U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED June 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
__________ TO __________
Commission file number - 33-53596
EXCHANGE BANCSHARES, INC.
------------------------
(Exact name of small business issuer as specified in its charter)
OHIO 34-1721453
---- ----------
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
237 Main Street
P.O. Box 177, Luckey, Ohio 43443
--------------------------------------- ------
(Address of principal executive offices) (Zip Code)
(419) 833-3401
--------------
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No . . .
---
As of August 2, 1999, 581,794 shares of Common Stock of the Registrant were
outstanding. There were no preferred shares outstanding.
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
FORM 10-QSB
INDEX
==============================================================================
Item
Number Page Number
PART I FINANCIAL INFORMATION
1. Financial Statements (Unaudited)
Consolidated balance sheets -- 3
June 30, 2000, and December 31, 1999
Consolidated statements of income --
Three and Six months ended June 30, 2000 and 1999 4
Consolidated statements of changes
in shareholders equity -- 5
Periods ended June 30, 2000, and December 31, 1999
Consolidated statements of cash flows -- 6
Six months ended June 30, 2000 and 1999
Notes to consolidated financial statements -- 7
June 30, 2000, and December 31, 1999
2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
PART II OTHER INFORMATION
1. Legal Proceedings 18
2. Changes in Securities and Use of Proceeds 18
3. Defaults upon Senior Securities 18
4. Submission of Matters to a Vote of Security Holders 18
5. Other Information 19
6. Exhibits and Reports on Form 8-K 19
Signatures 20
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED BALANCE SHEETS
==============================================================================
<TABLE>
<CAPTION>
(Dollars in thousands)
Unaudited
At June 30, At December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and amounts due from depository institutions $ 2,716 $ 3,646
Interest bearing demand deposits in banks 39 23
Federal funds sold 1,210 1,434
--------- --------
Total cash and cash equivalents 3,965 5,103
Investment securities
Securities available-for-sale 15,230 16,866
Securities held-to-maturity, fair values of $276 and $279 275 276
--------- --------
Total investment securities 15,505 17,142
Mortgage loans held-for-sale 0 34
Loans 78,085 71,955
Allowance for loan losses (898) (1,008)
-------- --------
Net loans 77,187 70,947
Premises and equipment, net 3,587 3,663
Accrued interest receivable 817 721
Deferred income taxes 337 266
Other assets 729 723
-------- --------
TOTAL ASSETS $102,127 $ 98,599
======== ========
LIABILITIES
Deposits:
Noninterest-bearing $ 9,932 $ 9,587
Interest-bearing 74,401 73,954
-------- --------
Total deposits 84,333 83,541
Borrowed funds 7,634 5,152
Accrued interest payable 196 189
Other liabilities 418 457
-------- --------
TOTAL LIABILITIES 92,581 89,339
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, 581,794 and 552,239 issued 2,909 2,761
Additional paid-in capital 4,992 4,382
Retained earnings 1,748 2,206
Treasury stock at cost, 0 shares 0 0
Accumulated other comprehensive income (103) (89)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 9,546 9,260
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 102,127 $ 98,599
========= ========
</TABLE>
---------------------------------------
See accompanying notes.
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF INCOME
=============================================================================
<TABLE>
<CAPTION>
(Dollars in thousands)
(Unaudited) (Unaudited)
3 Months Ended 6 Months Ended
-------------- --------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $1,789 $1,472 $3,464 $2,891
Interest and dividends on investment securities 219 260 465 521
Interest on federal funds sold 31 44 55 101
Interest on due from bank deposits 0 0 0 1
------ ------ ------ ------
TOTAL INTEREST INCOME 2,039 1,776 3,984 3,514
------ ------ ------ ------
INTEREST EXPENSE
Interest on deposits 833 788 1,637 1,573
Interest on borrowed funds 87 3 161 6
------ ------ ------ ------
TOTAL INTERST EXPENSE 920 791 1,798 1,579
------ ----- ------ ------
NET INTEREST INCOME 1,119 985 2,186 1,935
Provision for loan losses 0 0 0 0
------ ----- ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,119 985 2,186 1,935
NON-INTEREST INCOME
Service charges on deposits 77 74 143 141
Other income 54 94 98 174
------ ----- ------ ------
TOTAL NON-INTEREST INCOME 131 168 241 315
------ ----- ------ ------
NON-INTEREST EXPENSE
Salaries and employee benefits 460 468 931 855
Occupancy and equipment, net 160 144 313 303
Bank and ATM charges 26 22 53 46
Credit card 15 22 33 41
Data processing 33 30 68 62
Directors fees 20 20 34 34
Examination and accounting fees 42 62 77 101
State and other taxes 28 29 57 59
Postage and courier 31 29 62 58
Supplies and printing 39 31 65 59
Other expenses 127 142 217 254
------ ------ ------- ------
TOTAL NON-INTEREST EXPENSE 981 999 1,910 1,872
------ ------ ------- ------
INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 269 154 517 378
Federal income tax expense 72 44 155 110
------- ------- ------- -------
NET INCOME $ 197 $ 110 $ 362 $ 268
======= ====== ====== =======
Basic $0.34 $0.19 $0.62 $0.46
Diluted $0.34 $0.19 $0.62 $0.46
</TABLE>
See accompanying notes.
