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, 1999
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. $7,828,000
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 17, 2000, 552,239
common shares of the Registrant were outstanding. The aggregate market value
of the voting stock held by non-affiliates was $11,898,911 based upon the
trading price of $25.25 per share.
Documents Incorporated by References
The following sections of the definitive Proxy Statement for the 2000
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 "Bancorp") 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 Bancorp
acquired the Bank effective January 1, 1994. The Bancorp has authorized
750,000 common shares, par value $5.00 per share of which 552,239 are
currently outstanding.
The Bancorp 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 Bancorp may in the future acquire or form additional subsidiaries,
including other banks, to the extent permitted by law.
The Bancorp is subject to regulation by the Board of Governors of the
Federal Reserve System which limits the activities in which the Bancorp 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 Bancorp 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 Bancorp's financial
performance and could cause the Bancorp'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.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the operations of the Bank's, and the
Bancorp's actual results could differ significantly from those discussed in
the forward-looking statements. Some of the factors that could cause or
contribute to such differences are discussed herein, but also include changes
in the economy and changes in interest rates in the nation and the Bancorp's
primary market area.
Without limiting the generality of the foregoing, some of the forward-
looking statements included herein are the statements under the following
headings and regarding the following matters:
<PAGE>
1. Financial Condition. Management's statements regarding the amount and
adequacy of the allowance for loan losses at December 31, 1999.
2. Comparison of Results of Operations for the Fiscal Years Ended December
31, 1999 and 1998 -"Provision for Loan Losses". Management's
statements regarding the adequacy of the allowance for loan losses at
December 31, 1999.
3. Liquidity and Capital Resources. Management's belief that liquidity
and capital reserves are sufficient to meet its outstanding short- and
long-term needs.
4. New Legislation. Management's expectation that the Gramm-Leach-Bliley
Act will not have a material effect on the activities in which the Bank
and Bancorp currently engage, except to the extent that competition
from other types of financial institutions may increase as they engage
in activities not permitted prior to the enactment of the Gramm-Leach-
Bliley Act.
The Bancorp 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.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, 1999, the Bank had 47 full and 15 part-time employees.
Personnel costs incurred by the Bancorp are reimbursed to the Bank.
Competition
The Bank competes with several area banks and savings and loan associations,
as well as, 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 six 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, 1999 and December 31, 1998
the legal lending limits were approximately $1,526,254 and $1,583,000
respectively. As of December 31, 1999 and 1998, 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.
The Bank owns all of the above properties. The Bancorp operates out of the
Bank's main office although it has a separate mailing address. The Bancorp
reimburses the Bank for the fair value of the space occupied.
<PAGE>
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 Bancorp, 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 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.
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Shareholder
Matters
At December 31, 1999, the Corporation had approximately 802 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 $25.88 and
a low of $12.71. There are no plans to list the shares of the Corporation
Common Stock on any stock exchange.
Through 1999, McDonald & Company and Sweney Cartwright & Co. offered to
purchase shares of stock of the Corporation at prices ranging from $15.55 to
$22.50 per share, and was offering to sell such shares at prices ranging
$16.50 to $24.63 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 1999 the Corporation declared cash dividends of $.19 per
share payable on June 18, 1999 to shareholders of record on May 28, 1999 and a
cash dividend of $.30 per share payable on December 20, 1999 to shareholders
of record on November 30, 1999. The Corporation also declared a five percent
stock dividend to shareholders of record on May 29, 1999 payable on June 18,
1999. In 1998 the Corporation declared cash dividends of $.18 per share
<PAGE>
payable on June 15, 1998 to shareholders of record on May 30, 1998 and a cash
dividend of $.29 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 $.17 per share
payable on June 16, 1997 to shareholders of record on June 2, 1997 and a cash
dividend of $.28 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.
<TABLE>
<CAPTION>
March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999
<S> <C> <C> <C> <C>
High $24.500 $24.500 $22.500 $25.875
Low $22.500 $23.500 $21.500 $23.500
Dividend Declared $0.00 $0.19 $0.00 $0.30
Stock Dividend 5%
March 31, 1998 June 30, 1998 September 30, 1998 December 31, 1998
High $17.638 $20.952 $21.790 $22.381
Low $16.505 $17.1908 $20.476 $20.838
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.
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 "Bancorp") 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
Bancorp acquired the Bank on January 1, 1994, and as of December 31, 1999 had
combined assets of $99 million, $71 million in net loans, and $84 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 Bancorp'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-9SP). 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.
<PAGE>
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 Bancorp'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 21 of this report. To assist in
understanding and evaluating major changes in the Bancorp'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) 1999
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, 1999. 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, 1999, 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 20.98% in 1999 to represent 75.89% of average
earning assets compared to 69.43% in 1998 and 65.29% in 1997. Year-end total
real estate loans of $57,933,000 represented approximately 80.51% 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, decreasing slightly to 80.51% at December 31, 1999.
Installment loans to individuals continued to increase moderately to 13.91% of
loans outstanding at December 31, 1999 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) decreased in 1999 to 4.45% of
the total loans outstanding primarily as a result of the decrease of $833,000
in municipal loans. The increase experienced in 1998 was do to the acquisition
of the Towne Bank related loans. 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, 1999
represented 1.12% of the total loans outstanding. Agricultural loans
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.
Exchange Bancshares, Inc. and Subsidiary
Loan Information
<TABLE>
<CAPTION>
In thousands, except ratios 1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Loans at December 31,
Commercial 3,053 $ 2,880 955 783 851 1,353
Agricultural 806 880 709 802 943 1,259
Real estate
Secured by 1-4 family residential properties 37,333 31,813 24,353 20,826 19,037 17,815
Secured by other properties 20,600 19,199 13,170 11,449 10,637 9,162
Consumer 10,008 7,115 6,322 6,067 6,132 6,476
Tax-exempt 150 983 1,360 1,533 798 1,013
All other 5 4 3 11 4 9
------- ------- ------- ------ ------ ------
Total $71,955 $62,874 46,872 41,471 38,402 37,087
======= ======= ====== ====== ====== ======
Allowance for Loan Losses
Balance at beginning of year 1,542 624 508 483 465 469
Allowance related to acquired loans 0 961 0 0 0 0
Provision for loan losses 0 0 0 75 120 80
Charge-offs
Commercial and agricultural 460 0 0 0 106 17
Consumer 54 88 38 48 24 84
</TABLE>
<PAGE>
Exchange Bancshares, Inc. and Subsidiary
Loan Information
<TABLE>
<CAPTION>
In thousands, except ratios
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Credit Card 80 37 31 20 6 8
Real estate 0 0 0 0 0 0
------ ------ ------- ------- ------- -------
Total charge-offs 594 125 69 68 136 109
------ ------ ------- ------- ------- -------
Recoveries
Commercial and agricultural 1 60 156 0 25 6
Consumer 21 19 25 13 7 15
Credit card 21 1 2 3 1 4
Real estate 17 2 2 2 1 0
------ ------ ------- ------- ------- -------
Total recoveries 60 82 185 18 34 25
------ ------ ------- ------- ------- -------
Net charge-offs 534 43 (116) 50 102 84
------ ------ ------- ------- ------- -------
Balance at end of year $1,008 $1,542 $624 $508 $483 $465
====== ====== ======= ======= ======= =======
Allocation of Allowance for Loan Losses
Commercial $471 $1,001 157 183 236 186
Consumer 145 84 72 68 54 28
Real estate 173 160 161 159 62 74
Unallocated 219 298 234 98 131 177
------ ------ ------- ------- ------- -------
Total $1,008 $1,543 $624 $508 $483 $465
====== ====== ======= ======= ======= =======
Credit Quality Ratios
Net charge-offs as a percentage of average loans 0.79% 0.08% (0.26)% 0.13% 0.27% 0.23%
Allowance for loan losses to
Total loans at year end 1.40% 2.45% 1.33 % 1.22% 1.26% 1.25%
Net charge-offs 52.98% 35.86% (5.38)% 10.16% 4.74% 5.54%
Provision for loan losses to average loans 0.00% 0.00% 0.00 % 0.19% 0.32% 0.22%
Earnings coverage of net charge-offs $1.73 $21.09 $(10.39) $23.00 $9.80 $10.87
</TABLE>
In addition to the loans reported in the 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 $8.6 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.
