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 JUNE 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 July 31, 1996, 471,852 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
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Page Number
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PART I FINANCIAL INFORMATION
Item. 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- 3
June 30, 1996 and December 31, 1995
Condensed consolidated statements of income -- 4
Three months ended June 30, 1996 and 1995
Six months ended June 30, 1996 and 1995
Condensed consolidated statements of changes 5
in shareholders' equity --
Six months ended June 30, 1996 and 1995
Notes to condensed consolidated financial 6
statements -- June 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
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EXCHANGE BANCSHARES, INC.
Luckey, Ohio
CONSOLIDATED BALANCE SHEETS
< ---------- Dollars in thousands ----------->
June 30, December 31,
(Unaudited) (Unaudited)
1996 1995
Assets
Cash and due from banks $ 2,221 $ 2,197
Interest-bearing time deposits -0- -0-
Federal funds sold 1,990 3,895
Securities being held to maturity 3,358 3,703
(Fair value of $3,311 in 1996
and $3,619 in 1995)
Securities available for sale,
at fair value 18,310 16,876
Loans (net of unearned interest) 39,108 38,339
Less: Allowance for loan losses (508) (483)
Loans - net 38,600 37,856
Properties and equipment 943 913
Accrued income receivable 715 588
Other real estate -0- -0-
Deferred federal income taxes 53 7
Other assets 181 166
Total assets $66,371 $66,201
Liabilities
Demand deposit $15,047 $14,773
Savings 16,242 16,721
Time, $100,000 or over 2,650 2,694
Other time deposits 24,659 24,323
Total deposits 58,598 58,511
Borrowed funds -0- -0-
Accrued interest payable 121 126
Accrued expenses and other
liabilities 68 135
Total liabilities $58,787 $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 2,205 2,282
Treasury stock (3,895 shares
in 1996 and 899 shares in 1995) (59) (13)
Unrealized gain (loss) on
securities available for sale 7 94
Total equity 7,584 7,429
Total liabilities and shareholders'
equity $66,371 $66,201
_______________________________________________________________________________
The accompanying notes are an integral part of these financial statements.
EXCHANGE BANCSHARES, INC.
Luckey, Ohio
CONSOLIDATED STATEMENTS OF INCOME
________________________________________________________________________________
<---------Dollars in thousands, except per share amounts---------->
3 Months Ended 6 Months Ended
June 30, June 30,
1996 1995 1996 1995
Interest income
Interest and fees on loans $ 933 $ 830 $1,856 $1,698
Interest on investment securities:
Taxable 311 302 591 590
Exempt from federal income tax 15 10 31 36
Interest on federal funds sold 41 40 93 81
Total interest income 1,300 1,182 2,571 2,405
Interest expense
Interest on deposits 541 509 1,072 976
Total interest expense 541 509 1,072 976
Net interest income 759 673 1,499 1,429
Provision for loan losses 22 30 45 60
Net interest income after
provision for loan loss 737 643 1,454 1,369
Other income
Service charges on deposit
accounts 61 57 118 100
Net investment security
profits or losses 0 0 0 (38)
Other income 21 3 43 22
Total other income 82 60 161 84
Other expense
Salaries and employee benefits 288 264 532 508
Net occupancy expense 35 33 73 70
Equipment expense 36 33 71 65
FDIC deposit insurance expense 0 34 1 68
State & other taxes 27 26 55 51
Other expense 197 168 367 336
Total other expense 583 558 1,099 1,098
Income before income taxes 236 145 516 355
Income tax expense 72 43 160 105
Net Income $ 164 $ 102 $ 356 $ 250
_______________________________________________________________________________
Per share data:
Weighted average
shares outstanding 474,381 475,118 474,742 475,155
Net income per
share of common stock 0.34 0.21 0.75 0.53
_______________________________________________________________________________
The accompanying notes are an integral part of these financial statements.
EXCHANGE BANCSHARES, INC.