---------------------------------
<PAGE>
<TABLE>
<CAPTION>
EXCHANGE BANCSHARES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
==============================================================================
Number of Shares (Dollars in thousands)
---------------- ----------------------
Accumulated
other
Additional compre- Compre-
Common Treasury Common paid-in Retained Treasury hensive hensive
stock stock stock capital Earnings stock income income
----- ----- ----- ------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 524,620 (3,525) $2,623 $3,786 $2,488 $(50) $109
Net income 643 $643
Other comprehensive income-
Change in unrealized
gain (loss) on securities
available-for-sale,
net of tax of $102 (198) (198)
----
Comprehensive income $445
====
Cash dividends declared
($.47 per share) (269)
5% stock dividend declared 26,231 131 525 (656)
Issuance of common stock 1,388 7 28
Purchase of treasury stock (374) (9)
Sale of treasury stock 3,899 43 59
------- ----- ------ ------ ------ ---- ------
Balances at December 31, 1999 552,239 0 $2,761 $4,382 $2,206 $ 0 $ (89)
Net income 362 $362
Other comprehensive income-
Change in unrealized
gain (loss) on securities
available-for-sale,
net of tax of $7 (14) (14)
-----
Comprehensive income $348
=====
Cash dividends declared
($.20 per share) (115)
5% stock dividend declared 27,420 137 568 (705)
Issuance of common stock 2,135 11 42
-------- ---- ------ ------- ------- ----- ------
Balances at June 30, 2000 581,794 0 $2,909 $ 4,992 $ 1,748 $ 0 $(103)
======== ==== ====== ======= ======= ===== ======
</TABLE>
----------------------
See accompanying notes.
<PAGE>
EXCHANGE BANCHSARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF CASH FLOWS
=============================================================================
<TABLE>
<CAPTION>
(Dollars in thousands)
(Unaudited)
6 Months Ended
-----------------------
June 30, June 30,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 362 $ 268
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 0 0
Depreciation 153 160
Goodwill amortization 1 1
Deferred income taxes (64) 0
Amortization (accretion) 31 49
Proceeds from loans held-for-sale 34 602
Changes in operating assets and liabilities:
Accrued interest receivable (96) (80)
Accrued interest payable 7 (18)
Other assets (7) (339)
Other liabilities (41) 260
------ ------
Net cash provided by operating activities 380 903
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of held-to-maturity securities 0 342
Purchases of available-for-sale securities (2,491) (2,093)
Proceeds from maturities of available-for-sale securities 4,000 3,400
Proceeds from sale of available-for-sale securities 77 0
Net increase in loans (6,241) (3,128)
Purchases of premises and equipment (77) (41)
------- ------
Net cash used in investing activities (4,732) (1,520)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Noninterest-bearing, interest-bearing demand, and
savings deposits (50) 413
Certificates of deposit 842 (2,642)
Net decrease in short-term borrowings 2,502 0
Payments on long-term Federal Home Loan Bank advances (19) (19)
Sale of Common Stock 54 0
Sale of Treasury Stock 0 57
Purchase of Treasury Stock 0 (9)
Dividends paid (115) (105)
------- -------
Net cash provided by (used in) financing activities 3,214 (2,305)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,138) (2,922)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,103 7,987
------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $3,965 $5,065
====== ======
SUPPLEMENTAL DISCLOSURES
Cash paid during the six-month period for interest $1,721 $1,596
Cash paid during the six-month period for income taxes 219 88
</TABLE>
----------------------
See accompanying notes.
