U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED March 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
__________ TO __________
Commission file number - 33-53596
EXCHANGE BANCSHARES, INC.
----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
OHIO 34-1721453
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
237 Main Street
P.O.Box 177, Luckey, Ohio 43443
- ---------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(419) 833-3401
- ---------------------------
(Issuer's telephone number)
N/A
---
(Former name, former address and former fiscal year, if changed since last
report)
As of April 30, 1999, 552,239 shares of Common Stock of the Registrant were
outstanding. There were no preferred shares outstanding.
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
FORM 10-QSB
INDEX
Page Number
PART I FINANCIAL INFORMATION
Item. 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-- 3
March 31, 2000, and December 31, 1999
Condensed consolidated statements of income--
Three months ended March 31, 2000 and 1999 4
Condensed consolidated statements of changes
in shareholders equity -- Periods ended 5
March 31, 2000, and December 31, 1999
Condensed consolidated statements of cash flows 6
Three months ended March 31, 2000 and 1999
Notes to condensed consolidated financial statements-- 7
March 31, 2000, and December 31, 1999
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED BALANCE SHEETS
============================================================================
<TABLE>
<CAPTION>
(Dollars in thousands)
(Unaudited)
March 31, At December 31
--------- ---------------
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and amounts due from depository institutions $ 2,830 $ 3,646
Interest bearing demand deposits in banks 28 23
Federal funds sold 2,781 1,434
-------- --------
Total cash and cash equivalents 5,639 5,103
Investment securities
Securities available-for-sale 14,870 16,866
Securities held-to-maturity, fair values of $278 and $279 276 276
-------- --------
Total investment securities 15,146 17,142
Mortgage loans held-for-sale 0 34
Loans 74,328 71,955
Allowance for loan losses (990) (1,008)
-------- --------
Net loans 73,338 70,947
Premises and equipment, net 3,599 3,663
Accrued interest receivable 759 721
Deferred income taxes 278 266
Other assets 714 723
-------- --------
TOTAL ASSETS $ 99,473 $ 98,599
======== ========
LIABILITIES
Deposits:
Noninterest-bearing $ 9,992 $ 9,587
Interest-bearing 75,364 73,954
-------- --------
Total deposits 85,356 83,541
-------- --------
Borrowed funds 4,150 5,152
Accrued interest payable 183 189
Other liabilities 382 457
-------- --------
TOTAL LIABILITIES 90,071 89,339
-------- --------
SHAREHOLDERS' EQUITY
Preferred shares ($25.00 par value) 750 shares 0 0
authorized, 0 shares issued
Common shares ($5.00 par value) 750,000 shares 2,761 2,761
authorized, 552,239 and 552,239 issued
Additional paid-in capital 4,382 4,382
Retained earnings 2,371 2,206
Accumulated other comprehensive income (112) (89)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 9,402 9,260
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $99,473 $ 98,599
======== ========
- -----------------------
See accompanying notes.
</TABLE>
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF INCOME
==============================================================================
<TABLE>
<CAPTION>
(Dollars in thousands)
(Unaudited) (Unaudited)
3 Months Ended 3 Months Ended
-------------- --------------
March 31, March 31,
--------- ---------
2000 1999
---- ----
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $1,675 $1,420
Interest and dividends on investment securities 246 260
Interest on federal funds sold 24 57
Interest on due from bank deposits 0 1
------ ------
TOTAL INTEREST INCOME 1,945 1,738
INTEREST EXPENSE
Interest on deposits 804 785
Interest on advances from Federal Home Loan Bank 74 3
------ ------
TOTAL INTEREST EXPENSE 878 788
------ ------
NET INTEREST INCOME 1,067 950
Provision for loan losses 0 0
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,067 950
OTHER INCOME
Service charges on deposits 66 68
Other income 44 79
------ ------
TOTAL OTHER INCOME 110 147
OTHER EXPENSES
Salaries and employee benefits 471 387
Occupancy and equipment, net 153 159
Bank and ATM charges 27 25
Credit card 18 19
Data processing 35 32
Directors fees 14 14
Examination and accounting fees 35 39
State and other taxes 29 31
Postage and courier 31 29
Supplies and printing 26 28
Other expenses 90 110
------ ------
TOTAL OTHER EXPENSES 929 873
------ ------
INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 248 224
Federal income tax expense 83 67
------ ------
NET INCOME $ 165 $ 157
====== ======
EARNINGS PER SHARE:
Basic $0.30 $0.29
Diluted $0.30 $0.29
- ----------------------
See accompanying notes.