<PAGE>
Loans accounted for on a non-accrual basis decreased $389,000 or 97.49%
as of year-end 1999. Nonperforming assets at December 31, 1999 totaled
$84,000 or 0.09% of total assets. This represents a decrease of $430,000 or
83.66% from December 31, 1998. The large decrease in nonperforming assets is
attributable to the assets acquired as a result of the merger with Towne
Bank. Management has continued to monitor these assets and strengthen the Bank's
position whenever possible.
Exchange Bancshares, Inc. and Subsidiary
Non-performing Assets and 90-Day Past Due Loans
<TABLE>
<CAPTION>
In thousands, except per share amounts 1999 1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C>
At December 31,
Non-accrual loans $ 10 $399 $ 75 $196 $336 $ 25 $ 49
Restructured loans 0 0 0 0 0 0 0
----- ----- ----- ----- ----- ----- -----
Total non-accrual and restructured loans 10 399 75 196 336 25 49
Other real estate owned 0 0 0 0 0 26 23
----- ----- ----- ----- ----- ----- -----
Total non-performing assets 10 399 75 196 336 51 72
Loans past due 90-days or more* 74 115 10 125 57 162 31
----- ----- ----- ----- ----- ----- -----
Total non-performing assets and
90-day past due loans 84 $514 $ 85 $321 $393 $213 $103
----- ----- ----- ----- ------ ----- -----
Impaired loans $ 67 $720 $ 17 $ 23 $ 0 N/A N/A
===== ==== ===== ===== ======
</TABLE>
*Excludes non-accrual and restructured loans
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 six-year summary.
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.
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 50.87% of the reserve while
the installment (consumer) and real estate loans would require 49.13% 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 46.73%, real estate loans 17.16% and consumer loans 14.38%. The
remaining 21.73% of the allowance is currently "unallocated". The losses
<PAGE>
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, 1999. The Bank has no exposure from
troubled debts to lesser-developed countries or from significant amounts of
agricultural, real estate or energy related loans.
The average allowance to average loans outstanding ratio increased to
1.65% in 1999 from 1.43% and 0.90% in 1998 and 1997, respectively. The
allowance for loan losses to loan balances outstanding at year-end was 1.40%,
2.45% and 1.33% for years 1999, 1998 and 1997, respectively.
The Bank experienced net charge-offs in 1999 of $534,000 as compared to
net charge-offs in $43,000 in 1998. The average net charge-offs for the
preceding three years were $36,000. 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 (1995-1999) were $123,000.
The absence of a provision for loan losses in 1999 was due to the $961,000
allowance for possible loan losses associated with the merger of Towne Bank in
1998 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 would 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 Federal
Reserve Bank of Cleveland (the "FRB"), Federal Home Loan Bank of Cincinnati
(the "FHLB") and 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'
equity. At December 31, 1999 and 1998 the Bancorp's shareholders' equity
contained $(89,000) and $109,000, respectively, in unrealized losses and gains
on securities available-for-sale.
Investment securities at year-end 1999 decreased $2.3 million or 11.96%
from year-end 1998 while federal funds sold decreased $3.4 million from 1998
or 70.58%. Because the funding needs of the Bank's loan portfolio increased
while the deposits of the Bank decreased it was necessary to reallocate funds
from investment activities. 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 1999, by approximately $9.2
million, or 12.30% from 1998 which had also increased from 1997, by
approximately $11,6 million, or 19.90%. The average cost of funds for the Bank
was approximately 4.22% for the year ended December 31, 1999 compared to 4.43%
and 4.29% for 1998 and 1997, respectively.
<PAGE>
The Bank's deposit structure can be categorized as somewhat cyclical,
increasing as public depositors receive tax allocations and decreasing as
disbursements are made. The Bank experienced increases in the average balances
of all deposit categories during 1999. The shifting of individual deposits
from the traditional savings passbook accounts to higher yielding time open or
time certificate accounts seems to have stabilized as evidenced by the
composition of the deposit portfolios as of year-end 1999 comapred to year-end
1998. As a result the Bank's cost of funds has decreased as the older higher
yielding deposits (primarily associated with the Towne Bank) have repriced to
current market interest rates. Management is continually monitoring the local
market and responds to competitive pressures by pricing the Bank's loan
products and managing the investable funds. As a result, the net interest
margin has increased by 4 basis points since December 31, 1998.
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 9.5% for the past five
years. It should be noted that this ratio decreased by 87 basis points in
1999 to 9.54% which is still excess of the regulatory minimum capital
requirements. The decrease resulted primarily from the $198,000 decrease in
other comprehensive income (net unrealized losses on available-for-sale
investment securities) and the declaration of $269,000 in cash dividends
coupled with the $4.0 million growth in total assets. It should also be noted
that the return on average assets decreased in 1999 to $0.68 from $0.80 in
1998. This is due primarily to the continued legal, accounting and other
expenses associated with the Towne Bank acquisition, as well as, interest rate
fluctuations, deposit growth fluctuations, an changes in loan and investment
volumes and other operating costs.
The yield (interest expense) on interest-costing liabilities decreased more
rapidly than the yield (interest income) on interest- earning assets,
resulting in an increase in the Bank's interest margin. As indicated earlier,
the average allowance for loan losses to average loans outstanding was 1.65%,
1.43% and 0.90% for years 1999, 1998, and 1997, 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, 1999, the
Bank's risk-based capital ratio for Tier I and Tier II capital was 14.04% and
15.29% 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 - COMPARISON OF THE RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED
DECEMBER 31, 1999 AND 1998
General. The Bancorp had consolidated net income of $643,0000 or $1.17
basic earnings per share, for the year ended December 31, 1999 as compared to
$623,000 or $1.15 basic earnings per share for 1998 and $832,000 or $1.54
basic earnings per share for 1997. Return on average assets ratio (ROAA) was
0.68%, 0.80% and 1.17% in 1999, 1998, and 1997, 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 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.
<PAGE>
Exchange Bancshares, Inc. and Subsidiary
Consolidated Average Balance Sheets and Related Yields and Rates*
In thousands, except ratios
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ----------------------------- ----------------------------
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>
Assets
Cash and due from banks $ 1,501 $ 0 $ 2,618 $ 2,480
Interest bearing deposits in banks 17 1 4.58% 35 $ 2 5.71% 44 $ 2 4.55%
Federal funds sold 3,408 167 4.92 6,612 358 5.41 3,538 192 5.43
Investment securities
Taxable debt securities 16,717 969 5.79 16,402 988 6.02 18,406 1,130 6.14
Tax-exempt debt securities(1) 435 30 6.83 735 52 7.07 1,234 87 7.05
Equity securities 575 35 6.16 455 32 7.03 314 17 5.41
------- ------ ------- ------ ------- -------
Total Investment securities 17,727 1,034 5.83 17,592 1,072 6.09 19,954 1,234 6.18
Loans
Real Estate 31,491 2,630 8.35 28,413 2,499 8.80 22,969 2,048 8.92
Consumer 8,149 951 11.67 6,772 847 12.51 5,742 704 12.26
Commercial 26,930 2,452 9.04 19,874 1,840 9.26 15,554 1,428 9.18
------- ------ ------- ------ ------- -------
Total loans 66,570 6,033 9.02 55,059 5,186 9.42 44,265 4,180 9.44
Total earning assets 87,722 7,235 8.25 79,298 6,618 8.35 67,801 5,608 8.27
------ ------ -------
