UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2003
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________.
Commission file number: 0-23636
EXCHANGE NATIONAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1626350
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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(573) 761-6100
(Registrant's telephone number, including area code)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT:
Title of Each Class Name of Each Exchange on Which Registered
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None N/A
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SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:
Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. | |
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes |X| No | |
The aggregate market value of the 3,256,655 shares of voting stock of the registrant held by non-affiliates computed by reference to the $35.77 closing price of such stock on March 1, 2004, was $116,490,549. The aggregate market value of the 3,255,002 shares of voting stock of the issuer held by non-affiliates computed by reference to the $37.31 closing price of such stock on June 30, 2003, the last business day of the registrant's most recently completed second fiscal quarter, was $121,444,125. As of March 1, 2004, the registrant had 4,298,353 shares of common stock, par value $1.00 per share, issued and 4,169,847 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the indicated parts of this report: (1) 2003 Annual Report to Shareholders - Part II and (2) definitive Proxy Statement for the 2004 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A - Part III.
PART I
ITEM 1. BUSINESS.
GENERAL
Our Company, Exchange National Bancshares, Inc., is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Exchange was incorporated under the laws of the State of Missouri on October 23, 1992, and on April 7, 1993 it acquired all of the issued and outstanding capital stock of The Exchange National Bank of Jefferson City, a national banking association, pursuant to a corporate reorganization involving an exchange of shares. On November 3, 1997, our Company acquired Union State Bancshares, Inc., and Union's wholly-owned subsidiary, Union State Bank and Trust of Clinton. Following the May 4, 2000 acquisition of Calhoun Bancshares, Inc. by Union State Bank, Calhoun Bancshares' wholly-owned subsidiary, Citizens State Bank of Calhoun, merged into Union State Bank. The surviving bank in this merger is called Citizens Union State Bank & Trust. On January 3, 2000, our Company acquired Mid Central Bancorp, Inc., and Mid Central's wholly-owned subsidiary, Osage Valley Bank. On October 25, 1999, Exchange established ENB Holdings, Inc. as a wholly-owned subsidiary for the sole purpose of effecting the June 16, 2000 merger with CNS Bancorp, Inc. and its subsidiary, City National Savings Bank, FSB. City National subsequently was merged into Exchange National Bank. ENB Holdings owns 27.4% of Exchange National Bank with the balance owned by Exchange. On October 17, 2001, Exchange and Union each received approval from the Federal Reserve and elected to become a financial holding company.
Except as otherwise provided herein, references herein to "Exchange" or our "Company" include Exchange and its consolidated subsidiaries, and references herein to our "Banks" refer to Exchange National Bank, Citizens Union State Bank and Osage Valley Bank.
RECENT DEVELOPMENTS
ISSUANCE OF TRUST PREFERRED SECURITIES. Our Company is in the process of completing a private placement of $25,000,000 in 30-year floating rate trust preferred securities (TPS). The interest rate on the TPS will be a floating rate based on a specified margin above three-month LIBOR. It is expected that the placement will be closed on or about March 17, 2004. Based on the LIBOR rate as of March 8, 2004, the initial interest rate would be 3.81%. The TPS can be prepaid without penalty at any time after five years from the issuance date.
The TPS represent preferred interests in a special purpose subsidiary trust organized by our Company. Our Company will invest approximately $750,000 in common interests in the trust and the purchaser in the private placement will purchase $25,000,000 in preferred interests. The proceeds will be used to purchase from our Company its 30-year deeply subordinated debentures whose terms mirror those stated above for the TPS. The debentures are guaranteed by our Company pursuant to a subordinated guarantee. The trustee for the TPS holders will be U.S. Bank, N.A. The trustee will not have the power to take enforcement action in the event of a default under the TPS for five years from the date of default. In the event of default, however, our Company would be precluded from paying dividends until the default is cured.
The proceeds of the TPS placement will be used by our Company to pay down and eliminate a loan in the amount of $11,000,000 under its line of credit, to enable our Company to repurchase shares of its outstanding common stock, to provide additional capital to one of its subsidiary banks to facilitate expansion into two new markets and for general corporate purposes.
Currently, Federal Reserve Regulations allow TPS to be counted for up to 25% of total core capital elements. Because of a change in accounting practices which do not permit TPS to be included in capital, the Federal Reserve Board is considering whether to modify or eliminate Tier 1 capital treatment for TPS. In the
event the Federal Reserve Board would eliminate Tier 1 capital treatment for TPS without providing grandfather rights to issues outstanding prior to the change in treatment, our Company's ability to use the proceeds for share repurchases and expansion would be inhibited, but not eliminated.
LEE'S SUMMIT AND BRANSON, MISSOURI BRANCHES. In the first quarter of 2004, our Company announced its intention to expand into the Lee's Summit and Branson, Missouri markets. Subject to regulatory approval, we intend to open a de novo branch facility in each of those communities during the second quarter of 2004.
DESCRIPTION OF BUSINESS
EXCHANGE. Exchange is a bank holding company registered under the Bank Holding Company Act that has elected to become a financial holding company. Our Company's activities currently are limited to ownership, directly or indirectly through subsidiaries, of the outstanding capital stock of Exchange National Bank, Citizens Union State Bank and Osage Valley Bank. In addition to ownership of its subsidiaries, Exchange may seek expansion through acquisition and may engage in those activities (such as investments in banks or operations that are financial in nature) in which it is permitted to engage under applicable law. It is not currently anticipated that Exchange will engage in any business other than that directly related to its ownership of its banking subsidiaries or other financial institutions.
UNION. Union is a bank holding company registered under the Bank Holding Company Act that has elected to become a financial holding company. Union's activities currently are limited to ownership of the outstanding capital stock of Citizens Union State Bank. It is not currently anticipated that Union will engage in any business other than that directly related to its ownership of Citizens Union State Bank.
MID CENTRAL BANCORP. Mid Central Bancorp is a bank holding company registered under the Bank Holding Company Act. Mid Central Bancorp's activities currently are limited to ownership of the outstanding capital stock of Osage Valley Bank. It is not currently anticipated that Mid Central Bancorp will engage in any business other than that directly related to its ownership of Osage Valley Bank.
ENB HOLDINGS. ENB Holdings is a bank holding company registered under the Bank Holding Company Act. ENB Holdings' activities currently are limited to the ownership of 27.4% of the outstanding capital stock of Exchange National Bank. It is not currently anticipated that ENB Holdings will engage in any business other than that directly related to its minority ownership of Exchange National Bank.
EXCHANGE NATIONAL BANK. Exchange National Bank, located in Jefferson City, Missouri, was founded in 1865. Exchange National Bank is the oldest bank in Cole County, and became a national bank in 1927. Exchange National Bank has seven banking offices, including its principal office at 132 East High Street in Jefferson City's central business district, three Jefferson City branch facilities and a branch facility in each of the Missouri communities of Tipton, California and St. Robert. See "Item 2. Properties".
Exchange National Bank is a full service bank conducting a general banking and trust business, offering its customers checking and savings accounts, electronic cash management services, internet banking, debit cards, certificates of deposit, trust services, brokerage services, safety deposit boxes and a wide range of lending services, including credit card accounts, commercial and industrial loans, single payment personal loans, installment loans and commercial and residential real estate loans.
Exchange National Bank's deposit accounts are insured by the Federal Deposit Insurance Corporation (the "FDIC") to the extent provided by law, and it is a member of the Federal Reserve System. Exchange National Bank's operations are supervised and regulated by the Office of the Comptroller of the Currency (the "OCC"), the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and the FDIC. A periodic examination of Exchange National Bank is conducted by representatives of the OCC. Such
regulations, supervision and examinations are principally for the benefit of depositors, rather than for the benefit of the holders of Exchange National Bank's common stock. See "Regulation Applicable to Bank Holding Companies " and "Regulation Applicable to our Banks".
CITIZENS UNION STATE BANK. Citizens Union State Bank was founded in 1932 as a Missouri bank known as Union State Bank of Clinton. Union State Bank converted from a Missouri bank to a Missouri trust company on August 16, 1989, changing its name to Union State Bank and Trust of Clinton. On May 4, 2000, Union State Bank merged with Citizens State Bank of Calhoun and changed its name to Citizens Union State Bank and Trust. Citizens Union State Bank has nine banking offices, including its principal office at 102 North Second Street in Clinton, Missouri, four Clinton branch facilities, and a branch facility in each of the Missouri communities of Springfield, Collins, Osceola and Windsor. See "Item 2. Properties".
Citizens Union State Bank is a full service bank conducting a general banking and trust business, offering its customers checking and savings accounts, internet banking, debit cards, certificates of deposit, trust services, brokerage services, safety deposit boxes and a wide range of lending services, including commercial and industrial loans, single payment personal loans, installment loans and commercial and residential real estate loans.
Citizens Union State Bank's deposit accounts are insured by the FDIC to the extent provided by law. Citizens Union State Bank's operations are supervised and regulated by the FDIC and the Missouri Division of Finance. Periodic examinations of Citizens Union State Bank are conducted by representatives of the FDIC and the Missouri Division of Finance. Such regulations, supervision and examinations are principally for the benefit of depositors, rather than for the benefit of the holders of Citizens Union State Bank's common stock. See "Regulation Applicable to Bank Holding Companies " and "Regulation Applicable to our Banks".
OSAGE VALLEY BANK. Osage Valley Bank was founded in 1891 as a Missouri state bank. Osage Valley Bank has two banking offices, including its principal office at 200 Main Street in Warsaw, Missouri and a branch facility in Warsaw, Missouri. See "Item 2. Properties".
Osage Valley Bank is a full service bank conducting a general banking business, offering its customers checking and savings accounts, internet banking, debit cards, certificates of deposit, safety deposit boxes and a wide range of lending services, including commercial and industrial loans, single payment personal loans, installment loans and commercial and residential real estate loans.
Osage Valley Bank's deposit accounts are insured by the FDIC to the extent provided by law. Osage Valley Bank's operations are supervised and regulated by the FDIC and the Missouri Division of Finance. Periodic examinations of Osage Valley Bank are conducted by representatives of the FDIC and the Missouri Division of Finance. Such regulations, supervision and examinations are principally for the benefit of depositors, rather than for the benefit of the holders of Osage Valley Bank's common stock. See "Regulation Applicable to Bank Holding Companies " and "Regulation Applicable to our Banks".
EMPLOYEES
As of December 31, 2003, Exchange and its subsidiaries had approximately 245 full-time and 35 part-time employees. None of its employees is presently represented by any union or collective bargaining group, and our Company considers its employee relations to be satisfactory.
COMPETITION
Bank holding companies and their subsidiaries and affiliates encounter intense competition from nonbanking as well as banking sources in all of their activities. Our Banks' competitors include other commercial banks, savings and loan associations, savings banks, credit unions and money market mutual
funds. Savings and loan associations and credit unions now have the authority to offer checking accounts and to make corporate and agricultural loans and were granted expanded investment authority by recent federal regulations. As a result, these thrift institutions are expected to continue to offer increased competition to commercial banks in the future. In addition, large national and multinational corporations have in recent years become increasingly visible in offering a broad range of financial services to all types of commercial and consumer customers. In our Banks' respective service areas, new competitors, as well as the expanding operations of existing competitors, have had, and are expected to continue to have, an adverse impact on our Banks' market share of deposits and loans in such service areas.
Exchange National Bank experiences substantial competition for deposits and loans within both its primary service area of Jefferson City and its secondary service area of the nearby communities in Cole and Moniteau Counties. Exchange National Bank's principal competition for deposits and loans comes from eight other banks and fourteen credit unions within its primary service area of Jefferson City and, to an increasing extent, four other banks in nearby communities. Based on publicly available information, management believes that Exchange National Bank is the second largest (in terms of deposits) of the banks within Cole County. The main competition for Exchange National Bank's trust services is from other commercial banks.
The areas in which Citizens Union State Bank competes for deposits and loans are its primary service areas of Clinton, Springfield, Collins, Windsor and Osceola, Missouri and its secondary service area of the nearby communities in Henry and St. Clair counties. Citizens Union State Bank's principal competition for deposits and loans comes from four other banks within its primary service area and, to an increasing extent, six other banks in nearby communities. Based on publicly available information, management believes that Citizens Union State Bank is the largest (in terms of deposits) of the banks within Henry and St. Clair counties. The main competition for Citizens Union State Bank's trust services is from the trust departments of other commercial banks in the Kansas City area.
Osage Valley Bank competes for deposits and loans in its primary service area of Warsaw, Missouri and its secondary service area of the nearby communities in Benton County. Osage Valley Bank's principal competition for deposits and loans comes from banks within its primary service area of Warsaw and in nearby communities. Based on publicly available information, management believes that Osage Valley Bank is the largest (in terms of deposits) of the five banks within Benton County.
REGULATION APPLICABLE TO BANK HOLDING COMPANIES
GENERAL. As a registered bank holding company and a financial holding company under the Bank Holding Company Act (the "BHC Act") and the Gramm-Leach-Bliley Act (the "GLB Act"), Exchange is subject to supervision and examination by the Federal Reserve Board (the "FRB"). The FRB has authority to issue cease and desist orders against bank holding companies if it determines that their actions represent unsafe and unsound practices or violations of law. In addition, the FRB is empowered to impose civil money penalties for violations of banking statutes and regulations. Regulation by the FRB is intended to protect depositors of our Banks, not the shareholders of Exchange.
LIMITATION ON ACQUISITIONS. The BHC Act requires a bank holding company to obtain prior approval of the FRB before:
- taking any action that causes a bank to become a controlled subsidiary of the bank holding company;
- acquiring direct or indirect ownership or control of voting shares of any bank or bank holding company, if the acquisition results in the acquiring bank holding company having control of more than 5% of the outstanding shares of any class of voting securities of such bank or bank holding company, and such bank or bank holding company is not majority-owned by the acquiring bank holding company prior to the acquisition;
- acquiring substantially all of the assets of a bank; or
- merging or consolidating with another bank holding company.
LIMITATION ON ACTIVITIES. The activities of bank holding companies are generally limited to the business of banking, managing or controlling banks, and other activities that the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In addition, under the GLB Act, a bank holding company, all of whose controlled depository institutions are "well capitalized" and "well managed" (as defined in federal banking regulations) and which obtains "satisfactory" Community Reinvestment Act ratings, may declare itself to be a "financial holding company" and engage in a broader range of activities.
A financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature. "Financial in nature" activities include:
- securities underwriting, dealing and market making;
- sponsoring mutual funds and investment companies;
- insurance underwriting and insurance agency activities;
- merchant banking; and
- activities that the FRB determines to be financial in nature or incidental to a financial activity; or which is complementary to a financial activity and does not pose a safety and soundness risk.
A financial holding company that desires to engage in activities that are financial in nature or incidental to a financial activity but not previously authorized by the FRB must obtain approval from the FRB before engaging in such activity. Also, a financial holding company may seek FRB approval to engage in an activity that is complementary to a financial activity, if it shows that the activity does not pose a substantial risk to the safety and soundness of insured depository institutions or the financial system.
A financial holding company may acquire a company (other than a bank holding company, bank or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature without prior approval from the FRB. Prior FRB approval is required, however, before the financial holding company may acquire control of more than 5% of the voting shares or substantially all of the assets of a bank holding company, bank or savings association. In addition, under the FRB's merchant banking regulations, a financial holding company is authorized to invest in companies that engage in activities that are not financial in nature, as long as the financial holding company makes its investment with the intention of limiting the duration of the investment, does not manage the company on a day-to-day basis, and the company does not cross-market its products or services with any of the financial holding company's controlled depository institutions.
If any subsidiary bank of a financial holding company ceases to be "well-capitalized" or "well-managed," the FRB has authority to order the financial holding company to divest its subsidiary banks. Alternatively, the financial holding company may elect to limit its activities and the activities of its subsidiaries to those permissible for a bank holding company that is not a financial holding company. If any subsidiary bank of a financial holding company receives a rating under the Community Reinvestment Act of less than "satisfactory", then the financial holding company is prohibited from engaging in new activities or acquiring companies other than bank holding companies, banks or savings associations until the rating is raised to "satisfactory" or better.
REGULATORY CAPITAL REQUIREMENTS. The FRB has promulgated capital adequacy guidelines for use in its examination and supervision of bank holding companies. If a bank holding company's capital falls
below minimum required levels, then the bank holding company must implement a plan to increase its capital, and its ability to pay dividends and make acquisitions of new bank subsidiaries is restricted.
The FRB's capital adequacy guidelines provide for the following types of capital:
- Tier 1 capital, also referred to as core capital, which includes:
- common shareholders' equity;
- qualifying noncumulative perpetual preferred stock and related surplus;
- qualifying cumulative perpetual preferred stock and related surplus (limited to a maximum of 25% of Tier 1 capital elements); and
- minority interests in the equity accounts of consolidated subsidiaries.
Goodwill is excluded from Tier 1 capital. Most intangible assets are also deducted from Tier 1 capital.
- Tier 2 capital, also referred to as supplementary capital, which includes:
- allowances for loan and lease losses (limited to 1.25% of risk-weighted assets);
- most perpetual preferred stock and any related surplus;
- certain hybrid capital instruments, perpetual debt and mandatory convertible debt securities; and
- intermediate-term preferred stock and intermediate-term subordinated debt instruments (subject to limitations).
The maximum amount of supplementary capital that qualifies as Tier 2 capital is limited to 100% of Tier 1 capital.
- Total capital, which includes:
- Tier 1 capital;
- plus, qualifying Tier 2 capital;
- minus, investments in unconsolidated subsidiaries, reciprocal holdings of bank holding company capital securities, and deferred tax assets and other deductions.
The FRB's capital adequacy guidelines require that a bank holding company maintain a Tier 1 leverage ratio equal to at least 4% of its average total consolidated assets, a Tier 1 risk-based capital ratio equal to 4% of its risk-weighted assets and a total risk-based capital ratio equal to 8% of its risk-weighted assets.
On December 31, 2003, Exchange was in compliance with all of the FRB's capital adequacy guidelines. Exchange's capital ratios on December 31, 2003 are shown below:
Total Risk-Based
Tier 1 Risk-Based Capital Ratio (8%
Leverage Ratio (4% Capital Ratio (4% minimum
minimum requirement) minimum requirement) requirement)
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Exchange 7.18% 9.78% 10.98%
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INTERSTATE BANKING AND BRANCHING. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"), a bank holding company is permitted to acquire the stock or substantially all of the assets of banks located in any state regardless of whether such transaction is prohibited under the laws of any state. The FRB will not approve an interstate acquisition if as a result of the acquisition the bank holding company would control more than 10% of the total amount of insured deposits in the United States or would control more than 30% of the insured deposits in the home state of the acquired bank. The 30% of insured deposits state limit does not apply if the acquisition is the initial entry into a state by a bank holding company or if the home state waives such limit. The Riegle-Neal Act also authorizes banks to merge across state lines, thereby creating interstate branches. Banks are also permitted to acquire and to establish de novo branches in other states where authorized under the laws of those states.
Under the Riegle-Neal Act, individual states may restrict interstate acquisitions in two ways. A state may prohibit an out-of-state bank holding company from acquiring a bank located in the state unless the target bank has been in existence for a specified minimum period of time (not to exceed five years). A state may also establish limits on the total amount of insured deposits within the state which are controlled by a single bank holding company, provided that such deposit limit does not discriminate against out-of-state bank holding companies.
SOURCE OF STRENGTH. FRB policy requires a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. Under this "source of strength doctrine," a bank holding company is expected to stand ready to use its available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity, and to maintain resources and the capacity to raise capital which it can commit to its subsidiary banks. Furthermore, the FRB has the right to order a bank holding company to terminate any activity that the FRB believes is a serious risk to the financial safety, soundness or stability of any subsidiary bank.
LIABILITY OF COMMONLY CONTROLLED INSTITUTIONS. Under cross-guaranty provisions of the Federal Deposit Insurance Act (the "FDIA"), bank subsidiaries of a bank holding company are liable for any loss incurred by the Bank Insurance Fund (the "BIF"), the federal deposit insurance fund for banks, in connection with the failure of any other bank subsidiary of the bank holding company.
MISSOURI BANK HOLDING COMPANY REGULATION. Missouri prohibits any bank holding company from acquiring ownership or control of, any bank or Missouri depository trust company that has Missouri deposits if, after such acquisition, the bank holding company would hold or control more than 13% of total Missouri deposits. Because of this restriction, a bank holding company, prior to acquiring control of a bank or depository trust company that has deposits in Missouri, must receive the approval of the Missouri Division of Finance.
REGULATION APPLICABLE TO OUR BANKS
GENERAL. Exchange National Bank, a national bank, is subject to regulation and examination by the OCC and the FDIC. Citizens Union State Bank, a Missouri state non-member depository trust company, is subject to the regulation of the Missouri Division of Finance and the FDIC. Osage Valley Bank, a Missouri state non-member bank, is subject to the regulation of the Missouri Division of Finance and the FDIC. Each of the OCC and the FDIC is empowered to issue cease and desist orders against our Banks if it determines that activities of any of our Banks represents unsafe and unsound banking practices or violations of law. In addition, the OCC and the FDIC have the power to impose civil money penalties for violations of banking statutes and regulations. Regulation by these agencies is designed to protect the depositors of the bank, not shareholders of Exchange.
BANK REGULATORY CAPITAL REQUIREMENTS. The OCC and the FDIC have adopted minimum capital requirements applicable to national banks and state non-member banks, respectively, which are similar to the
capital adequacy guidelines established by the FRB for bank holding companies. Federal banking laws classify an insured financial institution in one of the following five categories, depending upon the amount of its regulatory capital:
- "well-capitalized" if it has a total Tier 1 leverage ratio of 5% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a total risk-based capital ratio of 10% or greater (and is not subject to any order or written directive specifying any higher capital ratio);
- "adequately capitalized" if it has a total Tier 1 leverage ratio of 4% or greater (or a Tier 1 leverage ratio of 3% or greater, if the bank has a CAMELS rating of 1), a Tier 1 risk-based capital ratio of 4% or greater and a total risk-based capital ratio of 8% or greater;
- "undercapitalized" if it has a total Tier 1 leverage ratio that is less than 4% (or a Tier 1 leverage ratio that is less than 3%, if the bank has a CAMELS rating of 1), a Tier 1 risk-based capital ratio that is less than 4% or a total risk-based capital ratio that is less than 8%;
- "significantly undercapitalized" if it has a total Tier 1 leverage ratio that is less than 3%, a Tier 1 risk based capital ratio that is less than 3% or a total risk-based capital ratio that is less than 6%; and
- "critically undercapitalized" if it has a Tier 1 leverage ratio that is equal to or less than 2%.