</TABLE>
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
==============================================================================
Year ended December 31, 1999 (audited) and March 31, 2000 (unaudited)
<TABLE>
<CAPTION>
Number of shares Amounts
---------------- ----------------------------------------------------------------
(Dollars in thousands)
----------------------
Accumu-
lated
other
Additional compre- Compre-
Common Treasury Common paid-in Retained Treasury hensive hensive
stock stock stock capital earnings stock income income
----- ----- ----- ------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 $18 (198) (198)
-----
Comprehensive income $445
=====
Cash dividends declared ($.49 per share) (269)
5% stock dividend declared 26,231 176 131 525 (656)
Issuance of common stock 1,388 7 28
Purchase of treasury shares 198 (9)
Sale of treasury stock 3,899 43 59
------- ------- ------ ------ ----- ---- ----
December 31, 1999 552,239 0 2,761 4,382 2,206 0 (89)
Net income 165 165
Other comprehensive income-
Change in unrealized gain (loss)
on securities available-for-sale,
net of tax $11 (23) (23)
-----
Comprehensive income $142
=====
------- --- ------ ------ ------ ---- ------
March 31, 1999 552,239 0 $2,761 $4,382 $2,371 $ 0 $(112)
======= === ====== ====== ====== ==== ======
- -----------------------
See accompanying notes.
</TABLE>
<PAGE>
EXCHANGE BANCHSARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF CASH FLOWS
===============================================================================
<TABLE>
<CAPTION>
(Dollars in thousands)
Unaudited Unaudited
3 Months Ended 3 Months Ended
-------------- --------------
March 31, March 31,
--------- ---------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 165 $ 157
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 0 0
Depreciation 76 80
Goodwill amortization 1 1
Deferred income taxes (1) 0
Investment securities amortization (accretion) 17 25
Originations of sale of loans held-for-sale 0 0
Proceeds from loans held-for-sale 34 603
Changes in operating assets and liabilities:
Accrued interest receivable (38) 1
Accrued interest payable (6) (2)
Other assets 9 (339)
Other liabilities (75) 325
-------- --------
Net cash provided by operating activities 182 851
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of held-to-maturity securities 0 275
Purchases of available-for-sale securities (983) (1,018)
Proceeds from maturities of available-for-sale securities 2,927 2,400
Net increase in loans (2,391) (2,002)
Purchases of premises and equipment (12) (31)
Proceeds from sale of other real estate owned 0 0
-------- ---------
Net cash used in investing activities (459) (376)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Noninterest-bearing, interest-bearing demand,
and savings deposits 1,464 (78)
Certificates of deposit 351 (478)
Payments on long-term Federal Home Loan Bank advances (2) (1)
Payments on short-term Federal Home Loan Bank advances (1,000) 0
Dividends paid 0 0
-------- --------
Net cash provided by financing activities 813 (557)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 536 (82)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,103 7,987
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,639 $ 7,905
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid during the three-month period for interest $883 $789
Cash paid during the three-month period for income taxes 83 0
- -----------------------
See accompanying notes.
