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 September 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 November 8, 2000, 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
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Item
Number Page Number
PART I FINANCIAL INFORMATION
1. Financial Statements (Unaudited)
Consolidated balance sheets - 3
September 30, 2000, and December 31, 1999
Consolidated statements of income -
Three and Nine months ended September 30, 2000 and 1999 4
Consolidated statements of changes
in shareholders equity - 5
Periods ended September 30, 2000, and December 31, 1999
Consolidated statements of cash flows - 6
Nine months ended September 30, 2000 and 1999
Notes to consolidated financial statements - 7
September 30, 2000, and December 31, 1999
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II OTHER INFORMATION
1. Legal Proceedings 17
2. Changes in Securities and Use of Proceeds 17
3. Defaults upon Senior Securities 17
4. Submission of Matters to a Vote of Security Holders 17
5. Other Information 17
6. Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
(Dollars in thousands)
Unaudited
At September 30, At December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and amounts due from depository institutions $ 3,130 $ 3,646
Interest bearing demand deposits in banks 19 23
Federal funds sold 1,727 1,434
-------- --------
Total cash and cash equivalents 4,876 5,103
Investment securities
Securities available-for-sale 15,144 16,866
Securities held-to-maturity, fair values of $276 and $279 275 276
-------- --------
Total investment securities 15,419 17,142
Mortgage loans held-for-sale 0 34
Loans 79,460 71,955
Allowance for loan losses (833) (1,008)
-------- --------
Net loans 78,627 70,947
Premises and equipment, net 3,528 3,663
Accrued interest receivable 976 721
Deferred income taxes 73 266
Other assets 898 723
-------- --------
TOTAL ASSETS $104,397 $ 98,599
======== ========
LIABILITIES
Deposits:
Noninterest-bearing $ 9,930 $ 9,587
Interest-bearing 78,357 73,954
-------- --------
Total deposits 88,287 83,541
Borrowed funds 5,633 5,152
Accrued interest payable 231 189
Other liabilities 443 457
-------- --------
TOTAL LIABILITIES 94,594 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 1,938 2,206
Treasury stock at cost, 0 shares 0 0
Accumulated other comprehensive income (36) (89)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 9,803 9,260
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $104,397 $ 98,599
======== ========
</TABLE>
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
(Unaudited) (Unaudited)
3 Months Ended 9 Months Ended
-------------- --------------
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $1,892 $1,503 $5,356 $4,394
Interest and dividends on investment securities 231 251 696 772
Interest on federal funds sold 36 41 91 142
Interest on due from bank deposits 1 0 1 1
------ ------ ------ ------
TOTAL INTEREST INCOME 2,160 1,795 6,144 5,309
------ ------ ------ ------
INTEREST EXPENSE
Interest on deposits 908 785 2,545 2,358
Interest on borrowed funds 109 3 270 9
------ ------ ------ ------
TOTAL INTERST EXPENSE 1,017 788 2,815 2,367
NET INTEREST INCOME 1,143 1,007 3,329 2,942
------ ------- ------ -------
Provision for loan losses 0 0 0 0
------ ------ ----- ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,143 1,007 3,329 2,942
NON-INTEREST INCOME
Service charges on deposits 76 73 219 214
Other income 35 84 133 258
------ ------ ----- ------
TOTAL NON-INTEREST INCOME 111 157 352 472
------ ------ ----- ------
NON-INTEREST EXPENSE
Salaries and employee benefits 483 415 1,414 1,270
Occupancy and equipment, net 154 143 467 446
Bank and ATM charges 28 26 81 72
Credit card 13 20 47 61
Data processing 35 30 103 92
Directors fees 14 14 48 49
Examination and accounting fees 49 34 125 135
State and other taxes 29 28 86 87
Postage and courier 33 28 95 86
Supplies and printing 33 33 99 91
Other expenses 105 117 321 370
------ ------ ------ ------
TOTAL NON-INTEREST EXPENSE 976 888 2,886 2,759
------ ------ ------ ------
INCOME BEFORE FEDERAL INCOME TAX EXPENSE 278 276 795 655
Federal income tax expense 89 86 243 197
------ ------ ------- ------
NET INCOME $ 189 $ 190 $ 552 $ 458
====== ====== ====== ======
Basic 0.32 0.33 0.94 0.79
Diluted 0.32 0.33 0.94 0.79
</TABLE>
<PAGE>
EXCHANGE BANCSHARES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
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 552 $ 552
Other comprehensive income-
