-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H9v3u7jzaBEZ/6VXLHxxFIwqSXTMBIdFKGiPzLvxRCwbo0/2bUs+rSJwnotueube yMJuQlQzBTy+jzZ8LihoQQ== 0000950134-03-004462.txt : 20030325 0000950134-03-004462.hdr.sgml : 20030325 20030325132259 ACCESSION NUMBER: 0000950134-03-004462 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXCHANGE NATIONAL BANCSHARES INC CENTRAL INDEX KEY: 0000893847 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 431626350 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23636 FILM NUMBER: 03615479 BUSINESS ADDRESS: STREET 1: 132 EAST HIGH STREET CITY: JEFFERSON CITY STATE: MO ZIP: 65101 BUSINESS PHONE: (573)761-6100 MAIL ADDRESS: STREET 1: P.O. BOX 688 CITY: JEFFERSON CITY STATE: MO ZIP: 65102 10-K 1 c75697e10vk.txt FORM 10-K ================================================================================ 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. ================================================================================ 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 2 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). 6 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. 7 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. 8
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 EX-13 3 c75697exv13.txt 2002 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 2002 ANNUAL REPORT TO SHAREHOLDERS EXCHANGE NATIONAL BANCSHARES, INC. JEFFERSON CITY, MISSOURI EXCHANGE NATIONAL BANCSHARES, INC. Jefferson City, Missouri March 21, 2003 Dear Shareholders: Upon assuming the position of chairman last April, I was charged with the responsibility of building on the key strengths of your organization. As a shareholder of Exchange National Bancshares, Inc., you already know that Exchange's business plan is premised on the foundation of providing solid earnings, steady growth and consistent dividends to its investors. For the foreseeable future, management's strategy is to focus on what got us to where we are today ... generating quality loans funded by competitive deposits. From the outside looking in, 2002 may have appeared to be a "quiet, non-eventful" year for your Company. However, such was not the case. During the fourth quarter of 2002, a major technology enhancement project was completed. Past acquisitions have been fully integrated from a data processing perspective and now your management team is able to concentrate on expansion into new markets. In addition to centralizing the data processing system, much of 2002 was devoted to establishing a dividend reinvestment program for investors desiring to increase their ownership interest in a cost-efficient manner. If you have not already enrolled in this program, I encourage you to review the plan by requesting an informational booklet from our investor relations department. In striving to improve your Company's financial performance, your Board of Directors authorized management to begin a stock repurchase program in 2001. As management continues to evaluate opportunities to acquire other financial institutions, it simply makes good business sense to purchase Exchange stock when it is selling at a discount as compared to our peers. The stock buyback program was very active in 2002 as approximately 60,000 shares were repurchased during the year. With reference to 2002 financial highlights, total assets increased $18,593,000 or 2.4% during 2002 as a result of sustained internal growth. Earnings for 2002 were $8,093,000 or $2.85 per fully diluted common share compared to $7,102,000 or $2.48 per share in 2001. The growth in earnings is primarily the result of eliminating goodwill amortization as required by a new accounting rule under Generally Accepted Accounting Principles (GAAP). Management continues to be proud of your Company's ability to pay cash dividends. Shareholders received dividends totaling $0.88 per share in 2002, an increase of 3.5% over the amount received the previous year. Dividends of $0.19 per share were paid January 1 and April 1. For the July 1 and October 1 dividends, the per share rate was increased to $0.20. A special dividend of $0.10 per share was paid December 1, 2002. Capitalization of your Company expressed in terms of tier one capital to adjusted average total assets (leverage ratio) was 7.36% at December 31, 2002 compared to 7.05% at December 31, 2001. Your Company's total capital to risk-weighted assets ratio was 12.10% at December 31, 2002 compared to 11.83% at December 31, 2001. The increased levels result from earnings retention rather than asset shrinkage. In closing, I want to acknowledge the 53 years of service that my predecessor, Donald Campbell, contributed to your Company. He very much embodied the spirit of our corporate motto of "looking forward, moving ahead." I plan to continue the business strategy of enhancing shareholder value through growth without negatively impacting earnings or asset quality. Sincerely, JAMES E. SMITH Chairman & Chief Executive Officer EXCHANGE NATIONAL BANCSHARES, INC. DESCRIPTION OF BUSINESS 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, Citizens Union State Bank. 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 to become a financial holding company. In addition to ownership of its subsidiaries, Exchange could seek expansion through acquisition and may engage in those activities (such as investments in banks or operations closely related to banking) in which it is permitted to engage under applicable law. It is not currently anticipated that Exchange will engage in any business other than that directly related to its ownership of its banking subsidiaries or other financial institutions. Except as otherwise provided herein, references herein to "Exchange" or our "Company" include Exchange and its consolidated subsidiaries. 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. Citizens Union State Bank was founded in 1932 as a Missouri bank known as Union State Bank of Clinton. Citizens 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. 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. 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. Each of our subsidiary Banks is a full service bank conducting a general banking business, offering its customers checking and savings accounts, debit cards, certificates of deposit, 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. In addition, Exchange National Bank and Citizens Union State Bank each provide trust services. The deposit accounts of our Banks are insured by the Federal Deposit Insurance Corporation (the "FDIC") to the extent provided by law. Exchange National Bank is a member of the Federal Reserve System, and its operations are supervised and regulated by the Office of the Comptroller of the Currency (the "OCC"), the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and the FDIC. The operations of Citizens Union State Bank and Osage Valley Bank are supervised and regulated by the FDIC and the Missouri Division of Finance. A periodic examination of Exchange National Bank is conducted by representatives of the OCC, and periodic examinations of Citizens Union State Bank and 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 shareholders. Exchange, Union, Mid Central Bancorp and ENB Holdings are subject to supervision by the Federal Reserve Board. 2 SELECTED CONSOLIDATED FINANCIAL DATA The following table presents selected consolidated financial information for our Company as of and for each of the years in the five-year period ended December 31, 2002. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of our Company, including the related notes, presented elsewhere herein. (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------ ------------ ---------- ---------- --------- INCOME STATEMENT DATA Interest income $ 40,463 49,289 46,544 32,249 32,180 Interest expense 16,326 25,389 25,177 16,225 17,197 ------------ ------------ ---------- ---------- --------- Net interest income 24,137 23,900 21,367 16,024 14,983 Provision for loan losses 936 1,154 1,222 910 702 ------------ ------------ ---------- ---------- --------- Net interest income after provision for loan losses 23,201 22,746 20,145 15,114 14,281 ------------ ----------- ---------- ---------- --------- Security gains (losses), net 163 98 (28) -- 6 Other noninterest income 5,940 5,299 3,618 2,948 2,698 ------------ ------------ ---------- ---------- --------- Total noninterest income 6,103 5,397 3,590 2,948 2,704 Noninterest expense 17,832 17,400 15,658 11,527 10,515 ------------ ------------ ---------- ---------- --------- Income before income taxes 11,472 10,743 8,077 6,535 6,470 Income taxes 3,379 3,641 2,592 2,071 2,117 ------------ ------------ ---------- ---------- --------- Net income $ 8,093 7,102 5,485 4,464 4,353 ============ ============ ========== ========== ========= DIVIDENDS Declared on common stock $ 2,510 2,425 2,260 1,732 1,609 Paid on common stock 2,493 2,425 2,115 1,695 1,609 Ratio of total dividends declared to net income 31.01% 34.15 41.20 38.80 36.96 PER SHARE DATA Basic earnings per common share $ 2.86 2.48 2.05 2.06 2.02 Diluted earnings per common share 2.85 2.48 2.05 2.06 2.02 Basic weighted average shares of common stock outstanding 2,828,572 2,858,252 2,669,370 2,162,414 2,155,446 Diluted weighted average shares of common stock outstanding 2,835,442 2,858,939 2,669,370 2,162,414 2,155,446
3
YEAR ENDED DECEMBER 31, ----------------------- 2002 2001 2000 1999 1998 ------------- ------------ ---------- ---------- ---------- BALANCE SHEET DATA (AT PERIOD END) Investment securities $ 186,724 181,649 155,917 111,237 101,066 Loans 486,564 464,364 468,471 326,229 288,218 Total assets 794,418 775,825 719,603 494,946 458,703 Total deposits 591,191 579,794 576,263 381,020 373,522 Securities sold under agreements to repurchase and other short term borrowed funds 70,421 62,033 16,942 27,643 17,667 Other borrowed money 41,795 43,138 42,378 26,451 17,151 Total stockholders' equity 82,827 78,353 73,584 55,948 46,113 EARNINGS RATIOS Return on average total assets 1.04% 0.96 0.85 0.95 0.96 Return on average stockholders' equity 9.89 9.21 8.49 9.41 9.73 ASSET QUALITY RATIOS Allowance for loan losses to loans 1.46 1.44 1.48 1.46 1.53 Nonperforming loans to loans (1) 0.62 0.86 1.73 0.52 0.28 Allowance for loan losses to nonperforming loans (1) 236.66 166.98 85.87 281.45 544.81 Nonperforming assets to loans and foreclosed assets (2) 0.67 1.03 1.76 0.55 0.34 Net loan charge-offs to average loans 0.10 0.31 0.05 0.18 0.07 CAPITAL RATIOS Average stockholders' equity to average total assets 10.51 10.37 9.99 10.07 9.83 Total risk-based capital ratio 12.10 11.83 11.90 15.06 12.94 Tier 1 risk-based capital ratio 10.88 10.58 10.65 13.81 11.69 Leverage ratio 7.36 7.05 7.07 9.73 7.87
- ----------------- (1) Nonperforming loans consist of nonaccrual loans and loans contractually past due 90 days or more and still accruing. (2) Nonperforming assets consist of nonperforming loans plus foreclosed assets. 4 A WORD CONCERNING FORWARD-LOOKING STATEMENTS 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, - - changes may occur in the securities markets. We have described under the caption "Factors That May Affect Future Results of Operations, Financial Condition or Business" in our Annual Report on Form 10-K for the year ended December 31, 2002, and in other reports that we file with the SEC from time to time, 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. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Our Company was organized on October 23, 1992, and on April 7, 1993, it acquired The Exchange National Bank of Jefferson City. The acquisition of Exchange National Bank represented a combination of entities under common control and, accordingly, was accounted for in a manner similar to a pooling of interests. On November 3, 1997, our Company acquired Union State Bancshares, Inc. and its wholly-owned subsidiary, Union State Bank and Trust of Clinton. The acquisition of Union was accounted for as a purchase transaction. 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 of Warsaw. This acquisition also was accounted for as a purchase transaction. Finally, on June 16, 2000, our Company acquired CNS Bancorp, Inc. and its subsidiary, City National Savings Bank, FSB. City National subsequently was merged into Exchange National Bank. This acquisition also was accounted for as a purchase transaction. Through the respective branch network, Exchange National Bank, Citizens Union State Bank and Osage Valley Bank provide similar products and services in three defined geographic areas. The products and services offered include a broad range of commercial and personal banking services, including certificates of deposit, individual retirement and other time deposit accounts, checking and other demand deposit accounts, interest checking accounts, savings accounts, and money market accounts. Loans include real estate, commercial, installment, and other consumer loans. Other financial services include automatic teller machines, trust services, credit related insurance, and safe deposit boxes. The revenues generated by each business segment consist primarily of interest income, generated from the loan and debt and equity security portfolios, and service charges and fees, generated from the deposit products and services. The geographic areas are defined to be communities surrounding Jefferson City, Clinton and Warsaw, Missouri. The products and services are offered to customers primarily within their respective geographical areas. The business segment results which follow are consistent with our Company's internal reporting system which is consistent, in all material respects, with generally accepted accounting principles and practices prevalent in the banking industry. Our Company has prepared all of the consolidated financial information in this report in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In preparing the consolidated financial statements in accordance with U.S. GAAP, our Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurances that actual results will not differ from those estimates. We have identified the accounting policy related to the allowance for loan losses as critical to the understanding of our Company's results of operations, since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change. The impact and any associated risks related to these policies on our business operations are discussed in the "Lending and Credit Management" section below. Our Company's consolidated net income for 2002 increased $991,000 or 14.0% over 2001 and followed a $1,617,000 or 29.5% increase for 2001 compared to 2000. Basic earnings per common share increased from $2.05 for 2000, to $2.48 for 2001 and increased to $2.86 for 2002. Diluted earnings per common share increased from $2.05 for 2000, to $2.48 for 2001 and increased to $2.85 for 2002. Return on average total assets increased from 0.85% for 2000, to 0.96% for 2001 and increased to 1.04% for 2002. Return on average total stockholders' equity increased from 8.49% for 2000 to 9.21% for 2001 and increased to 9.89% for 2002. Average investment securities and federal funds sold increased $22,525,000 or 10.6% to $235,981,000 for 2002 compared to $213,456,000 for 2001 and followed a $51,088,000 or 31.5% increase for 2001 compared to 2000. The increase in 2002 reflects increased collateral requirements for securities sold under agreement to repurchase. The increase in 2001 reflects the effect of both increased collateral requirements for securities sold under agreements to repurchase as well as having a full year of earning assets from acquisitions made during 2000. 6 Average loans outstanding increased $12,898,000 or 2.8% to $475,366,000 for 2002 compared to $462,468,000 for 2001 and followed a $38,915,000 or 9.2% increase for 2001 compared to 2000. Average commercial loans outstanding decreased $514,000 or 0.4% for 2002 compared to 2001 and followed a $8,450,000 or 6.2% increase for 2001 compared to 2000. Average real estate loans outstanding increased $18,710,000 or 7.0% for 2002 compared to 2001 and followed a $36,768,000 or 16.0% increase for 2001 compared to 2000. Average consumer loans outstanding decreased $5,298,000 or 10.3% for 2002 compared to 2001 and followed a $6,303,000 or 10.9% decrease for 2001 compared to 2000. The primary reason for the increase in average loans outstanding in 2002 compared to 2001 is due to increased real estate financing due to lower rates. The primary reason for the increase in average loans outstanding in 2001 compared to 2000 is due to having the loans of the companies acquired during 2000 on the books for a full year in 2001. Our Company acquired approximately $122,000,000 of loans in the acquisitions of 2000. However, it should be noted that consumer loans decreased on average in 2002 and 2001. These decreases reflect the low rates that existed in the consumer auto market that was fueled by manufacturers' low or zero rate financing programs. Our Company chose to not aggressively pursue consumer auto loans during 2002 and 2001 and as such this portion of the loan portfolio declined in balance. Average total time deposits decreased $4,579,000 or 0.9% to $505,907,000 for 2002 compared to $510,486,000 for 2001 and followed a $57,297,000 or 12.6% increase for 2001 compared to 2000. The 2002 decrease is due to disintermediation due to a low interest rate environment. Most of the 2001 increase in average tine deposits is due to having deposits of the companies acquired during 2000 on the books for the entire year of 2001 versus only a partial year during 2000. Average securities sold under agreements to repurchase increased $27,643,000 or 71.9% to $66,102,000 for 2002 compared to $38,459,000 for 2001 and followed a $18,297,000 or 90.8% increase for 2001 compared to 2000. Those variances reflected competition for institutional funds awarded based upon competitive bids. Average interest-bearing demand notes to U.S. Treasury increased $80,000 or 10.3% to $854,000 for 2002 compared to $774,000 for 2001 and followed a $110,000 or 12.4% decrease for 2001 compared to 2000. Balances in this account are governed by the U.S. Treasury's funding requirements. Average other borrowed money increased $966,000 or 2.3% to $42,226,000 for 2002 compared to $41,260,000 for 2001 and followed a $347,000 or 0.8% decrease for 2001 compared to 2000. The 2002 increase reflects additional Federal Home Loan Bank borrowings to fund loan demand. The 2001 decrease reflects repayments of Federal Home Loan Bank advances. 7 The following table provides a comparison of fully taxable equivalent earnings, including adjustments to interest income and tax expense for interest on tax-exempt loans and investments. (DOLLARS EXPRESSED IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2002 2001 2000 ------------ ------------ ------------ Interest income $ 40,463 49,289 46,544 Fully taxable equivalent (FTE) adjustment 780 828 821 ------------ ------------ ------------ Interest income (FTE basis) 41,243 50,117 47,365 Interest expense 16,326 25,389 25,177 ------------ ------------ ------------ Net interest income (FTE basis) 24,917 24,728 22,188 Provision for loan losses 936 1,154 1,222 ------------ ------------ ------------ Net interest income after provision for loan losses (FTE basis) 23,981 23,574 20,966 Noninterest income 6,103 5,397 3,590 Noninterest expense 17,832 17,400 15,658 ------------ ------------ ------------ Income before income taxes (FTE basis) 12,252 11,571 8,898 ------------ ------------ ------------ Income taxes 3,379 3,641 2,592 FTE adjustment 780 828 821 ------------ ------------ ------------ Income taxes (FTE basis) 4,159 4,469 3,413 ------------ ------------ ------------ Net income $ 8,093 7,102 5,485 ============ ============ ============ Average total earning assets $ 713,116 678,389 588,516 ============ ============ ============ Net interest margin 3.49% 3.65 3.77 ============ ============ ============
