UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
May 2, 2005
-----------
Date of Report (Date of earliest event reported)
EXCHANGE NATIONAL BANCSHARES, INC.
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(Exact name of registrant as specified in its charter)
Missouri 0-23636 43-1626350
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(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation) Identification Number)
132 East High Street, Jefferson City, MO 65101
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(Address of principal executive offices) (Zip Code)
(573) 761-6100
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Registrant's telephone number, including area code
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
EXPLANATORY NOTE
As previously reported, our Company, Exchange National Bancshares, Inc.,
completed its acquisition of Bank 10, a Missouri state bank. This Current Report
on Form 8-K/A is filed to include the financial statements of Bank 10 required
by Item 9.01(a) of Form 8-K and the pro forma financial statements required by
Item 9.01(b) of Form 8-K.
ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
On May 2, 2005, our Company, Exchange National Bancshares, Inc., completed
its acquisition of 100% of the outstanding capital stock of Bank 10, a Missouri
state bank with offices in the Missouri communities of Belton, Drexel,
Harrisonville, Independence and Raymore, Missouri. The press release that our
Company used to announce the completion of this acquisition is attached to this
report as Exhibit 99.1 and is incorporated herein by reference.
The terms and conditions of the acquisition were provided in an
Acquisition Agreement dated January 28, 2005 among our Company, Drexel
Bancshares, Inc., and certain other persons and entities, which Acquisition
Agreement was amended by an Agreement Altering Transaction Structure dated
February 28, 2005 between our Company, Drexel Bancshares and the representative
for the shareholders of Drexel Bancshares. A copy of the Acquisition Agreement
was attached as Exhibit 2.1 to our Company's Current Report on Form 8-K dated
February 28, 2005 and is incorporated herein by reference. A copy of the
Agreement Altering Transaction Structure was attached as Exhibit 2.1.1 to our
Company's Current Report on Form 8-K dated February 28, 2005 and is incorporated
herein by reference.
Under the terms of the Acquisition Agreement, as amended by an Agreement
Altering Transaction Structure, the purchase price payable to Drexel Bancshares,
Inc. for the outstanding capital stock of Bank 10 was an amount in cash equal to
$32,862,000, plus (or minus) any amount by which the book value of Bank 10 as of
the business day preceding the closing date was greater (or less) than
$13,144,800, subject to further adjustments to eliminate any unrealized gain or
loss in Bank 10's investment portfolio and to cause Bank 10's reserve for loan
losses to be at least 1.1% of the amount of its outstanding loans. In applying
these terms at the transaction closing, the purchase price for all of the
outstanding shares of Bank 10's common stock was determined to be approximately
$33,988,000. This amount was paid by our Company to Drexel Bancshares in cash at
the May 2, 2005 transaction closing. A final purchase adjustment of $32,000 was
made on June 27, 2005 resulting in a final purchase consideration of
$34,020,000.
The foregoing description of our Company's acquisition of Bank 10 does not
purport to be complete and is qualified in its entirety by reference to the full
text of the Acquisition Agreement and the Agreement Altering Transaction
Structure referred to above, each of which was previously filed with our
Company's Current Report on Form 8-K dated February 28, 2005.
Statements made in this report, including the exhibits hereto, that
suggest our Company's or our management's intentions, hopes, beliefs,
expectations, or predictions of the future constitute "forward-looking
statements" within the meaning of Section 21E of the Securities and Exchange Act
of 1934, as amended, and include statements suggesting that the acquisition
would be accretive to our Company's earnings per share. It is important to note
that actual results could differ materially from those projected in such
forward-looking statements. Factors that may cause actual results to differ
materially from those contemplated by such forward looking statements include,
among other things, the following possibilities: (i) revenues following the
acquisition may be lower than expected; (ii) competitive pressure among
depository institutions may increase significantly; (iii) costs related to the
integration of Bank 10 may be greater than expected; (iv) changes in the
interest rate environment may reduce interest margins; and (v) general economic
conditions, either nationally or in our market, may be less favorable than
expected. Additional information concerning factors that could cause actual
results to differ materially from those projected in such forward-looking
statements is contained from time to time in Exchange's quarterly and annual
reports filed with the Securities and Exchange Commission.
2
ITEM 9.01. FINANCIAL STATEMENTS AND OTHER EXHIBITS
(a) Financial Statements of Business Acquired
The following financial statements of Bank 10, together with the report of
the independent registered public accounting firm, are included in this Current
Report on Form 8-K/A:
Description Page
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Report of Independent Registered Public Accounting Firm 6
Balance Sheet as of December 31, 2004 7
Statement of Income for the year ended December 31, 2004 8
Statement of Stockholder's Equity for the year ended December 31, 2004 9
Statement of Cash Flows for the year ended December 31, 2004 10
Notes to Financial Statements 11
Unaudited Balance Sheet as of March 31, 2005 26
Unaudited Statements of Income for the three months ended March 31, 2005 and 2004 27
Unaudited Statements of Cash Flows for the three months ended March 31, 2005 and 2004 28
Notes to Unaudited Financial Statements 30
(b) Pro Forma Financial Information
The following pro forma financial information reflecting our Company's
acquisition of Bank 10 is included in this Current Report on Form 8-K/A:
Description Page
----------- ----
Unaudited Proforma Consolidated Balance Sheet as of March 31, 2005 33
Unaudited Proforma Consolidated Statement of Income for the year ended 34
December 31, 2004
Unaudited Proforma Consolidated Statement of Income for the three months ended 35
March 31, 2005
(c) Exhibits
Exhibit No. Description
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2.1 Acquisition Agreement, dated January 28, 2005 among Exchange National
Bancshares, Inc., 2005 Acquisition Company, Inc., Drexel Bancshares, Inc.,
3
and the shareholders of Drexel Bancshares, Inc. (filed as Exhibit 2.1 to our
Company's Current Report on Form 8-K dated February 28, 2005 and incorporated
herein by reference).
2.1.1 Agreement Altering Transaction Structure, dated February 28, 2005, among
Exchange National Bancshares, Inc., Drexel Bancshares, Inc., and the
shareholder representative of the shareholders of Drexel Bancshares, Inc.
(filed as Exhibit 2.1.1 to our Company's Current Report on Form 8-K dated
February 28, 2005 and incorporated herein by reference).
23.1 Consent of Independent Registered Public Accounting Firm.
99.1 Press Release of Exchange National Bancshares, Inc. dated May 2, 2005 (filed
as Exhibit 99.1 to the original filing of our Company's Current Report on Form 8-K
dated May 2, 2005 and incorporated herein by reference).
* * *
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
EXCHANGE NATIONAL BANCSHARES, INC.