</TABLE>
<PAGE>
EXCHANGE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (unaudited) and December 31, 1999
===========================================================================
NOTE 1. BASIS OF PRESENTATION
In the opinion of Management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary for a fair
presentation of Exchange Bancshares, Inc.'s ("Company") financial condition as
of March 31, 2000, and December 31, 1999, and the results of operations for
the three-months ended March 31, 2000 and 1999, and the cash flows for the
three-months ended March 31, 2000 and 1999. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to
the rules and regulations of the Securities and Exchange Commission. It is
suggested that these consolidated financial statements be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB. The results of operations for the
three- months ended March 31, 2000, are not necessarily indicative of the
results which may be expected for the entire fiscal year.
NOTE 2. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
(Dollars in thousands)
Three months ended Year ended
March 31, 2000 December 31, 1999
-------------- -----------------
Balance beginning of period $1,008 $1,542
Provision for loan losses 0 0
Loans charged-off (20) (594)
Recoveries on loans charged-off 2 60
------ ------
Balance, end of period $ 990 $1,008
====== ======
NOTE 3. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at March 31, 2000, consisted of one long-term advance totaling
$150,000 and three short-term variable rate advances totaling $4 million from
the Federal Home Loan Bank of Cincinnati ("FHLB"). The advances are
collateralized by all shares of FHLB stock owned by The Exchange Bank, Luckey,
Ohio, ("Bank") and by the Bank's qualified mortgage loan portfolio.
<PAGE>
Scheduled maturity of the advance from the FHLB is as follows:
(Dollars in thousands)
At March 31, 2000 At December 31, 1999
----------------- --------------------
Current
Interest rate Amount Amount
------------- ------ ------
Fixed ate advance:
Monthly principal and interest
Due July 1, 2017 6.85% $ 150 $ 152
Variable rate advances:
Monthly interest payments
Due February 1, 2001 6.28 2,000
Due February 18, 2001 6.28 1,000
Due February 22, 2001 6.28 1,000
Due February 1, 2000 2,000
Due February 18, 2000 1,000
Due March 27, 2000 2,000
The aggregate minimum future annual principal payments on borrowings are
$20,000 in 2000, $19,000 in 2001, $17,000 in 2002, $14,000 in 2003, $12,000 in
2004, and $68,000 after 2004.
NOTE 4. REGULATORY CAPITAL
The following table illustrates the compliance by the Bank with currently
applicable regulatory capital requirements at March 31, 2000.
<TABLE>
<CAPTION>
(Dollars in thousands)
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Risk-Based Capital
(to Risk-Weighted Assets) 10,160 14.76% $5,506 8.0% $6,882 10.0%
Tier I Capital
(to Risk-Weighted Assets 9,298 13.51 2,753 4.0 4,129 6.0
Tier I Capital
(to Average Assets) 9,298 9.48 2,950 3.0 4,916 5.0
</TABLE>
<PAGE>
NOTE 5. EARNINGS PER SHARE
Earnings per share ("EPS") is computed in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which
was adopted by the Company as of December 31, 1997. Common stock equivalents
would include shares held by the company's Employee Stock Ownership Plan
("ESOP") that are committed for release, shares awarded but not released under
the company?s Recognition and Retention Plan ("RRP"), and stock options
granted under the company's Stock Option Plan ("SOP"). Currently the Company
has no such plans in existence.
Following is a reconciliation of the numerators and denominators of the basic
and diluted EPS calculations.
For the Quarter Ended March 31, 2000
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) (Amount)
Basic EPS
Income available to
Common shareholders 64,733 552,239 $0.30
Effect of dilutive securities: 0 0 0
------- ------- -----
Diluted EPS
Income available to
Common shareholders +
Assumed conversions $164,733 552,239 $0.30
======== ======= =====
For the Quarter Ended March 31, 1999
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) (Amount)
Basic EPS
Income available to
Common shareholders $157,582 547,149 $0.29
Effect of dilutive securities: 0 0 0
-------- ------- -----
Diluted EPS
Income available to
Common shareholders +
Assumed conversions $157,285 547,149 $0.29
======== ======= =====
NOTE 6. RECLASSIFICATIONS
Certain amounts in the prior period's financial statements have been
reclassified to be consistent with the current period's presentation. The
reclassifications have no effect on net income.
