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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT Pursuant to SECTION 13 or 15(d) of
THE SECURITIES EXCHANGE ACT of 1934
For the fiscal year ended December 31, 1996
Commission File Number 33-54566
_____________________
EXCHANGE BANCSHARES, INC.
(name of small business issuer in its charter)
Ohio 34-1721453
(State or other Jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
237 Main Street, Box 177, Luckey, Ohio 43443
(Address of principal executive offices) (zip code)
Issuer's telephone number (419) 833-3401
____________________
Securities registered under Section 12(b) of the Exchange Act:
not applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Shares ($5.00 Par Value)
Preferred Shares ($25.00 Par Value)
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 ___
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10- KSB or any amendment to this Form 10-KSB. [ X ]
State issuer's revenues for the most recent fiscal year. $5,527,000.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold or the average
bid and asked prices if such stock, as of a specified date within the past 60
days: As of March 15, 1997, 475,747 shares of Common Stock of the Registrant
were outstanding. The aggregate market value of the voting stock held by non-
affiliates was $6,000,368 based upon the trading price of $16.00 per share.
Documents Incorporated by References
Part III: Proxy Statement, dated April 10, 1997, of Registrant
Transitional Small Business Disclosure Format YES ___ NO _X_
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<CAPTION>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
Cross Reference Sheet
Pursuant to Regulation ss 240.12b-23
_______________________________________________________________________________
FORM 10-KSB EXHIBIT
PART I
Page No. Page No.
<S> <C> <C>
ITEM 1. Description of Business 1 - 2
ITEM 2, Description of Property 2
ITEM 3. Legal Proceedings 2
ITEM 4. Submission of Matters to a
Vote of Security Holders Not Applicable
PART II
ITEM 5. Market for Common Equity
and Related Stockholder
Matters 3
ITEM 6. Management Discussion
and Analysis 3 - 10
Exhibit A All
ITEM 7. Financial Statements 10
Exhibit B All
ITEM 8. Changes In and Disagreements
With Accountants on Accounting Not Applicable
and Financial Disclosures
PART III
ITEM 9. Directors, Executive Officers,
Promoters and Control Persons:
Compliance With Section 16(a) Exhibit C
of the Exchange Act C -3
ITEM 10. Executive Compensation C -6
ITEM 11. Security Ownership of Certain
Beneficial Owners and Management C -3
ITEM 12. Certain Relationships and
Related Transactions C -9
ITEM 13. Exhibits and Reports on Exhibit A-Statistical Tables
Form 8-K Exhibit B-Financial
Statements
Exhibit C-Proxy Statement
(Incorporated by
reference)
Exhibit D-Article 9 FDS
(Exhibit 27)
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PART I
ITEM 1. Description of Business
Business
Exchange Bancshares, Inc. (the "Holding Company" or the "Corporation") was
organized as an Ohio corporation and incorporated by directors of The Exchange
Bank (the "Bank") under Ohio law on October 13, 1992 at the direction of the
Board of Directors of the Bank for the purpose of becoming a bank holding
company by acquiring all of the outstanding shares of Bank Common Stock. The
Holding Company acquired the Bank effective January 1, 1994. The Holding
Company has authorized 750,000 common shares, par value $5.00 per share of which
465,098 are currently outstanding.
The Holding Company also has authorized 750 preferred shares, par value
$25.00 per share without designating the terms of the preferred shares. No
preferred shares are currently outstanding or presently intended to be issued.
Exchange Bancshares, Inc. is a bank holding company engaged in the business
of commercial and retail banking through its subsidiary, The Exchange Bank,
which accounts for substantially all of its revenues, operating income, and
assets. The Holding Company may in the future acquire or form additional
subsidiaries, including other banks, to the extent permitted by law.
The Bank conducts a general banking business embracing the usual functions
of a commercial, retail and savings bank, including: time, savings, money market
and demand deposit accounts; commercial, industrial, agricultural, real estate,
consumer installment and credit card lending; safe deposit box rental, automated
teller machines, and other services tailored to individual customers. The Bank
makes and services secured and unsecured loans to individuals, firms and
corporations. The Bank continuously searches for new products and services
which are made available to their customers in order that they remain
competitive in the market place.
The Holding Company is subject to regulation by the Board of Governors of
the Federal Reserve System which limits the activities in which the Holding
Company and the Bank may engage. The Bank is supervised by the State of Ohio,
Division of Financial Institutions. The Bank is a member of the Federal Reserve
System and is subject to its supervision. The Bank is also a member of the
Federal Deposit Insurance Corporation (FDIC). As such, the Bank is subject to
periodic examination by the Division of Financial Institutions of the State of
Ohio and the Federal Reserve Board. The Holding 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.
Effect of Government Monetary Policies
The earnings of the Bank are affected by domestic economic conditions and
the monetary and fiscal policies of the United States government and its
agencies.
The Federal Reserve Board, through its monetary policies, regulates the
money supply, credit conditions and interest rates in order to influence the
general economic conditions. This is accomplished primarily by their open
market operations through the acquisition and disposition of United States
Government securities, varying the discount rate (rate charged on member bank
borrowings), targeting Federal Funds rates, and adjusting the reserve require-
ments of member and nonmember bank deposits. As a result the Federal Reserve
Board's monetary policies have had a significant effect on the interest income
and interest expense of commercial banks and are expected to continue to do so
in the future.
