U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED March 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
__________ TO __________
Commission file number - 33-53596
EXCHANGE BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
OHIO 34-1721453
------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
237 Main Street
P.O.Box 177, Luckey, Ohio 43443
--------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(419) 833-3401
--------------------------
(Issuer's telephone number)
N/A
---
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 . . .
------
As of April 30, 1999, 521,094 shares of Common Stock of the Registrant were
outstanding. There were no preferred shares outstanding.
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
FORM 10-QSB
INDEX
Page Number
PART I FINANCIAL INFORMATION
Item. 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- 3
March 31, 1999, and December 31, 1998
Condensed consolidated statements of income --
Three months ended March 31, 1999 and 1998 4
Condensed consolidated statements of changes
in shareholders equity -- Periods ended 5
March 31, 1999, and December 31, 1998
Condensed consolidated statements of cash flows -- 6
Three months ended March 31, 1999 and 1998
Notes to condensed consolidated financial statements -- 7
March 31, 1999, and December 31, 1998
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED BALANCE SHEETS
===============================================================================
<TABLE>
<CAPTION>
(Dollars in thousands)
(Unaudited)
March 31, At December, 31
--------- -----------
1999 1998
---- -----
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and amounts due from depository institutions $ 2,855 $ 3,092
Interest bearing demand deposits in banks 17 21
Federal funds sold 5,033 4,874
-------- ---------
Total cash and cash equivalents 7,905 7,987
Investment securities
Securities available-for-sale 16,951 18,448
Securities held-to-maturity, fair values of $751 and $1,030 744 1,022
--------- ---------
Total investment securities 17,695 19,470
Mortgage loans held-for-sale 0 602
Loans 64,726 62,874
Allowance for loan losses (1,393) (1,542)
--------- ---------
Net loans 63,333 61,332
Premises and equipment, net 3,860 3,910
Accrued interest receivable 688 689
Deferred income taxes 414 357
Other assets 672 337
--------- ---------
TOTAL ASSETS $ 94,567 $ 94,684
========= =========
LIABILITIES
Deposits:
Noninterest-bearing $ 8,234 $ 9,655
Interest-bearing 76,401 75,536
Total deposits 84,635 85,191
Borrowed funds 172 173
Accrued interest payable 169 171
Other liabilities 482 135
--------- ---------
TOTAL LIABILITIES 85,458 85,670
--------- ---------
SHAREHOLDERS' EQUITY
Preferred shares ($25.00 par value) 750 shares
authorized, 0 shares issued 0 0
Common shares ($5.00 par value) 750,000 shares
authorized, 524,620 and 499,534 issued 2,623 2,623
Additional paid-in capital 3,786 3,786
Retained earnings 2,703 2,546
Treasury stock at cost, 3,526 and 3,525 shares (50) (50)
Accumulated other comprehensive income 47 109
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 9,109 9,014
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 94,567 $ 94,684
========= =========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes.
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF INCOME
================================================================================
<TABLE>
<CAPTION>
(Dollars in thousands)
(Unaudited) (Unaudited)
3 Months Ended 3 Months Ended
March 31, March 31,
--------- ---------
1999 1998
---- ----
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $1,420 $1,107
Interest and dividends on investment securities 260 266
Interest on federal funds sold 57 59
Interest on due from bank deposits 1 1
------ ------
TOTAL INTEREST INCOME 1,738 1,433
INTEREST EXPENSE
Interest on deposits 785 623
Interest on advances from Federal Home Loan Bank 3 3
------ ------
TOTAL INTEREST EXPENSE 788 626
------ ------
NET INTEREST INCOME 950 807
Provision for loan losses 0 0
------ ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 950 807
OTHER INCOME
Service charges on deposits 68 63
Other income 79 20
------ ------
TOTAL OTHER INCOME 147 83
------ ------
OTHER EXPENSES
Salaries and employee benefits 387 277
Occupancy and equipment, net 159 82
Bank and ATM charges 25 21
Credit card 19 14
Data processing 32 25
Directors fees 14 13
Examination and accounting fees 39 26
State and other taxes 31 32
Postage and courier 29 18
Supplies and printing 28 24
Other expenses 110 54
------- ------
TOTAL OTHER EXPENSES 873 586
------- ------
INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 224 304
Federal income tax expense 67 96
------- ------
NET INCOME $ 157 $ 208
======= ======
EARNINGS PER SHARE:
Basic $0.30 $0.40
Diluted $0.30 $0.40
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes.
