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, 1997
[ ] 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)
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
___
As of April 30, 1997, 465,098 shares of Common Stock of the Registrant were
outstanding. There were no preferred shares outstanding.
<PAGE>
<TABLE>
<CAPTION>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
FORM 10-QSB
INDEX
________________________________________________________________________________
Page Number
<S> <C>
PART I FINANCIAL INFORMATION
Item. 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- 3
March 31, 1997 and December 31, 1996
Condensed consolidated statements of income -- 4
Three months ended March 31, 1997 and 1996
Condensed consolidated statements of cash flows -- 5
Three months ended March 31, 1997 and 1996
Notes to condensed consolidated financial 6
statements -- March 31, 1997, 1996 and December 31, 1996
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXCHANGE BANCSHARES, INC.
Luckey, Ohio
CONSOLIDATED BALANCE SHEETS
_________________________________________________________________________________________________
< ---------- Dollars in thousands ----------->
March 31, December 31,
(Unaudited) (Unaudited)
1997 1996
____ ____
<S> <C> <C>
Assets
Cash and cash equivalents
Cash and due from banks $ 2,840 $ 2,440
Federal funds sold 2,737 2,254
_______ _______
Total cash and cash equivalents 5,577 4,694
Securities being held-to-maturity 3,075 3,184
(Fair value of $3,032 in 1997 and $3,149 in 1996)
Securities available-for-sale, at fair value 17,275 17,664
Loans (net of unearned interest) 43,695 41,471
Less:Allowance for loan losses (646) (508)
_______ _______
Loans - net 43,049 40,963
Properties and equipment 869 892
Accrued income receivable 607 646
Other real estate 0 0
Deferred federal income taxes 62 22
Other assets 173 141
_______ _______
Total assets $70,687 $68,206
_______ _______
Liabilities and Shareholder's Equity
Deposits
Demand accounts $17,211 $16,023
Savings accounts 15,195 15,225
Time deposits, $100,000 or over 4,772 3,995
Other time deposits 25,337 24,914
_______ _______
Total deposits 62,515 60,158
Accrued interest payable 130 121
Accrued expenses and other liabilities 127 110
_______ _______
Total liabilities $62,772 $60,389
_______ _______
Shareholders' Equity
Common stock -- $5.00 par value 2,379 2,379
Shares Authorized -- 750,000
Shares Issued -- 475,747
Surplus 3,050 3,050
Retained earnings 2,666 2,459
Treasury stock (10,649 shares in 1997 and
8,395 shares in 1996) (167) (131)
Unrealized loss on securities available-for-sale, (13) 60
net of applicable deferred income taxes
_______ _______
Total shareholders' equity 7,915 7,817
_______ _______
Total liabilities and shareholders' equity $70,687 $68,206
_______ _______
_________________________________________________________________________________________________
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXCHANGE BANCSHARES, INC.
Luckey, Ohio
CONSOLIDATED STATEMENTS OF INCOME
____________________________________________________________________________________________________
<---------Dollars in thousands, except per share amounts---------->
3 Months Ended March 31,
1997 1996
____ ____
<S> <C> <C>
Interest income
Interest and fees on loans $ 975 $ 923
Interest on investment securities:
Taxable 293 280
Exempt from federal income tax 17 16
Interest on federal funds sold 29 52
_______ _______
Total interest income 1,314 1,271
Interest expense
Interest on interest-bearing checking accounts 68 63
Interest on savings accounts 98 107
Interest on time deposits 386 361
_______ _______
Total interest expense 552 531
Net interest income 762 740
Provision for loan losses 0 23
_______ _______
Net interest income after
provision for loan loss 762 717
Noninterest income
Service charges on deposit accounts 48 56
Gain on sale of other assets 2 0
Other income 24 23
_______ _______
Total noninterest income 74 79
_______ _______
Noninterest expense
Salaries and employee benefits 254 244
Net occupancy expense 39 38
Equipment expense 35 35
FDIC deposit insurance assessment 1 1
State and other taxes 29 28
Other expense 179 170
_______ _______
Total noninterest expense 537 516
_______ _______
Income before income taxes 299 280
Federal Income tax expense 92 88
_______ _______
Net Income $ 207 $ 192
_______ _______
_______________________________________________________________________________________________
Per share data:
Net income per share of common stock $ 0.44 $ 0.41
Weighted average shares outstanding 465,547 472,425
_______________________________________________________________________________________________
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXCHANGE BANCSHARES, INC.