Allowance for loan losses (1,451) (1,130) (612)
Other assets 6,677 3,459 1,705
------- ------- -------
Total assets $94,449 $84,245 $71,374
======= ======= =======
Liabilities and Shareholders' Equity
Noninterest-bearing deposits $ 9,423 $ 8,337 $ 7,342
Interest-bearing deposits
NOW accounts 13,766 461 3.35 10,644 377 3.54 8,500 270 3.18
Money market accounts 1,785 45 2.54 1,619 44 2.72 1,470 39 2.65
Savings accounts 16,148 391 2.42 15,334 391 2.55 14,858 387 2.60
Time deposits 43,275 2,254 5.21 39,035 2,134 5.47 30,744 1,683 5.47
------- ------ ------- ------ ------- ------
Total interest-bearing deposits 74,974 3,151 4.20 66,632 2,946 4.42 55,572 2,379 4.28
Borrowed funds 612 36 5.92 183 12 6.56 107 8 7.48
------- ------ ------- ------ ------- ------
Total interest-bearing liabilities 75,586 3,187 4.22 66,815 2,958 4.43 55,679 2,387 4.29
------ ------ ------
Other liabilities 424 321 230
Shareholders' equity 9,016 8,772 8,123
------- ------- -------
Total liabilities and shareholders'
equity $94,449 $84,245 $71,374
======= ======= =======
Net interest income (1) $4,048 $3,660 $3,221
====== ====== ======
Yield spread 4.03% 3.92% 3.98%
Net interest income to earnings assets 4.66% 4.62% 4.75%
Interest-bearing liabilities to earning assets 86.17% 84.26% 82.12%
</TABLE>
(1) tax-equivalent basis
<PAGE>
Exchange Bancshares, Inc. and Subsidiary
Income Statement Data
<TABLE>
<CAPTION>
1999 Over 1998 1998 Over 1997
------------------------- -------------------------
Yield/ Yield/
In Thousands Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Changes in Tax Equivalent Interest Income *
Interest income
Interest-bearing deposits in banks $ (1) $ 0 $ (1) $ 0 $ 0 $ 0
Federal funds sold (163) (28) (191) 167 (1) 166
Investment securities 8 (46) (38) (146) (16) (162)
Loans 1,098 (251) 847 1,019 (13) 1,006
------ ------ ------ ------ ------ -----
Total 942 (325) 617 1,040 (30) 1,010
------ ------ ------ ------ ------ ------
Interest expense
Interest-bearing deposits 254 (49) 205 473 94 567
Borrowed funds 32 (8) 24 6 (2) 4
----- ----- ------ ---- ----- -----
Total 286 (57) 229 479 92 571
----- ----- ------ ---- ----- -----
Net interest income $ 656 $(298) $ 358 $561 $(122) $ 439
===== ===== ===== ==== ====== =====
</TABLE>
* Changes in the average balance/rate are allocated entirely to the yield/
rate changes
<TABLE>
<CAPTION>
Analysis of Selected Non-Interest Expense
In Thousands, except ratios
1999 % Change 1998 % Change 1997
<S> <C> <C> <C> <C> <C>
Salaries and benefits
Benefits 286 12.60 254 27.0 200
------ ------ ------
Total $1,745 27.37% $1,370 22.7% $1,112
------ ------ ------
Occupancy and equipment
Depreciation $ 315 45.83% $ 216 81.5% $ 119
Maintenance and repairs 144 (1.37) 146 53.7 95
Real estate taxes 34 17.24 29 61.1 18
Insurance 19 11.76 17 13.3 15
Utilities 71 39.22 51 6.3 48
------ ----- ------ ---- ------
Total $ 583 27.02% $ 459 55.6% $ 295
======= ===== ====== ==== ======
Other expenses
Advertising $ 128 236.84% $ 38 5.6% $ 36
Dues and subscriptions 20 11.11 18 12.5 16
Telephone 62 29.17 48 37.1 35
Organizational costs 0 (100.00) 13 0.0 13
Insurance 31 55.00 20 11.1 18
Loan 19 (13.64) 22 37.5 16
Education 23 130.00 10 11.1 9
Travel and entertainment 21 10.53 19 18.8 16
FDIC insurance 10 (9.09) 11 57.1 7
Legal 114 338.46 26 136.4 11
Overdrafts 12 (7.69) 13 85.7 7
Other 48 50.00 32 (11.1) 36
------ ------ ------ ------- ------
Total $ 488 80.74% $ 270 22.7% $ 220
====== ====== ====== ======= ======
</TABLE>
<PAGE>
The net yield on interest-earning assets has increased to 4.66% in 1999
from 4.62% in 1998 and decreased from 4.75% in 1997. Net interest income
increased $400,000, or 11.02%, in 1999 and $451,000, or 14.91%, in 1998,
while earnings increased $20,000, or 3.21%, in 1999 from $623,000 in 1998
and decreased $163,000, or 19.51%, in 1998 from $832,000 in 1997. 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 by $11,511,000 and average interest-bearing
liabilities increased by $8,771,000 in 1999 which resulted in increased
earnings of $656,000 (due to volume); while the overall decrease in rates for
earning assets did not exceed the overall decrease in rates on interest-bearing
liabilities which resulted in a net decrease of $298,000 (due to rate) in net
interest income. The net effect of the changes in volume and interest rates
was to increase interest earnings by $358,000 during 1999.
Net loan income increased $847,000or 16.33% over the prior year primarily
as a result of the increased volume 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 40 basis points in 1999 after a 2 basis point decrease
in 1998. As of year-end 1999 approximately $27,863,000, or 39.74%, 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 decreased 24 basis
points in 1999, from an average portfolio yield of 7.07% to 6.83%, and
interest rates on equity investment securities have increased 87 basis points
from an average portfolio yield of 7.03% to 6.16%, and interest rates on
taxable investment securities decreased 23 basis points from an average yield
of 6.02% to 5.79%, resulting in a $46,000 decrease in taxable income due to
rates. Additionally, an $8,000 increase in income due to the volume, resulted
in a net decrease in income of $38,000. Approximately $7,637,000 of securities
matured in 1999. Reinvestment yields on approximately $3,000,000 of maturing
securities in 2000 will be used to determine appropriate maturities or
alternative investments.
Federal funds sold income decreased by $191,000 or 53.35% in 1998 after a
$166,000 or 86.46% increase in 1998. Volume decreased earnings $163,000 and
rates decreased earnings $28,000 in 1999. Federal funds are primarily used as
an investment mechanism for short-term liquidity purposes.
Interest-bearing deposit expense increased $205,000 or approximately 6.96%
in 1999 after a $567,000 or 23.83% increase in 1999. The volume increase
caused interest expense to increase $254,000 while changes in rates caused a
$49,000 decrease in interest expense in 1999. Rates paid on NOW accounts and
money market accounts increased 19 and 18 basis points respectively in 1999,
compared to an increase of 36 basis points for NOW accounts and a 7
basis-point increase for money market accounts in 1998. The yields on savings
accounts decreased 13 basis points and the yield on time deposits decreased 16
basis-points in 1999. 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 slight
increase in net interest margins.
The changes in both asset and liability volumes in 1999 coupled with
repricing of both interest-earning assets and interest-bearing liabilities
resulted in a net increase of $358,000 in net interest income. Changes in
volume accounted for a $656,000 increase in net interest income, while changes
in rates decreased net interest income $298,000.
The increases in both asset and liability volumes in 1998 had more of an
effect on the net interest margin, $561,000 increase, than the changes in the
yields on assets and liabilities, a $122,000 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, 1999, 1998, and 1997.
Income Taxes. Applicable income taxes of $282,000 in 1999 consist of
federal taxes only. For the previous two years the federal tax rate was 34%.
<PAGE>
Impacting the tax provisions for the three years covered in this report is
the level of the provision for possible loan losses ($-0- in 1999, $-0- in
1998 and $-0- in 1997) and the level of tax-exempt income on securities which
was $20,000, $39,000, and $65,000 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.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and results of operations primarily in terms of historical dollars
without considering changes in the relative purchasing power of money over
time because of inflation.
Virtually all assets and liabilities of the Bancorp are monetary in
nature. As a result, interest rates have a more significant impact on
performance than the effects of general levels of inflation.
Liquidity and Capital Resources
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 $30,070,000
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.