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Year ended December 31, 1998 (audited) and March 31, 1999 (unaudited)
<TABLE>
<CAPTION>
Number of shares Amounts
--------------- -------
(Dollars in thousands)
Accumulated
Additional other
Common Treasury Common paid-in Retained Treasury comprehensive Comprehensive
stock stock stock capital earnings stock income income
----- ----- ----- ------- -------- ----- ------ ------
<C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997 499,534 (8,439) $2,498 $3,370 $2,626 ($126) $ 75
Net income 672 $672
Other comprehensive income-
Change in unrealized gain (loss)
on securities available-for-sale,
net of tax of $18 34 34
----
Comprehensive income $706
====
Cash dividends declared ($.49 per share) (253)
5% stock dividend declared 24,976 (422) 124 375 (499)
Issuance of common stock 110 1 2
Sale of treasury stock 5,336 39 76
------- ------- ----- ----- ----- ---- ---
December 31, 1998 524,620 (3,525) 2,623 3,786 2,546 (50) 109
------- ------- ----- ----- ----- ---- ---
Net income 157 157
Other comprehensive income-
Change in unrealized gain (loss)
on securities available-for-sale,
net of tax $32 (62) (62)
----
Comprehensive income $ 95
====
Purchase of treasury stock (1)
------- ------ ------ ------ ------ ----- ---
March 31, 1999 524,620 (3,526) $2,623 $3,786 $2,703 ($50) $47
======= ======= ====== ====== ====== ===== ===
</TABLE>
See accompanying notes.
<PAGE>
EXCHANGE BANCHSARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF CASH FLOWS
===============================================================================
<TABLE>
<CAPTION>
(Dollars in thousands)
Unaudited Unaudited
3 Months Ended 3 Months Ended
-------------- --------------
March 31, March 31,
--------- ---------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 157 $ 208
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 0 0
Depreciation 80 31
Goodwill amortization 1 0
Deferred income taxes 0 (7)
Investment securities amortization (accretion) 25 22
Originations of sale of loans held-for-sale 0 (405)
Proceeds from loans held-for-sale 603 286
Changes in operating assets and liabilities:
Accrued interest receivable 1 (13)
Accrued interest payable (2) 0
Other assets (339) (40)
Other liabilities 325 72
-------- -------
Net cash provided by operating activities 851 154
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of held-to-maturity securities 275 641
Purchases of available-for-sale securities (1,018) (1,519)
Proceeds from maturities of available-for-sale securities 2,400 1,900
Net increase in loans (2,002) (1,476)
Purchases of premises and equipment (31) (43)
Proceeds from sale of other real estate owned 0 0
------- -------
Net cash used in investing activities (376) (497)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Noninterest-bearing, interest-bearing demand, and savings deposits (78) 1,517
Certificates of deposit (478) 472
Payments on long-term Federal Home Loan Bank advances (1) (1)
Dividends paid 0 0
------- -------
Net cash provided by financing activities (557) 1,988
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (82) 1,645
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,987 6,192
------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,905 $ 7,837
======= =======
SUPPLEMENTAL DISCLOSURES
Cash paid during the three-month period for interest $789 $626
Cash paid during the three-month period for income taxes 0 28
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes.
<PAGE>
EXCHANGE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 (unaudited) and December 31, 1998
NOTE 1. BASIS OF PRESENTATION
In the opinion of Management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary for a fair
presentation of Exchange Bancshares, Inc.'s ("Company") financial condition as
of March 31, 1999, and December 31, 1998, and the results of operations for
the three-months ended March 31, 1999 and 1998, and the cash flows for the
three-months ended March 31, 1999 and 1998. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to
the rules and regulations of the Securities and Exchange Commission. It is
suggested that these consolidated financial statements be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB. The results of operations for the
three- months ended March 31, 1999, are not necessarily indicative of the
results which may be expected for the entire fiscal year.