Luckey, Ohio
CONSOLIDATED STATEMENTS OF CASH FLOWS
___________________________________________________________________________________________________________
<------- Dollars in thousands ------->
3 Months ended March 31,
1997 1996
____ ____
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 207 $ 192
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 30 32
Provision for loan losses 0 23
Deferred income taxes (3) 0
Net loss on sale of other assets (2) 0
Amortization/Accretion - net 27 35
Changes in operating assets and liabilities:
(Increase) decrease in accrued income receivable 39 (47)
Increase in other assets (32) (85)
Decrease in accrued interest payable 8 9
Decrease in other liabilities (12) (14)
Increase in taxes payable 29 59
_______ _______
Total adjustments 84 12
_______ _______
Net cash provided by operating activities 291 204
_______ _______
Cash flows from investing activities:
Proceeds from maturities of held-to-maturity securities 0 143
Purchase of available-for-sale securities (2,738) (2,481)
Proceeds from maturities of available-for-sale securities 0 900
Payments on maturities on held-to-maturity securities 100 0
Proceeds from maturities on available-for-sale securities 3,000 0
Net change in loans (2,086) (450)
Capital purchases (7) (37)
Proceeds from other assets 2 0
_______ _______
Net cash used in investing activities (1,729) (1,925)
_______ _______
Cash flows from financing activities:
Net change in deposits 2,357 1,702
Purchase of treasury stock (36) (40)
Dividends paid 0 0
_______ _______
Net cash provided by financing activities 2,321 1,662
_______ _______
Net increase (decrease) in cash and cash equivalents 883 (59)
Cash and cash equivalents at beginning of period 4,694 6,092
_______ _______
Cash and cash equivalents at end of period $ 5,577 $ 6,033
_______ _______
___________________________________________________________________________________________________________
Supplemental information:
Cash paid for:
Interest paid 544 522
Net Income taxes paid 66 29
___________________________________________________________________________________________________________
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
EXCHANGE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and December 31, 1996
________________________________________________________________________________
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Corporation is a bank holding company whose activities are primarily
limited to holding the stock of The Exchange Bank, Luckey, Ohio, (the
"Company"). The Company 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 Company'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 both the three-month periods ended
March 31, 1997 and 1996. The weighted average number of shares outstanding
for the three-month periods ended March 31, 1997 and 1996, were 465,547 and
472,425 respectively.
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.
NOTE B - 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 instructions to Form 10-QSB and Article
10 of Regulation S-X and Rule 310 of Regulation SB. 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, 1997.
<PAGE>
EXCHANGE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
________________________________________________________________________________
The following focuses on the consolidated financial condition of the
Corporation at March 31, 1997, compared to December 31, 1996, and the results
of operations for the three-month period ended March 31, 1997, compared to the
same periods in 1996. 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 Corporation 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 Corporation
is not aware of any current recommendations by regulatory authorities which
would have such effect if implemented.
Note Regarding Forward-Looking Statements
In addition to historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Corporation's operations and the
Corporation's actual results could differ significantly from those discussed
in the forward-looking statements. Some of the factors that could cause or
contribute to such differences are discussed herein but also include changes
in the economy and interest rates in the nation and the Corporation's market
area generally. Some of the forward-looking statements included herein are
the statements regarding the allowance for loan losses.
Financial Condition
Liquidity
Liquidity relates to the Company's ability to meet cash demands of its
customers and their credit needs. Liquidity is provided by the Company'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 and cash equivalents, investment securities available-for-sale, and
mortgage-backed securities available-for-sale were $22.85 million at March
31, 1997, an increase of $494,000 from the December 31, 1996 total. Such
increase was attributable to the net inflow of funds from deposit account
balances being slightly greater than the increase in loan demand.
