U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 October 31, 1996, 467,352 shares of Common Stock of the Registrant were
outstanding. There were no peferred shares outstanding.
Transitional Small Business Disclosure Format
(Check one):
Yes . . . No X
Page 1 of 12
<PAGE>
<TABLE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
FORM 10-QSB
INDEX
<CAPTION>
Page Number
<C>
<S>
PART I FINANCIAL INFORMATION
Item. 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- 3
September 30, 1996 and December 31, 1995
Condensed consolidated statements of income -- 4
Three months ended September 30, 1996 and 1995
Nine months ended September 30, 1996 and 1995
Condensed consolidated statements of cash flows -- 5
Nine months ended September 30, 1996 and 1995
Notes to condensed consolidated financial 6
statements -- September 30, 1996
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
-2-
</TABLE>
<PAGE>
EXCHANGE BANCSHARES, INC.
Luckey, Ohio
CONSOLIDATED BALANCE SHEETS
<------- Dollars in thousands ------->
September 30, December 31,
(Unaudited) (Unaudited)
1996 1995
Assets
Cash and due from banks $ 2,794 $ 2,197
Interest-bearing time deposits -0- -0-
Federal funds sold 3,065 3,895
Securities being held to maturity 3,314 3,703
(Fair value of $3,272 in 1996
and $3,619 in 1995)
Securities available for sale,
at fair value 18,891 16,876
Loans (net of unearned interest) 40,015 38,339
Less: Allowance for loan losses (531) (483)
------ ------
Loans - net 39,484 37,856
Properties and equipment 916 913
Accrued income receivable 756 588
Other real estate -0- -0-
Deferred federal income taxes 53 7
Other assets 136 166
------- -------
Total assets $69,409 $66,201
======= =======
Liabilities
Demand deposit $17,303 $14,773
Savings 15,926 16,721
Time, $100,000 or over 3,579 2,694
Other time deposits 24,588 24,323
------- -------
Total deposits 61,396 58,511
Borrowed funds -0- -0-
Accrued interest payable 124 126
Accrued expenses and other
liabilities 141 135
------- -------
Total liabilities $61,661 $58,772
======= =======
Shareholders' equity
Common stock -- $5.00 par value 2,379 2,265
Shares Authorized -- 750,000
Shares Issued -- 475,747
Surplus 3,052 2,801
Retained earnings 2,411 2,282
Treasury stock (8,395 shares in
1996 and 899 shares in 1995) (131) (13)
Unrealized gain (loss) on
securities available for sale 37 94
------- -------
Total equity 7,748 7,429
Total liabilities and ------- -------
shareholders' equity $69,409 $66,201
======= =======
________________________________________________________________________________
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
EXCHANGE BANCSHARES, INC.
Luckey, Ohio
CONSOLIDATED STATEMENTS OF INCOME
<----Dollars in thousands,
except per share amounts---->
3 Months Ended 9 Months Ended
September 30, September 30,
1996 1995 1996 1995
Interest income
Interest and fees on loans $ 949 $ 884 $2,805 $2,582
Interest on investment
securities:
Taxable 300 304 891 894
Exempt from federal income tax 21 16 52 51
Interest on federal funds sold 42 51 135 133
------ ------ ------ ------
Total interest income 1,312 1,255 3,883 3,660
====== ====== ====== ======
Interest expense
Interest on deposits
Demand and savings deposits 183 191 528 570
Time deposits 364 337 1,091 934
------ ------ ------ ------
Total interest expense 547 528 1,619 1,504
------ ------ ------ ------
Net interest income 765 727 2,264 2,156
Provision for loan losses 20 30 65 90
------ ------ ------ ------
Net interest income after
provision for loan loss 745 697 2,199 2,066
Other income
Service charges on deposit
accounts 57 58 175 158
Net investment security profits
or losses 0 0 0 (38)
Other income 20 14 63 36
------ ------ ------ ------
Total other income 77 72 238 156
------ ------ ------ ------
Other expense
Salaries and employee benefits 261 229 793 737
Net occupancy expense 36 36 109 106
Equipment expense 34 35 105 100
FDIC deposit insurance expense 1 (4) 2 64
State & other taxes 27 26 82 76
Other expense 164 183 531 519
------ ------ ------ ------
Total other expense 523 505 1,622 1,602
------ ------ ------ ------
Income before income taxes 299 264 815 620
Income tax expense 93 105 253 210
------ ------ ------ ------
Net Income $ 206 $ 159 $ 562 $ 410
====== ====== ====== ======
________________________________________________________________________________
Per share data:
Weighted average shares
outstanding 467,352 453,092 470,725 453,092
Net income per share
of common stock 0.44 0.35 1.19 0.90
________________________________________________________________________________
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
EXCHANGE BANCSHARES, INC.