<PAGE>
EXCHANGE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 (unaudited) and December 31, 1999
=========================================================================
NOTE 1. BASIS OF PRESENTATION
In the opinion of Management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary for a fair
presentation of Exchange Bancshares, Inc.'s ("Company") financial condition
as of June 30, 2000, and December 31, 1999, and the results of operations
for the three-and six-months ended June 30, 2000 and 1999, and the cash flows
for the six-months ended June 30, 2000 and 1999. Certain information and
note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. It is suggested that these consolidated financial statements be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB. The results
of operations for the six- months ended June 30, 2000, are not necessarily
indicative of the results which may be expected for the entire fiscal year.
NOTE 2. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
(Dollars in thousands)
Year ended
Six months ended December 31,
June 30, 2000 1999
------------- ----
Balance beginning of period $1,008 $1,542
Provision for loan loss 0 0
Loans charged-off (144) (594)
Recoveries on loans charged-off 34 60
------ ------
Balance, end of period $ 898 $1,008
====== ======
<PAGE>
NOTE 3. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at June 30, 2000, consisted of one long-term advance totaling
$134,000 and seven short-term advances totaling $7.5 million from the Federal
Home Loan Bank of Cincinnati ("FHLB"). The advances are collateralized by
all shares of FHLB stock owned by The Exchange Bank, Luckey, Ohio, ("Bank")
and by the Bank's qualified mortgage loan portfolio.
Scheduled maturity of the advance from the FHLB is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
At June 30, 2000 At December 31, 1999
Current
Interest rate Amount Amount
------------- ------ ------
<S> <C> <C> <C>
Fixed rate advance:
Monthly principal and interest
Due July 1, 2017 6.85% $ 134 $ 152
Variable rate advances:
Monthly interest payments
Due July 30, 2000 6.78 1,500
Due August 14, 2000 6.78 1,000
Due August 17, 2000 6.78 1,000
Due August 22, 2000 6.78 1,000
Due August 31, 2000 6.78 1,000
Due September 11, 2000 6.78 1,000
Due September 18, 2000 6.78 1,000
Due February 1, 2000 2,000
Due February 18, 2000 1,000
Due March 27, 2000 2,000
</TABLE>
The aggregate minimum future annual principal payments on long-term
borrowings are $7,000 in 2000, $12,000 in 2001, $11,000 in 2002, $11,000
in 2003, $10,000 in 2004, and $83,000 after 2005.
<PAGE>
NOTE 4. REGULATORY CAPITAL
The following table illustrates the compliance by the Bank with currently
applicable regulatory capital requirements at June 30, 2000.
<TABLE>
<CAPTION>
(Dollars in thousands)
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(S> <C> <C> <C> <C> <C> <C>
Total Risk-Based Capital
(to Risk-Weighted Assets) $10,303 14.84% $5,553 8.00% $ 6,941 10.00%
Tier I Capital
(to Risk-Weighted Assets) 9,435 13.59 N/A N/A 4,165 6.00
Tier I Capital
(to Average Total Assets) 9,435 9.41 4,010 4.00 5,013 5.00
</TABLE>
NOTE 5. EARNINGS PER SHARE
Earnings per share ("EPS") is computed in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which
was adopted by the Company as of December 31, 1997. Common stock equivalents
would include shares held by the company's Employee Stock Ownership Plan
("ESOP") that are committed for release, shares awarded but not released
under the company's Recognition and Retention Plan ("RRP"), and stock options
granted under the company's Stock Option Plan ("SOP"). Currently the Company
has no such plans in existence.
Following is a reconciliation of the numerators and denominators of the basic
and diluted EPS calculations.
<TABLE>
<CAPTION>
For the Quarter Ended June 30, 2000
-----------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS $197,702 584,966 $0.34
Income available to
common shareholders
Effect of dilutive securities:
None 0 0
-------- -------
Diluted EPS
Income available to
common shareholders+
assumed conversions $197,702 584,966 $0.34
======== ======= =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Quarter Ended June 30, 1999
-----------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ------
<S> <C> <C> <C>
Basic EPS
Income available to
common shareholders $110,155 547,429 $0.19
Effect of dilutive securities:
None 0 0
-------- -------
Diluted EPS
Income available to
common shareholders +
assumed conversions $110,155 547,429 $0.19
======== ======= =====
</TABLE>
Following is a reconciliation of the numerators and denominators of the basic
and diluted EPS calculations.