Liability liquidity relates to the Company's ability to retain existing
deposits, obtain new deposits and borrow in the marketplace. Total deposits
increased $2.36 million for the three months ended March 31, 1997, compared to
December 31, 1996. During the first three months of 1997, the balances in all
categories of deposits increased with the exception of savings accounts, which
decreased by only $30,000, or 0.20%. Total deposit balances increased by
$2.38 million, or 3.92%, compared to December 31, 1996. The largest increase
was in the demand deposit account category, $1.19 million, or 7.41%.
Access to funds from the Federal Reserve Bank (the "FED") in the form
short- and long-term borrowings and the Federal Home Loan Bank (the "FHLB")
in the form of short- and long-term advances are supplemental sources of cash
to meet liquidity needs.
<PAGE>
Capital Resources
Shareholders' equity totaled $7.92 million at March 31, 1997, compared to
$7.82 million at December 31, 1996. This increase was primarily due to the
retention of the first quarter earnings of $207,000, which was offset by
$73,000 unrealized losses on securities available-for-sale and the purchase of
additional shares of treasury stock. As of March 31, 1997, the Company's
ratio of shareholders' equity to assets was 11.20%, compared to 11.46% at
December 31, 1996.
Regulatory Capital Requirements
The Company complies with the capital requirements established by the
Federal Reserve System, which are summarized as follows:
<TABLE>
<CAPTION>
Capital Position
Regulatory as of
Minimum March 31, 1997 December 31, 1996
____________________________________________________________________________________
<S> <C> <C> <C>
Tier I 4.00% 19.02% 21.33%
risk-based
capital......
Total Risk- 8.00% 20.27% 22.58%
Based capital
Tier I 3.00% - 5.00% 11.44% 11.15%
leverage.....
</TABLE>
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 Company
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 Company's compliance with capital guidelines.
Changes in Financial Condition
General. The Corporation's consolidated total assets were $70.69 million
at March 31, 1997, reflecting an increase of $2.48 million, or 3.64%, over the
$68.21 million at December 31, 1996. This growth was primarily attributable
to an increase in loans outstanding, funded primarily by the proceeds from an
almost equal growth in deposit accounts of $2.83 million.
Cash and Cash Equivalents, Investment Securities, Mortgage-Backed
Securities and FHLB Stock. Cash and cash equivalents, investment securities,
mortgage-backed securities and FHLB stock increased by $385,000 between
December 31, 1996, and March 31, 1997. The primary changes were an increase
in cash and cash equivalents from $4.69 million at December 31, 1996, to $5.58
million at March 31, 1997, and a decrease in investment securities from
$20.85 million at December 31, 1996, to $20.35 million at March 31, 1997.
Loans Receivable. Net loans receivable equaled $43.05 million at March
31, 1997, compared to $40.96 million at December 31, 1996, an increase of
5.09%, attributable to the demand for mortgage and commercial loans. Average
total loans outstanding for the three-month period ended March 31, 1997,
equaled $41.74 million, compared to $37.94 million for the same three-month
period ended March 31, 1996, which represents an increase of $3.80 million, or
10.01%. Approximately 65.39% of this increase was experienced in the
commercial loan portfolio (i.e., commercial, municipal, and student loans).
Management is continuing to emphasize local lending to qualified borrowers.
<PAGE>
Deposits. Total deposits increased by $2.58 million, or 3.92%, during
the first three months of 1997. Total time deposits increased by $1.20
million, or 4.15%, while demand and savings deposits increased a net amount of
$1.16 million, or 7.60%, during the three-month period ended March 31, 1997.
Liabilities other than deposits increased by $25,000. Such increase was
primarily attributed to the accrual for current period income taxes of $92,000
which was partially offset by decreases in other accrued expenses and
accounts payable related to operating expenses. Minor increases were also
reported in accrued interest payable and other miscellaneous liability
accounts.
Results of Operations
General. The Corporation recorded a consolidated net income of $207,000
for the three months ended March 31, 1997, compared to $192,000 for the same
quarter in 1996.