NOTE 2. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Three months Year ended
ended December 31,
March 31, 1999 1998
-------------- ------------
<S> <C> <C>
Balance beginning of period $1,542 $ 624
Allowance related to loans acquired 0 961
Provision for loan losses 0 0
Loans charged-off (159) (125)
Recoveries on loans charged-off 10 82
------ ------
Balance, end of period $1,393 $1,542
====== ======
</TABLE>
NOTE 3. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at March 31, 1999, consisted of one long-term advance totaling
$172,000 and from the Federal Home Loan Bank of Cincinnati ("FHLB"). The
advance is collateralized by all shares of FHLB stock owned by The Exchange
Bank, Luckey, Ohio, ("Bank") and by the Bank's qualified mortgage loan
portfolio.
<PAGE>
Scheduled maturity of the advance from the FHLB is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
At March 31, 1999 At December 31, 1998
------------------------------ ----------------------------------------
Range of Weighted- Range of Weighted-
interest average interest average
Amount rates interest Amount rates interest rate
<S> <C> <C> <C> <C> <C> <C>
After five years $ 172 6.85% 6.85% $ 173 6.85% 6.85%
</TABLE>
The aggregate minimum future annual principal payments on borrowings are
$23,000 in 1999, $22,000 in 2000, $19,000 in 2001, $17,000 in 2002, $14,000 in
2003, and $77,000 after 2002.
NOTE 4. REGULATORY CAPITAL
The following table illustrates the compliance by the Bank with currently
applicable regulatory capital requirements at March 31, 1999.
<TABLE>
<CAPTION>
(Dollars in thousands)
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Risk-Based Capital $9,670 15.51% $4,988 8.0% $6,235 10.0%
(to Risk-Weighted Assets)
Tier I Capital 8,883 14.25% N/A N/A 3,741 6.0%
(to Risk-Weighted Assets)
Tier I Capital 8,883 9.43% 3,768 4.0% 4,711 5.0%
(to Total Assets)
Tier I Capital 8,883 9.43% 2,827 3.0% N/A N/A
(to Total Assets)
</TABLE>
NOTE 5.EARNINGS PER SHARE
Earnings per share ("EPS") is computed in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which
was adopted by the Company as of December 31, 1997. Common stock equivalents
would include shares held by the company's Employee Stock Ownership Plan
("ESOP") that are committed for release, shares awarded but not released under
the company's Recognition and Retention Plan ("RRP"), and stock options
granted under the company's Stock Option Plan ("SOP"). Currently the Company
has no such plans in existence.
<PAGE>
Following is a reconciliation of the numerators and denominators of the basic
and diluted EPS calculations.
<TABLE>
<CAPTION>
For the Quarter Ended March 31, 1999
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS
Income available to
common shareholders $157,582 521,094 $0.30
Effect of dilutive securities:
None 0 0 0
-------- -------- ----
Diluted EPS
Income available to
common shareholders +
assumed conversions $157,582 521,094 $0.30
========= ======== =====
For the Quarter Ended March 31, 1998
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS
Income available to
common shareholders $207,783 515,650 $0.40
Effect of dilutive securities:
None 0 0 0
-------- ------- ----
Diluted EPS
Income available to
common shareholders +
assumed conversions $207,783 515,650 $0.40
======== ======= =====
</TABLE>
NOTE 6. RECLASSIFICATIONS
Certain amounts in the prior period's financial statements have been
reclassified to be consistent with the current period's presentation. The
reclassifications have no effect on net income.