Our Company's primary source of earnings is net interest income, which is the difference between the interest earned on interest earning assets and the interest paid on interest bearing liabilities. Net interest income on a fully taxable equivalent basis increased $189,000 or 0.8% to $24,917,000 for 2002 compared to $24,728,000 for 2001, and followed a $2,540,000 or 11.5% increase for 2001 compared to 2000. Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) decreased from 3.77% for 2000, to 3.65% for 2001, and to 3.49% for 2002. The provision for loan losses decreased $218,000 or 18.9% to $936,000 for 2002 compared to $1,154,000 for 2001 and followed a $68,000 or 5.6% decrease for 2001 compared to 2000. The decrease in the provision in 2002 was primarily due to a decrease in nonperforming loans. The decrease in the provision in 2001 was primarily due to a decrease in nonperforming loans. The allowance for loan losses totaled $7,121,000 or 1.46% of loans outstanding at December 31, 2002 compared to $6,674,000 or 1.44% of loans outstanding at December 31, 2001 and $6,940,000 or 1.48% of loans outstanding at December 31, 2000. The allowance for loan losses expressed as a percentage of nonperforming loans was 85.87% at December 31, 2000, 166.98% at December 31, 2001, and 236.66% at December 31, 2002. 8 RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2002 AND 2001 Our Company's net income increased by $991,000 or 14% to $8,093,000 for the year ended December 31, 2002 compared to $7,102,000 for 2001. Net interest income on a fully taxable equivalent basis increased to $24,917,000 or 3.49% of average earning assets for 2002 compared to $24,728,000 or 3.65% of average earning assets for 2001. The provision for loan losses for 2002 was $936,000 compared to $1,154,000 for 2001. Net loans charged off for 2002 were $488,000 compared to $1,421,000 for 2001. Noninterest income and noninterest expense for the years ended December 31, 2002 and 2001 were as follows: (DOLLARS EXPRESSED IN THOUSANDS)
YEAR ENDED DECEMBER 31, INCREASE (DECREASE) ----------------------- ------------------------ 2002 2001 AMOUNT % -------- --------- --------- ---------- NONINTEREST INCOME Service charges on deposit accounts $ 2,684 2,097 587 28.0% Trust department income 513 430 83 19.3 Brokerage income 88 91 (3) (3.3) Mortgage loan servicing fees 222 463 (241) (52.1) Gain on sales of mortgage loans 1,768 1,459 309 21.2 Gain (loss) on sales and calls of debt securities 163 98 65 66.3 Credit card fees 153 150 3 2.0 Other 512 609 (97) (15.9) --------- --------- --------- --------- $ 6,103 5,397 $ 706 $ 13.1% ========= ========= ========= ========= NONINTEREST EXPENSE Salaries and employee benefits $ 9,337 8,790 547 6.2% Occupancy expense, net 1,079 1,006 73 7.3 Furniture and equipment expense 1,887 1,597 290 18.2 FDIC insurance assessment 103 105 (2) (1.9) Advertising and promotion 467 457 10 2.2 Postage, printing, and supplies 918 765 153 20.0 Legal, examination, and professional fees 1,002 876 126 14.4 Credit card expenses 95 96 (1) 1.0 Credit investigation and loan collection 292 199 93 46.7 Amortization of goodwill -- 1,219 (1,219) (100.0) Amortization of intangible assets 299 313 (14) (4.5) Other 2,353 1,977 376 19.0 --------- --------- --------- --------- $ 17,832 17,400 432 $ 2.5% ========= ========= ========= =========
Noninterest income increased $706,000 or 13.1% to $6,103,000 for 2002 compared to $5,397,000 for 2001. Service charges on deposit accounts increased $587,000 or 28.0% primarily due to the institution of a new overdraft program. This program has generated an increase of approximately $560,000 in insufficient fund fees collected during 2002 compared to 2001. The increase in trust department income reflects higher trust distribution fees collected in 2002 compared to 2001. The decrease in mortgage servicing fees of $241,000 reflects a $258,000 write-down of our Company's mortgage servicing rights to their fair value during 2002. This write-down is reflective of the high refinancing activity that our Company has experienced in its servicing portfolio during the third and fourth quarters of 2002. Gains on sales of mortgage loans increased $309,000 or 21.2% due to an increase in volume of loans originated and sold to the secondary market from approximately $106,922,000 during 2001 to approximately $107,312,000 during 2002. The increase in volume of loans sold is a result of increased refinancing activity and new mortgage lending as a result of lower mortgage rates in effect during 2002 compared to those in effect during 2001. The $65,000 or 66.3% increase in gain (loss) on sales and calls of debt securities represents gains on the sale 9 of securities during 2002. The $97,000 or 15.9% decrease in other noninterest income primarily reflects gains recognized in 2001 on the sales of properties obtained in previous acquisitions. Noninterest expense increased $432,000 or 2.5% to $17,832,000 for 2002 compared to $17,400,000 for 2001. Salaries and benefits increased $547,000 or 6.2% and reflects normal salary adjustments, increased insurance benefit costs, and increased pension and profit sharing expense. The $73,000 or 7.3% increase in occupancy expense and the $290,000 or 18.2% increase in furniture and equipment expense are primarily related to increased depreciation associated with a new branch and hardware and software purchased in conjunction with a data processing conversion. The $153,000 or 20.0% increase in postage, printing and supplies reflects costs incurred by our Banks related to the data processing conversion. These costs include new forms and additional statement mailings. The $126,000 or 14.4% increase in legal, examination, and professional fees is due in large part to consulting fees related to our Company wide data processing conversion. During 2002, our Company converted all three of our banks to a common data processing platform. Approximately $1,500,000 was spent to purchase new core software and hardware systems. These costs will be amortized over periods ranging from 3 to 5 years and will be reflected in increased furniture and equipment expense in the upcoming years. The $1,219,000, or 100.0% decrease in amortization of goodwill reflects the discontinuance of goodwill amortization as required by SFAS No. 142, Goodwill and Other Intangible Assets. The periodic amortization of goodwill has been replaced by an annual impairment test. The $376,000 or 19.0% increase in other noninterest expense reflects increases in various categories including telecommunications expense, data processing expense, and training. These increases are primarily related to our Company's conversion to the new core data processing system. YEARS ENDED DECEMBER 31, 2001 AND 2000 Our Company's net income increased by $1,617,000 or 29.5% to $7,102,000 for the year ended December 31, 2001 compared to $5,485,000 for 2000. Net interest income on a fully taxable equivalent basis increased to $24,728,000 or 3.65% of average earning assets for 2001 compared to $22,188,000 or 3.77% of average earning assets for 2000. The provision for loan losses for 2001 was $1,154,000 compared to $1,222,000 for 2000. Net loans charged off for 2001 were $1,421,000 compared to $197,000 for 2000. The increase in net loans charged off for 2001 is primarily represented by three large commercial credits. Noninterest income and noninterest expense for the years ended December 31, 2001 and 2000 were as follows: (DOLLARS EXPRESSED IN THOUSANDS)
YEAR ENDED DECEMBER 31, INCREASE (DECREASE) --------------------------- ---------------------------- 2001 2000 AMOUNT % ------------ ------------ ------------ ------------- NONINTEREST INCOME Service charges on deposit accounts $ 2,097 $ 1,569 $ 528 33.7% Trust department income 430 560 (130) (23.2) Brokerage income 91 89 2 2.3 Mortgage loan servicing fees 463 536 (73) (13.6) Gain on sales of mortgage loans 1,459 402 1,057 262.9 Gain (loss) on sales and calls of debt securities 98 (28) 126 350.0 Credit card fees 150 145 5 3.5 Other 609 318 291 91.5 ------------ ------------ ------------ ------------ $ 5,397 $ 3,591 $ 1,806 50.3% ============ ============ ============ ============ NONINTEREST EXPENSE Salaries and employee benefits $ 8,790 $ 7,429 $ 1,361 18.3% Occupancy expense, net 1,006 981 25 2.3 Furniture and equipment expense 1,597 1,563 34 2.2 FDIC insurance assessment 105 101 4 4.0 Advertising and promotion 457 336 121 36.0
10 Postage, printing, and supplies 765 737 28 3.8 Legal, examination, and professional fees 876 609 267 43.8 Credit card expenses 96 101 (5) (5.0) Credit investigation and loan collection 199 236 (37) (15.7) Amortization of goodwill 1,219 972 247 25.4 Amortization of intangible assets 313 347 (34) (9.8) Other 1,977 2,246 (269) (4.6) ------------ ------------ ------------ ------------ $ 17,400 $ 15,658 $ 1,742 11.1% ============ ============ ============ ============
Noninterest income increased $1,806,000 or 50.3% to $5,397,000 for 2001 compared to $3,591,000 for 2000. Service charges on deposit accounts increased $528,000 or 33.7% primarily due to the institution of a new overdraft program at Exchange National Bank and Citizens Union State Bank. This program has generated an increase of approximately $476,000 in insufficient fund fees collected during 2001 compared to 2000. The balance of the increase in service charge income is mainly attributed to the acquisitions made during the second quarter of the prior year. The decrease in trust department income reflects lower trust distribution fees collected this year compared to the same period last year. The decrease in mortgage servicing fees of $73,000 reflects a $53,000 write-down of our Company's mortgage servicing rights to their fair value during 2001. This write-down is reflective of the high refinancing activity that our company has experienced in its servicing portfolio during the second and third quarters of 2001. Gains on sales of mortgage loans increased $1,057,000 or 262.9% due to an increase in volume of loans originated and sold to the secondary market from approximately $27,236,000 during 2000 to approximately $106,922,000 during 2001. The increase in volume of loans sold is a result of increased refinancing activity and new mortgage lending as a result of lower mortgage rates in effect during 2001 compared to those in effect during 2000. The $126,000 or 350.0% increase in gain (loss) on sales and calls of debt securities represents gains on the sale of securities during the fourth quarter of 2001. $127,000 of the $291,000 or 91.5% increase in other noninterest income reflects gains recognized on the sales of properties obtained in previous acquisitions. The balance of the increase is spread across various categories of other income including ATM surcharge fees, safe deposit box rental income and miscellaneous fee income. Noninterest expense increased $1,742,000 or 11.1% to $17,400,000 for 2001 compared to $15,658,000 for 2000. Approximately $747,000 of this increase was related to the acquisitions of CNS Bancorp and Mid Central during 2000. In addition, the increase in salaries and benefits reflects a one time retirement accrual of $252,000 that will be paid during the first quarter of 2002. Excluding the increases associated with the acquisitions and retirement accrual, salaries and benefits increased $656,000 or 8.8% and reflects normal salary adjustments, increased insurance benefit costs, and additional hires. The $25,000 or 2.3% increase in occupancy expense and the $34,000 or 2.2% increase in furniture and equipment expense are primarily related to increased costs associated with the acquisitions made in the prior year. The $121,000 or 36.0% increase in advertising and promotion is due in part to additional product advertising at Exchange National Bank related to trust services and internet banking. The $28,000 or 3.8% increase in postage, printing and supplies reflects costs incurred by our Banks for compliance with the privacy provisions of the Gramm-Leach-Bliley Act. The $267,000 or 43.8% increase in legal, examination, and professional fees is due in large part to consulting fees related to a company wide technology assessment that will determine a standard core processing platform for all of our banks. The entire increase in amortization of goodwill is related to the acquisitions. NET INTEREST INCOME Fully taxable equivalent net interest income increased $189,000 or 0.8% to $24,917,000 for 2002 compared to $24,728,000 for 2001, and followed a $2,540,000 or 11.5% increase from 2001 compared to 2000. The increase in net interest income in 2002 and 2001 was the result of increased earning assets. The following table presents average balance sheets, net interest income, average yields of earning assets, and average costs of interest bearing liabilities on a fully taxable equivalent basis for each of the years in the three-year period ended December 31, 2002. 11 (DOLLARS EXPRESSED IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------------------- 2002 2001 2000 ------------------------------ ------------------------------ ------------------------------ INTEREST RATE INTEREST RATE INTEREST RATE AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/ BALANCE EXPENSE(1) PAID(1) BALANCE EXPENSE(1) PAID(1) BALANCE EXPENSE(1) PAID(1) ---------- --------- ------- ---------- --------- ------- ---------- --------- ------ ASSETS Loans: (2) Commercial $ 143,727 $ 9,062 6.31% $ 144,241 $ 11,573 8.02% $ 135,791 $ 12,077 8.89% Real estate 285,342 19,262 6.75 266,632 21,651 8.12 229,864 19,291 8.39 Consumer 46,297 3,940 8.51 51,595 4,726 9.16 57,898 5,079 8.77 Investment in debt and equity securities:(3) U.S. Treasury and U.S. Government agencies 146,096 5,492 3.76 120,366 7,352 6.11 109,150 7,116 6.52 State and municipal 37,133 2,493 6.71 39,581 2,720 6.87 39,072 2,740 7.01 Other 4,970 215 4.33 4,753 239 5.03 3,908 263 6.73 Federal funds sold 47,782 736 1.54 48,756 1,762 3.61 10,238 640 6.25 Interest bearing deposits in other financial institutions 1,769 43 2.43 2,465 94 3.81 2,595 159 6.13 ---------- --------- ---------- --------- ---------- --------- Total interest earning assets 713,116 41,243 5.78 678,389 50,117 7.39 588,516 47,365 8.05 All other assets 71,982 72,267 64,236 Allowance for loan Losses (6,936) (7,139) (6,098) ---------- ---------- ---------- Total assets $778,162 $ 743,517 $ 646,654 ========== ========== ==========
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YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------------------- 2002 2001 2000 ------------------------------ ------------------------------ ----------------------------- INTEREST RATE INTEREST RATE INTEREST RATE AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/ BALANCE EXPENSE(1) PAID(1) BALANCE EXPENSE(1) PAID(1) BALANCE EXPENSE(1) PAID(1) ---------- --------- ------- ---------- --------- ------- ---------- --------- ------ LIABILITIES AND STOCKHOLDERS' EQUITY NOW accounts $ 87,759 $ 911 1.04% $ 87,970 $ 1,946 2.21% $83,594 $ 2,399 2.87% Savings 49,726 514 1.03 47,360 1,050 2.22 43,606 1,221 2.80 Money market 62,818 856 1.36 60,247 1,793 2.98 53,556 2,146 4.01 Time deposits of $100,000 and over 58,432 1,867 3.20 49,555 2,662 5.37 40,282 2,363 5.87 Other time deposits 247,172 8,921 3.61 265,354 14,210 5.36 232,151 13,116 5.65 ------- ------ ------- ------ ------- ------ Total time deposits 505,907 13,069 2.58 510,486 21,661 4.24 453,189 21,245 4.69 Federal funds purchased and securities sold under agreements to repurchase 66,102 1,004 1.52 38,459 1,219 3.17 20,162 1,162 5.76 Interest-bearing demand notes to U.S. Treasury 854 11 1.29 774 28 3.62 884 58 6.56 Other borrowed money 42,226 2,242 5.31 41,260 2,481 6.01 41,607 2,712 6.52 ---------- --------- ---------- --------- ---------- --------- Total interest- bearing liabilities 615,089 16,326 2.65 590,979 25,389 4.30 515,842 25,177 4.88 Demand deposits 71,107 63,233 60,208 Other liabilities 10,163 12,220 5,978 ---------- ---------- ---------- Total liabilities 696,359 666,432 582,028 Stockholders' equity 81,803 77,085 64,626 ---------- ---------- ---------- Total liabilities and stockholders' equity $ 778,162 $ 743,517 $ 646,654 ========== ========== ========== Net interest income $ 24,917 $ 24,728 $ 22,188 ========= ========= ========= Net interest margin 3.49% 3.65% 3.77% ==== ==== ====
- -------------- (1) Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate, net of nondeductible interest expense. Such adjustments totaled $780,000, $828,000 and $821,000 for the years ended December 31, 2002, 2001 and 2000, respectively. (2) Nonaccruing loans are included in the average amounts outstanding. (3) Average balances based on amortized cost. 13 The following table presents, on a fully taxable equivalent basis, an analysis of changes in net interest income resulting from changes in average volumes of earning assets and interest bearing liabilities and average rates earned and paid. The change in interest due to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of change in each. (DOLLARS EXPRESSED IN THOUSANDS)
YEAR ENDED YEAR ENDED DECEMBER 31, 2002 DECEMBER 31, 2001 COMPARED TO COMPARED TO DECEMBER 31, 2001 DECEMBER 31, 2000 ------------------------------ ------------------------------ TOTAL CHANGE DUE TO TOTAL CHANGE DUE TO -------- ------------------- -------- ------------------- CHANGE VOLUME RATE CHANGE VOLUME RATE -------- -------- -------- -------- -------- -------- INTEREST INCOME ON A FULLY TAXABLE EQUIVALENT BASIS: Loans: (1) Commercial $ (2,511) (41) (2,470) $ (504) 722 (1,226) Real estate(2) (2,389) 1,444 (3,883) 2,361 3,003 (642) Consumer (786) (465) (321) (353) (570) 217 Investment in debt and equity securities: U.S. Treasury and U.S. Government agencies (1,860) 1,356 (3,216) 236 703 (467) State and municipal(2) (227) (165) (62) (20) 36 (56) Other (24) 10 (34) (24) 50 (74) Federal funds sold (1,026) (34) (992) 1,122 1,494 (372) Interest bearing deposits in other financial Institutions (51) (23) (28) (65) (8) (57) -------- -------- -------- -------- -------- -------- Total interest Income (8,874) 2,082 (10,956) 2,753 5,430 (2,677)
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YEAR ENDED YEAR ENDED DECEMBER 31, 2002 DECEMBER 31, 2001 COMPARED TO COMPARED TO DECEMBER 31, 2001 DECEMBER 31, 2000 ----------------------------- ----------------------------- TOTAL CHANGE DUE TO TOTAL CHANGE DUE TO ----- --------------- ----- --------------- CHANGE VOLUME RATE CHANGE VOLUME RATE --------- ------ ------ --------- ------ ------ INTEREST EXPENSE: NOW accounts (1,035) (5) (1,030) (453) 121 (574) Savings (536) 50 (586) (171) 99 (270) Money market (937) 74 (1,011) (353) 245 (598) Time deposits of $100,000 and over (795) 418 (1,213) 300 510 (210) Other time Deposits (5,289) (919) (4,370) 1,094 1,804 (710) Federal funds purchased and securities sold under agreements to repurchase (215) 612 (827) 57 737 (680) Interest-bearing demand notes to U.S. Treasury (17) 3 (20) (30) (6) (24) Other borrowed money (239) 57 (296) (231) (23) (208) --------- ----- ------ --------- ----- ------ Total interest Expense (9,063) 290 (9,353) 213 3,487 (3,274) --------- ----- ------ --------- ----- ------ NET INTEREST INCOME ON A FULLY TAXABLE EQUIVALENT BASIS $ 189 1,792 (1,603) $ 2,540 1,943 597 ========= ===== ====== ========= ===== ======