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 2000
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS
Income available to
common shareholders $362,435 582,408 $0.62
Effect of dilutive securities:
None 0 0
------- -------
Diluted EPS
Income available to
common shareholders +
assumed conversions $362,435 582,408 $0.62
======== ======= =====
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1999
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ------
<S> <C> <C> <C>
Basic EPS
Income available to
common shareholders $267,737 574,655 $0.47
Effect of dilutive securities:
None 0 0
-------- -------
Diluted EPS
Income available to
common shareholders +
assumed conversions $267,737 574,655 $0.47
======== =======
</TABLE>
<PAGE>
NOTE 6. RECLASSIFICATIONS
Certain amounts in the prior period's financial statements have been
reclassified to be consistent with the current period's presentation. The
reclassifications have no effect on net income.
<PAGE>
EXCHANGE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
=============================================================================
Safe Harbor Clause
This report contains certain "forward-looking statements." The Company
desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for
the express purpose of availing itself of the protection of such safe harbor
with respect to all such forward-looking statements. These forward-looking
statements, which are included in Management's Discussion and Analysis,
describe future plans or strategies and include the Company's expectations of
future financial results. The words "believe," "expect," "anticipate,"
"estimate," "project," and similar expressions identify forward-looking
statements. The Company's ability to predict results or the effect of future
plans or strategies is inherently uncertain. Factors which could affect
actual results include interest rate trends, the general economic climate in
the Company's market area and the country as a whole, loan delinquency rates,
and changes in federal and state regulations. These factors should be
considered in evaluating the forward-looking statements, and undue reliance
should not be placed on such statements.
General
The Company is a bank holding company whose activities are primarily
limited to holding the stock of The Exchange Bank, Luckey, Ohio, ("Bank").
The Bank conducts a general banking business in northwest Ohio which consists
of attracting deposits from the general public and applying those funds to the
origination of loans for residential, consumer and non-residential purposes.
The Bank's profitability is significantly dependent on net interest income,
which is the difference between interest income generated from
interest-earning assets (i.e., loans and investments) and the interest
expense paid on interest-bearing liabilities (i.e., customer deposits and
borrowed funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and interest
received or paid on these balances. The level of interest rates paid or
received by the Company can be significantly influenced by a number of
environmental factors, such as governmental monetary policy, that are outside
of management control.
Earnings per common share were computed by dividing net income by the
weighted-average number of shares outstanding for the three-and six- month
periods ended June 30, 2000 and 1999.
The consolidated financial information presented herein has been prepared
in accordance with generally accepted accounting principles ("GAAP") and
general accounting practices within the financial services industry. In
preparing consolidated financial statements in accordance with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from such
estimates.
The Company is subject to regulation by the Board of Governors of the
Federal Reserve System, which limits the activities in which the Company and
the Bank may engage. The Bank is supervised by the State of Ohio, Division of
Financial Institutions and its deposits are insured up to applicable limits
under the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
<PAGE>
Corporation ("FDIC"). The Bank is a member of the Federal Reserve System and
is subject to its supervision. The Company and the Bank must file with the
U.S. Securities and Exchange Commission, the Federal Reserve Board and Ohio
Division of Financial Institutions the prescribed periodic reports containing
full and accurate statements of its affairs.
The Bank conducts its business through its five offices located in Wood
and Lucas Counties, Ohio. The primary market area of the Bank is Wood and
Lucas and contiguous counties in northwest Ohio.