Federal banking laws require the federal regulatory agencies to take prompt corrective action against undercapitalized financial institutions.
On December 31, 2003, each of our Banks was in compliance with its federal banking agency's minimum capital requirements. The capital ratios and classifications of each of our Banks as of December 31, 2003 is shown on the following chart.
Tier 1 Total
Risk-Based Risk-Based
Leverage Ratio Capital Ratio Capital Ratio Classification
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Exchange National Bank 9.17% 11.94% 13.19% Well-Capitalized
Citizens Union State Bank 7.44% 10.24% 11.39% Well-Capitalized
Osage Valley Bank 6.76% 12.12% 13.10% Well-Capitalized
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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 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 policies of the FRB, which regulates the supply of money and credit in the United States. Among the instruments of monetary policy available to the FRB are:
- conducting open market operations in United States government securities;
- changing the discount rates of borrowings of depository institutions;
- imposing or changing reserve requirements against depository institutions' deposits; and
- imposing or changing reserve requirements against certain borrowings by bank and their affiliates.
These methods are used in varying degrees and combinations to directly effect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. The policies of the FRB have a material effect on Exchange's business, results of operations and financial condition.
The references in the foregoing discussion to various aspects of statutes and regulation are merely summaries which do not purport to be complete and which are qualified in their entirety by reference to the actual statutes and regulations.
AVAILABLE INFORMATION
The address of our principal executive offices is 132 East High Street, Jefferson City, MO 65101 and our telephone number at this location is (573) 761-6100. Our common stock trades on the Nasdaq national market under the symbol "EXJF".
We electronically file certain documents with the Securities and Exchange Commission (SEC). We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K (as appropriate), along with any related amendments and supplements. From time-to-time, we also may file registration and related statements pertaining to equity or debt offerings. You may read and download our SEC filings over the internet from several commercial document retrieval services as well as at the SEC's internet website (www.sec.gov). You may also read and copy our SEC filings at the SEC's public reference room located at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC 1-800-SEC-0330 for further information concerning the public reference room and any applicable copy charges.
As of the date of this report, we do not maintain an internet website on which we make available our public filings with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, or any amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) of the Securities Exchange Act of 1934. Our Company is presently working to establish a website to make such filings and reports available. We anticipate having the site operational during the 2nd quarter of 2004. Our Company will provide a copy of any of our public filings, excluding exhibits, free of charge upon written request made to Kathleen L. Bruegenhemke, Exchange National Bancshares, Inc., 132 East High Street, Jefferson City, MO 65101. Please note that any internet addresses provided in this report are for information purposes only and are not intended to be hyperlinks. Accordingly, no information found and/or provided at such internet addresses is intended or deemed to be incorporated by reference herein.
ITEM 2. PROPERTIES.
None of Exchange, Union, Mid Central Bancorp or ENB Holdings owns or leases any property.
The principal offices of Exchange, ENB Holdings and Exchange National Bank are located at 132 East High Street in the central business district of Jefferson City, Missouri. The building, which is owned by Exchange National Bank, is a three-story structure constructed in 1927. A 1998 renovation and expansion project increased usable office space from 14,000 square feet to approximately 33,000 square feet. All of this office space is currently used by Exchange and Exchange National Bank. Management believes that this facility is adequately covered by insurance.
Exchange National Bank also owns a branch banking facility at 3701 West Truman Boulevard in Jefferson City. This facility has approximately 21,000 square feet of usable office space, all of which is used for Exchange National Bank operations, and has full drive-in facilities. Exchange National Bank owns a second branch banking facility, which is located at 217 West Dunklin Street in Jefferson City. This facility is a one-story building which has approximately 2,400 square feet of usable office space, all of which is used for Exchange National Bank operations. In addition, Exchange National Bank has established a branch banking facility at 800 Eastland Drive in Jefferson City with approximately 4,100 square feet of usable office space, all of which is used for Exchange National Bank's operations. In 2001, Exchange National Bank renovated 1,800 square feet of office space at 128 East High Street in Jefferson City for use as additional operations. Management believes that the condition of these banking facilities presently is adequate for Exchange National Bank's business and that these facilities are adequately covered by insurance.
Exchange National Bank also owns a branch in each of the California, Tipton and St. Robert communities. The California branch located at 1000 West Buchanan Street was constructed in 2002 and it is a single story structure with 2,270 square feet of usable office space. All of the California branch's office space is used for Exchange National Bank's operations. The Tipton branch which is located at 445 South Moreau is a single story structure with 1,962 square feet of usable office space all of which is used for Exchange National Bank's operations. The Tipton branch was constructed in the mid 1970's. The St. Robert branch located at 595 Missouri Avenue is a single story structure with 2,236 square feet of usable office space. The St. Robert branch was constructed in the late 1960's. All of the St. Robert office space is used for Exchange National Bank's operations.
The principal offices of Union and Citizens Union State Bank are located at 102 North Second Street in Clinton, Missouri. The bank building, which is owned by Citizens Union State Bank, is a one-story structure constructed in 1972. It has approximately 5,000 square feet of usable office space, all of which is currently used for Union's and Citizens Union State Bank's operations. Citizens Union State Bank also operates eight branch banking facilities, of which seven are owned by it. Citizens Union State Bank owns its downtown Clinton branch, which is located at 115 North Main Street. This facility has approximately 1,500 square feet of usable office space, all of which is used in Citizens Union State Bank operations. Citizens Union State Bank owns a second branch banking facility, which is located at 1603 East Ohio in Clinton. This facility is a two-story building which has approximately 5,760 square feet of usable office space, all of which is used for Citizens Union State Bank operations. Citizens Union State Bank owns its third branch banking facility, which is located at 608 East Ohio Street in Clinton. This facility is a one-story building which has approximately 3,500 square feet of usable office space, all of which is used for Citizens Union State Bank's operations. Citizens Union State Bank leases its fourth Clinton branch banking facility, which is located inside the Wal-Mart store at 1712 East Ohio. Citizens Union State Bank leases approximately 600 square feet of space at this facility under a five-year lease expiring in January 2004, with two five-year renewal options granted to Citizens Union State Bank. Citizens Union State Bank owns one Springfield, Missouri branch banking facility located at 321 West Battlefield. The facility is a two-story building constructed in 1986 which has approximately 12,500 square feet of usable office space. The entire upper level (6,600 square feet) is leased to a non-affiliate with the remaining usable office space used for Citizens Union State Bank operations. Citizens Union State Bank owns one Osceola, Missouri branch banking facility located at 4th and Chestnut. This facility is a one-story building which has approximately 1,580 square feet of usable office space, all of which is used for Citizens Union State Bank operations. Citizens Union State Bank owns a 1,500 square foot branch banking facility located at the intersection of Highways 13 and 54 in Collins, Missouri. In addition to its existing facilities, Citizens Union State Bank has a new branch facility at 125 South Main in Windsor, Missouri. This facility has 3,600 square feet of office space of which 2,800 square feet is used for operations of Citizens Union State Bank. Management believes that the condition of these banking facilities presently is adequate for Citizens Union State Bank's business and that these facilities are adequately covered by insurance.
The principal offices of Mid Central Bancorp and Osage Valley Bank are located at 200 Main Street in Warsaw, Missouri. The bank building, which is owned by Osage Valley Bank, is a two-story structure constructed in 1891. It has approximately 8,900 square feet of usable office space, all of which is currently used for Osage Valley Bank's operations. Osage Valley Bank also operates one branch banking facility, which is owned by it. Osage Valley Bank's branch facility is a one-story structure located at 2102 Long View Drive in Warsaw, Missouri, and it has approximately 1,000 square feet of usable office space, all of which is used for Osage Valley Bank operations. Management believes that the condition of these banking facilities presently is adequate for Osage Valley Bank's business and that these facilities are adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS.
None of Exchange or its subsidiaries is involved in any material pending legal proceedings, other than routine litigation incidental to their business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the holders of our Company's common stock during the fourth quarter of the year ended December 31, 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Pursuant to General Instruction G(2) to Form 10-K, the information required by this Item, other than that referred to below, is incorporated herein by reference to the information under the caption "Market Price of and Dividends on Equity Securities and Related Matters" in our Company's 2003 Annual Report to Shareholders.
We refer you to Item 12 of this report under the caption "Securities Authorized For Issuance Under Equity Compensation Plans" for certain equity plan information.
OUR PURCHASES OF EQUITY SECURITIES
The following table summarizes the purchases made by or on behalf of our Company or certain affiliated purchasers of shares of our common stock during the fourth quarter of the year ended December 31, 2003:
(d) Maximum Number
(or Approximate
(b) (c) Total Number of Dollar Value) of
(a) Total Average Shares (or Units) Shares (or Units)
Number of Price Purchased as Part that May Yet Be
Shares (or Paid per of Publicly Purchased Under
Units) Share Announced Plans or the Plans or
Period Purchased (or Unit) Programs * Programs *
------------------- ---------- --------- ------------------- ------------------
October 1-31, 2003 0 -- -- --
November 1-30, 2003 0 -- -- --
December 1-31, 2003 0 -- -- --
Total 0 -- -- --
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* On August 22, 2001, our Company announced that our Board of Directors authorized the purchase, through open market transactions, of up to $2,000,000 market value of our Company's common stock. Management was given discretion to determine the number and pricing of the shares to be purchased, as well as, the timing of any such purchases. On November 26, 2002, our Company announced that our Board of Directors authorized an additional $2,000,000 for the purchase of our Company's stock through open market transactions.
ITEM 6. SELECTED FINANCIAL DATA.
Pursuant to General Instruction G(2) to Form 10-K, the information required by this Item is incorporated herein by reference to the report of the independent auditors and the information under the caption "Selected Consolidated Financial Data" in Exchange's 2003 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
Pursuant to General Instruction G(2) to Form 10-K, certain information required by this Item is incorporated herein by reference to the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Exchange's 2003 Annual Report to Shareholders.
FORWARD-LOOKING STATEMENTS
This report, including information included or incorporated by reference in this report, contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of our Company and its subsidiaries, including, without limitation:
- statements that are not historical in nature, and
- statements preceded by, followed by or that include the words "believes," "expects," "may," "will," "should," "could," "anticipates," "estimates," "intends" or similar expressions.
Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:
- competitive pressures among financial services companies may increase significantly,
- costs or difficulties related to the integration of the business of Exchange and its acquisition targets may be greater than expected,
- changes in the interest rate environment may reduce interest margins,
- general economic conditions, either nationally or in Missouri, may be less favorable than expected,
- legislative or regulatory changes may adversely affect the business in which Exchange and its subsidiaries are engaged,
- technological changes may be more difficult or expensive than anticipated, and
- changes may occur in the securities markets.
We have described under " Factors That May Affect Future Results of Operations, Financial Condition or Business" additional factors that could cause actual results to be materially different from those described in the forward-looking statements. Other factors that we have not identified in this report could also have this effect. You are cautioned not to put undue reliance on any forward-looking statement, which speak only as of the date they were made.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS
We are identifying important risks and uncertainties that could affect our Company's results of operations, financial condition or business and that could cause them to differ materially from our Company's historical results of operations, financial condition or business, or those contemplated by forward-looking statements made herein or elsewhere, by, or on behalf of, our Company. Factors that could cause or contribute to such differences include, but are not limited to, those factors described below.
BECAUSE EXCHANGE PRIMARILY SERVES MISSOURI, A DECLINE IN THE LOCAL ECONOMIC CONDITIONS COULD LOWER EXCHANGE'S PROFITABILITY. The profitability of Exchange is dependant on the profitability of its banking subsidiaries, which operate out of central Missouri. The financial condition of these banks is affected by fluctuations in the economic conditions prevailing in the portion of Missouri in which their operations are located. Accordingly, the financial conditions of both Exchange and its banking subsidiaries would be adversely affected by deterioration in the general economic and real estate climate in Missouri.
An increase in unemployment, a decrease in profitability of regional businesses or real estate values or an increase in interest rates are among the factors that could weaken the local economy. With a weaker local economy:
- customers may not want or need the products and services of Exchange's banking subsidiaries,
- borrowers may be unable to repay their loans,
- the value of the collateral security of our banks' loans to borrowers may decline, and
- the overall quality of our banks' loan portfolio may decline.
Making mortgage loans and consumer loans is a significant source of profits for Exchange's banking subsidiaries. If individual customers in the local area do not want these loans, profits may decrease. Although our banks could make other investments, our banks may earn less revenue on these investments than on loans. Also, our banks' losses on loans may increase if borrowers are unable to make payments on their loans.
INTEREST RATE CHANGES MAY REDUCE THE PROFITABILITY OF EXCHANGE AND ITS BANKING SUBSIDIARIES. The primary source of earnings for Exchange's banking subsidiaries is net interest income. To be profitable, our banks have to earn more money in interest and fees on loans and other interest-earning assets than they pay as interest on deposits and other interest-bearing liabilities and as other expenses. If prevailing interest rates decrease, as has already happened on several occasions since January 2001, the amount of interest our banks earn on loans and investment securities may decrease more rapidly than the amount of interest our banks have to pay on deposits and other interest-bearing liabilities. This would result in a decrease in the profitability of Exchange and its banking subsidiaries, other factors remaining equal.
Changes in the level or structure of interest rates also affect
- our banks' ability to originate loans,
- the value of our banks' loan and securities portfolios,
- our banks' ability to realize gains from the sale of loans and securities,
- the average life of our banks' deposits, and
- our banks' ability to obtain deposits.
Fluctuations in interest rates will ultimately affect both the level of income and expense recorded on a large portion of our banks' assets and liabilities, and the market value of all interest-earning assets, other than interest-earning assets that mature in the short term. Our banks' interest rate management strategy is designed to stabilize net interest income and preserve capital over a broad range of interest rate movements by matching the interest rate sensitivity of assets and liabilities. Although Exchange believes that its banks' current mix of loans, mortgage-backed securities, investment securities and deposits is reasonable, significant fluctuations in interest rates may have a negative effect on the profitability of our banks.
THE PROFITABILITY OF EXCHANGE'S BANKING SUBSIDIARIES DEPENDS ON THEIR ASSET QUALITY AND LENDING RISKS. Success in the banking industry largely depends on the quality of loans and other assets. The loan officers of Exchange's banking subsidiaries are actively encouraged to identify deteriorating loans. Loans are also monitored and categorized through an analysis of their payment status. Our banks' failure to timely and accurately monitor the quality of their loans and other assets could have a materially adverse effect on the operations and financial condition of Exchange and its banking subsidiaries. There is a degree of credit risk associated with any lending activity. Our banks attempt to minimize their credit risk through loan diversification. Although our banks' loan portfolios are varied, with no undue concentration in any one industry, substantially all of the loans in the portfolios have been made to borrowers in central and west central Missouri. Therefore, the loan portfolios are susceptible to factors affecting the central and west central Missouri area and the level of non-performing assets is heavily dependant upon local conditions. There can be no assurance that the level of our banks' non-performing assets will not increase above current
levels. High levels of non-performing assets could have a materially adverse effect on the operations and financial condition of Exchange and its banking subsidiaries.
THE PROVISIONS FOR PROBABLE LOAN LOSSES OF EXCHANGE'S BANKING SUBSIDIARIES MAY NEED TO BE INCREASED. Each of Exchange's banking subsidiaries make a provision for loan losses based upon management's analysis of probable losses in the loan portfolio and consideration of prevailing economic conditions. Each of our banks may need to increase the provision for loan losses through additional provisions in the future if the financial condition of any of its borrowers deteriorates or if real estate values decline. Furthermore, various regulatory agencies, as an integral part of their examination process, periodically review the loan portfolio, provision for loan losses, and real estate acquired by foreclosure of each of our banks. Such agencies may require our banks to recognize additions to the provisions for loan losses based on their judgments of information available to them at the time of the examination. Any additional provisions for probable loan losses, whether required as a result of regulatory review or initiated by Exchange itself, may materially alter the financial outlook of Exchange and its banking subsidiaries.
IF EXCHANGE AND ITS BANKS ARE UNABLE TO SUCCESSFULLY COMPETE FOR CUSTOMERS IN EXCHANGE'S MARKET AREA, THEIR FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED. Exchange's banking subsidiaries face substantial competition in making loans, attracting deposits and providing other financial products and services. Our banks have numerous competitors for customers in their market area. Such competition for loans comes principally from:
- other commercial banks - mortgage banking companies
- savings banks - finance companies
- savings and loan associations - credit unions
Competition for deposits comes principally from:
- other commercial banks - brokerage firms
- savings banks - insurance companies
- savings and loan associations - money market mutual funds
- credit unions - mutual funds (such as corporate and government securities funds)
Many of these competitors have greater financial resources and name recognition, more locations, more advanced technology and more financial products to offer than our banks. Competition from larger institutions may increase due to an acceleration of bank mergers and consolidations in Missouri and the rest of the nation. In addition, the recently enacted Gramm-Leach-Bliley Act removes many of the remaining restrictions in federal banking law against cross-ownership between banks and other financial institutions, such as insurance companies and securities firms. The new law will likely increase the number and financial strength of companies that compete directly with our banks. The profitability of our banks depends of their continued ability to attract new customers and compete in Missouri. New competitors, as well as the expanding operations of existing competitors, have had, and are expected to continue to have, an adverse impact on our banks' market share of deposits and loans in our banks' respective service areas. If our banks are unable to successfully compete, their financial condition and results of operations will be adversely affected.
EXCHANGE AND ITS BANKING SUBSIDIARIES MAY BE ADVERSELY AFFECTED BY CHANGES IN LAWS AND REGULATIONS AFFECTING THE FINANCIAL SERVICES Industry. Banks and bank holding companies such as Exchange are subject to regulation by both federal and state bank regulatory agencies. The regulations, which are designed to protect borrowers and promote certain social policies, include limitations on the operations of
banks and bank holding companies, such as minimum capital requirements and restrictions on dividend payments. The regulatory authorities have extensive discretion in connection with their supervision and enforcement activities and their examination policies, including the imposition of restrictions on the operation of a bank, the classification of assets by an institution and requiring an increase in a bank's allowance for loan losses. These regulations are not necessarily designed to maximize the profitability of banking institutions. Future changes in the banking laws and regulations could have a material adverse effect on the operations and financial condition of Exchange and its banking subsidiaries.
THE SUCCESS OF EXCHANGE AND ITS BANKS LARGELY DEPENDS ON THE EFFORTS OF THEIR EXECUTIVE OFFICERS. The success of Exchange and its banking subsidiaries has been largely dependant on the efforts of James Smith and David Turner and the other executive officers. These individuals are expected to continue to perform their services. However, the loss of the services of Messrs. Smith or Turner, or any of the other key executive officers could have a materially adverse effect on Exchange and its banks.
EXCHANGE CANNOT PREDICT HOW CHANGES IN TECHNOLOGY WILL AFFECT ITS BUSINESS. The financial services market, including banking services, is increasingly affected by advances in technology, including developments in:
- telecommunications - Internet-based banking
- data processing - telebanking
- automation - debit cards and so-called "smart cards"
The ability of Exchange's banking subsidiaries to compete successfully in the future will depend on whether they can anticipate and respond to technological changes. To develop these and other new technologies our banks will likely have to make additional capital investments. Although our banks continually invest in new technology, there can be no assurance that our banks will have sufficient resources or access to the necessary proprietary technology to remain competitive in the future
ADDITIONAL FACTORS. Additional risks and uncertainties that may affect the future results of operations, financial condition or business of our Company and its banking subsidiaries include, but are not limited to: (i) adverse publicity, news coverage by the media, or negative reports by brokerage firms, industry and financial analysts regarding our Banks or our Company; and (ii) changes in accounting policies and practices.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our Company's exposure to market risk is reviewed on a regular basis by our Banks' Asset/Liability Committees and Boards of Directors. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Management realizes certain risks are inherent and that the goal is to identify and minimize those risks. Tools used by our Bank's management include the standard GAP report subject to different rate shock scenarios. At December 31, 2003, the rate shock scenario models indicated that annual net interest income could change by as much as 5.82% should interest rates rise or fall within 200 basis points from their current level over a one year period. However there are no assurances that the change will not be more or less than this estimate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Pursuant to General Instruction G(2) to Form 10-K, the information required by this Item is incorporated herein by reference to the report of the independent auditors and the information under the caption "Consolidated Financial Statements" in Exchange's 2003 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Our Company's management has evaluated, with the participation of our principal executive and principal financial officers, the effectiveness of our disclosure controls and procedures as of December 31, 2003. Based upon and as of the date of that evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required. It should be noted that any system of disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any system of disclosure controls and procedures is based in part upon assumptions about the likelihood of future events. Because of these and other inherent limitations of any such system, there can be no assurance that any design will always succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
There has been no change in our company's internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to General Instruction G(3) to Form 10-K, the information required by this Item, other than that referred to below, is incorporated herein by reference to (i) the information under the caption "Election of Directors--The Board of Directors," (ii) the information under the caption "Election of Directors--Nominees and Directors Continuing in Office," (iii) the information under the caption "Executive Compensation and Other Information--Executive Officers," (iv) the information under the caption "Election of Directors--Meetings of the Board and Committees," and (v) the information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance," in each case, in Exchange's definitive Proxy Statement for its 2004 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.
CODE OF ETHICS
Our Company has adopted a Code of Business Conduct and Ethics for directors, officers (including our principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions) and employees. A copy of this Code of Business Conduct and Ethics has been filed as an exhibit to this Annual Report on Form 10-K for the year ended December 31, 2003.
ITEM 11. EXECUTIVE COMPENSATION.