Dated: July 15, 2005
By: /s/ James E. Smith
------------------------------
James E. Smith
Chairman & CEO
4
BANK 10
(A WHOLLY OWNED SUBSIDIARY OF DREXEL BANCSHARES, INC.)
Financial Statements
December 31, 2004
(With Report of Independent Registered Public Accounting Firm Thereon)
5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Bank 10:
We have audited the accompanying balance sheet of Bank 10, a wholly owned
subsidiary of Drexel Bancshares, Inc., as of December 31, 2004, and the related
statements of income, stockholder's equity and comprehensive income, and cash
flows for the year then ended. These financial statements are the responsibility
of the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Bank's internal control over
financial reporting. Accordingly, we express no such opinion. 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
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bank 10 as of December 31,
2004, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ KPMG LLP
St. Louis, Missouri
July 15, 2005
6
BANK 10
(A Wholly Owned Subsidiary of Drexel Bancshares, Inc.)
Balance Sheet
December 31, 2004
ASSETS
Loans, net of allowance for loan losses of $1,356,477 $ 127,259,180
Investment in available-for-sale debt and equity securities, at fair value 26,469,003
Federal funds sold 3,049,000
Cash and due from banks 6,867,227
Premises and equipment 5,345,314
Accrued interest receivable 1,137,669
Cash surrender value - life insurance 1,486,968
Other assets 126,010
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Total assets $ 171,740,371
=============
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits:
Demand $ 24,020,430
NOW 13,591,817
Savings 9,865,319
Money market 25,828,897
Time deposits $100,000 and over 22,562,009
Other time deposits 44,447,392
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Total deposits 140,315,864
Securities sold under agreements to repurchase 946,240
Interest-bearing demand notes to U.S. Treasury 19,857
Other borrowed money 16,270,909
Accrued interest payable 169,564
Other liabilities 380,924
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Total liabilities 158,103,358
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Stockholder's equity:
Common stock, $100 par value. Authorized 1,000 shares;
issued 1,000 shares at December 31, 2004 100,000
Surplus 1,150,000
Retained earnings 12,472,389
Accumulated other comprehensive loss (85,376)
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Total stockholder's equity 13,637,013
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Total liabilities and stockholder's equity $ 171,740,371
=============
See accompanying notes to financial statements.
7
BANK 10
(A Wholly Owned Subsidiary of Drexel Bancshares, Inc.)
Statement of Income
Year ended December 31, 2004
Interest income:
Interest and fees on loans $ 7,981,078
Interest and dividends on debt and equity securities:
Securities of U.S. government agencies 355,237
Obligations of states and political subdivisions 303,475
Other securities 22,124
Interest on federal funds sold 83,547
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Total interest income 8,745,461
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Interest expense:
NOW accounts 40,564
Savings accounts 45,625
Money market accounts 391,236
Time deposit accounts $100,000 and over 405,470
Other time deposit accounts 962,411
Securities sold under agreements to repurchase 11,274
Federal funds purchased 763
Other borrowed money 495,421
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Total interest expense 2,352,764
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Net interest income 6,392,697
Provision for loan losses 11,829
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Net interest income after provision for loan losses 6,380,868
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Noninterest income:
Service charges on deposit accounts 1,552,947
Other 176,009
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Total noninterest income 1,728,956
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Noninterest expense:
Salaries and employee benefits 3,115,130
Occupancy expense, net 358,262
Furniture and equipment expense 338,435
Processing expense 350,898
Advertising and promotion 172,990
Postage and printing and supplies 270,631
Other 607,406
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Total noninterest expense 5,213,752
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Income before income taxes 2,896,072
Income taxes 16,653
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Net income $ 2,879,419
==============
See accompanying notes to financial statements.
8
BANK 10
(A Wholly Owned Subsidiary of Drexel Bancshares, Inc.)
Statement of Stockholder's Equity and Comprehensive Income (Loss)
Year Ended December 31, 2004
ACCUMULATED TOTAL
OTHER STOCK-
COMMON RETAINED COMPREHENSIVE HOLDER'S
STOCK SURPLUS EARNINGS INCOME (LOSS) EQUITY
---------- --------- ---------- ------------- ----------
Balance, December 31, 2003 $ 100,000 1,150,000 10,879,470 197,647 12,327,117
Comprehensive income:
Net income -- -- 2,879,419 -- 2,879,419
Other comprehensive loss:
Unrealized loss on debt
and equity securities available-for-sale -- -- -- (283,023) (283,023)
----------
Total other comprehensive loss (283,023)
----------
Total comprehensive income 2,596,396
----------
Cash dividends declared -- -- (1,286,500) -- (1,286,500)
---------- --------- ---------- ------------- ----------
Balance, December 31, 2004 $ 100,000 1,150,000 12,472,389 (85,376) 13,637,013
========== ========= ========== ============= ==========
See accompanying notes to financial statements.
9
BANK 10
(A Wholly Owned Subsidiary of Drexel Bancshares, Inc.)
Statement of Cash Flows
Year Ended December 31, 2004
Cash flows from operating activities:
Net income $ 2,879,419
Adjustments to reconcile net income to net cash
cash provided by operating activities:
Provision for loan losses 11,829
Depreciation expense 316,955
Net amortization of debt securities premiums and discounts 150,003
Increase in accrued interest receivable (70,865)
Increase in cash surrender value - life insurance (55,291)
Increase in other assets (64,128)
Increase in accrued interest payable 46,905
Increase in other liabilities 94,067
Loss on disposition of premises and equipment 6,994
Loss on sale other real estate owned 12,954
------------
Net cash provided by operating activities 3,328,842
Cash flows from investing activities:
Net increase in loans (19,137,626)
Purchase of available-for-sale debt securities (15,600,990)
Proceeds from maturities of available-for-sale debt securities 6,503,656
Proceeds from calls of available-for-sale debt securities 2,384,000
Purchase of premises and equipment (331,109)
Proceeds from dispositions of premises and equipment 46,500
Proceeds from sales of other real estate owned and repossessions 1,154,286
------------
Net cash used in investing activities $(24,981,283)
------------
Cash flows from financing activities:
Net increase in demand deposits $ 3,008,722
Net decrease in interest-bearing transaction accounts (6,019,071)
Net increase in time deposits 23,173,437
Net increase in securities sold under agreements to repurchase 392,386
Net decrease in interest-bearing demand notes to U.S. Treasury (38,877)
Proceeds from Federal Home Loan Bank borrowings 5,200,000
Repayment of Federal Home Loan Bank borrowings (11,818)
Cash dividends paid (1,286,500)
------------
Net cash provided by financing activities 24,418,279
Net decrease in cash and cash equivalents 2,765,838
Cash and cash equivalents, beginning of year 7,150,389
------------
Cash and cash equivalents, end of year $ 9,916,227
============
Supplemental disclosure of cash flow information -
Cash paid during year for:
Interest $ 2,305,859
Income taxes -
Supplemental schedule of noncash investing activities -
Other real estate and repossessions
acquired in settlement of loans $ 1,180,914
See accompanying notes to financial statements.