Acquisition or Disposition of Assets
On June 11, 1998, the Company entered into a definitive agreement with
Towne Bancorp, Inc., an Ohio corporation located in Perrysburg, Ohio ("Towne
Bancorp"), and Towne Bank, a wholly-owned subsidiary of Towne Bancorp,
pursuant to which the Company agreed to purchase 1,000,000 shares of original
issue common stock of Towne Bank for an aggregated purchase price of
$2,000,000 ("Agreement"). On June 19, 1998, the parties entered into a
Merger Agreement whereby Towne Bank would merge with and into The Exchange
Bank, the wholly owned subsidiary bank of the Company, with The Exchange Bank
being the surviving bank in the merger ("Merger"). Cash consideration for the
Merger was paid to Towne Bancorp in exchange for the remaining common stock of
Towne Bank held by Towne Bancorp. The cash consideration paid to Towne
Bancorp pursuant to the Merger Agreement consisted of $1.5 million to be
adjusted upward or downward on a dollar for dollar basis based upon the amount
of capital in Towne Bank's capital account that was greater than or less than
$1,000,000 at the Closing of the transaction, with a minimum purchase price
of $1,000,000. The actual cash consideration paid to Towne Bancorp at the
Closing was $1,100,560 of which 25% was held back by the Company in an escrow
account for a period of six months from Closing against which the Company may
collect for any breaches of the representations, warranties and covenants
given by Towne Bancorp and Towne Bank in the Agreement. The transactions
contemplated by both the Agreement and by the Merger were consummated on June
19, 1998.
Concurrently, on June 18, 1998, the Bank purchased the two parcels of real
estate that contained the main office and the one branch of Towne Bank in
Perrysburg and Sylvania, Ohio, respectively. Exchange Bancshares, Inc. and
Ms. Carol Haas entered into a real estate purchase agreement on May 19, 1998
whereby the Company or its subsidiary would purchase the two parcels for
$2,550,000, contingent upon the consummation of the transactions contemplated
by the Agreement and the Merger Agreement. The purchase was closed into
escrow on June 18, 1998, and the funds were released on June 19, 1998 upon
the consummation of the Agreement and Merger Agreement.
The Exchange Bank is an Ohio state-chartered bank, which, prior to the
transaction described herein, operated from its main office in Luckey, Ohio
and through two branches located in Holland and Walbridge, Ohio.
The following discussion under the captions "Changes in Financial
Condition" and "Results of Operations", make reference to the acquisition of
the "bank" or the "two office locations" which have had a significant effect
on the Company's operations during the second, third and fourth quarters of
fiscal 1998 as well as fiscal 1999. The following discussion, i.e.
comparisons and comments, are intended to assist the reader in understanding
the operating results of the Company for the periods presented.
Effect of Year 2000
The bank has yet to experience any significant problems as the year
changed from 1999 to 2000, or during the first two quarters of 2000.
Management had placed significant emphasis on ensuring that the bank's
operating systems were Year 2000 ("Y2K") compliant.
<PAGE>
Changes in Financial Condition
At June 30, 2000, the consolidated assets of the Company totaled $102.1
million, an increase of $3.5 million, or 3.58%, from $98.6 million at
December 31, 1999. There has been some reallocation of funds from the
investment portfolio to the higher yielding loan portfolio during the six
months ended June 30, 2000. The deposit portfolio increased by $792,000, or
0.95%, from $83.5 million at December 31, 1999.
Net loans receivable increased by $9.2 million, or 8.80%, to $77.2
million at June 30, 2000, compared to $70.9 million at December 31, 1999.
The majority of the increase was in the commercial loan portfolio primarily as
a result of the previously mentioned bank acquisition and the resulting staff
changes. The other loan portfolios remained relatively constant with the new
loan demand generally equaling loan repayments.
Investment securities decreased a net of $1.6 million, or 9.55%, from $17.1
million at December 31, 1999, to $15.5 million at June 30, 2000. The
decrease was primarily the result of scheduled maturities of short-term
investments being rolled into higher earning real estate and commercial loan
production as a part of the Company's ongoing strategy to expand their loan
product base.
Excess funds are temporarily invested in federal funds, which decreased
from $1.4 million at December 31, 1999, to $1.2 million at June 30, 2000.
These funds were utilized primarily to fund the increased loan demand.
Deposit liabilities increased $792,000, or 0.95%, during the six months
ended June 30, 2000. Noninterest bearing deposits increased $345,000, or
4.02%, while interest-bearing deposits increased $447,000, or 0.60%, during
the period. Management attributes the increase to the maintaining of
competitive rates in our market area. Interest credited on accounts also
contributed to the shift in deposit balances.
Total shareholders' equity increased $286,000, or 3.09%, from $9.3 million
at December 31, 1999, to $9.5 million at June 30, 2000. This increase was
primarily the result of $362,000 in earnings for the first six months in
fiscal 2000 and sale of $53,000 in additional common shares through the
Dividend Reinvestment Plan. These increases were partially offset by a
decrease in accumulated comprehensive income (unrealized gains on securities
available-for-sale) of $14,000 and the payment of cash dividends of $115,000.