Pursuant to General Instruction G(3) to Form 10-K, the information required by this Item is incorporated herein by reference to (i) the information under the caption "Executive Compensation and Other Information--Report on Executive Compensation," (ii) the information under the caption "Executive Compensation and Other Information--Compensation Committee Interlocks and Insider Participation," (iii) the information under the caption "Executive Compensation and Other Information--Executive Compensation," (iv) the information under the caption "Executive Compensation and Other Information--Option Grants," (v) the information under the caption "Executive Compensation and Other Information--
Option Exercises and Holdings," (vi) the information under the caption
"Executive Compensation and Other Information--Exchange National Bank
Profit-Sharing Trust," (vii) the information under the caption "Executive
Compensation and Other Information--Citizens Union State Bank Profit-Sharing
Plan," (viii) the information under the caption "Executive Compensation and
Other Information--Stock Option Plan," (ix) the information under the caption
"Executive Compensation and Other Information--Pension Plan," (x) the
information under the caption "Executive Compensation and Other
Information--Smith Employment Agreement," (xi) the information under the caption
"Executive Compensation and Other Information--Change of Control Agreement,"
(xii) the information under the caption "Executive Compensation and Other
Information--Company Performance," and (xiii) the information under the caption
"Election of Directors--Compensation of Directors", in each case, in Exchange's
definitive Proxy Statement for its 2004 Annual Meeting of Shareholders to be
filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Pursuant to General Instruction G(3) to Form 10-K, the information required by this Item, other than that presented below, is incorporated herein by reference to the information under the caption "Ownership of Common Stock" in Exchange's definitive Proxy Statement for its 2004 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Our Company has only one equity compensation plan for its employees pursuant to which options, rights or warrants may be granted. See Note 15 to the Consolidated Financial Statements for further information on the material terms of this plan. The following is a summary of the shares reserved for issuance pursuant to outstanding options, rights or warrants granted under equity compensation plans as of December 31, 2003:
Number of Number of securities
securities to be remaining available
issued upon Weighted-average for future issuance
exercise of exercise price under equity
outstanding of outstanding compensation plans
options, options, (excluding securities
warrants and warrants and reflected in column
Plan category rights rights (a))
--------------------- ---------------- ----------------- ---------------------
(a) (b) (c)
Equity compensation
plans approved by
security holders 98,891* $20.27 329,717
Equity compensation
plans not approved by
security holders -- -- --
Total 98,891* $20.27 329,717
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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 2004 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Pursuant to General Instruction G(3) to Form 10-K, the information required by this Item is incorporated herein by reference to the information under the captions (i) "Ratification of Selection of Independent Auditors--Independent Auditors' Fees" and (ii) "Ratification of Selection of Independent Auditors--Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services", in each case, in Exchange's definitive Proxy Statement for its 2004 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits, Financial Statements and Financial Statement Schedules:
1. Financial Statements:
The following consolidated financial statements of our Company and reports of our Company's independent auditors, included in our Annual Report to Shareholders for the year ended December 31, 2003 under the caption "Consolidated Financial Statements", are incorporated herein by reference:
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 2003 and 2002.
Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001.
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules:
Financial statement schedules have been omitted because they either are not required or are not applicable or because equivalent information has been included in the financial statements, the notes thereto or elsewhere herein.
3. Exhibits:
Exhibit No. Description
----------- -----------
3.1 Articles of Incorporation of our Company (filed as Exhibit
3(a) to our Company's Registration Statement on Form S-4
(Registration No. 33-54166) and incorporated herein by
reference).
3.2 Bylaws of our Company (filed with our Company's Annual Report
on Form 10-K for the year ended December 31, 2000 as Exhibit
3.2 and incorporated herein by reference).
4 Specimen certificate representing shares of our Company's
$1.00 par value common stock (filed with our Company's Annual
Report on Form 10-K for the year ended December 31, 1999 as
Exhibit 4 and incorporated herein by reference).
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10.1 Employment Agreement, dated November 3, 1997, between the
Registrant and James E. Smith (filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1997 as Exhibit 10.4 and incorporated herein by reference).*
10.2 Exchange National Bancshares, Inc. Incentive Stock Option Plan
(filed with our Company's Annual Report on Form 10-K for the
year ended December 31, 1999 as Exhibit 10.2 and incorporated
herein by reference).
10.3 Form of Change of Control Agreement and schedule of parties
thereto (filed with our Company's Annual Report on Form 10-K
for the year ended December 31, 2000 as Exhibit 10.3 and
incorporated herein by reference).*
13 The Registrant's 2003 Annual Report to Shareholders (only
those portions of this Annual Report to Shareholders which are
specifically incorporated by reference into this Annual Report
on Form 10-K shall be deemed to be filed with the Commission).
14 Code of Business Conduct and Ethics of our Company.
21 List of Subsidiaries (filed with our Company's Annual Report
on Form 10-K for the year ended December 31, 2000 as Exhibit
21 and incorporated herein by reference).
23 Consent of Independent Auditors
24 Power of Attorney (included on the signature page to this
Annual Report on Form 10-K).
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
as amended
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
as amended
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
* Management contracts or compensatory plans or arrangements required to be identified by Item 15(a).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by our Company during the three month period ended December 31, 2003 except for the following two reports:
Form 8-K dated November 19, 2003, filed with the SEC on November 24, 2003 with respect to Items 5 and 7 to report our issuance of a press release dated November 19, 2003 announcing that our board of directors had approved a quarterly cash dividend of 18 cents per share, payable January 1, 2004 to shareholders of record at the close of business on December 15, 2003.
Form 8-K dated October 31, 2003, filed with the SEC on November 3, 2003 with respect to Items 7 and 12 to report our issuance of a press release dated October 31, 2003 containing unaudited financial information and accompanying discussion for the third quarter ended September 30, 2003.
(c) Exhibits.
See exhibits identified above under Item 15(a)3.
(d) Financial Statement Schedules.
See financial statement schedules identified above under Item
15(a)2, if any.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EXCHANGE NATIONAL BANCSHARES, INC.
Dated: March 15, 2004 By /s/ James E. Smith
------------------------------------------
James E. Smith, Chairman of the Board
and Chief Executive Officer
|
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James E. Smith and Richard G. Rose, or either of them, his attorneys-in-fact, for such person in any and all capacities, to sign any amendments to this report and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that either of said attorneys-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date Signature and Title
March 15, 2004 /s/ James E. Smith
----------------------------------------
James E. Smith, Chairman of the
Board and Chief Executive Officer
(Principal Executive Officer)
March 15, 2004 /s/ Richard G. Rose
----------------------------------------
Richard G. Rose, Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
March 15, 2004 /s/ David T. Turner
----------------------------------------
David T. Turner, Director
March 15, 2004 /s/ James R. Loyd
----------------------------------------
James R. Loyd, Director
March 15, 2004 /s/ Charles G. Dudenhoeffer, Jr.
----------------------------------------
Charles G. Dudenhoeffer, Jr.,
Director
March 15, 2004 /s/ David R. Goller
----------------------------------------
David R. Goller, Director
March 15, 2004 /s/ Philip D. Freeman
----------------------------------------
Philip D. Freeman, Director
March 15, 2004 /s/ Kevin L. Riley
----------------------------------------
Kevin L. Riley, Director
March 15, 2004 /s/ Gus S. Wetzel, II
----------------------------------------
Gus S. Wetzel, II, Director
|
EXHIBIT INDEX
Exhibit No. Description Page No.
----------- ----------- --------
13 The Registrant's 2003 Annual Report to Shareholders
(only those portions of this Annual Report to
Shareholders which are specifically incorporated by
reference into this Annual Report on Form 10-K
shall be deemed to be filed with the Commission)
14 Code of Business Conduct and Ethics of our Company
23 Consent of Independent Auditors
24 Power of Attorney (included on the signature page
to this Annual Report on Form 10-K).
31.1 Certification of Chief Executive Officer pursuant
to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended
31.2 Certification of Chief Financial Officer pursuant
to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended
32.1 Certification of Chief Executive Officer pursuant
to 18 U.S.C. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant
to 18 U.S.C. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
|
Exhibit 13
2003
ANNUAL REPORT
TO
SHAREHOLDERS
EXCHANGE NATIONAL BANCSHARES, INC.
JEFFERSON CITY, MISSOURI
EXCHANGE NATIONAL BANCSHARES, INC.
Jefferson City, Missouri
March 15, 2004
Dear Shareholders:
2003 was a rewarding year for you and your Company. Our financial results were strong as evidenced by an 11.74% increase in net income, which resulted in a 13.15% increase in diluted earnings per share (EPS) over 2002. This increase over 2002 is attributed in large part to a higher volume of average earning assets with the purchase of a $35 million branch in Springfield, Missouri and continued strong activity in the residential mortgage department.
As of December 31, 2003, your Company's equity position was strong. Tier 1 capital as a percentage of adjusted average total assets (leverage ratio) was 7.18% at year-end 2003 compared to 7.36% at December 31, 2002. Total capital to risk-weighted assets ratio was 10.98% at December 31, 2003 compared to 12.10% at December 31, 2002. The decrease in our capital position is the result of asset growth and a larger dividend payout.
Shareholders received dividends totaling $0.71 per share in 2003 after adjusting for the three-for-two stock dividend in July 2003. This is an increase of $0.12 per share or 20% over 2002 dividends.
In these challenging and exciting times, management is looking for opportunities to move into metropolitan growth areas and, as a result, de novo branch applications have been filed with regulatory authorities to locate branches in the Branson and Lee's Summit markets. With approval, both of these branches should be operational in 2004. Your Company expects to continue its internal growth strategy and in order to fund growth without diluting earnings per share, we are in the process of completing a $25 million Trust Preferred Security offering. This Trust Preferred Security offering will allow us to fund future acquisitions, satisfy present outstanding debt, repurchase common stock and may be used for other general corporate purposes.
We have a great management team and we look forward to an exciting year in 2004. Thank you for your confidence.
Sincerely,
/s/ James E. Smith 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 nine banking offices, including its principal office at 102 North Second Street in Clinton, Missouri, four Clinton branch facilities, and a branch facility in each of the Missouri communities of Springfield, Collins, Osceola and Windsor.
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 commercial and industrial loans, residential real estate loans, single payment personal loans, installment loans and credit card accounts. 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.
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, 2003. 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,
-----------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
INCOME STATEMENT DATA
Interest income $ 38,922 40,463 49,289 46,544 32,249
Interest expense 12,798 16,326 25,389 25,177 16,225
--------- --------- --------- --------- ---------
Net interest income 26,124 24,137 23,900 21,367 16,024
Provision for loan losses 1,092 936 1,154 1,222 910
--------- --------- --------- --------- ---------
Net interest income
after provision for
loan losses 25,032 23,201 22,746 20,145 15,114
--------- --------- --------- --------- ---------
Security gains (losses), net 38 163 98 (28) --
Other noninterest income 6,666 5,940 5,299 3,618 2,948
--------- --------- --------- --------- ---------
Total noninterest income 6,704 6,103 5,397 3,590 2,948
Noninterest expense 18,536 17,832 17,400 15,658 11,527
--------- --------- --------- --------- ---------
Income before income taxes 13,200 11,472 10,743 8,077 6,535
Income taxes 4,156 3,379 3,641 2,592 2,071
--------- --------- --------- --------- ---------
Net income $ 9,044 8,093 7,102 5,485 4,464
========= ========= ========= ========= =========
DIVIDENDS
Declared on common stock $ 3,183 2,510 2,425 2,260 1,732
Paid on common stock 2,988 2,493 2,425 2,115 1,695
Ratio of total dividends
declared to net income 35.19% 31.01 34.15 41.20 38.80
PER SHARE DATA
Basic earnings per common share $ 2.17 1.91 1.66 1.37 1.37
Diluted earnings per common share 2.15 1.90 1.66 1.37 1.37
Basic weighted average shares of
common stock outstanding 4,169,432 4,242,858 4,287,378 4,004,055 3,243,621
Diluted weighted average shares of
common stock outstanding 4,209,272 4,253,163 4,288,408 4,004,055 3,243,621
|
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
BALANCE SHEET DATA
(AT PERIOD END)
Investment securities $188,956 186,724 181,649 155,917 111,237
Loans 583,919 486,564 464,364 468,471 326,229
Total assets 875,596 794,418 775,825 719,603 494,946
Total deposits 665,262 591,191 579,794 576,263 381,020
Securities sold under
agreements to repurchase
and other short term
borrowed funds 73,672 70,421 62,033 16,942 27,643
Other borrowed money 41,630 41,795 43,138 42,378 26,451
Total stockholders' equity 87,783 82,827 78,353 73,584 55,948
EARNINGS RATIOS
Return on average
total assets 1.09% 1.04 0.96 0.85 0.95
Return on average
stockholders' equity 10.45 9.89 9.21 8.49 9.41
ASSET QUALITY RATIOS
Allowance for loan losses
to loans 1.42 1.46 1.44 1.48 1.46
Nonperforming loans
to loans (1) 0.52 0.62 0.86 1.73 0.52
Allowance for loan losses
to nonperforming loans (1) 274.29 236.66 166.98 85.87 281.45
Nonperforming assets to loans
and foreclosed assets (2) 0.54 0.67 1.03 1.76 0.55
Net loan charge-offs to
average loans 0.03 0.10 0.31 0.05 0.18
CAPITAL RATIOS
Average stockholders' equity to
average total assets 10.39 10.51 10.37 9.99 10.07
Total risk-based
capital ratio 10.98 12.10 11.83 11.90 15.06
Tier 1 risk-based
capital ratio 9.78 10.88 10.58 10.65 13.81
Leverage ratio 7.18 7.36 7.05 7.07 9.73
|
(1) Nonperforming loans consist of nonaccrual loans and loans contractually past due 90 days or more and still accruing interest.
(2) Nonperforming assets consist of nonperforming loans plus foreclosed assets.
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, 2003, 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This overview of management's discussion and analysis highlights selected information in this document and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting estimates, you should carefully read this entire document. These have an impact on our Company's financial condition and results of operation.
BUSINESS STRATEGY: In 1865, The Exchange National Bank of Jefferson City opened for business serving the loan and deposit needs of citizens living in Missouri's State Capitol of Jefferson City. Leveraging off of its strong equity position, Exchange National Bank's Board of Directors established Exchange National Bancshares, Inc., a multi-bank holding company on October 23, 1992. On April 7, 1993, Exchange National Bancshares, Inc. acquired The Exchange National Bank of Jefferson City. On November 3, 1997, our Company acquired Union State Bancshares, Inc. and its wholly-owned subsidiary, Union State Bank and Trust of Clinton, Missouri. 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, Missouri. On June 16, 2000, our Company acquired CNS Bancorp, Inc. and its subsidiary, City National Savings Bank, FSB, Jefferson City, Missouri. City National subsequently was merged into Exchange National Bank. Finally, on June 26, 2003 our Company purchased the Springfield, Missouri branch of Missouri State Bank. Following the purchase, this branch was merged into Citizens Union State Bank and Trust.
RECENT EVENTS: With ample capital available, our Company's business strategy continues to focus on increasing loan and deposit levels through internal, organic means in addition to expanding our de novo branching network into metropolitan growth areas. During the first quarter of 2004, our Company announced regulatory filings to establish de novo branches in the Branson and Lee's Summit, Missouri communities.
MATERIAL CHALLENGES AND RISKS: Our Company may experience difficulties in managing growth and in effectively integrating newly established branches. As part of our general strategy, our Company may continue to acquire banks and establish de novo branches that we believe provide a strategic fit. To the extent that our Company does grow, there can be no assurances that we will be able to adequately and profitably manage such growth.
The successes of our Company's growth strategy will depend primarily on the ability of our banking subsidiaries to generate an increasing level of loans and deposits at acceptable risk levels and on acceptable terms without significant increases in non-interest expenses relative to revenues generated. Our Company's financial performance also depends, in part, on our ability to manage various portfolios and to successfully introduce additional financial products and services. Furthermore, the success of our Company's growth strategy will depend on our ability to maintain sufficient regulatory capital levels and on general economic conditions that are beyond our control.
REVENUE SOURCE: 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 primarily 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, Warsaw and Springfield, 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.
Much of our Company's business is commercial, commercial real estate development, and mortgage lending. Our Company has experienced continued strong loan demand in the communities within which we operate even during economic slowdowns. Our Company's income from mortgage brokerage activities is directly dependent on mortgage rates and the level of home purchases and refinancings.
Our Company's primary source of revenue is net interest income derived primarily from lending and deposit taking activities. A secondary source of revenue is investment income. The Company also derives income from trust, brokerage, credit card and mortgage banking activities and service charge income.
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 2003 increased $951,000 or 11.7% over 2002 and followed a $991,000 or 14.0% increase for 2002 compared to 2001. Basic earnings per common share increased from $1.66 for 2001, to $1.91 for 2002 and increased to $2.17 for 2003. Diluted earnings per common share increased from $1.66 for 2001, to $1.90 for 2002 and increased to $2.15 for 2003. Return on average total assets increased from 0.96% for 2001, to 1.04% for 2002 and increased to 1.09% for 2003. Return on average total stockholders' equity increased from 9.21% for 2001, to 9.89% for 2002 and increased to 10.45% for 2003.
Average loans outstanding increased $64,546,000 or 12.0% to $539,912,000 for 2003 compared to $475,366,000 for 2002 and followed a $12,898,000 or 2.8% increase for 2002 compared to 2001. Approximately $13,914,000 of the increase in average loans is attributed the acquisition of the Springfield branch. Other than the increase attributed to the acquisition, average commercial loans outstanding increased $33,105,000 or 23.03% for 2003 compared to 2002 and followed a $514,000 or 0.4% decrease for 2002 compared to 2001. Other than the increase attributed to the acquisition, average real estate loans outstanding increased $21,160,000 or 7.42% for 2003 compared to 2002 and followed a $18,710,000 or 7.0% increase for 2002 compared to 2001. Other than the increase attributed to the acquisition, average consumer loans outstanding decreased $3,633,000 or 7.85% for 2003 compared to 2002 and followed a $5,298,000 or 10.3% decrease for 2002 compared to 2001.
The primary reason for the increase in average loans outstanding in 2003 compared to 2002 is due to continued strong loan demand in our Company's trade areas especially in commercial real estate development lending. Residential real estate lending also continued to experience growth in 2003 due to favorable rates in the market. 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. It should be noted that consumer loans decreased on average in 2003, 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 2003, 2002 and 2001 and as such this portion of the loan portfolio declined in balance.
Average investment securities and federal funds sold decreased $11,942,000 or 5.1% to $224,039,000 for 2003 compared to $235,981,000 for 2002 and followed a $22,525,000 or 10.6% increase for 2002 compared to 2001. The decrease in 2003 reflects the use of investment liquidity to fund the Company's growth in the loan portfolio. The increase in 2002 reflects increased collateral requirements for securities sold under agreement to repurchase.
Average demand deposits increased $9,033,000 or 12.7% to $80,140,000 for 2003 compared to $71,107,000 and followed a $7,874,000 or 12.5% increase for 2002 compared to 2001. Approximately $1,777,000 of the increase in average time deposits is attributed to the acquisition.
Average total time deposits increased $42,096,000 or 8.3% to $548,003,000 for 2003 compared to $505,907,000 for 2002 and followed a $4,579,000 or 0.9% decrease for 2002 compared to 2001. Approximately $13,586,000 of the increase in average time deposits is attributed to the acquisition. Other than the increase attributed to the acquisition average time deposits increased approximately $28,510,000 or 5.64%. Approximately $8,522,000 of the remaining increase in average time deposits represents brokered time deposits. These brokered time deposits represent certificates of deposit issued in denominations of less than $100,000 for various terms up to two years in length. The 2002 decrease is due to a low interest rate environment in which depositors moved funds from banking institutions to brokerage and other investment institutions.
Average federal funds purchased and securities sold under agreements to repurchase increased $2,757,000 or 4.2% to $68,859,000 for 2003 compared to $66,102,000 for 2002 and followed a $27,643,000 or 71.9% increase for 2002 compared to 2001. Those variances reflected competition for institutional funds awarded based upon competitive bids as well as an increased use of federal funds purchased to fund loan growth.
Average interest-bearing demand notes to U.S. Treasury decreased $52,000 or 6.1% to $802,000 for 2003 compared to $854,000 for 2002 and followed a $80,000 or 10.3% increase for 2002 compared to 2001. Balances in this account are governed by the U.S. Treasury's funding requirements.
Average other borrowed money decreased $784,000 or 1.9% to $41,442,000 for 2003 compared to $42,226,000 for 2002 and followed a $966,000 or 2.3% increase for 2002 compared to 2001. The 2003 decrease reflects repayment of debt. The 2002 increase reflects additional Federal Home Loan Bank borrowings to fund loan demand.
Average stockholders' equity increased $4,732,000 or 5.8% to $86,535,000 for 2003 compared to $81,803,000 and followed a $4,718,000 or 6.1% increases for 2002 compared to 2001. The increases represents net income retained in excess of dividends declared plus adjustments for unrealized gains or losses on debt and equity securities, net of taxes.
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,
-------------------------------
2003 2002 2001
-------- -------- --------
Interest income $ 38,922 40,463 49,289
Fully taxable equivalent (FTE) adjustment 679 780 828
-------- -------- --------
Interest income (FTE basis) 39,601 41,243 50,117
Interest expense 12,798 16,326 25,389
-------- -------- --------
Net interest income (FTE basis) 26,803 24,917 24,728
Provision for loan losses 1,092 936 1,154
-------- -------- --------
Net interest income after provision
for loan losses (FTE basis) 25,711 23,981 23,574
Noninterest income 6,704 6,103 5,397
Noninterest expense 18,536 17,832 17,400
-------- -------- --------
Income before income taxes
(FTE basis) 13,879 12,252 11,571
-------- -------- --------
Income taxes 4,156 3,379 3,641
FTE adjustment 679 780 828
-------- -------- --------
Income taxes (FTE basis) 4,835 4,159 4,469
-------- -------- --------
Net income $ 9,044 8,093 7,102
======== ======== ========
Average total earning assets $767,928 713,116 678,389
======== ======== ========
Net interest margin 3.49% 3.49 3.65
======== ======== ========
|
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 $1,886,000 or 7.6% to $26,803,000 for 2003 compared to $24,917,000 for 2002, and followed a $189,000 or 0.8% increase for 2002 compared to 2001. Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) decreased from 3.65% for 2001, to 3.49% for 2002, and to 3.49% for 2003. Although rates on earning assets and interest-bearing liabilities continued to decline during 2003, our Company was able to maintain existing spreads between these assets and liabilities. As a result the net interest margin earned remained stable between 2003 and 2002 at 3.49%. The decrease in net interest margin from 3.65% 2001 to 3.49% in 2002 reflects the inability to maintain constant spreads in that rate environment.
