U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT Pursuant to SECTION 13 or 15(d) of
THE SECURITIES EXCHANGE ACT of 1934
For the fiscal year ended December 31, 1998
Commission File Number 33-54566
_____________________
EXCHANGE BANCSHARES, INC.
(name of small business issuer in its charter)
Ohio 34-1721453
(State or other Jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
237 Main Street, Box 177, Luckey, Ohio 43443
(Address of principal executive offices) (zip code)
Issuer's telephone number (419) 833-3401
-----------------------------------------
Securities registered under Section 12(b) of the Exchange Act:
not applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Shares ($5.00 Par Value)
Preferred Shares ($25.00 Par Value)
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 ___
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10- KSB or any amendment to this Form 10-KSB. [ X ]
State issuer's revenues for the most recent fiscal year. $7,007,000
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold or the average bid and asked prices if such stock, as
of a specified date within the past 60 days: As of March 19, 1999, 521,094
common shares of the Registrant were outstanding. The aggregate market value
of the voting stock held by non-affiliates was $10,903,687 based upon the
trading price of $24.75 per share.
Documents Incorporated by References
The following sections of the definitive Proxy Statement for the 1999
Annual Meeting of Shareholders of Exchange Bancshares, Inc. are incorporated
by reference into Part III of this Form 10-KSB:
1. Information Regarding Nominees and Continuing Directors
2. Summary Compensation Table
3. Indebtedness of and Transactions with Officers and Directors
Transitional Small Business Disclosure Format YES ___ NO _X_
<PAGE>
PART I
ITEM 1. Description of Business
Business
Exchange Bancshares, Inc. (the "Holding Company" or the "Corporation")
was organized as an Ohio corporation and incorporated by directors of The
Exchange Bank (the "Bank") under Ohio law on October 13, 1992 at the direction
of the Board of Directors of the Bank for the purpose of becoming a bank
holding company by acquiring all of the outstanding shares of Bank Common
Stock. The Holding Company acquired the Bank effective January 1, 1994. The
Holding Company has authorized 750,000 common shares, par value $5.00 per
share of which 465,098 are currently outstanding.
The Holding Company also has authorized 750 preferred shares, par value
$25.00 per share without designating the terms of the preferred shares. No
preferred shares are currently outstanding or presently intended to be issued.
Exchange Bancshares, Inc. is a bank holding company engaged in the
business of commercial and retail banking through its subsidiary, The Exchange
Bank, which accounts for substantially all of its revenues, operating income,
and assets. The Holding Company may in the future acquire or form additional
subsidiaries, including other banks, to the extent permitted by law.
The Holding Company is subject to regulation by the Board of Governors of
the Federal Reserve System which limits the activities in which the Holding
Company and the Bank may engage. The Bank is supervised by the State of Ohio,
Division of Financial Institutions. The Bank is a member of the Federal
Reserve System and is subject to its supervision. The Bank is also a member of
the Federal Deposit Insurance Corporation (FDIC). As such, the Bank is
subject to periodic examination by the Division of Financial Institutions of
the State of Ohio and the Federal Reserve Board. The Holding 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 a general banking business embracing the usual
functions of a commercial, retail and savings bank, including: time, savings,
money market and demand deposit accounts; commercial, industrial,
agricultural, real estate, consumer installment and credit card lending; safe
deposit box rental, automated teller machines, and other services tailored to
individual customers. The Bank makes and services secured and unsecured loans
to individuals, firms and corporations. The Bank continuously searches for
new products and services which are made available to their customers in order
that they may remain competitive in the market place.
Forward-Looking Statements
When used in this Form 10-KSB, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimated,"
"projected," or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties,
including changes in economic conditions in the Bank's market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Bank's market area and competition, that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. Factors listed above could affect the Holding
Company's financial performance and could cause the Holding Company's actual
results for future periods to differ materially from any statements expressed
with respect to future periods. See Exhibit 99.2 hereto, "Safe Harbor Under
the Private Securities Litigation Reform Act of 1995," which is incorporated
herein by reference.
The Holding Company does not undertake, and specifically disclaims any
obligation, to publicly revise any forward-looking statements to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
Effect of Government Monetary Policies
The earnings of the Bank are affected by domestic economic conditions and
the monetary and fiscal policies of the United States government and its
agencies.
<PAGE>
The Federal Reserve Board, through its monetary policies, regulates the
money supply, credit conditions and interest rates in order to influence the
general economic conditions. This is accomplished primarily by their open
market operations through the acquisition and disposition of United States
Government securities, varying the discount rate (rate charged on member bank
borrowings), targeting Federal Funds rates, and adjusting the reserve
requirements of member and nonmember bank deposits. As a result the Federal
Reserve Board's monetary policies have had a significant effect on the
interest income and interest expense of commercial banks and are expected to
continue to do so in the future.
Employees
As of December 31, 1998, the Bank had 43 full and 10 part-time employees.
Personnel costs incurred by the Holding Company are reimbursed to the Bank.
Competition
The Bank competes with seven area banks and five savings and loan
associations, various credit unions, finance companies, large retail stores,
credit corporations, and both local and Federal governments for sources and
uses of funds. The Bank is the second largest bank headquartered in Wood
County, Ohio.
The competitive factors among financial institutions can be classified
into two categories, competitive rates and competitive services. With the
advent of deregulation, rates have become more competitive, especially in the
area of time deposits. From a service standpoint, financial institutions
compete against each other in types of services such as service costs, banking
hours and similar features. The Bank is generally competitive with competing
financial institutions in its primary service area with respect to interest
rates paid on time and savings deposits, charges on deposit accounts and
interest rates charged on loans. With respect to services, the Bank offers
extended banking hours and operates three ATM's (automated teller machines).
Pursuant to state regulations, the Bank is limited to the amount that it
may lend to a single borrower. As of December 31, 1998 and December 31, 1997
the legal lending limits were approximately $1,583,000 and $1,183,000
respectively. As of December 31, 1998 and 1997, no loans were over the legal
lending limit.
ITEM 2. Properties
The Bank's principal office is located at 235 Main Street, Luckey, Ohio
43443. The Bank's four branches are located at 311 North Main Street,
Walbridge, Ohio 43465, 940 Clarion Avenue, Holland, Ohio 43528, 610 East South
Boundary Street, Perrysburg, Ohio 43551, and 6401 Monroe Street, Sylvania,
Ohio 43560. All of the above properties are owned by the Bank. The Holding
Company operates out of the Bank's main office although it has a separate
mailing address. The Holding Company reimburses the Bank for the fair value
of the space occupied.
ITEM 3. Legal Proceedings
In June 1998, The Exchange Bank merged with Towne Bank in Perrysburg,
Ohio. As a result of this merger, The Exchange Bank succeeded to all of the
outstanding rights and obligations of Towne Bank. One of these obligations
arose out of an Agreement dated April 4, 1996 between Towne Bancorp, Inc.,
Towne Bank and Norman J. Rood, a former director and officer of Towne Bancorp,
Inc. and Towne Bank (the "Agreement"). One of the terms of the Agreement
provided that Towne Bancorp, Inc. and Towne Bank would defend and indemnify
Mr. Rood if he was ever involved in a lawsuit resulting from actions taken
while he served as an officer or director of the Bancorp or Bank. In 1998,
Mr. Rood was named in two class action lawsuits brought by certain of the
shareholders of Towne Bancorp, Inc., styled (1)Joseph Gomez and Read Backus,
et al. vs. Towne Bancorp, Inc. et al. United States District Court, Northern
District of Ohio, Western Division, Case No. 3:98CV7436, and (2)Anne Stahl
Crowley, Trustee, et al. vs. Huntington Trust Co. N.A., et al. United States
District Court, Northern District of Ohio, Western Division, Case No.
3:98CV7575. Mr. Rood has hired legal counsel and has made demand that Towne
Bancorp, Inc. and The Exchange Bank indemnify him under the Agreement for
expenses and attorney fees as provided for in the Agreement. Mr. Rood's
attorneys have agreed to provide The Exchange Bank with regular status reports
regarding the litigation and have estimated that the total expenses of the
defense could exceed $75,000. In February 1999, Mr. Rood was dismissed from
these lawsuits, but there can be no assurance that he will not be adjoined.
In the event The Exchange Bank would be liable for the full expenses
associated with Mr. Rood's defense and/or liability, The Exchange Bank would
look to Towne Bancorp, Inc. and Towne Bank's directors and officers insurance
policy for contribution. There is no assurance, however, that Towne Bancorp,
Inc. will have the funds to make the appropriate contribution or that the
insurer will pay their claim.
In the opinion of management of the Holding Company, there are no legal
proceedings pending to which the Corporation is a party or to which its
property is subject, which, if determined adversely to the Corporation, would
be material in relation to the Corporation's undivided profits or financial
<PAGE>
condition, nor are there any proceedings pending other than ordinary routine
litigation incident to the business of the Corporation. In addition, no
material proceedings are pending or are known to be threatened or contemplated
against the Corporation by government authorities or others.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
<PAGE>
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Shareholder
Matters
At December 31, 1998, the Corporation had approximately 835 shareholders
of record. The McDonald & Company, broker-dealer, makes a limited
over-the-counter market in shares of Corporation Common Stock. In addition,
there have been a limited number of private transactions known to the
management of the Corporation. Based solely on information made available to
the Corporation from First Scioto Company and from a limited number of buyers
and sellers, shares of the Corporation Common Stock that have been traded in
private transactions since January 1, 1996 were traded at a high of $23.50 and
a low of $14.02. There are no plans to list the shares of the Corporation
Common Stock on any stock exchange.
Through 1998, McDonald & Company and Sweney Cartwright & Co. offered to
purchase shares of stock of the Corporation at prices ranging from $16.33 to
$22.50 per share, and was offering to sell such shares at prices ranging
$17.33 to $23.50 per share. The offer to purchase shares, in some instances
was conditional upon their ability to sell the shares at a predetermined
price. In addition to shares traded through McDonald & Company and Sweney
Cartwright & Co. there have been a limited number of private transactions
known to the Management of the Corporation.
Effective January 1, 1994, the Corporation acquired the Bank and
shareholders of the Bank exchanged one share of Bank stock for four shares of
the Corporation. In 1998 the Corporation declared cash dividends of $.19 per
share payable on June 15, 1998 to shareholders of record on May 30, 1998 and a
cash dividend of $.30 per share payable on December 18, 1998 to shareholders
of record on December 4, 1998. The Corporation also declared a five percent
stock dividend to shareholders of record on May 31, 1998 payable on June 15,
1998. In 1997 the Corporation declared cash dividends of $.18 per share
payable on June 16, 1997 to shareholders of record on June 2, 1997 and a cash
dividend of $.29 per share payable on December 19, 1997 to shareholders of
record on December 1, 1997. The Corporation also declared a five percent
stock dividend to shareholders of record on June 2, 1997 payable on June 16
1997. In 1996 the Corporation declared cash dividends of $.13 per share
payable on June 15, 1996 to shareholders of record on June 1, 1996 and a cash
dividend of $.27 per share payable on December 16, 1996 to shareholders of
record on December 2, 1996. The Corporation also declared a five percent
stock dividend to shareholders of record on June 1, 1996 payable on June 15,
1996.
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1998 September 30, 1998 December 31, 1998
<S> <C> <C> <C> <C>
High $18.52 $22.00 $22.88 $23.50
Low $17.33 $18.05 $21.50 $21.88
Dividend Declared $0.00 $0.19 $0.00 $ 0.30
Stock Dividend 5%
March 31, 1997 June 30, 1997 September 30, 1997 December 31, 1997
High $15.38 $16.28 $17.80 $18.05
Low $14.47 $15.38 $16.62 $16.62
Dividend Declared $0.00 $0.18 $0.00 $0.29
Stock Dividend 5%
</TABLE>
Dividends by the Corporation necessarily depend upon earnings, financial
condition, appropriate legal restrictions and other factors relevant at the
time the Board of Directors of the Corporation considers dividend policy.
Under Ohio Revised Code, the Corporation is prohibited from paying dividends
if either the Corporation would be unable to pay its debts as they come due,
or the Corporation's total assets would be less than its total liabilities
plus an amount needed to satisfy any preferential rights of shareholders. The
Corporation may only pay dividends out of surplus. Surplus is defined as the
excess of a corporation's assets over its liabilities plus stated capital.
Total assets and liabilities are determined by the Board of Directors, which
may base its determination on such factors as it considers relevant, including
without limitation: (i) the book values of assets and liabilities of the
Corporation, as reflected on its books and records; and (ii) unrealized
appreciation and depreciation of the assets of the Corporation.
If in the opinion of the applicable federal bank regulatory authority, a
bank under its jurisdiction is engaged in or is about to engage in an unsafe
or unsound practice (which, depending on the financial condition of the bank,
could include the payment of dividends), such authority may require, after
notice of hearing, that such bank cease and desist from such practice. The
Federal Reserve Board has similar authority with respect to bank holding
companies. In addition, the Federal Reserve Bank and the FDIC have issued
policy statements which provide that insured banks and bank holding companies
should generally only pay dividends out of current operating earnings.
<PAGE>
The Bank, as a State Bank is subject to the dividend restrictions set
forth by the State of Ohio Division of Financial Institutions. Under such
restrictions, the Bank may not, without the prior approval of the
Superintendent of Financial Institutions, declare dividends in excess of the
sum of the current year's earnings (as defined) plus the retained earnings (as
defined) from the prior two years.