The Bank's liquidity, primarily represented by cash and cash equivalents,
is a result of its operating, investing and financing activities. Principal
sources of funds are deposits, loan and mortgage-backed security repayments,
maturities of securities and other funds provided by operations. The Bank
also has the ability to borrow from the FHLB. While scheduled loan repayments
and maturing investments are relatively predictable, deposit flows and early
loan and mortgage-backed security prepayments are more influenced by interest
rates, general economic conditions and competition. The Bank maintains
investments in liquid assets based upon management's assessment of (i) the
need for funds, (ii) expected deposit flows, (iii) the yields available on
short-term liquid assets and (iv) the objectives of the asset/liability
management program. In the ordinary course of business, part of such liquid
investment portfolio is composed of deposits at correspondent banks.
Although the amount on deposit at such banks often exceeds the $100,000 limit
covered by FDIC insurance, the Bank monitors the capital of such institutions
to ensure that such deposits do not expose the Bank to undue risk of loss.
The Asset/Liability Management Committee of the Bank is responsible for
liquidity management. This committee, which is comprised of various managers,
has an Asset/Liability Policy that covers all assets and liabilities, as well
as off-balance sheet items that are potential sources and uses of liquidity.
The Bank's liquidity management objective is to maintain the ability to meet
<PAGE>
commitments to fund loans and to purchase securities, as well as to repay
deposits and other liabilities in accordance with their terms. The Bank's
overall approach to liquidity management is to ensure that sources of
liquidity are sufficient in amounts and diversity to accommodate changes in
loan demand and deposit fluctuations without a material adverse impact on net
income. The Committee monitors the Bank's liquidity needs on an ongoing
basis. Currently the Bank has several sources available for both short- and
long-term liquidity needs. These include, but are not restricted to advances
from the FHLB, Federal Funds and borrowings from the Federal Reserve Bank and
other correspondent banking arrangements.
The Bank is subject to various regulatory capital requirements
administered by its primary federal regulator, the Federal Reserve Bank ("FRB").
Failure to meet minimum capital requirements can initiate certain mandatory and
possible additional discretionary actions by regulators that, if undertaken,
could have a material affect on the Company and the consolidated financial
statements. Under the regulatory capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
under the prompt corrective action guidelines are also subject to qualitative
judgements by the regulators about components, risk-weightings, and other
factors.
Qualitative measures established by regulation to ensure capital adequacy
requires the Bank to maintain minimum amounts and ratios of 1. Total
risk-based capital, 2. Tier I capital to risk-weighted assets (as defined by
the regulations), and 3. Tier I capital to average assets (as defined).
Management believes, as of June 30, 2000, that the Bank meets all of the
capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the FDIC, the
Bank was categorized as well capitalized under the regulatory framework for
prompt corrective action. To remain categorized as well capitalized, the
Bank will have to maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as disclosed in Note 4 - Regulatory Capital. There are
no conditions or events since the most recent notification that management
believes have changed the Bank's prompt corrective action category.
At June 30, 2000, Exchange Bancshares had no material commitments for
capital expenditures.
Results of Operations
Comparison of Three months Ended June 30, 2000 and 1999
General. Net income increased for the three months ended June 30, 2000,
to $197,000, as compared to the three months ended June 30, 1999, $110,000,
an increase of $87,000, or 79.09%. This increase was primarily attributed to
the increase in net interest income, the majority of which were directly
related to the continued growth in the loan portfolio. This is discussed in
greater detail under the captions "Interest Income" and "Interest Expense".
Interest Income. Average earning assets have increased during the second
quarter of 2000 which contributed to an increase in interest income of
$263,000, or 14.81%, for the three months ended June 30, 2000, compared to
same three month period in 1999. The increase was attributed to the
additional $317,000 income from lending activities. The increase was offset
by decreases in interest income of $41,000 from investment securities and
$13,000 from federal funds sold. The overall yield on average
interest-earning assets increased 47 basis points, or 0.47%, during the
second quarter of fiscal 2000 as compared to 1999, from 8.17% to 8.64%.