10
BANK 10
(A Wholly Owned Subsidiary of Drexel Bancshares, Inc.)
Notes to Financial Statements
December 31, 2004
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Bank 10 (the Company) a wholly owned subsidiary of Drexel Bancshares,
Inc., provides a full range of banking services to individual and
corporate customers through Belton, Independence, Harrisonville and
Raymore, Missouri. The Company is subject to competition from other
financial and nonfinancial institutions providing financial products.
Additionally, the Company is subject to the regulations of certain
regulatory agencies and undergoes periodic examinations by those
regulatory agencies.
The financial statements of the Company have been prepared in conformity
with U.S. generally accepted accounting principles and conform to
predominant practices within the banking industry. The preparation of the
financial statements in conformity with U.S. generally accepted accounting
principles 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, which affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
The significant accounting policies used by the Company in the preparation
of the financial statements are summarized below:
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 are deferred and recognized using a straight
line basis over the life of the loan.
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,
11
BANK 10
Notes to Financial Statements
December 31, 2004
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 Company
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.
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
(Continued)
12
BANK 10
Notes to Financial Statements
December 31, 2004
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 Company, a member of the Federal Home Loan Bank System (FHLB)
administered by the Federal Housing Finance Board, is required to
maintain an investment in the capital stock of the FHLB in an amount
equal to 0.12% of the Company's total assets, plus 4.45% of advances
from the FHLB to the Company.
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 7 to 40 years
for buildings and improvements and 3 to 10 years for furniture and
equipment. Maintenance and repairs are charged to expense as
incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
In August 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 144, (SFAS
No. 144) Accounting for the Impairment or Disposal of Long-Lived
Assets.
In accordance with SFAS No. 144, long-lived assets, such as premises
and equipment, and purchased intangibles subject to amortization,
are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount
by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of would be separately presented in
the balance sheet and reported at the lower of the carrying amount
or fair value less costs to sell and are no longer depreciated. The
assets and liabilities of a disposed group classified as held for
sale would be presented separately in the appropriate asset and
liability sections of the balance sheet.
OTHER REAL ESTATE
Other real estate, included in other assets in the accompanying
balance sheets, is recorded at fair value, less estimated selling
costs. If the fair value of other real estate declines subsequent
(Continued)
13
BANK 10
Notes to Financial Statements
December 31, 2004
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.
STATEMENT OF CASH FLOWS
For the purpose of the statement of cash flows, cash and cash
equivalents consist of federal funds sold, and cash and due from
banks.
COMPREHENSIVE INCOME
The Company reports comprehensive income in the statement of
stockholder's equity and comprehensive income.
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 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 was
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 SFAS No. 150.
In November 2003, the Emerging Issues Tasks 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 investment in debt and marketable equity securities that
are accounted under SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, and SFAS No. 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 has
adopted the disclosure requirements of EITF Issue No. 03-1 and they
are included in note 5 of this report.
In March 2004, the EITF came to a consensus regarding EITF Issue No.
03-1. Securities in scope are those subject to SFAS No. 115 and SFAS
No. 124. The EITF adopted a three-step model that requires
management to determine if impairment exists, decide whether it is
other than temporary, and record other than temporary losses in
earnings.
In September 2004, FASB, approved issuing a staff position to delay
the requirement to record impairment losses under EITF Issue No.
03-1, but broadened the delay's scope to
(Continued)
14
BANK 10
Notes to Financial Statements
December 31, 2004
include additional types of securities. As proposed, the delay would
have applied only to those debt securities described in paragraph 16
of EITF Issue No. 03-1, the consensus that provides guidance for
determining whether an investment's impairment is other than
temporary and should be recognized in income. The approved delay
will apply to all securities within the scope of EITF Issue No. 03-1
and is expected to end when new guidance is issued and comes into
effect.
In December 2003, the Accounting Standards Executive Committee,
(AcSEC) issued Statement of Position 03-3, (SOP 03-3) Accounting for
Certain Loans or Debt Securities Acquired in a Transfer, effective
for loans acquired in fiscal years beginning after December 15,
2004. The scope of SOP 03-3 applies to "problem" loans that have
been acquired, either individually in a portfolio, or in an
acquisition. These loans must have evidence of credit deterioration
and the purchaser must not expect to collect contractual cash flows.
SOP 03-3 updates Practice Bulletin (PB) No. 6, Amortization of
Discounts on Certain Acquired Loans, for more recently issued
literature, including FASB Statements No. 114, Accounting by
Creditors for Impairment of a Loan; No. 115, Accounting for Certain
Investments in Debt and Equity Securities; and No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. Additionally, it addresses FASB Statement No. 91,
Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases,
which requires that discounts be recognized as an adjustment of
yield over a loan's life.
SOP 03-3 states that an institution may no longer display discounts
on purchased loans within the scope of SOP 03-3 on the balance sheet
and may not carry over the allowance for loan losses. For those
loans within the scope of SOP 03-3, this statement clarifies that a
buyer cannot carry over the seller's allowance for loan losses for
the acquisition of loans with credit deterioration. Loans acquired
with evidence of deterioration in credit quality since origination
will need to be accounted for under a new method using an income
recognition model. This prohibition also applies to purchases of
problem loans not included in a purchase business combination, which
would include syndicated loans purchased in the secondary market and
loans acquired in portfolio sales. The Company will adopt SOP 03-3
effective January 1, 2005 and does not expect it to have a material
effect on the Company's financial statements.
(2) SUBSEQUENT EVENT
On February 18, 2005, Exchange National Bancshares, Inc. (Exchange)
entered into an agreement to acquire the Company. The transaction was
consummated on May 2, 2005, at which time the Company became a wholly
owned subsidiary of Exchange. Exchange purchased for cash all of the
outstanding shares of the Company's common stock for a purchase price of
$34,020,000.
(Continued)
15
BANK 10
Notes to Financial Statements
December 31, 2004
(3) CAPITAL REQUIREMENTS
The Company is 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 financial statements. Under
capital adequacy guidelines, the Company 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 is
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 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, 2004, the Company met all capital adequacy
requirements to which they are subject.
As of December 31, 2004, the most recent notification from the regulatory
authorities categorized the Company as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Company 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 Company's categories.