ITEM 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Exchange Bancshares, Inc., (the "Holding Company") was organized as an
Ohio Corporation and incorporated by the Board of Directors of The Exchange
Bank (the "Bank") under Ohio law on October 13, 1992, for the purpose of
becoming a bank holding company owning all of the outstanding shares of the
bank. The Holding Company acquired the Bank on January 1, 1994, and as of
December 31, 1998 had combined assets of $95 million, $61 million in net
loans, and $85 million in deposits. The Bank through its three commercial
banking offices located in Wood County, Ohio, and two Lucas County offices,
provides financial services to both individual and commercial customers. The
Bank is subject to supervision, examination, and regulation of the Division of
Financial Institutions of the State of Ohio. The deposits of the Bank are
insured by the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is
a member of the Federal Reserve System. Selected financial data on the
Holding Company's condition and operations is filed with the United States
Securities and Exchange Commission (Form 10-KSB and Form 10-QSB) and the Board
of Governors of the Federal Reserve System (FRY-9). Selected financial data
on the subsidiary Bank's condition and operations is filed quarterly with the
Ohio Division of Financial Institutions and the Federal Reserve System.
Exchange Bancshares, Inc. is a bank holding company engaged in the
business of commercial and retail banking through its subsidiary The Exchange
Bank, Luckey, Ohio, which accounts for substantially all of the Holding
Company's revenues, operating income, and assets.
The following discussion is intended to focus on and highlight certain
financial information regarding the Bank and should be read in conjunction
with the Consolidated Financial Statements and related Notes to Consolidated
Financial Statements, which have been prepared by the Management of Exchange
Bancshares Inc. in conformity with generally accepted accounting principles
("GAAP"). The Board of Directors engaged Robb, Dixon, Francis, Davis, Oneson
and Company, independent auditors, to audit the financial statements, and
their report is included on page XX of this report. To assist in
understanding and evaluating major changes in the Holding Company's and the
Bank's financial position and results of operations, two and three year
comparisons are provided in tabular form for ease of comparison.
Three major areas of discussion that follow are an analysis of (a) assets
and liabilities including liquidity and interest rate sensitivity, (b)
shareholders' equity including dividends and risk-based capital, and (c) 1998
results of operations.
I - FINANCIAL CONDITION
Loan Portfolio. Loans, as a component of earning assets, represent a
significant portion of earning assets at December 31, 1998. The Bank offers a
wide variety of loans including commercial, consumer, and both residential and
commercial real estate in its primary marketing area of northwestern Ohio. At
December 31, 1998, the Bank did not have any loan concentrations which
exceeded 10% of total loans or significant amounts of loans for agricultural
purposes.
Average loans increased 24.38% in 1998 to represent 69.43% of average
earning assets compared to 65.29% in 1997 and 61.48% in 1996. Year-end total
real estate loans of $51,012,000 represented approximately 81.13% of the total
loans outstanding. The portion of the loan portfolio represented by real
estate loans has increased from 72.74% at December 31, 1994 to 81.13% at
December 31, 1998. Installment loans to individuals have increased moderately
to 11.32% of loans outstanding at December 31, 1998 continuing the trend begun
in 1997. Prior to 1997 the installment loan portfolio had been declining
steadily since 1993 when they comprised 16.60% of total loan portfolio. The
dollar amounts of commercial loans (including tax-exempt loans) increased in
1998 to 6.14% of the total loans outstanding primarily as a result of the
acquisition of Towne Bank in June 1998. Prior to 1998 the commercial loan
portfolio had remained constant, however, their relative portion of the loan
portfolio had decreased from 6.38% at December 31, 1994 to 4.94% at December
31, 1997. The dollar amount of agricultural loans outstanding at December 31,
1998 represented 1.40% of the total loans outstanding. Agricultural loan
outstanding have remained relatively constant over the last four years while
the relative portion of total loans has continued to decline. The table
entitled "Loan Information" provides a five-year summary of the loan history.
<PAGE>
<TABLE>
<CAPTION>
Exchange Bancshares, Inc. and Subsidiary
Loan Information
In thousands, except ratios 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans at December 31,
Commercial $2,880 955 783 851 1,353
Agricultural 880 709 802 943 1,259
Real estate
Secured by 1-4 family residential properties 31,813 24,353 20,826 19,037 17,815
Secured by other properties 19,199 13,170 11,449 10,637 9,162
Consumer 7,115 6,322 6,067 6,132 6,476
Tax-exempt 983 1,360 1,533 798 1,013
All other 4 3 11 4 9
------- ------ ------ ------ ------
Total $62,874 46,872 41,471 38,402 37,087
======= ====== ====== ====== ======
Allowance for Loan Losses
Balance at beginning of year 624 508 483 465 469
Allowance related to acquired loans 961 0 0 0 0
Provision for loan losses 0 0 75 120 80
Charge-offs
Commercial and agricultural 0 0 0 106 17
Consumer 88 38 48 24 84
Credit Card 37 31 20 6 8
Real estate 0 0 0 0 0
--- -- -- --- ---
Total charge-offs 125 69 68 136 109
=== == == === ===
Recoveries
Commercial and agricultural 60 156 0 25 6
Consumer 19 25 13 7 15
Credit card 1 2 3 1 4
Real estate 2 2 2 1 0
----- ---- ---- ---- ----
Total recoveries 82 185 18 34 25
----- ---- ---- ---- ----
Net charge-offs 43 (116) 50 102 84
----- ---- ---- ---- ----
Balance at end of year $1,542 $624 $508 $483 $465
====== ==== ==== ==== ====
Allocation of Allowance for Loan Losses
Commercial $1,001 157 183 236 186
Consumer 84 72 68 54 28
Real estate 160 161 159 62 74
Unallocated 298 234 98 131 177
------ ---- ---- ---- ----
Total $1,543 $624 $508 $483 $465
====== ==== ==== ==== ====
Credit Quality Ratios
Net charge-offs as a percentage of average loans 0.08% (0.26)% 0.13% 0.27% 0.23%
Allowance for loan losses to
Total loans at year end 2.45% 1.33% 1.22% 1.26% 1.25%
Net charge-offs 35.86 (5.38) 10.16 4.74 5.54
Provision for loan losses to average loans 0.00% 0.00% 0.19% 0.32% 0.22%
Earnings coverage of net charge-offs 21.15 (10.43) 23.12 9.80 10.87
</TABLE>
<PAGE>
In addition to the loans reported in Loan Information table, there are
certain off-balance sheet products such as letters of credit and loan
commitments which are offered under the same credit standards as the loan
portfolio. Since the possibility of a liability exists, generally accepted
accounting principles require that these financial instruments be disclosed
but treated as contingent liabilities and thus, not reflected in the
accompanying financial statements (approximately $11.7 million). Management
closely monitors the financial condition of potential creditors throughout the
terms of the instrument to assure that they maintain certain credit
standards. Refer to Note J of the Notes to Consolidated Financial Statements
for additional information on off-balance sheet financial instruments.
Non-Performing Assets. The Table entitled "Non-performing Assets and
90-Day Past Due Loans" provides a six-year summary of nonperforming assets
which are defined as loans accounted for on a non-accrual basis, accruing
loans that are contractually past due 90 days or more as to principal or
interest payments, renegotiated troubled debt, and other real estate obtained
through loan foreclosure.
A loan is placed on non-accrual when payment terms have been seriously
violated (principal and/or interest payments are 90 days or more past due,
deterioration of the borrower's ability to repay, or significant decrease in
value of the underlying loan collateral) and stays on non-accrual until the
loan is brought current as to principal and interest. The classification of a
loan or other asset as non-accruing does not indicate that loan principal and
interest will not be collectible. The Bank adheres to the policy of the
Federal Reserve that banks may not accrue interest on any loan when the
principal or interest is due and has remained unpaid for 90 days or more
unless the loan is both well secured and in the process of collection.
A loan is considered restructured or renegotiated when either the rate is
reduced below current market rates for that type of risk, principal or
interest is forgiven, or the term is extended beyond that which the Bank would
accept for loans with comparable risk. Properties obtained from foreclosing
on loans secured by real estate are adjusted to market value prior to being
capitalized in an account entitled "Other Real Estate held for resale."
Regulatory provisions on other real estate are such that after five years, or
ten years under special circumstances, property must be charged-off. This
period gives the Bank adequate time to make provisions for disposing of any
real estate property.
Loans accounted for on a non-accrual basis increased $324,000 or 532.00%
as of year-end 1998. Nonperforming assets at December 31, 1998 totaled
$514,000 or 0.54% of total assets. This represents an increase of $429,000 or
504.71% from December 31, 1997. The large increase in nonperforming assets is
attributable to the assets acquired as a result of the merger with Towne
Bank. Management is continuing to monitor these assets and strengthening the
Bank's position whenever possible.
Analysis of the Allowance/Provision for Loan Loss. The allowance for
loan losses was established and is maintained by periodic charges to the
provision for loan loss, an operating expense, in order to provide for losses
inherent in the Bank's loan portfolio. Loan losses and recoveries are charged
or credited respectively to the allowance for loan losses as they occur. See
the table entitle "Loan Information" for a five-year summary.
<TABLE>
<CAPTION>
Exchange Bancshares, Inc. and Subsidiary
Non-performing Assets and 90-Day Past Due Loans
In thousands, except per share amounts 1998 1997 1996 1995 1994
1993
<S> <C> <C> <C> <C> <C> <C>
At December 31,
- ---------------------------------------
Non-accrual loans $399 75 196 336 25 49
Restructured loans 0 0 0 0 0 0
---- ---- ---- ---- ----- ----
Total non-accrual and restructured loans 399 75 196 336 25 49
Other real estate owned 0 0 0 0 26 23
---- ---- ---- ----- ---- ----
Total non-performing assets 399 75 196 336 51 72
Loans past due 90-days or more* 115 10 125 57 162 31
---- ---- ---- ----- ---- ----
Total non-performing assets and
90-day past due loans $514 85 321 393 213 103
==== ==== ==== ==== ==== ====
Impaired loans $720 17 23 0 N/A N/A
==== ==== ==== ==== ==== ====
</TABLE>
*Excludes non-accrual and restructured loans
The allowance/provision for loan losses is determined by Management by
considering such factors as the size and character of the loan portfolio, loan
loss experience, problem loans, and economic conditions in its market area.
The risk associated with the lending operation can be minimized by evaluating
each loan independently based on criteria which includes, but is not limited
to, (a) the purpose of the loan, (b) the credit history of the borrower, (c)
the market value of the collateral involved, and (d) the down payment made.
<PAGE>
More than 90% of the Bank's total gross loans are secured by deeds of
trust on real property, security agreements on personal property, insurance
contracts from independent insurance companies or through the full faith and
credit of government agencies. The Bank's lending policies require
substantial down payments along with current market appraisals on collateral
when the loans are originated, thus reducing the risk of any potential losses.
To further minimize the risks of lending, quarterly reviews of the loan
portfolio are made to identify problem loans and to determine the course of
action. Collection policies have been developed to monitor the status of all
loans and are activated when a loan becomes past due.
Management has both internal and external loan review procedures that
provide for analysis of operating data, tax returns and financial statement
performance ratios for all significant commercial loans, regulatory classified
loans, past due loans and internally identified "Watch" loans.
The loans are graded for asset quality by the reviewer and independently
analyzed by both the senior loan officer and the chief executive officer of
the bank. The results of the grading process in conjunction with independent
collateral evaluations are used by Management and the Board of Directors in
determining the adequacy of the allowance for loan loss account on a quarterly
basis.
The entire allowance for loan losses is available to absorb any
particular loan loss. However, for analytical purposes, the allowance could
be allocated based upon net historical charge-offs of each loan type for the
last five years. If applied, commercial loans would require 24.26% of the
reserve while the installment (consumer) and real estate loans would require
75.84% and 0.00%, respectively. Currently, the allowance for loan losses has
been allocated based upon the results of the loan reviews and management's
assessment of the overall portfolio and other factors as follows; commercial
loans - 64.87%, real estate loans - 10.37% and consumer loans - 5.44%. The
remaining 19.31% of the allowance is currently "unallocated". The losses
experienced, combined with the type and market value of the collateral
securing the various loans within the portfolio, is the primary reason for the
percentage allocation of the allowance to the individual loan types.
Management believes significant factors affecting the allowance are
reviewed regularly and that the allowance is adequate to cover potentially
uncollectible loans at December 31, 1998. The Bank has no exposure from
troubled debts to lesser developed countries nor from significant amounts of
agricultural, real estate or energy related loans.
The average allowance to average loans outstanding ratio increased to
1.43% in 1998 from 0.90% and 0.78% in 1997 and 1996, respectively. The
allowance for loan losses to loan balances outstanding at year-end was 2.45%,
1.33% and 1.22% for years 1998, 1997 and 1996, respectively.
The Bank experienced net charge-offs in 1998 of $43,000 as compared to
net recoveries in 1997 of $116,000 and net charge-offs in the preceding three
years. The 1997 net recovery position is primarily attributed to a single
borrower. Net charge-offs in 1996 decreased to $50,000 from $102,000 in
1995. The yearly average net charge-offs for the last five-year period
(1994-1998) were $33,000.