Luckey, Ohio
CONSOLIDATED STATEMENTS OF CASH FLOWS
<----- Dollars in thousands ----->
9 Months ended September 30,
1996 1995
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net Income $ 561 $ 421
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 98 95
Provision for loan losses 65 90
Provision for deferred taxes 2 40
Gain on investments 0 38
Net loss on sale of other assets 1 4
Amortization/Accretion - net 99 99
Change in accrued income and other assets (199) (144)
Change in accrued expenses and other
liabilities 46 125
------- -------
Total adjustments 112 347
------- _______
Net cash provided by operating activities 673 757
_______ _______
Cash flows from investing activities:
Net change in federal funds sold 830 (2,987)
Securities held to maturity:
Proceeds from maturities 470 223
Proceeds from sales 0 0
Purchases (100) (508)
Securities available for sale:
Proceeds from maturities 6,400 500
Proceeds from sales 0 4,066
Purchases (8,581) (3,115)
Net change in loans (1,694) (1,072)
Capital purchases (101) (14)
Proceeds from fixed assets 0 5
Proceeds from other real estate 0 22
_______ _______
Net cash used in investing activities (2,776) (2,880)
_______ _______
Cash flows from financing activities:
Net change in deposits 2,885 1,357
Net change in short-term borrowing 0 0
Purchase of treasury 117) (5)
Sale of common stock 0 0
Sale of treasury stock 0 0
Dividends paid (68) (65)
_______ _______
Net cash provided by financing activities 2,700 1,287
_______ _______
Net increrase (decrease) in cash and cash
equivalents 597 (836)
Cash and cash equivalents at beginning of
year 2,197 3,191
_______ _______
Cash and cash equivalents at end of period $ 2,794 $ 2,355
======= =======
________________________________________________________________________________
Supplemental information:
Cash paid for:
Interest paid 1,621 1,476
Net Income taxes paid 232 96
_______________________________________________________________________________
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
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.
-6-
<PAGE>
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 September 30, 1996, compared to December 31, 1995, and the
results of operations for the three and nine month periods ended September 30,
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 $5,859,000 at
September 30, 1996 while investments and mortgage-backed securities available-
for-sale were $18,891,000. These amounts increased by a total of $2,015,000 and
$581,000 respectively from December 31, 1995 and June 30, 1996 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 a moderate growth from June 30, 1996, increasing by $2,798,000 or 4.77%,
which offset the second quarter decrease of $1,615,000. The Corporation has
not experienced any significant deposit disintermediation during he first nine
months of 1996. Management anticipates deposits to experience some continued
moderate growth during the remainder of 1996.
<PAGE>
Access to advances from the Federal Reserve Bank (FRB) in the form of
Federal Funds Purchased and securities sold under agreement to repurchase (Repo
Agreements) are supplemental sources of cash to meet liquidity needs.
Capital Resources
Shareholders' equity totaled $7,749,000 at September 30, 1996, compared to
$7,429,000 at December 31, 1995. This increase was attributed to nine months
earnings of $561,000 reduced by the acquisition of 7,662 shares of treasury
stock, payment of cash dividends of $68,000 and a net unrealized holding loss on
securities available for sale of $56,000. As of September 30, 1996, the ratio
of shareholders' equity to assets was 11.16% 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 September 30, 1996 December 31, 1995
Tier I 4.00% 15.89% 20.26%
risk-based
capital......
Total Risk- 8.00% 16.99% 21.51%
Based capital
Tier I 3.00% - 5.00% 11.34% 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 $69,409,000 at the end of the current period
reflecting a increase of $3,038,000 or 4.57% during the third quarter of 1996.
This increase was funded primarily from savings and other transaction accounts.
The funds held in overnight deposits, i.e. Federal Funds, were utilized to fund
the increases in investments and loans.
<PAGE>
The total investments outstanding increased during the third quarter
primarily due to the demand to fund loans not keeping pace with the increases in
deposits. 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 increase for the third quarter of 1996 of $30,000 as
compared to the second quarter's decline of $79,000, or less than 50 basis
points since December 31, 1995.
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 within the Bank's
market area. The risk associated with the lending operation can be minimized by
evaluating each loan independently based upon criteria which includes, 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. 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 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 type of loan for the last five
years. If applied, commercial loans would require 15% of the reserve while
installment (consumer) and real estate loans would require 60% and 25%
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 September 30, 1996. The Bank has no exposure from
troubled debt to lesser developed countries.
Results of Operations - Third Quarter 1996 vs Third Quarter 1995
Consolidated net income of $206,000 for the third quarter of 1996 was 30%
more than the $159,000 recorded for the third quarter of 1995. Expressed as
annualized returns on average assets and average shareholders' equity, net
income for 1996 was 1.19% and 9.45% compared to 0.95% and 9.19% for 1995.