- ---------- (1) Nonaccruing loans are included in the average amounts outstanding. (2) Interest income and yields are presented on a fully taxable equivalent basis using the federal statutory income tax rate, net of nondeductible interest expense. Such adjustments totaled $780,000, $828,000 and $821,000 for the years ended December 31, 2002, 2001 and 2000, respectively. LENDING AND CREDIT MANAGEMENT Interest earned on the loan portfolio is a primary source of interest income for our Company. Net loans represented 60.4% of total assets as of December 31, 2002. Total loans increased steadily from December 31, 1998 through December 31, 2002 due to stable local economies and reasonable interest rates. Lending activities are conducted pursuant to written loan policies approved by our Banks' Boards of Directors. Larger credits are reviewed by our Banks' Discount Committees. These committees are comprised of members of senior management. 15 The following table shows the composition of the loan portfolio by major category and each category as a percentage of the total portfolio as of the dates indicated. (DOLLARS EXPRESSED IN THOUSANDS)
DECEMBER 31, -------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % --------- ------ --------- ----- --------- ----- --------- ----- --------- ------- Commercial, financial and agricultural $ 147,851 30.4% $ 137,235 29.5% $ 151,330 32.3% $ 114,469 35.1% $ 98,298 34.1% Real estate - Construction 41,437 8.5 25,820 5.6 20,500 4.4 24,891 7.6 19,414 6.7 Real estate - Mortgage 250,318 51.4 254,324 54.8 238,157 50.8 135,677 41.6 123,534 42.8 Installment loans to individuals 46,958 9.7 46,985 10.1 58,484 12.5 51,192 15.7 46,972 16.3 --------- --------- --------- --------- --------- Total loans $ 486,564 100.0% $ 464,364 100.0% $ 468,471 100.0% $ 326,229 100.0% $ 288,218 100.0% ========= ========= ========= ========= =========
Loans at December 31, 2002 mature as follows: (DOLLARS EXPRESSED IN THOUSANDS)
OVER ONE YEAR THROUGH FIVE YEARS OVER FIVE YEARS ------------------------ ----------------------- ONE YEAR FIXED FLOATING FIXED FLOATING OR LESS RATE RATE RATE RATE TOTAL --------- --------- -------- -------- -------- --------- Commercial, financial, and agricultural $ 72,609 $ 44,558 $ 22,462 $ 5,481 $ 2,741 $ 147,851 Real estate -- construction 41,429 8 -- -- -- 41,437 Real estate -- mortgage 28,720 120,610 35,910 46,907 18,171 250,318 Installment loans to individuals 17,837 28,624 197 211 89 46,958 --------- --------- -------- -------- -------- --------- Total loans $ 160,595 $ 193,800 $ 58,569 $ 52,599 $ 21,001 $ 486,564 ========= ========= ======== ======== ======== =========
Our Company generally does not retain long-term fixed rate residential mortgage loans in its portfolio. Fixed rate loans conforming to standards required by the secondary market are offered to qualified borrowers, but are not funded until our Company has a non-recourse purchase commitment from the secondary market at a predetermined price. At December 31, 2002 our Company was servicing approximately $197,000,000 of loans sold to the secondary market. Mortgage loans retained in our Company's portfolio generally include provisions for rate adjustments at one to three year intervals. Commercial loans and real estate construction loans generally have maturities of less than one year. Installment loans to individuals are primarily fixed rate loans with maturities from one to five years. The provision for loan losses is based on management's evaluation of the loan portfolio in light of national and local economic conditions, changes in the composition and volume of the loan portfolio, changes in the volume of past due and nonaccrual loans, and other relevant factors. The allowance for loan losses which is reported as a deduction from loans, is available for loan charge-offs. This allowance is increased by the provision charged to expense and is reduced by loan charge-offs net of loan recoveries. Management formally reviews all loans in excess of certain dollar amounts (periodically established) at least annually. In addition, on a monthly basis, management reviews past due, "classified", and "watch list" loans in order to classify or reclassify loans as "loans requiring attention," "substandard," "doubtful," or "loss". During that 16 review, management also determines what loans should be considered to be "impaired". Management believes, but there can be no assurance, that these procedures keep management informed of possible problem loans. Based upon these procedures, both the allowance and provision for loan losses are adjusted to maintain the allowance at a level considered adequate by management for probable losses inherent in the loan portfolio. 17 The following table summarizes loan loss experience for the periods indicated: (DOLLARS EXPRESSED IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Analysis of allowance for loan losses: Balance beginning of year $ 6,673 6,940 4,765 4,413 3,914 Allowance for loan losses of acquired companies at date of acquisitions -- -- 1,150 -- -- Charge-offs: Commercial, financial, and agricultural 146 689 273 410 90 Real estate -- construction 19 144 -- -- -- Real estate -- mortgage 22 61 10 36 32 Installment loans to individuals 581 708 436 288 325 --------- ------- ------- ------- ------- 768 1,602 719 734 447 Recoveries: Commercial, financial, and agricultural 115 22 409 57 111 Real estate -- construction -- -- -- -- -- Real estate -- mortgage 1 8 -- 3 -- Installment loans to individuals 164 151 113 116 133 --------- ------- ------- ------- ------- 280 181 522 176 244 --------- ------- ------- ------- ------- Net charge-offs 488 1,421 197 558 203 --------- ------- ------- ------- ------- Provision for loan losses 936 1,154 1,222 910 702 --------- ------- ------- ------- ------- Balance at end of year $ 7,121 6,673 6,940 4,765 4,413 ========= ======= ======= ======= ======= Loans outstanding: Average $ 475,366 462,468 423,553 303,492 279,679 End of period 486,564 464,364 468,471 326,229 288,218 Allowance for loan losses to loans outstanding: Average 1.50% 1.44 1.64 1.57 1.58 End of period 1.46 1.44 1.48 1.46 1.53 Net charge-offs to average loans outstanding 0.10 0.31 0.05 0.18 0.07
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Allocation of allowance for loan losses at end of period: Commercial, financial, and Agricultural $ 2,627 2,444 2,838 1,214 935 Real estate -- construction 168 104 530 479 496 Real estate -- mortgage 2,208 1,872 1,552 1,202 1,265 Installment loans to individuals 542 669 900 392 413 Unallocated 1,576 1,584 1,120 1,478 1,304 --------- ------- ------- ------- ------- Total $ 7,121 6,673 6,940 4,765 4,413 ========= ======= ======= ======= ======= Percent of categories to total loans: Commercial, financial, and agricultural 30.4% 29.5 32.3 35.1 34.1 Real estate -- construction 8.5 5.6 4.4 7.6 6.7 Real estate -- mortgage 51.4 54.8 50.8 41.6 42.9 Installment loans to individuals 9.7 10.1 12.5 15.7 16.3 --------- ------- ------- ------- ------- Total 100.0 100.0 100.0 100.0 100.0 ========= ======= ======= ======= =======
18 Nonperforming loans, defined as loans on nonaccrual status, loans 90 days or more past due, and restructured loans totaled $3,009,000 or 0.62% of total loans at December 31, 2002 compared to $3,997,000 or 0.86% of total loans at December 31, 2001. The following table summarizes our Company's nonperforming assets at the dates indicated: (DOLLARS EXPRESSED IN THOUSANDS)
DECEMBER 31, ----------------------------------------------------------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Nonaccrual loans: Commercial, financial, and agricultural $ 1,179 2,518 2,648 841 102 Real estate -- construction 69 66 1,006 134 274 Real estate -- mortgage 1,152 842 3,584 507 272 Installment loans to individuals 81 124 453 57 59 --------- ------- ------- ------- ------- Total nonaccrual loans 2,481 3,550 7,691 1,539 707 --------- ------- ------- ------- ------- Loans contractually past-due 90 days or more and still accruing: Commercial, financial, and agricultural 85 96 -- -- -- Real estate -- construction 169 -- -- -- -- Real estate -- mortgage 254 299 237 -- -- Installment loans to individuals 20 52 154 22 18 --------- ------- ------- ------- ------- Total loans contractually past-due 90 days or more and still accruing 528 447 391 22 18 Restructured loans -- -- -- 132 85 --------- ------- ------- ------- ------- Total nonperforming loans 3,009 3,997 8,082 1,693 810 Other real estate 116 650 36 -- 85 Repossessions 115 141 143 91 93 --------- ------- ------- ------- ------- Total nonperforming assets $ 3,240 4,788 8,261 1,784 988 ========= ======= ======= ======= ======= Loans $ 486,564 464,364 468,471 326,229 288.218 Allowance for loan losses to Loans 1.46% 1.44 1.48 1.46 1.53 Nonperforming loans to loans 0.62 0.86 1.73 0.52 0.28 Allowance for loan losses to nonperforming loans 236.66 166.98 85.87 281.45 544.81 Nonperforming assets to loans and foreclosed assets 0.67 1.03 1.76 0.55 0.34
It is our Company's policy to discontinue the accrual of interest income on loans when the full collection of principal or interest is in doubt, or when the payment of principal or interest has become contractually 90 days past due unless the obligation is both well secured and in the process of collection. Interest on year-end nonaccrual loans, which would have been recorded under the original terms of the loans, was approximately $203,000, $591,000 and $727,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Approximately $39,000, $300,000 and $403,000 was actually recorded as interest income on such loans for the year ended December 31, 2002, 2001 and 2000, respectively. A loan is considered impaired when it is probable a creditor will be unable to collect all amounts due - both principal and interest - according to the contractual terms of the loan agreement. In addition to nonaccrual loans at December 31, 2002 included in the table above, which were considered impaired, management has identified 19 additional loans totaling approximately $9,137,000 which are not included in the nonaccrual table above but are considered by management to be impaired. The $9,137,000 of loans identified by management as being impaired reflected various commercial, commercial real estate, real estate, and consumer loans ranging in size from approximately $3,000 to approximately $2,160,000. Impairment reserves for our Company's impaired loans were determined based on the fair value of the collateral securing those loans, or in the case of loans guaranteed by the Small Business Administration, the amount of that guarantee. At December 31, 2002 $1,352,000 of our Company's allowance for loan losses related to impaired loans totaling approximately $11,618,000. As of December 31, 2002 and 2001 approximately $2,697,000 and $9,527,000, respectively, of loans not included in the nonaccrual table above or identified by management as being "impaired" were classified by management as having more than normal risk which raised doubts as to the ability of the borrower to comply with present loan repayment terms. In addition to the classified list, our Company also maintains an internal loan watch list of loans which for various reasons, not all related to credit quality, management is monitoring more closely than the average loan in the portfolio. Loans may be added to this list for reasons which are temporary and correctable, such as the absence of current financial statements of the borrower, or a deficiency in loan documentation. Other loans are added as soon as any problem is detected which might affect the borrower's ability to meet the terms of the loan. This could be initiated by the delinquency of a scheduled loan payment, a deterioration in the borrower's financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment within which the borrower operates. Once a loan is placed on our Company's watch list, its condition is monitored closely. Any further deterioration in the condition of the loan is evaluated to determine if the loan should be assigned to a higher risk category. The allowance for loan losses is available to absorb probable loan losses regardless of the category of loan to be charged off. However, as a part of management's evaluation of the adequacy of the allowance for loan losses, an allocation of the allowance by loan category is made. At December 31, 2002, management allocated $5,545,000 of the $7,121,000 total allowance for loan losses to specific loan categories and $1,576,000 was unallocated. Considering the size of several of our Company's lending relationships and the loan portfolio in total, management believes that the December 31, 2002 allowance for loan losses is adequate. Our Company does not lend funds for the type of transactions defined as "highly leveraged" by bank regulatory authorities or for foreign loans. Additionally, our Company does not have any concentrations of loans exceeding 10% of total loans which are not otherwise disclosed in the loan portfolio composition table. Our Company does not have any interest-earning assets which would have been included in nonaccrual, past due, or restructured loans if such assets were loans. INVESTMENT PORTFOLIO Our Company classifies its debt and equity securities into one of the following two categories: Held-to-Maturity - includes investments in debt securities which our Company has the positive intent and ability to hold until maturity. Available-for-Sale - includes investments in debt and equity securities not classified as held to maturity or trading (i.e., investments which our Company has no present plans to sell in the near-term but may be sold in the future under different circumstances). Debt securities classified as held-to-maturity are carried at amortized cost, while debt and equity securities classified as trading or available-for-sale are carried at estimated market value. Unrealized holding gains and losses from available-for-sale securities are excluded from earnings and reported, net of applicable taxes, as a separate component of stockholders' equity until realized. As allowed upon adoption of SFAS 133, our Company transferred its held-to-maturity portfolio to its available-for-sale portfolio. This transfer was made effective January 1, 2001. At the time of the transfer the amortized cost of the securities transferred was $22,463,000 and the fair value was $22,676,000. 20 Our Company does not engage in trading activities and accordingly does not have any debt or equity securities classified as trading securities. Historically our Company's practice had been to purchase and hold debt instruments until maturity unless special circumstances exist. However, since the investment portfolio's major function is to provide liquidity and to balance our Company's interest rate sensitivity position, certain debt securities along with stock of the Federal Home Loan Bank and the Federal Reserve Bank are classified as available-for-sale. At December 31, 2002 debt and equity securities classified as available-for-sale represented 23.5% of total consolidated assets. Future levels of held-to-maturity and available-for-sale investment securities can be expected to vary depending upon liquidity and interest sensitivity needs as well as other factors. 21 The following table presents the composition of the investment portfolio by major category. (DOLLARS EXPRESSED IN THOUSANDS)
DECEMBER 31, ----------------------------------------------------------------------- 2002 2001 ----------------------------------------------------------------------- AVAILABLE- HELD-TO- AVAILABLE- HELD-TO- FOR-SALE MATURITY TOTAL FOR-SALE MATURITY TOTAL -------- -------- ----- -------- -------- ----- U.S. Treasury securities $ -- -- -- 517 -- 517 U.S. Government agencies and corporations: Mortgage-backed 9,104 -- 9,104 8,469 -- 8,469 Other 136,742 -- 136,742 127,763 -- 127,763 States and political Subdivisions 35,804 -- 35,804 39,940 -- 39,940 Other debt securities 1,485 -- 1,485 1,445 -- 1,445 ---------- -------- ------- ------- -------- ------- Total debt securities 183,135 -- 183,135 178,134 -- 178,134 Federal Home Loan Bank Stock 2,829 -- 2,829 2,755 -- 2,755 Federal Reserve Bank Stock 750 -- 750 750 -- 750 Federal Agricultural Mortgage Corporation 10 -- 10 10 -- 10 ---------- -------- ------- -------- -------- ------- Total investments $ 186,724 -- 186,724 181,649 -- 181,649 ========== ======== ======= ======== ======== =======
DECEMBER 31, ----------------------------------- 2000 ----------------------------------- AVAILABLE- HELD-TO- FOR-SALE MATURITY TOTAL -------- -------- ----- U.S. Treasury securities 1,506 -- 1,506 U.S. Government agencies and corporations: Mortgage-backed 4,099 601 4,700 Other 102,461 3,500 105,961 States and political Subdivisions 22,405 17,667 40,072 Other debt securities 202 695 897 ------- ------ ------- Total debt securities 130,673 22,463 153,136 Federal Home Loan Bank Stock 2,711 -- 2,711 Federal Reserve Bank Stock 60 -- 60 Federal Agricultural Mortgage Corporation 10 -- 10 ------- ------ ------- Total investments 133,454 22,463 155,917 ======= ====== =======
As of December 31, 2002, the maturity of debt securities in the investment portfolio was as follows: (DOLLARS EXPRESSED IN THOUSANDS)
OVER ONE OVER FIVE WEIGHTED ONE YEAR THROUGH THROUGH OVER AVERAGE AVAILABLE-FOR-SALE OR LESS FIVE YEARS TEN YEARS TEN YEARS YIELD (1) - ------------------------ ------- ---------- --------- --------- --------- U.S. Government agencies and corporations: Mortgage-backed (2) $ 568 8,277 259 -- 4.24 Other 43,957 71,772 21,013 -- 3.32 -------- ---------- --------- --------- Total U.S. Government agencies 44,525 80,049 21,272 -- 3.38 States and political subdivisions (3) 3,361 17,484 12,548 2,411 6.65 Other debt security 1,007 478 -- -- 5.63 -------- ---------- --------- --------- Total available-for-sale debt securities $ 48,893 $ 98,011 $ 33,820 $ 2,411 4.02 ======== ========== ========= ========= Weighted average yield (1) 2.74% 4.31% 4.97% 7.36%
- --------------- (1) Weighted average yield is based on amortized cost. (2) Mortgage-backed securities issued by U.S. Government agencies and corporations have been included using historic repayment speeds. Repayment speeds were determined from actual portfolio experience during the twelve months ended December 31, 2002 calculated separately for each mortgage-backed security. These repayment speeds are not necessarily indicative of future repayment speeds and are subject to change based on changing mortgage interest rates. 22 (3) Rates on obligations of states and political subdivisions have been adjusted to fully taxable equivalent rates using the statutory Federal income tax rate of 34%. At December 31, 2002 $40,916,000 of debt securities classified as available-for-sale in the table above had variable rate provisions with adjustment periods ranging from one week to twelve months. INTEREST SENSITIVITY AND LIQUIDITY The concept of interest sensitivity attempts to gauge exposure of our Company's net interest income to adverse changes in market-driven interest rates by measuring the amount of interest sensitive assets and interest sensitive liabilities maturing or subject to repricing within a specified time period. Liquidity represents the ability of our Company to meet the day-to-day withdrawal demands of its deposit customers balanced against the fact that those deposits are invested in assets with varying maturities. Our Company must also be prepared to fulfill the needs of credit customers for loans with various types of maturities and other financing arrangements. Our Company monitors its interest sensitivity and liquidity through the use of static gap reports which measure the difference between assets and liabilities maturing or repricing within specified time periods. At December 31, 2002 Exchange National Bank, Citizens Union State Bank and Osage Valley Bank each independently monitored their static gap reports with their goals being to limit each bank's potential change in net interest income due to changes in interest rates to acceptable limits. Interest rate changes used by the individual banks ranged from 2.00% to 3.00% and the resulting net interest income changes ranged from approximately 2.0% to 10.7%. 23 The following table presents our Company's consolidated static gap position at December 31, 2002 for the next twelve months and the potential impact on net interest income for 2002 of an immediate 2% increase in interest rates.