The absence of a provision for loan losses in 1998 was due to the
$961,000 allowance for possible loan losses associated with the merger of
Towne Bank as well as, the over-all quality of the loan portfolio and
management's assessment of the local economic conditions. The decrease in the
provision for the allowance for loan loss in 1997 and prior years is
attributed to efforts by Management (in 1995) to strengthen loan
administration, underwriting guidelines, and collection policies and
procedures coupled with the increase in the amount of credits granted. It
should be noted that as the Bank's loan portfolio experiences growth, there
will normally be an increase in credit losses. However, it is Management's
intention to minimize such losses through prompt loan collection efforts and
the credit review process.
Investments. Investments represent the second largest use of financial
resources. The investment portfolio, shown in the table "Other Balance Sheet
Data - Maturity of Investment Securities", includes United States Treasury and
Federal agency securities, state and municipal obligations, mortgage-backed
securities, other securities consisting of collateralized mortgage obligations
("CMO's"), corporate debt securities and equity securities of the Independent
State Bank of Ohio.
A portion of the portfolio's investment debt securities classified as
Held-To-Maturity are those securities which the Bank has the ability and
intent to hold to maturity. These securities are stated at cost adjusted for
the amortization of premium and accretion of discount, computed by the
interest method. The remainder of the debt securities and the Bank's
marketable equity investment securities are carried at market value, and
accordingly, are classified as Available-For-Sale.
In May 1993 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Under SFAS No. 115, beginning in
1994 debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of shareholders'
<PAGE>
equity. At December 31, 1998 and 1997 the Holding Company's shareholders'
equity contained $109,000 and $75,000, respectively, in unrealized gains on
securities available-for-sale.
Investment securities at year-end 1998 increased $702,000 or 3.74% from
year-end 1997 while federal funds sold increased $948,000 from 1997 or
24.15%. Because the increase in total deposit account balances (primarily as
a result of the Towne Bank acquisition) exceeded the funding needs of the
Bank's loan portfolio, coupled with the interest rate structure within the
investment portfolio, excess funds were allocated primarily to the federal
fund portfolio with the remainder utilized to purchase additional investment
securities. Management maintains Federal funds sold balances consistently at
levels that will cover short-term liquidity needs of the Bank.
The Bank utilizes an outside investment firm to analyze, evaluate, and
offer investment recommendations to Management based on such criteria as
security ratings, yields, and terms. The Bank does not invest in any one type
of security over another. Funds allocated to the investment portfolio are
constantly monitored by Management to ensure that a proper ratio of liquidity
and earnings is maintained.
Deposits. The "Consolidated Average Balance Sheet and Related Yields and
Rates" table highlights average deposits and interest rates during the last
three years. Average deposits have increased in 1998, approximately
$11,060,000 or 19.90% from 1997 which had decreased from 1996, approximately
$2,169,000 or 4.06%. The average cost of funds for the bank was approximately
4.43% for the year ended December 31, 1998 compared to 4.29% and 4.07% for
1997 and 1996, respectively.
The Bank's deposit structure can be categorized as somewhat cyclical,
increasing as public depositors receive tax allocations and decreasing as
disbursements are made. Aside from the deposits acquired from the Towne Bank
merger, during 1998 the Bank also experienced continued shifting of individual
deposits from the traditional savings passbook accounts to higher yielding
time open or time certificate accounts. As a result the Bank's cost of funds
has increased steadily putting additional pressure on the net interest
margin. Management has responded to this pressure by competitively pricing
its loan products and managing the investable funds. As a result, the net
interest margin has decreased by 6 basis points since December 31, 1997.
Shareholders' Equity. Maintaining a strong capital position in order to
absorb inherent risk is one of Management's top priorities. Selected capital
ratios for the last three years, presented in the "Six-Year Consolidated
Financial Summary" table, reveal that the Bank has been able to maintain an
average equity to average asset ratio of greater than 10% for the past four
years. It should be noted that this ratio decreased by 97 basis points in
1998 to 10.41% and increased in 1997 by 15 basis points to 11.38%. The
decrease resulted primarily from a large dividend being declared to the
holding company to fund the acquisition of Towne Bank. It should also be
noted that the return on average assets decreased in 1998 to $0.80 from $1.17
in 1997. This is due primarily to the additional legal, accounting and other
expenses associated with the acquisition, as well as, interest rate
fluctuations, deposit growth fluctuations, an increase in loan and investment
volumes and a modest increase in other operating costs.
The yield (interest expense) on liabilities increased more rapidly than
the yield (interest income) on interest earning assets, resulting in a
decrease in the Bank's interest margin. As indicated earlier, the average
allowance for loan losses to average loans outstanding was 1.43%, 0.90% and
0.78% for years 1998, 1997, and 1996, respectively.
Banking regulations have established minimum capital ratios for banks.
The primary purpose of these requirements is to assess the riskiness of a
financial institution's balance sheet and off balance sheet financial
instruments in relation to adjusted capital. The Bank is required to maintain
a minimum total qualifying capital ratio of at least 8% with at least 4% of
capital composed of Tier I (CORE) capital. Tier I capital includes common
equity, non cumulative perpetual preferred stock, and minority interest less
goodwill and other disallowed intangibles. Tier II (supplementary) capital
includes subordinate debt, intermediate-term preferred stock, the allowance
for loan losses and preferred stock not qualifying for Tier I capital. Tier
II capital is limited to 100% of Tier I capital. At December 31, 1998, the
Bank's risk-based capital ratio for Tier I and Tier II capital was 14.10% and
15.30% respectively, thus surpassing the required 4% and 8% for Tier I and
Tier II capital. The "Risk-Based Capital" table contains a summary of both
the Bank's risk-based capital and leverage components and ratios.
II - RESULTS OF OPERATIONS
General. The Holding Company had consolidated net income of $672,0000 or
$1.30 basic earnings per share, for the year ended December 31, 1998 as
compared to $835,000 or $1.63 basic earnings per share for 1997 and $747,000
or $1.44 basic earnings per share for 1996. Return on average assets ratio
(ROAA) was 0.80%, 1.17% and 1.10% in 1998, 1997, and 1996, respectively.
Net Interest Income. Net interest income, the income received on
investments in loans, securities, due from banks, and federal funds less
interest paid to depository and short-term creditors to fund these investments
is the Bank's primary source of revenue. The following discussion and
analysis of the Bank's net interest income is based primarily on the tables
entitled "Consolidated Average Balances Sheets and Related Yields and Rates",
"Income Statement Data - Changes in Tax Equivalent Income", and "Interest
Sensitive Assets and Liabilities" for all years presented using the Federal
<PAGE>
statutory rate of 34%. These tables have been prepared on a tax-equivalent
basis. The stated (pre-tax) yield on tax-exempt loans and securities are
lower than the yield on taxable assets of similar risk and maturity. The
average balances were calculated on a monthly basis.
Exchange Bancshares, Inc. and
Subsidiary
<TABLE>
<CAPTION>
Consolidated Average Balance Sheets and Related Yields and Rates*
1998 1997 1996
--------------------------- ---------------------------- ------------------------------
In thousands, except ratios
Interest Average Interest Average Interest Average
Average Income Yields/ Average Income/ Yields/ Average Income/ Yields/
Balance Expense Rates Balance Expense Rates Balance Expense Rates
------- ------- ------ ------- ------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and due from banks $2,618 $2,480 $2,103
Interest bearing deposits in banks 35 $ 2 5.71% 44 $ 2 4.55% 0 $ 0
Federal funds sold 6,612 358 5.41% 3,538 192 5.43% 3,678 193 5.25%
Investment securities
Taxable debt securities 16,402 988 6.02% 18,406 1,130 6.14% 19,734 1,189 6.03%
Tax-exempt debt securities 735 52 7.07% 1,234 87 7.05% 1,223 86 7.03%
Equity securities 455 32 7.03% 314 17 5.41% 146 9 6.16%
------ ----- ------ ------ ------ -----
Total Investment securities 17,592 1,072 6.09% 19,954 1,234 6.18% 21,103 1,284 6.08%
Loans
Real Estate 28,413 2,499 8.80% 22,969 2,048 8.92% 21,235 1,912 9.00%
Consumer 6,772 847 12.51% 5,742 704 12.26% 5,743 710 12.36%
Commercial 19,874 1,840 9.26% 15,554 1,428 9.18% 12,578 1,151 9.15%
------ ----- ------ ----- ------ -----
Total loans 55,059 5,186 9.42% 44,265 4,180 9.44% 39,556 3,773 9.54%
Total earning assets 79,298 6,618 8.35% 67,801 5,608 8.27% 64,337 5,250 8.16%
----- ----- ------ -----
Allowance for loan losses (1,130) (612) (503)
Other assets 3,459 1,705 1,809
------ ------ ------
Total assets $84,245 $71,374 $67,746
======= ======= =======
Liabilities and Shareholders'
Equity
Noninterest-bearing deposits $ 8,337 $ 7,342 $ 6,474
Interest-bearing deposits
NOW accounts 10,644 77 3.54% 8,500 270 3.18% 7,910 243 3.07%
Money market accounts 1,619 44 2.72% 1,470 39 2.65% 1,658 44 2.65%
Savings accounts 15,334 391 2.55% 14,858 387 2.60% 16,100 421 2.61%
Time deposits 39,035 2,134 5.47% 30,744 1,683 5.47% 27,735 1,466 5.29%
------ ----- ------ ----- ------- -----
Total interest-bearing
deposits 66,632 2,946 4.42% 55,572 2,379 4.28% 53,403 2,174 4.07%
Borrowed funds 183 12 6.56% 107 8 7.48% 0 0
------ ----- ------ ----- ------ -----
Total interest-bearing liabilities 66,815 2,958 4.43% 55,679 2,387 4.29% 53,403 2,174 4.07%
----- ----- -----
Other liabilities 321 230 263
Shareholders' equity 8,772 8,123 7,606
------- ------ ------
Total liabilities and
shareholders' equity $84,245 $71,374 $67,746
======= ======= =======
Net interest income (tax-equivalent basis) $3,660 $3,221 $3,076
====== ====== ======
Yield spread 3.92% 3.98% 4.09%
Net interest income to earnings assets 4.62% 4.75% 4.78%
Interest-bearing liabilities to earning asset 84.26% 82.12% 83.01%
</TABLE>
<PAGE>
Exchange Bancshares, Inc. and Subsidiary
Income Statement Data
<TABLE>
<CAPTION>
1998 Over 1997 1997 Over 1996
----------------------- -------------------------
In Thousands Volume Yield/Rate Total Volume Yield/Rate
Total
<C> <C> <C> <C> <C> <C>
Changes in Tax Equivalent Interest Income *
- -------------------------------------------
Interest Income $ 0 $ 0 $ 0 $ 2 $ 0 $ 2
Federal funds sold 167 (1) 166 (7) 6 (1)
Investment securities (146) (16) (162) (70) 20 (50)
Loans 1,019 (13) 1,006 449 (42) 407
----- ---- ----- --- ---- ----
Total 1,040 (30) 1,010 374 (16) 358
===== ==== ====== === ==== ====
Interest expense
Interest-bearing deposits 473 94 567 88 117 205
Borrowed funds 6 (2) 4 8 0 8
--- --- --- --- --- ---
Total 479 92 571 96 117 213
--- --- --- --- --- ---
Net interest income $561 $(122) $ 439 $278 $(133) $145
==== ====== ===== ==== ====== ====
</TABLE>
*Changes in the average balance/rate are allocated entirely to the yield/rate
changes
<TABLE>
Analysis of Selected Non-Interest Expenses
- ------------------------------------------
1998 % Change 1997 % Change 1996
<S> <C> <C> <C> <C> <C>
Salaries and benefits
Salaries $1,110 21.7% $ 912 3.3% $ 883
Benefits 254 27.0% 200 2.0% 196
------ ------ -----
Total $1,364 22.7% $1,112 $1,079
====== ====== ======
Occupancy and equipment
Depreciation $216 81.5% $119 (9.2)% $131
Maintenance and repairs 146 53.7% 95 25.0% 76
Real estate taxes 29 61.1% 18 5.9% 17
Insurance 17 13.3% 15 (6.3)% 16
Utilities 51 6.3% 48 2.1% 47
---- ---- ----
Total $459 55.6% $295 2.8% $287
==== ==== ====
Other expenses
Advertising $ 38 5.6% $ 36 (23.4)% $ 47
Dues and subscriptions 18 12.5% 16 23.1% 13
Telephone 48 37.1% 35 (10.3)% 39
Organizational costs 13 0.0% 13 0.0% 13
Insurance 20 11.1% 18 0.0% 18
Loan 22 37.5% 16 (11.1)% 18
Education 10 11.1% 9 (10.0)% 10
Travel and entertainment 19 18.8% 16 60.0% 10
FDIC insurance 11 57.1% 7 250.0% 2
Legal 26 136.4% 11 (8.3)% 12
Overdrafts 13 85.7% 7 0.0% 7
Other 32 (11.1)% 36 63.6% 22
--- --- ---
Total $270 22.7% $220 4.3% $211
==== ==== ====
</TABLE>
<PAGE>
The net yield on interest-earning assets has decreased to 4.62% in 1998
from 4.75% in 1997 and from 4.78% in 1996. Net interest income increased
$451,000, or 14.19%, in 1998 and $141,000, or 4.64%, in 1997, while earnings
decreased $163,000, or 19.52%, in 1998 from $835,000 in 1997 and increased
$88,000, or 11.78%, in 1997 from $747,000 in 1995. The "Income Statement Data
- - Changes in Tax Equivalent Income" table analyzes the reason for the changes
in interest income by applying either volume or rate changes to interest
sensitive assets and liabilities. Average interest-earning assets increased
to $11,497,000 and average interest-bearing liabilities increased to
$11,136,000 in 1998 which resulted in increased earnings of $561,000 (due to
volume); while the overall increase in rates for earning assets did not exceed
the overall increase in rates on interest-bearing liabilities which resulted
in a net decrease of $122,000 (due to rate) in net interest income. The net
effect of the changes in volume and interest rates was to increase interest
earnings by $439,000 during 1998.