The actual and required capital amounts and ratios for the Company as of
December 31, 2004 are as follows (dollars in thousands):
TO BE WELL CAPITALIZED
UNDER PROMPT CORRECTIVE
ACTUAL CAPITAL REQUIREMENTS ACTION PROVISION
------------------ -------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
Total capital (to risk-weighted
assets): $15,077 10.21% $11,810 8.00% $14,763 10.00%
Tier I capital (to risk-weighted
assets): 13,721 9.31 5,905 4.00 8,858 6.00
Tier I capital (to adjusted
average assets): 13,721 7.91 5,205 3.00 8,674 5.00
Bank dividends are the principal source of funds for payment of dividends
by the Company to its stockholder. The Company is subject to regulations,
which require the maintenance of minimum capital requirements. At December
31, 2004, unappropriated retained earnings of approximately $1,724,000
were available for the declaration of dividends by the Company without
prior approval from regulatory authorities.
(Continued)
16
BANK 10
Notes to Financial Statements
December 31, 2004
(4) LOANS
A summary of loans, by classification, at December 31, 2004 is as
follows:
Real estate - construction $ 44,049,287
Real estate - mortgage 70,617,423
Commercial 11,083,468
Installment and other consumer 3,031,597
Unamortized loan origination fees (166,118)
-------------
128,615,657
Less allowance for loan losses 1,356,477
-------------
$ 127,259,180
=============
The Company grants real estate, commercial, installment, and other
consumer loans to customers located within the communities surrounding
Belton, Independence, Harrisonville, and Raymore, Missouri. As such, the
Company is susceptible to changes in the economic environment in these
communities. The Company does not have a concentration of credit in any
one economic sector. Installment and other consumer loans consist
primarily of the financing of vehicles.
Changes in the allowance for loan losses for 2004 are as follows:
Balance, beginning of year $ 1,367,547
Provision for loan losses 11,829
Charge-offs (103,311)
Recoveries of loans previously charged off 80,412
-----------
Balance, end of year $ 1,356,477
===========
At December 31, 2004, the balance of nonaccrual loans was $236,246 and the
corresponding allowance for loan losses was $42,089. The average balance
of impaired loans during 2004 was $456,000.
A summary of interest income on nonaccrual loans for 2004 is as follows:
Income recognized $14,646
Interest income had interest accrued 85,314
(Continued)
17
\
BANK 10
Notes to Financial Statements
December 31, 2004
(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, 2004 are as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
Securities of U.S. government
agencies $10,793,362 15,904 94,376 10,714,890
Asset backed securities 2,879,539 5,523 34,743 2,850,319
Obligations of states and political
subdivisions 11,833,253 125,145 102,829 11,855,569
----------- ----------- ----------- -----------
Total debt securities 25,506,154 146,572 231,948 25,420,778
Midwest Independent Bancshares stock 150,625 -- -- 150,625
Federal Home Loan Bank stock 897,600 -- -- 897,600
----------- ----------- ----------- -----------
$26,554,379 146,572 231,948 26,469,003
=========== =========== =========== ===========
The amortized cost and fair value of debt securities classified as
available-for-sale at December 31, 2004, 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 $ 5,064,993 5,051,872
Due after one year through five years 10,893,371 10,875,641
Due after five years through ten years 6,423,470 6,400,825
Due after ten years 244,781 242,121
----------- ----------
22,626,615 22,570,459
Asset-backed securities .................... 2,879,539 2,850,319
----------- ----------
$25,506,154 25,420,778
=========== ==========
Debt securities with carrying values aggregating approximately $11,500,000
at December 31, 2004 were pledged to secure public funds, securities sold
under agreements to repurchase, and for other purposes as required or
permitted by law.
(Continued)
18
BANK 10
Notes to Financial Statements
December 31, 2004
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, 2004, 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 $ 8,254,600 (80,466) 1,998,125 (13,910) 10,252,725 (94,376)
Asset-backed securities 941,512 (11,408) 1,478,909 (23,335) 2,420,421 (34,743)
Obligations of states and
political subdivisons 4,525,425 (84,797) 1,489,024 (18,032) 6,014,449 (102,829)
------------ ---------- ---------- ----------- ----------- --------
$ 13,721,537 (176,671) 4,966,058 (55,277) 18,687,595 (231,948)
============ ========== ========== =========== =========== ========
Securities of U.S. government agencies: The unrealized losses on investments in
securities of U.S. government agencies were caused by interest rate increases.
It is expected that the securities would not be settled 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.
Asset-backed securities: The unrealized losses on asset-backed securities 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. It is expected that the securities would not be settled
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.
(Continued)
19
BANK 10
Notes to Financial Statements
December 31, 2004
(6) PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 2004 is as follows:
Land $1,177,934
Buildings and improvements 4,491,196
Furniture and equipment 2,832,972
----------
8,502,102
Less accumulated depreciation... 3,156,788
----------
$5,345,314
==========
(7) DEPOSITS
The scheduled maturities of time deposits at December 31, 2004 are as
follows:
Due within:
One year $54,715,439
Two - three years 11,493,774
Over three years 800,188
-----------
$67,009,401
===========
(8) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information relating to securities sold under agreements to repurchase at
December 31, 2004 is as follows:
Average daily balance $ 755,814
Maximum balance at month-end 1,370,408
Weighted average interest rate at year-end 2.00%
Weighted average interest rate for the year 1.49%
The securities underlying the agreements to repurchase are under the
control of the Company.
Under agreements with unaffiliated banks, the Company may borrow up to
$5,000,000 in federal funds on an unsecured basis at December 31, 2004.
(Continued)
20
BANK 10
Notes to Financial Statements
December 31, 2004
(9) OTHER BORROWED MONEY
Other borrowed money at December 31, 2004 is summarized as follows:
FHLB advances, weighted average rate
of 3.338%, due at various dates through 2009 $16,270,909
The advances from the FHLB are secured under a blanket agreement which
assigns all investment in FHLB stock, as well as mortgage loans equal to
120% of the outstanding advance balance, to secure amounts borrowed by the
Company.
Based upon the collateral pledged to the FHLB at December 31, 2004, the
Company had a credit line of $25,605,000 of which $9,346,000 was available
for additional borrowings.
The scheduled principal reduction of other borrowed money at December 31,
2004 was as follows:
2005 $ 5,523,636
2006 5,211,818
2007 2,511,818
2008 1,000,000
2009 2,023,637
-----------
$16,270,909
===========
(10) RESERVE REQUIREMENTS AND COMPENSATING BALANCES
The Federal Reserve Bank required the Company to maintain cash or balances
of $667,000 at December 31, 2004, to satisfy reserve requirements.
Average compensating balances held at correspondent banks were $2,231,000
at December 31, 2004. The Company maintains such compensating balances
with correspondent banks to offset charges for services rendered by those
banks.
(11) INCOME TAXES
The Company elected S Corporation status effective January 1, 1997. Earnings and
losses after that date are included in the personal federal income tax returns
of the stockholders and taxed at their effective tax rates. Accordingly, the
Company is not subject to income tax obligations, except for possible "built-in
gains taxes" and State of Missouri bank franchise taxes. Therefore, the
financial statements generally do not include provisions for federal income
taxes after January 1, 1997.