Change in unrealized
gain (loss) on securities
available-for-sale,
net of tax of $18 53 53
-----
Comprehensive income $ 605
=====
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 Sept. 30, 2000 581,794 0 $2,909 $4,992 $ 1,938 $ 0 $ (36)
======= ====== ====== ====== ======= ===== =======
</TABLE>
<PAGE>
EXCHANGE BANCHSARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
(Unaudited)
9 Months Ended
September 30,
-------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 552 $ 458
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 0 0
Depreciation 231 239
Goodwill amortization 2 2
Deferred income taxes 147 0
Amortization (accretion) 44 72
Proceeds from loans held-for-sale 34 603
Loss on disposal of fixed assets 0 3
Changes in operating assets and liabilities:
Accrued interest receivable (255) (95)
Accrued interest payable 42 (6)
Other assets (158) (312)
Other liabilities (15) 276
------ ------
Net cash provided by operating activities 624 1,240
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of held-to-maturity securities 0 518
Purchases of available-for-sale securities (4,015) (3,692)
Proceeds from maturities of available-for-sale securities 5,700 5,400
Proceeds from sale of available-for-sale securities 77 0
Net increase in loans (7,683) (4,560)
Purchases of premises and equipment (96) (60)
------- ------
Net cash used in investing activities (6,017) (2,394)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Noninterest-bearing, interest-bearing demand, and savings deposits 1,215 1,494
Certificates of deposit 3,531 (1,737)
Proceeds from long-term Federal Home Loan Bank advances 500 0
Payments on long-term Federal Home Loan Bank advances (19) (21)
Sale of Common Stock 54 0
Sale of Treasury Stock 0 58
Purchase of Treasury Stock 0 (9)
Dividends paid (115) (104)
------- ------
Net cash provided by (used in) financing activities 5,166 (319)
------- ------
NET DECREASE IN CASH AND CASH EQUIVALENTS (227) (1,473)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,103 7,987
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,876 $6,514
====== ======
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for interest $2,773 $2,373
Cash paid during the period for income taxes $ 97 $ 225
</TABLE>
<PAGE>
EXCHANGE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September
30, 2000, and December 31, 1999, and the results of operations for the
three-and nine-months ended September 30, 2000 and 1999, and the cash flows
for the nine months ended September 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 nine months ended September 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
Nine months ended December 31,
September 30, 2000 1999
------------------ ----
Balance beginning of period $1,008 $1,542
Provision for loan loss 0 0
Loans charged-off (247) (594)
Recoveries on loans charged-off 71 60
------ ------
Balance, end of period $ 832 $1,008
======= ======
NOTE 3. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at September 30, 2000, consisted of one long-term advance totaling
$133,000 and six short-term advances totaling $5.5 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.
<PAGE>
Scheduled maturity of the advance from the FHLB is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
At September 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% $ 133 $ 152
Variable rate advances:
-----------------------
Monthly interest payments
Due October 25, 2000 6.90% 500
Due November 13, 2000 6.90% 1,000
Due November 15, 2000 6.90% 1,000
Due November 29, 2000 6.90% 1,000
Due December 9, 2000 6.90% 1,000
Due December 16, 2000 6.90% 1,000
Due February 1, 2000 2,000
Due February 18, 2000 1,000
Due March 27, 2000 2,000
The aggregate minimum future annual principal payments on long-term borrowings
are $6,000 in 2000, $12,000 in 2001, $11,000 in 2002, $11,000 in 2003, $10,000
in 2004, and $83,000 after 2005.
NOTE 4. REGULATORY CAPITAL
The following table illustrates the compliance by the Bank with currently
applicable regulatory capital requirements at September 30, 2000.
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)
Categorized as "Well
Required 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) $10,467 14.65% $5,716 8.00% $7,146 10.00%
Tier I Capital
(to Risk-Weighted Assets) 9,635 13.48% 4,126 4.00% 6,189 6.00%
Tier I Capital
(to Average Total Assets) 9,635 9.34% 3,095 3.00% 5,158 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
<PAGE>
("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.