Net loan income increased $1,009,000, or 24.26% over the prior year
primarily as a result of the increased volume resulting from the acquisition
of Towne Bank and changes in the composition of the portfolio, increased
competition from financial and non-financial sources, and Management's
strengthening of loan underwriting standards. Average loan yields have
decreased 2 basis points in 1998 after a 10 basis point decrease in 1997. As
of year-end 1998 approximately $25,863,000, or 45.77%, of the loan portfolio
is maturing or repricing in the next year. Variable rates and short-term
maturities are two tools Management is using to achieve greater flexibility in
a changing rate environment.
Interest rates on tax-free investment securities have increased two basis
points in 1998, from an average portfolio yield of 7.05% to 7.07%, and
interest rates on equity investment securities have increased 162 basis points
from an average portfolio yield of 5.41% to 7.03%, and interest rates on
taxable investment securities decreased nine basis points from an average
yield of 6.18% to 6.09%, resulting in a $16,000 decrease in taxable income due
to rates. Additionally, a $146,000 decline in income due to the volume,
resulted in a net decrease in income of $162,000. Approximately $6,662,000 of
securities matured in 1998. Reinvestment yields on approximately $7,721,000
of maturing securities in 1999 will be used to determine appropriate
maturities or alternative investments.
Federal funds sold income increased by $166,000 or 86.46% in 1998 after a
$1,000 or 0.52% decrease in 1997. Volume increased earnings $167,000 and
rates decreased earnings $1,000 in 1998. Federal funds are primarily used as
an investment mechanism for short-term liquidity purposes.
Interest-bearing deposit expense increased $567,000 or approximately
23.83% in 1998 after a $205,000 or 9.43% increase in 1997. The volume
increase caused interest expense to increase $473,000 while changes in rates
caused a $94,000 increase in interest expense in 1998. Rates paid on NOW
accounts and money market accounts increased 36 and 7 basis points
respectively in 1998, compared to an increase of 11 basis points for NOW
accounts and no increase or decrease for money market accounts in 1997. The
yields on savings accounts decreased five basis points and the yield on time
deposits remained virtually unchanged in 1998. Also, competition from
non-financial institutions has continued to be a factor which is causing a
shifting of depositors' resources.
In summary, the "Changes in Tax Equivalent Income" table discloses the
reasons for changes in interest income and interest expense. It should be
noted that the changes, or restructuring, in the Bank's interest-earning
assets (loans, investments, federal funds and interest-bearing deposits) and
the interest-bearing liabilities (NOW, money market, savings, time deposits
and borrowed funds) combined with the repricing of each resulted in a decrease
in net interest margins.
The changes in both asset and liability volumes in 1998 coupled with
repricing of both interest-earning assets and interest-bearing liabilities
resulted in a net increase of $439,000 in net interest income. Changes in
volume accounted for a $561,000 increase in net interest income, while changes
in rates decreased net interest income $122,000.
The increases in both asset and liability volumes in 1997 had more of an
effect on the net interest margin, $278,000 increase, than the changes in the
yields on assets and liabilities, a $133,000 decrease.
Other Income and Other Expense. Total other income consists of operating
income attributed to providing deposit accounts for bank customers, the
disposition of investment securities prior to their maturity (which are
classified as available-for-sale), and fees from banking services.
Total other expenses consists of operating expense attributed to staffing
(personnel costs), operation and maintenance of bank building and equipment,
banking services promotion, taxes and assessments, and other operating
expenses. Table 16, "Other Income and Other Expenses," contains a summary of
these items for the years ended December 31, 1998, 1997, and 1996.
Income Taxes. Applicable income taxes of $253,000 in 1998 consist of
federal taxes only. For the previous two years the federal tax rate was 34%.
<PAGE>
Impacting the tax provisions for the three years covered in this report
is the level of the provision for possible loan losses ($-0- in 1998, $-0- in
1997 and $75,000 in 1996) and the level of tax-exempt income on securities
which was $39,000, $65,000, and $64,000 for the three years presented.
Statement of Financial Accounting Standard (SFAS) No. 109, "Accounting
for Income Taxes" requires a liability approach to accounting for income
taxes as opposed to a deferred approach. The liability approach places
emphasis on the accuracy of the balance sheet while the deferred approach
emphasizes the income statement. Under the liability approach, deferred taxes
are computed based on the tax rates in effect for the periods in which
temporary differences are expected to reverse. An annual adjustment of the
deferred tax liability or asset is made for any subsequent change in tax
rates.
Effects of Inflation/Changing Prices
The effects of inflation on operations of the Bank occur through
increased operating costs which can be recovered through increased prices for
services. Virtually all of the Bank's assets and liabilities are monetary in
nature and can be repriced on a more frequent basis than in other industries.
Every effort is being made through interest sensitivity management to monitor
products and interest rates and their impact on future earnings.
Liquidity and Interest Rate Sensitivity Management
Management utilizes several tools currently available to monitor and
ensure that liquid funds are available to satisfy the normal loan and deposit
needs of its customers while taking advantage of investment opportunities as
they arise in order to maintain consistent growth and interest income. Cash
and due from banks, marketable investment securities with maximum one year
maturities, and federal funds sold are the principal components of asset
liquidity. Referring to "Interest Rate Sensitivity" table, the Bank is in a
liability sensitive position up to one year which is more beneficial in a
period of declining interest rates since liabilities can be repriced at lower
rates. In periods of rising interest rates, an asset sensitive position is
more favorable as interest sensitive assets may be adjusted to rising market
rates prior to maturing interest sensitive liabilities. The three-month
category of interest sensitive liabilities include approximately $30,825,000
of NOW, money market and savings accounts which can be adjusted nearly
immediately to offset any positive gap in a declining rate environment.
Management utilizes variable rate loans (on a limited basis) and
adjustable rate deposits to maintain desired net interest margins. A
procedural process has been developed to monitor changes in market rates on
interest sensitive assets and liabilities with appropriate action being taken
when warranted.
Exchange Bancshares, Inc. and Subsidiary
Interest Rate Sensitivity
<TABLE>
<CAPTION>
Repricing or Maturing
Over Over Over
Within 3 Months 1 Year 3 Years After
In thousands, except ratios 3 Months to 1 Year to 3 Years to 5 Years 5 Years
<S> <C> <C> <C> <C> <C>
Loans $14,415 $14,334 $ 9,176 $7,661 $17,288
Investment securities 2,604 5,121 11,223 0 522
Other earning assets 4,895
Other assets 0 7,445
------- ------- ------- ------ -------
Total assets $21,914 $19,455 $20,399 $7,661 $25,255
======= ======= ======= ====== =======
Noninterest-bearing deposits $ 9,655
Interest-bearing deposits 37,860 24,702 $12,336 $ 638 $ 0
Borrowed funds 6 18 41 31 77
Other liabilities and equity 0 9,320
------- ------ ------- ------ -------
Total liabilities
and equity $ 47,521 $24,720 $12,377 $ 669 $ 9,397
======== ======= ======= ======= =======
Gap* $(25,607) (5,265) 8,022 6,992 15,858
Cumulative gap (25,607) (30,872) (22,850) (15,858) 0
Cumulative gap as a
percent of total assets (27.04)% 32.61)% (24.13)% (16.75)% 0.00%
</TABLE>
Exchange Bancshares, Inc. and Subsidiary
Other Balance Sheet Data
In thousands, except ratios
Maturity of Total Investment Securities (a)
<TABLE>
<CAPTION>
Carrying Value Total
Within 1 Year 1-5 Years After 10 Years No Fixed Maturity Total Market
Amount/Yield Amount/Yield Amount/Yield Amount/Yield Amount/Yield Value
------------ ------------ -------------- ------------------ ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At December 31, 1998
Investment securities
available-for-sale:
U.S. Treasury $6,479 6.22% $4,623 5.90% $11,102 6.09% $11,102
Federal agency 2,785 5.12% 2,785 5.12% 2,785
Corporate debt 501 6.10% 3,538 5.90% 4,039 5.92% 4,039
Equity $ 522 7.03% 522 7.03% 522
------ ------ ----- -------- ------ -------
Total securities
available-for-sale 6,980 6.21% 10,946 5.70% 0 522 7.03% 18,448 5.73% 18,448
------ ------ ----- -------- ------ -------
Investment securities
held-to-maturity:
State municipal
- tax exempt (b) 328 7.07% 277 6.86% 605 6.97% 617
Mortgage-backed 417 4.06% 417 4.06% 413
------ ------ -------- ------ -------
Total securities
held-to-maturity 745 5.38% 277 6.86% 0 0 1,022 5.79% 1,030
----- ------ ----- -------- ------ -------
Total investment
securities $7,725 6.13% $11,223 5.72% $ 0 $ 522 7.03% $19,470 5.92% $19,478
====== ======= ===== ======== ======= =======
</TABLE>
Maturity of Loans (c)
<TABLE>
<CAPTION>
Within 1-5 After 5
1 year years years Total
------ ----- ----- -----
<C> <C> <C> <C>
Commercial $10,353 7,510 1,695 19,558
Real Estate 15,510 5,750 15,683 36,943
------ ----- ------ ------
Total $25,863 13,260 17,378 56,501
======= ====== ====== ======
Fixed 3,386 2,721 7,611 13,718
Variable 22,477 10,539 9,767 42,783
------- ------ ----- ------
Total $25,863 13,260 17,378 56,501
======= ====== ====== ======
</TABLE>
Maturity of Time Deposits of $100,000 or more
<TABLE>
<CAPTION>
<S>
Within 3-6 6-12 Over 12
3 Months Months Months Months Total
-------- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Certificates of deposit and other time deposits
- ---------------------------------------------------------
$1,055 1,981 2,881 1,916 7,833
====== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
<S>
Deposits at December 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Noninterest-bearing deposits $ 9,655 6,371 6,720 5,777 6,321
Interest-bearing deposits
NOW and money market accounts 14,835 9,757 9,303 9,053 8,459
Savings accounts 15,990 14,591 15,225 16,721 18,801
Certificates of deposit 44,711 33,209 28,910 26,960 24,605
------ ------ ------ ------ ------
Total deposits $85,191 $63,928 $60,158 $58,511 $58,186
======= ======= ======= ======= =======
(a) Based on contractual maturities
(b) The yield on state municipal securities is increased by the benefit of
tax exemption, assuming a 34% federal income tax rate. For the year
ended December 31, 1998, the amount of the increases in the yields for
these securities and for total securities held-to-maturity is 1.78%
and 1.19%, respectively.
(c) Excludes consumer and residential mortgage loans of $6,373,000
</TABLE>
<PAGE>
Year 2000 Readiness
The Year 2000 ("Y2K") date change can affect any system that uses
computer software programs or computer chips, including automated equipment
and machinery. For example, many software programs and computer chips store
calendar dates as two-digit rather than four-digit numbers. These software
programs record the year 1998 as "98". This approach will work until the Year
2000 when the "00" may be read as 1900 instead of 2000. The year 2000 is more
than just a mainframe problem. It also includes firmware, embedded systems,
and external systems. Businesses, utilities and other organizations are
fixing their systems to make sure they will operate properly when the calendar
changes. Since banks rely on these systems, they are placing great emphasis
on making sure their systems are ready for the Year 2000. Because of the
importance of this issue, the Company established a committee to address the
Y2K issue. In 1997, the Board of Directors assigned an officer of the bank as
the Y2K project coordinator and a committee was formed to address the
problem. The project includes planning, assessing, testing and re-testing
with monthly progress reports being made to the Board. The objective is to
ensure that all conceivable steps are taken to facilitate a smooth transition
of all operations of the Company into the next century. The Company and the
Bank are dedicated to providing reliable, trustworthy banking to its customers
before, during and after the century transition.
Senior Management and the Board of Directors are actively involved in
overseeing internal Year 2000 efforts and monitoring the business risks posed
by vendors, business partners, counter parties and major loan customers. We
are identifying relevant systems; repairing, replacing, or upgrading systems
to resolve potential problems; and testing systems for Year 2000
compatibility. We are also working closely with our third-party service
providers to monitor their readiness for Year 2000. Management has been
assured by their software vendors that any program changes necessary to ensure
Year 2000 compliance will be completed in adequate time to prevent any
foreseeable processing problems. We plan to complete testing and have all
system changes implemented by June 30, 1999, as required by federal bank
regulators. We will have alternative methods of doing business as a
contingency should problems occur. The contingency plans 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.
Our contingency planning will be substantially complete in advance of the
June 30, 1999 deadline. Management believes the contingency planning process
will help minimize the impact and reduce response time if the failure of a
resource occurs. Modifications will be made to this plan as required to
achieve Year 2000 readiness.
The company estimates that total Year 2000 project costs will not exceed
the budgeted amount of $140,000 of which $109,000 has already been expensed.
These costs include external consultants, purchases of hardware and software,
customer awareness materials and the direct costs of internal employees
working on the project.