(Continued)
21
BANK 10
Notes to Financial Statements
December 31, 2004
The composition of income tax expense for 2004 is as follows:
Current:
State $16,653
-------
Total current $16,653
=======
(12) PENSION AND RETIREMENT PLANS
The Company participates in a 401 (k) plan. The plan was originally
effective on January 1, 1983. The amended and restated provisions of the
Plan became effective January 1, 2003. All eligible employees receive a
contribution of a fixed amount equal to 50% of the elected salary deferral
up to 5% of their annual compensation. For the year, the Company
contributed $151,914 to the plan.
(13) Commitments and Contingencies
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 balance sheets.
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 balance sheets. At December 31, 2004, 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, 2004 is as follows:
Commitments to extend credit $21,149,575
Standby letters of credit 247,000
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, 2004, approximately $16,751,000 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 not 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.
(Continued)
22
BANK 10
Notes to Financial Statements
December 31, 2004
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, 2004.
(14) DISCLOSURES ABOUT FINANCIAL INSTRUMENTS
A summary of the carrying amounts and fair values of the Company's
financial instruments at December 31, 2004 is as follows:
CARRYING FAIR
AMOUNT VALUE
--------------------- -------------------
Assets:
Loans $ 127,259,180 126,533,000
Investment in debt and
equity securities 26,469,003 26,469,003
Federal fund sold and
securities purchased under
agreements to resell 3,049,000 3,049,000
Cash and due from banks 6,867,227 6,867,227
Accrued interest receivable 1,137,669 1,137,669
--------------------- -------------------
$ 164,782,079 164,055,899
===================== ===================
Liabilities:
Deposits:
Demand $ 24,020,430 24,020,430
NOW 13,591,817 13,591,817
Savings 9,865,319 9,865,319
Money market 25,828,897 25,828,897
Time 67,009,401 67,122,000
Federal funds purchased and
securities sold under
agreements to repurchase 946,240 946,240
Interest-bearing demand
notes to U.S. Treasury 19,857 19,857
Other borrowed money 16,270,909 16,333,000
Accrued interest payable 169,564 169,564
--------------------- -------------------
$ 157,722,434 157,897,124
===================== ===================
(Continued)
23
BANK 10
Notes to Financial Statements
December 31, 2004
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 -
construction, real estate - mortgage, installment and other consumer, and
commercial. Each loan category is further segmented into fixed and
adjustable interest rate terms and by performing and nonperforming
categories.
The fair value of loans is calculated by discounting scheduled cash flows
through estimated maturity using estimated market discount rates that
reflect the 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.
INVESTMENT IN DEBT AND EQUITY SECURITIES
Fair values are based on quoted market prices or dealer quotes.
FEDERAL FUNDS SOLD, CASH, AND DUE FROM BANKS
For federal funds sold, cash, and due from banks, the carrying amount is a
reasonable estimate of fair value, as such instruments reprice in a short
time period.
ACCRUED INTEREST RECEIVABLE AND PAYABLE
For accrued interest receivable and payable, the carrying amount is a
reasonable estimate of fair value because of the short maturity for these
financial instruments.
DEPOSITS
The fair value of deposits with no stated maturity, such as
noninterest-bearing demand, NOW accounts, savings, and money market, is
equal to the amount payable on demand. The fair value of time deposits is
based on the discounted value of contractual cash flows. The discount rate
is estimated using the rates currently offered for deposits of similar
remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND INTEREST-BEARING DEMAND
NOTES TO U.S. TREASURY
For securities sold under agreements to repurchase and interest-bearing
demand notes to U.S. Treasury, the carrying amount is a reasonable
estimate of fair value, as such instruments reprice in a short time
period.
OTHER BORROWED MONEY
The fair value of other borrowed money is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently offered for other borrowed money of similar remaining
maturities.
(Continued)
24
BANK 10
Notes to Financial Statements
December 31, 2004
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.
(15) LITIGATION
Various legal claims have arisen in the normal course of business, which,
in the opinion of management of the Company, will not result in any
material liability to the Company.
(Continued)
25
BANK 10
(A Wholly Owned Subsidiary of Drexel Bancshares, Inc.)
Condensed Balance Sheet
March 31, 2005
(Unaudited)
ASSETS
Loans, net of allowance for loan losses of $1,357,517 $ 127,979,846
Investment in available-for-sale debt and equity securities, at fair value 25,412,516
Federal funds sold 4,293,000
Cash and due from banks 6,067,782
Premises and equipment 5,317,213
Accrued interest receivable 1,175,323
Cash surrender value - life insurance 1,500,334
Other assets 81,061
-------------
Total assets $ 171,827,075
=============
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits:
Demand $ 22,938,737
NOW 14,886,135
Savings 10,202,904
Money market 25,670,747
Time deposits $100,000 and over 24,427,797
Other time deposits 44,864,705
-------------
Total deposits 142,991,025
Securities sold under agreements to repurchase 969,450
Interest-bearing demand notes to U.S. Treasury 8,778
Other borrowed money 13,259,091
Accrued interest payable 215,794
Other liabilities 499,142
-------------
Total liabilities 157,943,280
-------------
Stockholder's equity:
Common stock, $100 par value. Authorized 1,000 shares;
issued 1,000 shares at December 31, 2004 100,000
Surplus 1,150,000
Retained earnings 12,955,488
Accumulated other comprehensive loss (321,693)
-------------
Total stockholder's equity 13,883,795
-------------
Total liabilities and stockholder's equity $ 171,827,075
=============
See accompanying notes to unaudited condensed financial statements.
26
BANK 10
(A Wholly Owned Subsidiary of Drexel Bancshares, Inc.)