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Employees
As of December 31, 1996, the Bank had 37 full and 8 part-time employees.
Personnel costs incurred by the Holding Company are reimbursed to the Bank.
Competition
The Bank competes with seven area banks and five savings and loan associa-
tions, various credit unions, finance companies, large retail stores, credit
corporations, and both local and Federal governments for sources and uses of
funds. The Bank is the second largest bank headquartered in Wood County, Ohio.
The competitive factors among financial institutions can be classified into
two categories, competitive rates and competitive services. With the advent of
deregulation, rates have become more competitive, especially in the area of time
deposits. From a service standpoint, financial institutions compete against
each other in types of services such as service costs, banking hours and similar
features. The Bank is generally competitive with competing financial
institutions in its primary service area with respect to interest rates paid
on time and savings deposits, charges on deposit accounts and interest rates
charged on loans. With respect to services, the Bank offers extended banking
hours and operates three ATM's (automated teller machines).
Pursuant to state regulations, the Bank is limited to the amount that it
may lend to a single borrower. As of December 31, 1996 and December 31, 1995
the legal lending limits were approximately $1,183,200 and $1,173,000
respectively. As of December 31, 1996 and 1995, no loans were over the legal
lending limit.
ITEM 2. Properties
The Bank's principal office is located at 235 Main Street, Luckey, Ohio
43443. The Bank's two branches are located at 311 North Main Street, Walbridge,
Ohio 43465, and 940 Clarion Avenue, Holland, Ohio 43528. All of the above
properties are owned by the Bank. The Holding Company operates out of the
Bank's main office although it has a separate mailing address. The Holding
Company reimburses the Bank for the fair value of the space occupied.
ITEM 3. Legal Proceedings
In the opinion of management of the Holding Company, there are no legal
proceedings pending to which the Corporation is a party or to which its property
is subject, which, if determined adversely to the Corporation, would be material
in relation to the Corporation's undivided profits or financial condition, nor
are there any proceedings pending other than ordinary routine litigation
incident to the business of the Corporation. In addition, no material pro-
ceedings are pending other than ordinary routine litigation incident to the
business of the Corporation. In addition, no material proceedings are pending
or are known to be threatened or contemplated against the Corporation by
government authorities or others.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
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PART II
ITEM 5. Market for the Registrant's Common Stock and Related Shareholder Matters
At December 31, 1996, the Corporation had approximately 812 shareholders
of record. The McDonald & Company, broker-dealer, makes a limited over-the-
counter market in shares of Corporation Common Stock. In addition, there have
been a limited number of private transactions known to the management of the
Corporation. Based solely on information made available to the Corporation from
First Scioto Company and from a limited number of buyers and sellers, shares
of the Corporation Common Stock that have been traded in private transactions
since January 1, 1996 were traded at a high of $17.00 and a low of $15.50.
There are no plans to list the shares of the Corporation Common Stock on any
stock exchange.
Through 1996, McDonald & Company offered to purchase shares of stock of the
Corporation at $16.00 per share, and was offering to sell such shares at $17.00
per share. The offer to purchase shares at $16.00 was conditional upon their
ability to sell the shares at $17.00 per share. In addition to the shares
traded through McDonald & Company there have been a limited number of private
transactions known to the Management of the Corporation.
Effective January 1, 1994, the Corporation acquired the Bank and share-
holders of the Bank exchanged one share of Bank stock for four shares of the
Corporation. In 1996, the Corporation declared cash dividends of $.15 per
share payable on June 15, 1996 to shareholders of record on June 1, 1996 and a
cash dividend of $.30 per share payable on December 16, 1996 to shareholders
of record on December 2, 1996. The Corporation also declared a five percent
stock dividend to shareholders of record on June 1, 1996 payable on June 15,
1996. In 1995, the Corporation declared cash dividends of $.13 per share pay-
able on June 15, 1995 to shareholders of record on June 2, 1995 and a cash
dividend of $.24 per share payable on December 15, 1995 to shareholders of
record on December 2, 1995. The Corporation also declared a five percent stock
dividend to shareholders of record on June 2, 1995 payable on June 15, 1995.
Dividends by the Corporation necessarily depend upon earnings, financial
condition, appropriate legal restrictions and other factors relevant at the
time the Board of Directors of the Corporation considers dividend policy.
Under Ohio Revised Code, the Corporation is prohibited from paying dividends
if either the Corporation would be unable to pay its debts as they come due, or
the Corporation's total assets would be less than its total liabilities plus
an amount needed to satisfy any preferential right of shareholders. The
Corporation may only pay dividends out of surplus. Surplus is defined as the
excess of a corporation's assets over its liabilities plus stated capital.
Total assets and liabilities are determined by the Board of Directors, which
may base its determination on such factors as it considers relevant, including
without limitation: (i) the book values of assets and liabilities of the
Corporation, as reflected on its books and records; and (ii) unrealized
appreciation and depreciation of the assets of the Corporation.