In accordance with the FDIC and FFIEC guidelines, we have kept, and will
continue to keep, our customers aware of the Y2K issues and keep them informed
of our progress and we ask that they will respond as to their own efforts to
achieve Year 2000 readiness. The company remains dedicated to providing the
highest level of service to its customers and shareholders, and will continue
a proactive approach to Year 2000 readiness.
Any forward-looking statements made in the foregoing Y2K discussion speak
only as of the date on which such statements are made, and the Bank undertakes
no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurance of unanticipated events.
This discussion constitutes a Year 2000 Readiness Disclosure within the
meaning of the Year 2000 Readiness and Disclosure Act of 1998.
<PAGE>
<TABLE>
<CAPTION>
Exchange Bancshares, Inc. and Subsidiary
Six-Year Consolidated Financial Summary
In thousands, except per common share amounts and ratios 1998 1997 1996 1995
1994 1993
<S> <C> <C> <C> <C> <C> <C>
Years Ended December 31,
Statements of Income
Interest Income $6,587 $5,565 $5,211 $4,958 $4,673 $4,863
Interest Expense 2,958 2,387 2,174 2,038 1,892 2,142
----- ----- ----- ----- ------ ------
Net interest income 3,629 3,178 3,037 2,920 2,781 2,721
Provision for loan losses 0 0 75 120 80 60
----- ----- ----- ----- ------ ------
Net interest income after provision for loan losses 3,629 3,178 2,962 2,800 2,701 2,661
Non-interest income 420 320 314 230 307 357
Non-interest expenses 3,124 2,288 2,195 2,150 2,175 2,131
----- ----- ----- ----- ----- -----
Income before income taxes 925 1,210 1,081 880 833 887
Income tax expense 253 375 334 268 253 262
----- ----- ----- ------ ----- -----
Net income $ 672 $ 835 $ 747 $ 612 $ 580 $ 625
====== ====== ====== ====== ====== ======
Per Common Share
Net Income
Basic $1.30 $1.63 $1.44 $1.17 $1.11 $1.20
Diluted 1.30 1.63 1.44 1.17 1.11 1.20
Dividends declared 0.49 0.47 0.40 0.34 0.36 0.34
Stockholders' equity 17.18 16.37 15.11 14.19 12.55 12.42
Selected Consolidated Balance Sheet Data at December 31,
Assets $94,684 $72,795 $68,206 $66,140 $64,903 $67,357
Investment securities 19,470 18,768 20,848 20,579 22,791 25,105
Loans (B) 61,332 46,248 40,963 37,856 36,583 35,515
Deposits 85,191 63,928 60,158 58,625 60,878 60,805
Borrowed funds 173 198 0 0 0 0
Shareholders' equity 9,014 8,443 7,817 7,429 6,574 6,495
Ratios (C)
Per $100 of average assets
Net Interest Income (tax-equivalent basis) $4.34 $4.51 $4.54 $4.46 $4.12 $4.05
Provision for loan losses 0 0 0.11 0.18 0.12 0.09
---- ---- ----- ----- ----- -----
Net interest income after provision for loan losses 4.34 4.51 4.43 4.28 4.00 3.96
Non-interest income 0.50 0.45 0.46 0.35 0.45 0.53
Non-interest expense 3.70 3.20 3.24 3.26 3.19 3.14
---- ---- ---- ---- ---- ----
Income before income taxes 1.14 1.76 1.65 1.37 1.25 1.34
Income tax expense 0.34 0.59 0.55 0.44 0.40 0.42
---- ---- ---- ---- ---- ----
Net income $0.80 $1.17 $1.10 $0.93 $0.85 $0.92
===== ===== ===== ===== ===== =====
Leverage (D) 9.60 8.79 8.91 9.33 10.44 10.76
Return on average shareholders' equity 7.66% 10.28% 9.82% 8.67% 8.90% 9.92%
Average shareholders' equity to average assets 10.41% 11.38% 11.23% 10.71% 9.57% 9.29%
Dividend payout ratio 37.80% 28.74% 27.71% 29.08% 32.07% 28.64%
Tier 1 capital ratio at December 31 14.00% 16.10% 21.30% 20.30% 19.60% 17.50%
Tier 1 and Tier 2 capital ratio at December 31 15.30% 17.30% 22.60% 21.50% 20.80% 18.80%
Leverage ratio 9.10% 9.90% 11.10% 10.70% 10.10% 9.40%
</TABLE>
(A) Includes $11 cumulative effect of accounting change regarding accounting
for income taxes in 1993.
(B) Net of unearned income.
(C) Based on average balances and net income for the periods.
(D) The ratio of average assets to average shareholders equity.
<PAGE>
Exchange Bancshares, Inc. and Subsidiary
Consolidated Income Summary
<TABLE>
<CAPTION>
In thousands 1998 Change 1997 Change 1996 1995
1994
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income (tax-equivalent basis) $6,618 18.01% $5,608 6.82% $5,250 $4,976 $4,694
Interest expense 2,958 23.92% 2,387 9.80% 2,174 2,038 1,892
----- ----- ----- ----- -----
Net interest income 3,660 13.63% 3,221 4.71% 3,076 2,938 2,802
Provision for loan losses 0 0 (100.00)% 75 120 80
------ ----- ----- ----- -----
Net interest income after provision
for loan losses 3,660 13.63% 3,221 7.33% 3,001 2,818 2,722
Non-interest income 420 31.25% 320 1.91% 314 230 307
Non-interest expense 3,124 36.54 2,288 4.24% 2,195 2,150 2,175
----- ----- ----- ----- -----
Income before income taxes 956 (23.70)% 1,253 11.88% 1,120 898 854
Income tax expense 253 (32.53)% 375 12.28% 334 268 253
Tax-equivalent adjustment 31 (27.91)% 43 10.26% 39 18 21
----- ----- ------ ------ -----
Net income $ 672 (19.52)% $ 835 11.78% $ 747 $ 612 $ 580
===== ===== ====== ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>
Exchange Bancshares, Inc. and Subsidiary
Quarterly Condensed Consolidated Financial Information
1998 Quarters 1997 Quarters
----------------------------------- --------------------------------------
In thousands, except per common share amounts
and ratios
Fourth Third Second First Fourth Third Second First
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $1,829 1,819 1,503 1,436 1,467 1,404 1,380 1,314
Interest expense 837 835 660 626 643 615 577 552
----- ----- ----- ----- ----- ----- ----- -----
Net interest income 992 984 843 810 824 789 803 762
Provision for loan losses 0 0 0 0 0 0 0 0
Non-interest income 163 93 84 80 81 80 85 74
Non-interest expense 925 901 712 586 610 535 606 537
----- ----- ----- ----- ----- ----- ---- -----
Income before income taxes 230 176 215 304 295 334 282 299
Income tax expense 65 32 60 96 92 105 86 92
Net income $ 165 144 155 208 203 229 196 207
----- ----- ---- ----- ----- ----- ---- -----
Per Common Share
Net income $0.32 $0.28 $0.30 $0.40 $0.39 $0.45 $0.38 $0.41
Basic 0.32 0.28 0.30 0.40 0.39 0.45 0.38 0.41
Diluted 0.30 0 0.19 0 0.29 0 0.18 0
Dividends declared
Shareholder's equity 17.37 17.28 16.96 16.79 16.42 16.25 15.77 15.41
Stock price range
High 23.50 22.88 22.00 18.52 18.05 17.81 16.28 15.38
Low 21.88 21.50 18.05 17.33 16.62 16.62 15.38 14.47
Tax-equivalent
Yields and Rates 5.00% 4.29% 5.38% 5.41% 8.89% 5.71% 6.67%
Federal funds sold 5.25% 5.63% 5.44% 5.04% 5.49% 5.53% 5.45% 5.07%
Investment securities 6.14% 6.21% 5.96% 6.07% 6.30% 6.13% 6.18% 6.13%
Loans 9.27% 9.66% 9.24% 9.49% 9.71% 9.39% 9.40% 9.26%
Total earning assets 8.26% 8.63% 8.12% 8.31% 8.45% 8.23% 8.29% 8.12%
Interest-bearing deposits 4.38% 4.64% 4.24% 4.39% 4.44% 4.36% 4.21% 4.11%
Borrowed funds 6.55% 6.56% 6.56% 6.56% 8.08% 6.00% 7.02%
Total interest-bearing liabilities
4.38% 4.65% 4.25% 4.39% 4.45% 4.36% 4.21% 4.11%
Yield spread 3.88% 3.98% 3.87% 3.92% 4.00% 3.86% 4.08% 4.02%
Net interest income to earning assets
4.50% 4.68% 4.57% 4.71% 4.77% 4.65% 4.85% 4.74%
Ratios
Return on assets 0.69% 0.63% 0.80% 1.15% 1.11% 1.27% 1.10% 1.20%
Leverage 10.65 10.31 8.90 8.50 8.73 8.80 8.87 8.77
Return on average shareholders' equity
7.35% 6.51% 7.12% 9.73% 9.67% 11.14% 9.80% 10.53%
Average Assets
Cash and due from banks $ 2,996 $ 2,949 $ 2,348 $ 2,178 $2,226 $ 2,448 $ 2,754 $ 2,640
Interest-bearing deposits
in banks 24 28 52 37 45 70 60 0
Federal funds sold 8,462 6,320 7,064 4,602 5,317 3,980 2,567 2,288
Investment securities 17,710 17,782 17,065 17,810 19,391 19,789 20,022 20,609
Loans 62,666 60,458 50,107 47,005 45,262 44,943 44,500 42,352
------ ------ ------ ------ ------ ------ ------ ------
Total earning assets 88,862 84,588 74,288 69,454 70,015 68,782 67,149 65,249
Allowance for loan losses (1,528) (1,528) (846) (618) (630) (642) (647) (577)
Other assets 5,306 5,247 1,662 1,621 1,686 1,764 1,726 1,706
------- ------- ------- ------- ------- ------- ------- -------
Total average assets $95,636 $91,256 $77,452 $72,635 $73,297 $72,352 $70,982 $69,018
======= ======= ======= ======= ======= ======= ======= =======
Average Liabilities and
Shareholders' Equity
Noninterest-bearing deposits $10,102 $10,025 $ 6,402 $ 6,822 $ 6,874 $ 7,537 $ 7,932 $ 7,164
Interest-bearing deposits 76,084 71,824 61,815 56,804 57,591 56,178 54,771 53,744
Borrowed funds 174 175 186 197 198 200 57 0
Other liabilities 294 382 345 262 238 218 220 244
Shareholders' equity 8,982 8,850 8,704 8,550 8,396 8,219 8,002 7,866
------ ------ ------ ------ ------ ------- ------- -------
Total average liabilities
and shareholders' equity $95,636 $91,256 $77,452 $72,635 $73,297 $72,352 $70,982 $69,018
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
ITEM #7
FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Exchange Bancshares, Inc.
Luckey, Ohio
We have audited the consolidated balance sheets of Exchange Bancshares,
Inc. and Subsidiary as of December 31, 1998, and 1997, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Exchange Bancshares, Inc. and Subsidiary as of December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Robb, Dixon,
Francis, Davis, Oneson
& Company
Granville, Ohio
March 3, 1999
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
1998 1997
---- ----
ASSETS
Cash and cash equivalents
Cash and amounts due from depository institutions $ 3,092 $ 2,224
Interest bearing demand deposits in banks 21 42
Federal funds sold 4,874 3,926
------- -------
Total cash and cash equivalents 7,987 6,192
Investment securities
Securities available-for-sale 18,448 16,362
Securities held-to-maturity, fair values
of $1,030 and $2,405 1,022 2,406
------ ------
Total investment securities 19,470 18,768
Mortgage loans held-for-sale 602 0
Loans 62,874 46,872
Allowance for loan losses (1,542) (624)
------ ------
Net loans 61,332 46,248
Premises and equipment, net 3,910 844
Accrued interest receivable 689 625
Deferred income taxes 357 10
Other assets 337 108
------ ------
TOTAL ASSETS $94,684 $72,795
======= =======
LIABILITIES
Deposits:
Noninterest-bearing $ 9,655 $ 6,371
Interest-bearing 75,536 57,557
------ ------
Total deposits 85,191 63,928
Borrowed funds 173 198
Accrued interest payable 171 149
Other liabilities 135 77
------ ------
TOTAL LIABILITIES 85,670 64,352
------ ------
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 2,498
Additional paid-in capital 3,786 3,370
Retained earnings 2,546 2,626
Treasury stock at cost, 3,525 and 8,439 shares (50) (126)
Accumulated other comprehensive income 109 75
------ ------
TOTAL SHAREHOLDERS' EQUITY 9,014 8,443
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $94,684 $72,795
======= =======
See accompanying notes.