<PAGE>
Exchange Bancshares, Inc. and Subsidiary
Interest Rate Sensitivity
<TABLE>
<CAPTION>
Repricing or Maturing
---------------------------------------------------------------------------
Over Over Over
Within 3 Months 1 Year 3 Years After 5
In thousands, except ratios 3 Months to 1 Year to 3 Years To 5 Years Total
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1999
Loans $13,402 $14,461 $ 8,597 $14,180 $19,466 $70,106
Investment securities 2,854 3,528 9,161 997 602 17,142
Other earning assets 1,457 1,457
Other assets 9,894 9,894
------- ------- -------- ------- ------- -------
Total assets $17,713 $17,989 $ 17,758 $15,177 $29,962 $98,599
======= ======= ======== ======= ======== =======
Noninterest-bearing deposits $ 9,587 $ $ $ $ $ 9,587
Interest-bearing deposits 38,166 18,570 16,183 1,034 73,954
Borrowed funds 0 5,000 152 5,152
Other liabilities and equity 0 9,906 9,906
------- ------- -------- ------- ------ -------
Total liabilities and equity $ 47,753 $18,570 $ 21,183 $ 1,034 $10,058 $98,599
======== ======= ======= ====== ====== =======
Gap* $ (20,453) (582) (3,426) 14,143 19,916 9,599
Cumulative gap (20,453) (21,035) (24,460) (10,317) 9,599
Cumulative gap as a
percent of total assets (20.74)% (21.33)% (24.13)% (10.46)% 9.74%
</TABLE>
Exchange Bancshares, Inc. and Subsidiary
Other Balance Sheet Data
In thousands, except ratios
Maturity of Total Investment Securities (a)
<TABLE>
<CAPTION>
Carrying No Fixed
Value After Maturity Total
Within 1 Year 1-5 Years Ten Years Amount/ Total Market
Amount/Yield Amount/Yield Amount/Yield Yield Amount/Yield Value
------------ ------------ ------------ ----- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1999
Investment securities
available-for-sale:
U.S. Treasury $3,508 6.42% $3,499 6.15% $ 7,007 6.31% $ 7,007
Federal agency 200 6.04 5,576 6.28 5,776 6.27 3,776
Corporate debt 2,499 6.36 982 5.69 3,481 6.17 3,481
Equity $602 6.62% 602 6.62 602
------- ------ ---- ---- ------ ------
Total securities
available-for-sale 6,207 6.40 10,057 6.18 0 602 6.62 16,866 6.27 16,866
------ ------ ---- ---- ------ ------
Investment securities
Held-to-maturity:
State municipal, tax-
exempt (b) 176 6.02 100 4.94 276 5.63 278
------ ------ ---- ---- ------- -------
Mortgage-backed
Total securities
Held-to-maturity 176 6.02 100 4.94 0 0 276 5.63 278
------ ----- ---- ---- ------- -------
Total investment
Securities $6,383 6.39% $10,157 6.17% $ 0 $602 6.62% $17,142 6.26% $17,144
====== ======= ==== ==== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Maturity of Loans (c) Within 1-5 After 5
1 year years Years Total
<S> <C> <C> <C> <C>
Commercial $12,310 $11,202 $ 1,255 $24,767
Real Estate 11,508 6,281 16,832 34,621
------- ------- ------- -------
Total $23,818 $17,483 $18,087 $59,388
Fixed $ 2,081 $ 3,192 $ 8,695 $13,968
Variable 21,737 14,291 9,392 45,420
------- ------- ------- -------
Total $23,818 $17,483 $18,087 $59,388
======= ======= ======= =======
</TABLE>
<PAGE>
Exchange Bancshares, Inc. and Subsidiary
Other Balance Sheet Data
In thousands, except ratios
<TABLE>
<CAPTION>
Maturity of Time Deposits of $100,000 or more
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 $1,343 $1,238 $3,239 $2,673 $8,493
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Deposits at December 31, 1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ----- ----
Noninterest-bearing deposits $ 9,587 $ 9,655 6,371 6,720 5,777 6,321
Interest-bearing deposits
NOW and money market accounts 14,357 14,835 9,757 9,303 9,053 8,459
Savings accounts 15,713 15,990 14,591 15,225 16,721 18,801
Certificates of deposit 43,884 44,711 33,209 28,910 26,960 24,605
------- ------- ------ ------- ------ -------
Total deposits $83,541 $85,191 $63,928 $60,158 $58,511 $58,186
======= ======= ======= ======= ======= =======
</TABLE>
(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
Financial Services Modernization Act of 1999
- --------------------------------------------
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (better known as the Financial Services Modernization
Act of 1999) which will, effective March 11, 2000, permit bank holding
companies to become financial holding companies and thereby affiliate with
securities and insurance companies and engage in other activities that are
financial in nature. A bank holding company may become a financial holding
company if each of its subsidiary banks is well capitalized under the Federal
Deposit Insurance Corporation Act of 1991 (prompt corrective action
provisions), is well managed, and has at least a satisfactory rating under the
Community Reinvestment Act, by filing a declaration that the bank holding
company wishes to become a financial holding company. No regulatory approval
will be required for a financial holding company to acquire a company, other
than a bank or savings association, engaged in activities that are financial
in nature or incidental to activities that are financial in nature, as
determined by the Federal Reserve Board.
The Financial Services Modernization Act defines "financial in nature" to
include:
* Securities underwriting, dealing and market making
* Sponsoring mutual funds and investment companies
* Insurance underwriting and agency
* Merchant banking activities
* and activities that the Federal Reserve Board has determined to be
closely related to banking.
A national bank also may engage, subject to limitations or investment, in
activities that are financial in nature, other than insurance underwriting,
insurance company portfolio investment, real estate development and real
estate investment, through a financial subsidiary of the bank, if the bank is
well capitalized, well managed and has at least a satisfactory Community
Reinvestment Act rating. Subsidiary banks of a financial holding company or
national banks with financial subsidiaries must continue to be well
capitalized and well managed in order to continue to engage in activities that
are financial in nature without regulatory actions or restrictions, which
could include divestiture of the financial in nature subsidiary or
subsidiaries. In addition, a financial holding company or a bank may not
acquire a company that is engaged in activities that are financial in nature
unless each of the subsidiary banks of the financial holding company or the
bank has a Community Reinvestment Act rating of satisfactory or better.
The specific effects of the enactment of the Financial Services
Modernization Act on the banking industry in general and on Exchange
Bancshares, Inc. in particular have yet to be determined due to the fact that
the Financial Services Modernization Act was only recently adopted.
<PAGE>
Effect of Year 2000
The Bank did not experience any problems as the year changed from 1999 to
2000. Management had placed significant emphasis on ensuring that its
operating systems were Year 2000 ("Y2K") compliant.
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 included planning, assessing, testing and re-testing with monthly
progress reports being made to the Board. The objective was to ensure that
all conceivable steps were taken to facilitate a smooth transition of all
operations of the Bank into the next century. A business resumption
contingency plan was developed inclusive of cash management aspects to
minimize or avoid any possible customer inconvenience
The Bank had projected costs of $250,000 for Y2K preparedness. Some of the
major factors included were the use of external consultants, purchases of
hardware and software, the purchase, printing and delivery of customer
awareness materials and the borrowing and lost opportunity costs associated
with the build-up of a sufficient source of cash to meet customer needs.
Actual expenses amounted to approximately $247,000, the bulk of which is
reflected in this year's Consolidated Financial Statements.