The provision for loan losses increased $156,000 or 16.7% to $1,092,000 for 2003 compared to $936,000 for 2002 and followed a $218,000 or 18.9% decrease for 2002 compared to 2001. The increase in the provision in 2003 was primarily due to increased reserve allocations associated with impaired loans. The decrease in the provision in 2002 was primarily due to a decrease in nonperforming loans. The allowance for loan losses totaled $8,267,000 or 1.42% of loans outstanding at December 31, 2003 compared to $7,121,000 or 1.46% of loans outstanding at December 31, 2002 and $6,674,000 or 1.44% of loans outstanding at December 31, 2001. The allowance for loan losses expressed as a percentage of nonperforming loans was 274.29% at December 31, 2003, 236.66% at December 31, 2002, and 166.98% at December 31, 2001.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003 AND 2002
Our Company's net income increased by $951,000 or 11.8% to $9,044,000 for the year ended December 31, 2003 compared to $8,093,000 for 2002. Net interest income on a fully taxable equivalent basis increased to $26,803,000 or 3.49% of average earning assets for 2003 compared to $24,917,000 or 3.49% of average earning assets for 2002. The provision for loan losses for 2003 was $1,092,000 compared to $936,000 for 2002. Net loans charged off for 2003 were $158,000 compared to $488,000 for 2002.
Noninterest income and noninterest expense for the years ended December 31, 2003 and 2002 were as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
YEAR ENDED
DECEMBER 31, INCREASE (DECREASE)
------------------ -----------------------
2003 2002 AMOUNT %
-------- ------ -------- ----------
NONINTEREST INCOME
Service charges on deposit accounts $ 2,752 2,684 68 2.5%
Trust department income 793 513 280 54.6
Brokerage income 107 88 19 21.6
Mortgage loan servicing fees, net (125) 222 (347) (156.3)
Gain on sales of mortgage loans 2,506 1,768 738 41.7
Gain on sales and calls of debt securities 38 163 (125) (76.7)
Credit card fees 158 153 5 3.3
Other 475 512 (37) (7.2)
-------- ------ -------- ----------
$ 6,704 6,103 601 9.8%
======== ====== ======== ==========
NONINTEREST EXPENSE
Salaries and employee benefits $ 10,088 9,337 751 8.0%
Occupancy expense, net 1,074 1,079 (5) (0.5)
Furniture and equipment expense 2,087 1,887 200 10.6
FDIC insurance assessment 96 103 (7) (6.8)
Advertising and promotion 560 467 93 19.9
Postage, printing, and supplies 847 918 (71) (7.7)
Legal, examination, and professional fees 745 1,002 (257) (25.6)
Credit card expenses 99 95 4 4.2
Credit investigation and loan collection 129 292 (163) (55.8)
Amortization of intangible assets 307 299 8 2.7
Other 2,504 2,353 151 6.4
-------- ------ -------- ----------
$ 18,536 17,832 704 3.9%
======== ====== ======== ==========
|
Noninterest income increased $601,000 or 9.8% to $6,704,000 for 2003 compared to $6,103,000 for 2002. The increase in trust department income reflects higher trust distribution fees collected in 2003 compared to 2002. The decrease in mortgage servicing fees of $347,000 reflects a $566,000 impairment write-down of our Company's mortgage servicing rights to their fair value during 2003 compared to $259,000 during 2002. This write-down is reflective of the high refinancing activity that our Company has experienced in its servicing portfolio during the first and second quarters of 2003. Gains on sales of mortgage loans increased $738,000 or 41.7% due to an increase in volume of loans originated and sold to the secondary market from approximately $107,312,000 during 2002 to approximately $112,759,000 during 2003. 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 2003 compared to those in effect during 2002. The $125,000 or 76.7% decrease in gain on sales and calls of debt securities represents a decrease in the volume of securities sold in 2003 versus 2002.
Noninterest expense increased $704,000 or 3.9% to $18,536,000 for 2003 compared to $17,832,000 for 2002. Salaries and benefits increased $751,000 or 8.0%. Approximately $124,000 of this increase reflects costs associated with the acquisition of the Springfield branch. The balance of the increase reflects normal salary
adjustments, increased insurance benefit costs, and increased pension and profit sharing expense. The $200,000 or 10.6% increase in furniture and equipment expense are primarily related to increased depreciation associated with purchases of core data processing hardware and software during the second half of the prior year as well as upgrades of numerous personal computers in the current year. The $257,000 or 25.6% decrease in legal, examination, and professional fees is due in large part to consulting fees paid in the prior year for services related to our Company wide data processing conversion. The $163,000 or 55.8% decrease in credit investigation and loan collection expense reflects lower costs related to foreclosed properties and repossessions.
The $151,000 or 6.4% 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, 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, net 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 a higher volume of securities sold in 2002 versus 2001. 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.
NET INTEREST INCOME
Fully taxable equivalent net interest income increased $1,886,000 or 7.6% to $26,803,000 for 2003 compared to $24,917,000 for 2002, and followed a $189,000 or 0.8% increase from 2002 compared to 2001. The increase in net interest income in 2003 and 2002 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, 2003.
(DOLLARS EXPRESSED IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
2003 2002 2001
-------------------------------- -------------------------------- --------------------------------
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 $181,142 $ 10,611 5.86% $143,727 $ 9,062 6.31% $144,241 $ 11,573 8.02%
Real estate 315,810 18,687 5.92 285,342 19,262 6.75 266,632 21,651 8.12
Consumer 42,960 3,381 7.87 46,297 3,940 8.51 51,595 4,726 9.16
Investment in debt and
equity securities:(3)
U.S. Treasury and U.S.
Government agencies 151,806 4,284 2.82 146,096 5,492 3.76 120,366 7,352 6.11
State and municipal 31,375 2,062 6.57 37,133 2,493 6.71 39,581 2,720 6.87
Other 4,653 170 3.65 4,970 215 4.33 4,753 239 5.03
Federal funds sold 36,205 365 1.01 47,782 736 1.54 48,756 1,762 3.61
Interest bearing
deposits in other
financial institutions 3,977 41 1.03 1,769 43 2.43 2,465 94 3.81
-------- ---------- -------- ---------- -------- ----------
Total interest
earning assets 767,928 39,601 5.16 713,116 41,243 5.78 678,389 50,117 7.39
All other assets 72,962 71,982 72,267
Allowance for loan
Losses (7,717) (6,936) (7,139)
-------- -------- --------
Total assets $833,173 $778,162 $743,517
======== ======== ========
|
Continued on next page
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
2003 2002 2001
-------------------------------- -------------------------------- --------------------------------
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 $100,959 $ 672 0.67% $ 87,759 $ 911 1.04% $ 87,970 $ 1,946 2.21%
Savings 53,630 371 0.69 49,726 514 1.03 47,360 1,050 2.22
Money market 64,999 582 0.90 62,818 856 1.36 60,247 1,793 2.98
Time deposits of
$100,000 and over 77,631 1,859 2.39 58,432 1,867 3.20 49,555 2,662 5.37
Other time deposits 250,784 6,881 2.74 247,172 8,921 3.61 265,354 14,210 5.36
-------- ---------- -------- -------- ---------- -------- -------- ---------- --------
Total time deposits 548,003 13,069 1.89 505,907 13,069 2.58 510,486 21,661 4.24
Federal funds purchased
and securities sold
under agreements to
repurchase 68,859 664 0.96 66,102 1,004 1.52 38,459 1,219 3.17
Interest-bearing demand
notes to U.S. Treasury 802 7 0.87 854 11 1.29 774 28 3.62
Other borrowed money 41,442 1,762 4.25 42,226 2,242 5.31 41,260 2,481 6.01
-------- ---------- -------- -------- ---------- -------- -------- ---------- --------
Total interest-
bearing liabilities 659,106 12,798 1.94 615,089 16,326 2.65 590,979 25,389 4.30
Demand deposits 80,140 71,107 63,233
Other liabilities 7,392 10,163 12,220
-------- -------- --------
Total liabilities 746,638 696,359 666,432
Stockholders' equity 86,535 81,803 77,085
-------- -------- --------
Total liabilities and
stockholders' equity $833,173 $778,162 $743,517
======== ======== ========
Net interest income $ 26,803 $ 24,917 $ 24,728
========== ========== ==========
Net interest margin 3.49% 3.49% 3.65%
======== ======== ========
|
(1) Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate of 35%, net of nondeductible interest expense. Such adjustments totaled $679,000, $780,000 and $828,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
(2) Nonaccruing loans are included in the average amounts outstanding.
(3) Average balances based on amortized cost.
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, 2003 DECEMBER 31, 2002
COMPARED TO COMPARED TO
DECEMBER 31, 2002 DECEMBER 31, 2001
-------------------------------- --------------------------------
CHANGE DUE TO CHANGE DUE TO
TOTAL -------------------- TOTAL --------------------
CHANGE VOLUME RATE CHANGE VOLUME RATE
-------- -------- -------- -------- -------- --------
INTEREST INCOME ON A FULLY
TAXABLE EQUIVALENT BASIS:
Loans: (1)
Commercial $ 1,549) 2,231 (682) $ (2,511) (41) (2,470)
Real estate (2) (575) 1,939 (2,514) (2,389) 1,444 (3,883)
Consumer (559) (274) (285) (786) (465) (321)
Investment in debt and
equity securities:
U.S. Treasury and U.S.
Government agencies (1,208) 208 (1,416) (1,860) 1,356 (3,216)
State and municipal(2) (431) (379) (52) (227) (165) (62)
Other (45) (13) (32) (24) 10 (34)
Federal funds sold (371) (153) (218) (1,026) (34) (992)
Interest bearing deposits
in other financial
Institutions (2) 33 (35) (51) (23) (28)
-------- -------- -------- -------- -------- --------
Total interest
Income (1,642) 3,592 (5,234) (8,874) 2,082 (10,956)
|
Continued on next page
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
COMPARED TO COMPARED TO
DECEMBER 31, 2002 DECEMBER 31, 2001
-------------------------------- --------------------------------
CHANGE DUE TO CHANGE DUE TO
TOTAL -------------------- TOTAL --------------------
CHANGE VOLUME RATE CHANGE VOLUME RATE
-------- -------- -------- -------- -------- --------
INTEREST EXPENSE:
NOW accounts (239) 123 (362) (1,035) (5) (1,030)
Savings (143) 38 (181) (536) 50 (586)
Money market (274) 29 (303) (937) 74 (1,011)
Time deposits of
$100,000 and over (8) 526 (534) (795) 418 (1,213)
Other time
Deposits (2,040) 128 (2,168) (5,289) (919) (4,370)
Federal funds purchased
and securities sold
under agreements
to repurchase (340) 40 (380) (215) 612 (827)
Interest-bearing
demand notes to
U.S. Treasury (4) (1) (3) (17) 3 (20)
Other borrowed money (480) (40) (440) (239) 57 (296)
-------- -------- -------- -------- -------- --------
Total interest
Expense (3,528) 843 (4,371) (9,063) 290 (9,353)
-------- -------- -------- -------- -------- --------
NET INTEREST INCOME
ON A FULLY TAXABLE
EQUIVALENT BASIS $ 1,886 2,749 (863) $ 189 1,792 (1,603)
======== ======== ======== ======== ======== ========
|
(1) Nonaccruing loans are included in the average amounts outstanding.
(2) Interest income and yields are presented on a fully taxable equivalent basis using the federal statutory income tax rate of 35%, net of nondeductible interest expense. Such adjustments totaled $679,000, $780,000 and $828,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
LENDING AND CREDIT MANAGEMENT
Interest earned on the loan portfolio is a primary source of interest income for our Company. Net loans represented 65.7% of total assets as of December 31, 2003. Total loans increased steadily from December 31, 1999 through December 31, 2003 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.
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,
------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Commercial, financial
and agricultural $212,440 36.4% $147,851 30.4% $137,235 29.5% $151,330 32.3% $114,469 35.1%
Real estate --
Construction 46,672 8.0 41,437 8.5 25,820 5.6 20,500 4.4 24,891 7.6
Real estate --
Mortgage 283,111 48.5 250,318 51.4 254,324 54.8 238,157 50.8 135,677 41.6
Installment loans
to individuals 41,696 7.1 46,958 9.7 46,985 10.1 58,484 12.5 51,192 15.7
======== ======== ======== ======== ========
Total loans $583,919 100.0% $486,564 100.0% $464,364 100.0% $468,471 100.0% $326,229 100.0%
======== ======== ======== ======== ========
|
Loans at December 31, 2003 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 $109,413 $ 67,186 $ 24,507 $ 6,853 $ 4,481 $212,440
Real estate-- construction 46,497 175 -- -- -- 46,672
Real estate -- mortgage 48,372 97,844 70,670 24,135 42,190 283,111
Installment loans to individuals 17,928 23,265 137 276 90 41,696
-------- -------- -------- -------- -------- --------
Total loans $222,210 $188,470 $ 95,314 $ 31,264 $ 46,661 $583,919
======== ======== ======== ======== ======== ========
|
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, 2003 our Company was servicing approximately $209,112,000 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, value of underlying collateral and other relevant factors. The allowance for loan losses which is reported as a deduction from loans, is available for loan charge-offs. This allowance is increased by the provision charged to expense and is reduced by loan charge-offs net of loan recoveries.
Management formally reviews all loans in excess of certain dollar amounts (periodically established) at least annually. In addition, on a monthly basis, management reviews past due, "classified", and "watch list" loans in order to classify or reclassify loans as "loans requiring attention," "substandard," "doubtful," or "loss". During that
review, management also determines what loans should be considered to be "impaired". Management believes, but there can be no assurance, that these procedures keep management informed of possible problem loans. Based upon these procedures, both the allowance and provision for loan losses are adjusted to maintain the allowance at a level considered adequate by management for probable losses inherent in the loan portfolio.
The following table summarizes loan loss experience for the periods indicated:
(DOLLARS EXPRESSED IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Analysis of allowance for loan losses:
Balance beginning of year $ 7,121 6,673 6,940 4,765 4,413
Allowance for loan losses of
acquired companies
at date of acquisitions 212 -- -- 1,150 --
Charge-offs:
Commercial, financial, and agricultural 47 146 689 273 410
Real estate-- construction -- 19 144 -- --
Real estate-- mortgage 86 22 61 10 36
Installment loans to individuals 340 581 708 436 288
-------- -------- -------- -------- --------
484 768 1,602 719 734
Recoveries:
Commercial, financial, and agricultural 164 115 22 409 57
Real estate-- construction -- -- -- -- --
Real estate-- mortgage -- 1 8 -- 3
Installment loans to individuals 162 164 151 113 116
-------- -------- -------- -------- --------
326 280 181 522 176
-------- -------- -------- -------- --------
Net charge-offs 158 488 1,421 197 558
-------- -------- -------- -------- --------
Provision for loan losses 1,092 936 1,154 1,222 910
-------- -------- -------- -------- --------
Balance at end of year $ 8,267 $ 7,121 6,673 6,940 4,765
======== ======== ======== ======== ========
Loans outstanding:
Average $539,912 $475,366 462,468 423,553 303,492
End of period 583,919 486,564 464,364 468,471 326,229
Allowance for loan losses to loans outstanding:
Average 1.53% 1.50% 1.44 1.64 1.57
End of period 1.42 1.46 1.44 1.48 1.46
Net charge-offs to average
loans outstanding 0.03 0.10 0.31 0.05 0.18
|
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Allocation of allowance for loan losses at end of period:
Commercial, financial, and
agricultural $ 3,979 2,627 2,444 2,838 1,214
Real estate-- construction 201 168 104 530 479
Real estate-- mortgage 2,538 2,208 1,872 1,552 1,202
Installment loans to individuals 561 542 669 900 392
Unallocated 988 1,576 1,584 1,120 1,478
-------- -------- -------- -------- --------
Total $ 8,267 $ 7,121 6,673 6,940 4,765
======== ======== ======== ======== ========
Percent of categories to total loans:
Commercial, financial, and agricultural 36.4% 30.4 29.5 32.3 35.1
Real estate-- construction 8.0 8.5 5.6 4.4 7.6
Real estate-- mortgage 48.5 51.4 54.8 50.8 41.6
Installment loans to individuals 7.1 9.7 10.1 12.5 15.7
-------- -------- -------- -------- --------
Total 100.0 100.0 100.0 100.0 100.0
======== ======== ======== ======== ========
|
The allocation of allowance for loan losses related to commercial, financial, and agricultural loans was $3,979,000 at December 31, 2003 compared to $2,627,000 at December 31, 2002. This $1,352,000 increase is the result of both specific and non-specific allocations related to an increase of approximately $4,855,000 in loans rated by management as substandard.
Nonperforming loans, defined as loans on nonaccrual status, loans 90 days or more past due, and restructured loans totaled $3,014,000 or 0.52% of total loans at December 31, 2003 compared to $3,009,000 or 0.62% of total loans at December 31, 2002. The following table summarizes our Company's nonperforming assets at the dates indicated:
(DOLLARS EXPRESSED IN THOUSANDS)
DECEMBER 31,
-----------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Nonaccrual loans:
Commercial, financial,
and agricultural $ 1,520 1,179 2,518 2,648 841
Real estate-- construction 59 69 66 1,006 134
Real estate-- mortgage 1,270 1,152 842 3,584 507
Installment loans to individuals 55 81 124 453 57
-------- -------- -------- -------- --------
Total nonaccrual loans 2,904 2,481 3,550 7,691 1,539
-------- -------- -------- -------- --------
Loans contractually past-due 90 days or more and still accruing:
Commercial, financial, and agricultural 66 85 96 -- --
Real estate-- construction -- 169 -- -- --
Real estate-- mortgage 4 254 299 237 --
Installment loans to individuals 40 20 52 154 22
-------- -------- -------- -------- --------
Total loans contractually past-due
90 days or more and still accruing 110 528 447 391 22
Restructured loans -- -- -- -- 132
-------- -------- -------- -------- --------
Total nonperforming loans 3,014 3,009 3,997 8,082 1,693
Other real estate 47 116 650 36 --
Repossessions 73 115 141 143 91
-------- -------- -------- -------- --------
Total nonperforming assets $ 3,134 3,240 4,788 8,261 1,784
======== ======== ======== ======== ========
Loans $583,919 486,564 464,364 468,471 326,229
Allowance for loan losses to
loans 1.42% 1.46 1.44 1.48 1.46
Nonperforming loans to loans 0.52 0.62 0.86 1.73 0.52
Allowance for loan losses to
nonperforming loans 274.29 236.66 166.98 85.87 281.45
Nonperforming assets to loans and
foreclosed assets 0.54 0.67 1.03 1.76 0.55
|
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 $227,000, $203,000 and $591,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Approximately
$56,000, $39,000 and $300,000 was actually recorded as interest income on such loans for the year ended December 31, 2003, 2002 and 2001, respectively.
A loan is considered impaired when it is probable a creditor will be unable to collect all amounts due - both principal and interest - according to the contractual terms of the loan agreement. In addition to nonaccrual loans at December 31, 2003 included in the table above, which were considered impaired, management has identified additional loans totaling approximately $66,000 which are not included in the nonaccrual table above but are considered by management to be impaired. The $66,000 of loans identified by management as being impaired reflected various commercial loans ranging in size from approximately $14,000 to approximately $31,000.
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, 2003 $685,000 of our Company's allowance for loan losses related to impaired loans totaling approximately $1,572,000.
As of December 31, 2003 and 2002 approximately $17,167,000 and $11,440,000, 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. The increase in classified loans is primarily represented by one large commercial credit. This credit is paying as agreed and management feels it is well secured. 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. The allowance for loan losses consists of three components: asset-specific reserves, reserves based on expected loss estimates, and unallocated reserves.
The asset-specific component applies to loans evaluated individually for impairment and is based on management's best estimate of discounted cash repayments and proceeds from liquidating collateral. The actual timing and amount of repayments and the ultimate realizable value of the collateral may differ from management's estimate.
The expected loss component is generally determined by applying statistical loss factors and other risk indicators to pools of loans by asset type. These expected loss estimates are sensitive to changes in delinquency status, realizable value of collateral, and other risk factors.
The underlying assumptions, estimates and assessments used by management to determine these components are continually evaluated and updated to reflect management's current view of overall economic conditions and relevant factors impacting credit quality and inherent losses. Changes in such estimates could significantly impact the allowance and provision for credit losses. Our Company could experience credit losses that are different from the current estimates made by management.
At December 31, 2003, management allocated $7,279,000 of the $8,627,000 total allowance for loan losses to specific loans and loan categories and $988,000 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, 2003 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.
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, 2003 debt and equity securities classified as available-for-sale represented 21.6% 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.
The following table presents the composition of the investment portfolio by major category.
(DOLLARS EXPRESSED IN THOUSANDS)
2003 2002 2001
AVAILABLE- AVAILABLE- AVAILABLE-
FOR-SALE FOR-SALE FOR-SALE
---------- ---------- ----------
U.S. Treasury securities $ -- $ -- 517
U.S. Government agencies
and corporations:
Asset-backed 13,242 9,104 8,469
Other 142,332 136,742 127,763
States and political
Subdivisions 29,327 35,804 39,940
Other debt securities 1,032 1,485 1,445
---------- ---------- ----------
Total debt securities 185,933 183,135 178,134
Federal Home Loan Bank
Stock 2,262 2,829 2,755
Federal Reserve Bank
Stock 751 750 750
Federal Agricultural
Mortgage Corporation 10 10 10
---------- ---------- ----------
Total investments $ 188,956 $ 186,724 181,649
========== ========== ==========
|
As of December 31, 2003, 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
OR LESS FIVE YEARS TEN YEARS TEN YEARS YIELD (1)
-------- ---------- --------- --------- ---------
AVAILABLE-FOR-SALE
U.S. Government agencies and corporations:
Asset-backed (2) $ 3,195 9,804 243 -- 2.14%
Other 23,882 91,520 26,931 -- 2.62
-------- ---------- --------- ---------
Total U.S. Government agencies 27,077 101,324 27,174 -- 2.58
States and political subdivisions (3) 2,654 13,342 11,785 2,545 6.45
Other debt security 1,032 -- 3.38
-------- ---------- --------- ---------
Total available-for-sale
debt securities $ 29,731 115,698 37,959 2,545 3.19
======== ========== ========= =========
Weighted average yield (1) 2.36% 3.01% 4.19% 6.52%
|
(1) Weighted average yield is based on amortized cost.