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998 , 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 5,168 $ 4,159 $ 3,756
Interest and dividends on investment securities 1,059 1,212 1,262
Interest on federal funds sold 358 192 193
Interest on due from bank deposits 2 2 0
------- ------ -------
TOTAL INTEREST INCOME 6,587 5,565 5,211
------- ------ -------
INTEREST EXPENSE
Interest on deposits 2,946 2,379 2,174
Interest on advances from Federal Home Loan Bank 12 8 0
------ ----- ------
TOTAL INTEREST EXPENSE 2,958 2,387 2,174
------ ----- ------
NET INTEREST INCOME 3,629 3,178 3,037
Provision for loan losses 0 0 75
----- ------ ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,629 3,178 2,962
OTHER INCOME
Service charges on deposits 281 260 260
Other income 139 60 54
----- ----- -----
TOTAL OTHER INCOME 420 320 314
----- ----- -----
OTHER EXPENSES
Salaries and employee benefits 1,364 1,112 1,079
Occupancy and equipment, net 459 295 287
Bank and ATM charges 98 79 77
Credit card 80 56 50
Data processing 111 87 88
Directors fees 66 62 51
Examination and accounting fees 338 116 97
State and other taxes 119 108 109
Postage and courier 88 61 58
Supplies and printing 131 92 88
Other expenses 270 220 211
----- ----- -----
TOTAL OTHER EXPENSES 3,124 2,288 2,195
----- ----- -----
INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 925 1,210 1,081
Federal income tax expense 253 375 334
------ ------ ------
NET INCOME $ 672 $ 835 $ 747
====== ======= ======
EARNINGS PER SHARE:
Basic $1.30 $1.63 $1.44
Diluted $1.30 $1.63 $1.44
</TABLE>
See accompanying notes.
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of shares Amounts (Dollars in thousands)
-------------------------- -------------------------------------------------------------
Accumulated
Additional other Compre-
Common Treasury Common paid-in Retained Treasury
comprehensive hensive
stock stock stock capital earnings stock income
income
----- ----- ----- ------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
<C>
December 31, 1995 453,092 (898) $2,265 $2,801 $2,282 ($13) $ 94
Net income 747 $747
Other comprehensive income-
Change in unrealized
gain (loss) on securities
available-for-sale,
net of tax of $17 (34) (34)
----
Comprehensive income $713
Cash dividends declared ====
($.40 per share) (207)
5% stock dividend declared 22,655 (125) 114 249 (363)
Purchase treasury stock (7,372) (118)
------- ------- ----- ----- ----- ----- ------
December 31, 1996 475,747 (8,395) 2,379 3,050 2,459 (131) 60
Net income 835 $835
Other comprehensive income-
Change in unrealized
gain (loss) on securities
available-for-sale,
Net of tax of $8 15 15
-----
Comprehensive income $850
=====
Cash dividends declared
($.47 per share) (240)
5% stock dividend declared 23,787 (532) 119 309 (428)
Purchase treasury stock (2,620) (42)
Sale of treasury stock 3,108 11 47
------- ------ ------ ----- ----- ----- ---
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
======= ======= ====== ====== ====== ===== =====
</TABLE>
See accompanying notes.
<PAGE>
EXCHANGE BANCHSARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
Year ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 672 $ 835 $ 747
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 0 0 75
Loss on sale of other real estate owned 0 1 0
Gain on sale of premises and equipment 0 0 (1)
Depreciation 216 119 131
Goodwill amortization 1 0 0
Deferred income taxes (47) 5 2
Investment securities amortization (accretion) 84 107 134
Originations of sale of loans held-for-sale (4,676) 0 0
Proceeds from loans held-for-sale 4,074 0 0
Changes in operating assets and liabilities:
Accrued interest receivable 27 21 (58)
Accrued interest payable (24) 28 26
Other assets 25 33 (36)
Other liabilities (75) (33) 5
------ ------ ------
Net cash provided by operating activities 277 1,116 1,025
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of held-to-maturity securities 0 0 (100)
Proceeds from maturities of held-to-maturity securities 1,357 738 605
Purchases of available-for-sale securities (6,201) (4,742) (9,360)
Proceeds from maturities of available-for-sale securities 5,305 6,000 8,400
Proceeds from merger with Towne Bank 918 0 0
Net increase in loans (2,072) (5,307) (3,182)
Purchases of premises and equipment (3,211) (71) (110)
Proceeds from sale of equipment 0 0 1
Proceeds from sale of other real estate owned 0 21 0
------ ------- -------
Net cash used in investing activities (3,904) (3,361) (3,746)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Noninterest-bearing, interest-bearing demand,
and savings deposits 5,563 (530) (302)
Certificates of deposit 18 4,299 1,950
Proceeds from long-term Federal Home Loan Bank advances 0 200 0
Payments on long-term Federal Home Loan Bank advances (24) (2) 0
Issuance of common stock 3 0 0
Purchase of treasury stock 0 (42) (118)
Sale of treasury stock 115 58 0
Dividends paid (253) (240) (207)
------ ------ -----
Net cash provided by financing activities 5,422 3,743 (1,323)
----- ----- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,795 1,498 (1,398)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,192 4,694 6,092
------ ------ -----
CASH AND CASH EQUIVALENTS AT END OF YEAR $7,987 $6,192 $4,694
====== ====== ======
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for interest $2,982 $2,359 $2,148
Cash paid during the year for income taxes 331 406 300
</TABLE>
See accompanying notes.
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
================================================================================
Notes to Consolidated Financial Statements
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Exchange Bancshares, Inc. (the "Bancorp") is a bank holding company whose
principal activity is the ownership and management of its wholly-owned
subsidiary, The Exchange Bank, (the "Bank"). The Bank generates commercial
(including agricultural), mortgage and consumer loans and receives deposits
from customers located primarily in portions of Lucas and Wood Counties in
Northwest Ohio. The Bank operates under a state bank charter and provides
full banking services. As a state bank, the Bank is subject to regulations by
the State of Ohio Division of Financial Institutions and the Federal Reserve
System through the Federal Reserve Bank of Cleveland (FRB).
Basis of Consolidation
The consolidated financial statements include the accounts of Exchange
Bancshares, Inc. and its wholly-owned subsidiary, The Exchange Bank, after
elimination of all material intercompany transactions and balances.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that 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 determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. In connection with the
determination of the estimated losses on loans, management obtains independent
appraisals for significant collateral.
The Bank's loans are generally secured by specific items of collateral
including real property, consumer assets, and business assets. Although the
Bank has a diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent on local economic conditions in
the agricultural industry.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Bank to recognize additional
losses based on their judgments about information available to them at the
time of their examination. Because of these factors, it is reasonably
possible that the estimated losses on loans may change materially in the near
term. However the amount of change that is reasonably possible cannot be
estimated.
Investment Securities
Debt securities are classified as held-to-maturity when the Bancorp has the
positive intent and ability to hold the securities to maturity. Securities
held-to-maturity are carried at amortized cost. The amortization of premiums
and accretion of discounts are recognized in interest income using methods
approximating the interest method over the period to maturity.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Securities available-for- sale are carried at fair value
with unrealized gains and losses reported in other comprehensive income.
Realized gains (losses) on securities available-for-sale are included in other
income (expense) and, when applicable, are reported as a reclassification
adjustment, net of tax, in other comprehensive income. Gains and losses on
sales of securities are determined on the specific-identification method.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary
result in write-downs of the individual securities to their fair value. The
related write-downs are included in earnings as realized losses.
<PAGE>
Loans Held for Sale
Mortgage loans originated and held for sale in the secondary market are
carried at the lower of cost or market value determined on an aggregate
basis. Net unrealized losses are recognized in a valuation allowance through
charges to income. Gains and losses on the sale of loans held for sale are
determined using the specific identification method.
Loans
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan fees.
Loan origination fees, as well as certain direct origination costs, are
deferred and amortized as a yield adjustment over the lives of the related
loans using the interest method. Amortization of deferred loan fees is
discontinued when a loan is placed on nonaccrual status.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest
income on other nonaccrual loans is recognized only to the extent of interest
payments received.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions and other risks inherent in the portfolio.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows. Although management uses
available information to recognize losses on loans, because of uncertainties
associated with local economic conditions, collateral values, and future cash
flows on impaired loans, it is reasonably possible that a material change
could occur in the allowance for loan losses in the near term. However, the
amount of the change that is reasonably possible cannot be estimated. The
allowance is increased by a provision for loan losses, which is charged to
expense, and reduced by charge-offs, net of recoveries. Changes in the
allowance related to impaired loans are charged or credited to the provision
for loan losses.
Premises and Equipment
Land is carried at cost. Other premises and equipment are recorded at cost
net of accumulated depreciation. Depreciation is computed using the
straight-line method based principally on the estimated useful lives of the
assets. Maintenance and repairs are expensed as incurred while major
additions and improvements are capitalized.
Other Real Estate Owned
Real estate properties acquired through or in lieu of loan foreclosure are
initially recorded at the lower of the Bank's carrying amount or fair value
less estimated selling cost at the date of foreclosure. Any write-downs based
on the asset's fair value at the date of acquisition are charged to the
allowance for loan losses. After foreclosure, these assets are carried at the
lower of their new cost basis or fair value less cost to sell. Costs of
significant property improvements are capitalized, whereas costs relating to
holding property are expensed. The portion of interest costs related to
development of real estate is capitalized. Valuations are periodically
performed by management, and any subsequent write-downs are recorded as a
charge to operations, if necessary, to reduce the carrying value of a property
to the lower of its cost or fair value less cost to sell.
Income Taxes
Income taxes are provided for the tax effects reported in the financial
statements and consist of taxes currently due plus deferred taxes related
primarily to differences between the basis of available-for-sale securities,
allowance for loan losses, accumulated depreciation, non-accrual loan
interest, deferred acquisition costs and net deferred loan fees. The deferred
tax assets and liabilities represent the future tax return consequences of
those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. Deferred tax assets and liabilities
are reflected at income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled.
As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes. The Bancorp
files a consolidated income tax return with its subsidiary.
<PAGE>
Statements of Cash Flows
The Bancorp considers all cash and amounts due from depository institutions,
interest-bearing deposits in other banks, and federal funds sold to be cash
equivalents for purposes of the statements of cash flows.
Reclassifications
Certain amounts in 1997 and 1996 have been reclassified to conform with the
1998 presentation.
NOTE B - BUSINESS COMBINATION
On June 19, 1998, the company acquired Towne Bank, Perrysburg, Ohio in a
business combination accounted for as a purchase. Immediately after the
purchase, Towne Bank was merged with and into The Exchange Bank. Towne Bank
was a full service community bank with facilities in Perrysburg and Sylvania,
Ohio and had approximately $16.8 million in assets. The results of operations
of Towne Bank are not included in the accompanying financial statements due to
Towne Bank ceasing to exist after it was acquired. The total cost of the
acquisition was $3,101,000, which exceeded the fair value of the assets of
Towne Bank by $40,000, which is being amortized on the straight-line method
over 15 years.
The following summarized pro forma (unaudited) information assumes the
acquisition had occurred on January 1, 1996:
(Dollars in thousands, except per share data)
1998 1997 1996
---- ---- ----
Net interest income $3,985 $3,750 $3,191
====== ====== ======
Net income $ (227) $(381) $ 148
======= ====== ======
Earnings per share:
Basic $(0.44) $(0.74) $ 0.29
======= ======= ======
Diluted $(0.44) $(0.74) $ 0.29
======= ======= ======
The above amounts reflect adjustments for amortization of goodwill and income
taxes.
NOTE C - RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve funds in cash or on deposit with the
Federal Reserve Bank and another correspondent banks. The required reserve at
December 31, 1998 and 1997 was $755,000 and $560,000, respectively.
<PAGE>
NOTE D - INVESTMENT SECURITIES
The amortized cost of securities and their approximate fair values are as
follows:
<TABLE>
<CAPTION>
Available-for-sale
- ------------------
(Dollars in thousands)
December 31, 1998 December 31, 1997
--------------------------------------------------- ----------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized
Unrealized Fair
Cost Gains Losses Value Cost Gains Losses
Value
---- ----- ------ ----- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
<C>
U.S.
Government $10,967 $135 $ 0 $11,102 $12,169 $108 $ 0 $12,277
Federal agency 2,778 7 0 2,785 0 0 0 0
Corporate
debt securities 4,015 26 (2) 4,039 3,712 8 (2) 3,718
Equity
securities 522 0 0 522 367 0 0 367
----- ---- ---- ------ ------ ---- ------ -------
Total
available-for-sale 18,282 168 (2) 18,448 16,248 116 (2) 16,362
====== ==== ===== ====== ====== ===== ====== ========
Held-to-maturity
- ----------------
State &
municipal securities 605 12 0 617 1,171 18 0 1,189
Mortgage-backed
securities 417 0 (4) 413 1,235 0 (19) 1,216
--- ---- ---- ----- ----- ---- ----- -------
Total
held-to-maturity 1,022 12 (4) 1,030 2,406 18 (19) 2,405
------ ---- ---- ----- ----- ---- ----- -------
Total $19,304 $180 $ (6) $19,478 $18,654 $134 $(21) $18,767
======= ==== ===== ======= ======= ==== ===== =======
</TABLE>
The amortized cost and estimated fair value of securities available-for-sale
and held-to-maturity at December 31, 1998, by contractual maturity, are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Available-for-sale Held-to-maturity
Amortized Fair Amortized Fair
Amounts maturing in : Cost Value Cost Value
---- ----- ---- ------
<S> <C> <C> <C> <C>
One year or less $ 6,920 $ 6,980 $ 328 $ 331
After one year through five years 10,840 10,946 277 286
Mortgage-backed securities 0 0 417 413
Equity securities 522 522 0 0
------- ------- ------ -----
Total $18,282 $18,448 $1,022 $1,030
======= ======= ====== ======
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations without call or prepayment
penalties.
The bank did not sell any securities in 1998, 1997, or in 1996.
Investment securities with a carrying value of approximately $9,831,000 and
$8,500,000 were pledged at December 31, 1998 and 1997 to secure certain
deposits.