For the Quarter Ended September 30, 2000
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income available to
common shareholders 189,188 588,187 $0.32
Effect of dilutive securities:
None None
Diluted EPS
Income available to
common shareholders +
assumed conversions 189,188 588,187 $0.32
For the Quarter Ended September 30, 1999
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income available to
common shareholders 189,981 576,566 $0.33
Effect of dilutive securities:
None None
Income available to
common shareholders +
assumed conversions 189,981 576,566 $0.33
<PAGE>
Following is a reconciliation of the numerators and denominators of the basic
and diluted EPS calculations.
For the Nine Months Ended September 30, 2000
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income available to
common shareholders 551,623 584,349 $0.94
Effect of dilutive securities:
None None
Diluted EPS
Income available to
common shareholders +
assumed conversions 551,623 584,349 $0.94
For the Nine Months Ended September 30, 1999
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Income available to
common shareholders 457,718 577,865 $0.79
Effect of dilutive securities:
None None
Income available to
common shareholders +
assumed conversions 457,718 577,865 $0.79
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 nine month
periods ended September 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
<PAGE>
under the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is a member of the Federal Reserve System and
is subject to its supervision. The Company and the Bank must file with the
U.S. Securities and Exchange Commission, the Federal Reserve Board and Ohio
Division of Financial Institutions the prescribed periodic reports containing
full and accurate statements of its affairs.
The Bank conducts its business through its five offices located in Wood
and Lucas Counties, Ohio. The primary market area of the Bank is Wood and
Lucas and contiguous counties in northwest Ohio.
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.
Changes in Financial Condition
At September 30, 2000, the consolidated assets of the Company totaled
$104.4 million, an increase of $5.8 million, or 5.88%, 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 nine
<PAGE>
months ended September 30, 2000. The deposit portfolio increased by $4.7, or
5.68%, from $83.5 million at December 31, 1999.
Net loans receivable increased by $7.7 million, or 10.82%, to $79.5
million at September 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.
Investment securities decreased a net of $1.7 million, or 10.05% from
$17.1 million at December 31, 1999, to $15.4 million at September 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 on going strategy to expand their loan
product base.
Excess funds are temporarily invested in federal funds, which increased
from $1.4 million at December 31, 1999, to $1.7 million at September 30, 2000.
These funds were realized from the increase in deposits.
Deposit liabilities increased $4.7 million, or 5.68%, during the nine
months ended September 30, 2000. Noninterest bearing deposits increased
$343,000, or 3.58%, while interest-bearing deposits increased $4.4 million, or
5.98%, 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 $543,000, or 5.86%, from $9.3 million
at December 31, 1999, to $9.8 million at September 30, 2000. This increase
was primarily the result of $552,000 in earnings for the first nine months in
fiscal 2000, the sale of $54,000 in additional common shares through the
Dividend Reinvestment Plan and an increase in accumulated comprehensive income
(unrealized gains on securities available-for-sale) of 53,000. These increases
were partially offset by 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
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.
<PAGE>
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 September 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 September 30, 2000, Exchange Bancshares had no material commitments
for capital expenditures.
Results of Operations
Comparison of Three months Ended September 30, 2000 and 1999
General. Net income decreased for the three months ended September 30,
2000, to $189,000, as compared to the three months ended September 30, 1999,
$190,000, a decrease of $1,000, or 0.53%. This decrease was primarily
attributed to the increase in non-interest expense and a decrease in other
non-interest income, the majority of which were directly related to the
continued growth in the loan portfolio. These are discussed in greater detail
under the captions "Non-Interest Income" and "Non-Interest Expense".
Interest Income. Average earning assets have increased during the third
quarter of 2000 which contributed to an increase in interest income of
$365,000, or 20.33%, for the three months ended September 30, 2000, compared
to same three month period in 1999. The increase was attributed to the
additional $389,000 income from lending activities. The increase was offset
by decreases in interest income of $20,000 from investment securities and
$5,000 from federal funds sold. The overall yield on average interest-earning
assets increased 13 basis points, or 0.13%, during the third quarter of fiscal
2000 as compared to 1999, from 8.41% to 8.54%.
Interest Expense. Interest expense on deposit liabilities increased
$123,000, or 15.67%, for the three months ended September 30, 2000 as compared
to the same period in 1999. Average interest-bearing deposits increased by
$2.3 million comparing three month period ended September 30, 2000 to September
30, 1999, and the average interest paid on interest-bearing deposits increased
by 49 basis points from 4.20% for the three months ended September 30, 1999,
to 4.69% for the same period ended September 30, 2000. The FHLB advance
interest expense during the three-month period ended September 30, 2000
increased by $106,000 in 2000 compared to the same three-month period in 1999.
