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, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_________ TO __________
Commission file number - 33-54566
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
incorporation or organization) Identification No.)
235 Main Street, P.O. Box 129, Luckey, Ohio 43443
(Address of principal executive offices) (Zip Code)
(419) 833-3401
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No . . .
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes . . No . .
Applicable only to corporate issuers
As of April 30, 1996, 449,736 shares of Common Stock of the Registrant were
outstanding. There were no preferred shares outstanding.
Transitional Small Business Disclosure Format (Check one): Yes . . No X
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EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
FORM 10-QSB
INDEX
<CAPTION>
Page Number
<S> <C>
PART I FINANCIAL INFORMATION
Item. 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- 3
March 31, 1996 and December 31, 1995
Condensed consolidated statements of income -- 4
Three months ended March 31, 1996 and 1995
Condensed consolidated statements of changes 5
in shareholders' equity --
Three months ended March 31, 1996 and 1995
Condensed consolidated statements of cash flows -- 6
Three months ended March 31, 1996 and 1995
Notes to condensed consolidated financial 7
statements -- March 31, 1996
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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EXCHANGE BANCSHARES, INC.
Luckey, Ohio
CONSOLIDATED BALANCE SHEETS
<CAPTION>
( Dollars in thousands )
March 31, December 31,
(Unaudited) (Unaudited)
1996 1995
<S> <C> <C>
Assets
Cash and due from banks $ 2,166 $ 2,197
Interest-bearing time deposits -0- -0-
Federal funds sold 3,867 3,895
Securities being held to maturity 3,554 3,703
(Fair value of $3,515 in 1996 and
$3,619 in 1995)
Securities available for sale, at fair value 18,375 16,876
Loans (net of unearned interest) 38,766 38,339
Less: Allowance for loan losses (483) (483)
________ ________
Loans - net 38,283 37,856
Properties and equipment 919 913
Accrued income receivable 673 588
Other real estate -0- -0-
Deferred federal income taxes 25 7
Other assets 152 166
_______ _______
Total assets $68,014 $66,201
Liabilities
Demand deposit $14,829 $14,773
Savings 16,636 16,721
Time, $100,000 or over 3,534 2,694
Other time deposits 25,214 24,323
_______ _______
Total deposits 60,213 58,511
Borrowed funds -0- -0-
Accrued interest payable 135 126
Accrued expenses and other liabilities 120 135
Total liabilities $60,468 $58,772
Shareholders' equity
Common stock -- $5.00 par value 2,265 2,265
Shares Authorized -- 750,000
Shares Issued -- 453,092
Surplus 2,801 2,801
Retained earnings 2,474 2,282
Treasury stock
(3,356 shares in 1996 and 490 shares in 1995) (53) (13)
Unrealized gain (loss) on securities
available-for-sale 59 94
_______ _______
Total equity 7,546 7,429
_______ _______
Total liabilities and shareholders' equity $68,014 $66,201
<FN>
______________________________________________________________________________
The accompanying notes are an integral part of these financial statements.
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EXCHANGE BANCSHARES, INC.
Luckey, Ohio
CONSOLIDATED STATEMENTS OF INCOME
_____________________________________________________________________________
( Dollars in thousands, except per share amounts )
<CAPTION>
3 Months Ended
March 31,
<S> <C> <C>
1996 1995
Interest income
Interest and fees on loans $ 923 $ 868
Interest on investment securities:
Taxable 280 288
Exempt from federal income tax 16 16
Interest on federal funds sold 52 26
______ ______
Total interest income 1,271 1,198
Interest expense
Interest on deposits 531 467
______ ______
Total interest expense 531 467
______ ______
Net interest income 740 731
Provision for loan losses 23 30
______ ______
Net interest income after
provision for loan loss 717 701
Other income
Service charges on deposit accounts 56 43
Net investment security profits or losses -0- (38)
Other income 23 19
______ ______
Total other income 79 24
Other expense
Salaries and employee benefits 244 244
Net occupancy expense 38 37
Equipment expense 35 32
FDIC deposit insurance expense 1 34
State & other taxes 28 25
Other expense 170 168
______ ______
Total other expense 516 540
______ ______
Income before income taxes 280 185
Income tax expense 88 62
______ ______
Net Income $ 192 $ 123
______________________________________________________________________________
Per share data:
Net income per share of common stock $ .43 $ .30
<FN>
________________________________________________________________________________
The accompanying notes are an integral part of these financial statements.
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EXCHANGE BANCSHARES, INC.