Luckey, Ohio
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
________________________________________________________________________________
(Dollars in thousands)
(Unaudited)
Unrealized
Gain/Loss
on Total
Common Securities Share-
Common Retained Treasury Available holders'
Stock Surplus Earnings Stock For Sale Equity
Balance at 12/31/94 $2,158 $2,564 $2,192 $ (8) $ (332) $ 6,574
Net income 251 251
Purchase of 341
treasury shares (5) (5)
Change in unrealized
securities loss 355 355
5% stock dividend
(21,576 shares
issued) 107 238 (345) -0-
Cash dividends
declared ($0.15
per share) (65) (65)
Balance at 6/30/95 $2,265 $2,802 $2,033 $ (13) $ (23) $ 7,110
Balance at 12/31/95 $2,265 $2,801 $2,282 $ (13) $ 94 $ 7,429
Net income 356 356
Purchase of 2,969
treasury shares (46) (46)
Change in unrealized
securities loss (87) (87)
5% stock dividend 114 251 (365) -0-
(22,655 shares
issued)
Cash dividends
declared ($0.15
per share) (68) (68)
Balance at 6/30/96 $2,379 $3,052 $2,205 $ (59) $ 7 $ 7,584
_____________________________________________________________________________
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 June 30, 1996, compared to December 31, 1995, and the
results of operations for the three and six month periods ended June 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 $4,211,000 at
June 30, 1996 while investments and mortgage-backed securities available-for-
- -sale were $18,310,000. These amounts decreased by a total of $1,887,000 and
$447,000 respectively from December 31, 1995 and March 31, 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 decline from March 31, 1996, decreasing by $1,615,000 or
2.68%, which almost offset the first quarter increase of $1,702,000. The
Corporation has not experienced any significant deposit disintermediation during
he first six 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 and securities sold under agreement to repurchase (Repo
Agreements) are supplemental sources of cash to meet liquidity needs.
Capital Resources
Shareholders' equity totaled $7,584,000 at June 30, 1996, compared to
$7,429,000 at December 31, 1995. This increase was attributed to first half
earnings of $356,000 reduced by the acquisition of 2,969 shares of treasury
stock, payment of cash dividends of $68,000 and a net unrealized holding loss on
securities available for sale of $87,000. As of June 30, 1996, the ratio of
shareholders' equity to assets was 11.43% 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 June 30, 1996 December 31, 1995
Tier I 4.00% 18.73% 20.26%
risk-based
capital......
Total Risk- 8.00% 19.98% 21.51%
Based capital
Tier I 3.00% - 5.00% 11.09% 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 $66,371,000 at the end of the current period
reflecting a decrease of $1,643,000 or 2.48% during the second three months of
1996. This decrease was funded primarily from higher rate time deposits of
$1,439,000. The funds held in overnight deposits, i.e. Federal Funds, were
utilized to fund the deposit outflow.
The total investments outstanding decreased slightly during the second
quarter primarily due to the maturities and principal reductions. 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 second quarter of 1996 of $79,000 as compared to the first
quarter's decline of $35,000, or less than 63 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 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 June 30, 1996. The Bank has no exposure from troubled
debt to lesser developed countries.
Results of Operations - Second Quarter 1996 vs Second Quarter 1995
Consolidated net income of $164,000 for the second quarter of 1996 was 59%
more than the $102,000 recorded for the second quarter of 1995. Expressed as
annualized returns on average assets and average shareholders' equity, net
income for 1996 was 1.06% and 9.47% compared to 0.76% and 7.28% for 1995.
Earnings per share increased $.22 to $.75 per share for the first six months of
1996 compared to the same period in 1995.
The increased level of net income for the second quarter of 1996 compared to
the second quarter of 1995, is attributed to the increase in interest and fees
on loans of $103,000, the increase in other miscellaneous income of $18,000, and
only relatively minor increases in interest and other operating expenses of
$32,000 and $25,000 respectively. As a result, the income tax provision also
increased by $29,000.
Net interest income was $86,000 greater in the second quarter of 1996
compared to 1995. Total interest income increased by $118,000 and total
interest expense increased by $32,000. 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 second quarter of 1996 as compared to
1995.
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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 held its annual meeting
of Shareholders and approved the following:
1. Elected 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. Ratified 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: August 14, 1996 Marion Layman
Marion Layman
Chairman and President
Date: August 14, 1996 Joseph R. Hirzel
Joseph R. Hirzel
Secretary and Treasurer