Condensed Statements of Income
Three Months Ended March 31, 2005 and 2004
(Unaudited)
2005 2004
---------- ----------
Interest income:
Interest and fees on loans $2,090,444 $1,901,639
Interest and dividends on debt and equity securities:
Securities of U.S. government agencies 88,768 97,634
Obligations of states and political subdivisions 107,887 60,410
Other securities 13,390 4,867
Interest on federal funds sold 10,705 7,618
---------- ----------
Total interest income 2,311,194 2,072,168
---------- ----------
Interest expense:
NOW accounts 10,845 9,410
Savings accounts 11,515 12,983
Money market accounts 84,471 109,888
Time deposit accounts $100,000 and over 172,543 34,086
Other time deposit accounts 280,971 205,433
Securities sold under agreements to repurchase 4,994 1,143
Other borrowed money 132,833 120,333
---------- ----------
Total interest expense 698,172 493,276
---------- ----------
Net interest income 1,613,022 1,578,892
Provision for loan losses 1,400 2,224
---------- ----------
Net interest income after provision for loan losses 1,611,622 1,576,668
---------- ----------
Noninterest income:
Service charges on deposit accounts 360,008 382,605
Gain on sales and calls of debt securities 15,391 --
Other 51,810 39,977
---------- ----------
Total noninterest income 427,209 422,582
---------- ----------
Noninterest expense:
Salaries and employee benefits 823,435 731,938
Occupancy expense, net 87,409 100,286
Furniture and equipment expense 91,924 83,315
Processing expense 75,421 84,868
Advertising and promotion 33,160 28,673
Postage and printing and supplies 76,590 66,329
Other 213,437 164,956
---------- ----------
Total noninterest expense 1,401,376 1,260,365
---------- ----------
Income before income taxes 637,455 738,885
Income taxes 5,470 --
---------- ----------
Net income $ 631,985 $ 738,885
========== ==========
See accompanying notes to unaudited condensed financial statements.
(Continued)
27
BANK 10
(AWholly Owned Subsidiary of Drexel Bancshares, Inc.)
Condensed Statements of Cash Flows
Three Months Ended March 31, 2005 and 2004
(Unaudited)
2005 2004
------------ ------------
Cash flows from operating activities:
Net income $ 631,985 $ 738,885
Adjustments to reconcile net income to net cash
cash provided by operating activities:
Provision for loan losses 1,400 2,224
Depreciation expense 79,309 81,792
Net amortization of debt securities premiums and discounts 42,199 31,793
(Increase) decrease in accrued interest receivable (37,654) 70,373
Increase in cash surrender value - life insurance (13,366) (12,323)
(Increase) decrease in other assets 38,456 (66,013)
Increase (decrease) in accrued interest payable 46,230 (4,728)
Increase in other liabilities 118,218 89,928
Gain on sales and calls of debt securities (15,392) -
Gain on disposition of premises and equipment - (69)
------------ ------------
Net cash provided by operating activities 891,385 931,862
Cash flows from investing activities:
Net increase in loans (733,266) (5,166,159)
Purchase of available-for-sale debt securities (1,200,870) (3,791,458)
Proceeds from maturities of available-for-sale debt securities 762,411 2,206,287
Proceeds from calls of available-for-sale debt securities 510,000 1,584,000
Proceeds from sales of available-for-sale debt securities 721,822 -
Purchase of premises and equipment (51,208) (69,243)
Proceeds from dispositions of premises and equipment - 30,000
Proceeds from sales of other real estate owned and repossessions 17,693 3,101
------------ ------------
Net cash provided (used) in investing activities $ 26,582 $ (5,203,472)
------------ ------------
Continued on next page
Continued
28
BANK 10
(A Wholly Owned Subsidiary of Drexel Bancshares, Inc.)
Condensed Statements of Cash Flows (Continued)
Three Months Ended March 31, 2005 and 2004
(Unaudited)
2005 2004
------------- ------------
Cash flow from financing activities:
Net increase (decrease) in demand deposits $ (1,081,693) $ 2,339,821
Net increase in interest-bearing transaction accounts 1,473,753 3,244,984
Net increase (decrease) in time deposits 2,283,101 (409,971)
Net increase (decrease) in securities sold under agreements to
repurchase 23,210 (269,176)
Net decrease in interest-bearing demand notes to U.S. Treasury (11,079) (29,105)
Proceeds from Federal Home Loan Bank borrowings - 2,500,000
Repayment of Federal Home Loan Bank borrowings (3,011,818) (11,818)
Cash dividends paid (148,886) (116,499)
------------- ------------
Net cash provided by financing activities (473,412) 7,248,236
Net increase in cash and cash equivalents 444,555 2,976,626
Cash and cash equivalents, beginning of period 9,916,227 7,150,389
------------- ------------
Cash and cash equivalents, end of period $ 10,360,782 $ 10,127,015
============= ============
Supplemental disclosure of cash flow information -
Cash paid during period for:
Interest $ 651,942 $ 498,004
Income taxes 7,474 -
Supplemental schedule of noncash investing activities -
Other real estate and repossessions acquired in settlement
of loans $ 11,200 $ 11,185
See accompanying notes to unaudited condensed financial statements.
(Continued)
29
BANK 10
(A Wholly Owned Subsidiary of Drexel Bancshares, Inc.)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended March 31, 2005 and 2004
The accompanying unaudited condensed financial statements include all
adjustments that in the opinion of management are necessary in order to make
those statements not misleading. Operating results for the period ended March
31, 2005 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2005.
The accompanying unaudited financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed and omitted. These
financial statements contain all adjustments (consisting of normal recurring
accruals) necessary to present fairly the financial position as of March 31,
2005 and the statements of income and cash flows for the three months ended
March 31, 2005 and 2004.
COMPREHENSIVE INCOME
For the three-month periods ended March 31, 2005 and 2004, unrealized
holding gains and losses on investments in debt and equity securities
available-for-sale were the only other comprehensive income component.
Comprehensive income for the three-month periods ended March 31, 2005 and 2004
is summarized as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2005 2004
---------- ----------
Net income $ 631,985 $ 738,885
Other comprehensive income (loss):
Net unrealized holding gains (losses) on investments in debt
and equity securities available-for-sale (251,709) 92,732
Adjustment for net securities losses (gains) realized in
net income 15,391 -
---------- ----------
Total other comprehensive income (loss) (236,318) 92,732
---------- ----------
Comprehensive income $ 395,667 $ 831,617
========== ==========
30
BANK 10
(A Wholly Owned Subsidiary of Drexel Bancshares, Inc.)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended March 31, 2005 and 2004
SUBSEQUENT EVENT
On May 2, 2005, Exchange National Bancshares, Inc. completed its acquisition of
all of the outstanding shares of Bank 10 for cash of $34,020,000. As a result,
Bank 10 has become a wholly owned subsidiary of Exchange. Bank 10 will apply
purchase accounting as of May 2, 2005, adjusting Bank 10's assets and
liabilities to the their fair values, including goodwill resulting from the
acquisition.
31
EXCHANGE NATIONAL BANCSHARES
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
On May 2, 2005 Exchange National Bancshares, Inc. (Company) completed the
purchase of Bank 10 of Belton, Missouri from Drexel Bancshares, Inc. Our Company
paid $34,020,000 in cash which resulted in the recording of approximately
$4,500,000 of core deposit intangible and approximately $13,968,000 of goodwill.
The core deposit intangible value is subject to final adjustment pending the
completion of a third party core deposit valuation. At the date of acquisition,
Bank 10 had total assets of approximately $178,296,000, loans of approximately
$133,278,000, and deposits of approximately $149,299,000.