Luckey, Ohio
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
______________________________________________________________________________
(Dollars in thousands)
(Unaudited)
<CAPTION>
Unrealized
Gain/Loss
on Total
Securities Share-
Capital Retained Treasury Available holders'
Stock Surplus Earnings Stock For
Sale Equity
_______ _______ _______ _______ _______ _______
<S> <C> <C> <C> <C> <C> <C>
Balance at December
1994 $2,158 $2,564 $2,193 $ (8) $ (332) $6,575
Net income 123 123
Change in unrealized
gain/loss on available
for sale securities 220 220
______ ______ ______ ______ ______ _______
Balance at 3/31/95 $2,158 $2,564 $2,316 $ (8) $ (112) $6,918
Balance at 12/31/95 $2,265 $2,801 $2,282 $ (13) $ 94 $7,429
Net income 192 192
Purchase of 2,500
treasury shares (40) (40)
Change in unrealized
gain/loss on available
for sale securities (35) (35)
______ ______ ______ ______ ______ _______
Balance at 3/31/96 $2,265 $2,801 $2,474 $ (53) $ 59 $7,546
<FN>
______________________________________________________________________________
The accompanying notes are an integral part of these financial statements.
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EXCHANGE BANCSHARES, INC.
Luckey, Ohio
CONSOLIDATED STATEMENT OF CASH FLOWS
______________________________________________________________________________
( Dollars in thousands )
<CAPTION>
3 Months Ended
March 31,
1996 1995
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 192 $ 123
Adjustments to reconcile net income to next cash
provided by operating activities:
Depreciation 32 32
Provision for loan losses 23 30
Provision for deferred taxes -0- 4
Gain/Loss on investments -0- 38
Amortization/Accretion - net 35 32
Change in accrued income and other assets (132) (125)
Change in accrued expenses and other liabilities 54 90
_____ _____
Total adjustments 12 101
_____ _____
Net cash provided by operating activities 204 224
Cash flows from investing activities:
Net change in federal funds sold 28 (3,275)
Securities held to maturity:
Proceeds from maturities 143 92
Securities available for sale:
Proceeds from maturities 900 500
Proceeds from sales -0- 4,066
Purchases (2,481) (3,115)
Net change in loans (450) (99)
Capital purchases (37) (2)
_____ _____
Net cash used in investing activities (1,897) (1,833)
Cash flows from financing activities:
Net change in deposits 1,702 422
Purchase of treasury stock (40) -0-
_____ _____
Net cash provided by financing activities 1,662 422
Net decrease in cash and cash equivalents (31) (1,187)
Cash and cash equivalents at beginning of year 2,197 3,190
_____ _____
Cash and cash equivalents at end of year $ 2,166 $2,003
Supplemental information:
Interest paid $ 522 $ 454
Net income taxes paid 29 15
<FN>
______________________________________________________________________________
The accompanying notes are an integral part of these financial statements.
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EXCHANGE BANCSHARES, INC.
AND SUBSIDIARY
LUCKEY, OHIO
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not include all information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in the Company's annual report on
Form 10-KSB for the year ended December 31, 1995.
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EXCHANGE BANCSHARES, INC.
AND SUBSIDIARY
LUCKEY, OHIO
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following focuses on the consolidated financial condition of Exchange
Bancshares, Inc. at March 31, 1996, compared to December 31, 1995, and the
results of operations for the three month period ended March 31, 1996, compared
to the same periods in 1995. The purpose of this discussion is to provide a
better understanding of the consolidated financial statements and footnotes
included in the Form 10-QSB. The Registrant is not aware of any market or
institutional trend, events or uncertainties that will have or are reasonably
likely to have a material effect on liquidity, capital resources or operations
except as discussed herein. Other than as discussed herein, the Registrant is
not aware of any current recommendations by regulatory authorities which
would have such effect if implemented.
Financial Condition
Liquidity
Liquidity relates to the Corporation's ability to meet cash demands of its
customers and their credit needs. Liquidity is provided by the Corporation's
ability to readily convert assets to cash and readily marketable, short-term
assets such as federal funds sold and deposits in other banks.
Cash, amounts due from banks and federal funds sold totaled $6,033,000 at
March 31, 1996. Investments and mortgage-backed securities available-for-sale
were $18,375,000 at March 31, 1996. This amount decreased by $1,440,000 from
December 31, 1995 balances. These assets, as well as anticipated deposit growth
and scheduled loan payments and maturing investment securities, provide the
Corporation with an adequate source of funds for expected future demand for
loans and for fluctuations in deposit volume. They also provide management
with the flexibility to change the composition of interest earning assets as
market conditions change in the future.
Liability liquidity relates to the Corporation's ability to retain existing
deposits, obtain new deposits and borrow in the marketplace. Total deposits
showed moderate growth increasing by $1,702,000 or 2.91% for the three month
ended March 31, 1996. The Corporation has not experienced any significant
deposit disintermediation during he first three months of 1996. Management
anticipates deposits to experience some continued moderate growth during the
remainder of 1996.
Access to advances from the Federal Reserve Bank (FRB) in the form of
Federal Funds Purchased is a supplemental source of cash to meet liquidity
needs.
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Capital Resources
Shareholders' equity totaled $7,546,000 at March 31, 1996, compared to
$7,429,000 at December 31, 1995. This increase was attributed to first quarter
earnings of $192,000 reduced by the acquisition of 2,500 shares of treasury
stock and a net unrealized holding loss on securities available for sale of
$35,000. As of March 31, 1996, the ratio of shareholders' equity to assets was
11.09% compared to 11.22% at December 31, 1995.