<PAGE>
EXCHANGE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
===========================================================================
Safe Harbor Clause
This report contains certain "forward-looking statements." The Company
desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for
the express purpose of availing itself of the protection of such safe harbor
with respect to all such forward-looking statements. These forward-looking
statements, which are included in Management's Discussion and Analysis,
describe future plans or strategies and include the Company's expectations of
future financial results. The words "believe," "expect," "anticipate,"
"estimate," "project," and similar expressions identify forward-looking
statements. The Company's ability to predict results or the effect of future
plans or strategies is inherently uncertain. Factors which could affect
actual results include interest rate trends, the general economic climate in
the Company's market area and the country as a whole, loan delinquency rates,
and changes in federal and state regulations. These factors should be
considered in evaluating the forward-looking statements, and undue reliance
should not be placed on such statements.
General
The Company is a bank holding company whose activities are primarily limited
to holding the stock of The Exchange Bank, Luckey, Ohio, ("Bank"). The Bank
conducts a general banking business in northwest Ohio which consists of
attracting deposits from the general public and applying those funds to the
origination of loans for residential, consumer and non-residential purposes.
The Bank's profitability is significantly dependent on net interest income
which is the difference between interest income generated from
interest-earning assets (i.e., loans and investments) and the interest expense
paid on interest-bearing liabilities (i.e., customer deposits and borrowed
funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and interest received
or paid on these balances. The level of interest rates paid or received by
the Company can be significantly influenced by a number of environmental
factors, such as governmental monetary policy, that are outside of management
control.
Earnings per common share were computed by dividing net income by the
weighted-average number of shares outstanding for the three-month periods
ended March 31, 2000 and 1999.
The consolidated financial information presented herein has been prepared in
accordance with generally accepted accounting principles ("GAAP") and general
accounting practices within the financial services industry. In preparing
consolidated financial statements in accordance with GAAP, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from such estimates.
The Company is subject to regulation by the Board of Governors of the Federal
Reserve System which limits the activities in which the Company and the Bank
may engage. The Bank is supervised by the State of Ohio, Division of
Financial Institutions and its deposits are insured up to applicable limits
under the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is a member of the Federal Reserve System and
is subject to its supervision. The Company and the Bank must file with the
U.S. Securities and Exchange Commission, the Federal Reserve Board and Ohio
Division of Financial Institutions the prescribed periodic reports containing
full and accurate statements of its affairs.
The Bank conducts its business through its five offices located in Wood and
Lucas Counties, Ohio. The primary market area of the Bank is Wood and Lucas
and contiguous counties in northwest Ohio.
Acquisition or Disposition of Assets
On June 11, 1998, the Company entered into a definitive agreement with Towne
Bancorp, Inc., an Ohio corporation located in Perrysburg, Ohio ("Towne
Bancorp"), and Towne Bank, a wholly-owned subsidiary of Towne Bancorp,
pursuant to which the Company agreed to purchase 1,000,000 shares of original
issue common stock of Towne Bank for an aggregated purchase price of
$2,000,000 ("Agreement"). On June 19, 1998, the parties entered into a Merger
Agreement whereby Towne Bank would merge with and into The Exchange Bank, the
wholly owned subsidiary bank of the Company, with The Exchange Bank being the
surviving bank in the merger ("Merger"). Cash consideration for the Merger
was paid to Towne Bancorp in exchange for the remaining common stock of Towne
Bank held by Towne Bancorp. The cash consideration paid to Towne Bancorp
pursuant to the Merger Agreement consisted of $1.5 million to be adjusted
upward or downward on a dollar for dollar basis based upon the amount of
capital in Towne Bank's capital account that was greater than or less than
$1,000,000 at the Closing of the transaction, with a minimum purchase price of
$1,000,000. The actual cash consideration paid to Towne Bancorp at the
Closing was $1,100,560 of which 25% was held back by the Company in an escrow
account for a period of six months from Closing against which the Company may
collect for any breaches of the representations, warranties and covenants
given by Towne Bancorp and Towne Bank in the Agreement. The transactions
contemplated by both the Agreement and by the Merger were consummated on June
19, 1998.