CUMULATIVE ONE THROUGH TWELVE MONTH (DOLLARS EXPRESSED IN THOUSANDS) PERIOD ------------- Assets maturing or repricing within one year $ 403,250 Liabilities maturing or repricing within one year 513,084 ------------ Gap $ (109,834) ============ Ratio of assets maturing or repricing to liabilities maturing or repricing 79% ============ Impact on net interest income of an immediate 2.00% increase in interest rates $ (2,197) ============ Net interest income for 2002 $ 24,138 ============ Percentage change in 2002 net interest income due to an immediate 2.00% increase in interest rates (9.10)% ============
In addition to managing interest sensitivity and liquidity through the use of gap reports, Exchange National Bank has provided for emergency liquidity situations with informal agreements with correspondent banks which permit it to borrow up to $25,000,000 in federal funds on an unsecured basis and formal agreements to sell and repurchase securities on which it may draw up to $10,000,000. Exchange National Bank, Citizens Union State Bank and Osage Valley Bank are members of the Federal Home Loan Bank which may be used to provide a funding source for fixed rate real estate loans and/or additional liquidity. At December 31, 2002 and 2001, our Company had certificates and other time deposits in denominations of $100,000 or more which mature as follows: (DOLLARS EXPRESSED IN THOUSANDS)
DECEMBER 31, ------------------------------- 2002 2001 ---- ---- Three months or less $ 23,624 $ 10,369 Over three months through six months 14,570 13,507 Over six months through twelve months 12,694 16,941 Over twelve months 12,562 3,828 ------------ ------------ $ 63,450 $ 44,645 ============ ============
Securities sold under agreements to repurchase generally mature the next business day; however, certain agreements with local political subdivisions and select businesses are fixed rate agreements with original maturities generally ranging from 30 to 120 days. Information relating to securities sold under agreements to repurchase is as follows: 24 (DOLLARS EXPRESSED IN THOUSANDS)
AT END OF PERIOD FOR THE PERIOD ENDING --------------------------- ----------------------------------------------- WEIGHTED WEIGHTED AVERAGE MAXIMUM AVERAGE INTEREST MONTH-END AVERAGE INTEREST BALANCE RATE BALANCE BALANCE RATE ------- ---- ------- ------- ---- December 31, 2002 $ 67,359 1.08 $ 74,687 $ 66,024 1.52 December 31, 2001 61,645 1.67 63,874 38,236 3.16 December 31, 2000 16,398 6.03 25,660 17,620 5.63
LIQUIDITY The role of liquidity management is to ensure funds are available to meet depositors' withdrawal and borrowers' credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in the supply of those funds. Liquidity to meet the demands is provided by maturing assets, short-term liquid assets that can be converted to cash and the ability to attract funds from external sources, principally depositors. Due to the nature of services offered by our Company, management prefers to focus on transaction accounts and full service relationships with customers. Management believes it has the ability to increase deposits at any time by offering rates slightly higher than the market rate. Our Banks' Asset/Liability Committees (ALCO), primarily made up of senior management, have direct oversight responsibility for our Company's liquidity position and profile. A combination of daily, weekly and monthly reports provided to management detail the following: internal liquidity metrics, composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, available pricing and market access to the financial markets for capital and exposure to contingent draws on our Company's liquidity. Our Company has a number of sources of funds to meet liquidity needs on a daily basis. The deposit base, consisting of consumer and commercial deposits and large dollar denomination ($100,000 and over) certificates of deposit, is a source of funds. Our Company has no brokered deposits, and has an insignificant amount of deposits on which the rate paid exceeded the market rate by more that 50 basis points when the account was established. Other sources of funds available to meet daily needs include the sales of securities under agreements to repurchase and funds made available under a treasury tax and loan note agreement with the federal government. Also, the Banks are members of the Federal Home Loan Bank of Des Moines (FHLB). As members of the FHLB, the Banks have access to credit products of the FHLB. At December 31, 2002, the amounts of available credit from the FHLB totaled $85,145,000. As of December 31, 2002, the Banks had $22,844,000 in outstanding borrowings with the FHLB. The Banks have federal funds purchased lines with correspondent banks totaling $25,000,000 and agreements with unaffiliated banks to sell and repurchase securities of $10,000,000. Finally, our Company has $20,000,000 line of credit with a correspondent bank of which approximately $7,500,000 is in use. Our Company's liquidity depends primarily on the dividends paid to it as the sole shareholder of our subsidiary Banks. As discussed in Note 3 to our company's consolidated financial statements, the Banks may pay up to $2,407,000 in dividends to our Company without regulatory approval subject to the ongoing capital requirements of the Banks. Over the normal course of business, our Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through our Company's various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of our Company's liquidity. 25 OTHER OFF-BALANCE SHEET ACTIVITIES In the normal course of business, our Company is party to activities that contain credit, market and operational risk that are not reflected in whole or in part in our Company's consolidated financial statements. Such activities include traditional off-balance sheet credit related financial instruments. Our Company provides customers with off-balance sheet credit support through loan commitments and standby letters of credit. Summarized credit-related financial instruments, including both commitments to extend credit and letters of credit at December 31, 2002 are as follows: (DOLLARS EXPRESSED IN THOUSANDS)
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD ------------------------------------------------------------------------------ LESS THAN 1 - 3 3 - 5 OVER 5 TOTAL 1 YEAR YEARS YEARS YEARS ----- ------ ----- ----- ----- Unused loan commitments $ 91,291 74,193 10,869 4,252 1,977 Standby letters of credit 2,593 1,922 149 300 222
Since many of the unused commitments are expected to expire or be only partially used, the total amount of commitments in the preceding table does not necessarily represent future cash requirements. CONTRACTUAL CASH OBLIGATIONS The required payments of time deposits and other borrowed money at December 31, 2002 are as follows: (DOLLARS EXPRESSED IN THOUSANDS)
PAYMENTS DUE BY PERIOD ------------------------------------------------------------------------------------ LESS THAN 1 - 3 3 - 5 OVER 5 TOTAL 1 YEAR YEARS YEARS YEARS ----- ------ ----- ----- ----- Time deposits $307,817 206,083 85,833 15,481 420 Other borrowed money 41,795 27,591 11,751 1,142 1,311
CAPITAL Risk-based capital guidelines for financial institutions were adopted by regulatory authorities effective January 1, 1991. These guidelines are designed to relate regulatory capital requirements to the risk profiles of the specific institutions and to provide more uniform requirements among the various regulators. Our Company is required to maintain a minimum risk-based capital to risk-weighted assets ratio of 8.00%, with at least 4.00% being "Tier 1" capital. In addition, a minimum leverage ratio, Tier 1 capital to adjusted total assets, of 3.00% must be maintained. However, for all but the most highly rated financial institutions, a leverage ratio of 3.00% plus an additional cushion of 100 to 200 basis points is expected. Detail concerning our Company's capital ratios at December 31, 2002 is included in Note 3 of our Company's consolidated financial statements included elsewhere in this report. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with definite 26 useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The amortization of goodwill ceased upon adoption of SFAS 142, which for calendar year-end companies was January 1, 2002. On January 1, 2002, our Company adopted SFAS 142. At the date of adoption, our Company had unamortized goodwill of $23,408,000, core deposit intangibles of $879,000, consulting/noncompete agreements of $275,000, and mortgage servicing rights of $1,134,000, all of which were subject to the transition provisions of SFAS 142. Under SFAS 142, our Company will continue to amortize, on an accelerated basis, its core deposit intangibles associated with the purchase of Citizens Union State Bank and Trust. Goodwill associated with the purchase of subsidiaries will no longer be amortized, but instead, will be tested annually for impairment following our Company's existing methods of measuring and recording impairment losses. Our Company has completed the transitional goodwill impairment test required under SFAS 142 to determine the potential impact, if any, on the consolidated financial statements. The results of the transitional goodwill impairment testing did not identify any impairment losses. The gross carrying amount and accumulated amortization of our Company's amortized intangible assets for the periods ended December 31, 2002 and 2001 are as follows:
December 31, 2002 December 31, 2001 ----------------------------- ---------------------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ----------- ------------ --------- ------------ Amortized intangible assets: Core deposit intangible $ 1,800,000 (1,069,860) 1,800,000 (921,180) Consulting/Noncompete agreements 900,000 (775,000) 900,000 (625,000) ----------- ---------- --------- ---------- $ 2,700,000 (1,844,860) 2,700,000 (1,546,180) =========== ========== ========= ==========
The aggregate amortization expense of intangible assets subject to amortization for the past three years, is as follows:
Twelve Months Ended December 31, 2002 2001 2000 ----------- ------- ------- Aggregate amortization expense $ 298,680 313,080 346,560 =========== ======= =======
The estimated amortization expense for the next five years is as follows: Estimated amortization expense: For year ended 2003 $ 273,680 For year ended 2004 148,680 For year ended 2005 148,680 For year ended 2006 148,680 For year ended 2007 135,420
27 Our Company's mortgage servicing rights are amortized in proportion to the related estimated net servicing income on a straight line basis over the estimated lives of the related mortgages which is seven years. Changes in mortgage servicing rights, net of amortization, for the periods indicated were as follows:
December 31, 2002 2001 2000 ----------- --------- ------- Balance, beginning of period $ 1,134,234 621,827 229,604 Originated mortgage servicing rights 919,014 727,429 216,400 Obtained in acquisitions -- -- 250,988 Amortization (278,835) (162,206) (75,165) Impairment charge (258,565) (52,816) -- ----------- --------- ------- Balance, end of period $ 1,515,848 1,134,234 621,827 =========== ========= =======
The estimated amortization expense for the next five years is as follows: Estimated amortization expense: For year ended 2003 $ 297,213 For year ended 2004 255,708 For year ended 2005 254,516 For year ended 2006 250,600 For year ended 2007 250,600
Our Company's goodwill associated with the purchase of subsidiaries by reporting segments for the periods ended December 31, 2002 and 2001 is summarized as follows:
December 31, 2002 The Exchange Citizens Union National Bank State Bank and Osage of Jefferson Trust of Valley Bank City Clinton of Warsaw Total ------------- -------------- ------------- ---------- Goodwill associated with the purchase of subsidiaries $ 4,382,098 14,912,760 4,112,876 23,407,734 ============= ========== ========= ==========
December 31, 2001 The Exchange Citizens Union National Bank State Bank and Osage of Jefferson Trust of Valley Bank City Clinton of Warsaw Total ------------- -------------- ------------- ---------- Goodwill associated with the purchase of subsidiaries $ 4,382,098 14,912,760 4,112,876 23,407,734 ============= ========== ========= ==========
28 The following is a reconciliation of reported net income to net income adjusted to reflect the adoption of SFAS 142: (DOLLARS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, ----------------------------------------- 2002 2001 2000 ------- ------- ------- Net Income: Reported net income $ 8,093 $ 7,102 $ 5,485 Add back - goodwill amortization -- 1,219 973 ------- ------- ------- Adjusted net income 8,093 8,321 6,458 ======= ======= ======= Basic earnings per share: As reported $ 2.86 $ 2.48 $ 2.05 Add back - goodwill amortization -- 0.43 0.37 ------- ------- ------- Adjusted basic earnings per share $ 2.86 $ 2.91 $ 2.42 ======= ======= ======= Diluted earnings per share: As reported $ 2.85 $ 2.48 $ 2.05 Add back - goodwill amortization -- 0.43 0.37 ------- ------- ------- Adjusted diluted earnings per share $ 2.85 $ 2.91 $ 2.42 ======= ======= =======
In August 2001, FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, it retains many of the fundamental provisions of that statement. SAFS 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extend that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. SFAS 144 is effective for fiscal years beginning after December 31, 2001 and interim financial periods within those fiscal years. The adoption of this statement did not have a material effect on our Company's consolidated financial statements. In October 2002, FASB issued Statement of Financial Accounting Standards No. 147, Acquisitions of Certain Financial Institutions (SFAS 147). SFAS 147 brings all business combinations involving financial institutions, except mutuals, into the scope of SFAS No. 141, Business Combinations. SFAS 147 requires that all acquisitions of financial institutions that meet the definition of a business, including acquisitions of part of a financial institution that meet the definitions of a business, must be accounted for in accordance with SFAS 141 and the related intangibles accounted for in accordance with SFAS 142. SFAS 147 removes such acquisitions from the scope of SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, which was adopted in February 1983 to address financial institutions' acquisitions during a period when many of such acquisitions involved "troubled" institutions. SFAS 147 also amends SFAS 144 to include in its scope long-term customer-relationship intangible assets of financial institutions. SFAS 147 is generally effective immediately and provides guidance with respect to amortization and impairment of intangibles recognized in connection with acquisitions 29 previously within the scope of SFAS 72. The adoption of SFAS 147 will not have a material effect on our Company's consolidated financial statements. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 expands disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 applies to most types of guarantees except for, among others, guarantees relating to employee compensation, residual value guarantees under capital lease arrangements, commercial letters of credit, loan commitments, and guarantees of a company's own future performance. Historically, the guarantor has not recorded guarantees until it was probable that a payment would be required under the guarantee. The new accounting requirements now require a guarantor to record a liability at its fair value at the time the guarantee is made. Certain guarantees are subject to the disclosure requirements of FIN 45, but not its recognition provisions. These guarantees include, but are limited to, guarantees treated as derivatives under SFAS 133, guarantees that are considered contingent consideration in a business combination, and guarantees issued between parent corporations and their subsidiaries or between entities under common control. The new disclosure requirements require a guarantor to disclose the following about each guarantee: the overall details of the guarantee, the maximum potential amount of future payments that could be required, the carrying amount of the guarantor's obligation under the guarantee, the fair value of the liability included in the statement of financial position, and the nature and extent of recourse provisions and collateral related to the guarantee and the extent of any potential amounts that the guarantor may recover from third parties as a result of payments made under the guarantee. The new accounting requirements are to be applied prospectively to any guarantees issued or modified after December 31, 2002. The new disclosure requirements are applicable to all guarantees covered by this interpretation, no matter when issued, and are effective for interim or annual financial statements for periods ending after December 15, 2002. Additional information related to our Company's significant guarantees are disclosed in Footnote 17 in the notes to our Company's 2002 consolidated financial statements. The adoption of this FIN 45 is not expected to have a material effect on our Company's consolidated financial statements. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure (SFAS 148), which amends SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 148 requires more frequent and prominent disclosures in the financial statements about the effects of stock-based compensation. It also provides alternative methods for the voluntary transition to the expense recognition method of accounting for stock options. The transition and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002 and are included in Footnote 1 in the notes to our Company's 2002 consolidated financial statements, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The adoption of this Statement did not have a material effect on our Company's consolidated financial statements. EFFECTS OF INFLATION The effects of inflation on financial institutions are different from the effects on other commercial enterprises since financial institutions make few significant capital or inventory expenditures which are directly affected by changing prices. Because bank assets and liabilities are virtually all monetary in nature, inflation does not affect a financial institution as much as do changes in interest rates. The general level of inflation does underlie the general level of most interest rates, but interest rates do not increase at the rate of inflation as do prices of goods and services. Rather, interest rates react more to changes in the expected rate of inflation and to changes in monetary and fiscal policy. Inflation does have an impact on the growth of total assets in the banking industry, often resulting in a need to increase capital at higher than normal rates to maintain an appropriate capital to asset ratio. In the opinion of management, inflation did not have a significant effect on our Company's operations for the three years ended December 31, 2002. 30 FINANCIAL INSTRUMENT MARKET VALUES As disclosed in note 17 of our Company's consolidated financial statements, the fair values of financial instrument assets included in the balance sheet as of December 31, 2002 reflect fair values of approximately $11,694,000 more than the amounts recorded on the consolidated balance sheet. The fair value of financial liabilities as of December 31, 2002 reflected fair values of approximately $8,220,000 more than the amounts recorded on the consolidated balance sheet. Such differences reflect the effects of an increasing rate environment, the effects of which are partially offset by the effectiveness of our Company's asset/liability and credit risk management programs. 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 Banks' 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 7% 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. 31 CONSOLIDATED FINANCIAL STATEMENTS The following consolidated financial statements of our Company and reports of our Company's independent auditors appear on the pages indicated.