$23,000,000 of the purchase price was funded thru the issuance of Trust
Preferred securities with the balance of the purchase price provided by cash on
hand. The following unaudited pro forma balance sheet and income statements
reflect all significant pro forma adjustments for the periods presented. The pro
forma statements do not reflect anticipated cost savings that our Company
expects to recognize from the consolidation operations.
32
EXCHANGE NATIONAL BANCSHARES
UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET
MARCH 31, 2005
EXCHANGE CONSOLIDATED
NATIONAL PRO FORMA PRO FORMA
BANCSHARES BANK 10 ADJUSTMENTS 03/31/05
------------- ------------- -------------- ---------------
ASSETS
Loans, net of allowance for loan losses $ 633,572,974 $ 127,979,846 $ - $ 761,552,820
Investment in available for sale debt
and equity securities, at fair value 223,793,181 25,412,516 (23,000,000)(1) 249,205,697
Federal funds sold 37,135,691 4,293,000 (11,017,304)(1) 30,411,387
Cash and due from banks 22,222,447 6,067,782 - 28,290,229
Premises and equipment 22,284,338 5,317,213 1,665,219(2) 29,266,770
Accrued interest receivable 5,719,294 1,175,323 - 6,894,617
Mortgage servicing rights 1,588,292 - - 1,588,292
Goodwill 25,196,736 - 13,968,289(2) 39,165,025
Intangible assets 744,354 - 4,500,000(2) 5,244,354
Cash surrender value - life insurance - 1,500,334 - 1,500,334
Other assets 4,330,248 81,061 - 4,411,309
------------- ------------- -------------- ---------------
Total assets $ 976,587,555 $ 171,827,075 $ (13,883,796) $ 1,134,530,834
============= ============= ============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 95,141,393 $ 22,938,737 $ - $ 118,080,130
NOW 121,622,912 14,886,135 - 136,509,047
Savings 50,395,643 10,202,904 - 60,598,547
Money market 127,957,574 25,670,747 - 153,628,321
Time deposits $100,000 and over 91,379,067 24,427,797 - 115,806,864
Other time deposits 251,432,212 44,864,705 - 296,296,917
------------- ------------- -------------- ---------------
Total deposits 737,928,801 142,991,025 - 880,919,826
Federal funds purchased and securities
sold under agreements to repurchase 51,288,037 969,450 - 52,257,487
Interest-bearing demand notes to U.S. Treasury 705,725 8,778 - 714,503
Subordinated notes 49,486,000 - - 49,486,000
Other borrowed money 39,253,899 13,259,091 - 52,512,990
Accrued interest payable 2,044,364 215,794 - 2,260,158
Other Liabilities 3,674,466 499,142 - 4,173,608
------------- ------------- -------------- ---------------
Total liabilities 884,381,292 157,943,280 - 1,042,324,572
STOCKHOLDERS' EQUITY
Common stock - $1 par value; 15,000,000 shares
authorized; 4,298,353 issued 4,298,353 100,000 (100,000)(3) 4,298,353
Surplus 22,030,074 1,150,000 (1,150,000)(3) 22,030,074
Retained earnings 69,203,552 12,955,488 (12,955,489)(3) 69,203,551
Accumulated other comprehensive income (loss)
net of tax (673,207) (321,693) 321,693(3) (673,207)
Treasury stock, 128,506 shares at cost (2,652,509) - - (2,652,509)
------------- ------------- -------------- ---------------
Total stockholders' equity 92,206,263 13,883,795 (13,883,796) 92,206,262
------------- ------------- -------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 976,587,555 $ 171,827,075 $ (13,883,796) $ 1,134,530,834
============= ============= ============== ===============
Pro forma adjustments:
(1) To record purchase of Bank 10.
(2) To record pro forma adjustments:
Premises and equipment - fair value adjustment $ 1,665,219
Goodwill 13,968,289
Core deposit intangible 4,500,000
-------------
$ 20,133,508
=============
(3) Eliminate stockholder's equity of Bank 10
33 (Continued)
EXCHANGE NATIONAL BANCSHARES
UNAUDITED CONSOLIDATED PRO FORMA INCOME STATEMENT
FOR THE YEAR ENDED
DECEMBER 31, 2004
EXCHANGE PRO FORMA CONSOLIDATED
NATIONAL ADJUSTMENTS PRO FORMA
BANCSHARES BANK 10 DR CR 12/31/04
------------ ----------- ------------------------- ------------
Interest Income:
Interest and fees on loans $ 35,266,846 $ 7,981,078 $ - $ - $ 43,247,924
Interest on debt and equity securities:
Securities of U.S. Government agencies 3,920,940 355,237 - - 4,276,177
Obligations of states and political subdivisions 1,301,547 303,475 - - 1,605,022
Other securities 164,850 22,124 - 44,856(1) 231,830
Interest on federal funds sold 402,818 83,547 172,328(2) - 314,037
Interest on interest-bearing deposits 33,595 - - - 33,595
------------ ----------- ----------- --------- ------------
Total interest income 41,090,596 8,745,461 172,328 44,856 49,708,585
Interest expense:
NOW accounts 794,070 40,564 - - 834,634
Savings 318,461 45,625 - - 364,086
Money market account 1,265,068 391,256 - - 1,656,324
Time deposit accounts $100,000 and over 1,928,942 405,470 - - 2,334,412
Other time deposit accounts 5,931,091 962,391 - - 6,893,482
Federal funds purchased and securities sold
under agreements to repurchase 688,248 12,037 - - 700,285
Subordinated Notes 886,324 - 1,493,856(1) - 2,380,180
Federal Home Loan Bank borrowings 1,567,248 495,421 - - 2,062,669
Other borrowings 7,459 - - - 7,459
------------ ----------- ----------- --------- ------------
Total interest expense 13,386,911 2,352,764 1,493,856 - 17,233,531
Net interest income 27,703,685 6,392,697 (1,666,184) 44,856 32,475,054
Provision for loan losses 942,000 11,829 - - 953,829
------------ ----------- ----------- --------- ------------
Net Interest Income after provision for loan losses 26,761,685 6,380,868 (1,666,184) 44,856 31,521,225
Noninterest income:
Service charges on deposit accounts 3,041,056 1,552,947 - - 4,594,003
Trust department income 694,132 - - - 694,132
Brokerage income 100,463 - - - 100,463
Mortgage loan servicing fees, net 431,284 - - - 431,284
Gain on sales of mortgage loans 796,595 - - - 796,595
Credit card fees 173,012 - - - 173,012
Other 496,015 176,009 - - 672,024
------------ ----------- ----------- --------- ------------
Total noninterest income 5,732,557 1,728,956 - - 7,461,513
------------ ----------- ----------- --------- ------------
Noninterest expense:
Salaries and employee benefits 11,226,511 3,115,130 - - 14,341,641
Occupancy expense 1,142,734 358,262 66,600(3) - 1,567,596
Furniture and equipment expense 2,014,375 338,435 - - 2,352,810
FDIC insurance assessment 100,232 9,301 - - 109,533
Advertising and promotion 574,586 172,990 - - 747,576
Postage, printing and supplies 102,181 270,631 - - 372,812
Legal, examination, and professional fees 215,112 44,452 - - 259,564
Other 5,006,975 904,551 562,500(3) - 6,474,026
------------ ----------- ----------- --------- ------------
Total noninterest expense 20,382,706 5,213,752 629,100 - 26,225,558
------------ ----------- ----------- --------- ------------
Income before income taxes 12,111,536 2,896,072 (2,295,284) 44,856 12,757,180
Income taxes 3,806,556 16,653 1,013,625(4) 787,650(5) 4,049,184
------------ ----------- ----------- --------- ------------
Net income $ 8,304,980 $ 2,879,419 $(3,308,910) $ 832,506 $ 8,707,995
============ =========== =========== ========= ============
Basic earnings per share $ 1.99 $ 2.09
Diluted earnings per share $ 1.98 $ 2.07
Weighted average shares of common stock outstanding
Basic 4,169,847 4,169,847
Diluted 4,204,752 4,204,752
Pro forma adjustments:
(1) Interest expense on subordinated notes of $23,712,000 @ 6.30% and interest
income on equity securities of $712,000 @ 6.30%.