If in the opinion of the applicable federal bank regulatory authority, a
bank under its jurisdiction is engaged in or is about to engage in an unsafe
or unsound practice (which, depending on the financial condition of the bank,
could include the payment of dividends), such authority may require, after
notice of hearing, that such bank cease and desist from such practice. The
Federal Reserve Board has similar authority with respect to bank holding
companies. In addition, the Federal Reserve Bank and the FDIC have issued
policy statements which provide that insured banks and bank holding companies
should generally only pay dividends out of current operating earnings.
The Bank, as a State Bank is subject to the dividend restrictions set forth
by the State Division of Financial Institutions. Under such restrictions, the
Bank may not, without the prior approval of the Superintendent of Financial
Institutions, declare dividends in excess of the sum of the current year's
earnings (as defined) plus the retained earnings (as defined) from the prior
two years.
ITEM 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Exchange Bancshares, Inc., (the "Holding Company") was organized as an Ohio
Corporation and incorporated by the Board of Directors of The Exchange Bank
(the "Bank") under Ohio law on October 13, 1992, for the purpose of becoming
a bank holding company owning all of the outstanding shares of the bank. The
<PAGE>
Holding Company acquired the Bank on January 1, 1994, and as of December 31,
1996 had combined assets of $68 million, $41 million in net loans, and $60
million in deposits. The Bank through its two commercial banking offices
located in Wood County, Ohio, and one Lucas County office, provides financial
services to both individual and commercial customers. The Bank is subject to
supervision, examination, and regulation of the Division of Financial
Institutions of the State of Ohio. The deposits of the Bank are insured by the
Federal Deposit Insurance Corporation (FDIC). The Bank is a member of the
Federal Reserve System. Selected financial data on the Holding Company's
condition and operations is filed with the United States Securities and Exchange
Commission (Form 10-KSB and Form 10-QSB) and the Board of Governors of the
Federal Reserve System (FRY-9). Selected financial data on the subsidiary
Bank's condition and operations is filed quarterly with the Ohio Division of
Financial Institutions and the Federal Reserve System.
Exchange Bancshares, Inc. is a bank holding company engaged in the business
of commercial and retail banking through its subsidiary The Exchange Bank,
Luckey, Ohio, which accounts for substantially all of the Holding Company's
revenues, operating income, and assets.
The following discussion is intended to focus on and highlight certain
financial information regarding the Bank and should be read in conjunction with
the Financial Statements and related Notes (see Exhibit B - Financial State-
ments, of this report) which have been prepared by the Management of Exchange
Bancshares, Inc. in conformity with generally accepted accounting principles.
The Board of Directors engaged Robb, Dixon, Francis, Davis, Oneson and Company,
independent auditors, to audit the financial statements, and their report is
included in Exhibit B of this report. To assist in understanding and evaluating
major changes in the Holding Company's and the Bank's financial position and
results of operations, two and three year comparisons are provided in tabular
form for ease of comparison. Please refer to Exhibit A - Statistical Tables,
of this report.
Three major areas of discussion that follow are an analysis of (a) assets
and liabilities including liquidity and interest rate sensitivity, (b) share-
holders' equity including dividends and risk-based capital, and (c) 1996 results
of operations.
I - FINANCIAL CONDITION
Loan Portfolio
Loans, as a component of earning assets, represent a significant portion
of earning assets at December 31, 1996. The Bank offers a wide variety of loans
including commercial, consumer, and both residential and commercial real estate
in its primary marketing area of northwestern Ohio. At December 31, 1996, the
Bank did not have any loan concentrations which exceeded 10% of total loans or
significant amounts of loans for agricultural purposes.
Average loans increased 5.36% in 1996 to represent 61.48% of average
earning assets compared to 59.84% in 1995 and 56.07% in 1994. Year-end total
real estate loans of $32,365,000 represented approximately 77.91% of the total
loans outstanding. The portion of the loan portfolio represented by real estate
loans has increased from 72.74% at December 31, 1992 to 77.91% at December 31,
1996. Installment loans to individuals have continued to decline steadily
since 1992 from 19.49% of loans outstanding to 14.55% at December 31, 1996. The
dollar amounts of commercial loans (including tax-exempt loans) have decreased
from 7.69% at December 31, 1992 to 7.51% at December 31, 1996. Table 2 provides
a five-year loan history.
In addition to the loans reported in Table 2 are certain off-balance sheet
products such as letters of credit and loan commitments which are offered under
the same credit standards as the loan portfolio. Since the possibility of a
liability exists, generally accepted accounting principles require that these
financial instruments be disclosed but treated as contingent liabilities and
thus, not reflected in the accompanying financial statements (approximately
$5.98 million). Management closely monitors the financial condition of
potential creditors throughout the terms of the instrument to assure that they
maintain certain credit standards. Refer to Notes K and L of the Notes to
Consolidated Financial Statements for additional information on off-balance
sheet financial instruments.
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Non-Performing Assets
Table 3 provides a five-year summary of nonperforming assets which are
defined as loans accounted for on a non-accrual basis, accruing loans that are
contractually past due 90 days or more as to principal or interest payments,
renegotiated troubled debt, and other real estate obtained through loan fore-
closure.