Page ---- Independent Auditors' Report. 33 Consolidated Balance Sheets as of December 31, 2002 and 2001. 34 Consolidated Statements of Income for each of the years ended December 31, 2002, 2001 and 2000. 35 Consolidated Statements of Stockholders' Equity and Comprehensive Income for each of the years ended December 31, 2002, 2001 and 2000. 36 Consolidated Statements of Cash Flows for each of the years ended December 31, 2002, 2001 and 2000. 37 Notes to Consolidated Financial Statements. 38
32 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Exchange National Bancshares, Inc. Jefferson City, Missouri: We have audited the accompanying consolidated balance sheets of Exchange National Bancshares, Inc. and subsidiaries (Company) as of December 31, 2002 and 2001, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Exchange National Bancshares, Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. As discussed in note 1 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No.142, Goodwill and Other Intangible Assets. /s/ KPMG, LLP St. Louis, Missouri February 21, 2003 33 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2002 and 2001
2002 2001 ------------- ----------- ASSETS Loans, net of allowance for loan losses of $7,121,114 and $6,673,586 at December 31, 2002 and 2001, respectively $ 479,443,190 457,690,046 Investment in available-for-sale debt and equity securities, at fair value 186,724,362 181,649,054 Federal funds sold 49,669,213 54,481,931 Cash and due from banks 27,742,030 31,127,216 Premises and equipment 16,586,332 15,193,390 Accrued interest receivable 5,539,661 6,019,680 Goodwill 23,407,734 23,407,734 Intangible assets 855,140 1,153,820 Other assets 4,450,250 5,102,465 ------------- ----------- $ 794,417,912 775,825,336 ============= =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand $ 77,474,471 78,637,109 NOW 93,728,675 92,027,032 Savings 49,720,928 48,686,631 Money market 62,449,717 61,693,528 Time deposits $100,000 and over 63,449,382 44,645,154 Other time deposits 244,367,479 254,104,736 ------------- ----------- Total deposits 591,190,652 579,794,190 Securities sold under agreements to repurchase 67,359,199 61,644,544 Interest-bearing demand notes to U.S. Treasury 3,061,503 388,122 Other borrowed money 41,795,016 43,137,614 Accrued interest payable 1,984,745 3,059,714 Other liabilities 6,199,677 9,448,504 ------------- ----------- Total liabilities 711,590,792 697,472,688 ------------- ----------- Commitments and contingent liabilities Stockholders' equity: Common stock, $1 par value. Authorized 15,000,000 shares; issued 2,865,601 and 2,863,493 shares at December 31, 2002 and 2001, respectively 2,865,601 2,863,493 Surplus 21,983,467 21,970,425 Retained earnings 58,363,271 52,783,864 Accumulated other comprehensive income, net of tax 2,294,471 1,542,272 Treasury stock; 86,680 and 29,348 shares, at cost, at December 31, 2002 and 2001, respectively (2,679,690) (807,406) ------------- ----------- Total stockholders' equity 82,827,120 78,352,648 ------------- ----------- $ 794,417,912 775,825,336 ============= ===========
See accompanying notes to consolidated financial statements. 34 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 2002, 2001, and 2000
2002 2001 2000 ------------- ---------- ---------- Interest income: Interest and fees on loans $ 32,257,968 37,935,476 36,427,148 Interest and dividends on debt and equity securities: U.S. Treasury securities 28,980 70,717 163,665 Securities of U.S. government agencies 5,463,353 7,281,692 6,952,067 Obligations of states and political subdivisions 1,720,441 1,906,703 1,940,162 Other securities 214,850 238,634 262,614 Interest on federal funds sold 734,675 1,762,453 639,650 Interest on time deposits with other banks 43,030 94,084 159,014 ------------- ---------- ---------- Total interest income 40,463,297 49,289,759 46,544,320 ------------- ---------- ---------- Interest expense: NOW accounts 910,699 1,946,178 2,399,529 Savings accounts 513,664 1,050,084 1,221,390 Money market accounts 856,499 1,793,160 2,145,648 Time deposit accounts $100,000 and over 1,433,624 2,662,260 2,362,977 Other time deposit accounts 9,354,715 14,210,160 13,116,358 Securities sold under agreements to repurchase 1,002,997 1,209,056 991,264 Interest-bearing demand notes to U.S. Treasury 11,436 27,801 57,893 Federal funds purchased 817 9,885 170,372 Other borrowed money 2,241,249 2,480,840 2,712,166 ------------- ---------- ---------- Total interest expense 16,325,700 25,389,424 25,177,597 ------------- ---------- ---------- Net interest income 24,137,597 23,900,335 21,366,723 Provision for loan losses 936,000 1,154,000 1,222,000 ------------- ---------- ---------- Net interest income after provision for loan losses 23,201,597 22,746,335 20,144,723 ------------- ---------- ---------- Noninterest income: Service charges on deposit accounts 2,684,126 2,097,242 1,569,331 Trust department income 512,924 429,602 559,904 Brokerage commissions 87,623 90,707 89,324 Mortgage loan servicing fees 221,581 462,689 536,024 Gain on sales of mortgage loans 1,768,091 1,458,683 402,402 Gain (loss) on sales and calls of debt securities 162,769 97,808 (27,710) Credit card fees 152,550 149,577 145,028 Other 513,006 610,615 316,203 ------------- ---------- ---------- 6,102,670 5,396,923 3,590,506 ------------- ---------- ---------- Noninterest expense: Salaries and employee benefits 9,336,627 8,789,578 7,429,043 Occupancy expense, net 1,079,023 1,005,905 981,101 Furniture and equipment expense 1,887,225 1,596,569 1,563,184 FDIC insurance assessment 103,213 130,725 126,668 Advertising and promotion 466,994 457,498 336,060 Credit card expenses 94,751 96,317 100,909 Amortization of goodwill -- 1,218,892 972,783 Amortization of intangible assets 298,680 313,080 346,560 Other 4,565,084 3,791,528 3,801,933 ------------- ---------- ---------- 17,831,597 17,400,092 15,658,241 ------------- ---------- ---------- Income before income taxes 11,472,670 10,743,166 8,076,988 Income taxes 3,379,380 3,640,956 2,592,319 ------------- ---------- ---------- Net income $ 8,093,290 7,102,210 5,484,669 ============= ========== ========== Basic earnings per share 2.86 2.48 2.05 Diluted earnings per share $ 2.85 2.48 2.05
See accompanying notes to consolidated financial statements. 35 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity and comprehensive Income Years ended December 31, 2002, 2001, and 2000
ACCUMULATED TOTAL OTHER STOCK- COMMON RETAINED COMPREHENSIVE TREASURY HOLDERS' STOCK SURPLUS EARNINGS INCOME (LOSS) STOCK EQUITY ------------ ---------- ---------- --------- ---------- ---------- Balance, December 31, 1999 $ 1,219,025 9,618,307 46,100,995 (990,769) -- 55,947,558 Comprehensive income: Net income -- -- 5,484,669 -- -- 5,484,669 Other comprehensive income: Unrealized gain on debt and equity securities available- for-sale, net of tax -- -- -- 1,630,921 -- 1,630,921 Adjustment for loss on sales and calls of debt and equity securities, net of tax -- -- -- 18,287 -- 18,287 ---------- Total other comprehensive income 1,649,208 ---------- Total comprehensive income 7,133,877 ---------- Two-for-one stock split accounted for as a dividend 1,219,025 -- (1,219,025) -- -- -- Acquisition of CNS Bancorp, Inc. 425,443 12,336,968 -- -- -- 12,762,411 Cash dividends declared, $0.85 per share -- -- (2,260,109) -- -- (2,260,109) ------------ ---------- ---------- --------- ---------- ---------- Balance, December 31, 2000 2,863,493 21,955,275 48,106,530 658,439 -- 73,583,737 Comprehensive income: Net income -- -- 7,102,210 -- -- 7,102,210 Other comprehensive income: Unrealized gain on debt and equity securities available- for-sale, net of tax -- -- -- 948,386 -- 948,386 Adjustment for gain on sales and calls of debt and equity securities, net of tax -- -- -- (64,553) -- (64,553) ---------- Total other comprehensive income 883,833 ---------- Total comprehensive income 7,986,043 ---------- Adjustment for deferred compensation plan -- 15,150 -- -- -- 15,150 Purchase of common stock -- -- -- -- (807,406) (807,406) Cash dividends declared, $0.85 per share -- -- (2,424,876) -- -- (2,424,876) ------------ ---------- ---------- --------- ---------- ---------- Balance, December 31, 2001 2,863,493 21,970,425 52,783,864 1,542,272 (807,406) 78,352,648 Comprehensive income: Net income -- -- 8,093,290 -- -- 8,093,290 Other comprehensive income: Unrealized gain on debt and equity securities available- for-sale, net of tax -- -- -- 859,627 -- 859,627 Adjustment for gain on sales and calls of debt and equity securities, net of tax -- -- -- (107,428) -- (107,428) ---------- Total other comprehensive income 752,199 ---------- Total comprehensive income 8,845,489 ---------- Adjustment for deferred compensation plan -- 15,150 -- -- 15,150 Stock options exercised 2,108 (2,108) -- -- -- -- Proceeds from sale of treasury stock -- -- (3,560) -- 39,527 35,967 Purchase of common stock -- -- -- (1,911,811) (1,911,811) Cash dividends declared, $0.89 per share -- -- (2,510,323) -- (2,510,323) ------------ ---------- ---------- --------- ---------- ---------- Balance, December 31, 2002 $ 2,865,601 21,983,467 58,363,271 2,294,471 (2,679,690) 82,827,120 ============ ========== ========== ========= ========== ==========
See accompanying notes to consolidated financial statements. 36 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2002, 2001, and 2000
2002 2001 2000 -------------- ----------- ----------- Cash flows from operating activities: Net income $ 8,093,290 7,102,210 5,484,669 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 936,000 1,154,000 1,222,000 Depreciation expense 1,426,460 1,263,896 1,281,252 Net amortization (accretion) of debt securities, premiums, and discounts 999,445 (495,576) (398,714) Amortization of goodwill -- 1,218,892 972,783 Amortization of intangible assets 298,680 313,080 346,560 Decrease (increase) in accrued interest receivable 480,019 775,588 (1,128,303) Increase in other assets (295,284) (364,719) (11,830) (Decrease) increase in accrued interest payable (1,074,969) (1,360,340) 1,119,991 (Decrease) increase in other liabilities (3,248,827) 3,431,774 3,380,550 (Gain) loss on sales and calls of debt securities (162,769) (97,808) 27,710 Origination of mortgage loans for sale (107,312,242) (106,922,389) (27,235,887) Proceeds from the sale of mortgage loans 109,080,333 108,381,072 27,638,289 Gain on sale of mortgage loans (1,768,091) (1,458,683) (402,402) Loss (gain) on sales of premises and equipment 3,417 (127,379) -- Other, net 32,223 21,272 (448,945) -------------- ----------- ----------- Net cash provided by operating activities 7,487,685 12,834,890 11,847,723 -------------- ----------- ----------- Cash flows from investing activities: Net (increase) decrease in loans (23,528,051) 1,053,703 (19,977,196) Purchases of debt securities: Available-for-sale (124,050,131) (207,926,512) (86,579,932) Held-to-maturity -- -- (567,724) Proceeds from maturities of debt securities: Available-for-sale 68,043,902 129,048,704 90,941,266 Held-to-maturity -- -- 6,072,430 Proceeds from calls of debt securities: Available-for-sale 38,827,250 52,935,000 2,155,000 Held-to-maturity -- -- 1,010,000 Proceeds from sales of debt securities: Available-for-sale 12,406,693 2,106,018 978,878 Purchase of subsidiaries, net of cash and cash equivalents acquired -- -- (8,320,751) Purchases of premises and equipment (2,838,819) (2,304,551) (1,444,691) Proceeds from sales of premises and equipment 16,000 1,765,866 52,478 Proceeds from sales of other real estate owned and repossessions 1,398,910 1,022,185 828,336 -------------- ----------- ----------- Net cash used in investing activities (29,724,246) (22,299,587) (14,851,906) -------------- ----------- ----------- Cash flows from financing activities: Net (decrease) increase in demand deposits (1,162,638) 9,914,274 (16,447,426) Net increase in interest-bearing transaction accounts 3,492,129 3,608,271 5,768,350 Net increase (decrease) in time deposits 9,066,971 (9,991,242) 32,059,340 Net increase (decrease) in securities sold under agreements to repurchase 5,714,655 45,246,060 (10,695,771) Net increase (decrease) in interest-bearing demand notes to U.S. Treasury 2,673,381 (155,545) (2,204,269) Proceeds from bank debt -- -- 12,000,000 Proceeds from Federal Home Loan Bank advances -- 3,400,000 12,000,000 Proceeds from sale of common stock -- -- -- Proceeds from sale of treasury stock 35,967 -- -- Repayment of bank debt and Federal Home Loan Bank advances (1,342,598) (2,640,173) (11,037,964) Cash dividends paid (2,493,247) (2,424,876) (2,114,804) Purchase of common stock (1,911,811) (807,406) -- -------------- ----------- ----------- Net cash provided by financing activities 14,072,809 46,149,363 19,327,456 -------------- ----------- ----------- Net (decrease) increase in cash and cash equivalents (8,163,752) 36,684,666 16,323,273 Cash and cash equivalents, beginning of year 85,609,147 48,924,481 32,601,208 -------------- ----------- ----------- Cash and cash equivalents, end of year $ 77,445,395 85,609,147 48,924,481 ============== =========== =========== Supplemental disclosure of cash flow information: Cash paid (received) during the year for: Interest $ 17,400,669 26,749,764 23,136,391 Income taxes 4,509,122 1,103,960 (232,547) Supplemental schedule of noncash investing activities: Other real estate and repossessions acquired in settlement of loans $ 838,907 1,633,693 915,987 Note payable -- -- 1,000,000 Stock issued in acquisition -- -- 12,762,411 Transfer of investment securities from held-to-maturity to available-for-sale -- 22,463,000 --
See accompanying notes to consolidated financial statements. 37 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Exchange National Bancshares, Inc. (Company) provides a full range of banking services to individual and corporate customers through The Exchange National Bank of Jefferson City, Citizens Union State Bank and Trust of Clinton, and Osage Valley Bank of Warsaw, (Banks) located within the communities surrounding Jefferson City, Clinton, and Warsaw, Missouri. The Banks are subject to competition from other financial and nonfinancial institutions providing financial products. Additionally, the Company and its subsidiaries are subject to the regulations of certain regulatory agencies and undergo periodic examinations by those regulatory agencies. The consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America and conform to predominant practices within the banking industry. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions, including the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosure or in satisfaction of loans, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant accounting policies used by the Company in the preparation of the consolidated financial statements are summarized below: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company, The Exchange National Bank of Jefferson City, Union State Bancshares, Inc. (USB), and its wholly owned subsidiary, Citizens Union State Bank and Trust of Clinton, Mid Central Bancorp, Inc. and its wholly owned subsidiary, Osage Valley Bank of Warsaw. All significant intercompany accounts and transactions have been eliminated in consolidation. LOANS Loans are stated at unpaid principal balance amount less unearned income and the allowance for loan losses. Income on loans is accrued on a simple-interest basis. Loans are placed on nonaccrual status when management believes that the borrower's financial condition, after consideration of business conditions and collection efforts, is such that collection of interest is doubtful. Interest accrued in the current year is reversed against interest income. A loan remains on nonaccrual status until the loan is current as to payment of both principal and interest and/or the borrower demonstrates the ability to pay and remain current. Loan origination fees and certain direct costs are deferred and recognized over the life of the loan as an adjustment to yield. (Continued) 38 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 The Exchange National Bank of Jefferson City originates certain loans which are sold in the secondary mortgage market to the Federal Home Loan Mortgage Corporation (Freddie Mac). These long-term, fixed-rate loans are sold on a note-by-note basis. Immediately upon locking in an interest rate, the Company enters into an agreement to sell the mortgage loan to Freddie Mac without recourse, thereby eliminating the Company's exposure to interest rate fluctuations. The Company allocates the cost of loans originated between the mortgage loans and the mortgage servicing rights. At December 31, 2002 and 2001, no mortgage loans were held for sale. Mortgage loan servicing fees earned on loans sold to Freddie Mac are reported as income when the related loan payments are collected. Operational costs to service such loans are charged to expense as incurred. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is increased by provisions charged to expense and is reduced by loan charge-offs, net of recoveries. Management utilizes a systematic, documented approach in determining an adequate allowance for loan losses. Management's approach, which provides for general and specific valuation allowances, is based on current economic conditions, past losses, collection experience, risk characteristics of the portfolio, assessment of collateral values by obtaining independent appraisals for significant properties, and such other factors, which, in management's judgment, deserve current recognition in estimating loan losses. Management believes the allowance for loan losses is adequate to absorb probable losses in the loan portfolio. While management uses available information to recognize loan losses, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require the Banks to increase the allowance for loan losses based on their judgment about information available to them at the time of their examination. A loan is considered impaired when it is probable a creditor will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. When measuring impairment, the expected future cash flows of an impaired loan are discounted at the loan's effective interest rate. Alternatively, impairment is measured by reference to an observable market price, if one exists, or the fair value of the collateral for a collateral-dependent loan. Regardless of the historical measurement method used, the Company measures impairment based on the fair value of the collateral when foreclosure is probable. Additionally, impairment of a restructured loan is measured by discounting the total expected future cash flows at the loan's effective rate of interest as stated in the original loan agreement. The Company follows its nonaccrual method for recognizing interest income on impaired loans. INVESTMENT IN DEBT AND EQUITY SECURITIES At the time of purchase, debt securities are classified into one of two categories: available-for-sale or held-to-maturity. Held-to-maturity securities are those securities which the Company has the ability and positive intent to hold until maturity. All equity securities and debt securities not classified as held-to-maturity, are classified as available-for-sale. (Continued) 39 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 Available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization of premiums or discounts. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and reported as accumulated other comprehensive income, a separate component of stockholders' equity, until realized. Premiums and discounts are amortized using the interest method over the lives of the respective securities, with consideration of historical and estimated prepayment rates for mortgage-backed securities, as an adjustment to yield. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale are included in earnings based on the specific identification method for determining the cost of securities sold. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security. The Banks, as members of the Federal Home Loan Bank System administered by the Federal Housing Finance Board, are required to maintain an investment in the capital stock of the Federal Home Loan Bank (FHLB) in an amount equal to the greater of 1% of each bank's total mortgage-related assets at the beginning of each year, 0.3% of each bank's total assets at the beginning of each year, or 5% of advances from the FHLB to each bank. Additionally, The Exchange National Bank of Jefferson City is required to maintain an investment in the capital stock of the Federal Reserve Bank. These investments are recorded at cost which represents redemption value. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation. Depreciation applicable to buildings and improvements and furniture and equipment is charged to expense using straight-line and accelerated methods over the estimated useful lives of the assets. Such lives are estimated to be 5 to 55 years for buildings and improvements and 3 to 15 years for furniture and equipment. Maintenance and repairs are charged to expense as incurred. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. (Continued) 40 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 In connection with SFAS No. 142's transitional goodwill impairment evaluation, the Statement required the Company to perform an assessment of whether there was an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company was required to identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002. The Company was required to determine the fair value of each reporting unit and compare it to the carrying value of the reporting unit within six months of January 1, 2002. To the extent the carrying amount of a reporting unit exceeded the fair value of the reporting unit, the Company would be required to perform the second step of the transitional impairment test, as this is an indication that the reporting unit may be impaired. The second step was not required because the fair value exceeded the carrying value for the reporting units. Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line basis over the expected periods to be benefited, generally 20 to 25 years, and assessed for recoverability by determining whether the amortization of the goodwill balance over its remaining life could be recovered through undiscounted future operating cash flows of the acquired operation. All other intangible assets were amortized on straight-line or accelerated methods ranging from 6 to 10 years. The amount of goodwill and other intangible asset impairment, if any, was measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The core deposit intangible established in the acquisition of USB is being amortized over a ten-year period on an accelerated method of amortization. Other intangible assets are amortized over periods up to six years. IMPAIRMENT OF LONG-LIVED ASSETS SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as held for sale; and broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. The Company adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not affect the Company's consolidated financial statements. In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. (Continued) 41 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 Goodwill and intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. Prior to the adoption of SFAS No. 144, the Company accounted for long-lived assets in accordance with SFAS No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. OTHER REAL ESTATE Other real estate, included in other assets in the accompanying consolidated balance sheets, is recorded at fair value, less estimated selling costs. If the fair value of other real estate declines subsequent to foreclosure, the difference is recorded as a valuation allowance through a charge to expense. Subsequent increases in fair value are recorded through a reversal of the valuation allowance. Expenses incurred in maintaining the properties are charged to expense. INCOME TAXES The Company and its subsidiaries file a consolidated Federal income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. TRUST DEPARTMENTS Property held by the Banks in fiduciary or agency capacities for customers is not included in the accompanying consolidated balance sheets, since such items are not assets of the Company. Trust department income is recognized on the accrual basis. (Continued) 42 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 EARNINGS PER SHARE Earnings per share was computed as follows:
2002 2001 2000 ---------- --------- --------- Net income, basic and diluted $8,093,290 7,102,210 5,484,669 Average shares outstanding 2,828,572 2,858,252 2,669,370 Effect of dilutive stock options 6,870 687 -- ---------- --------- --------- Average shares outstanding including dilutive stock options $2,835,442 2,858,939 2,669,370 ========== ========= ========= Net income per share, basic $ 2.86 2.48 2.05 Net income per share, diluted $ 2.85 2.48 2.05
The weighted average common and diluted shares outstanding and earnings per share amounts have been restated to give effect to the two-for-one stock split accounted for as a dividend on June 5, 2000. CONSOLIDATED STATEMENTS OF CASH FLOWS For the purpose of the consolidated statements of cash flows, cash and cash equivalents consist of federal funds sold, cash, and due from banks. STOCK OPTIONS The Company accounts for it stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The Company provides pro forma net income and pro forma net income per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123, Accounting for Stock-Based Compensation, had been applied. (Continued) 43 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each period:
2002 2001 2000 ------------- --------- --------- Net income: As reported $ 8,093,290 7,102,210 5,484,669 Deduct total stock-based employee compensation expense determined under fair-value based method for all awards, net of tax (61,110) (30,233) (30,233) ------------- --------- --------- Pro forma $ 8,032,180 7,071,977 5,454,436 ============= ========= ========= Pro forma earnings per common share: As reported basic $ 2.86 2.48 2.05 Pro forma basic 2.84 2.47 2.04 As reported diluted 2.85 2.48 2.05 Pro forma diluted 2.83 2.47 2.04 Treasury Stock
The purchase of the Company's common stock is recorded at cost. Upon subsequent reissuance, the treasury stock account is reduced by the average cost basis of such stock. COMPREHENSIVE INCOME The Company reports comprehensive income in the consolidated statements of stockholders' equity and comprehensive income. SEGMENT INFORMATION The Company has defined its business segments to be the Banks, which is consistent with the management structure of the Company and the internal reporting system that monitors performance. RECENTLY ISSUED ACCOUNTING STANDARDS In November 2002, the FASB issued FASB Interpretation No. 45 (FIN No. 45), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB statements No. 5, 57, and 107, and a rescission of FASB interpretation No. 34. FIN No. 45 elaborates on the disclosures to be made by a guarantor in its financial statements about its obligation under guarantees issued. The interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company's consolidated financial statements. The disclosure (Continued) 44 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 requirements are effective for financial statements for periods ending after December 15, 2002 and are included in the notes to these consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements. RECLASSIFICATIONS Certain prior-year information has been reclassified to conform with current-year presentation. (2) ACQUISITIONS On January 3, 2000, the Company acquired 100% of the outstanding shares of common stock of Mid Central Bancorp. (Mid Central), a one-bank holding company located in Warsaw, Missouri. At the date of acquisition, Mid Central had total assets and deposits of approximately $55,100,000 and $49,400,000, respectively. The transaction was accounted for under the purchase method of accounting; therefore, Mid Central's results of operations are included with the Company's from January 3, 2000 forward. Cash consideration of $8,798,000 was paid resulting in initial goodwill of $4,057,000. On May 4, 2000, the Company acquired 100% of the outstanding shares of common stock of Calhoun Bancshares, Inc., Calhoun, and its subsidiary, Citizens State Bank of Calhoun (Citizens Bank). Immediately upon acquisition, Citizens State Bank of Calhoun was merged with and into Citizens Union State Bank and Trust of Clinton with the surviving institution being renamed the Citizens Union State Bank and Trust of Clinton. At the date of acquisition, Calhoun had total assets and deposits of approximately $69,900,000 and $60,500,000, respectively. The transaction was accounted for under the purchase method of accounting; therefore, Citizens Bank's results of operations are included with the Company's from May 4, 2000 forward. Cash consideration of $14,480,000 was paid resulting in initial goodwill of $8,106,000. On June 16, 2000, the Company acquired 100% of the outstanding shares of common stock of CNS Bancorp, Inc. (CNS) and its wholly owned subsidiary, City National Savings Bank, FSB, a federally chartered savings bank. Immediately upon acquisition, City National Savings Bank was merged with and into The Exchange National Bank of Jefferson City. At the date of acquisition, CNS had total assets and deposits of approximately $86,4000,000 and $64,200,000, respectively. The transaction was accounted for under the purchase method of accounting; therefore, CNS' results of operation are included with the Company's from June 16, 2000 forward. Cash consideration of $12,764,000 and stock consideration of 425,443 shares was paid resulting in initial goodwill of $3,962,000. A summary of unaudited pro forma combined financial information for the year ended December 31, 2000 for the Company and the aforementioned acquisitions as if the transactions had occurred on January 1, (Continued) 45 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 2000 follows. These pro forma presentations do not include any anticipated expense reductions that may result from the mergers discussed above.
2000 ----------- Net interest income $22,647,916 Net income 5,235,605 Earnings per share 1.96
(3) CAPITAL REQUIREMENTS The Company and the Banks are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines, the Company and the Banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification of the Company and the Banks are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. Quantitative measures established by regulations to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk-weighted assets, and of Tier I capital to adjusted-average assets. Management believes, as of December 31, 2002, the Company and the Banks meet all capital adequacy requirements to which they are subject. As of December 31, 2002, the most recent notification from the regulatory authorities categorized the banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since the notifications that management believes have changed the Banks' categories. (Continued) 46 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 The actual and required capital amounts and ratios for the Company and the Banks as of December 31, 2002 and 2001 are as follows (dollars in thousands):
2002 ------------------------------------------------------------------------------- TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTUAL CAPITAL REQUIREMENTS ACTION PROVISION ------------------------ --------------------- ----------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO --------- ----- --------- ----- --------- ----- Total capital (to risk-weighted assets): Company $ 63,250 12.10% $ 41,806 8.00% $ -- -- The Exchange National Bank of Jefferson City 48,145 14.14 27,239 8.00 34,048 10.00% Citizens Union State Bank and Trust of Clinton 20,686 14.68 11,270 8.00 14,087 10.00 Osage Valley Bank 6,040 14.65 3,298 8.00 4,122 10.00 Tier I capital (to risk-weighted assets): Company 56,868 10.88 20,903 4.00 -- -- The Exchange National Bank of Jefferson City 43,880 12.89 13,619 4.00 20,429 6.00 Citizens Union State Bank and Trust of Clinton 18,992 13.48 5,635 4.00 8,452 6.00 Osage Valley Bank 5,617 13.63 1,649 4.00 2,473 6.00 Tier I capital (to adjusted average assets): Company 56,868 7.36 23,195 3.00 -- -- The Exchange National Bank of Jefferson City 43,880 9.52 13,832 3.00 23,054 5.00 Citizens Union State Bank and Trust of Clinton 18,992 8.39 6,788 3.00 11,314 5.00 Osage Valley Bank 5,617 7.53 2,237 3.00 3,728 5.00
(Continued) 47 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000
2001 ------------------------------------------------------------------------------- TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTUAL CAPITAL REQUIREMENTS ACTION PROVISION ------------------------ --------------------- ------------------------ AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO --------- ----- --------- ----- --------- ----- Total capital (to risk-weighted assets): Company $ 58,528 11.83% $ 39,566 8.00% $ -- -- The Exchange National Bank of Jefferson City 47,148 14.84 25,420 8.00 31,775 10.00% Citizens Union State Bank and Trust of Clinton 20,220 14.14 11,444 8.00 14,305 10.00 Osage Valley Bank 5,543 15.80 2,807 8.00 3,509 10.00 Tier I capital (to risk-weighted assets): Company 52,346 10.58 19,782 4.00 -- -- The Exchange National Bank of Jefferson City 43,168 13.59 12,710 4.00 19,065 6.00 Citizens Union State Bank and Trust of Clinton 18,569 12.98 5,722 4.00 8,583 6.00 Osage Valley Bank 5,157 14.70 1,404 4.00 2,105 6.00 Tier I capital (to adjusted average assets): Company 52,346 7.05 22,284 3.00 -- -- The Exchange National Bank of Jefferson City 43,168 9.79 13,222 3.00 22,036 5.00 Citizens Union State Bank and Trust of Clinton 18,569 8.19 6,804 3.00 11,339 5.00 Osage Valley Bank 5,157 7.28 2,127 3.00 3,544 5.00
Bank dividends are the principal source of funds for payment of dividends by the Company to its stockholders. The Banks are subject to regulations which require the maintenance of minimum capital requirements. At December 31, 2002, unappropriated retained earnings of approximately $2,407,000 were available for the declaration of dividends to the Company without prior approval from regulatory authorities. (Continued) 48 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 (4) LOANS A summary of loans, by classification, at December 31, 2002 and 2001 is as follows:
2002 2001 ------------ ----------- Real estate $291,755,539 280,144,049 Commercial 147,850,348 137,235,054 Installment and other consumer 46,958,417 46,984,529 ------------ ----------- 486,564,304 464,363,632 Less allowance for loan losses 7,121,114 6,673,586 ------------ ----------- $479,443,190 457,690,046 ============ ===========
The Banks grant real estate, commercial, and installment and other consumer loans to customers located within the communities surrounding Jefferson City, Clinton, and Warsaw, Missouri. As such, the Banks are susceptible to changes in the economic environment in these communities. The Banks do not have a concentration of credit in any one economic sector. Installment and other consumer loans consist primarily of the financing of vehicles. Following is a summary of activity in 2002 of loans made by the Banks to executive officers and directors or to entities in which such individuals had a beneficial interest. Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the same time for comparable transactions with other persons, and did not involve more than the normal risk of collectibility or present unfavorable features. Balance at December 31, 2001 $ 11,780,729 New loans 55,454,054 Payments received (59,919,841) ------------- Balance at December 31, 2002 $ 7,314,942 =============
(Continued) 49 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 Changes in the allowance for loan losses for 2002, 2001, and 2000 are as follows:
2002 2001 2000 ----------- ---------- --------- Balance, beginning of year $ 6,673,586 6,939,991 4,764,801 Allowance for loan losses of acquired companies at date of acquisition -- -- 1,150,457 Provision for loan losses 936,000 1,154,000 1,222,000 Charge-offs (768,340) (1,602,266) (719,263) Recoveries of loans previously charged off 279,868 181,861 521,996 ----------- ---------- --------- Balance, end of year $ 7,121,114 6,673,586 6,939,991 =========== ========== =========
A summary of nonaccrual and other impaired loans at December 31, 2002 and 2001 is as follows:
2002 2001 ----------- --------- Nonaccrual loans $ 2,481,101 3,550,492 Impaired loans continuing to accrue interest 9,136,536 5,804,193 ----------- --------- Total impaired loans $11,617,637 9,354,685 =========== ========= Allowance for loan losses on impaired loans $ 1,351,653 1,217,631 Impaired loans with no related allowance for loan losses 10,824,228 7,789,480
The average balance of impaired loans during 2002, 2001, and 2000 was $14,837,000, $10,896,000, and $9,513,000, respectively. A summary of interest income on nonaccrual and other impaired loans for 2002, 2001, and 2000 is as follows:
IMPAIRED LOANS NONACCRUAL CONTINUING TO LOANS ACCRUE INTEREST TOTAL ----------- --------------- ------- 2002: Income recognized $ 38,769 710,710 749,479 Interest income had interest accrued 202,698 710,710 913,408 2001: Income recognized 300,429 400,502 700,931 Interest income had interest accrued 590,511 400,502 991,013 2000: Income recognized 402,659 264,763 667,422 Interest income had interest accrued 726,687 264,763 991,450
(Continued) 50 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 (5) INVESTMENT IN DEBT AND EQUITY SECURITIES The amortized cost and fair value of debt and equity securities classified as available-for-sale at December 31, 2002 and 2001 are as follows:
2002 ------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE ------------ ---------- ---------- ----------- Securities of U.S. government agencies $134,790,220 1,988,202 36,050 136,742,372 Mortgage Backed Securities 8,987,306 121,519 5,298 9,103,527 Obligations of states and political subdivisions 34,417,319 1,407,777 20,973 35,804,123 Other debt securities 1,463,396 21,294 -- 1,484,690 ------------ --------- ------ ----------- Total debt securities 179,658,241 3,538,792 62,321 183,134,712 Federal Home Loan Bank stock 2,829,225 -- -- 2,829,225 Federal Reserve Bank stock 750,300 -- -- 750,300 Federal Agricultural Mortgage Corporation stock 10,125 -- -- 10,125 ------------ --------- ------ ----------- $183,247,891 3,538,792 62,321 186,724,362 ============ ========= ====== ===========
2001 ------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE ------------ ---------- ---------- ----------- U.S. Treasury securities $ 499,069 17,651 -- 516,720 Securities of U.S. government agencies 126,450,496 1,397,499 84,679 127,763,316 Mortgage Backed Securities 8,391,947 107,938 30,622 8,469,263 Obligations of states and political subdivisions 39,050,081 950,252 59,911 39,940,422 Other debt securities 1,406,188 38,645 -- 1,444,833 ------------ --------- ------- ----------- Total debt securities 175,797,781 2,511,985 175,212 178,134,554 Federal Home Loan Bank stock 2,754,525 -- -- 2,754,525 Federal Reserve Bank stock 749,850 -- -- 749,850 Federal Agricultural Mortgage Corporation stock 10,125 -- -- 10,125 ------------ --------- ------- ----------- $179,312,281 2,511,985 175,212 181,649,054 ============ ========= ======= ===========
(Continued) 51 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2002, by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.