(2) Interest income lost on $10,771,000 of net funds used in excess of funds
provided at 1.60%.
(3) To record amortization of fair value adjustments to assets under pushdown
accounting ($1,665,000 / 25 yrs) plus amortization of core deposit
intangible ($4,500,000 / 8 yrs)
(4) Income taxes on S Corp Income at 35%
(5) Income tax benefit of net acquisition adjustments at 35%
(Continued)
34
EXCHANGE NATIONAL BANCSHARES
UNAUDITED CONSOLIDATED PRO FORMA INCOME STATEMENT
FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 2005
EXCHANGE PRO FORMA CONSOLIDATED
NATIONAL ADJUSTMENTS PRO FORMA
BANCSHARES BANK 10 DR CR 03/31/05
----------- ----------- ---------------------------- ------------
Interest Income:
Interest and fees on loans $ 9,736,094 $ 2,090,444 $ - $ - $ 11,826,538
Interest on debt and equity securities:
Securities of U.S. government agencies 1,121,606 88,768 25,875 (2) - 1,184,499
Obligations of states and political subdivisions 342,914 107,887 - - 450,801
Other securities 58,190 13,390 - 9,345 (1) 80,925
Interest on federal funds sold 252,652 10,705 71,612 (3) - 191,745
Interest on interest-bearing deposits 15,922 - - - 15,922
----------- ----------- ---------- ---------- ------------
Total interest income 11,527,378 2,311,194 97,487 9,345 13,750,430
Interest expense:
NOW accounts 355,545 10,845 - - 366,390
Savings 71,245 11,515 - - 82,760
Money market account 644,726 84,471 - - 729,197
Certificates of deposit:
$100,000 and over 620,082 172,543 - - 792,625
Other time deposits 1,659,442 280,971 - - 1,940,413
Federal funds purchased and securities sold
under agreements to repurchase 268,122 4,994 - - 273,116
Subordinated Notes 403,065 - 311,220 (1) - 714,285
Federal Home Loan Bank borrowings 414,690 132,833 - - 547,523
Other borrowings 3,350 - - - 3,350
----------- ----------- ---------- ---------- ------------
Total interest expense 4,440,267 698,172 311,220 - 5,449,659
Net interest income 7,087,111 1,613,022 (408,707) 9,345 8,300,771
Provision for loan losses 235,500 1,400 - - 236,900
----------- ----------- ---------- ---------- ------------
Net Interest Income after provision for loan losses 6,851,611 1,611,622 (408,707) 9,345 8,063,871
Noninterest income:
Service charges on deposit accounts 680,509 360,008 - - 1,040,517
Trust department income 182,011 - - - 182,011
Brokerage income 40,562 - - - 40,562
Mortgage loan servicing fees, net 112,767 - - - 112,767
Gain on sales of mortgage loans 129,696 - - - 129,696
Credit card fees 34,968 - - - 34,968
Other 150,831 67,201 - - 218,032
----------- ----------- ---------- ---------- ------------
Total noninterest income 1,331,344 427,209 - - 1,758,553
----------- ----------- ---------- ---------- ------------
Noninterest expense:
Salaries and employee benefits 2,885,789 823,435 - 3,709,224
Occupancy expense 289,770 87,409 16,650 (4) - 393,829
Furniture and equipment expense 504,229 91,924 - - 596,153
FDIC insurance assessment 24,776 9,729 - - 34,505
Advertising and promotion 152,752 33,160 - - 185,912
Postage, printing and supplies 164,151 76,590 - - 240,741
Legal, examination, and professional fees 251,096 20,640 - - 271,736
Other 702,695 258,489 140,625 (4) - 1,101,809
----------- ----------- ---------- ---------- ------------
Total noninterest expense 4,975,258 1,401,376 157,275 - 6,533,909
----------- ----------- ---------- ---------- ------------
Income before income taxes 3,207,697 637,455 (565,982) 9,345 3,288,515
Income taxes 970,083 5,470 223,109 (5) 194,823 (6) 1,003,839
----------- ----------- ---------- ---------- ------------
Net income $ 2,237,614 $ 631,985 $ (789,092) $ 204,168 $ 2,284,675
=========== =========== ========== ========== ============
Basic earnings per share $ 0.54 $ 0.55
Diluted earnings per share $ 0.53 $ 0.54
Weighted average shares of common stock outstanding
Basic 4,169,847 4,169,847
Diluted 4,204,752 4,204,752
Pro forma adjustments.
(1) Interest expense on subordinated notes of $23,712,000 @ 6.30% and interest
income on equity securities of $712,000 @ 6.30%.
(2) Interest income on $23,000,000 invested short-term prior to closing at
2.70%.
(3) Interest income lost on $11,017,000 of cash used in purchase at 2.60%.
(4) To record amortization of fair value adjustments to assets under pushdown
accounting ($1,665,000 / 25 yrs) plus amortization of
core deposit intangible ($4,500,000 / 8 yrs)
(5) Income taxes on S Corp Income at 35%
(6) Income tax benefit of net acquisition adjustments at 35%
(Continued)
35
EXHIBIT INDEX
Exhibit No. Description
----------- --------------------------------------------------------
23.1 Consent of Independent Registered Public Accounting Firm
(continued)
36