<PAGE>
Exchange Bancshares, Inc. and Subsidiary
Six-Year Consolidated Financial Summary
<TABLE>
<CAPTION>
In thousands, except per common share amounts and ratios
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Years Ended December 31,
Statements of Income
Interest Income $7,216 $6,587 $5,565 $5,211 $4,958 $4,673
Interest Expense 3,187 2,958 2,387 2,174 2,038 1,892
------ ------ ------ ------ ------ ------
Net interest income 4,048 3,629 3,178 3,037 2,920 2,781
Provision for loan losses 0 0 0 75 120 80
------ ------ ------ ------ ------ ------
Net interest income after
provision for loan losses 4,029 3,629 3,178 2,962 2,800 2,701
Non-interest income 612 420 320 314 230 307
Non-interest expenses 3,716 3,125 2,293 2,195 2,150 2,175
------ ------ ------ ------ ------ ------
Income before income taxes 925 924 1,205 1,081 880 833
Income tax expense 282 301 373 334 268 253
------ ------ ------ ------ ------ ------
Net income $ 643 $ 623 $ 832 $ 747 $ 612 $ 580
====== ====== ====== ====== ====== ======
Per Common Share
Net Income
Basic $1.17 $1.15 $1.54 $1.44 $1.17 $1.11
Diluted 1.17 1.15 1.54 1.44 1.17 1.11
Dividends declared 0.49 0.47 0.45 0.38 0.32 0.34
Stockholders' equity 16.77 16.26 15.31 14.39 13.51 11.95
Selected Consolidated Balance Sheet Data at December 31,
Assets $98,599 $94,641 $72,795 $68,206 $66,140 $64,903
Investment securities 17,142 19,470 18,768 20,848 20,579 22,791
Loans (B) 70,947 61,332 46,248 40,963 37,856 36,583
Deposits 83,541 85,191 63,928 60,158 58,625 60,878
Borrowed funds 5,152 173 198 0 0 0
Shareholders' equity 9,260 8,956 8,434 7,811 7,429 6,574
Ratios (C)
Per $100 of average assets
Net Interest Income
(tax-equivalent basis) $4.27 $4.34 $4.51 $4.54 $4.46 $4.12
Provision for loan losses 0 0 0 0.11 0.18 0.12
----- ----- ----- ----- ----- -----
Net interest income after
provision for loan losses 4.27 4.34 4.51 4.43 4.28 4.00
Non-interest income 0.65 0.50 0.45 0.46 0.35 0.45
Non-interest expense 3.93 3.70 3.20 3.24 3.26 3.19
----- ----- ----- ----- ----- -----
Income before income taxes 0.98 1.14 1.76 1.65 1.37 1.25
Income tax expense 0.30 0.34 0.59 0.55 0.44 0.40
----- ----- ----- ----- ----- -----
Net income $0.68 $0.80 $1.17 $1.10 $0.93 $0.85
===== ===== ===== ===== ===== =====
Leverage (D) 9.55 9.60 8.79 8.91 9.33 10.44
Return on average
shareholders' equity 7.13% 7.66% 10.28% 9.82% 8.67% 8.90%
Average shareholders' equity
to average assets 9.54% 10.41% 11.38% 11.23% 10.71% 9.57%
Dividend payout ratio 41.80% 37.80% 28.74% 27.71% 29.08% 32.07%
Tier 1 capital ratio at December 31 14.04% 14.00% 16.10% 21.30% 20.30% 19.60%
Tier 1 and Tier 2 capital ratio at
December 31 15.29% 15.30% 17.30% 22.60% 21.50% 20.80%
Leverage ratio 9.48% 9.10% 9.90% 11.10% 10.70% 10.10%
</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>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
In thousands, except percentages 1999 % Change 1998 % Change 1997 1996 1995 1994
Interest income (tax-equivalent basis) $7,235 9.32% $6,618 18.01% $5,608 $5,250 $4,976 $4,694
Interest expense 3,187 7.74 2,958 23.92 2,387 2,174 2,038 1,892
------- ------ ------ ------ ------ ------
Net interest income 4,048 10.60 3,660 13.63 3,221 3,076 2,938 2,802
Provision for loan losses 0 0 0 75 120 80
------ ------ ------- ------ ------ ------
Net interest income after provision
for loan losses 4,048 10.60 3,660 13.63 3,221 3,001 2,818 2,722
Non-interest income 612 45.71 420 31.25 320 314 230 307
Non-interest expense 3,716 18.91 3,125 36.54 2,288 2,195 2,150 2,175
------ ------ ------ ------ ------- -------
Income before income taxes 944 ( 1.15) 955 (23.70) 1,253 1,120 898 854
Income tax expense 282 (6.31) 301 (32.53) 375 334 268 253
Tax-equivalent adjustment 19 (30.71) 31 (27.91) 43 39 18 21
------ ------ ------ ------ ------- ------
Net income $ 643 3.20 $ 623 (19.52) $ 835 $ 747 $ 612 $ 580
====== ====== ====== ====== ======= ======
</TABLE>
<PAGE>
Exchange Bancshares, Inc. and Subsidiary
Quarterly Condensed Consolidated Financial Information
<TABLE>
<CAPTION>
1999 Quarters 1998 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 $1,907 $1,795 $1,776 $1,738 $1,829 $1,819 $1,503 $1,436
Interest expense 820 788 791 788 837 835 660 626
------ ------ ------ ------ ------ ------ ------ ------
Net interest income 1,087 1,007 985 950 992 984 843 810
Provision for loan losses 0 0 0 0 0 0 0 0
Non-interest income 140 157 168 147 163 93 84 80
Non-interest expense 956 888 999 873 925 901 712 586
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes 271 276 154 224 230 176 215 304
Income tax expense 85 86 44 67 65 32 60 96
------ ------ ------ ------ ------ ------ ------ ------
Net income $ 186 $ 190 $ 110 $ 157 $ 165 $ 144 $ 155 $ 208
====== ====== ====== ====== ====== ====== ====== ======
Per Common Share
Net income
Basic $0.32 $0.35 $0.20 $0.29 $0.32 $0.28 $0.30 $0.40
Diluted 0.32 0.35 0.20 0.29 0.32 0.28 0.30 0.40
Dividends declared 0.30 0 0.19 0 0.30 0.00 0.18 0.00
Shareholders' equity 9,221 9,095 9,095 9,109 17.37 17.28 16.96 16.79
Stock price range
High 25.88 22.50 24.50 24.50 23.50 22.88 22.00 18.52
Low 23.50 21.50 23.50 22.50 21.88 21.50 18.05 17.33
Tax-equivalent Yields and Rates 3.46% 8.36% 3.80% 7.11% 5.00% 4.29% 5.38% 5.41%
Federal funds sold 4.63 4.84 4.93 5.65 5.25 5.63 5.44 5.04
Investment securities 5.80 5.88 5.69 5.83 6.14 6.21 5.96 6.07
Loans 9.35 8.99 10.10 10.21 9.27 9.66 9.24 9.49
Total earning assets 8.59 8.17 8.99 8.93 8.26 8.63 8.12 8.31
Interest-bearing deposits 4.22 4.17 4.20 4.16 4.38 4.64 4.24 4.39
Borrowed funds 5.67 6.80 6.92 6.95 6.55 6.56 6.56 6.56
Total interest-bearing liabilities 4.26 4.18 4.21 4.16 4.38 4.65 4.25 4.39
Yield spread 4.33 3.99 4.78 4.77 3.88 3.98 3.87 3.92
Net interest income to
earning assets 4.87 4.51 5.28 5.26 4.50 4.68 4.57 4.71
Ratios
Return on assets 0.77% 0.81% 0.47% 0.67% 0.69% 0.63% 0.80% 1.15%
Leverage 9.48 9.74 9.50 9.43 10.65 10.31 8.90 8.50
Return on average
shareholders' equity 8.15 8.43 4.89 7.04 7.35 6.51 7.12 9.73
Average Assets
Cash and due from banks $ 3,646 $ 2,830 $ 2,865 $ 2,855 $ 2,996 $ 2,949 $ 2,348 $ 2,178
Interest-bearing deposits in banks 12 8 29 13 24 28 52 37
Federal funds sold 1,788 3,278 3,638 4,964 8,462 6,320 7,064 4,602
Investment securities 17,244 17,475 17,839 18,366 17,710 17,782 17,065 17,810
Loans 69,752 65,837 65,488 63,488 62,666 60,458 50,107 47,005
------- ------- ------- ------- ------- ------- ------- -------
Total earning assets 88,796 86,598 86,994 86,831 88,862 84,588 74,288 69,454
Allowance for loan losses (1,194) (1,274) (1,320) (1,520) (1,528) (1,528) (846) (618)
Other assets 5,116 6,046 5,378 5,554 5,306 5,247 1,662 1,621
------- ------- ------- ------- -------- -------- ------- -------
Total average assets $96,364 $93,750 $93,917 $93,720 $95,636 $91,256 $77,452 $72,635
======= ======= ======= ======= ======= ======= ======= =======
Average Liabilities and Shareholders' Equity
Noninterest-bearing deposits $10,319 $ 9,498 $ 9,084 $ 8,772 $10,102 $10,025 $ 6,402 $ 6,822
Interest-bearing deposits 74,522 74,701 75,247 75,440 76,084 71,824 61,815 56,804
Borrowed funds 1,935 153 171 173 174 175 186 197
Other liabilities 460 381 418 414 294 382 345 262
Shareholders' equity 9,128 9,017 8,997 8,921 8,982 8,850 8,704 8,550
------- ------- ------- ------- ------- -------- ------ ------
Total average liabilities and
shareholders' equity $96,364 $93,750 $93,917 $93,720 $95,636 $91,256 $77,452 $72,635
======= ======= ======= ======= ======== ======== ======= =======
</TABLE>
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, 1999 and 1998, 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, 1999.
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, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1999, in conformity
with generally accepted accounting principles.