AMORTIZED FAIR COST VALUE ------------ ----------- Due in one year or less $ 48,101,693 48,324,419 Due after one year through five years 87,715,130 89,733,749 Due after five years through ten years 32,549,534 33,561,526 Due after ten years 2,304,578 2,411,491 ------------ ----------- 170,670,935 174,031,185 Mortgage-backed securities 8,987,306 9,103,527 ------------ ----------- $179,658,241 183,134,712 ============ ===========
Debt securities with carrying values aggregating approximately $145,104,000 and $136,701,000 at December 31, 2002 and 2001, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law. Proceeds of $12,407,000 and gross gains of $162,769 were recorded on the sales of debt securities in 2002. Proceeds of $2,106,000 and gross gains of $97,808 were recorded on the sales of debt securities in 2001. Proceeds of $979,000 and gross losses of $27,710 were recorded on the sales of debt securities classified as available-for-sale in 2000. As allowed upon adoption of SFAS No. 133, the Company transferred its held-to-maturity portfolio to its available-for-sale portfolio. This transfer was made effective January 1, 2001. At the time of the transfer the amortized cost of the securities transferred was $22,463,000 and the fair value was $22,676,000. (6) PREMISES AND EQUIPMENT A summary of premises and equipment at December 31, 2002 and 2001 is as follows:
2002 2001 -------------- ---------- Land $ 3,726,381 3,556,258 Buildings and improvements 12,135,931 12,225,079 Furniture and equipment 8,291,368 8,655,312 Construction in progress 1,789 706,751 -------------- ---------- 24,155,469 25,143,400 Less accumulated depreciation 7,569,137 9,950,010 -------------- ---------- $ 16,586,332 15,193,390 ============== ==========
(Continued) 52 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 (7) GOODWILL AND OTHER INTANGIBLE ASSETS A summary of goodwill and other intangible assets at December 31, 2002 and 2001 is as follows:
2002 2001 ------------- ---------- Excess of cost over the fair value of net assets acquired $ 23,407,734 23,407,734 Core deposit intangible 730,140 878,820 Consulting/noncompete agreements 125,000 275,000 -------------- ---------- $ 24,262,874 24,561,554 ============== ==========
The gross carrying amount and accumulated amortization of our Company's amortized intangible assets for the periods ended December 31, 2002 and 2001 are as follows:
December 31, 2002 December 31, 2001 ---------------------------- ------------------------------ Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ----------- ------------- ----------- ------------- Amortized intangible assets: Core deposit intangible $ 1,800,000 (1,069,860) 1,800,000 (921,180) Consulting/noncompete agreements 900,000 (775,000) 900,000 (625,000) ----------- ---------- --------- ---------- $ 2,700,000 (1,844,860) 2,700,000 (1,546,180) =========== ========== ========= ==========
The aggregate amortization expense of intangible assets subject to amortization for the past three years, is as follows:
Twelve months ended December 31, ------------------------------ 2002 2001 2000 -------- ------- ------- Aggregate amortization expense $298,680 313,080 246,560 ======== ======= =======
The estimated amortization expense for the next five years is as follows: For year ended 2003 $273,680 For year ended 2004 148,680 For year ended 2005 148,680 For year ended 2006 148,680 For year ended 2007 135,420
(Continued) 53 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 Our Company's goodwill associated with the purchase of subsidiaries by reporting segments for the periods ended December 31, 2002 and 2001 is summarized as follows:
The Exchange Citizens Union National Bank State Bank and Osage of Jefferson Trust of Valley Bank City Clinton of Warsaw Total ----------------- -------------- ----------- ---------- Goodwill associated with the purchase of subsidiaries $ 4,382,098 14,912,760 4,112,876 23,407,734 ============ ========== ========= ==========
The following is a reconciliation of reported net income to net income adjusted to reflect the adoption of SFAS No. 142: (Dollars expressed in thousands, except per share data)
DECEMBER 31, ----------------------------- 2002 2001 2000 ------- ------- ----- Net income: Reported net income $ 8,093 7,102 5,485 Add back - goodwill amortization -- 1,219 973 ------- ------ ----- Adjusted net income $ 8,093 8,321 6,458 ======= ====== ===== Basic earnings per share: As reported $ 2.86 2.48 2.05 Add back - goodwill amortization -- 0.43 0.37 ------- ------ ----- Adjusted basic earnings per share $ 2.86 2.91 2.42 ======= ====== ===== Diluted earnings per share: As reported $ 2.85 2.48 2.05 Add back - goodwill amortization -- 0.43 0.37 ------- ------ ----- Adjusted diluted earnings per share $ 2.85 2.91 2.42 ======= ====== =====
(8) MORTGAGE SERVICING RIGHTS Loans serviced for others totaled approximately $203,397,000 and $181,468,000 at December 31, 2002 and 2001, respectively. Mortgage servicing rights totaled $1,516,000 and $1,134,000 at (Continued) 54 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 December 31, 2002 and 2001, respectively and reflect a $258,565 and $52,816 write-down to fair value during 2002 and 2001, respectively. Changes in the balance of servicing assets related to the loans serviced by Exchange National Bank for the years ended December 31, 2002 and 2001 are as follows: Balance at December 31, 2000 $ 621,827 Additions 727,429 Amortization (162,206) Impairment charge (52,816) ----------- Balance at December 31, 2001 1,134,234 Additions 919,014 Amortization (278,835) Impairment charge (258,565) ----------- Balance at December 31, 2002 $ 1,515,848 ===========
Our Company's mortgage servicing rights are amortized in proportion to the related estimated net servicing income on a straight line basis over the estimated lives of the related mortgages which is seven years. The estimated amortization expense for the next five years is as follows: For year ended 2003 $297,213 For year ended 2004 255,708 For year ended 2005 254,516 For year ended 2006 250,600 For year ended 2007 250,600
(9) DEPOSITS The scheduled maturities of time deposits are as follows (in thousands):
2002 2001 -------- -------- Due within: One year $206,083 235,307 Two years 58,036 47,775 Three years 27,797 8,829 Four years 4,548 5,573 Five years 10,933 1,068 Thereafter 420 198 -------- ------- $307,817 298,750 ======== =======
(Continued) 55 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 (10) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Information relating to securities sold under agreements to repurchase is as follows:
2002 2001 2000 ----------- ---------- ---------- Average daily balance $66,023,628 38,235,639 17,619,834 Maximum balance at month-end 74,686,617 63,874,272 25,660,251 Weighted average interest rate at year-end 1.08% 1.67 6.03 Weighted average interest rate for the year 1.52 3.16 5.63
The securities underlying the agreements to repurchase are under the control of the Banks. Unused agreements with unaffiliated banks to sell and repurchase securities on which The Exchange National Bank of Jefferson City may draw totaled $10,000,000 at December 31, 2002. Additionally, under agreements with unaffiliated banks, The Exchange National Bank of Jefferson City may borrow up to $25,000,000 in federal funds on an unsecured basis at December 31, 2002. (Continued) 56 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 (11) OTHER BORROWED MONEY Other borrowed money at December 31, 2002 and 2001 is summarized as follows:
2002 2001 ----------- ---------- The Company: Notes payable, 30-day LIBOR plus 125 basis points, due January 2004, interest only until maturity $11,450,568 11,450,568 Note payable, 7.00%, due April 2002 -- 500,000 Bank of America, $7,500,000 line of credit, 30-day LIBOR plus 125 basis points, due June 2003, interest only until maturity (2.67% and 3.33% at December 31, 2002 and 2001 respectively) 7,500,000 7,500,000 The Exchange National Bank of Jefferson City: Federal Home Loan Bank advances, weighted average rate of 5.59% at December 31, 2002 and 2001, due at various dates through 2010 15,000,000 15,000,000 Citizens Union State Bank and Trust of Clinton: Federal Home Loan Bank advances, weighted average rate of 5.84% and 5.91% at December 31, 2002 and 2001, respectively, due at various dates through 2008 3,800,000 4,100,000 Osage Valley Bank of Warsaw: Federal Home Loan Bank advances, weighted average rate of 4.78% and 4.76% at December 31, 2002 and 2001, respectively, due at various dates through 2013 4,044,448 4,587,046 ----------- ---------- $41,795,016 43,137,614 =========== ==========
In conjunction with the acquisition of USB, the Company issued notes payable totaling $11,700,568 to the former stockholders of USB. The notes payable are secured by all issued and outstanding shares of common stock of Citizens Union State Bank and Trust of Clinton. In conjunction with the acquisition of Mid Central, the Company issued a note payable for $1,000,000 to a former stockholder of Mid Central. This note was paid off in 2002. The advances from the Federal Home Loan Bank are secured under a blanket agreement which assigns all investment in Federal Home Loan Bank stock as well as mortgage loans equal to 120% of the outstanding advance balance to secure amounts borrowed at The Exchange National Bank of Jefferson City and Osage Valley Bank, and 135% at Citizens Union State Bank and Trust of Clinton. The Exchange National Bank has $5,000,000 and $10,000,000 of FHLB advances callable on March 3, 2003 and February 27, 2003, respectively. Citizens Union State Bank has $3,000,000 callable on January 23, 2003. (Continued) 57 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 The scheduled principal reduction of other borrowed money at December 31, 2002 was as follows: 2003 $ 27,590,975 2004 11,750,568 2005 -- 2006 668,021 2007 474,222 2008 and thereafter 1,311,230 ------------ $ 41,795,016 ============
At December 31, 2002 and 2001, $7,000,000 of the amount included in other borrowed money is owed to members of the Company's board of directors as a result of the acquisition of Union State Bancshares. Interest expense paid on this related-party borrowed money totaled $490,000 for each of the years ended December 31, 2002 and 2001. (12) RESERVE REQUIREMENTS AND COMPENSATING BALANCES The Federal Reserve Bank required the Banks to maintain a balance of $3,077,000 and $2,501,000 at December 31, 2002 and 2001, respectively, to satisfy reserve requirements. Average compensating balances held at correspondent banks were $4,114,000 and $2,514,000 at December 31, 2002 and 2001, respectively. The Banks maintain such compensating balances with correspondent banks to offset charges for services rendered by those banks. (Continued) 58 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 (13) INCOME TAXES The composition of income tax expense (benefit) for 2002, 2001, and 2000 is as follows:
2002 2001 2000 ----------- --------- --------- Current: Federal $ 3,333,043 3,068,417 2,980,092 State 54,309 31,446 42,051 ----------- --------- --------- Total current 3,387,352 3,099,863 3,022,143 ----------- --------- --------- Deferred: Federal (7,972) 541,093 (429,824) State -- -- -- ----------- --------- --------- Total deferred (7,972) 541,093 (429,824) ----------- --------- --------- Total income tax expense $ 3,379,380 3,640,956 2,592,319 =========== ========= =========
Applicable income taxes for financial reporting purposes differ from the amount computed by applying the statutory Federal income tax rate for the reasons noted in the table below:
2002 2001 2000 ----------- --------- ---------- Tax at statutory Federal income tax rate $ 3,915,435 3,660,108 2,746,176 Tax-exempt income (517,703) (539,042) (527,951) Amortization of nondeductible intangibles -- 414,423 330,746 State income tax, net of Federal tax benefit 35,844 20,754 27,754 Other, net (54,196) 84,713 15,594 ----------- --------- --------- $ 3,379,380 3,640,956 2,592,319 =========== ========= =========
(Continued) 59 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 The components of deferred tax assets and deferred tax liabilities at December 31, 2002 and 2001 are as follows:
2002 2001 ---------- ---------- Deferred tax assets: Allowance for loan losses $2,320,981 2,070,156 Nonaccrual loan interest 183,127 160,638 Capital loss carryover 15,062 5,975 Purchase accounting adjustments to securities and other investments 103,391 103,391 Deferred compensation 128,883 166,716 Other 158,100 153,231 ---------- --------- Total deferred tax assets 2,909,544 2,660,107 ---------- --------- Deferred tax liabilities: Available-for-sale securities 1,182,000 794,503 Premises and equipment 953,586 724,189 Core deposit intangible 248,248 298,799 Prepaid pension expense 92,540 83,645 Mortgage servicing rights 125,489 76,164 FHLB stock dividend 129,939 129,939 Other 52,647 48,248 ---------- --------- Total deferred tax liabilities 2,784,449 2,155,487 ---------- --------- Net deferred tax asset $ 125,095 504,620 ========== =========
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these temporary differences at December 31, 2002 and, therefore, has not established a valuation reserve. At December 31, 2002, the accumulation of prior years' earnings representing tax bad debt deductions of Exchange National Bank were $2,931,503. If these tax bad debt reserves were charged for losses other than bad debt losses, Exchange National Bank would be required to recognize taxable income in the amount of the charge. It is not contemplated that such tax-restricted retained earnings will be used in a manner that would create federal income tax liabilities. (Continued) 60 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 (14) PENSION AND RETIREMENT PLANS The Exchange National Bank of Jefferson City provides a noncontributory defined benefit pension plan in which all full-time employees become participants upon the later of the completion of one year of qualified service or the attainment of age 21, and in which they continue to participate as long as they continue to be full-time employees, until their retirement, death, or termination of employment prior to normal retirement date. The normal retirement benefits provided under the plan vary depending upon the participant's rate of compensation, length of employment, and social security benefits. Retirement benefits are payable for life, but not less than ten years. Plan assets consist of U.S. Treasury and government agency securities, corporate common stocks and bonds, real estate mortgages, and demand deposits. Pension benefit for the plan for 2002, 2001, and 2000 is as follows:
2002 2001 2000 --------- --------- --------- Service cost - benefits earned during the year $ 206,921 147,123 129,396 Interest costs on projected benefit obligations 223,184 213,910 203,328 Expected return on plan assets (371,413) (350,247) (320,528) Net amortization and deferral (35,512) (35,512) (35,512) Recognized net gains (49,341) (70,086) (49,376) --------- -------- -------- Pension benefit $ (26,161) (94,812) (72,692) ========= ======== ========
A summary of the activity in the plan's benefit obligation, assets, funded status, and amounts recognized in the Company's consolidated balance sheets at December 31, 2002, 2001, and 2000 are as follows:
2002 2001 2000 ----------- --------- --------- Benefit obligation: Balance, January 1 $ 3,681,619 3,132,468 3,078,659 Service cost 206,921 147,123 129,396 Interest cost 223,184 213,910 203,328 Actuarial loss (gain) 161,741 376,061 (101,840) Benefits paid (221,354) (187,943) (177,075) ----------- --------- --------- Balance, December 31 $ 4,052,111 3,681,619 3,132,468 =========== ========= =========
(Continued) 61 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000
----------- ----------- ----------- 2002 2001 2000 ----------- ----------- ----------- Plan assets: Fair value, January 1 $ 5,224,801 5,473,789 5,607,364 Actual return (521,331) (61,045) 43,500 Benefits paid (221,354) (187,943) (177,075) ----------- ---------- ---------- Fair value, December 31 $ 4,482,116 5,224,801 5,473,789 =========== ========== ========== Funded status: Excess of plan assets over benefit obligation $ 430,005 1,543,182 2,341,321 Unrecognized net gains (157,829) (1,297,167) (2,190,118) ----------- ---------- ---------- Prepaid pension expense included in other assets $ 272,176 246,015 151,203 =========== ========== ==========
Rates utilized for the plan years ended December 31, 2002, 2001, and 2000 are as follows:
2002 2001 2000 ------- ------ ------ Discount rate for the funded status 5.875% 6.25 7.04 Weighted average rate of compensation increase used to measure the projected benefit obligation 6.00 6.00 6.00 Expected long-term rate of return on plan assets 7.00 7.00 7.00
In addition to the pension plan described above, The Exchange National Bank of Jefferson City has a profit-sharing plan which covers all full-time employees. The Exchange National Bank of Jefferson City makes annual contributions in an amount equal to 6% of income before income taxes and before contributions to the profit-sharing and pension plans for all participants, limited to the maximum amount deductible for Federal income tax purposes. Contributions to the profit-sharing plan for 2002, 2001, and 2000 were $530,430, $534,910, and $423,324, respectively. At December 31, 2002, the profit-sharing plan held 147,097 shares of the common stock of the Company. Citizens Union State Bank and Trust of Clinton has a profit-sharing plan which covers all full-time employees. Eligible employees may defer up to 8% of his or her salary each year. Citizens Union State Bank and Trust of Clinton matches 1/3 of each employee's deferral. In addition, a discretionary contribution may be made each year by Citizens Union State Bank and Trust of Clinton. Contributions to the profit-sharing plan for 2002, 2001, and 2000 were $139,140, $116,744, and $112,902, respectively. (Continued) 62 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 Osage Valley Bank of Warsaw has a profit-sharing plan and a 401k employer match plan covering all full-time employees. Osage Valley Bank of Warsaw makes a contribution to the profit-sharing plan using a graduated contribution scale that is based on the bank's return on assets. Under the 401k plan, Osage Valley Bank of Warsaw will match 1/2 of each employee's first 6% of salary deferral. Contributions to the profit sharing and 401k plans for 2002, 2001, and 2000 were $32,650, $31,921, and $23,067, respectively. (15) STOCK OPTION PLANS On December 4, 2000, the Incentive Stock Option Committee of the board of directors (Committee) approved the Company's stock plan which provides for the grant of options to purchase up to 300,000 shares of the Company's common stock to officers and other key employees of the Company and its subsidiaries. Terms and conditions (including price, exercise date and number of shares) are determined by the committee. All options were granted at fair value and vest over four years, except for 3,214 options issued in 2002 that vested immediately. The following table summarizes the Company's stock option activity:
WEIGHTED AVERAGE NUMBER OF SHARES EXERCISE PRICE DECEMBER 31 DECEMBER 31 -------------------------- ---------------------- 2002 2001 2000 2002 2001 2001 ------- ------ ------ ------ ----- ------ Outstanding, beginning of year 34,929 34,929 -- $24.50 24.50 -- Granted 29,428 -- 34,929 28.00 -- 24.50 Exercised (13,253) -- -- 25.35 -- -- Canceled -- -- -- -- -- -- ------- ------ ------ ------ ----- ----- Outstanding, end of year 51,104 34,929 34,929 $26.30 24.50 24.50 ======= ====== ====== ====== ===== ===== Exercisable, end of year 11,711 14,753 4,082 $24.50 24.50 24.50
The weighted average remaining contractual life of options outstanding at December 31, 2002 was approximately nine years. (Continued) 63 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 The Company applies APB Opinion No. 25, in accounting for the stock options and, accordingly, no compensation cost has been recognized in the consolidated financial statements. The weighted average grant-date fair values of stock options granted during the following years and the weighted average significant assumptions used to determine those fair values, using the Black-Scholes option-pricing model are as follows:
2002 2000 ------- ------ Options issued during: Grant date fair value per share $ 28.00 24.50 Significant assumptions: Risk-free interest rate at grant date 4.91% 5.24% Expected annual rate of quarterly dividends 3.21 3.66 Expected stock price volatility 20 20
(Continued) 64 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 (16) SEGMENT INFORMATION Through the respective branch network, the Banks provide similar products and services in two defined geographic areas. The products and services offered include a broad range of commercial and personal banking services, including certificates of deposit, individual retirement and other time deposit accounts, checking and other demand deposit accounts, interest checking accounts, savings accounts, and money market accounts. Loans include real estate, commercial, and installment and other consumer. Other financial services include automatic teller machines, trust services, credit related insurance, and safe deposit boxes. The revenues generated by each business segment consist primarily of interest income, generated from the loan and debt and equity security portfolios, and service charges and fees, generated from the deposit products and services. The geographic areas are defined to be communities surrounding Jefferson City and Clinton, Missouri. The products and services are offered to customers primarily within their respective geographic areas. The business segments results which follow are consistent with the Company's internal reporting system which is consistent, in all material respects, with accounting principles generally accepted in the United States of America and practices prevalent in the banking industry.