<PAGE>
NOTE E - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31, 1998 and 1997 are summarized as
follows:
(Dollars in thousands)
1998 1997
---- ----
Loans secured by real estate:
Construction $ 250 $ 0
Farmland 2,959 2,978
One-to-four family residential properties 31,813 24,353
Multifamily (5 or more) residential properties 1,173 1,337
Nonfarm nonresidential properties 14,817 8,855
Agricultural production 880 709
Commercial and industrial 2,880 955
Consumer 7,115 6,322
Municipal 983 1,360
Other loans 4 3
------- -------
Total $62,874 $46,872
======= =======
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Allowance for loan losses:
Balance beginning of year $ 624 $ 508 $ 483
Allowance related to loans acquired 961 0 0
Provision for loan losses 0 0 75
Recoveries on loans 82 185 18
Loans charged off (125) (69) (68)
------ ----- ------
Balance, end of year $1,542 $ 624 $ 508
======= ===== ======
</TABLE>
At December 31, 1998 and 1997, the total recorded investment in impaired loans,
all of which had allowances determined in accordance with SFAS No. 114 and No.
118, amounted to approximately $720,000 and $17,000, respectively. The average
recorded investment in impaired loans amounted to approximately $394,000 and
$17,000 for the years ended December 31, 1998 and 1997, respectively. The
allowance for loan losses related to impaired loans amounted to approximately
$385,000 and $15,000 at December 31, 1998 and 1997, respectively. Interest
income on impaired loans of $63,000, $1,000 and $2,000 was recognized for cash
payments received in 1998, 1997 and 1996, respectively. The bank has no
commitments to loan additional funds to borrowers whose loans have been
classified as impaired.
The Bank has entered into transactions with certain directors, executive
officers, significant shareholders, and their affiliates. Such transactions
were on substantially the same terms, including interest rates and collateral,
as those prevailing at the time of comparable transactions with other
customers, and did not, in the opinion of management, involve more than a
normal credit risk or present any other unfavorable features. The aggregate
amount of loans to such related parties at December 31, 1998 was $437,000.
During the year ended December 31, 1998, new loans made to such related
parties amounted to $142,000 and payments amounted to $140,000.
Loans with carrying amounts of $22,000 were transferred to other real estate
owned in 1997. No loans were transferred to other real estate owned in 1998
or in 1996.
<PAGE>
NOTE F - PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1998 and 1997 follows:
(Dollars in thousands)
1998 1997
---- ----
Land $ 724 $ 105
Buildings 3,220 1,250
Equipment 1,545 853
----- -----
5,489 2,208
Accumulated depreciation (1,579) (1,364)
------ ------
Total $3,910 $ 844
====== ======
NOTE G - DEPOSITS
Deposit account balances at December 31, 1998 and 1997, are summarized as
follows:
(Dollars in thousands)
1998 1997
---- ----
Noninterest-bearing $ 9,655 $ 6,371
Interest-bearing demand 14,835 9,757
Savings accounts 15,990 14,591
Certificates of deposit 44,711 33,209
------- -------
Total $85,191 $ 63,928
======= =======
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $7,838,000 and $6,090,000 at
December 31, 1998 and 1997.
Certificates maturing in years ending December 31, as of December 31, 1998:
(Dollars in thousands)
1999 $31,737
2000 10,505
2001 1,831
2002 389
2003 and thereafter 249
-------
Total $44,711
=======
The Bank held related party deposits of approximately $748,000 and $465,000 at
December 31, 1998 and 1997, respectively.
Overdrawn demand deposits reclassified as loans totaled $3,000 and $4,000 at
December 31, 1998 and 1997, respectively.
NOTE H - BORROWED FUNDS
Borrowed funds are comprised of the following at December 31:
<TABLE>
<CAPTION>
(Dollars in thousands)
Current Balance
Interest -----------------------
Rate 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal Home Loan Bank advances
Fixed rate advances, with monthly principal
principal and interest payments
Advance due July 1, 2017 6.85% $173 $198
==== ====
</TABLE>
Federal Home Loan Bank ("FHLB") advances are collateralized by all shares of
FHLB stock owned by the Bank (totaling $280,000) and by 100% of the Bank's
qualified mortgage loan portfolio (totaling approximately $31,813,000). Based
on the carrying amount of FHLB stock owned by the Bank, total FHLB advances
are limited to approximately $5,602,000.
The aggregate minimum future annual principal payments on FHLB advances are
$24,000 in 1999, $22,000 in 2000, $19,000 in 2001, $17,000 in 2002, $14,000 in
2003 and $77,000 after 2003.
NOTE I - FEDERAL INCOME TAXES
The provision for income taxes for the years ended December 31, 1998 and 1997
consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income tax expense
Current tax expense $300 $370 $332
Deferred tax expense (47) 5 2
---- ---- ----
Total $253 $375 $334
==== ==== ====
</TABLE>
The provision for federal income taxes differs from that computed by applying
federal statutory rates to income before federal income tax expense, as
indicated in the following analysis:
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax at 34% $315 $411 $368
Tax exempt income
Current tax expense (37) (46) (39)
Net operating loss carryforward (19) 0 0
Other (6) 10 5
---- ---- ----
Total $253 $375 $334
==== ==== ====
</TABLE>
<PAGE>
A cumulative net deferred tax asset is included in other assets at December
31, 1998 and 1997. The components of the asset are as follows:
(Dollars in thousands)
1998 1997
---- ----
Differences in available-for-sale securities $ (56) $ (39)
Differences in depreciation methodsCurrent tax expense (54) (57)
Differences in accounting for loan losses 436 111
Differences in accounting for loan fees (18) (2)
Differences in interest income for nonaccrual loans 3 4
Differences in acquisition costs 48 0
Net operating loss carryforward of acquired company 366 0
Other (2) (7)
------ ------
Total 723 10
Valuation allowance (366) 0
------ ------
Total $ 357 $ 10
====== ======
Deferred tax assets $ 853 $ 115
Deferred tax liabilities (130) (105)
Valuation allowance (366) 0
------ ------
Net deferred tax asset $ 357 $ 10
====== ======
NOTE J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Bank has outstanding commitments and
contingent liabilities, such as commitments to extend credit , which are not
included in the accompanying consolidated financial statements. The Bank's
exposure to credit loss in the event of nonperformance by the other party to
the financial instruments for commitments to extend credit and standby letters
of credit is represented by the contractual or notional amount of those
instruments. The Bank uses the same credit policies in making such
commitments as it does for instruments that are included in the consolidated
balance sheet.
Financial instruments whose contract amount represents credit risk were as
follows:
(Dollars in thousands)
1998 1997
---- ----
Home equity lines $ 1,226 $ 1,155
Credit card lines 3,040 2,160
Other loan commitments 7,456 2,642
------- -------
Total $11,722 $ 5,957
======= =======
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. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount and type of
collateral obtained, if deemed necessary by the Bank upon extension of credit,
is based on management's credit evaluation. Collateral held varies but may
include accounts receivable, inventory, property and equipment, and
income-producing commercial properties.
<PAGE>
The Bank has not been required to perform on any financial guarantees during
the past two years. The Bank has not incurred any losses on its commitments
during the past two years.
The Bank maintains several bank accounts at six banks. Accounts at an
institution are insured by the Federal Deposit Insurance Corporation (FDIC) up
to $100,000. Cash at two of these institutions exceeded federally insured
limits. The amount in excess of the FDIC limit totaled $1,517,000.
NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank periodically is subject to claims and lawsuits which arise in the
ordinary course of business. It is the opinion of management that the
disposition or ultimate resolution of such claims and lawsuits will not have a
material adverse effect on the financial position of the Bank.
NOTE L - RESTRICTION ON DIVIDENDS
The Bank is subject to certain restrictions on the amount of dividends that it
may pay without prior regulatory approval. The Bank normally restricts
dividends to a lesser amount. At December 31, 1998, no retained earnings was
available for the payment of dividends to the holding company without prior
regulatory approval.
NOTE M - EMPLOYEE BENEFIT PLANS
In 1968 The Exchange Bank initiated a Profit Sharing Plan which includes all
employees who have been employed by the Bank for at least one year and those
who work at least one thousand hours per year. Under the plan the Bank
contributed five percent of net income after provision for income taxes,
adjustments for chargeoffs and recoveries, and after provision for cash
dividend to the shareholders. Early in 1994 this Profit Sharing Plan was
changed to a Prototype Cash or Deferred Profit Sharing Plan and
Trust/Custodial Account Plan. This new plan includes a 401(k) plan, also.
Under the new plan the Bank will match fifty cents for each dollar which the
employee voluntarily contributes to the plan. This match by the Bank is
limited to three percent of the employee's annual salary. The contributions
made by the bank for the years 1998, 1997 and 1996 were $30,000 each year.
Thirty-seven employees participated in the plan during 1998, thirty-five in
1997, and twenty eight employees participated in the plan during 1996.
NOTE N - STOCK DIVIDEND
On June 15,1998, the Company distributed 24,976 shares of common stock in
connection with a 5% stock dividend. As a result of the stock dividend,
common stock was increased by $124,000, additional paid-in capital was
increased by $375,000, and retained earnings was decreased by $499,000. All
references in the accompanying financial statements to the number of common
shares and per share amounts for 1997 and 1996 have been restated to reflect
the stock dividend.
NOTE O - REGULATORY MATTERS
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 direct material affect on the Bancorp 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 regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of: total risk-based
<PAGE>
capital and Tier I capital to risk-weighted assets (as defined in the
regulations), and Tier I capital to average assets (as defined). Management
believes, as of December 31, 1998, 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 the table below. There are no conditions or
events since the most recent notification that management believes have
changed the Bank's prompt corrective action category.
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
<S>
(Dollars in thousands)
To Be 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>
As of December 31, 1998:
Total Risk-Based Capital
(to Risk Weighted Assets) $9,500 15.3% $4,980 8.0% $6,225 10.0%
Tier I Capital
(to Risk Weighted Assets) 8,712 14.0 2,490 4.0 3,735 6.0
Tier I Capital
(to Average Assets) 8,712 9.1 2,860 3.0 4,767 5.0
As of December 31, 1997:
Total Risk-Based Capital
(to Risk Weighted Assets) $7,827 17.3% $3,610 8.0% $4,513 10.0%
Tier I Capital
(to Risk Weighted Assets) 7,262 16.1 1,805 4.0 2,708 6.0
Tier I Capital
(to Average Assets) 7,262 9.9 2,212 3.0 3,686 5.0
</TABLE>
NOTE P - FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statement of
financial condition. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Statement No. 107 excluded certain financial
instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Bank.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate those assets' fair values.
Investment securities: Fair values for investment securities are based on
quoted market prices.
Loans held-for-sale: Fair value of mortgages held-for-sale are stated at
market.
<PAGE>
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans (for example, fixed rate commercial real
estate and rental property mortgage loans and commercial and industrial loans)
are estimated using discounted cash flow analysis, based on interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. Loan fair value estimates include judgments regarding future
expected loss experience and risk characteristics. Fair values for impaired
loans are estimated using discounted cash flow analysis or underlying
collateral values, where applicable.
Deposits: The fair values disclosed for demand deposits are, by definition,
equal to the amount payable on demand at the reporting date (that is, their
carrying amounts). The carrying amounts of variable-rate, fixed-term
money-market accounts and certificates of deposit approximate their fair
values. Fair values for fixed-rate certificates of deposit are estimates
using a discounted cash flow calculation that applies interest rates currently
offered on certificates to a schedule of aggregated contractual expected
monthly maturities on time deposits.
Accrued interest: The carrying amounts of accrued interest approximate the
fair values.
Borrowed funds: The carrying amounts of borrowed funds are estimated using
discounted cash flow analysis based on interest rates currently being offered
borrowed funds.
The estimated fair values of the Company's financial instruments at December
31 are as follows:
(Dollars in thousands)
1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
Cash and cash equivalents $7,987 $7,987 $ 6,192 $ 6,192
Investments securities 19,470 19,478 18,768 18,767
Loans held-for-sale 602 602 0 0
Loans 61,332 61,748 46,248 46,265
Accrued interest receivable 689 689 625 625
Financial liabilities:
Deposits 85,191 85,078 63,928 63,858
Borrowed funds 173 184 198 203
Accrued interest payable 171 171 149 149
NOTE Q - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Exchange Bancshares, Inc. (parent company
only) follows:
Condensed Balance Sheets
at December 31,
(Dollars in thousands)
1998 1997
---- ----
Assets
Noninterest-bearing deposit with subsidiary bank $ 64 $ 58
Time deposit with subsidiary bank 0 1,000
Investment in subsidiary bank 8,861 7,337
Deferred income taxes 48 0
Other assets 41 48
----- -----
Total assets $9,014 $8,443
====== ======
Liabilities and Shareholders' Equity
Shareholders' Equity $9,014 $8,443
====== ======
<PAGE>
Condensed Statements of Income
Years ended December 31,
<TABLE>
<CAPTION>
(Dollars in thousands)
Year ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income
Interest on deposits in subsidiary bank $ 21 $ 0 $ 0
Dividends from subsidiary bank 2,455 1,335 287
------ ----- ------
Total income 2,476 1,335 287
Expenses
Salaries 23 22 21
Accounting and consulting fees 200 32 24
Other expenses 58 49 40
----- ----- -----
Total expenses 281 103 85
----- ----- -----
Income before income taxes and equity in undistributed
earnings of subsidiary 2,195 1,232 202
Income tax (provision) benefit 88 35 29
Income before undistributed earnings of subsidiary 2,283 1,267 231
Equity in undistributed earnings of subsidiary (1,611) (432) 516
------ ------ -----
Net income $ 672 $ 835 $ 747
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
Years Ended December 31,
(Dollars in thousands)
Year ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $672 $835 $747
Adjustments to reconcile net income to net cash
flows from operating activities:
Deferred income taxes (48) 0 0
Change in other assets 7 6 45
Equity in undistributed earnings of subsidiary 1,611 432 (516)
----- ----- -----
Net Cash from Operating Activities 2,242 1,273 276
----- ----- -----
Cash Flows from Investing Activities
Purchase of time deposit 0 (1,000) 0
Maturity of time deposit 1,000 0 0
Purchase of Town Bank (3,101) 0 0
------- ------ -----
Net cash provided by (used in)
financing activities (2,101) (1,000) 0
------- ------- ------
Cash Flows from Financing Activities
Proceeds from sale of common stock 3 0 0
Purchase of treasury stock 0 (42) (118)
Sale of treasury stock 115 58 0
Cash dividends paid (253) (240) (207)
------ ------ ------
Net Cash Used for Financing Activities (135) (224) (325)
Net Increase (decrease) in Cash
and Cash Equivalents 6 49 (49)
Cash and Cash Equivalents
Beginning of year 58 9 58
------ ------ -----
End of year $ 64 $ 58 $ 9
======= ====== =====
</TABLE>
<PAGE>
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
ITEM 9. Directors and Executive Officers of the Registrant
The information set forth under the caption "INFORMATION REGARDING
NOMINEES AND CONTINUING DIRECTORS" of the Definitive Proxy Statement of the
Holding Company to be filed prior to April 15, 1999 with the United States
Securities and Exchange Commission is incorporated by reference herein.