/s/ Robb, Dixon, Francis, Davis, Oneson & Company
Robb, Dixon,
Francis, Davis, Oneson
& Company
Granville, Ohio
February 10, 2000
<PAGE>
EXCHANGE BANCSHARES, INC. - CONSOLIDATED BALANCE SHEETS
==============================================================================
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and amounts due from depository institutions $ 3,646 $ 3,092
Interest bearing demand deposits in banks 23 21
Federal funds sold 1,434 4,874
------- -------
Total cash and cash equivalents 5,103 7,987
Investment securities
Securities available-for-sale 16,866 18,448
Securities held-to-maturity, fair values of $279 and $1,030 276 1,022
------- -------
Total investment securities 17,142 19,470
Mortgage loans held-for-sale 34 602
Loans 71,955 62,874
Allowance for loan losses (1,008) (1,542)
------- -------
Net loans 70,947 61,332
Premises and equipment, net 3,663 3,910
Accrued interest receivable 721 689
Deferred income taxes 266 314
Other assets 723 337
------- -------
TOTAL ASSETS $98,599 $94,641
LIABILITIES
Deposits:
Noninterest-bearing $ 9,587 $ 9,655
Interest-bearing 73,954 75,536
------- -------
Total deposits 83,541 85,191
Borrowed funds 5,152 173
Accrued interest payable 189 171
Other liabilities 457 150
------- -------
TOTAL LIABILITIES 89,339 85,685
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, 552,239 and 524,620 issued 2,761 2,623
Additional paid-in capital 4,382 3,786
Retained earnings 2,206 2,488
Treasury stock at cost, 0 and 3,525 shares 0 (50)
Accumulated other comprehensive income (89) 109
------- ------
TOTAL SHAREHOLDERS' EQUITY $ 9,260 $ 8,956
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $98,599 $94,641
======= =======
</TABLE>
- ---------------------------------
See accompanying notes.
<PAGE>
EXCHANGE BANCSHARES, INC. - CONSOLIDATED STATEMENTS OF INCOME
===============================================================================
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Years Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 6,020 $ 5,168 $ 4,159
Interest and dividends on investment securities 1,028 1,059 1,212
Interest on federal funds sold 167 358 192
Interest on due from bank deposits 1 2 2
------- ------- -------
TOTAL INTEREST INCOME 7,216 6,587 5,565
INTEREST EXPENSE
Interest on deposits 3,151 2,946 2,379
Interest on advances from Federal Home Loan Bank 36 12 8
------- ------- -------
TOTAL INTEREST EXPENSE 3,187 2,958 2,387
------- ------- -------
NET INTEREST INCOME 4,029 3,629 3,178
Provision for loan losses 0 0 0
------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,029 3,629 3,178
NON-INTEREST INCOME
Service charges on deposits 276 281 260
Other income 336 139 60
------- ------- -------
TOTAL NON-INTEREST INCOME 612 420 320
NON-INTEREST EXPENSES
Salaries and employee benefits 1,745 1,370 1,117
Occupancy and equipment, net 583 459 295
Bank and ATM charges 100 98 79
Credit card 80 80 56
Data processing 123 111 87
Directors fees 62 66 62
Examination and accounting fees 173 333 116
State and other taxes 114 119 108
Postage and courier 117 88 61
Supplies and printing 131 131 92
Advertising 128 38 36
Legal 114 26 11
Other expenses 246 206 173
------- ------- -------
TOTAL NON-INTEREST EXPENSES 3,716 3,125 2,293
------- ------- -------
INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 925 924 1,205
Federal income tax expense 282 301 373
------- ------- -------
NET INCOME $ 643 $ 623 $ 832
======= ======= =======
EARNINGS PER SHARE:
Basic $1.17 $1.15 $1.54
Diluted $1.17 $1.15 $1.54
</TABLE>
- ----------------------------
See accompanying notes.
<PAGE>
EXCHANGE BANCSHARES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
===============================================================================
<TABLE>
<CAPTION>
Number of shares (Dollars in thousands)
---------------- ----------------------
Accumulated
Other
Addditional 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, 1996
As previously stated 475,747 (8,395) $2,379 $3,050 $2,459 $(131) $ 60
Prior period adjustment -
accrued payroll (6)
Balances at December 31, 1996
------- ------ ------ ------ ------ ------ ------
Restated 475,747 (8,395) 2,379 $3,050 $2,453 $(131) $ 60
Net income 832 $832
Other comprehensive income-
Change in unrealized
gain (loss) on securities
available-for-sale,
net of tax of $8 15 15
----
Comprehensive income $847
====
Cash dividends declared
($.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
------- ------- ----- ----- ----- ----- ---
Balances at December 31, 1997 499,534 (8,439) 2,498 3,370 2,617 (126) 75
Net income as restated 623 $623
Other comprehensive income-
Change in unrealized
gain (loss) on securities
available-for-sale,
net of tax of $18 34 34
----
Comprehensive income
Cash dividends declared $657
====
($.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
------- ------ ----- ----- ----- ---- ---
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 $445
=====
Cash dividends declared
($.49 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)
======= ===== ====== ====== ====== ==== ======
</TABLE>
________________________________
See accompanying notes.
EXCHANGE BANCHSARES, INC. -CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
(Dollars in thousands)
Year ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 643 $ 623 $ 832
Adjustments to reconcile net income to net cash
Provided by operating activities:
Loss on sale of other real estate owned 0 0 1
Depreciation 316 216 119
Goodwill amortization 8 1 0
Deferred income taxes 116 (47) 3
Investment securities amortization (accretion), net 97 84 107
Originations of loans held-for-sale (757) (4,676) 0
Proceeds from loans held-for-sale 1,325 4,074 0
Changes in operating assets and liabilities:
Accrued interest receivable (32) 27 21
Accrued interest payable 18 (24) 28
Other assets (360) 58 33
Other liabilities 307 (59) (28)
------- ------ -------
Net cash provided by operating activities 1,681 277 1,116
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of held-to-maturity securities 737 1,357 738
Purchases of available-for-sale securities (5,706) (6,201) (4,742)
Proceeds from maturities of available-for-sale securities 6,900 5,305 6,000
Proceeds from merger with Towne Bank 0 918 0
Net increase in loans (9,615) (2,072) (5,307)
Purchases of premises and equipment (69) (3,211) (71)
Proceeds from sale of other real estate owned 0 0 21
------ ------ -------
Net cash used in investing activities (7,753) (3,904) (3,361)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Noninterest-bearing, interest-bearing demand,
and savings depCertificates of deposit (823) 5,563 530
Certificates of deposit (827) 18 4,299
Proceeds from short-term Federal Home Loan Bank advances 5,000 0 200
Payments on long-term Federal Home Loan Bank advances (21) (24) (2)
Issuance of common stock 35 3 0
Purchase of treasury stock (9) 0 (42)
Sale of treasury stock 102 115 58
Dividends paid (269) (253) (240)
------- ------- -------
Net cash provided by financing activities 3,188 5,422 3,743
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,884) 1,795 1,498
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,987 6,192 4,694
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,103 $ 7,987 $ 6,192
======= ======= =======
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for interest $ 3,169 $ 2,982 $ 2,359
Cash paid during the year for income taxes 271 331 406
</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 Bank 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.
<PAGE>
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.
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.
<PAGE>
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.
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 1998 and 1997 have been reclassified to conform with the
1999 presentation.
Prior Period Adjustment
The accompanying financial statements for 1998, 1997, and 1996 have been
restated to properly reflect the accrued payroll as of December 31, 1998,
1997, and 1996. The effect of restatement was to decrease net income in 1998,
1997, and 1996 by $4,000 ($0 per share), $3,000 ($.01 per share) and $6,000
net of the income tax effect of $2,000 ($.01 per share), $2,000 ($0 per share)
and $4,000 ($.01 per share), respectively.
Restatement
Net income for 1998 was restated by $48,000 ($.09 per share) as a result of
the reassessment of the tax deductibility of expenses associated with the
acquisition of Towne Bank in 1998. A total of $141,000 of legal, accounting
and other related expenses had initially been considered as tax deductible
which have been permanently capitalized as merger and acquisition costs.
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
<PAGE>
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, 1997:
(Dollars in thousands, except per share data)
1998 1997
---- ----
Net interest income $3,985 $3,750
Net income $ (228) $ (378)
Earnings per share:
Basic $(0.42) $(0.70)
======= =======
Diluted $(0.42) $(0.70)
======= =======
The above amounts reflect adjustments for amortization of goodwill and income
taxes and reflect the 5% stock dividend issued in both 1999 and 1998.