<PAGE>
EXCHANGE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
===============================================================================
Safe Harbor Clause
This report contains certain "forward-looking statements." The Company
desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for
the express purpose of availing itself of the protection of such safe harbor
with respect to all such forward-looking statements. These forward-looking
statements, which are included in Management's Discussion and Analysis,
describe future plans or strategies and include the Company's expectations of
future financial results. The words "believe," "expect," "anticipate,"
"estimate," "project," and similar expressions identify forward-looking
statements. The Company's ability to predict results or the effect of future
plans or strategies is inherently uncertain. Factors which could affect actual
results include interest rate trends, the general economic climate in the
Company's market area and the country as a whole, loan delinquency rates, and
changes in federal and state regulations. These factors should be considered
in evaluating the forward-looking statements, and undue reliance should not be
placed on such statements.
General
The Company is a bank holding company whose activities are primarily
limited to holding the stock of The Exchange Bank, Luckey, Ohio, ("Bank").
The Bank conducts a general banking business in northwest Ohio which consists
of attracting deposits from the general public and applying those funds to the
origination of loans for residential, consumer and non-residential purposes.
The Bank's profitability is significantly dependent on net interest income
which is the difference between interest income generated from
interest-earning assets (i.e., loans and investments) and the interest expense
paid on interest-bearing liabilities (i.e., customer deposits and borrowed
funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and interest received
or paid on these balances. The level of interest rates paid or received by
the Company can be significantly influenced by a number of environmental
factors, such as governmental monetary policy, that are outside of management
control.
Earnings per common share were computed by dividing net income by the
weighted-average number of shares outstanding for the three-month periods
ended March 31, 1999 and 1998.
The consolidated financial information presented herein has been prepared
in accordance with generally accepted accounting principles ("GAAP") and
general accounting practices within the financial services industry. In
preparing consolidated financial statements in accordance with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could differ from
such estimates.
The Company is subject to regulation by the Board of Governors of the
Federal Reserve System which limits the activities in which the Company and
the Bank may engage. The Bank is supervised by the State of Ohio, Division of
Financial Institutions and its deposits are insured up to applicable limits
under the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is a member of the Federal Reserve System and
is subject to its supervision. The Company and the Bank must file with the
U.S. Securities and Exchange Commission, the Federal Reserve Board and Ohio
Division of Financial Institutions the prescribed periodic reports containing
full and accurate statements of its affairs.
The Bank conducts its business through its five offices located in Wood
and Lucas Counties, Ohio. The primary market area of the Bank is Wood and
Lucas and contiguous counties in northwest Ohio.
<PAGE>
Acquisition or Disposition of Assets
On June 11, 1998, the Company entered into a definitive agreement with
Towne Bancorp, Inc., an Ohio corporation located in Perrysburg, Ohio ("Towne
Bancorp"), and Towne Bank, a wholly-owned subsidiary of Towne Bancorp,
pursuant to which the Company agreed to purchase 1,000,000 shares of original
issue common stock of Towne Bank for an aggregated purchase price of
$2,000,000 ("Agreement"). On June 19, 1998, the parties entered into a Merger
Agreement whereby Towne Bank would merge with and into The Exchange Bank, the
wholly-owned subsidiary bank of the Company, with The Exchange Bank being the
surviving bank in the merger ("Merger"). Cash consideration for the Merger
was paid to Towne Bancorp in exchange for the remaining common stock of Towne
Bank held by Towne Bancorp. The cash consideration paid to Towne Bancorp
pursuant to the Merger Agreement consisted of $1.5 million to be adjusted
upward or downward on a dollar for dollar basis based upon the amount of
capital in Towne Bank's capital account that was greater than or less than
$1,000,000 at the Closing of the transaction, with a minimum purchase price of
$1,000,000. The actual cash consideration paid to Towne Bancorp at the
Closing was $1,100,560 of which 25% was held back by the Company in an escrow
account for a period of six months from Closing against which the Company may
collect for any breaches of the representations, warranties and covenants
given by Towne Bancorp and Towne Bank in the Agreement. The transactions
contemplated by both the Agreement and by the Merger were consummated on June
19, 1998.