A loan is placed on non-accrual when payment terms have been seriously
violated (principal and/or interest payments are 90 days or more past due,
deterioration of the borrower's ability to repay, or significant decrease in
value of the underlying loan collateral) and stays on non-accrual until the loan
is brought current as to principal and interest. The classification of a loan
or other asset as non-accruing does not indicate that loan principal and
interest will not be collectible. The Bank adheres to the policy of the
Federal Reserve that banks may not accrue interest on any loan when the
principal or interest is due and has remained unpaid for 90 days or more unless
the loan is both well secured and in the process of collection.
A loan is considered restructured or renegotiated when either the rate is
reduced below current market rates for that type of risk, principal or interest
is forgiven, or the term is extended beyond that which the Bank would accept
for loans with comparable risk. Properties obtained from foreclosing on loans
secured by real estate are adjusted to market value prior to being capitalized
in an account entitled "Other Real Estate held for resale." Regulatory
provisions on other real estate are such that after five years, or ten years
under special circumstances, property must be charged-off. This period gives
the Bank adequate time to make provisions for disposing of any real estate
property.
Loans accounted for on a non-accrual basis decreased $140,000 or 41.67%
as of year-end 1996. Nonperforming assets at December 31, 1996 totaled
$344,000 or 0.50% of total assets. This represents a decrease of $49,000 or
12.47% from December 31, 1995.
Analysis of the Allowance/Provision 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. See Table 4 for a five-year summary.
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 in its market area.
The risk associated with the lending operation can be minimized by evaluating
each loan independently based on criteria which includes, but is not limited
to, (a) the purpose of the loan, (b) the credit history of the borrower, (c)
the market value of the collateral involved, and (d) the down payment made.
More than 90% of the Bank's total gross loans are secured by deeds of trust
on real property, security agreements on personal property, insurance contracts
from independent insurance companies or through the full faith and credit of
government agencies. The Bank's lending policies require substantial down pay-
ments along with current market appraisals on collateral when the loans are
originated, thus reducing the risk of any potential losses.
To further minimize the risks of lending, quarterly reviews of the loan
portfolio are made to identify problem loans and to determine the course of
action. Collection policies have been developed to monitor the status of all
loans and are activated when a loan becomes past due.
Management has implemented internal loan review procedures that 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 loan 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.
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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 loan type for the last five years.
If applied, commercial loans would require 41.94% of the reserve while the
installment (consumer) and real estate loans would require 51.88% and 6.18%,
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
reviewed regularly and that the allowance is adequate to cover potentially
uncollectible loans. The Bank has no exposure from troubled debts to lesser
developed countries nor from significant amounts of agricultural, real estate
or energy related loans.
The average allowance to average loans outstanding ratio increased to 1.27%
in 1996 from 1.26% and 1.27% in 1995 and 1994, respectively. The allowance
for loan losses to loan balances outstanding at year-end was 1.22%, 1.26%, and
1.25% for years 1996, 1995, and 1994, respectively.
Net charge-offs in 1996 of $50,000 decreased $52,000 from $102,000 in 1995.
The 1996 decrease is primarily attributed to a single borrower whose financial
condition had worsened in 1995. Net charge-offs in 1995 increased to $102,000
from $84,000 in 1994. The yearly average net charge-offs for the same five-year
period (1992-1996) were $74,400.
The decrease in the provision for the allowance for loan loss as compared
to 1995 is attributed to efforts by Management (in 1995) to strengthen loan
administration, underwriting guidelines, and collection policies and procedures
coupled with the increase in the amount of credits granted. It should be noted
that as the Bank's loan portfolio experiences growth, there will normally be
an increase in credit losses. However, it is Management's intention to minimize
such losses through prompt loan collection efforts and the credit review
process.
Investments
Investments represent the second largest use of financial resources. The
investment portfolio, shown in Table 5, includes United States securities, state
and municipal obligations, mortgage-backed securities, other securities
consisting of collateralized mortgage obligations (CMO), and equity securities
of the Independent State Bank of Ohio.
A portion of the portfolio's investment debt securities classified as
Held-To-Maturity are those securities which the Bank has the ability and intent
to hold to maturity. These securities are stated at cost adjusted for the
amortization of premium and accretion of discount, computed by the interest
method. The remainder of the debt securities and the Bank's marketable equity
investment securities are carried at cost or market value, whichever is the
lower, and accordingly are classified as Available-For-Sale.
In May 1993 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Invest-
ments in Debt and Equity Securities. Under SFAS No. 115, beginning in 1994 debt
and equity securities not classified as either held-to-maturity securities or
trading securities are classified as available-for-sale securities and reported
at fair value, with unrealized gains and losses excluded from earnings and
reported in a separate component of shareholder's equity. On January 1, 1994,
the Bank adopted SFAS No. 115. The effect of adopting SFAS No. 115 was to
increase shareholders' equity $227,000 at January 1, 1994 and decrease share-
holders' equity $332,000 at December 31, 1994. At December 31, 1996 and 1995
the Company's shareholders' equity contained $60,000 and $94,000, respectively,
in unrealized gains on securities available-for-sale.