<PAGE>
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.
Approximately two-thirds of the additional $123,000 interest expense, or
$80,000, is attributable to the increases in deposit yields whereas, the
remaining $23,000 is attributable to increases in average deposit 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 $66,000 during the three months ended September
30, 2000, compared to no provisions and net charge-offs of $9,000 during the
three months ended September 30, 1999. Provisions for possible loan losses
are based upon management's assessment of the results obtained from the
ongoing loan review process asecured 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 $46,000, or 29.30, to
$111,000 for the three months ended September 30, 2000, from $157,000 for the
three months ended September 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
$49,000.
Non-Interest Expense. Non-interest expense increased $88,000, or 9.91%,
to $976,000 for the three months ended September 30, 2000, from $888,000 in
the comparable period in 1999. Of this increase, $68,000 was attributable to
an increase in salaries and employee benefits, $15,000 in examination and
accounting fees and $9,000 in occupancy and equipment expense. Other
miscellaneous operating expenses decreased $12,000 during the third quarter
2000 as compared to the same period in 1999. 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 $3,000 for the
three months ended September 30, 2000, compared with the prior year, primarily
as a result of increased taxable income for the quarter.
Comparison of Nine months Ended September 30, 2000 and 1999
General. Net income increased for the nine months ended September 30,
2000, to $552,000, as compared to the nine months ended September 30, 1999,
$458,000, an increase of $94,000, or 20.92%. 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 nine months of 2000 which has contributed to an increase in interest
income of $835,000, or 15.73%, for the nine months ended September 30, 2000,
compared to 1999. The increase was attributed to the additional loan income
of $962,000 resulting from an increase in loans receivable which were offset
by decreases in investment income of $76,000 and a decrease of $51,000 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.
Interest Expense. Interest expense on deposit liabilities increased
$186,000 for the nine months ended September 30, 2000, as compared to the same
period in 1999. Average interest-bearing deposits increased by $341,000
during the nine-month period ended September 30, 2000 as compared to the same
period in 1999. The average yield on interest-bearing deposits also increased
during 2000 by 38 basis point from 4.27% for the period ended September 30,
1999, to 4.65% for the same period in 2000. The interest expense associated
<PAGE>
with the FHLB advances increased during the nine-month period ended September
30, 2000, as a result of the increased utilization of advances as an
alternative funding source for loans became more prevalent. The interest
expense associated with the FHLB advances increased by $261,000 to $270,000 for
the nine-months ended September 30, 2000.
Provision for Loan Losses. There were no provisions for loan losses and
there were net charge-offs of $176,000 during the nine months ended September
30, 2000, compared to no provisions and net charge-offs of $348,000 during the
nine months ended September 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 $120,000, or 25.45%,
to $352,000 for the nine months ended September 30, 2000, from $472,000 for
the nine months ended September 30, 1999. Service charges on deposit accounts
increased slightly, or $5,000, while other income (primarily miscellaneous fee
income from Fintegra) decreased by $125,000.
Non-Interest Expense. Non-interest expense increased $127,000, or 4.60%,
to $2.9 million for the nine months ended September 30, 2000, from $2.8
million in the comparable period in 1999. Of this increase, $144,000 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 $11,000 in data processing is primarily attributable to
computer system enhancements and increased volume or usage. The normal legal,
accounting and examination expenses remained relatively constant with the
remainder of the general expenses decreasing slightly over the levels
experienced during the same nine month period in 1999. The significant decrease
in other expense, $49,000, 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 $46,000 for the
nine months ended September 30, 2000, compared with the prior year, primarily
as a result of higher taxable income for the nine-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
Not Applicable
ITEM 5 - OTHER INFORMATION
Not Applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit 27: Financial Data Schedule
b. No report on Form 8-K was filed during the quarter ended
September 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.
November 14, 2000 /s/ Marion Layman
----------------- -----------------------------------
Date Marion Layman
Chairman, President,
and Chief Executive Officer
November 14, 2000 /s/ Marion Layman
----------------- -----------------------------------
Date Marion Layman
Principal Accounting
and Financial Officer
1