Concurrently, on June 18, 1998, the Bank purchased the two parcels of real
estate that contained the main office and the one branch of Towne Bank in
Perrysburg and Sylvania, Ohio, respectively. Exchange Bancshares, Inc. and
Ms. Carol Haas entered into a real estate purchase agreement on May 19, 1998
whereby the Company or its subsidiary would purchase the two parcels for
$2,550,000, contingent upon the consummation of the transactions contemplated
by the Agreement and the Merger Agreement. The purchase was closed into
escrow on June 18, 1998, and the funds were released on June 19, 1998 upon the
consummation of the Agreement and Merger Agreement.
The Exchange Bank is an Ohio state-chartered bank which, prior to the
transaction described herein, operated from its main office in Luckey, Ohio
and through two branches located in Holland and Walbridge, Ohio.
The following discussion under the captions "Changes in Financial Condition"
and "Results of Operations", make reference to the acquisition of the "bank"
or the "two office locations" which have had a significant effect on the
Company's operations during the second, third and fourth quarters of fiscal
1998 as well as the first quarter of fiscal 1999. The following discussion,
<PAGE>
i.e. comparisons and comments, are intended to assist the reader in
understanding the operating results of the Company for the periods
presented.
Effect of Year 2000
The Bank did not experience any problems as the year changed from 1999 to
2000, or during the first quarter of 2000. Management had placed significant
emphasis on ensuring that its operating systems were Year 2000 ("Y2K")
compliant.
Changes in Financial Condition
At March 31, 2000, the consolidated assets of the Company totaled $99.5
million, an increase of $874,000, or 0.89% from $98.6 million at December 31,
1999. There has been some reallocation of funds from the investment portfolio
to the higher yielding loan portfolio during the three months ended March 31,
2000. The deposit portfolio increased by $1.8 million, or 2.17% also
Net loans receivable increased by $2.4 million, or 3.37%, to $73.3 million at
March 31, 2000, compared to $70.9 million at December 31, 1999. The majority
of the increase was in the commercial loan portfolio primarily as a result of
the previously mentioned bank acquisition and the resulting staff changes.
The consumer installment portfolio also experienced a moderate growth as
well. The other loan portfolios remained relatively constant with the new
loan demand equaling loan repayments.
Investment securities decreased a net of $2.0million, or 11.64%, from $17.1
million at December 31, 1999, to $15.1 million at March 31, 2000. The
decrease was primarily the result of scheduled maturities of short-term
investment being rolled into higher earning real estate and commercial loan
production as a part of the Company?s on going strategy to expand their loan
product base.
Excess funds are temporarily invested in federal funds, which increased from
$1.4 million at December 31, 1999, to $2.8million at March 31, 2000.
Deposit liabilities increased $1.8 million during the three months ended March
31, 2000. Noninterest bearing deposits increased $405,000, or 4.22%, while
interest-bearing deposits increased $1.4 million, or 1.91%, during the
period. Management attributes the increase to the maintaining of competitive
rates in our market area. Interest credited on accounts also contributed to
the shift in deposit balances.
Total shareholders' equity increased $142,000, or 1.53%, from $9.3 million at
December 31, 1999, to $9.4 million at March 31, 2000. This increase was
primarily the result of $165,000 in earnings for the first three months in
fiscal 2000, being offset by a decrease in accumulated comprehensive income
(unrealized gains on securities available-for-sale) of $23,000.