(2) Asset-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, 2003 calculated separately for each mortgage-backed security. These repayment speeds are not necessarily indicative of future repayment speeds and are subject to change based on changing mortgage interest rates.
(3) Rates on obligations of states and political subdivisions have been adjusted to fully taxable equivalent rates using the statutory Federal income tax rate of 34%.
At December 31, 2003 $46,426,000 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, 2003 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 4.5% to 14.2%.
The following table presents our Company's consolidated static gap position at December 31, 2003 for the next twelve months and the potential impact on net interest income for 2003 of an immediate 2% increase in interest rates.
(DOLLARS EXPRESSED IN THOUSANDS) CUMULATIVE
ONE THROUGH
TWELVE MONTH
PERIOD
------------
Assets maturing or repricing within one year $ 503,140
Liabilities maturing or repricing within one year 579,159
------------
Gap $ (76,019)
============
Ratio of assets maturing or repricing to
liabilities maturing or repricing 87%
============
Impact on net interest income of an immediate
2.00% increase in interest rates $ (1,520)
============
Net interest income for 2003 $ 26,124
============
Percentage change in 2003 net interest
income due to an immediate 2.00% increase in
interest rates (5.82)%
============
|
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 $40,000,000 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, 2003 and 2002, 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,
-------------------
2003 2002
-------- --------
Three months or less $ 26,325 $ 23,624
Over three months through six months 23,652 14,570
Over six months through twelve months 17,709 12,694
Over twelve months 22,270 12,562
-------- --------
$ 89,956 $ 63,450
======== ========
|
Securities sold under agreements to repurchase generally mature the next business day; however, certain agreements with local political subdivisions and select businesses are fixed rate agreements with original maturities generally ranging from 30 to 120 days. Information relating to securities sold under agreements to repurchase is as follows:
(DOLLARS EXPRESSED IN THOUSANDS)
AT END OF PERIOD FOR THE PERIOD ENDING
------------------ ------------------------------
WEIGHTED WEIGHTED
AVERAGE MAXIMUM AVERAGE
INTEREST MONTH-END AVERAGE INTEREST
BALANCE RATE BALANCE BALANCE RATE
------- -------- --------- ------- --------
December 31, 2003 $67,597 0.87% $ 72,921 $67,597 0.95%
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
|
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 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, 2003, the amounts of available credit from the FHLB totaled $90,103,000. As of December 31, 2003, the Banks had $23,679,000 in outstanding borrowings with the FHLB. The Banks have federal funds purchased lines with correspondent banks totaling $40,000,000 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 $4,819,000 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. In the section entitled, "Other Off-Balance Sheet Activities", we disclose that our Company has $94,519,000 in unused loan commitments as of December 31, 2003. While this commitment level would be difficult to fund given our Company's current liquidity resources, we know that the nature of these commitments are such that the likelihood of such a funding demand is very low.
For the years ended December 31, 2003, 2002 and 2001, net cash provided by operating activities was $12,640,000 in 2003 versus $7,454,000 in 2002, and $12,835,000 in 2001. While net cash provided by operating activities was materially consistent for the year 2003 and 2001, the $5,381,000 decrease between 2002 and 2001 was primarily the result of differences in the amount of taxes paid in those years and the elimination of goodwill amortization.
Net cash used in investing activities was $76,466,000 in 2003 versus $29,724,000 in 2002, and $22,300,000 in 2001. While cash used in investing activities was materially consistent between 2002 and 2001, the $46,742,000 increase in 2003 versus 2002 is primarily represented by the growth in our Company's loan portfolio.
Net cash provided by financing activities was $43,460,000 in 2003 versus $14,073,000 in 2002, and $46,149,000 in 2001. Net cash provided by financing activities was materially consistent for the years 2003 and 2001 but increased approximately $29,387,000 when comparing 2003 and 2002. Approximately $26,224,000 of this increase is represented by growth in our Company's deposits in 2003. Also contributing to the 2003 increase was the purchase in 2002 of $1,912,000 of treasury stock. Our Company only purchased $3,000 of treasury stock in 2003.
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, 2003 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 $ 94,519 70,839 13,130 6,073 4,477
Standby letters of credit 2,774 2,185 67 300 222
|
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, 2003 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 $ 343,576 228,090 86,581 28,475 430
Other borrowed money 41,630 37,034 466 1,238 2,892
|
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, 2003 is included in Note 3 of our Company's consolidated financial statements included elsewhere in this report.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 (FIN 46R) (revised December 2003), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003. The Company will be required to apply FIN 46R to variable interests in VIEs created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. The adoption of FIN 46R did not have an effect on our Company's consolidated financial statements as of December 31, 2003.
In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities under SFAS
133. The new guidance amends SFAS 133 for decisions made: (a) as part of the
Derivatives Implementation Group process that effectively required amendments to
SFAS 133, (b) in connection with other Board projects dealing with financial
instruments, and (c) regarding implementation issues raised in relation to the
application of the definition of derivative. The amendments set forth in SFAS
149 improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. SFAS 149 is generally effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The provisions of SFAS 149 did not
have a material impact on our Company's consolidated financial statements.
SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, was issued in May 2003. This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The Statement also includes required disclosures for financial instruments within its scope. For our Company, the Statement was effective for instruments entered into or modified after May 31, 2003 and otherwise will be effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, the Statement will be effective for our Company on January 1, 2005. The effective date has been deferred indefinitely for certain other types of manditorily redeemable financial instruments. Our Company currently does not have any financial instruments that are within the scope of this Statement.
In November 2003, the Emerging Issues Task Force (EITF) reached a consensus on certain disclosure requirements under EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The new disclosure requirements apply to investments in debt and marketable equity securities that are accounted for under SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, and SFAS 124, Accounting for Certain Investments Held by Not-For-Profit Organizations. Effective for fiscal years ending after December 15, 2003, companies are required to disclose information about debt or
marketable equity securities with market values below carrying values. Our Company adopted the disclosure requirements of EITF No. 03-1 and they are included in footnote 5 of our Company's 2003 consolidated financial statements.
In December 2003, the FASB issued SFAS 132 (Revised 2003), Employers' Disclosures about Pension and Other Postretirement Benefits, which increases the disclosure requirements of the original statement by requiring more details about pension plan assets, benefit obligations, cash flows, benefit costs and related information and also requires companies to disclose various elements of pension and postretirement benefit costs in interim-period financial statements for quarters beginning after December 15, 2003. The disclosure requirements of SFAS 132 (Revised 2003) are included in Footnote14 of our Company's 2003 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, 2003.
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, 2003, the rate shock scenario models indicated that annual net interest income could change by as much as 6% 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. Management further believes this is an acceptable level of risk.
The following table presents the scheduled repricing of market risk sensitive instruments at December 31, 2003:
OVER
5 YEARS OR
NO STATED
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 MATURITY TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ----------
ASSETS
Inestments in debt and
equity securities $ 114,446 20,592 19,894 6,961 4,447 22,616 188,956
Interest-bearing deposits 2,195 -- -- -- -- -- 2,195
Federal funds sold and securities
purchased under agreements
to resell 29,228 -- -- -- -- -- 29,228
Loans 357,271 63,130 52,646 44,021 44,830 22,021 583,919
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 503,140 83,722 72,540 50,982 49,277 44,637 804,298
========== ========== ========== ========== ========== ========== ==========
LIABILITIES
Savings, Now, Money Market
deposits $ 232,472 -- -- -- -- -- 232,472
Time deposits 235,981 55,661 27,359 14,289 9,783 503 343,576
Federal funds purchased and
securities sold under
agreements to repurchase 72,983 -- -- -- -- -- 72,983
Interest-bearing demand notes
of U.S. treasury 689 -- -- -- -- -- 689
Other borrowed money 37,034 -- 466 359 879 2,892 41,630
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 579,159 55,661 27,825 14,648 10,662 3,395 691,350
========== ========== ========== ========== ========== ========== ==========
|
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. 30
Consolidated Balance Sheets as of December 31, 2003 and 2002. 31
Consolidated Statements of Income for each of the years ended December
31, 2003, 2002 and 2001. 32
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for each of the years ended December 31, 2003, 2002 and 2001. 33
Consolidated Statements of Cash Flows for each of the years ended
December 31, 2003, 2002 and 2001. 34
Notes to Consolidated Financial Statements. 35
|
[KPMG LOGO]
KPMG LLP
Suite 900
10 South Broadway
St. Louis, MO 63102-1761
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, 2003 and 2002, 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, 2003. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, 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 13, 2004
|
[KPMG LOGO] KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative.
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2003 and 2002
ASSETS 2003 2002
------------ ------------
Loans, net of allowance for loan losses of $8,267,380 and
$7,121,114 at December 31, 2003 and 2002, respectively $575,651,786 479,443,190
Investment in available-for-sale debt and equity securities, at fair value 188,955,832 186,724,362
Federal funds sold and securities purchased
under agreements to resell 29,227,798 49,669,213
Cash and due from banks 27,817,117 27,742,030
Premises and equipment 17,774,633 16,586,332
Accrued interest receivable 5,107,980 5,539,661
Goodwill 25,196,736 23,407,734
Intangible assets 1,013,244 855,140
Other assets 4,850,866 4,450,250
------------ ------------
$875,595,992 794,417,912
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 89,214,182 77,474,471
NOW 110,879,585 93,728,675
Savings 55,334,554 49,720,928
Money market 66,257,738 62,449,717
Time deposits $100,000 and over 89,956,113 63,449,382
Other time deposits 253,619,793 244,367,479
------------ ------------
Total deposits 665,261,965 591,190,652
Federal funds purchased and securities sold
under agreements to repurchase 72,983,423 67,359,199
Interest-bearing demand notes to U.S. Treasury 688,978 3,061,503
Other borrowed money 41,629,893 41,795,016
Accrued interest payable 1,650,292 1,984,745
Other liabilities 5,598,697 6,199,677
------------ ------------
Total liabilities 787,813,248 711,590,792
------------ ------------
Commitments and contingent liabilities
Stockholders' equity:
Common stock, $1 par value. Authorized 15,000,000 shares;
issued 4,298,353 and 2,865,601 shares at December 31,
2003 and 2002, respectively 4,298,353 2,865,601
Surplus 21,999,714 21,983,467
Retained earnings 62,789,107 58,363,271
Accumulated other comprehensive income, net of tax 1,348,079 2,294,471
Treasury stock; 128,506 and 86,680 shares, at cost, at December 31,
2003 and 2002, respectively (2,652,509) (2,679,690)
------------ ------------
Total stockholders' equity 87,782,744 82,827,120
------------ ------------
$875,595,992 794,417,912
============ ============
|
See accompanying notes to consolidated financial statements.
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2003, 2002, and 2001
2003 2002 2001
------------ ---------- ----------
Interest income:
Interest and fees on loans $ 32,652,603 32,257,968 37,935,476
Interest and dividends on debt and equity securities:
U.S. Treasury securities -- 28,980 70,717
Securities of U.S. government agencies 4,283,674 5,463,353 7,281,692
Obligations of states and political subdivisions 1,409,061 1,720,441 1,906,703
Other securities 170,444 214,850 238,634
Interest on federal funds sold and securities purchased
under agreements to resell 365,308 734,675 1,762,453
Interest on time deposits with other banks 41,024 43,030 94,084
------------ ---------- ----------
Total interest income 38,922,114 40,463,297 49,289,759
------------ ---------- ----------
Interest expense:
NOW accounts 672,431 910,699 1,946,178
Savings accounts 370,554 513,664 1,050,084
Money market accounts 581,858 856,499 1,793,160
Time deposit accounts $100,000 and over 1,859,358 1,433,624 2,662,260
Other time deposit accounts 6,880,756 9,354,715 14,210,160
Securities sold under agreements to repurchase 645,317 1,002,997 1,209,056
Interest-bearing demand notes to U.S. Treasury 7,289 11,436 27,801
Federal funds purchased 18,955 817 9,885
Other borrowed money 1,761,823 2,241,249 2,480,840
------------ ---------- ----------
Total interest expense 12,798,341 16,325,700 25,389,424
------------ ---------- ----------
Net interest income 26,123,773 24,137,597 23,900,335
Provision for loan losses 1,092,000 936,000 1,154,000
------------ ---------- ----------
Net interest income after provision for loan losses 25,031,773 23,201,597 22,746,335
------------ ---------- ----------
Noninterest income:
Service charges on deposit accounts 2,752,573 2,684,126 2,097,242
Trust department income 793,083 512,924 429,602
Brokerage commissions 107,259 87,623 90,707
Mortgage loan servicing fees, net (124,988) 221,581 462,689
Gain on sales of mortgage loans 2,505,682 1,768,091 1,458,683
Gain on sales and calls of debt securities 37,689 162,769 97,808
Credit card fees 158,057 152,550 149,577
Other 474,658 513,006 610,615
------------ ---------- ----------
6,704,013 6,102,670 5,396,923
------------ ---------- ----------
Noninterest expense:
Salaries and employee benefits 10,088,440 9,336,627 8,789,578
Occupancy expense, net 1,074,400 1,079,023 1,005,905
Furniture and equipment expense 2,087,084 1,887,225 1,596,569
FDIC insurance assessment 96,124 103,213 130,725
Advertising and promotion 559,877 466,994 457,498
Credit card expenses 98,907 94,751 96,317
Amortization of goodwill -- -- 1,218,892
Amortization of intangible assets 306,896 298,680 313,080
Other 4,224,279 4,565,084 3,791,528
------------ ---------- ----------
18,536,007 17,831,597 17,400,092
------------ ---------- ----------
Income before income taxes 13,199,779 11,472,670 10,743,166
Income taxes 4,155,865 3,379,380 3,640,956
------------ ---------- ----------
Net income $ 9,043,914 8,093,290 7,102,210
============ ========== ==========
Basic earnings per share $ 2.17 1.91 1.66
Diluted earnings per share $ 2.15 1.90 1.66
|
See accompanying notes to consolidated financial statements.
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income Years ended December 31, 2003, 2002, and 2001
ACCUMULATED TOTAL
OTHER STOCK-
COMMON RETAINED COMPREHENSIVE TREASURY HOLDERS'
STOCK SURPLUS EARNINGS INCOME STOCK EQUITY
---------- ---------- ---------- ------------- ---------- ----------
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, $0.57 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, $0.59 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
Comprehensive income:
Net income -- -- 9,043,914 -- -- 9,043,914
Other comprehensive loss:
Unrealized loss on debt
and equity securities available-
for-sale, net of tax -- -- -- (921,894) -- (921,894)
Adjustment for gain on sales and
calls of debt and equity securities,
net of tax -- -- -- (24,498) -- (24,498)
----------
Total other comprehensive loss (946,392)
----------
Total comprehensive income 8,097,522
----------
Three-for-two stock split (accounted for as
a dividend) 1,432,752 13 (1,435,282) -- 14 (2,503)
Adjustment for deferred compensation plan -- 15,150 -- -- -- 15,150
Stock options exercised -- 1,084 -- -- 27,167 28,251
Cash dividends declared, $0.76 per share -- -- (3,182,796) -- -- (3,182,796)
---------- ---------- ---------- ------------- ---------- ----------
Balance, December 31, 2003 $4,298,353 21,999,714 62,789,107 1,348,079 (2,652,509) 87,782,744
========== ========== ========== ============= ========== ==========
|
See accompanying notes to consolidated financial statements.
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2003, 2002, and 2001
2003 2002 2001
------------- ------------ ------------
Cash flows from operating activities:
Net income $ 9,043,914 8,093,290 7,102,210
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 1,092,000 936,000 1,154,000
Depreciation expense 1,665,737 1,426,460 1,263,896
Net amortization (accretion) of debt securities, premiums, and discounts 1,441,469 999,445 (495,576)
Amortization of goodwill -- -- 1,218,892
Amortization of intangible assets 306,896 298,680 313,080
Decrease in accrued interest receivable 538,680 480,019 775,588
Decrease in other assets (91,595) (295,284) (364,719)
Decrease in accrued interest payable (396,279) (1,074,969) (1,360,340)
(Decrease) increase in other liabilities (741,630) (3,248,827) 3,431,774
Gain on sales and calls of debt securities (37,689) (162,769) (97,808)
Origination of mortgage loans for sale (112,759,003) (107,312,242) (106,922,389)
Proceeds from the sale of mortgage loans 115,264,685 109,080,333 108,381,072
Gain on sale of mortgage loans (2,505,682) (1,768,091) (1,458,683)
(Gain) loss on sales of premises and equipment (1,796) 3,417 (127,379)
Other, net (179,931) (1,929) 21,272
------------- ------------ ------------
Net cash provided by operating activities 12,639,776 7,453,533 12,834,890
------------- ------------ ------------
Cash flows from investing activities:
Net (increase) decrease in loans (70,328,755) (23,528,051) 1,053,703
Purchase of available-for-sale debt securities (182,219,699) (124,050,131) (207,926,512)
Proceeds from maturities of available-for-sale debt securities 111,290,416 68,043,902 129,048,704
Proceeds from calls of available-for-sale debt securities 55,962,300 38,827,250 52,935,000
Proceeds from sales of available-for-sale debt securities 9,929,230 12,406,693 2,106,018
Purchase of branch, net of cash and cash equivalents acquired (814,572) -- --
Purchases of premises and equipment (1,073,041) (2,838,819) (2,304,551)
Proceeds from sales of premises and equipment 34,320 16,000 1,765,866
Proceeds from sales of other real estate owned and repossessions 754,172 1,398,910 1,022,185
------------- ------------ ------------
Net cash used in investing activities (76,465,629) (29,724,246) (22,299,587)
------------- ------------ ------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits 8,175,593 (1,162,638) 9,914,274
Net increase in interest-bearing transaction accounts 19,127,427 3,492,129 3,608,271
Net increase (decrease) in time deposits 16,031,896 9,066,971 (9,991,242)
Net increase in securities sold under agreements to repurchase 5,624,224 5,714,655 45,246,060
Net (decrease) increase in interest-bearing demand notes to U.S. Treasury (2,372,525) 2,673,381 (155,545)
Proceeds from Federal Home Loan Bank advances 3,000,000 -- 3,400,000
Proceeds from exercise of stock options 28,251 35,967 --
Repayment of bank debt and Federal Home Loan Bank advances (3,165,123) (1,342,598) (2,640,173)
Cash dividends paid (2,987,715) (2,493,247) (2,424,876)
Purchase of common stock (2,503) (1,911,811) (807,406)
------------- ------------ ------------
Net cash provided by financing activities 43,459,525 14,072,809 46,149,363
------------- ------------ ------------
Net (decrease) increase in cash and cash equivalents (20,366,328) (8,197,904) 36,684,666
Cash and cash equivalents, beginning of year 77,411,243 85,609,147 48,924,481
------------- ------------ ------------
Cash and cash equivalents, end of year $ 57,044,915 77,411,243 85,609,147
============= ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 13,194,620 17,400,669 26,749,764
Income taxes 5,838,657 4,509,122 1,103,960
Supplemental schedule of noncash investing activities:
Other real estate and repossessions acquired in settlement of loans $ 643,020 838,907 1,633,693
Transfer of investment securities from held-to-maturity to available-for-sale -- -- 22,463,000
|
See accompanying notes to consolidated financial statements.
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
(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 weighted average common and diluted shares outstanding and earnings per share amounts have been restated to give effect to the three-for-two stock split accounted for as a dividend on July 15, 2003.
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)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
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, 2003 and 2002, 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)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
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. To determine whether an impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year-end, and forecasted performance of the investee.
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
(continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
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.
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 acquisitions of USB and the Springfield branch discussed in Note 2 is being amortized over a ten-year and seven-year period, respectively, on a straight-line 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
(continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
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.
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.
Income taxes are accounted for under the asset and liability method. 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 DEPARTMENT
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)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
EARNINGS PER SHARE
Earnings per share was computed as follows:
2003 2002 2001
---------- ---------- ----------
Net income, basic and diluted $9,043,914 8,093,290 7,102,210
Average shares outstanding 4,169,432 4,242,858 4,287,378
Effect of dilutive stock options 39,840 10,305 1,030
---------- ---------- ----------
Average shares outstanding including
dilutive stock options 4,209,272 4,253,163 4,288,408
========== ========== ==========
Net income per share, basic $ 2.17 1.91 1.66
Net income per share, diluted $ 2.15 1.90 1.66
|
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. SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No. 123, establishes accounting and disclosure requirements using a fair-value based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards, the Company has elected to continue to apply the provision of APB Opinion No. 25, as described above, and has adopted only the disclosure requirements of SAFS No. 123, as amended by SFAS No. 148.
(continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
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:
2003 2002 2001
---------- ---------- ----------
Net income:
As reported $9,043,914 8,093,290 7,102,210
Deduct total stock-based employee
compensation expense determined
under fair-value based method for
all awards, net of tax (93,673) (61,110) (30,227)
---------- ---------- ----------
Pro forma $8,950,241 8,032,180 7,071,983
========== ========== ==========
Pro forma earnings per common share:
As reported basic $ 2.17 1.91 1.66
Pro forma basic 2.15 1.89 1.65
As reported diluted 2.15 1.90 1.66
Pro forma diluted 2.13 1.89 1.65
|
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 January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 (FIN 46R) (revised December 2003), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003. The Company will be required to apply FIN 46R to variable interests in VIEs created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling
(continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. The adoption of FIN 46R did not have an effect on the Company's consolidated financial statements as of December 31, 2003.