Concurrently, on June 18, 1998, the Bank purchased the two parcels of
real estate that contained the main office and the one branch of Towne Bank in
Perrysburg and Sylvania, Ohio, respectively. Exchange Bancshares, Inc. and
Ms. Carol Haas entered into a real estate purchase agreement on May 19, 1998
whereby the Company or its subsidiary would purchase the two parcels for
$2,550,000, contingent upon the consummation of the transactions contemplated
by the Agreement and the Merger Agreement. The purchase was closed into
escrow on June 18, 1998, and the funds were released on June 19, 1998 upon the
consummation of the Agreement and Merger Agreement.
The Exchange Bank is an Ohio state-chartered bank which, prior to the
transaction described herein, operated from its main office in Luckey, Ohio
and through two branches located in Holland and Walbridge, Ohio.
The following discussion under the captions "Changes in Financial
Condition" and "Results of Operations", make reference to the acquisition of
the "bank" or the "two office locations" which have had a significant effect
on the Company's operations during the second, third and fourth quarters of
fiscal 1998 as well as the first quarter of fiscal 1999. The following
discussion, i.e. comparisons and comments, are intended to assist the reader
in understanding the operating results of the Company for the periods
presented.
Year 2000 Readiness
As with other organizations, the data processing programs used by the
Company were originally designed to recognize calendar years by their last two
digits. Calculations performed using the truncated fields may not work
properly with dates beyond 1999. Correct processing of date orientated
information is critical to the operation of all financial institutions.
Failure of these processes could severely hinder the ability to continue
operations and provide customer service. Because of the critical nature of
the issue, the Company established a committee early in 1997 to address "Year
2000" issues. Data processing for the Company is provided by a third party
service bureau. The service bureau has stated that all their processing is or
will be Year 2000 ready. The Company's subsidiary had been selected to be a
"proxy" bank and was one of the user institution where the service bureau
tested applications in December 1998.
Critical data processing applications, in addition to those provided by
the service bureau, have been identified. These include applications such as
electronic processing through the Federal Reserve Bank and ATM processing.
Testing procedures for these applications has been completed. Validation of
the testing will be completed during the month of May, 1999. Contingency and
Business Resumption plans are being developed. These plans will address
actions to be taken to continue operations in the event of system failure due
to areas that cannot be tested in advance, such as power and telephone
service, which are vital to business continuation.
All personal computers ("PCs") and related software throughout the
Company have been inventoried and tested for Year 2000 capabilities. The
Company is using two testing methods for PC certification of Year 2000
compatibility. PCs must pass both tests to be considered ready for Year
<PAGE>
2000. Those PCs identified as non-Year 2000 compatible are being modified
and/or replaced . The Company believes that the Year 2000 issue will not pose
significant operational problems and is not anticipated to be material to its
financial position or results of operation in any given year. As of March 31,
1999, the Company estimates that total Year 2000 implementation costs will not
exceed $250,000 ($192,000 which have already been incurred) and are expected
to be expensed over the next 9 months, impacting fiscal year ending December
31, 1999. This estimate is based on information available at March 31, 1999,
and may be revised as additional information and actual costs become
available.
Changes in Financial Condition
At March 31, 1999, the consolidated assets of the Company totaled $94.6
million, a decrease of $117,000, or 0.12%, from $94.7 million at December 31,
1998. There has been some reallocation of funds from the investment portfolio
to the higher yielding loan portfolio during the three months ended March 31,
1999. The deposit portfolio remained relatively constant experiencing a
$556,000, or 0.65% decrease.
Net loans receivable increased by $2.0 million, or 3.26%, to $63.3
million at March 31, 1999, compared to $61.3 million at December 31, 1998.
The majority of the increase was in the commercial loan portfolio primarily as
a result of the previously mentioned bank acquisition and the resulting staff
changes. The other loan portfolios remained relatively constant with the new
loan demand equaling loan repayments.
Investment securities decreased a net of $1.8 million, or 9.12%, from
$19.5 million at December 31, 1998, to $17.7 million at March 31, 1999. The
decrease was primarily the result of scheduled maturities of short-term
investment being rolled into higher earning real estate and commercial loan
production as a part of the Company's on going strategy to expand their loan
product base.