The Bank's liquidity, primarily represented by cash and cash equivalents, is a
result of its operating, investing and financing activities. Principal
sources of funds are deposits, loan and mortgage-backed security repayments,
maturities of securities and other funds provided by operations. The Bank
also has the ability to borrow from the FHLB. While scheduled loan repayments
and maturing investments are relatively predictable, deposit flows and early
loan and mortgage-backed security prepayments are more influenced by interest
rates, general economic conditions and competition. The Bank maintains
investments in liquid assets based upon management's assessment of (i) the
need for funds, (ii) expected deposit flows, (iii) the yields available on
short-term liquid assets and (iv) the objectives of the asset/liability
management program. In the ordinary course of business, part of such liquid
<PAGE>
investment portfolio is composed of deposits at correspondent banks. Although
the amount on deposit at such banks often exceeds the $100,000 limit covered
by FDIC insurance, the Bank monitors the capital of such institutions to
ensure that such deposits do not expose the Bank to undue risk of loss.
The Asset/Liability Management Committee of the Bank is responsible for
liquidity management. This committee, which is comprised of various managers,
has an Asset/Liability Policy that covers all assets and liabilities, as well
as off-balance sheet items that are potential sources and uses of liquidity.
The Bank's liquidity management objective is to maintain the ability to meet
commitments to fund loans and to purchase securities, as well as to repay
deposits and other liabilities in accordance with their terms. The Bank?s
overall approach to liquidity management is to ensure that sources of
liquidity are sufficient in amounts and diversity to accommodate changes in
loan demand and deposit fluctuations without a material adverse impact on net
income. The Committee monitors the Bank's liquidity needs on an ongoing
basis. Currently the Bank has several sources available for both short- and
long-term liquidity needs. These include, but are not restricted to advances
from the FHLB, Federal Funds and borrowings from the Federal Reserve Bank and
other correspondent banking arrangements.
The Bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the Federal Reserve Bank ("FRB"). Failure to
meet minimum capital requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that, if undertaken, could have
a material affect on the Company and the consolidated financial statements.
Under the regulatory capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification under the prompt
corrective action guidelines are also subject to qualitative judgements by the
regulators about components, risk-weightings, and other factors.
Qualitative measures established by the regulation to ensure capital adequacy
requires the Bank to maintain minimum amounts and ratios of: total risk-based
capital and Tier I capital to risk-weighted assets (as defined by the
regulations), and Tier I capital to average assets (as defined by the
regulation). Management believes, as of March 31, 2000, that the Bank meets
all of the capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the FDIC, the Bank
was categorized as well capitalized under the regulatory framework for prompt
corrective action. To remain categorized as well capitalized, the Bank will
have to maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as disclosed in Note 4 - Regulatory Capital. There are no
conditions or events since the most recent notification that management
believes have changed the Bank's prompt corrective action category.
At March 31, 2000, Exchange Bancshares had no material commitments for capital
expenditures.
Results of Operations
Comparison of Three Months Ended March 31, 2000 and 1999
General. Net income increased for the three months ended March 31, 2000, to
$165,000, as compared to the three months ended March 31, 1999, $157,000, an
increase of $8,000. This increase was primarily attributed to the increase of
$842,000 in net interest income. Increases were noted in several of the
operating expenses, primarily salaries and employee benefits, which are
indirectly related to the acquisition of Towne Bank.
Interest Income. Average earning assets have continued to increase during the
first quarter of 2000 which has contributed to an increase in interest income
of $207,000, or 11.91%, for the three months ended March 31, 2000, compared to
1999. The increase was attributed to the additional loan income of $255,000
resulting from an increase in loans receivable which was offset by decreases
in investment income, $15,000, and federal funds income, $33,000.
Interest Expense. Interest expense on deposit liabilities increased $90,000
for the three months ended March 31, 2000, as compared to the same period in
1999. Total deposits increased by $1.8 million comparing March 31, 2000 to
March 31, 1999, the average interest paid on interest-bearing deposits
increased by 76 basis points from 3.91% for the three months ended March 31,
1999, to 4.67% for the same period ended March 31, 2000. The FHLB advance
interest expense during the three-month period ended March 31, 2000, increased
significantly as the Bank increased their utilization of FHLB advances as a
funding source. Interest expense on FHLB advances increased $71,000 in 2000
as compared to the same period in 1999. The average interest cost on advances
during the first quarter of 2000 was 6.04%
Provision for Loan Losses. There were no provisions for loan losses and there
were net charge-offs of $18,000 during the three months ended March 31, 2000,
compared to no provisions and net charge-offs of $149,000 during the three
months ended March 31, 1999. The absence of a provision was based upon the
results of the ongoing loan reviews and composition of the loan portfolio,
primarily loans secured by one-to four-family residential properties and other
forms of collateral, which are considered to have less risk, as well as the
reserves associated with the recent bank acquisition.