Investment securities at year-end 1996 increased $269,000 or 1.32% over
year-end 1995 while federal funds sold decreased $1,641,000 from 1995. Because
the increase in total deposit account balances did not meet the funding needs
of the Bank's loan portfolio, coupled with the interest rate structure within
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the investment portfolio, federal funds sold were utilized to fund the current
loan demand. Federal funds sold are consistently maintained at levels that will
cover short-term liquidity needs of the Bank.
The Bank utilizes an outside investment firm to analyze, evaluate, and
offer investment recommendations to Management based on such criteria as
security ratings, yields, and terms. The Bank does not invest in any one type
of security over another. Funds allocated to the investment portfolio are
constantly monitored by Management to ensure that a proper ratio of liquidity
and earnings is maintained.
Deposits
Table 8 highlights average deposits and interest rates during the last
three years. Average deposits have increased in 1996, approximately $1,252,000
or 2.14% from 1995 which had decreased from 1994, approximately $2,749,000 or
4.69%. The average cost of funds for the bank was approximately 3.63% for the
year ended December 31, 1996 compared to 3.48% and 3.08% for 1995 and 1994,
respectively.
The Bank's deposit structure can be categorized as somewhat cyclical,
increasing as public depositors receive tax allocations and decreasing as dis-
bursements are made. During 1996 the Bank also experienced continued shifting
of individual deposits from the traditional savings passbook accounts to higher
yielding time open or time certificate accounts. As a result the Bank's cost
of funds has increased steadily putting additional pressure on the net interest
margin. Management has responded to this pressure by competitively pricing
its loan products and managing the investable funds. As a result, the net
interest margin has increased by 10 basis points since December 31, 1995.
Shareholders' Equity
Maintaining a strong capital position in order to absorb inherent risk is
one of Management's top priorities. Selected capital ratios for the last three
years, presented in Table 9, "Capital Resources," reveal that the Bank has been
able to maintain an average equity to average asset ratio of greater than 9%
for the past three years. It should be noted that this ratio increased by
114 basis points in 1995 to 10.71% and an additional 52 basis points in 1996
to 11.23%. It should also be noted that the return on average assets increased
in 1996 to 1.10% from 0.93% in 1995. This is due primarily to rising interest
rates, deposit growth fluctuations, an increase in loan volume, the decrease
in investments and a modest increase in operating costs.
The yield (interest expense) on interest bearing liabilities increased
less rapidly than the yield (interest income) on interest earning assets,
resulting in an increase in the Bank's interest margin. As indicated earlier,
the average allowance for loan losses to average loans outstanding was 1.27%,
1.26% and 1.27% for years 1996, 1995, and 1994, respectively.
Banking regulations have established minimum capital ratios for banks. The
primary purpose of these requirements is to assess the riskiness of a financial
institution's balance sheet and off balance sheet financial instruments in
relation to adjusted capital. The Bank is required to maintain a minimum total
qualifying capital ratio of at least 8% with at least 4% of capital composed of
Tier I (core) capital. Tier I capital includes common equity, non cumulative
perpetual preferred stock, and minority interest less goodwill and other dis-
allowed intangibles. Tier II (supplementary) capital includes subordinate debt,
intermediate-term preferred stock, the allowance for loan losses and preferred
stock not qualifying for Tier I capital. Tier II capital is limited to 100% of
Tier I capital. At December 31, 1996, the Bank's risk-based capital ratio for
Tier I and Tier II capital was 21.33% and 22.58% respectively, thus surpassing
the required 4% and 8% for Tier I and Tier II capital. Table 10 is a summary
of both the Bank's risk-based capital and leverage components and ratios.
II - RESULTS OF OPERATIONS
The Holding Company had consolidated net income of $747,000 or $1.59 per
share, for the year ended December 31, 1996 as compared to $612,000 or $1.28
per share for 1995 and $580,000 or $1.22 per share for 1994. Return on average
assets ratio (ROAA) was 1.10%, 0.93% and 0.85% in 1996, 1995, and 1994,
respectively.
<PAGE>
Net interest income, the income received on investments in loans,
securities, due from banks, and federal funds less interest paid to depository
and short-term creditors to fund these investments is the Bank's primary source
of revenue. The following discussion and analysis of the Bank's net interest
income is based primarily on Table 12, "Average Balances and Interest Rates,"
Table 13, "Net Interest Income," Table 14, "Rate/Volume Analysis of Changes in
Interest Income and Interest Expenses," and on rate of 34%. Tables 12, 13 and
14 have been prepared on a tax-equivalent basis. The stated (pre-tax) yield on
tax-exempt loans and securities are lower than the yield on taxable assets of
similar risk and maturity. The average balances were calculated on a monthly
basis.
The net yield on interest-earning assets has increased to 4.78% in 1996
from 4.68% and 4.34% in 1995 and 1994, respectively. Net interest income in-
creased $138,000 or 4.70% in 1996 and $136,000 or 4.85% in 1995, while earnings
increased $135,000 or 22.06% in 1996 from $612,000 in 1995 and increased $32,000
or 5.52% in 1995 from $580,000 in 1994. Table 14 analyzes the reason for the
changes in interest income by applying either volume or rate changes to interest
sensitive assets and liabilities. Average interest-earning assets increased
($1,600,000) and average interest-bearing liabilities decreased ($133,000) in
1996 which resulted in increased earnings of $121,000 (due to volume); while
rates increased for all but tax-free debt securities and federal funds
categories of assets; and rates increased for savings and NOW accounts and
increased for time deposits which resulted in a net increase of $17,000 (due
to rate) in net interest income. The net effect of the changes in volume and
interest rates was to increase interest earnings by $138,000 during 1996.