Regulatory Capital Requirements
The Corporation complies with the capital requirements established by the
Federal Reserve System, which are summarized as follows:
Capital Position
Regulatory as of
Minimum March 31, 1996 December 31, 1995
Tier I 4.00% 26.69% 20.26%
isk-based
capital......
Total Risk- 8.00% 27.94% 21.51%
Based capital
Tier I 3.00% - 5.00% 11.14% 10.71%
leverage.....
Under "Prompt Corrective Action" regulations adopted in September 1992,
the Federal Deposit Insurance Corporation (FDIC) has defined five categories
of capitalization (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized). The
Corporation meets the "Well capitalized" definition, which requires a total
risk-based capital ratio of at least 10%, and a leverage ratio of at least 8%.
Under a current regulatory proposal, interest rate risk would become an
additional element in measuring risk-based capital. This proposed change is
not expected to significantly impact the Corporation's compliance with capital
guidelines.
Changes in Financial Condition
Consolidated total assets were $68,014,000 at the end of the current period
reflecting a increase of $1,813,000 or 2.74% during the first three months of
1996. This increase was funded primarily from the growth in time deposits of
$1,702,000. Approximately $1,285,000 was utilized to fund security purchases
and the remainder to fund loan growth.
The total investments outstanding increased during the first quarter
primarily due to the allocation of short-term funds in an effort to increase
yields. The valuation of the investment portfolio, which is classified as
available-for-sale, continues to remain relatively stable as shown by the
aggregate market value decline for the first quarter of 1996 of $35,000, or
less than 30 basis points since December 31, 1995.
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Allowance 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.
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 the Bank's market
area. The risk associated with the lending operation can be minimized by
evaluating each loan independently based upon criteria which included, but is
not limited to, (a) the purpose of the loan, (b) the credit history of the
borrower,(c) the borrower's financial standing and trends, (d) the market value
of the collateral involved, and (e) the down payment received.
Quarterly reviews of the loan portfolio are conducted to identify problem
loans and to determine appropriate courses of action on a loan by loan basis.
Collection policies have been developed to monitor the status of all loans.
Collection procedures are being activated when a loan becomes past due.
Current internal loan review procedures provide for the analysis of a
borrower's operating data, tax returns and financial performance ratios for
all significant commercial loans, regulatory classified loans, past due loans
and internally identified "Watch" loans. Specifically these procedures 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
lending officer and the chief executive officer of the Bank. The results of
the grading process in conjunction with independent collateral evaluation 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 type of loan for the last five
years. If applied, commercial loans would require 10% of the reserve while
installment (consumer) and real estate loans would require 75% and 15%
respectively. The losses experienced, combined with the type and market value
of the collateral securing the consumer loan portfolio is the primary reason
for the larger percentage allocation of the allowance to this loan type.
Management believes significant factors affecting the allowance are being
reviewed regularly and that the allowance is adequate to cover potentially
uncollectible loans as of March 31, 1996. The Bank has no exposure from trouble
debt to lesser developed countries.
Results of Operations - First Quarter 1996 vs First Quarter 1995
Consolidated net income of $192,000 for the first quarter of 1996 was 26%
more than the $123,000 recorded for the first quarter of 1995. Expressed as
annualized returns on average assets and average shareholders' equity, net
income for 1996 was 1.14% and 10.25% compared to 0.89% and 7.29% for 1995.
Earnings per share increased $.13 to $.43 per share for the first quarter 1996
compared to the same period in 1995.
The increased level of net income for the first quarter of 1996 compared
to the first quarter of 1995, is attributed to the decrease in recognized
investment security losses, $38,000 and the increase in service charge income,
$13,000 and the increase in net interest income, $9,000. This was partially
offset by a $24,000 increase in other expense and the increased income tax
provision of $26,000.
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Net interest income was almost the same for both the first quarter of 1996
and 1995. Total interest income increased by $73,000 and total interest expense
increased by $64,000. This occurred primarily as a result of increasing yields
on interest earning assets and the restructuring of the deposit portfolio.
The decrease in the provision for loan losses is attributed primarily to
those factors previously discussed above.
Net occupancy and equipment expenses remained almost constant for the two
periods presented. It should be noted that there was an appreciable reduction
in the FDIC insurance assessment for the first quarter of 1996 as compared
to 1995.
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO 43443
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
On May 15, 1996 the Company will hold its annual meeting
of Shareholders to approve the following:
1. Electing three (3) Class I directors to the Board of
Directors for terms of three (3) years and until their
successors are elected and qualified.
2. Ratification of the appointment of the Company's Independent
Accountants for the fiscal year ending December 31, 1996.
ITEM 5 - OTHER INFORMATION
Not Applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter.
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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.
Date May 14, 1996 Marion Layman
Marion Layman
Chairman and President
Date May 14, 1996 Joseph R. Hirzel
Joseph R. Hirzel
Secretary and Treasurer
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