In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments imbedded in other contracts, and for hedging activities under SFAS 133. The new guidance amends SFAS 133 for decisions made: (a) as part of the Derivatives Implementation Group process that effectively required amendments to SFAS 133, (b) in connection with other Board projects dealing with financial instruments, and (c) regarding implementation issues raised in relation to the application of the definition of derivative. The amendments set forth in SFAS 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The provisions of SFAS 149 did not have a material impact on the Company's consolidated financial statements.
SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, was issued in May 2003. This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The Statement also includes required disclosures for financial instruments within its scope. For the Company, the Statement was effective for instruments entered into or modified after May 31, 2003 and otherwise will be effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, the Statement will be effective for the Company on January 1, 2005. The effective date has been deferred indefinitely for certain other types of manditorily redeemable financial instruments. The Company currently does not have any financial instruments that are within the scope of this Statement.
In November 2003, the Emerging Issues Task Force (EITF) reached a consensus on certain disclosure requirements under EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The new disclosure requirements apply to investments in debt and marketable equity securities that are accounted for under SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, and SFAS 124, Accounting for Certain Investments Held by Not-For-Profit Organizations. Effective for fiscal years ending after December 15, 2003, companies are required to disclose information about debt or marketable equity securities with market values below carrying values. The Company adopted the disclosure requirements of EITF No. 03-1 and they are included in Note 5 of this report.
In December 2003, the FASB issued SFAS 132 (Revised 2003), Employers' Disclosures about Pension and Other Postretirement Benefits, which increases the disclosure requirements of the original statement by requiring more details about pension plan assets, benefit obligations, cash flows, benefit costs and related information and also requires companies to disclose various elements of pension and postretirement benefit costs in interim-period financial statements for quarters
(continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
beginning after December 15, 2003. The disclosure requirements of SFAS 132 (Revised 2003) are included in Note14 of this report.
RECLASSIFICATIONS
Certain prior-year information has been reclassified to conform with current-year presentation.
(2) ACQUISITIONS
On June 26, 2003, the Company acquired Trustcorp Financial, Inc.'s branch of Missouri State Bank in Springfield, Missouri. Immediately upon acquisition, the branch was merged with and is operated as a branch of Citizens Union State Bank and Trust. The Company received approximately $27,615,000 in loans, $30,736,000 in deposits as well as the real estate and tangible assets of the branch. Total cost of the transaction was approximately $4,000,000 and was financed with cash on hand. The transaction generated approximately $1,789,000 of goodwill, and $465,000 of core deposit intangible which is being amortized on a straight-line basis over seven years. The results of operations of the acquired branch are included with the Company's from June 26, 2003 forward.
(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, 2003 and 2002, the Company and the Banks meet all capital adequacy requirements to which they are subject.
As of December 31, 2003, 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)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
The actual and required capital amounts and ratios for the Company and the Banks as of December 31, 2003 and 2002 are as follows (dollars in thousands):
2003
---------------------------------------------------
TO BE WELL
CAPITALIZED
UNDER PROMPT
CORRECTIVE
CAPITAL ACTION
ACTUAL REQUIREMENTS PROVISION
--------------- -------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------ ----- ------ -----
Total capital (to risk-weighted assets):
Company $67,726 10.98% 49,327 8.00% -- --
The Exchange National
Bank of Jefferson City 49,994 13.19 30,327 8.00 37,909 10.00%
Citizens Union State
Bank and Trust of Clinton 21,668 11.39 15,215 8.00 19,019 10.00
Osage Valley Bank 6,199 13.10 3,785 8.00 4,731 10.00
Tier I capital (to risk-weighted assets):
Company 60,310 9.78 24,663 4.00 -- --
The Exchange National
Bank of Jefferson City 45,245 11.94 15,164 4.00 22,745 6.00
Citizens Union State
Bank and Trust of Clinton 19,466 10.24 7,607 4.00 11,411 6.00
Osage Valley Bank 5,734 12.12 1,892 4.00 2,838 6.00
Tier I capital (to adjusted average assets):
Company 60,310 7.18 25,206 3.00 -- --
The Exchange National Bank
of Jefferson City 45,245 9.17 14,804 3.00 24,674 5.00
Citizens Union State Bank
and Trust of Clinton 19,466 7.44 7,853 3.00 13,089 5.00
Osage Valley Bank 5,734 6.76 2,545 3.00 4,242 5.00
|
(continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
2002
---------------------------------------------------
TO BE WELL
CAPITALIZED
UNDER PROMPT
CORRECTIVE
CAPITAL ACTION
ACTUAL REQUIREMENTS 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
|
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, 2003, unappropriated retained earnings of approximately $4,819,000 were available for the declaration of dividends to the Company without prior approval from regulatory authorities.
(continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
(4) LOANS
A summary of loans, by classification, at December 31, 2003 and 2002 is as follows:
2003 2002
------------ ------------
Real estate $329,782,699 291,755,539
Commercial 212,440,053 147,850,348
Installment and other consumer 41,696,414 46,958,417
------------ ------------
583,919,166 486,564,304
Less allowance for loan losses 8,267,380 7,121,114
------------ ------------
$575,651,786 479,443,190
============ ============
|
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 2003 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, 2002 $ 7,314,942
New loans 10,685,555
Payments received (9,084,217)
------------
Balance at December 31, 2003 $ 8,916,280
============
|
(continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
Changes in the allowance for loan losses for 2003, 2002, and 2001 are as follows:
2003 2002 2001
---------- ---------- ----------
Balance, beginning of year $7,121,114 6,673,586 6,939,991
Allowance for loan losses of acquired
branch at date of acquisition 212,000 -- --
Provision for loan losses 1,092,000 936,000 1,154,000
Charge-offs (484,131) (768,340) (1,602,266)
Recoveries of loans previously charged off 326,397 279,868 181,861
---------- ---------- ----------
Balance, end of year $8,267,380 7,121,114 6,673,586
========== ========== ==========
|
A summary of nonaccrual and other impaired loans at December 31, 2003 and 2002 is as follows:
2003 2002
---------- ----------
Nonaccrual loans $2,904,218 2,481,101
Impaired loans continuing to accrue interest 65,659 254,084
Restructured loans -- --
---------- ----------
Total impaired loans $2,969,877 2,735,185
========== ==========
Allowance for loan losses on impaired loans $ 684,784 590,984
Impaired loans with no specific allowance for loan losses 1,396,654 1,350,374
|
The average balance of impaired loans during 2003, 2002, and 2001 was $2,814,000, $3,305,000, and $6,758,342, respectively.
(continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
A summary of interest income on nonaccrual and other impaired loans for 2003, 2002, and 2001 is as follows:
IMPAIRED
LOANS
NONACCRUAL CONTINUING TO
LOANS ACCRUE INTEREST TOTAL
---------- --------------- -------
2003:
Income recognized $ 55,989 3,300 59,289
Interest income had interest accrued 226,797 3,300 230,097
2002:
Income recognized 38,212 13,288 51,500
Interest income had interest accrued 202,698 13,288 215,986
2001:
Income recognized 300,429 2,577 303,006
Interest income had interest accrued 590,511 2,577 593,088
|
(continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
(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, 2003 and 2002 are as follows:
2003
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ---------- ---------- -----------
Securities of U.S. government agencies $141,710,271 854,887 232,962 142,332,196
Asset backed securities 13,226,446 56,436 40,918 13,241,964
Obligations of states and political subdivisions 27,904,101 1,431,565 9,070 29,326,596
Other debt securities 1,017,747 14,029 -- 1,031,776
------------ ---------- ---------- -----------
Total debt securities 183,858,565 2,356,917 282,950 185,932,532
Federal Home Loan Bank stock 2,262,425 -- -- 2,262,425
Federal Reserve Bank stock 750,750 -- -- 750,750
Federal Agricultural Mortgage
Corporation stock 10,125 -- -- 10,125
------------ ---------- ---------- -----------
$186,881,865 2,356,917 282,950 188,955,832
============ ========== ========== ===========
|
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
Asset 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
============ ========== ========== ===========
|
49 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2003, 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 $ 26,442,781 26,535,300
Due after one year through five years 104,979,309 105,894,128
Due after five years through ten years 37,064,824 37,975,304
Due after ten years 2,145,205 2,285,836
------------ -----------
170,632,119 172,690,568
Asset-backed securities 13,226,446 13,241,964
------------ -----------
$183,858,565 185,932,532
============ ===========
|
Debt securities with carrying values aggregating approximately $157,686,000 and $145,104,000 at December 31, 2003 and 2002, 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 $9,929,000 and gross gains of $37,689 were recorded on the sales of debt securities in 2003. 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.
Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2003, were as follows:
Less than 12 months 12 months or more Total
------------------------- ------------------------ ------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------- ---------- ---------- ---------- ---------- ----------
Securities of U.S. government agencies $46,092,757 (229,231) 10,000,000 (3,731) 56,092,757 (232,962)
Asset-backed securities 9,980,160 (34,473) 1,164,564 (6,446) 11,144,724 (40,918)
Obligations of states and political subdivisons 1,086,175 (8,757) 239,688 (312) 1,325,863 (9,070)
----------- ---------- ---------- ---------- ---------- ----------
$57,159,092 (272,461) 11,404,252 (10,489) 68,563,344 (282,950)
=========== ========== ========== ========== ========== ==========
|
Securities of U.S. government agencies: The unrealized losses on investments in securities of U.S. government agencies were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.
50 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
Asset-backed securities: The unrealized losses on asset-backed were caused by interest rate increases. The contractual cash flows of these securities are guaranteed by various government or government sponsored agencies. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.
Obligations of states and political subdivisions: The unrealized losses on investments in obligations of states and political subdivisions were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.
(6) PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 2003 and 2002 is as follows:
2003 2002
------------ ------------
Land $ 5,089,646 3,726,381
Buildings and improvements 12,981,232 12,135,931
Furniture and equipment 8,569,139 8,291,368
Construction in progress 1,152 1,789
------------ ------------
26,641,169 24,155,469
Less accumulated depreciation 8,866,536 7,569,137
------------ ------------
$ 17,774,633 16,586,332
============ ============
|
(7) GOODWILL AND OTHER INTANGIBLE ASSETS
A summary of goodwill and other intangible assets at December 31, 2003 and 2002 is as follows:
2003 2002
------------ ------------
Excess of cost over the fair value of net assets acquired $ 25,196,736 23,407,734
Core deposit intangible 1,013,244 730,140
Consulting/noncompete agreements -- 125,000
------------ ------------
$ 26,209,980 24,262,874
============ ============
|
51 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
The gross carrying amount and accumulated amortization of our Company's amortized intangible assets for the years ended December 31, 2003 and 2002 are as follows:
December 31, 2003 December 31, 2002
------------------------- -------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
---------- ------------ ---------- ------------
Amortized intangible assets:
Core deposit intangible $2,265,000 (1,251,756) 1,800,000 (1,069,860)
Consulting/noncompete agreements -- -- 900,000 (775,000)
---------- ------------ ---------- ------------
$2,265,000 (1,251,756) 2,700,000 (1,844,860)
========== ============ ========== ============
|
The aggregate amortization expense of intangible assets subject to amortization for the past three years, is as follows:
Year ended
December 31,
------------------------------
2003 2002 2001
-------- -------- --------
Aggregate amortization expense $306,896 298,680 313,080
======== ======== ========
|
The estimated amortization expense for the next five years is as follows:
For year ended 2004 $215,112 For year ended 2005 215,112 For year ended 2006 215,112 For year ended 2007 201,852 For year ended 2008 66,432 |
The Company's goodwill associated with the purchase of subsidiaries by reporting segments for the years ended December 31, 2003, 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
-------------- -------------- ----------- ----------
2003:
Goodwill associated with the purchase of subsidiaries $ 4,382,098 16,701,762 4,112,876 25,196,736
============== ========== ========= ==========
|
52 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
The Exchange Citizens Union
National Bank State Bank and Osage
of Jefferson Trust of Valley Bank
City Clinton of Warsaw Total
-------------- -------------- ----------- ----------
2002 and 2001:
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 in 2001:
(Dollars expressed in thousands, except per share data)
December 31,
------------------------
2003 2002 2001
------ ------ ------
Net income:
Reported net income $9,044 8,093 7,102
Add back - goodwill amortization -- -- 1,219
------ ------ ------
Adjusted net income $9,044 8,093 8,321
====== ====== ======
Basic earnings per share:
As reported $ 2.17 1.91 1.66
Add back - goodwill amortization -- -- 0.29
------ ------ ------
Adjusted basic earnings per share $ 2.17 1.91 1.95
====== ====== ======
Diluted earnings per share:
As reported $ 2.15 1.90 1.66
Add back - goodwill amortization -- -- 0.29
------ ------ ------
Adjusted diluted earnings per share $ 2.15 1.90 1.95
====== ====== ======
|
(8) MORTGAGE SERVICING RIGHTS
Mortgage loans serviced for others totaled approximately $209,112,000 and $196,031,000 at December 31, 2003 and 2002, respectively. Mortgage servicing rights totaled $1,591,000 and $1,516,000 at December 31, 2003 and 2002, respectively and reflect a $566,000 and $259,000 write-down to fair value during 2003 and 2002, respectively.
53 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
Changes in the balance of servicing assets related to the loans serviced by Exchange National Bank for the years ended December 31, 2003 and 2002 are as follows:
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
Additions 1,113,052
Amortization (471,571)
Impairment charge (566,040)
-----------
Balance at December 31, 2003 $ 1,591,289
===========
|
The 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 2004 $385,653 For year ended 2005 385,653 For year ended 2006 385,653 For year ended 2007 385,653 For year ended 2008 385,653 |
(9) DEPOSITS
The scheduled maturities of time deposits are as follows (in thousands):
2003 2002
-------- --------
Due within:
One year $228,090 206,083
Two years 55,836 58,036
Three years 30,745 27,797
Four years 11,718 4,548
Five years 16,757 10,933
Thereafter 430 420
-------- --------
$343,576 307,817
======== ========
|
54 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
(10) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information relating to securities sold under agreements to repurchase is as follows:
2003 2002 2001
------------ ------------ ------------
Average daily balance $ 67,597,201 66,023,628 38,235,639
Maximum balance at month-end 72,920,590 74,686,617 63,874,272
Weighted average interest rate at year-end 0.87% 1.08 1.67
Weighted average interest rate for the year 0.95 1.52 3.16
|
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, 2003. Additionally, under agreements with unaffiliated banks, The Exchange National Bank of Jefferson City may borrow up to $40,000,000 in federal funds on an unsecured basis at December 31, 2003.
(11) OTHER BORROWED MONEY
Other borrowed money at December 31, 2003 and 2002 is summarized as follows:
2003 2002
------------ ------------
The Company:
Notes payable, 3-month LIBOR plus 150 basis points, due
January 2004, interest only until maturity $ 10,450,568 11,450,568
US Bank, $20,000,000 line of credit, 3-month
LIBOR plus 150 basis points, due January 2004, interest
only until maturity (2.62% and 2.67% at
December 31, 2003 and 2002 respectively) 7,500,000 7,500,000
The Exchange National Bank of Jefferson City:
Federal Home Loan Bank advances, weighted average
rate of 5.60% at December 31, 2003 and 2002,
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 5.37% and 5.84% at December 31, 2003 and
2002, respectively, due at various dates through 2008 3,400,000 3,800,000
Osage Valley Bank of Warsaw:
Federal Home Loan Bank advances, weighted average
rate of 3.84% and 4.78% at December 31, 2003 and
2002, respectively, due at various dates through 2013 5,279,325 4,044,448
------------ ------------
$ 41,629,893 41,795,016
============ ============
|
55 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
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. These notes were paid in full in January, 2004.
The US Bank line of credit was renewed in January, 2004 and is now due December, 2004. The Company borrowed an additional $3,500,000 against this line in January, 2004 to retire the notes payable.
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, 2004 and February 27, 2004, respectively. Citizens Union State Bank has $3,000,000 callable on January 23, 2004.
Based upon the collateral pledged to the Federal Home Loan Bank at December 31, 2003, the banks' had combined credit lines of $113,783,000 of which $90,103,000 was available for additional borrowings.
The scheduled principal reduction of other borrowed money at December 31, 2003 was as follows:
2004 $37,033,715
2005 --
2006 465,747
2007 359,554
2008 878,959
2009 and thereafter 2,891,918
-----------
$41,629,893
===========
|
At December 31, 2003 and 2002, $6,000,000 and $7,000,000, respectively, 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 $169,303 and $490,000, respectively, for each of the years ended December 31, 2003 and 2002.
(12) RESERVE REQUIREMENTS AND COMPENSATING BALANCES
The Federal Reserve Bank required the Banks to maintain cash or balances of $3,954,000 and $3,077,000 at December 31, 2003 and 2002, respectively, to satisfy reserve requirements.
Average compensating balances held at correspondent banks were $2,817,000 and $4,114,000 at December 31, 2003 and 2002, respectively. The Banks maintain such compensating balances with correspondent banks to offset charges for services rendered by those banks.
56 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
(13) INCOME TAXES
The composition of income tax expense (benefit) for 2003, 2002, and 2001 is as follows:
2003 2002 2001
---------- ---------- ----------
Current:
Federal $4,717,263 3,333,043 3,068,417
State 58,960 54,309 31,446
---------- ---------- ----------
Total current 4,776,223 3,387,352 3,099,863
Deferred (620,358) (7,972) 541,093
---------- ---------- ----------
Total income tax expense $4,155,865 3,379,380 3,640,956
========== ========== ==========
|
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:
2003 2002 2001
---------- ---------- ----------
Tax at statutory Federal income tax rate $4,519,923 3,915,435 3,660,108
Tax-exempt income (457,039) (517,703) (539,042)
Amortization of nondeductible intangibles -- -- 414,423
State income tax, net of Federal tax benefit 38,324 35,844 20,754
Other, net 54,657 (54,196) 84,713
---------- ---------- ----------
$4,155,865 3,379,380 3,640,956
========== ========== ==========
|
57 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
The components of deferred tax assets and deferred tax liabilities at December 31, 2003 and 2002 are as follows:
2003 2002
---------- ----------
Deferred tax assets:
Allowance for loan losses $2,893,583 2,320,981
Nonaccrual loan interest 229,091 183,127
Capital loss carryover -- 15,062
Purchase accounting adjustments to securities and
other investments 100,557 103,391
Deferred compensation 96,918 128,883
Other 185,500 158,100
---------- ----------
Total deferred tax assets 3,505,649 2,909,544
---------- ----------
Deferred tax liabilities:
Available-for-sale securities 725,889 1,182,000
Premises and equipment 982,794 953,586
Core deposit intangible 197,310 248,248
Prepaid pension expense 64,128 92,540
Mortgage servicing rights 104,140 125,489
FHLB stock dividend 95,653 129,939
Intangible assets 92,598 --
Other 41,573 52,647
---------- ----------
Total deferred tax liabilities 2,304,085 2,784,449
---------- ----------
Net deferred tax asset $1,201,564 125,095
---------- ----------
|
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, 2003 and, therefore, has not established a valuation reserve.
At December 31, 2003, 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.
58 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
(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.
The measurement date used to determine pension benefit measures for the pension plan is November 1.
Pension expense (benefit) for the plan for 2003, 2002, and 2001 is as follows:
2003 2002 2001
------------ ------------ ------------
Service cost - benefits earned during the year $ 257,103 206,921 147,123
Interest costs on projected benefit obligations 231,253 223,184 213,910
Expected return on plan assets (373,976) (371,413) (350,247)
Net amortization and deferral (35,512) (35,512) (35,512)
Recognized net gains (29,916) (49,341) (70,086)
------------ ------------ ------------
Pension expense (benefit) $ 48,952 (26,161) (94,812)
============ ============ ============
|
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, 2003, 2002, and 2001 are as follows:
2003 2002 2001
------------ ------------ ------------
Benefit obligation:
Balance, January 1 $ 4,052,111 3,681,619 3,132,468
Service cost 257,103 206,921 147,123
Interest cost 231,253 223,184 213,910
Actuarial loss 217,913 161,741 376,061
Benefits paid (231,785) (221,354) (187,943)
------------ ------------ ------------
Balance, December 31 $ 4,526,595 4,052,111 3,681,619
============ ============ ============
|
59 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
2003 2002 2001
------------ ------------ ------------
Plan assets:
Fair value, January 1 $ 4,482,116 5,224,801 5,473,789
Actual return 828,863 (521,331) (61,045)
Benefits paid (231,785) (221,354) (187,943)
------------ ------------ ------------
Fair value, December 31 $ 5,079,194 4,482,116 5,224,801
============ ============ ============
Funded status:
Excess of plan assets over benefit obligation $ 552,599 430,005 1,543,182
Unrecognized net gains (329,375) (157,829) (1,297,167)
------------ ------------ ------------
Prepaid pension expense included in other assets $ 223,224 272,176 246,015
============ ============ ============
|
Weighted average rates utilized to determine benefit obligation for the plan years ended December 31, 2003, 2002, and 2001 are as follows:
2003 2002 2001
------------ ------------ ------------
Discount rate 5.500% 5.875% 6.250%
Annual rate of compensation increase 6.000 6.000 6.000
|
Weighted average rates utilized to determine net cost for plan years ended December 31, 2003, 2002, and 2001 are as follows:
2003 2002 2001
------------ ------------ ------------
Discount rate for the service cost 5.875% 6.250% 7.040%
Annual rate of assumed compensation increase 6.000 6.000 6.000
Expected long-term rate of return on plan assets 7.000 7.000 7.000
|
The weighted-average asset allocation of the Company's pension benefits at December 31, 2003, 2002, and 2001 were as follows:
60 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
PENSION PLAN ASSETS
at DECEMBER 31
--------------------------
Asset Category: 2003 2002 2001
------ ------ ------
Equity scecurties 75.62% 69.64% 61.10%
Debt securities 19.82 28.35 30.55
Other 4.56 2.01 8.35
------ ------ ------
Total 100.00% 100.00% 100.00%
====== ====== ======
|
The Company's investment goals are to invest the assets in a manner that they benefit both the current beneficiaries and the future beneficiaries on the pension plan while minimizing the risk to the overall portfolio. The Company addresses these issues by diversifying the assets through investments in domestic and international fixed income securities and domestic and international equity securities. These assets are readily marketable and can be sold to fund benefit payment obligations as they become payable.