Net loan income increased $268,000 or 7.65% over the prior year primarily
as a result of the increased yields resulting from the changes in the composi-
tion of the portfolio, increased competition from financial and non-financial
sources, and Management's strengthening of loan underwriting standards. Average
loan yields have increased 20 basis points in 1996 after a 59-basis point in-
crease in 1995. As of year-end 1996 approximately $23,234,000 or 56.02% of the
loan portfolio is maturing or repricing in the next year. Variable rates and
short-term maturities are two tools Management is using to achieve greater flex-
ibility in a changing rate environment.
Interest rates on tax-free investment securities have decreased three basis
points in 1996, from an average portfolio yield of 7.06% to 7.03%, and interest
rates on equity investment securities have increased 68 basis points from an
average portfolio yield of 5.48% to 6.16%, resulting in a $44,000 increase in
taxable income due to rates. Additionally, a $39,000 decline in income due to
the volume, resulted in a net increase in income of $5,000. Approximately
$8,400,000 of securities matured in 1996. Reinvestment yields on approximately
$6,105,000 of maturing securities in 1997 will be used to determine appropriate
maturities or alternative investments.
Federal funds sold income increased $1,000 or 0.52% in 1996 after a $63,000
or 48.84% increase in 1995. Volume increased earnings $15,000 and rates de-
creased earnings $14,000 in 1996. Federal funds are primarily used as an
investment mechanism for short-term liquidity purposes.
Interest-bearing deposit expense increased $136,000 or approximately 6.67%
in 1996 after a $146,000 or 7.72% increase in 1995. The volume increase caused
interest expense to increase $43,000 while changes in rates caused a $93,000 in-
crease in interest expense in 1995. Rates paid on Savings/NOW/insured deposits
and time deposits increased four and 30 basis points respectively in 1996,
compared to a decrease of five and an increase of 88 basis points respectively
in 1995. These improvements were partially offset by the general increase in
time deposit accounts coupled with an offsetting decrease in rates paid on
Savings/NOW/insured deposits has occurred as a result of the rising interest
rates and the continued pressure on interest margins. Also, competition from
non-financial institutions has resulted in a shifting of depositors' resources.
In summary, Table 14, "Rate Volume Analysis of Changes in Interest Income
and Interest Expense," discloses the reasons for changes in interest income and
interest expense. It should be noted that the changes, or restructuring, in the
Bank's interest-earning assets (loans, investments and federal funds) and the
interest-bearing liabilities (savings and time deposits) combined with the
repricing of each resulted in an increase in net interest margins.
<PAGE>
The changes in both asset and liability volumes in 1996 coupled with
repricing of both interest-earning assets and interest-bearing liabilities
resulted in a net increase of $138,000 net interest income. Changes in volume
accounted for a $121,000 increase in net interest income, while changes in rates
increased net interest income $17,000.
The increases in both asset and liability volumes in 1995 had less of an
effect on the net interest margin, $1,000 increase, than the increases in the
yields on assets and liabilities, a $135,000 increase.
Other Income and Other Expense
Total other income consists of operating income attributed to providing
deposit accounts for bank customers, the disposition of investment securities
prior to their maturity (which are classified as available-for-sale), and fees
from banking services.
Total other expenses consists of operating expense attributed to staffing
(personnel costs), operation and maintenance of bank building and equipment,
banking services promotion, taxes and assessments, and other operating expenses.
Table 16, "Other Income and Other Expenses," contains a summary of these items
for the years ended December 31, 1996, 1995, and 1994.
Income Taxes
Applicable income taxes of $334,000 in 1996 consist of federal taxes only.
For the previous two years the federal tax rate was 34%.
Impacting the tax provisions for the three years covered in this report
is the level of the provision for possible loan losses ($75,000 in 1996,
$120,000 in 1995 and $80,000 in 1994) and the level of tax-exempt income on
securities which was $64,000, $63,000, and $63,000 for the three years
presented.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes" in February
1992. This statement, effective for fiscal years beginning after December 15,
1992, amends or supersedes existing pronouncements relating to the accounting
for income taxes. The Bank adopted the Statement in 1993. SFAS No. 109 re-
quires a liability approach to accounting for income taxes as opposed to a
deferred approach. The liability approach places emphasis on the accuracy of
the balance sheet while the deferred approach emphasizes the income statement.
Under the liability approach, deferred taxes are computed based on the tax rates
in effect for the periods in which temporary differences are expected to
reverse. An annual adjustment of the deferred tax liability or asset is made
for any subsequent change in tax rates.
Effects of Inflation/Changing Prices
The effects of inflation on operations of the Bank occur through increased
operating costs which can be recovered through increased prices for services.