Three Months Ended March 31, 1997, Compared to Three Months Ended March 31, 1996
Net Interest Income. The Corporation's net interest income for the three
months ended March 31, 1997, increased by 2.97%, from $740,000, to $762,000,
compared to the same period in 1996. The net interest margin, which consists
of net interest income as a percentage of average interest-earning assets,
decreased slightly, from 4.70% for the three months ended March 31, 1996, to
4.68% for the same period in 1997, primarily as a result of the repricing of
earning assets. During the same period, the net interest spread, which
reflects average yield on interest-earning assets less average costs of
interest-bearing liabilities, decreased 17 basis points, to 3.98%. Average
loans outstanding increased by $3.80 million as compared to 1996, which
contributed approximately $88,000 to the net interest income, while the change
in average yield on loans outstanding decreased the net interest income by
approximately $39,000.
Provision for Loan Losses. 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 the risk of loss inherent in the
Company's loan portfolio. Loan losses and recoveries are charged or
credited, respectively, to the allowance for loan losses as they occur.
The allowance and provision for loan losses is determined by management
upon consideration of such factors as the size and character of the loan
portfolio, loan loss experience, problem loans and economic conditions in the
Company's market area. Management attempts to minimize the risk associated
with each loan by evaluating each loan independently based upon criteria which
include, but are 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. While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in material adjustments, and net earnings could be significantly
adversely affected, if circumstances differ substantially from the assumptions
used in making the final determination. Increases in the loan portfolio,
increases in the types of loans carrying greater risk of loss, increases in
non-performing loans and changes in the local and national economy all could
cause the allowance for loan losses to be insufficient.
The Management determined that additional provisions to the allowance for
loan loss account were not necessary during the quarter ended March 31, 1997,
due to the net recoveries on loans previously charged-off of $139,000 during
the three months ended March 31, 1997.
Noninterest Income and Expense. Noninterest income was $74,000 for the
three months ended March 31, 1997, compared to $79,000, for the same period in
1996. This decrease was a result of the $8,000 decrease in service charge
income on deposit accounts. Noninterest expense increased by $21,000 for the
three months ended March 31, 1997, compared to the same period in 1996. The
increase was attributed to the increased costs of employee salaries and
benefit plans, professional fees, corporate franchise tax and other
miscellaneous operating expenses.
<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 reports on Form 8-K were filed during the quarter ended
March 31, 1997.
<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: May 15, 1997 /s/ Marion Layman
_____________ ________________________________________
Marion Layman
Chairman, President, and
Chief Executive Officer
Date: May 15, 1997 /s/ Joseph R. Hirzel
_____________ ________________________________________
Joseph R. Hirzel
Secretary and Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Balace Sheets as of March 31, 1997 and December 31, 1996, and the
related Consolidated Income Statements for the three months ending March 31,
1997 and 1996, and the periods ended March 31, 1997 and 1996, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000720912
<NAME> EXCHANGE BANCSHARES,INC
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,840
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,737
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,275
<INVESTMENTS-CARRYING> 3,075
<INVESTMENTS-MARKET> 3,032
<LOANS> 43,695
<ALLOWANCE> 646
<TOTAL-ASSETS> 70,687
<DEPOSITS> 62,515
<SHORT-TERM> 0
<LIABILITIES-OTHER> 257
<LONG-TERM> 0
0
0
<COMMON> 2,379
<OTHER-SE> 5,536
<TOTAL-LIABILITIES-AND-EQUITY> 70,687
<INTEREST-LOAN> 975
<INTEREST-INVEST> 310
<INTEREST-OTHER> 29
<INTEREST-TOTAL> 1,314
<INTEREST-DEPOSIT> 552
<INTEREST-EXPENSE> 552
<INTEREST-INCOME-NET> 762
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 537
<INCOME-PRETAX> 299
<INCOME-PRE-EXTRAORDINARY> 207
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 207
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
<YIELD-ACTUAL> 4.54
<LOANS-NON> 154
<LOANS-PAST> 11
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 508
<CHARGE-OFFS> 29
<RECOVERIES> 167
<ALLOWANCE-CLOSE> 646
<ALLOWANCE-DOMESTIC> 646
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 438
</TABLE>