ITEM 10. Executive Compensation
The information set forth under the caption "SUMMARY COMPENSATION
TABLE" of the Proxy Statement of the Holding Company to be filed prior to
April 15, 1999 with the United States Securities and Exchange Commission is
incorporated by reference herein.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "INFORMATION REGARDING
NOMINEES AND CONTINUING DIRECTORS" of the Proxy Statement of the Holding
Company to be filed prior to April 15, 1999 with the United States Securities
and Exchange Commission is incorporated by reference herein.
ITEM 12. Certain Relationships and Related Transactions
The information set forth under the caption "INDEBTEDNESS OF AND
TRANSACTIONS WITH OFFICERS AND DIRECTORS" of the Proxy Statement of the
Holding Company to be filed prior to April 15, 1999 with the United States
Securities and Exchange Commission is incorporated by reference herein.
ITEM 13. Exhibits, Financial Statements, and Reports on Form 8-K
(a) Exhibits
3(i) The Amended and Restated Articles of Incorporation of
Exchange Bancshares, Inc.
(Incorporated by reference.)
3(ii) Code of Regulations of Exchange Bancshares, Inc.
(Incorporated by reference.)
21 Subsidiaries
27 Financial Data Schedule
99.1 Proxy Statement (Incorporated by reference.)
99.2 Safe Harbor Under the Private Securities Litigation Reform Act
of 1995
(b) Report on Form 8-K
The Registrant did not file any reports on Form 8-K during
the quarter ended December 31, 1998.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EXCHANGE BANCSHARES, INC.
Principle Executive Officer:
/s/ Marion Layman
----------------------------------
Marion Layman
Chairman, President, and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant in the capacities
on the dates indicated.
/s/ Marion Layman /s/ Rolland I. Huss
---------------------------------- -------------------------------
Marion Layman, Chairman Rolland I. Huss, Vice-Chairman
March 30, 1999 March 30, 1999
---------------------------------- -------------------------------
Date Date
/s/ Donald H. Lusher /s/ Cecil R. Adkiins
---------------------------------- ---------------------------------
Donald H. Lusher, Director Cecil R. Adkins, Director
March 30, 1999 March 30, 1999
---------------------------------- ---------------------------------
Date Date
/s/ Joseph R. Hirzel /s/ David G. Marsh
---------------------------------- ---------------------------------
Joseph R. Hirzel, Director David G. Marsh, Director
Secretary and Treasurer
March 30, 1999 March 30, 1999
---------------------------------- ---------------------------------
Date Date
/s/ Donald P. Gerke /s/ Edmund J. Miller
---------------------------------- ---------------------------------
Donald P. Gerke, Director Edmund J. Miller, Director
March 30, 1999 March 30, 1999
---------------------------------- ---------------------------------
Date Date
/s/ Norma J. Christen /s/ Marion Layman
---------------------------------- ---------------------------------
Norma J. Christen, Director Marion Layman
Principle Accounting
and Financial Officer:
March 30, 1999 March 30, 1999
---------------------------------- ---------------------------------
Date Date
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
3(i) The Amended and Restated Incorporated by reference to the
Articles of Incorporation
Registrant's Quarterly Report on
Form 10-QSB for the Quarter Ended
June 30, 1995 ("June 30, 1995,
10-QSB"), Exhibit 3(i)
3(ii) Code of Regulations of Exchange Incorporated by reference to the
Bancshares, Inc. Registrant's Registration
Statement on Form S-4 dated
November 16, 1992, as amended on
Amendment No. 1 to the Company's
Registration Statement on
Form S-4 dated January 14, 1993,
Registration Number 33-05466.
21 Subsidiaries of Exchange Incorporated by reference to the
Bancshares, Inc. December 31, 1997, 10-KSB,
Exhibit 21
27 Financial Data Schedule
99.1 Proxy Statement Incorporated by reference to the
definitive Proxy Statement of the
Registrant for the 1999 Annual
Meeting of Shareholders of Exchange
Bancshares, filed with the
Securities and Exchange Commission
99.2 Safe Harbor Under the Private
Securities Litigation Reform
Act of 1995
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Balance Sheets as of December 31, 1998 and 1997, and the
related Consolidated Income Statements for the twelve months ended
December 31, 1998 and 1997, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<CIK> 0000720912
<NAME> EXCHANGE BANCSHARES, INC.
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 3,092
<INT-BEARING-DEPOSITS> 21
<FED-FUNDS-SOLD> 4,874
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,448
<INVESTMENTS-CARRYING> 1,022
<INVESTMENTS-MARKET> 1,030
<LOANS> 62,874
<ALLOWANCE> 1,542
<TOTAL-ASSETS> 94,684
<DEPOSITS> 85,191
<SHORT-TERM> 0
<LIABILITIES-OTHER> 306
<LONG-TERM> 173
0
0
<COMMON> 2,623
<OTHER-SE> 6,391
<TOTAL-LIABILITIES-AND-EQUITY> 94,684
<INTEREST-LOAN> 5,168
<INTEREST-INVEST> 1,059
<INTEREST-OTHER> 360
<INTEREST-TOTAL> 6,587
<INTEREST-DEPOSIT> 2,946
<INTEREST-EXPENSE> 2,958
<INTEREST-INCOME-NET> 3,629
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,124
<INCOME-PRETAX> 925
<INCOME-PRE-EXTRAORDINARY> 672
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 672
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.30
<YIELD-ACTUAL> 4.62
<LOANS-NON> 399
<LOANS-PAST> 115
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 720
<ALLOWANCE-OPEN> 624
<CHARGE-OFFS> 125
<RECOVERIES> 82
<ALLOWANCE-CLOSE> 1,542
<ALLOWANCE-DOMESTIC> 1,542
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 298
</TABLE>
EXHIBIT 99.2
Safe Harbor Under the Private Securities Litigation Reform Act of 1995
- ----------------------------------------------------------------------
The Private Securities Litigation Reform Act of 1995 (the "Act") provides
a "safe harbor" for forward-looking statements to encourage companies to
provide prospective information about their companies, so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those discussed in the statement. Exchange
Bancshares, Inc. (the "Holding Company") desires to take advantage of the
"safe harbor" provisions of the Act. Certain information, particularly
information regarding future economic performance and finances and plans and
objectives of management, contained or incorporated by reference in the
Holding Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1998 is forward-looking. In some cases, information regarding
certain important factors that could cause actual results of operations or
outcomes of other events to differ materially from any such forward-looking
statement appear together with such statement. In addition, forward-looking
statements are subject to other risks and uncertainties affecting the
financial institutions industry, including, but not limited to, the
following:
Interest Rate Risk
- ------------------
The Holding Company's operating results are dependent to a significant
degree on its net interest income, which is the difference between interest
income from loans, investments and other interest-earning assets and interest
expense on deposits, borrowings and other interest-bearing liabilities. The
interest income and interest expense of the Holding Company change as the
interest rates on interest-earning assets and interest-bearing liabilities
change. Interest rates may change because of general economic conditions, the
policies of various regulatory authorities and other factors beyond the
Holding Company's control. In a rising interest rate environment, loans tend
to prepay slowly and new loans at higher rates increase slowly, while interest
paid on deposits increases rapidly because the terms to maturity of deposits
tend to be shorter than the terms to maturity or prepayment of loans. Such
differences in the adjustment of interest rates on assets and liabilities may
negatively affect the Holding Company's income.
Possible Inadequacy of the Allowance for Loan Losses
- ----------------------------------------------------
The Holding Company maintains an allowance for loan losses based upon a
number of relevant factors, including, but not limited to, trends in the level
of nonperforming assets and classified loans, current and anticipated economic
conditions in the primary lending area, past loss experience, possible losses
arising from specific problem loans and changes in the composition of the loan
portfolio. While the Board of Directors of the Holding Company believes that
it uses the best information available to determine the allowance for loan
losses, unforeseen market conditions could result in material adjustments, and
net earnings could be significantly adversely affected if circumstances differ
substantially from the assumptions used in making the final determination.
Loans not secured by one- to four-family residential real estate are
generally considered to involve greater risk of loss than loans secured by
one- to four-family residential real estate due, in part, to the effects of
general economic conditions. The repayment of multifamily residential and
nonresidential real estate loans generally depends upon the cash flow from the
operation of the property, which may be negatively affected by national and
local economic conditions. Construction loans may also be negatively affected
by such economic conditions, particularly loans made to developers who do not
have a buyer for a property before the loan is made. The risk of default on
consumer loans increases during periods of recession, high unemployment and
other adverse economic conditions. When consumers have trouble paying their
bills, they are more likely to pay mortgage loans than consumer loans. In
addition, the collateral securing such loans, if any, may decrease in value
more rapidly than the outstanding balance of the loan.
<PAGE>
Competition
- -----------
The Exchange Bank (the"Bank") competes for deposits with other commercial
banks, savings associations and credit unions and issuers of commercial paper
and other securities, such as shares in money market mutual funds. The
primary factors in competing for deposits are interest rates and convenience
of office location. In making loans, the Bank competes with other savings
associations, commercial banks, consumer finance companies, credit unions,
leasing companies, mortgage companies and other lenders. Competition is
affected by, among other things, the general availability of lendable funds,
general and local economic conditions, current interest rate levels and other
factors which are not readily predictable. The size of financial institutions
competing with the Bank is likely to increase as a result of changes in
statutes and regulations eliminating various restrictions on interstate and
inter-industry branching and acquisitions. Such increased competition may
have an adverse effect upon the Bank.
Legislation and Regulation that may Adversely Affect the Holding Company's
- --------------------------------------------------------------------------
Earnings
- --------
The Bank is subject to extensive regulation by the Board of Governors of
the Federal Reserve System (the "FRB"), the State of Ohio, Division of
Financial Institutions (the "Division") and the Federal Deposit Insurance
Corporation (the "FDIC") and is periodically examined by such regulatory
agencies to test compliance with various regulatory requirements. As a bank
holding company, the Holding Company is also subject to regulation and
examination by the FRB and the Division. Such supervision and regulation of
Holding Company and Bank are intended primarily for the protection of
depositors and not for the maximization of shareholder value and may affect
the ability of the company to engage in various business activities. The
assessments, filing fees and other costs associated with reports, examinations
and other regulatory matters are significant and may have an adverse effect on
Holding Company's net earnings.
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance of members of the Bank Insurance fund (the "BIF") and the
Savings Association Insurance Fund (the "SAIF"). The FDIC has established a
risk-based assessment system for both BIF and SAIF members. Under such
system, assessments may vary depending on the risk the institution poses to
its deposit insurance fund. Such risk level is determined by reference to the
institution's capital level and the FDIC's level of supervisory concern about
the institution.
For several years, Congress has been considering various changes to the
bank and savings association charters, the activities in which banks and
savings associations and their holding companies and subsidiaries may engage
and the authority of various regulatory authorities over the financial
institutions and their holding companies and subsidiaries. The Holding
Company cannot predict at this time whether and when Congress will actually
adopt such "financial modernization legislation" or in what form it will be
adopted. It is expected, however, that the range of activities in which banks
and their affiliated companies may engage will be expanded, and it is possible
that the range of activities in which the Holding Company and the Bank may
engage will be restricted. It is not anticipated that the current activities
of the Holding Company or the Bank will be materially affected by any such
legislation.
Legislation to recapitalize the SAIF, which was enacted in 1996, provided
that the SAIF and the Bank Insurance Fund (the "BIF") would be merged if the
federal savings association charter was eliminated. Although the elimination
of the federal savings association charter has not occurred and is not now
expected in the near future, Congress is still discussing the merger of the
SAIF and the BIF. Although the merger could be expected to change the deposit
insurance premiums paid by the Bank, the effect on the Bank and the Holding
Company cannot be predicted at this time.