The Company does not expect to make a contribution to its pension plan in 2004.
The benefits expected to be paid in each year 2004 - 2008 are $230,000, $240,000, $250,000, $240,000, and $230,000, respectively. The aggregate benefits to paid in the five years from 2009 - 2013 are $1,080,000. The expected benefits are based on the same assumptions used to measure the Company's benefit obligations at November 1 and include future employee service.
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 2003, 2002, and 2001 were $590,135, $530,430, and $534,910, respectively. At December 31, 2003, the profit-sharing plan held 207,957 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 2003, 2002, and 2001 were $126,365, $139,140, and $116,744, respectively.
61 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
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 2003, 2002, and 2001 were $43,715, $32,650, and $31,921, 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 450,000 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 4,821 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
-------------------------------- ------------------------
2003 2002 2001 2003 2002 2001
-------- -------- -------- ------ ------ ------
Outstanding, beginning of year 76,654 52,392 52,392 $17.53 16.33 16.33
Granted 30,493 44,141 -- 26.57 18.67 --
Exercised (1,513) (19,879) -- 18.67 16.90 --
Canceled (6,743) -- -- 17.91 -- --
-------- -------- -------- ------ ------ ------
Outstanding, end of year 98,891 76,654 52,392 $20.27 17.53 16.33
======== ======== ======== ====== ====== ======
Exercisable, end of year 34,658 17,566 22,131 $16.89 16.33 16.33
|
The weighted average remaining contractual life of options outstanding at December 31, 2003 was approximately nine years.
62 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
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:
2003 2002
---- ----
Options issued during:
Grant date fair value per share $6.47 4.24
Significant assumptions:
Risk-free interest rate at grant date 3.82% 4.91%
Expected annual rate of quarterly dividends 3.66 3.21
Expected stock price volatility 20 20
|
63 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
(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.
2003
-----------------------------------------------------------------------------------
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 $ 356,157,080 174,415,896 45,078,810 -- 575,651,786
Debt and equity securities 110,422,665 45,520,374 33,012,793 -- 188,955,832
Goodwill 4,382,098 16,701,762 4,112,876 -- 25,196,736
Intangible assets -- 1,013,244 -- -- 1,013,244
Total assets 502,800,863 281,534,651 91,417,739 (157,261) 875,595,992
Deposits 370,806,600 228,706,626 74,414,622 (8,665,883) 665,261,965
Stockholders' equity 50,025,363 37,444,782 9,911,423 (9,598,824) 87,782,744
Statement of income information:
Total interest income $ 22,626,953 12,061,252 4,233,909 -- 38,922,114
Total interest expense 6,911,788 3,710,899 1,681,014 494,640 12,798,341
-------------- -------------- -------------- -------------- --------------
Net interest income 15,715,165 8,350,353 2,552,895 (494,640) 26,123,773
Provision for loan losses 750,000 300,000 42,000 -- 1,092,000
Noninterest income 5,091,980 1,336,216 361,831 (86,014) 6,704,013
Noninterest expense 10,860,654 5,705,513 1,595,778 374,062 18,536,007
Income taxes 2,998,600 1,131,416 360,049 (334,200) 4,155,865
-------------- -------------- -------------- -------------- --------------
Net income (loss) $ 6,197,891 2,549,640 916,899 (620,516) 9,043,914
============== ============== ============== ============== ==============
Capital expenditures $ 280,160 241,423 551,458 -- 1,073,041
|
64 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
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
|
65 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
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
|
66 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
(17) CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY
The condensed balance sheets as of December 31, 2003 and 2002 and the related condensed statements of income and cash flows for the years ended December 31, 2003, 2002, and 2001 of the Company are as follows:
CONDENSED BALANCE SHEETS
ASSETS 2003 2002
------------ ------------
Cash and due from banks $ 8,445,003 6,460,589
Investment in subsidiaries 97,926,600 95,853,890
Consulting/noncompete agreements -- 125,000
Other assets 186,000 162,775
------------ ------------
Total assets $106,557,603 102,602,254
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 10,450,568 11,450,568
Other borrowed money 7,500,000 7,500,000
Dividends payable 750,573 555,491
Other liabilities 73,718 269,075
Stockholders' equity 87,782,744 82,827,120
------------ ------------
Total liabilities and stockholders' equity $106,557,603 102,602,254
============ ============
|
67 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
CONDENSED STATEMENTS OF INCOME
2003 2002 2001
------------ ------------ ------------
Revenue:
Dividends received from subsidiaries $ 6,660,477 7,500,000 7,400,000
Interest on bank time deposits -- -- 5,709
Other 499 -- --
------------ ------------ ------------
6,660,976 7,500,000 7,405,709
------------ ------------ ------------
Expenses:
Interest on bank debt 208,305 231,863 411,763
Interest on notes payable 286,335 733,801 845,266
Amortization of intangible assets 125,000 150,000 150,000
Other 335,575 327,459 188,153
------------ ------------ ------------
955,215 1,443,123 1,595,182
------------ ------------ ------------
Income before income tax benefit and
equity in undistributed income
of subsidiaries 5,705,761 6,056,877 5,810,527
Income tax benefit 334,200 492,100 540,400
Equity in undistributed income
of subsidiaries 3,003,953 1,544,313 751,283
------------ ------------ ------------
Net income $ 9,043,914 8,093,290 7,102,210
============ ============ ============
|
68 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
CONDENSED STATEMENTS OF CASH FLOWS
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 9,043,914 8,093,290 7,102,210
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed
income of subsidiaries (3,003,953) (1,544,313) (751,283)
Other, net (93,580) 505,758 38,342
------------ ------------ ------------
Net cash provided by
operating activities 5,946,381 7,054,735 6,389,269
------------ ------------ ------------
Cash flows from investing activities:
Consulting/noncompete payments -- (150,000) (150,000)
------------ ------------ ------------
Net cash used in investing activities -- (150,000) (150,000)
------------ ------------ ------------
Cash flows from financing activities:
Repayment of bank debt (1,000,000) (500,000) (1,500,000)
Cash dividends paid (2,987,715) (2,510,323) (2,424,876)
Proceeds from exercise of stock options 28,251 35,967 --
Purchases of common stock (2,503) (1,911,811) (807,406)
------------ ------------ ------------
Net cash used in financing activities (3,961,967) (4,886,167) (4,732,282)
------------ ------------ ------------
Net increase in cash 1,984,414 2,018,568 1,506,987
Cash at beginning of year 6,460,589 4,442,021 2,935,034
------------ ------------ ------------
Cash at end of year $ 8,445,003 6,460,589 4,442,021
============ ============ ============
|
(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.
69 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
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, 2003, 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, 2003 and 2002 is as follows:
2003 2002
------------ ------------
Commitments to extend credit $ 94,518,824 91,290,843
Standby letters of credit 2,774,353 2,592,866
|
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, 2003 approximately $61,950,000 represents fixed-rate loan commitments. Of the total commitments to extend credit at December 31, 2002 approximately $57,495,000 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, 2003
70 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
A summary of the carrying amounts and fair values of the Company's financial instruments at December 31, 2003 and 2002 is as follows:
2003 2002
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
Assets:
Loans $575,651,786 583,482,000 479,443,190 491,137,000
Investment in debt and equity securities 188,955,832 188,955,832 186,724,362 186,724,362
Federal fund sold and
securities purchased under
ageements to resell 20,299,742 20,299,742 49,669,213 49,669,213
Cash and due from banks 36,745,173 36,745,173 27,742,030 27,742,030
Accrued interest receivable 5,107,980 5,107,980 5,539,661 5,539,661
------------ ------------ ------------ ------------
$826,760,513 834,590,727 749,118,456 760,812,266
============ ============ ============ ============
Liabilities:
Deposits:
Demand $ 89,214,182 89,214,182 77,474,471 77,474,471
NOW 110,879,585 110,879,585 93,728,675 93,728,675
Savings 55,334,554 55,334,554 49,720,928 49,720,928
Money market 66,257,738 66,257,738 62,449,717 62,449,717
Time 343,575,906 345,212,000 307,816,861 310,638,000
Federal funds purchased and
securities sold under
agreements to repurchase 72,983,423 72,983,423 67,359,199 67,359,199
Interest-bearing demand
notes to U.S. Treasury 688,978 688,978 3,061,503 3,061,503
Other borrowed money 41,629,893 41,984,000 41,795,016 47,194,000
Accrued interest payable 1,650,292 1,650,292 1,984,745 1,984,745
------------ ------------ ------------ ------------
$782,214,551 784,204,752 705,391,115 713,611,238
============ ============ ============ ============
|
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.
71 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
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.
72 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
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.
73 (Continued)
EXCHANGE NATIONAL BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
(20) QUARTERLY FINANCIAL INFORMATION
(unaudited)
(In thousands, except per share data)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR-TO-DATE
-------- -------- -------- -------- ------------
2003
--------------------------------------------------------
Interest income $ 9,431 9,552 9,997 9,942 38,922
Interest expense 3,282 3,253 3,172 3,091 12,798
-------- -------- -------- -------- ------------
Net interest income $ 6,149 6,299 6,825 6,851 26,124
======== ======== ======== ======== ============
Provision for loan losses $ 236 235 311 310 1,092
Noninterest income 1,972 1,465 1,902 1,365 6,704
Noninterest expense 4,500 4,584 4,590 4,862 18,536
Income taxes 1,030 902 1,282 942 4,156
Net income 2,355 2,043 2,544 2,102 9,044
Net income per share:
Basic earnings per share 0.57 0.49 0.61 0.50 2.17
Diluted earnings per share 0.56 0.49 0.60 0.50 2.15
|
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 0.45 0.47 0.48 0.51 1.91
Diluted earnings per share 0.45 0.47 0.48 0.50 1.90
|
74 (Continued)
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 2003 and 2002 in which the stock was traded. The prices have been restated to give effect to the three-for-two stock dividend distributed July 15, 2003.
2003 HIGH LOW
-------------- ------ -----
Fourth Quarter 37.50 33.18
Third Quarter 42.75 34.25
Second Quarter 40.33 31.13
First Quarter 31.53 21.93
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2002 HIGH LOW
-------------- ------ -----
Fourth Quarter $23.00 19.33
Third Quarter 21.50 19.33
Second Quarter 21.33 18.50
First Quarter 19.17 17.00
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As of March 1, 2004, our Company had issued 4,298,353 shares of common stock, of which 4,169,847 shares were outstanding. The outstanding shares 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 2003 and 2002. The information has been restated to give effect to the three-for-two stock dividend distributed July 15, 2003.
DIVIDENDS PAID
MONTH PAID PER SHARE
-------------- --------------
January, 2003 $ 0.13
April, 2003 0.13
July, 2003 0.18
October, 2003 0.18
December, 2003 0.09
--------------
Total for 2003 $ 0.71
==============
January, 2002 $ 0.13
April, 2002 0.13
July, 2002 0.13
October, 2002 0.13
December, 2002 0.07
--------------
Total for 2002 $ 0.59
==============
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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 $4,819,000 in dividends to our Company without regulatory approval subject to the ongoing capital requirements of the Banks.
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, Inc.
Bank 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
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ANNUAL REPORT ON FORM 10-K
A copy of our Company's Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission, excluding exhibits, will be furnished without charge to shareholders entitled to vote at the 2004 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.
EXHIBIT 14
EXCHANGE NATIONAL BANCSHARES, INC.
CODE OF BUSINESS CONDUCT AND ETHICS
Exchange National Bancshares, Inc.
Code of Business Conduct and Ethics
I. GENERAL
To foster a culture of honesty and accountability, we have adopted this Code of Business Conduct and Ethics (this "Code"). This Code sets forth specific corporate policies governing the conduct of the business of Exchange National Bancshares, Inc. and its subsidiaries (collectively, the "Company" or "we" "our" or "us"). These policies were developed and are intended to be applied in good faith with reasonable business judgment to enable us to achieve our operating and financial goals within the framework of the law.
We are committed to conducting our business with honesty and integrity and to maintaining the high standards of conduct reflected in our Code. We are committed to creating a free and open environment in which compliance with this Code is considered the responsibility of each director, officer, employee and agent of the Company (all "Employees" or "you" or "your"). We require our Employees to act in a manner which promotes:
1. Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
2. Avoidance of conflicts of interest, including disclosure to an appropriate person or persons identified in this Code of any material transaction or relationship that reasonably could be expected to give rise to such a conflict;
3. Full, fair, accurate, timely, and understandable disclosure in reports and documents that our Company files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Company;
4. Compliance with applicable governmental laws, rules and regulation;
5. The prompt internal reporting to an appropriate person or persons identified in this Code of violations of this Code; and
6. Accountability for adherence to this Code.
The Company recognizes that rapid changes in business constantly pose new ethical and legal considerations. No set of guidelines, therefore, should be considered the absolute last word under all circumstances. We encourage our Employees to consult with any supervisor, manager or officer of the Company, or the Audit Committee of the Board of Directors of the Company (the "Audit Committee") if there is any doubt as to the proper course of action (see "Reporting Procedures" below). Willingness to raise ethical concerns is essential. We are confident each of our Employees shares our sense of determination in this area.
Our policy requires our Employees to observe high standards of business and personal ethics in the conduct of their duties and responsibilities. Each Employee must obey the law, practice honesty and integrity and act ethically in every aspect of dealing with other Employees, the public, the business community, shareholders, customers, suppliers and government authorities. Our Chief Executive Officer ("CEO") and Senior Officers (as defined herein) are responsible for setting standards of business ethics and overseeing compliance with these standards. Our Employees frequently encounter a variety of ethical and legal questions.
The way we decide these issues should be consistent with our basic values and principles. This Code provides general guidance for resolving a variety of legal and ethical questions for our Employees.
The topics discussed in this Code may not cover every situation and are in addition to our other policies and programs.
B. ANTI-RETALIATION. No one will suffer any adverse effects to his or her job or career as a result of raising, in good faith, an ethical concern or questioning, in good faith, a Company practice. It is a violation of this Code to discriminate or retaliate against any Employee for reporting a suspected violation. Supervisory personnel have a special responsibility to demonstrate high ethical standards in their behavior and to handle reports of suspected violations properly. Each supervisor is expected to take all necessary actions to ensure compliance with and to bring problems to the attention of higher management or officers of the Company and any member of the Audit Committee.
C. FAILURE TO COMPLY. Failure to comply with this Code can have severe consequences for both an Employee and the Company. Conduct that violates this Code may also violate national or state laws and can subject both an Employee and the Company to civil and criminal penalties. No Employee should be misguided by any sense of loyalty to the Company or a desire for profitability that might cause him or her to disobey any applicable Law or our policies. Violation of our policies will constitute grounds for disciplinary action, including, when appropriate, termination of employment.
D. DEFINITIONS. As used in this Code, the following terms have the meanings set forth below:
1. "Disclosure Controls and Procedures" means the Company's controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the Reports that it files and submits under the Securities Exchange Act of 1934 ("Exchange Act") is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.(1)b
2. "Fraud" includes, but is not limited to, embezzlement, criminal fraud, taking of property through deceit or artifice, misappropriation and other irregularities including such things as any:
- dishonest or fraudulent act;
- defalcation;
- embezzlement;
- forgery or alteration of negotiable instruments such as Company checks and drafts;
- misappropriation of Company, Employee, customer, partner or supplier assets;
- conversion to personal use of cash, securities, supplies or any other Company asset;
- unauthorized handling or reporting of Company transactions; and
- falsification of Company records or financial statements for personal or other reasons.
(1) Rule 13a-15(e).
The above list is not all-inclusive but intended to be representative of situations involving Fraud. Fraud may be perpetrated not only by Company employees, but by agents and other outside parties as well. All such situations require specific action by the Company.
3. "Internal Control over Financial Reporting" is defined as a process designed by, or under the supervision of, the Company's principal executive and principal financial officers, or persons performing similar functions, and effected by the Company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
4. "Laws" means laws, rules, regulations, orders, directives and judgments of governmental agencies, authorities, courts and administrative bodies.
5. "Material Nonpublic Information" shall have the same meaning as the phrase is used in connection with the Exchange Act and any case law interpreting that Statute, including any information which could reasonably be expected to affect the price of the Company's stock should it become public knowledge.
6. "Quarterly Blackout Period" is a period during which the Company allows no trading in its stock from the first day of the last month of each fiscal quarter and ending after the market closes the second trading day after the release of the results of operations for that quarter (and in the case of the last fiscal quarter, its results of operations for the fiscal year then ended) to the public
7. "Senior Officers" means all executive officers, the principal financial officer, the controller or the principal accounting officer or any person performing similar functions.
8. "Sensitive information" includes confidential and proprietary information, customer lists, materials developed for in-house use, administrative processes, business plans, pricing strategies and any formulas, devices and compilations of information which give the Company a competitive advantage.
II. STANDARDS OF CONDUCT
9. Employees shall exercise honesty, objectivity, and diligence and act ethically in the performance of their duties and responsibilities. Employees shall be ever mindful of their obligation to maintain the high standards of competence, morality and dignity.
10. Employees shall exhibit loyalty in all matters pertaining to the affairs of the Company. However, Employees shall not knowingly be a party to any Fraud or other illegal or improper activity. All Employees are expected to adhere to high standards of personal integrity. For example, perjury or any other illegal act taken to "protect" the Company and sales made by deception or production quotas achieved through questionable means or figures are wrong and will not be tolerated by the Company.
11. Employees shall not knowingly engage in acts or activities, which are discreditable to the Company.
12. Employees shall refrain from entering into any activity which may be in conflict with the interest of the Company or which would prejudice their ability to carry out objectively their duties and responsibilities.
13. Employees shall not accept anything of value from an Employee, customer or supplier of the Company which would impair or be presumed to impair their professional judgment. Employees shall not accept costly entertainment or gifts (excepting mementos and novelties of nominal value) from others with whom the Company does business.
14. Employees shall be prudent in the use of information acquired in the course of their duties. They shall not use sensitive information for any personal gain, unless approved in advance by the Audit Committee, nor in any manner which would be contrary to law or detrimental to the welfare of the Company.
15. Employees, when reporting on the results of their work, shall reveal all material facts known to them which, if not revealed, could either distort reports of operations or conceal unlawful practices.
16. Employees shall continually strive for improvement in the proficiency, and in the effectiveness and quality of their service to the Company.
17. Employees shall not become involved in circumstances that produce, or reasonably appear to produce, conflict between personal interests of an employee and interests of the Company, including, without limitation, investments in suppliers, customers or competing companies (except insubstantial securities investments in publicly traded companies), outside employment which would affect working efficiency, and direct or indirect ownership of property or other tangible items which may be sold or leased to the Company.
18. The integrity of the Company's accounting and financial records is based on the validity, accuracy and completeness of basic information supporting entries to the Company's books of account. All Employees involved in creating, processing or recording such information are held responsible for its integrity and are responsible for full, fair, accurate, timely, and understandable disclosure in the periodic reports required to be filed by the Company.
19. Every accounting or financial entry should reflect exactly that which is described by the supporting information. There must be no concealment of information from (or by) management, or from the Company's independent auditors.
20. Employees who become aware of possible omission, falsification or inaccuracy of accounting or financial entries or basic data supporting such entries, are held responsible for reporting such information.
21. All Employees are encouraged to take part in public matters of their individual choice. The Company may, to the extent legally permissible, support committees aimed at encouraging political contributions by individuals.
22. In dealing with public officials and private business associates, the Company will utilize only ethical commercial practices. The Company and its Employees will not seek to influence sales of its products or services (or other events impacting on the Company) by payments of bribes, kickbacks or other questionable inducements. Payments or commitments (whether cast in the form of commissions, payment or fees for goods
or services received, or otherwise) made with the understanding or under circumstances that would indicate that all or part thereof is to be paid (directly or indirectly) to a public official or employee to induce said individual to fail to perform their duties, to perform them in an incorrect manner, or to cause any privilege or favor toward the Company or its products are strictly prohibited.
23. While the Company may hire individuals who have knowledge and experience in various technical areas, it is not the Company's intent to employ such persons as a means of gaining access to the trade secrets of others. New Employees will not be asked to divulge such trade secrets. Similarly, we require that Employees not make unauthorized disclosure of our trade secrets, either during their employment or thereafter.
III. COMPLIANCE WITH LAWS
Our policy is to comply fully with all Laws applicable to our business. You must become familiar with and comply with the Laws which govern your area of responsibility. You are not authorized by the Company to take any action which you are advised would constitute a violation of Law.
Each Employee and agent is personally responsible for adhering to the standards and restrictions, whether imposed by Law or this Code, applicable to his or her assigned duties and responsibilities and to conduct himself or herself accordingly. Such standards and restrictions require each employee and agent to avoid any activities which would involve the Company in any practice which is not in compliance with this Code. Any Employee or agent who does not adhere to such standards and restrictions is acting outside the scope of his or her employment or agency.
Beyond legal compliance, all Employees are expected to observe high standards of business and personal ethics in the discharge of their assigned duties and responsibilities. This requires the practice of honesty and integrity in every aspect of dealing with other Employees, the public, the business community, shareholders, customers, suppliers and governmental and regulatory authorities.
COMPANY POLICY PROHIBITS EMPLOYEES FROM DISCRIMINATING AGAINST EMPLOYEES, SHAREHOLDERS, DIRECTORS, OFFICERS, CUSTOMERS OR SUPPLIERS ON ACCOUNT OF RACE, COLOR, AGE, SEX, RELIGION OR NATIONAL ORIGIN EXCEPT AS MAY BE REQUIRED BY APPLICABLE LAW. ALL OF SUCH PERSONS SHALL BE TREATED WITH DIGNITY AND RESPECT AND THEY SHALL NOT BE UNREASONABLY INTERFERED WITH IN THE CONDUCT OF THEIR DUTIES AND RESPONSIBILITIES.
The Company will endeavor to provide a work environment free of all forms of harassment or discrimination, and it is your obligation to assist the Company in that endeavor.