2002 -------------------------------------------------------------------------- CITIZENS THE EXCHANGE UNION NATIONAL STATE BANK OSAGE VALLEY BANK OF AND TRUST BANK CORPORATE JEFFERSON CITY OF CLINTON OF WARSAW AND OTHER TOTAL -------------- ----------- ------------ ----------- ----------- Balance sheet information: Loans, net of allowance for loan losses $ 316,680,812 123,679,641 39,082,737 -- 479,443,190 Debt and equity securities 102,210,874 55,259,879 29,253,609 -- 186,724,362 Goodwill 4,382,098 14,912,760 4,112,876 -- 23,407,734 Intangible assets -- 730,140 -- 125,000 855,140 Total assets 472,806,720 240,869,039 81,209,370 (467,217) 794,417,912 Deposits 344,375,565 187,796,880 66,553,127 (7,534,920) 591,190,652 Stockholders' equity 48,956,217 35,513,162 9,979,001 (11,621,260) 82,827,120 Statement of income information: Total interest income $ 24,036,274 11,930,480 4,496,543 -- 40,463,297 Total interest expense 8,874,830 4,621,153 1,864,053 965,664 16,325,700 -------------- ----------- ----------- ----------- ----------- Net interest income 15,161,444 7,309,327 2,632,490 (965,664) 24,137,597 Provision for loan losses 600,000 300,000 36,000 -- 936,000 Noninterest income 4,450,701 1,346,864 305,105 -- 6,102,670 Noninterest expense 10,547,678 5,278,672 1,527,788 477,459 17,831,597 Income taxes 2,614,600 884,673 372,207 (492,100) 3,379,380 -------------- ----------- ----------- ----------- ----------- Net income (loss) $ 5,849,867 2,192,846 1,001,600 (951,023) 8,093,290 ============== =========== =========== =========== =========== Capital expenditures $ 2,059,837 464,187 314,795 -- 2,838,819
(Continued) 65 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000
2001 ------------------------------------------------------------------------- CITIZENS THE EXCHANGE UNION NATIONAL STATE BANK OSAGE VALLEY BANK OF AND TRUST BANK CORPORATE JEFFERSON CITY OF CLINTON OF WARSAW AND OTHER TOTAL -------------- ----------- ------------ ----------- ----------- Balance sheet information: Loans, net of allowance for loan losses $ 301,142,563 118,802,018 37,745,465 -- 457,690,046 Debt and equity securities 103,947,535 47,964,827 29,736,692 -- 181,649,054 Goodwill 4,382,098 14,912,760 4,112,876 -- 23,407,734 Intangible assets -- 878,820 -- 275,000 1,153,820 Total assets 458,792,287 241,965,161 76,326,052 (1,258,164) 775,825,336 Deposits 332,433,328 191,926,170 61,984,563 (6,549,871) 579,794,190 Stockholders' equity 48,018,123 34,899,318 9,219,276 (13,784,069) 78,352,648 Statement of income information: Total interest income $ 29,547,390 14,683,598 5,053,061 5,710 49,289,759 Total interest expense 14,220,305 7,611,188 2,300,902 1,257,029 25,389,424 -------------- ----------- ------------ ----------- ----------- Net interest income 15,327,085 7,072,410 2,752,159 (1,251,319) 23,900,335 Provision for loan losses 750,000 300,000 104,000 -- 1,154,000 Noninterest income 4,186,412 992,265 218,246 -- 5,396,923 Noninterest expense 10,540,436 5,001,352 1,489,836 368,468 17,400,092 Income taxes 2,645,520 1,069,054 466,782 (540,400) 3,640,956 -------------- ----------- ------------ ----------- ----------- Net income (loss) $ 5,577,541 1,694,269 909,787 (1,079,387) 7,102,210 ============== =========== ============ =========== =========== Capital expenditures $ 1,268,840 1,061,254 79,457 -- 2,409,551
(Continued) 66 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000
2000 -------------------------------------------------------------------------- CITIZENS THE EXCHANGE UNION NATIONAL STATE BANK OSAGE VALLEY BANK OF AND TRUST BANK CORPORATE JEFFERSON CITY OF CLINTON OF WARSAW AND OTHER TOTAL -------------- ----------- ------------ ----------- ----------- Balance sheet information: Loans, net of allowance for loan losses $ 307,896,826 124,074,520 29,560,096 -- 461,531,442 Debt and equity securities 59,926,441 68,896,826 27,093,633 -- 155,916,900 Total assets 411,937,825 241,626,885 65,006,410 1,032,226 719,603,346 Deposits 331,374,737 194,121,199 53,974,652 (3,207,701) 576,262,887 Stockholders' equity 46,953,624 34,422,578 9,079,936 (16,872,401) 73,583,737 Statement of income information: Total interest income $ 28,468,216 13,853,633 4,189,133 33,338 46,544,320 Total interest expense 14,317,221 7,271,435 2,171,941 1,417,000 25,177,597 -------------- ----------- ------------ ----------- ----------- Net interest income 14,150,995 6,582,198 2,017,192 (1,383,662) 21,366,723 Provision for loan losses 900,000 305,000 17,000 -- 1,222,000 Noninterest income 2,664,742 721,454 204,310 -- 3,590,506 Noninterest expense 9,210,971 4,589,975 1,370,666 486,629 15,658,241 Income taxes 2,054,500 889,173 274,246 (625,600) 2,592,319 -------------- ----------- ------------ ----------- ----------- Net income (loss) $ 4,650,266 1,519,504 559,590 (1,244,691) 5,484,669 ============== =========== ============ =========== =========== Capital expenditures $ 450,029 955,555 39,107 -- 1,444,691
(Continued) 67 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 (17) CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY The condensed balance sheets as of December 31, 2002 and 2001 and the related condensed statements of income and cash flows for the years ended December 31, 2002, 2001, and 2000 of the Company are as follows: CONDENSED BALANCE SHEETS
2002 2001 ------------ ---------- ASSETS Cash and due from banks $ 6,460,589 4,442,021 Investment in subsidiaries 95,853,890 93,542,227 Consulting/noncompete agreements 125,000 275,000 Other assets 162,775 439,888 ------------ ---------- Total assets $102,602,254 98,699,136 ============ ========== LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable $ 11,450,568 11,950,568 Other borrowed money 7,500,000 7,500,000 Consulting/noncompete agreements -- 150,000 Dividends payable 555,491 538,488 Other liabilities 269,075 207,432 Stockholders' equity 82,827,120 78,352,648 ------------ ---------- Total liabilities and stockholders' equity $102,602,254 98,699,136 ============ ==========
(Continued) 68 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 CONDENSED STATEMENTS OF INCOME
2002 2001 2000 ----------- --------- ----------- Revenue: Dividends received from subsidiaries $ 7,500,000 7,400,000 20,825,500 Interest on bank time deposits -- 5,709 33,338 ----------- --------- ----------- 7,500,000 7,405,709 20,858,838 ----------- --------- ----------- Expenses: Interest on bank debt 231,863 411,763 543,456 Interest on notes payable 733,801 845,266 873,544 Amortization of intangible assets 150,000 150,000 150,000 Other 327,459 188,153 306,290 ----------- --------- ----------- 1,443,123 1,595,182 1,873,290 ----------- --------- ----------- Income before income tax benefit and equity in undistributed income (dividends distributed in excess of income) of subsidiaries 6,056,877 5,810,527 18,985,548 Income tax benefit 492,100 540,400 625,600 Equity in undistributed income (dividends distributed in excess of income) of subsidiaries 1,544,313 751,283 (14,126,479) ----------- --------- ----------- Net income $ 8,093,290 7,102,210 5,484,669 =========== ========= ===========
(Continued) 69 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 CONDENSED STATEMENTS OF CASH FLOWS
2002 2001 2000 ----------- --------- ----------- Cash flows from operating activities: Net income $ 8,093,290 7,102,210 5,484,669 Adjustments to reconcile net income to net cash provided by operating activities: Dividends distributed in excess of income (equity in undistributed income) of subsidiaries (1,544,313) (751,283) 14,126,479 Other, net 505,758 38,342 352,066 ----------- --------- ----------- Net cash provided by operating activities 7,054,735 6,389,269 19,963,214 ----------- --------- ----------- Cash flows from investing activities: Purchase of subsidiaries -- -- (35,161,514) Consulting/noncompete payments (150,000) (150,000) (150,000) ----------- --------- ----------- Net cash used in investing activities (150,000) (150,000) (35,311,514) ----------- --------- ----------- Cash flows from financing activities: Proceeds from bank debt -- -- 12,000,000 Repayment of bank debt (500,000) (1,500,000) (3,500,000) Cash dividends paid (2,510,323) (2,424,876) (2,114,804) Proceeds from sale of treasury stock 35,967 -- -- Purchases of common stock (1,911,811) (807,406) -- ----------- --------- ----------- Net cash (used in) provided by financing activities (4,886,167) (4,732,282) 6,385,196 ----------- --------- ----------- Net increase (decrease) in cash 2,018,568 1,506,987 (8,963,104) Cash at beginning of year 4,442,021 2,935,034 11,898,138 ----------- --------- ----------- Cash at end of year $ 6,460,589 4,442,021 2,935,034 =========== ========= =========== Supplemental schedule of noncash activities: Note payable $ -- -- 1,000,000 Stock issued in acquisition -- -- 12,762,411
(18) DISCLOSURES ABOUT FINANCIAL INSTRUMENTS The Company issues financial instruments with off-balance-sheet risk in the normal course of business of meeting the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. (Continued) 70 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 The Company's extent of involvement and maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets. At December 31, 2002, no amounts have been accrued for any estimated losses for these financial instruments. The contractual amount of off-balance-sheet financial instruments as of December 31, 2002 and 2001 is as follows:
2002 2001 ------------ ---------- Commitments to extend credit $ 91,290,843 71,772,491 Standby letters of credit 2,592,866 2,746,314
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Of the total commitments to extend credit at December 31, 2002, approximately $57,495,000 represents fixed-rate loan commitments. Of the total commitments to extend credit at December 31, 2001, approximately $41,467,000 represents fixed-rate loan commitments. Since certain of the commitments and letters of credit are expected to expire without being drawn upon, the total commitment amounts do no necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, furniture and equipment, and real estate. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support contractual obligations of the Company's customers. The credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers. The approximate remaining term of standby letters of credit range from one month to ten years at December 31, 2002. (Continued) 71 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 A summary of the carrying amounts and fair values of the Company's financial instruments at December 31, 2002 and 2001 is as follows:
2002 2001 --------------------------- -------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------------ ----------- ----------- ----------- Assets: Loans $479,443,190 491,137,000 457,690,046 468,576,000 Investment in debt and equity securities 186,724,362 186,724,362 181,649,054 181,649,054 Federal funds sold 49,669,213 49,669,213 54,481,931 54,481,931 Cash and due from banks 27,742,030 27,742,030 31,127,216 31,127,216 Accrued interest receivable 5,539,661 5,539,661 6,019,680 6,019,680 ------------ ----------- ----------- ----------- $749,118,456 760,812,266 730,967,927 741,853,881 ============ =========== =========== =========== Liabilities: Deposits: Demand $ 77,474,471 77,474,471 78,637,109 78,637,109 NOW 93,728,675 93,728,675 92,027,032 92,027,032 Savings 49,720,928 49,720,928 48,686,631 48,686,631 Money market 62,449,717 62,449,717 61,693,528 61,693,528 Time 307,816,861 310,638,000 298,749,890 302,733,000 Securities sold under agreements to repurchase 67,359,199 67,359,199 61,644,544 61,644,544 Interest-bearing demand notes to U.S. Treasury 3,061,503 3,061,503 388,122 388,122 Other borrowed money 41,795,016 47,194,000 43,137,614 43,301,000 Accrued interest payable 1,984,745 1,984,745 3,059,714 3,059,714 ------------ ----------- ----------- ----------- $705,391,115 713,611,238 688,024,184 692,170,680 ============ =========== =========== ===========
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value: LOANS Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type, such as real estate, installment and other consumer, commercial, and bankers' acceptances. Each loan category is further segmented into fixed and adjustable interest rate terms and by performing and nonperforming categories. (Continued) 72 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 The fair value of performing loans is calculated by discounting scheduled cash flows through estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. The fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market and specific borrower information. INVESTMENT IN DEBT AND EQUITY SECURITIES Fair values are based on quoted market prices or dealer quotes. FEDERAL FUNDS SOLD, CASH, AND DUE FROM BANKS For federal funds sold, cash, and due from banks, the carrying amount is a reasonable estimate of fair value, as such instruments reprice in a short time period. ACCRUED INTEREST RECEIVABLE AND PAYABLE For accrued interest receivable and payable, the carrying amount is a reasonable estimate of fair value because of the short maturity for these financial instruments. DEPOSITS The fair value of deposits with no stated maturity, such as noninterest-bearing demand, NOW accounts, savings, and money market, is equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND INTEREST-BEARING DEMAND NOTES TO U.S. TREASURY For securities sold under agreements to repurchase and interest-bearing demand notes to U.S. Treasury, the carrying amount is a reasonable estimate of fair value, as such instruments reprice in a short time period. OTHER BORROWED MONEY The fair value of other borrowed money is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for other borrowed money of similar remaining maturities. (Continued) 73 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT The fair value of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments, and the present creditworthiness of such counterparties. The Company believes such commitments have been made on terms, which are competitive in the markets in which it operates. The fair value estimates provided are made at a point in time based on market information and information about the financial instruments. Because no market exists for a portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the fair value estimates. (19) LITIGATION Various legal claims have arisen in the normal course of business, which, in the opinion of management of the Company, will not result in any material liability to the Company. (Continued) 74 EXCHANGE NATIONAL BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2002, 2001, and 2000 (20) QUARTERLY FINANCIAL INFORMATION (unaudited) (In thousands, except per share data)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER YTD ------- ------- ------- ------- ------ 2002 ----------------------------------------------- Interest income $10,293 10,214 10,126 9,830 40,463 Interest expense 4,388 4,174 4,079 3,685 16,326 ------- ------- ------- ------- ------ Net interest income $ 5,905 6,040 6,047 6,145 24,137 ======= ======= ======= ======= ====== Provision for loan losses $ 234 234 234 234 936 Noninterest income 1,305 1,354 1,490 1,954 6,103 Noninterest expense 4,221 4,400 4,420 4,791 17,832 Income taxes 826 762 856 935 3,379 Net income 1,929 1,998 2,027 2,139 8,093 Net income per share: Basic earnings per share 0.68 0.70 0.72 0.76 2.86 Diluted earnings per share 0.68 0.70 0.71 0.76 2.85 2001 ----------------------------------------------- Interest income $13,253 12,586 12,197 11,253 49,289 Interest expense 7,324 6,790 6,163 5,112 25,389 ------- ------- ------- ------- ------ Net interest income $ 5,929 5,796 6,034 6,141 23,900 ======= ======= ======= ======= ====== Provision for loan loses $ 248 231 231 444 1,154 Noninterest income 1,074 1,234 1,289 1,800 5,397 Noninterest expense 4,108 4,237 4,403 4,652 17,400 Income taxes 886 893 924 938 3,641 Net income 1,761 1,669 1,765 1,907 7,102 Net income per share: Basic earnings per share 0.62 0.58 0.62 0.67 2.48 Diluted earnings per share 0.62 0.58 0.62 0.67 2.48
75 MARKET PRICE OF AND DIVIDENDS ON EQUITY SECURITIES AND RELATED MATTERS Since June 19, 2000 our Company's common stock has been traded on Nasdaq's national market under the stock symbol of "EXJF." The following table sets forth the range of high and low bid prices of our Company's common stock by quarter for each quarter in 2002 and 2001 in which the stock was traded.
2002 HIGH LOW ---- ---- --- Fourth Quarter $34.50 29.00 Third Quarter 32.25 29.00 Second Quarter 32.00 27.75 First Quarter 28.75 25.50
2001 HIGH LOW ---- ---- --- Fourth Quarter $28.00 24.25 Third Quarter 27.95 22.10 Second Quarter 23.50 20.50 First Quarter 24.00 22.75
As of March 14, 2003, our Company had issued and outstanding 2,778,921 shares of common stock, which were held of record by approximately 1,500 persons. The common stock is the only class of equity security which our Company has outstanding. The following table sets forth information on dividends paid by our Company in 2002 and 2001.
DIVIDENDS PAID MONTH PAID PER SHARE - -------------- --------- January, 2002 $ 0.19 April, 2002 0.19 July, 2002 0.20 October, 2002 0.20 December, 2002 0.10 ------------- Total for 2002 $ 0.88 ============= January, 2001 $ 0.19 April, 2001 0.19 July, 2001 0.19 October, 2001 0.19 December, 2001 0.09 ------------- Total for 2001 $ 0.85 =============
Our Board of Directors intends that our Company will continue to pay quarterly dividends at least at the current rate. In addition, our Board of Directors intends, to the extent appropriate, that our Company will continue to pay an additional special dividend. The actual amount of quarterly dividends and the payment, as well as amount, of any special dividend ultimately will depend upon the payment of sufficient dividends by our subsidiary Banks to our Company. The payment by our Banks of dividends to our Company will depend upon such factors as our Banks' financial condition, results of operations and current and anticipated cash needs, including capital requirements. As discussed in Note 3 to our Company's consolidated financial statements, the Banks may pay up to $2,407,000 in dividends to our Company without regulatory approval subject to the ongoing capital requirements of the Banks. 76 DIRECTORS AND EXECUTIVE OFFICERS OF OUR COMPANY
Name Position with Our Company Position with Subsidiary Banks Principal Occupation - ---- ------------------------- ------------------------------ -------------------- James E. Smith Chairman, Chief Executive Chairman, Chief Executive Position with Exchange, Officer and Director-Class I Officer, and Director of Citizens Union State Bank and Citizens Union State Bank, Vice Osage Valley Bank Chairman and Director of Osage Valley Bank, Director of Exchange National Bank David T. Turner President and Director-Class Chairman, President, Chief Position with Exchange and III Executive Officer and Director Exchange National Bank of Exchange National Bank, Director of Citizens Union State Bank Charles G. Dudenhoeffer, Jr. Director-Class I Director of Exchange National Retired Bank Philip D. Freeman Director-Class I Director of Exchange National Owner/Manager, Freeman Bank Mortuary, Jefferson City, Missouri David R. Goller Director-Class II Director of Exchange National Attorney with the law firm of Bank Goller, Gardner & Feather, P.C., Jefferson City, Missouri James R. Loyd Director-Class II Director of Exchange National Retired Bank Kevin L. Riley Director-Class III Director of Exchange National Co-owner, Riley Chevrolet, Bank Inc. and Riley Oldsmobile, Cadillac, Inc., Jefferson City, Missouri Gus S. Wetzel, II Director-Class II Director of Citizens Union Physician State Bank Richard G. Rose Treasurer Senior Vice President and Position with Exchange and Controller of Exchange National Exchange National Bank Bank Kathleen L. Bruegenhemke Senior Vice President and Position with Exchange Secretary
ANNUAL REPORT ON FORM 10-K A copy of our Company's Annual Report on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission, excluding exhibits, will be furnished without charge to shareholders entitled to vote at the 2003 annual meeting of shareholders upon written request to Kathleen L. Bruegenhemke, Secretary, Exchange National Bancshares, Inc., 132 East High Street, Jefferson City, Missouri 65101. Our Company will provide a copy of any exhibit to the Form 10-K to any such person upon written request and the payment of our Company's reasonable expenses in furnishing such exhibits. 77 EX-23 4 c75697exv23.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors Exchange National Bancshares, Inc: We consent to the incorporation by reference in the registration statement (No. 333-68388) on Form S-8 of Exchange National Bancshares, Inc. of our report dated February 21, 2003, with respect to the consolidated balance sheets of Exchange National Bancshares, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2002, which report appears in the December 31, 2002 annual report on Form 10-K of Exchange National Bancshares, Inc. Our report refers to Exchange National Bancshares, Inc. changing its method of accounting for goodwill and other intangible assets in 2002. /s/KPMG St. Louis, Missouri March 21, 2003 -----END PRIVACY-ENHANCED MESSAGE-----