Virtually all of the Bank's assets and liabilities are monetary in nature and
can be repriced on a more frequent basis than in other industries. Every effort
is being made through interest sensitivity Management to monitor products and
interest rates and their impact on future earnings.
Liquidity and Interest Rate Sensitivity Management
Management utilizes several tools currently available to monitor and ensure
that liquid funds are available to satisfy the normal loan and deposit needs
of its customers while taking advantage of investment opportunities as they
arise in order to maintain consistent growth and interest income. Cash and due
from banks, marketable investment securities with maximum one year maturities,
and federal funds sold are the principal components of asset liquidity.
Referring to Table 17, the Bank is in a liability sensitive position up to one
year which is more beneficial in a period of declining interest rates since
liabilities can be repriced at lower rates. In periods of rising interest
rates, an asset sensitive position is more favorable as interest sensitive
assets may be adjusted to rising market rates prior to maturing interest
sensitive liabilities. The three-month category of interest sensitive
liabilities include approximately $24,528,000 of savings, NOW accounts, and
<PAGE>
insured earnings which can be adjusted nearly immediately to offset any positive
gap in a declining rate environment.
Management utilizes variable rate loans (on a limited basis) and adjustable
rate deposits to maintain desired net interest margins. A procedural process
has been developed to monitor changes in market rates on interest sensitive
assets and liabilities with appropriate action being taken when warranted.
Refer to Exhibit A - Statistical Tables
ITEM 7. Financial Statements
Refer to Exhibit B - Financial Statements
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
<PAGE>
PART III
ITEM 9. Directors and Executive Officers of the Registrant
The information set forth under the caption "INFORMATION REGARDING NOMINEES
AND CONTINUING DIRECTORS" of the Definitive Proxy Statement of the Holding
Company to be filed prior to April 10, 1997 with the United States Securities
and Exchange Commission is incorporated by reference herein.
ITEM 10. Executive Compensation
The information set forth under the caption "SUMMARY COMPENSATION TABLE"
of the Proxy Statement of the Holding Company to be filed prior to April 10,
1997 with the United States Securities and Exchange Commission is incorporated
by reference herein.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "INFORMATION REGARDING NOMINEES
AND CONTINUING DIRECTORS" of the Proxy Statement of the Holding Company to be
filed prior to April 10, 1997 with the United States Securities and Exchange
Commission is incorporated by reference herein.
ITEM 12. Certain Relationships and Related Transactions
The information set forth under the caption "INDEBTEDNESS OF AND TRANS-
ACTIONS WITH OFFICERS AND DIRECTORS" of the Proxy Statement of the Holding
Company to be filed prior to April 10, 1997 with the United States Securities
and Exchange Commission is incorporated by reference herein.
ITEM 13. Exhibits, Financial Statements, and Reports on Form 8-K
(a) The following documents are filed as a part of this Report:
1. Exhibit A - Statistical Tables:
All schedules, except those included by reference in Items 6 and
7, are omitted because they are not applicable, not required, or
the information is included in the financial statements or the
notes thereto, or the proxy statement.
2. Exhibit B - Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets - As of December 31, 1996 and 1995
Consolidated Statements of Income - Years Ended December 31,
1996, 1995 and 1994
Consolidated Statement of Changes in Shareholders' Equity - Years
Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
3. Exhibit C - Proxy Statement:
Proxy Statement of the Holding Company to be filed prior to April
10, 1997 with the United States Securities and Exchange Commission
<PAGE>
4. Reports on Form 8-K
The Holding Company has not filed any reports on Form 8-K during
the last quarter of 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 OR 15 (d) 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 in the City of
Luckey, State of Ohio on the 27th day of March, 1997.
EXCHANGE BANCSHARES, INC.
s/Marion Layman
_____________________________
Marion Layman
Chairman, President, and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following Directors in the capacities indicated
on March 27, 1997.