The Company and Employees will comply with all health and safety Laws covering Company facilities and otherwise strive to maintain a safe and happy working environment.
IV. DEFALCATION, MISAPPROPRIATION AND SIMILAR IRREGULARITIES (FRAUD)
This policy establishes and communicates the Company's policy regarding the prohibition, recognition, reporting and investigation of suspected Fraud and other similar irregularities.
The Company prohibits all Fraud. In accordance with the "Audit Committee - Financial Matters Complaint Policy", situations involving suspected Fraud shall be reported to any supervisor, manager, or officer of the Company, the Chief Financial Officer or the Audit Committee. All Fraud investigations under the Financial Matters Complaint Policy will be conducted under the authorization and direction of the Audit Committee.
The Chief Financial Officer will maintain close liaison with the Audit Committee and will assist in investigations as deemed appropriate under the circumstances.
V. CONFLICT OF INTEREST
Employees must deal with suppliers, customers, auditors and others doing business with the Company in a manner that avoids even the appearance of conflict between personal interests and those of the Company. This requirement applies equally to business relationships as well as personal activities. Employees have a duty of loyalty to the Company to advance its legitimate interests when the opportunity to do so arises.
Although not all situations in which a conflict may arise can be defined precisely, you should avoid situations which interfere with your ability to act in an honest and ethical manner. You must avoid situations where your private interests, or the private interests of members of your family conflict with the interests of the Company. You should not have any business or financial relationship with customers, suppliers or competitors that could influence or appear to influence you in carrying our your responsibilities. You should not acquire any interests or participate in any activities that would deprive the Company of the time or attention required to perform your duties properly, or create an obligation of distraction that would affect your judgment or ability to act solely in the Company's best interest. Any Employee who becomes aware of a potential conflict of interest should communicate this to the Audit Committee in accordance with the Reporting Procedures set forth in Section XVIII (G) below. Employees are required to ethically handle actual or apparent conflicts of interest between personal and professional relationships.
Examples of the types of situations, which must be approved by the Company, are set forth below:
- Obtaining a significant financial or other beneficial interest in one of the Company's outside accounting firms, suppliers, customers or competitors. None of our executive officers or directors may have been previously employed by our current independent auditor within the most recent five years.
- Engaging in a significant personal business transaction involving the Company for profit or gain.
- If an executive officer or director, obtaining a loan or guarantee from the Company for personal benefit.
- Accepting money, gifts of other than nominal value, excessive hospitality, loans or other improper personal benefits from any supplier, customer or competitor of the Company as a result of his or her position in the Company.
- Participating in the use, sale, loan or gift of Company property, information or position for personal gain.
- Learning of a business opportunity through association with the Company and disclosing it to a third party or investing in the opportunity without first offering it to the Company.
- Competing with the Company.
- Using the Company property or services for personal benefit.
- Working for a competitor, customer or supplier as an employee, consultant or member of its board of directors.
VI. ENTERTAINMENT, GIFTS AND PAYMENTS
The Company considers that in the interests of avoiding even the appearance of impropriety, Employees may not furnish on behalf of the Company expensive gifts or provide excessive entertainment or benefits to other persons. In addition, Employees may not use their employment status to obtain gain from the Company's auditors, suppliers or customers doing or seeking to do business with the Company.
Family members of Employees may not accept any gift or gratuity in any form from any auditor, supplier or customer of the Company unless the gift is a commonly distributed item of nominal value given for advertising or promotional purposes or is of modest value and consistent with local business custom. Employees may not solicit or accept gifts, gratuities, tickets or entertainment having a value of $500 or more from auditors, suppliers or customers.
VII. INSIDER TRADING
This Code prohibits Employees from buying, selling, assigning, transferring or otherwise trading in the securities of the Company while in the possession of Material Nonpublic Information. This Code also prohibits Employees from engaging in any action to take advantage of, or pass on to others, Material Nonpublic Information. This policy is intended to enforce the securities laws of the United States which prohibit Employees from buying or selling securities of the Company while in possession of Material Nonpublic Information relating to the Company or from using Material Nonpublic Information.
Our prohibition applies to Material Nonpublic Information obtained in the course of an Employee's employment relating to any auditors, customers, suppliers and companies with whom the Company is considering a transaction. We will hold the Employee responsible for the compliance of his or her family members and for the actions of any other party who has received the Material Nonpublic Information from the Employee as a "tip". Employees may not buy or sell securities of the Company while in possession of Material Nonpublic Information relating to the Company.
If you are an Executive Officer or Director of the Company, you are subject to certain restrictions on trading, including a prohibition from trading in Company stock during a Quarterly Blackout Period. Such restrictions may include requiring pre-clearance of trades in Company securities and the prohibition from engaging in any of the following activities with respect to securities of the Company: (i) trading on a short-term basis (i.e., purchase and sale within a six month period); (ii) short sales; or (iii) buying or selling puts or calls. See the Company's "Section 16 Reporting Policy" and the Company's "Policy Applicable to Covered Persons Regarding Securities Trading and Handling of Nonpublic Information."
VIII. CONCERNS REGARDING DISCLOSURE
The Company is dedicated to fully complying with the applicable securities laws, including reporting requirements, and to ensuring that information contained in its public communications and its publicly filed financial statements and periodic reports fairly present, in all material respects, the matters disclosed and, as applicable, the financial condition, results of operations and cash flows of the Company.
The Company's books and records will reflect, in an accurate, fair and timely manner, the transactions and disposition of assets of the Company. All funds and assets will be properly recorded and disclosed. Employees may not use the books and records to mislead those who receive them, or to conceal anything that is improper (e.g., secret funds). Those responsible for the accounting and record-keeping functions must be vigilant in ensuring that the Company's funds or assets are not used for any unlawful or improper purpose. Employees are required to promote full, fair, accurate, timely, and understandable disclosure in the periodic reports required to be filed by us and in all public communications.
Accordingly, the Company is committed to providing an environment which is receptive to receiving and effectively dealing with complaints regarding its accounting, internal accounting controls, or auditing matters and maintaining the confidentiality and anonymity of employees who submit concerns regarding questionable accounting or auditing matters.
Under the "Audit Committee - Financial Matters Complaint Policy" the board of directors of the Company and the Audit Committee maintain an "open door" policy to receive, retain and handle complaints and notification regarding the Company's accounting, internal accounting controls, auditing matters and other reportable offenses as described in this policy. We encourage the prompt reporting of such complaints or concerns so that rapid and constructive action can be taken.
IX. IMPROPER INFLUENCE OVER AUDITORS
The Company recognizes the importance of preventing improper influence on the conduct of auditors. Accordingly, the Company prohibits any Employee from conducting any action to fraudulently influence, coerce, manipulate, or mislead any of our auditors during their review or examination of our financial statements for the purpose of rendering the financial statements materially misleading. Such conduct is prohibited even if it does not succeed in affecting our audit or review. Improper influence would include, but is not limited to, directly or indirectly:
1. Offering or paying bribes or other financial incentives, including offering future employment or contracts for non-audit services.
2. Providing an auditor with inaccurate or misleading accounting, financial or legal analysis, records or information.
3. Threatening to cancel or canceling existing non-audit or audit engagements if the auditor object to the proposed accounting.
4. Seeking to have a partner removed from the audit engagement because the partner objects to the proposed accounting.
5. Blackmailing; and
6. Making physical threats.
X. INTERNAL CONTROLS OVER FINANCIAL REPORTING AND DISCLOSURE
CONTROLS AND PROCEDURES
The Company shall maintain disclosure controls and procedures to ensure that the information required to be disclosed by the issuer in its periodic reports, current reports and proxy statements ("Exchange Act Reports") filed by the Company under the Securities Exchange Act of 1934, as amended (the "Exchange Act"):
- Recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms; and
- Accumulated and communicated to the management, including the CEO and Chief Financial Officer ("CFO") to allow timely decisions regarding required disclosure.
The Company shall maintain a system of internal controls over financial reporting to ensure reliability and adequacy of its books and records and proper recording of all transactions including dispositions of assets. The Company has established guidelines and procedures related to the keeping of books and records that in reasonable detail accurately and fairly reflect the Company's transactions and dispositions of assets. The Company guidelines and procedures are intended to prevent the records from being misleading or concealing anything that is improper.
Employees must strictly comply with disclosure controls and procedures and internal controls over financial reporting and must be vigilant in ensuring that the Company's funds or assets are not used for any unlawful or improper purpose. Employees may only enter into transactions which are executed in accordance with the Company's specific authorization or established formalized policies and procedures. Employees must not allow any transaction to be recorded in the accounts of the Company unless it is within the scope of written policies and procedures or is specifically and formally approved by an appropriate and designated employee. Such approval requires the determination that the transaction:
- has been authorized in accordance with Company policy, and
- is supported by documentary evidence to verify the validity of the transaction.
All transactions that have been accounted for in accordance with Company policy will be accumulated and processed in a manner which will permit preparation of financial statements, reports and data for purposes of internal, public and regulatory reporting. Such statements, reports and data must be in a form sufficient to reflect accurately and fairly the results of transactions entered into by the Company and to permit proper accountability for assets.
The implementation and maintenance of disclosure controls and procedures and internal controls over financial reporting that are adequate in all respects to satisfy the requirements of the Company will be the primary responsibility of the Chief Financial Officer. All failures regarding these of which an Employee becomes aware should be reported to Chief Financial Officer, so that deficiencies can be corrected and assurance of compliance can be maintained.
XI. CONFIDENTIAL, PROPRIETARY INFORMATION
Employees have access to and become knowledgeable about sensitive information regarding the Company and our customers that is confidential, private or proprietary and which is valuable to us. Disclosure of confidential and proprietary information outside the Company either during and after an Employee's employment with the Company could be irreparably harmful to the Company or a customer or be helpful to a competitor. The Company regularly receives sensitive information from those with whom it does business. Confidential and proprietary information of a customer is often received under the terms of a written agreement that specifies the Company's obligations for the use and protection of the customer's information ("Customer Confidentiality Agreements").
Employees entrusted with or otherwise knowledgeable about information of a confidential or proprietary nature, shall not disclose such information to non-employees without written Company authorization. Employees shall disclose sensitive information to other Employees of the Company only on a need to know basis.
Employees must use or disclose the customer's sensitive information only for Company purposes and not for personal benefit or a competing interest. Access to sensitive information will be limited to those having a need to know. Employees have a continuing duty to the Company to maintain the confidentiality of sensitive information both during and after employment. Employees must protect the confidentiality of any such information, whether or not such a Customer Confidentiality agreement exists, and limit use of it to what is authorized. Employees must protect the confidentiality of such customer sensitive information, whether or not such customer confidentiality agreement exists, and limit the use of such information to the extent authorized by the customer.
XII. FAIR DEALING
The Company is committed to promoting the values of honesty, integrity and fairness in the conduct of its business and sustaining a work environment that fosters mutual respect, openness and individual integrity. Employees are expected to deal honestly and fairly with the Company's customers, suppliers, competitors and other third parties. To this end, Employees shall not:
- make false or misleading statements to customers, suppliers or other third parties;
- make false or misleading statements about competitors;
- solicit or accept any fee, commission or other compensation for referring customers to third-party vendors; or
- otherwise take unfair advantage of the Company's customers or suppliers, or other third parties, through manipulation, concealment, abuse of privileged information or any other unfair-dealing practice.
XIII. IMPROPER INFLUENCE OR PAYMENTS; POLITICAL CONTRIBUTIONS
In dealing with public officials and private business associates, the Company will utilize only ethical commercial practices. Improper influence over auditors, suppliers or customers through accepting or giving bribes, kickbacks or other payoffs and other questionable inducements is illegal, unethical and dishonest.
Accordingly, the Company prohibits Employees from using such schemes to influence sales of its products or services (or other events impacting on the Company).
Employees must not take any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged to perform an audit of the financial statements of the Company for the purpose of rendering such financial statements materially misleading. The Company strictly prohibits Employees from accepting or taking any kickbacks, bribes and other illegal payments.
Without our prior approval, Employees may not directly or indirectly offer, solicit, provide or accept any kind of payments, commitments (whether cast in the form of commissions, payments, fees or goods or services received or otherwise) or contribution of a significant value (other than salary, wages or other ordinary compensation from the Company) for the purpose of:
- influencing customers, suppliers or governmental entities including their officers or employees to cause any privilege or favor toward the Company or its products,
- obtaining, giving or keeping business,
- persuading any officials or employees for another company to fail to perform or improperly perform their duties, or
- influencing legislation or regulations.
The Company policy does not prohibit expenditures of nominal amounts by Employees for meals and entertainment of suppliers and customers which are ordinary and customary business expenses, if they are otherwise lawful. The lawful expenditures incurred in this way should be properly accounted for in an expense report. Employees may not use Company's funds, goods or services as contributions for political parties, candidates or campaigns, unless previously authorized in writing by the Company.
XIV. RECORD RETENTION AND DESTRUCTION; GOVERNMENT INVESTIGATIONS
The Company's corporate records are important assets. The Company is required by Law and its business needs to follow certain specific requirements in managing Company records, including certain requirements regarding the retention and destruction of certain records. Records include paper documents, CDs, computer hard disks, e-mail, floppy disks, microfiche, microfilm and all other media, and all other records Employees produce, whether in hard copy or electronic form, and informal records such as desk calendars and personal notes regarding company matters. The Company and its Employees may be subject to certain civil and criminal penalties for failure to comply with these requirements. From time to time the Company establishes retention or destruction policies and schedules for specific categories of records in order to ensure legal compliance, and also to accomplish other objectives, such as preserving intellectual property and cost management.
Each Employee must fully comply with any such published records retention or destruction policies and schedules with the important exceptions described below. If an Employee has reason to believe, or the Company informs an Employee (such as through a legal hold described in the next subsection), that Company records are relevant to pending or anticipated litigation or a governmental proceeding or investigation, then the Employee must preserve those records until the Company's legal counsel determines that the records are no longer needed. This exception to any record destruction policy supersedes any previously or subsequently established destruction schedule for those records. If an Employee has reason to believe that the exception to
any record destruction policy may apply, or has any question regarding the possible applicability of such exception, the Employee should contact the Company's CEO or Chief Financial Officer for advice.
XV. ADMINISTRATION OF CODE OF BUSINESS CONDUCT
This Code of Business Conduct of the Company shall be administered as follows:
A. SCOPE. The Audit Committee shall, periodically, in light of the experience of the Company, review this Code, and when necessary or desirable, make recommendations to the Board of Directors (i) to ensure its continued conformance to applicable Law, (ii) to ensure that it meets or exceeds industry standards, and (iii) to ensure that any weaknesses revealed through monitoring, auditing and reporting systems are eliminated or corrected.
B. ALLOCATIONS OF RESPONSIBILITY. The Audit Committee shall be responsible for the administration of this Code. The Audit Committee shall establish such procedures as it shall deem necessary or desirable in order to discharge this responsibility. Such procedures shall provide for obtaining advice of legal counsel where appropriate. In discharging these responsibilities, the Audit Committee may delegate authority to such committees, officers and other employees and may engage such agents and advisors as it shall deem necessary or desirable.
C. DELEGATION OF SUBSTANTIAL DISCRETIONARY AUTHORITY. No Employee shall delegate substantial discretionary authority to any individual who such Employee knows, or through the exercise of due diligence should know, has a propensity to engage in illegal activities.
D. COMMUNICATION OF POLICIES. To ensure the continued dissemination and communication of this Code, the Audit Committee shall take, or cause to be taken, reasonable steps to communicate effectively the standards and procedures included in this Code to employees and agents of the Company.
E. MONITORING AND AUDITING. The Audit Committee shall take reasonable steps to monitor and audit compliance with this Code, including the establishment of monitoring and auditing systems that are reasonably designed to detect conduct in violation of this Code by employees and agents of the Company.
To the extent so directed by the Audit Committee, the information developed by the Company's independent accountants in performing their engagement by the Company and by its internal auditors in the performance of their assigned responsibilities shall be made available to the Audit Committee in its capacity as administrator of this Code as a means of monitoring and auditing compliance with this Code.
To the extent so directed by the Audit Committee, the results of the periodic health, safety and environmental audits and export administration audits of the Company's facilities shall be made available to the Audit Committee in its capacity as the administrator of this Code as a means to monitor and audit compliance with this Code.
F. BOARD COMMITTEES. The CEO or the Chief Financial Officer shall report to the Audit Committee, at least once each year, regarding the general effectiveness of this Code.
G. REPORTING PROCEDURES. The Company expects Employees to report possible violations of this Code. No retaliatory action will be taken against Employees who report in good faith suspected criminal
activity or ethical violations. You should first consult with your immediate supervisor. Supervisors are responsible for maintaining a workplace environment that encourages and solicits frank and open communication regarding the importance of operating under this Code.
Employees that feel uncomfortable raising a concern with their immediate supervisor should notify the head of their operation. If this course of action is not acceptable under the circumstances, Employees may contact the Chief Financial Officer or any other Senior Officer, or any member of the Audit Committee. Employees may write directly to the Audit Committee at the following address:
Audit Committee
Exchange National Bancshares, Inc.
132 East High Street, Box 688
Jefferson City, MO 65102
Attn: Chairman of Audit Committee
Employees may make reports anonymously to the Audit Committee as stated above if the Employees deem it necessary. Employees are, however, encouraged to identify themselves, in the knowledge that there will be no retaliation where reports are made in good faith, to enable the Company to clarify details and take appropriate action.
The Company will promptly forward all financial matters complaints to the Audit Committee to investigate as appropriate and, as appropriate, will investigate any report of alleged misbehavior, take the appropriate action and respect the rights of all parties concerned.
H. INVESTIGATION OF VIOLATIONS. If, through operation of the Company's compliance monitoring and auditing systems or its violation reporting systems or otherwise, the Company receives information regarding an alleged violation of this Code, the person or persons authorized by the Audit Committee to investigate alleged violations of this Code shall, as appropriate:
1. evaluate such information as to gravity and credibility;
2. initiate an informal inquiry or a formal investigation with respect thereto;
3. prepare a report of the results of such inquiry or investigation, including recommendations as to the disposition of such matter;
4. make the results of such inquiry or investigation available to the Board of Directors or the Audit Committee for action;
5. recommend discipline or changes in this Code necessary or desirable to prevent further similar violations; and
6. if required, ensure reporting of any change or waiver of this Code within 2 business days of the change or waiver on a Form 8-K or on the Company's website.
The Company may disclose the results of investigations to law enforcement agencies.
I. DOCUMENTATION. Subject to the applicable document retention program, the Company shall document its compliance efforts and results to evidence its commitment to comply with the standards and procedures set forth above.
XVI. COMPLIANCE WITH CODE
The Company encourages strict compliance with this Code. Failure to comply with this Code can have severe consequences for both Employees and the Company. The Audit Committee will impose appropriate discipline, which may include discharge, for violations of this Code. Conduct that violates this Code may also violate national or state laws and can subject both Employees and the Company to civil and criminal penalties. Only with the approval of our board of directors or any committee created by our board of directors, the Company may, in special and appropriate circumstances, waive compliance with this Code by individual Executive Officers or Directors.
XVII. DISSEMINATION; DISTRIBUTION AND ACKNOWLEDGMENT
This Code will be posted at each Company office and facility in the appropriate locations. If required by applicable Law, amendments to this Code will be filed with the SEC on Form 8-K and posted at each Company office and facility.
* * *
[AT COMMENCEMENT OF EMPLOYMENT AND ON A PERIODIC BASIS THEREAFTER, ANYONE WHO MAY HAVE ACCESS TO SENSITIVE INFORMATION WILL BE PROVIDED WITH A COPY OF THIS CODE AND WILL BE REQUIRED TO SIGN THE PRESCRIBED FORM OF ACKNOWLEDGMENT.]
I acknowledge that I have received a copy of the Exchange National Bancshares, Inc. Code of Business Conduct and Ethics and that I have read this Code and understand its provisions.
_______________________ ________________________________________
Date Signature
________________________________________
Printed Name
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EXHIBIT 23
[KPMG LOGO]
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 13, 2004, with respect to the consolidated balance sheets of Exchange National Bancshares, Inc. as of December 31, 2003 and 2002, 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, 2003, which report appears in the December 31, 2003 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 LLP
St. Louis, Missouri
March 15, 2004
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[KPMG LOGO] KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative.
Exhibit 31.1
CERTIFICATIONS
I, James E. Smith, certify that:
1. I have reviewed this report on Form 10-K of Exchange National Bancshares, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 15, 2004 /s/ James E. Smith
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James E. Smith
Chairman of the Board and Chief
Executive Officer
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Exhibit 31.2
CERTIFICATIONS
I, Richard G. Rose, certify that:
1. I have reviewed this report on Form 10-K of Exchange National Bancshares, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 15, 2004 /s/ Richard G. Rose
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Richard G. Rose
Treasurer
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Exhibit 32.1
Certification of Chief Executive Officer
In connection with the Annual Report of Exchange National Bancshares, Inc. (the "Company") on Form 10-K for the year ended December 31, 2003 as filed with the Securities and Exchange Commission (the "Report"), I, James E. Smith, Chairman of the Board and Chief Executive Officer of the Company, hereby certify in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(a) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(b) The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.
Dated: March 15, 2004
/s/ James E. Smith
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James E. Smith
Chairman of the Board and Chief
Executive Officer
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"A signed original of this written statement required by Section 906 has been provided to Exchange National Bancshares, Inc. and will be retained by Exchange National Bancshares, Inc. and furnished to the Securities and Exchange Commission or its staff upon request."
Exhibit 32.2
Certification of Chief Financial Officer
In connection with the Quarterly Report of Exchange National Bancshares, Inc. (the "Company") on Form 10-K for the year ended December 31, 2003 as filed with the Securities and Exchange Commission (the "Report"), I, Richard G. Rose, Treasurer of the Company, hereby certify in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(a) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(b) The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.
Dated: March 15, 2004
/s/ Richard G. Rose
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Richard G. Rose
Treasurer
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"A signed original of this written statement required by Section 906 has been provided to Exchange National Bancshares, Inc. and will be retained by Exchange National Bancshares, Inc. and furnished to the Securities and Exchange Commission or its staff upon request."