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 other correspondent banks. The required reserve at
December 31, 1999 and 1998 was $655,000 and $755,000, 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, 1999 December 31, 1998
----------------------------------------------- --------------------------------------------------
Gross 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 $ 7,048 $ 7 $ (48) $ 7,007 $10,967 $ 135 $ 0 $11,102
Federal agency 5,846 0 (70) 5,776 2,778 7 0 2,785
Corporate
Debt securities 3,506 0 (25) 3,481 4,015 26 (2) 4,039
Equity
Securities 602 0 0 602 522 0 0 522
------- ---- ----- ------- ------- ----- ---- -------
Total
Available-for-sale 17,002 7 (143) 16,866 18,282 168 (2) 18,448
Held-to-maturity
State &
Municipal securities 276 3 0 279 605 12 0 617
Mortgage-backed
Securities 0 0 0 0 417 0 (4) 413
------- ----- ----- ------- ------- ----- ----- -------
Total
Held-to-maturity 276 3 0 279 1,022 12 (4) 1,030
------- ----- ----- ------- ------- ----- ----- -------
Total $17,278 $ 10 $(143) $17,145 $19,304 $ 180 $ (6) $19,478
======= ===== ====== ======= ======= ===== ===== =======
</TABLE>
<PAGE>
The amortized cost and estimated fair value of securities available-for-sale
and held-to-maturity at December 31, 1999, 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 $ 6,204 $ 6,207 $176 $178
After one year through five years 10,196 10,057 100 101
Equity securities 602 602 0 0
------- ------- ---- ----
Total $17,002 $16,866 $276 $279
======= ======= ==== ====
</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 1999, 1998, or in 1997.
Investment securities with a carrying value of approximately $9,586,000 and
$9,831,000 were pledged at December 31, 1999 and 1998 to secure certain
deposits.
NOTE E - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31, 1999 and 1998 are summarized as follows:
(Dollars in thousands)
1999 1998
---- ----
Loans secured by real estate:
Construction $ 133 $ 250
Farmland 2,883 2,959
One-to four-family residential properties 37,333 31,813
Multifamily (5 or more) residential properties 1,133 1,173
Nonfarm nonresidential properties 16,451 14,817
Agricultural production 806 880
Commercial and industrial 3,053 2,880
Consumer 10,008 7,115
Municipal 150 983
Other loans 5 4
------- -------
Total $71,955 $62,874
======= =======
<PAGE>
Allowance for loan losses: 1999 1998 1997
---- ---- ----
Balance, beginning of year $1,542 $ 624 $ 504
Allowance related to loans acquired 0 961 0
Provision for loan losses 0 0 0
Recoveries on loans 60 82 185
Loans charged off (594) (125) (69)
------ ------ ------
Balance, end of year $1,008 $1,542 $ 624
====== ====== ======
At December 31, 1999 and 1998, 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 $67,000 and $720,000, respectively.
The average recorded investment in impaired loans amounted to approximately
$366,000 and $394,000 for the years ended December 31, 1999 and 1998,
respectively. The allowance for loan losses related to impaired loans
amounted to approximately $34,000 and $385,000 at December 31, 1999 and 1998,
respectively. Interest income on impaired loans of $20,000, $63,000 and
$1,000 was recognized for cash payments received in 1999, 1998 and 1997,
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, 1999 was $752,000.
During the year ended December 31, 1999, new loans made to such related
parties amounted to $823,000 and payments amounted to $512,000.
No loans were transferred to other real estate owned in 1999 or 1998.
NOTE F - PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1999 and 1998 follows:
(Dollars in thousands)
1999 1998
---- ----
Land $ 738 $ 724
Buildings 3,216 3,220
Equipment 1,604 1,545
------- -------
5,558 5,489
Accumulated depreciation (1,895) (1,579)
------- -------
Total $ 3,663 $ 3,910
======= =======
<PAGE>
NOTE G - DEPOSITS
Deposit account balances at December 31, 1999 and 1998, are summarized as
follows:
(Dollars in thousands)
1999 1998
---- ----
Noninterest-bearing $ 9,587 $ 9,655
Interest-bearing demand 14,357 14,835
Savings accounts 15,713 15,990
Certificates of deposit 43,884 44,711
------- -------
$83,541 $85,191
Total ======= =======
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $8,493,000 and $7,838,000 at
December 31, 1999 and 1998.
Certificates maturing in years ending December 31, as of December 31, 1999:
(Dollars in thousands)
2000 $26,667
2001 13,691
2002 2,492
2003 1,019
2004 15
-------
Total $43,884
=======
The Bank held related party deposits of approximately $806,000 and $942,000 at
December 31, 1999 and 1998, respectively.
Overdrawn demand deposits reclassified as loans totaled $6,000 and $3,000 at
December 31, 1999 and 1998, respectively.
<PAGE>
NOTE H - BORROWED FUNDS
Borrowed funds are comprised of the following at December 31:
<TABLE>
<CAPTION>
(Dollars in
thousands)
Current
Interest Balance
--------------------
Rate 1999 1998
---- ---- ----
<S> <C> <C> <C>
Fixed rate advances, with monthly principal
and interest payments due July 1, 2017 6.85% $ 152 $173
Variable rate advances, with monthly interest
payments and principal due:
Advance due February 1, 2000 4.75% 2,000 0
Advance due February 18, 2000 4.75% 1,000 0
Advance due March 27, 2000 4.75% 2,000 0
------ ----
Total advances $5,152 $173
====== ====
Federal Home Loan Bank ("FHLB") advances are collateralized by all shares of
FHLB stock owned by the Bank (totaling $359,700) and by 100% of the Bank's
qualified mortgage loan portfolio (totaling approximately $7,728,000). Based
on the carrying amount of FHLB stock owned by the Bank, total FHLB advances
are limited to approximately $7,194,000.
The aggregate minimum future annual principal payments on FHLB advances are
$5,020,000 in 2000, $17,000 in 2001, $15,000 in 2002, $14,000 in 2003, $12,000
in 2004, and $74,000 after 2004.
<PAGE>
NOTE I - FEDERAL INCOME TAXES
The components of income tax expense for the years ended December 31, 1999,
1998 and 1997 are as follows:
(Dollars in thousands)
1999 1998 1997
---- ---- ----
Income tax expense
Current tax expense $166 $348 $370
Deferred tax expense 116 (47) 3
---- ---- ----
Total $282 $301 $373
==== ==== ====
A reconciliation of the federal statutory tax rate to the Bancorp's effective
tax rate for the years ended December 31, 1999, 1998, and 1997 is as follows:
(Dollars in thousands)
1999 1998 1997
---- ---- ----
Federal statutory income tax at 34% $315 $314 $410
Tax exempt income (24) (37) (46)
Net operating loss carryforward (19) (19) 0
Non-deductible expenses 0 48 0
Other 10 (5) 9
---- ---- ----
Total $282 $301 $373
==== ==== ====
<PAGE>
The tax effects of temporary differences which comprise the significant
portions of the Company's deferred tax assets and deferred tax liabilities as
of December 31, 1999 and 1998 are as follows:
(Dollars in thousands)
1999 1998
---- ----
Deferred tax assets:
Allowance for loan losses $ 282 $ 436
Investment securities 46 0
Net operating loss carryforward 347 366
Nonaccrual loans 3 3
Other 0 3
------ ------
678 808
Deferred tax liabilities:
Loan fees (18) (18)
Depreciation (46) (54)
Investment securities (0) (56)
Other (1) (0)
------ -----
(65) (128)
Valuation allowance for deferred tax assets (347) (366)
------ -----
Net deferred tax asset $ 266 $ 314
====== ======
In accordance with Internal Revenue Code Section 382, utilization of the
Company's net operating loss carryforward's estimated to be limited to
approximately $19,000 per year. The net operating loss carryforward expires
in 2018. Because of the Section 382 limitation, the portion of the Company's
total net operating loss carryforward that may be utilized through expiration
is estimated to be approximately $347,000.
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.
<PAGE>
Financial instruments whose contract amount represents credit risk were as
follows:
(Dollars in thousands)
1999 1998
---- ----
Home equity lines $ 1,277 $ 1,226
Credit card lines 2,697 3,040
Other loan commitments 4,641 7,456
------- -------
Total $ 8,615 $11,722
======= =======
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.
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 $1,406,000.
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, 1999, no retained earnings were
available for the payment of dividends to the holding company without prior
regulatory approval.
<PAGE>
NOTE M - EMPLOYEE BENEFIT PLANS
In 1994 the Profit Sharing Plan was changed to a discretionary Prototype Cash
or Deferred Profit Sharing Plan and Trust/Custodial Account Plan which also
includes a 401(k) plan. 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 1999, 1998 and 1997
were $30,000 each year. Thirty-five employees participated in the plan during
1999, thirty-seven in 1998, and thirty-five employees participated in the plan
during 1997.