<PAGE>
Interest Expense. Interest expense on deposit liabilities increased
$129,000, or 16.31%, for the three months ended June 30, 2000, as compared to
the same period in 1999. Average interest-bearing deposits decreased by
$102,000 comparing three month period ended June 30, 2000 to June 30, 1999, and
the average interest paid on interest-bearing deposits increased by 40 basis
points from 4.19% for the three months ended June 30, 1999, to 4.59% for the
same period ended June 30, 2000. The FHLB advance interest expense during
the three-month period ended June 30, 2000 increased by $84,000 in 2000
compared to the same three-month period in 1999. The Bank has had to rely
more heavily on advances from the FHLB as an alternate source of funding the
increases in commercial and real estate loans. The additional $45,000 in
interest expense on deposit accounts in 2000 was attributed to general interest
rate increases on new and existing account balances. This seems to be the
general trend throughout the financial institution industry as a whole.
Provision for Loan Losses. There were no provisions for loan losses and
there were net charge-offs of $92,000 during the three months ended June 30,
2000, compared to no provisions and net charge-offs of $190,000 during the
three months ended June 30, 1999. Provisions for possible loan losses are
based upon management's assessment of the results obtained from the ongoing
loan review process and the composition, or makeup, of the loan portfolio.
Currently the loan portfolio consists primarily loans secured by one-to
four-family residential properties and other forms of collateral, which are
considered to have less risk, as well as the reserves associated with the
recent bank acquisition.
Non-Interest Income. Non-interest income decreased $37,000, or 22.02, to
$131,000 for the three months ended June 30, 2000, from $168,000 for the
three months ended June 30, 1999. Service charges on deposit accounts increased
$3,000 while other income, primarily commissions and fees associated with the
sale of alternative investment products, decreased by $40,000.
Non-Interest Expense. Non-interest expense decreased $18,000, or 1.80%,
to $981,000 for the three months ended June 30, 2000, from $999,000 in the
comparable period in 1999. Of this decrease, $20,000 was attributable to a
decrease in examination and accounting fees, $16,000 in occupancy and
equipment expense and $15,000 in other miscellaneous operating expenses.
Generally speaking, the majority of the other operating expenses remained
relativity constant either increasing or decreasing slightly from period to
period.
Income Taxes. The provision for income taxes increased $28,000 for the
three months ended June 30, 2000, compared with the prior year, primarily as
a result of increased taxable income for the quarter.
Comparison of Six months Ended June 30, 2000 and 1999
General. Net income increased for the six months ended June 30, 2000, to
$362,000, as compared to the six months ended June 30, 1999, $268,000, an
increase of $94,000. This increase was primarily attributed to the increases
in the net interest income while the various operating expenses remained
relatively constant from year to year. The additional expenses related to
the acquisition and operation of the offices associated with the Towne Bank
acquisition are no longer having a significant negative effect on the overall
profitability of the Bank. These are discussed in greater detail under the
captions "Non-Interest Income" and "Non-Interest Expense".
Interest Income. Average earning assets have continued to increase during
the six months of 2000 which has contributed to an increase in interest
income of $251,000, or 12.97%, for the six months ended June 30, 2000,
compared to 1999. The increase was attributed to the additional loan income
of $573,000 resulting from an increase in loans receivable which were offset by
decreases in investment income of $56,000 and a decrease of $46,000 federal
funds sold income. This is a direct result of reallocating resources to the
loan portfolio in an effort to increase income and satisfy the increased
demand for commercial and real estate credit.
<PAGE>
Interest Expense. Interest expense on deposit liabilities increased
$64,000 for the six months ended June 30, 2000, as compared to the same
period in 1999. Average interest-bearing deposits decreased by $760,000
comparing the six months ended June 30, 2000 to June 30, 1999, and the
average interest paid on interest-bearing deposits increased by 34 basis point
from 4.33% for the six months ended June 30, 1999, to 4.67% for the same period
ended June 30, 2000. The FHLB advance interest expense during the six-month
period ended June 30, 2000, also increased as the utilization of advances
became more prevalent as an alternative funding source for the increased loan
demand. The interest expense associated with the FHLB advances increased to
$161,000 from $6,000 in the same six-month period in 1999.