Earnings per share increased $.34 to $1.19 per share for the first nine months
of 1996 compared to the same period in 1995.
<PAGE>
The increased level of net income for the third quarter of 1996 compared to
the third quarter of 1995, is attributed to the increase in interest and fees on
loans of $65,000, the increase in investment income of $31,000, the decrease in
interest on federal funds sold of $9,000, and only relatively minor increases in
other operating income and expenses of $5,000 and $18,000 respectively. As a
result, the income tax provision also changed by $12,000.
Net interest income was $38,000 greater in the third quarter of 1996
compared to 1995. Total interest income increased by $57,000 and total interest
expense increased by $19,000. 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 three quarters of 1996 as compared to
1995.
<PAGE>
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
Not Applicable
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.
<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.
Date November 14, 1996 s/Marion Layman
Marion Layman
Chairman and President
Date November 14, 1996 s/Joseph R. Hirzel
Joseph R. Hirzel
Secretary and Treasurer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SEPTEMBER
30, JUNE 30, AND MARCH 31, 1996 & 1995, AND DECEMBER 31, 1995, CONSOLIDATED
STATEMENTS OF CONDITION AND CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000720912
<NAME> EXCHANGE BANCSHARES INC
<MULTIPLIER> 1000
<CURRENCY> U S DOLLARS
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 3-MOS 3-MOS 9-MOS 9-MOS
YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1996 DEC-31-1995
DEC-31-1995
<PERIOD-START> JUL-01-1996 JUL-01-1995 JAN-01-1996 JAN-01-1995
JAN-01-1995
<PERIOD-END> SEP-30-1996 SEP-30-1995 SEP-30-1996 SEP-30-1995
DEC-31-1995
<EXCHANGE-RATE> 1 1 1 1
1
<CASH> 2794 2355 2794 2355
2197
<INT-BEARING-DEPOSITS> 0 0 0 0
0
<FED-FUNDS-SOLD> 3065 3237 3065 3237
3895
<TRADING-ASSETS> 0 0 0 0
0
<INVESTMENTS-HELD-FOR-SALE> 18891 16308 18891 16308
16876
<INVESTMENTS-CARRYING> 3314 5785 3314 5785
3703
<INVESTMENTS-MARKET> 3272 5772 3272 5772
3619
<LOANS> 40015 38027 40015 38027
38339
<ALLOWANCE> (531) (462) (531) (462)
(483)
<TOTAL-ASSETS> 69409 67106 69409 67106
66201
<DEPOSITS> 61396 59543 61396 59543
58511
<SHORT-TERM> 0 0 0 0
0
<LIABILITIES-OTHER> 265 285 265 285
261
<LONG-TERM> 0 0 0 0
0
0 0 0 0
0
0 0 0 0
0
<COMMON> 2379 2265 2379 2265
2265
<OTHER-SE> 5369 5013 5369 5013
5164
<TOTAL-LIABILITIES-AND-EQUITY> 69409 67106 69409 67106
66201
<INTEREST-LOAN> 949 884 2805 2582
3505
<INTEREST-INVEST> 321 320 943 945
1258
<INTEREST-OTHER> 42 51 135 133
192
<INTEREST-TOTAL> 1312 1255 3883 3660
4955
<INTEREST-DEPOSIT> 547 528 1619 1504
2038
<INTEREST-EXPENSE> 547 528 1619 1504
2038
<INTEREST-INCOME-NET> 765 727 2264 2156
2917
<LOAN-LOSSES> 20 30 65 90
120
<SECURITIES-GAINS> 0 0 0 0
(38)
<EXPENSE-OTHER> 523 505 1622 1602
2155
<INCOME-PRETAX> 299 264 815 620
881
<INCOME-PRE-EXTRAORDINARY> 206 159 562 410
612
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 206 159 562 410
612
<EPS-PRIMARY> 0.44 0.33 1.19 0.85
1.35
<EPS-DILUTED> 0.44 0.33 1.19 0.85
1.35
<YIELD-ACTUAL> 4.54 4.40 4.54 4.58
5.00
<LOANS-NON> 294 336 294 336
336
<LOANS-PAST> 31 29 31 29
57
<LOANS-TROUBLED> 0 0 0 0
0
<LOANS-PROBLEM> 0 0 0 0
0
<ALLOWANCE-OPEN> (508) (433) (483) (465)
(465)
<CHARGE-OFFS> 5 2 33 122
136
<RECOVERIES> (8) (1) (16) (30)
(34)
<ALLOWANCE-CLOSE> (531) (462) (531) (462)
(483)
<ALLOWANCE-DOMESTIC> (531) (462) (531) (462)
(483)
<ALLOWANCE-FOREIGN> 0 0 0 0
0
<ALLOWANCE-UNALLOCATED> (364) (248) (364) (248)
(280)
</TABLE>