NOTE N - EARNINGS PER SHARE
The corporation adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS #128), at the end of 1998, which replaced the
calculation of primary and fully diluted earnings per share with earnings per
share and earnings per share - assuming dilution. Because there are no common
stock equivalents, no difference exists between the application of SFAS #128
and previous methods. Accordingly, no restatement at prior years was
necessary.
The following table sets forth the computation of earnings per share:
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net income, earnings per share and
earnings per share - assuming dilution $ 643 $ 623 $ 832
Denominator:
Weighted average shares outstanding,
earnings per share and earnings per share-
assuming dilution 548,310.4 543,048.1 539112.5
Earnings per share $1.17 $1.15 $1.54
===== ===== =====
Earnings per share - assuming dilution $1.17 $1.15 $1.54
===== ===== =====
NOTE O - STOCK DIVIDEND
On June 8, 1999, the Company distributed 26,231 shares of common stock in
connection with a 5% stock dividend. As a result of the stock dividend,
common stock was increased by $131,000, additional paid-in capital was
increased by $525,000, and retained earnings was decreased by $656,000. All
references in the accompanying financial statements to the number of common
shares and per share amounts for 1998 and 1997 have been restated to reflect
the stock dividend.
<PAGE>
NOTE P - REGULATORY MATTERS
The Bank is subject to various regulatorements 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
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, 1999, 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 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>
<TABLE>
<CAPTION>
(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, 1999:
Total Risk-Based Capital
(to Risk-Weighted Assets) $9,934 15.3% $5,202 8.0% $6,503 10.0%
Tier I Capital
(to Risk-Weighted Assets) 9,119 14.0 2,601 4.0 3,902 6.0
Tier I Capital
(to Average Assets) 9,119 9.5 2,890 3.0 4,816 5.0
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
</TABLE>
<PAGE>
NOTE Q - 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.
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
on borrowed funds.
<PAGE>
The estimated fair values of the Company's financial instruments at December
31 are as follows:
(Dollars in thousands)
1999 1998
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
Cash and cash equivalents $ 5,103 $ 5,103 $ 7,987 $ 7,987
Investments securities 17,142 17,145 19,470 19,478
Loans held-for-sale 34 34 602 602
Loans 70,947 70,102 61,332 61,748
Accrued interest receivable 721 721 689 689
Financial liabilities:
Deposits 83,541 83,489 85,191 85,078
Borrowed funds 5,152 5,129 173 184
Accrued interest payable 189 189 171 171
<PAGE>
NOTE R - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Exchange Bancshares, Inc. (parent company
only) follows:
Condensed Balance Sheets
(Dollars in thousands)
at December 31,
1999 1998
---- ----
Assets
Noninterest-bearing deposit with subsidiary bank $ 162 $ 64
Investment in subsidiary bank 9,061 8,861
Other assets 312 316
------ ------
Total assets $9,535 $9,241
====== ======
Other liabilities $ 275 $ 275
Shareholders' Equity 9,260 8,966
------ ------
Total liabilities and shareholders' equity $9,535 $9,241
====== ======
Condensed Statements of Income
<TABLE>
<CAPTION>
(Dollars in thousands)
Year ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income
Interest on deposits in subsidiary bank $ 0 $ 21 $ 0
Dividends from subsidiary bank 300 2,455 1,335
------ ------ -------
Total income 300 2,476 1,335
Expenses
Salaries 24 23 22
Accounting and consulting fees 42 200 32
Other expenses 34 58 49
------ ------ -------
Total expenses 100 281 103
------ ------ -------
Income before income taxes and equity in undistributed
Earnings of subsidiary 200 2,195 1,232
Income tax (provision) benefit 34 40 35
------ ------ -------
Income before undistributed earnings of subsidiary 234 2,235 1,267
Equity in undistributed earnings of subsidiary 409 (1,612) (435)
------ ------ -------
Net income $ 643 $ 623 $ 832
====== ====== =======
</TABLE>
<PAGE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
(Dollars in thousands)
Year ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 643 $ 623 $ 832
Adjustments to reconcile net income to net cash
flows from operating activities:
Deferred income taxes 0 0 0
Change in other assets 5 7 6
Change in other liabilities 0 0 0
Equity in undistributed earnings of subsidiary (409) 1,612 435
------ ------- -------
Net Cash from Operating Activities 238 2,242 1,273
Cash Flows from Investing Activities
Purchase of time deposit 0 0 (1,000)
------ ------- -------
Maturity of time deposit 0 1,000 0
Purchase of Towne Bank 0 (3,101) 0
------ ------- -------
Net cash provided by (used in) financing activities 0 (2,101) (1,000)
------ ------- --------
Cash Flows from Financing Activities
Proceeds from sale of common stock 35 3 0
Purchase of treasury stock (9) 0 (42)
Sale of treasury stock 102 115 58
Cash dividends paid (269) (253) (240)
------ ------- --------
Net Cash Used for Financing Activities (141) (135) (224)
------ ------- --------
Net Increase in Cash
and Cash Equivalents 98 6 49
Cash and Cash Equivalents
Beginning of year 64 58 9
------ ------- --------
End of year $ 162 $ 64 $ 58
====== ======= ========
</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, 2000 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,
2000 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, 2000 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, 2000 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, 2000 March 30, 2000
- ---------------------------------- ------------------------------------
Date Date
/s/ Donald H. Lusher /s/ Cecil R. Adkins
- ---------------------------------- ------------------------------------
Donald H. Lusher, Director Cecil R. Adkins, Director
March 30, 2000 March 30, 2000
- ---------------------------------- ------------------------------------
Date Date
/s/ Joseph R. Hirzel /s/ David G. March
- ---------------------------------- ------------------------------------
Joseph R. Hirzel, Director David G. Marsh, Director
Secretary and Treasurer
March 30, 2000 March 30, 2000
- ---------------------------------- ------------------------------------
Date Date
/s/ Donald P. Gerke Edmund J. Miller
- ---------------------------------- ------------------------------------
Donald P. Gerke, Director Edmund J. Miller, Director
March 30, 2000 March 30, 2000
- ---------------------------------- ------------------------------------
Date Date
/s/ Norma J. Christen /s/ Marion Layman
- ---------------------------------- -------------------------------------
Norma J. Christen, Director Marion Layman
Principle Accounting
and Financial Officer
March 30, 2000 March 30, 2000
- ---------------------------------- -------------------------------------
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
22 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 2000
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
<PAGE>
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 "Bancorp") 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 Bancorp's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1999, 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 appears 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 Bancorp'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 Bancorp 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 Bancorp'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 Bancorp's income.
Possible Inadequacy of the Allowance for Loan Losses
- ----------------------------------------------------
THE BANCORP 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 Bancorp 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.
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 Commercial
banks, savings associations, 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.
<PAGE>
Legislation and Regulation that may Adversely Affect the Bancorp's Earnings
- ---------------------------------------------------------------------------
The Bank is subject to extensive regulation by the Ohio Division of Financial
Institutions (the "DFI"), The Board of Governors of the Federal Reserve System
(the "FRB") 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 Bancorp is
also subject to regulation and examination by the FRB. Such supervision and
regulation of the Bancorp and The 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 the Bancorp'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.
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act repealed prior laws which had generally
prevented banks from affiliating with securities and insurance firms and makes
other significant changes in the financial services in which various types of
financial institutions may engage.
Prior to the GLB Act, unitary savings and loan holding companies which
met certain requirements were the only financial institution holding companies
that were permitted to engage in any type of business activity, whether or not
the activity was a financial service. The GLB Act continues those broad
powers for unitary thrift holding companies in existence on May 4, 1999,
including the Company. Any thrift holding company formed after May 4, 1999,
however, will be subject to the same restrictions as multiple thrift holding
companies, which generally are limited to activities that are considered
incidental to banking.
The GLB Act authorizes a new "financial holding company," which can own
banks and thrifts and which are also permitted to engage in a variety of
financial activities, including insurance and securities underwriting and
agency activities, as long as the depository institutions it owns are well
capitalized, well managed and meet certain other tests.
The GLB Act is not expected to have a material effect on the activities
in which The Bank and the Bancorp currently engage, except to the extent that
competition from other types of financial institutions may increase as they
engage in activities not permitted prior to enactment of the GLB Act.