Excess funds are temporarily invested in federal funds which increased
slightly from $4.9 million at December 31, 1998, to $5.0 million at March 31,
1999.
Deposit liabilities decreased $556,000 during the three months ended
March 31, 1999. Noninterest bearing deposits decreased $1.4 million, or
14.71%, while interest-bearing deposits increased $865,000, or 1.15%, during
the period. Management attributes the decrease to the maintaining of
competitive rates in our market area. Interest credited on accounts also
contributed to the shift in deposit balances.
Total shareholders' equity increased $95,000, or 1.05%, from $9.0 million
at December 31, 1998, to $9.1 million at March 31, 1999. This increase was
primarily the result of $157,000 in earnings for the first three months in
fiscal 1999, being offset by a decrease in accumulated comprehensive income
(unrealized gains on securities available-for-sale) of $62,000.
The Bank's liquidity, primarily represented by cash and cash equivalents,
is a result of its operating, investing and financing activities. Principal
sources of funds are deposits, loan and mortgage-backed security repayments,
maturities of securities and other funds provided by operations. The Bank
also has the ability to borrow from the FHLB. While scheduled loan repayments
and maturing investments are relatively predictable, deposit flows and early
loan and mortgage-backed security prepayments are more influenced by interest
rates, general economic conditions and competition. The Bank maintains
investments in liquid assets based upon management's assessment of (i) the
need for funds, (ii) expected deposit flows, (iii) the yields available on
short-term liquid assets and (iv) the objectives of the asset/liability
management program. In the ordinary course of business, part of such liquid
investments portfolio is composed of deposits at correspondent banks.
Although the amount on deposit at such banks often exceeds the $100,000 limit
covered by FDIC insurance, the Bank monitors the capital of such institutions
to ensure that such deposits do not expose the Bank to undue risk of loss.
The Asset/Liability Management Committee of the Bank is responsible for
liquidity management. This committee, which is comprised of various managers,
has an Asset/Liability Policy that covers all assets and liabilities, as well
as off-balance sheet items that are potential sources and uses of liquidity.
The Bank's liquidity management objective is to maintain the ability to meet
commitments to fund loans and to purchase securities, as well as to repay
deposits and other liabilities in accordance with their terms. The Bank's
overall approach to liquidity management is to ensure that sources of
<PAGE>
liquidity are sufficient in amounts and diversity to accommodate changes in
loan demand and deposit fluctuations without a material adverse impact on net
income. The Committee monitors the Bank's liquidity needs on an ongoing
basis. Currently the Bank has several sources available for both short- and
long-term liquidity needs. These include, but are not restricted to advances
from the FHLB, Federal Funds and borrowings from the Federal Reserve Bank and
other correspondent banking arrangements.
The Bank is subject to various regulatory capital requirements
administered by its primary federal regulator, the Federal Reserve Bank
("FRB"). Failure to meet minimum capital requirements can initiate certain
mandatory, and possible additional discretionary actions by regulators that,
if undertaken, could have a material affect on the Company and the
consolidated financial statements. Under the regulatory capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of
the Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts
and classification under the prompt corrective action guidelines are also
subject to qualitative judgements by the regulators about components,
risk-weightings, and other factors.
Qualitative measures established by the regulation to ensure capital
adequacy requires the Bank to maintain minimum amounts and ratios of: total
risk-based capital and Tier I capital to risk-weighted assets (as defined by
the regulations), and Tier I capital to average assets (as defined).
Management believes, as of March 31, 1999, that the Bank meets all of the
capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the FDIC, the
Bank was categorized as well capitalized under the regulatory framework for
prompt corrective action. To remain categorized as well capitalized, the Bank
will have to maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as disclosed in Note 4 - Regulatory Capital. There are no
conditions or events since the most recent notification that management
believes have changed the Bank's prompt corrective action category.
At March 31, 1999, Exchange Bancshares had no material commitments for
capital expenditures.