Provision for Loan Losses. There were no provisions for loan losses and
there were net charge-offs of $110,000 during the six months ended June 30,
2000, compared to no provisions and net charge-offs of $339,000 during the
six months ended June 30, 1999. The absence of a provision was based upon
the results of the ongoing loan reviews and composition of the loan portfolio,
primarily loans secured by one-to four-family residential properties and
other forms of collateral, which are considered to have less risk, as well as
the reserves associated with the recent bank acquisition.
Non-Interest Income. Non-interest income decreased $74,000, or 23.49%, to
$241,000 for the six months ended June 30, 2000, from $315,000 for the six
months ended June 30, 1999. Service charges on deposit accounts increased
$2,000 while other income (primarily miscellaneous fee income from Fintegra)
decreased by $76,000.
Non-Interest Expense. Non-interest expense increased $38,000, or 2.03%, to
$1.9 million for the six months ended June 30, 2000, from $1.8 million in the
comparable period in 1999. Of this increase, $76,000 was attributable to an
increase in compensation and benefit expense in 2000, reflecting normal
salary and benefit adjustments as well as additional staffing. The increase
of $10,000 in occupancy and equipment is primarily attributable to the two new
office locations. The normal legal, accounting and examination expenses
remained relatively constant with the remainder of the general expenses
increasing slightly over the levels experienced during the same three month
period in 1999. The significant decrease in other expense, $37,000, was
primarily a result of the additional expenses incurred as a result of the
ongoing legal, consulting and accounting fees, and the data processing
services associated with the 1998 bank acquisition.
Income Taxes. The provision for income taxes increased $45,000 for the
six months ended June 30, 2000, compared with the prior year, primarily as a
result of higher taxable income for the six-month period.
<PAGE>
EXCHANGE BANCSHARES, INC.
PART II - OTHER INFORMATION
==============================================================================
ITEM 1 - LEGAL PROCEEDINGS
Not Applicable
ITEM 2 - CHANGES IN SECURITIES
Not Applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
John Moore and Sharon Hoffman duly appointed Judges of Election
of the Company do hereby certify that:
The Annual Meeting of Shareholders ("Annual Meeting") of the
Company will be held at the Eastwood High School, 4900 Sugar Ridge
Road, Pemberville, Ohio on May 17, 2000 following the
shareholders dinner at 6:30 p.m.
According to the certified list of shareholders which was
presented at the Annual Meeting, there were 552,238.5987 votes
entitled to be cast at the Annual Meeting, of which 276,119.2994
represented a majority. There were present at the Annual
Meeting, in person or by proxy, 452,802.3277 shares, and
at least a majority of the outstanding votes entitled to vote.
John Moore and Sharon Hoffman inspected the signed proxies and
ballots used at the Annual Meeting and found the same to be in
proper form and accepted the tabulation of votes cast by proxy.
The following is a record of the votes cast in connection with the
various propositions presented at the Annual Meeting:
<PAGE>
Proposal No. 1:
RESOLVED, that Cecil R. Adkins, Norma J. Christen, and Donald H.
Lusher be elected to the Board of Directors of the Company for
three-year terms expiring in 2003.
Cecil R. Adkins Number of Votes For 451,831
Percentage 81.82%
Number of Votes Withheld 971
Percentage 1.76%
Norma J. Christen Number of Votes For 452,458
Percentage 81.93%
Number of Votes Withheld 344
Percentage 0.06%
Donald H. Lusher Number of Votes For 452,765
Percentage 81.87%
Number of Votes Withheld 37
Percentage 0.01%
Proposal No. 2:
RESOLVED, that the appointment by the Board of Directors of the
firm of Robb, Dixon, Francis, Davis, Oneson and Company as
independent accountants of the Company for the fiscal year ending
December 31, 2000 be ratified and approved in all respects.
FOR AGAINST ABSTAIN
--- ------- -------
Number of Votes 412,511 39,072 1,219
------- ------ -----
Percentage 74.70% 7.08% 0.22%
----- ---- ----
ITEM 5 - OTHER INFORMATION
Not Applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit 27: Financial Data Schedule
b. No report on Form 8-K was filed during the quarter ended
June 30, 2000.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
EXCHANGE BANCSHARES, INC.
August 11, 2000 /s/ Marion Layman
--------------- ------------------------------------------------
Date Marion Layman
Chairman, President, and Chief Executive Officer
August 11, 2000 /s/ Marion Layman
--------------- ------------------------------------------------
Marion Layman
Principal Accounting and Financial Officer