Non-Interest Income. Non-interest income decreased $37,000, or 4.69%, to
$110,000 for the three months ended March 31, 2000, from $147,000 for the
three months ended March 31, 1999. Service charges on deposit accounts
decreased $2,000 while other income (primarily miscellaneous fee income
associated with the sale of annuities and mutual funds) decreased by $35,000.
Non-Interest Expense. Non-interest expense increased $56,000, or 6.41%, to
$929,000 for the three months ended March 31, 2000, from $873,000 in the
comparable period in 1999. Of this increase, $84,000 was attributable to an
increase in compensation and benefit expense in 2000, reflecting normal salary
and benefit adjustments as well as staffing changes. The decrease of $6,000 in
occupancy and equipment is primarily attributable to the elimination of the
"start-up costs" associated with the new office locations. The normal legal,
accounting and examination expenses remained relatively constant with the
remainder of the general expenses decreasing slightly over the levels
experienced during the same three month period in 2000. The significant
decrease in other expense, $20,000, was primarily a result of the elimination
of the expenses associated with the on going due diligence efforts for the
recent bank acquisition.
Income Taxes. The provision for income taxes decreased $16,000 for the three
months ended March 31, 2000, compared with the prior year, primarily as a
result of higher taxable income for the quarter.
<PAGE>
EXCHANGE BANCSHARES, INC.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Not Applicable
ITEM 2 - CHANGES IN SECURITIES
Not Applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5 - OTHER INFORMATION
Not Applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit 27: Financial Data Schedule
b. No report on Form 8-K was filed during the quarter
ended March 31, 2000.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EXCHANGE BANCSHARES, INC.
May 15, 2000 /s/ Marion Layman
- ------------------------- ---------------------------------
Date Marion Layman
Chairman, President, and
Chief Executive Officer
May 15, 2000 /s/ Marion Layman
- ------------------------- ----------------------------------
Date Marion Layman
Principal Accounting and
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Balance Sheets as of March 31, 2,000 and December 31, 1999, the
related Consolidated Income Statements and the related Consolidated Statements
of Cash Flows for the three months ended March 31, 2000 and 1999, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000720912
<NAME> EXCHANGE BANCSHARES INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 2,830
<INT-BEARING-DEPOSITS> 28
<FED-FUNDS-SOLD> 2,781
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,870
<INVESTMENTS-CARRYING> 276
<INVESTMENTS-MARKET> 278
<LOANS> 74,328
<ALLOWANCE> 990
<TOTAL-ASSETS> 99,473
<DEPOSITS> 85,356
<SHORT-TERM> 4,150
<LIABILITIES-OTHER> 565
<LONG-TERM> 0
2,761
0
<COMMON> 0
<OTHER-SE> 6,641
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<INTEREST-LOAN> 1,675
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<INTEREST-TOTAL> 1,945
<INTEREST-DEPOSIT> 804
<INTEREST-EXPENSE> 878
<INTEREST-INCOME-NET> 1,067
<LOAN-LOSSES> 0
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<EXPENSE-OTHER> 929
<INCOME-PRETAX> 248
<INCOME-PRE-EXTRAORDINARY> 165
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 165
<EPS-BASIC> 0.30
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<YIELD-ACTUAL> 4.65
<LOANS-NON> 199
<LOANS-PAST> 179
<LOANS-TROUBLED> 17
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<ALLOWANCE-OPEN> 1,008
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</TABLE>
