein by reference:
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 2003 and 2002.
Consolidated Statements of Income for the years ended December 31,
2003, 2002 and 2001.
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the years ended December 31, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for the years ended December
31, 2003, 2002 and 2001.
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).
21
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 2003 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).
14 Code of Business Conduct and Ethics of our Company.
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
24 Power of Attorney (included on the signature page to this
Annual Report on Form 10-K).
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
as amended
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
as amended
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
- ----------
* Management contracts or compensatory plans or arrangements required to be
identified by Item 15(a).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by our Company during the three
month period ended December 31, 2003 except for the following two
reports:
Form 8-K dated November 19, 2003, filed with the SEC on
November 24, 2003 with respect to Items 5 and 7 to report our
issuance of a press release dated November 19, 2003 announcing
that our board of directors had approved a quarterly cash
dividend of 18 cents per share, payable January 1, 2004 to
shareholders of record at the close of business on December
15, 2003.
Form 8-K dated October 31, 2003, filed with the SEC on
November 3, 2003 with respect to Items 7 and 12 to report our
issuance of a press release dated October 31, 2003 containing
unaudited financial information and accompanying discussion
for the third quarter ended September 30, 2003.
22
(c) Exhibits.
See exhibits identified above under Item 15(a)3.
(d) Financial Statement Schedules.
See financial statement schedules identified above under Item
15(a)2, if any.
23
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 15, 2004 By /s/ James E. Smith
------------------------------------------
James E. Smith, Chairman of the Board
and Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James E. Smith and Richard G. Rose, or
either of them, his attorneys-in-fact, for such person in any and all
capacities, to sign any amendments to this report and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
either of said attorneys-in-fact, or substitute or substitutes, may do or cause
to be done by virtue hereof.
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 15, 2004 /s/ James E. Smith
----------------------------------------
James E. Smith, Chairman of the
Board and Chief Executive Officer
(Principal Executive Officer)
March 15, 2004 /s/ Richard G. Rose
----------------------------------------
Richard G. Rose, Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
March 15, 2004 /s/ David T. Turner
----------------------------------------
David T. Turner, Director
March 15, 2004 /s/ James R. Loyd
----------------------------------------
James R. Loyd, Director
March 15, 2004 /s/ Charles G. Dudenhoeffer, Jr.
----------------------------------------
Charles G. Dudenhoeffer, Jr.,
Director
March 15, 2004 /s/ David R. Goller
----------------------------------------
David R. Goller, Director
March 15, 2004 /s/ Philip D. Freeman
----------------------------------------
Philip D. Freeman, Director
March 15, 2004 /s/ Kevin L. Riley
----------------------------------------
Kevin L. Riley, Director
March 15, 2004 /s/ Gus S. Wetzel, II
----------------------------------------
Gus S. Wetzel, II, Director
24
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
13 The Registrant's 2003 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)
14 Code of Business Conduct and Ethics of our Company
23 Consent of Independent Auditors
24 Power of Attorney (included on the signature page
to this Annual Report on Form 10-K).
31.1 Certification of Chief Executive Officer pursuant
to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended
31.2 Certification of Chief Financial Officer pursuant
to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended
32.1 Certification of Chief Executive Officer pursuant
to 18 U.S.C. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant
to 18 U.S.C. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
25