Results of Operations
Comparison of Three Months Ended March 31, 1999 and 1998
General. Net income decreased for the three months ended March 31, 1999,
to $157,000, as compared to the three months ended March 31, 1998, $208,000, a
decrease of $51,000. This decrease was primarily attributed to the increases
in the various operating expenses, a number of which are directly related to
the acquisition of Towne Bank. These are discussed in greater detail under
the captions "Non-Interest Income" and "Non-Interest Expense".
Interest Income. Average earning assets have continued to increase
during the first quarter of 1999 which has contributed to an increase in
interest income of $305,000, or 21.28%, for the three months ended March 31,
1999, compared to 1998. The increase was attributed to the additional loan
income of $313,000 resulting from an increase in loans receivable which was
offset by decreases in investment income, $6,000, and federal funds income,
$2,000.
Interest Expense. Interest expense on deposit liabilities increased
$162,000 for the three months ended March 31, 1999, as compared to the same
period in 1998. Total deposits increased by an estimated $1.8 million
(exclusive of the deposit liabilities assumed in conjunction with the bank
acquisition) comparing March 31, 1999 to 1998, the average interest paid on
interest-bearing deposits increased by 16 basis points from 3.75% for the
three months ended March 31, 1998, to 3.91% for the same period ended March
31, 1999. The FHLB advance interest expense during the three-month period
ended March 31, 1999, remained constant at $3,000 in both 1999 and 1998.
Provision for Loan Losses. There were no provisions for loan losses and
there were net charge-offs of $149,000 during the three months ended March 31,
1999, compared to no provisions and net charge-offs of $11,000 during the
three months ended March 31, 1998. The absence of a provision was based upon
the results of the ongoing loan reviews and composition of the loan portfolio,
primarily loans secured by one-to four-family residential properties and other
<PAGE>
forms of collateral, which are considered to have less risk, as well as the
reserves associated with the recent bank acquisition.
Non-Interest Income. Non-interest income increased $64,000, or 77.119%,
to $147,000 for the three months ended March 31, 1999, from $83,000 for the
three months ended March 31, 1998. Service charges on deposit accounts
increased $5,000 while other income (primarily miscellaneous fee income from
PrimeVest) increased by $59,000.
Non-Interest Expense. Non-interest expense increased $287,000, or
48.97%, to $873,000 for the three months ended March 31, 1999, from $586,000
in the comparable period in 1998. Of this increase, $110,000 was attributable
to an increase in compensation and benefit expense in 1999, reflecting normal
salary and benefit adjustments as well as additional staffing associated with
the addition of two branch office locations. The increase of $77,000 in
occupancy and equipment is primarily attributable to the two new office
locations. The normal legal, accounting and examination expenses remained
relatively constant with the remainder of the general expenses increasing
slightly over the levels experienced during the same three month period in
1998. The significant increase in other expense, $56,000, was primarily a
result of the additional expenses incurred as a result of the on going due
diligence efforts, legal and accounting fees, and the data processing services
associated with the recent bank acquisition.
Income Taxes. The provision for income taxes decreased $29,000 for the
three months ended March 31, 1999, compared with the prior year, primarily as
a result of lower taxable income for the quarter.
<PAGE>
EXCHANGE BANCSHARES, INC.
PART II - OTHER INFORMATION
================================================================================
ITEM 1 - LEGAL PROCEEDINGS
Not Applicable
ITEM 2 - CHANGES IN SECURITIES
Not Applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5 - OTHER INFORMATION
Not Applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit 27: Financial Data Schedule
b. No report on Form 8-K was filed during the quarter ended
March 31, 1999.
<PAGE>
SIGNATURES
In accordance with 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, thereunto duly authorized.
EXCHANGE BANCSHARES, INC.
/s/ Marion Layman
Date May 14, 1999 --------------------------------
------------ Marion Layman
Chairman, President, and Chief Executive
Officer
/s/ Marion Layman
Date May 14, 1999 ---------------------------------
------------ Marion Layman
Principal Accounting and Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998,
the related Consolidated Income Statements and the related Consolidated
Statements of Cash Flows for the three months ended March 31, 1999 and 1998,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000720912
<NAME> EXCHANGE BANCSHARES, INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
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