s/Marion Layman s/Rolland I. Huss
____________________________ _____________________________
Marion Layman, Chairman Rolland I. Huss, Vice-Chairman
s/Donald H. Lusher s/Cecil R. Adkins
____________________________ _____________________________
Donald H. Lusher, Director Cecil R. Adkins, Director
s/Joseph R. Hirzel s/David G. Marsh
____________________________ _____________________________
Joseph R. Hirzel, Director David G. Marsh, Director
Secretary and Treasurer
s/Donald A. Gerke s/Edmund J. Miller
_____________________________ ____________________________
Donald A. Gerke, Director Edmund J. Miller, Director
s/Norma J. Christen
_____________________________
Norma J. Christen, Director
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
_______________________________________________________________________________________
Dollars in thousands, except per share data
For the year: 1996 1995 1994 1993 1992
________________________________________________
<S> <C> <C> <C> <C> <C>
Earnings:
Net interest income $ 3,037 $ 2,917 $ 2,781 $ 2,721 $ 2,565
Provision for loan losses 75 120 80 60 60
Net income 747 612 580 615 541
Cash dividends declared 207 178 186 179 164
Per share data:
Net income $ 1.59 $ 1.28 $ 1.22 $ 1.31 $ 1.14
Cash dividends 0.45 0.37 0.39 0.38 0.34
Book value at period end 16.73 15.64 13.83 13.69 12.75
Average balances:
Total assets $67,746 $65,914 $68,080 $67,785 $63,416
Total earning assets 64,337 62,737 64,611 62,611 58,161
Total deposits 59,877 58,625 61,374 61,164 57,152
Total loans 39,556 37,544 36,225 34,712 33,640
Shareholders' equity 7,606 7,062 6,518 6,299 5,888
Period end amounts:
Total assets $68,206 $66,140 $64,903 $67,537 $67,177
Total shareholders' equity 7,817 7,429 6,574 6,495 6,049
Number of shareholders
of record 812 780 780 760 760
Number of full-time
equivalent employees 42 40 40 41 41
Ratios:
Return on average assets 1.10% 0.93% 0.85% 0.91% 0.85%
Average shareholders' equity
to average assets 11.23% 10.71% 9.57% 9.29% 9.28%
Return on average
shareholders' equity 9.82% 8.67% 8.90% 9.76% 9.19%
Dividend payout ratio 27.71% 29.08% 32.07% 29.11% 30.31%
Common share amounts:
Weighted average shares
outstanding 475,891 475,011 475,091 474,210 474,210
Shares outstanding at
period end 467,352 474,848 475,206 474,210 474,210
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Selected Financial Data
Five Year Comparative Financial Information
(In Thousands, Except per Share Data)
DECEMBER 31,
Summary of Operations 1996 1995 1994 1993 1992
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 3,756 $ 3,505 $ 3,171 $ 3,305 $ 3,400
Interest on investment securities:
Taxable 1,189 1,187 1,302 1,383 1,650
Tax-exempt 64 63 63 63 36
Dividends 9 8 8 8 8
Interest on federal funds sold 193 192 129 104 110
_______ _______ _______ _______ _______
Total Interest Income 5,211 4,955 4,673 4,863 5,204
Interest expense:
Interest on deposits 2,174 2,038 1,892 2,142 2,628
Interest on borrowed funds 0 0 0 0 0
_______ _______ _______ _______ _______
Total Interest Expense 2,174 2,038 1,892 2,142 2,628
_______ _______ _______ _______ _______
Net Interest Income 3,037 2,917 2,781 2,721 2,576
Provision for loan losses 75 120 80 60 60
_______ _______ _______ _______ _______
Net interest income after provision
for loan losses 2,962 2,797 2,701 2,661 2,516
Other income 316 239 307 357 266
Other expense 2,197 2,155 2,175 2,131 1,983
Applicable income taxes 334 269 253 273 258
Cumulative effect of accounting
change 0 0 0 11 0
_______ _______ _______ _______ _______
Net Income $ 747 $ 612 $ 580 $ 625 $ 541
_______ _______ _______ _______ _______
Per share data:
Net income $ 1.59 $ 1.28 $ 1.22 $ 1.31 $ 1.14
Dividends declared 0.45 0.37 0.39 0.38 0.34
Shareholders' equity, end of year 7,817 7,429 6,574 6,495 6,049
Financial Highlights:
Total assets $68,206 $66,140 $64,903 $67,357 $67,177
Total deposits 59,877 58,625 60,878 60,805 60,802
Total shareholders' equity 7,817 7,429 6,574 6,495 6,049
Return on average assets 1.10% 0.93% 0.85% 0.91% 0.85%
Return on average shareholders'
equity 9.82% 8.67% 8.90% 9.76% 9.19%
Dividend payment ratio on common
stock 27.71% 29.08% 32.07% 29.11% 30.31%
Average equity to average assets
ratio 11.23% 10.71% 9.57% 9.29% 9.28%
</TABLE>
<TABLE>
<PAGE>
<CAPTION>
Selected Financial Data
Quarterly Earnings Summary
The following is a summary of the quarterly results of operations for the years ended December 31, 1996 and 1995:
(In Thousands, Except per Share Amounts)
March 31, June 30, September 30, December 31,
1996 1995 1996 1995 1996 1995 1996 1995
____ ____ ____ ____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Interest and fees
on loans $ 923 $ 868 $ 933 $ 830 $ 949 $ 884 $ 951 $ 923
Interest on investment
securities:
Taxable 280 288 307 298 300 304 302 297
Tax-exempt 16 16 15 10 21 16 12 21
Dividends 0 0 4 4 0 0 5 4
Interest on federal funds sold 52 26 41 40 42 51 58 75
______ ______ ______ ______ ______ ______ ______ ______
Total Interest Income $1,271 $1,198 $1,300 $1,182 $1,312 $1,255 $1,328 $1,320
Interest Expense:
Interest on deposits 531 467 541 509 547 528 555 534
______ ______ ______ ______ ______ ______ ______ ______
Total Interest Expense 531 467 541 509 547 528 555 534
Net interest income 740 731 759 673 765 727 773 786
Provision for loan losses 23 30 22 30 20 30 10 30
______ ______ ______ ______ ______ ______ ______ ______
Net interest income after
provision for loan losses 717 701 737 643 745 697 763 756
Net gain/losses on investment
securities 0 (38) 0 0 0 0 0 0
Other income 79 62 82 60 77 72 78 83
Other expense 516 540 583 558 523 505 575 552
______ ______ ______ ______ ______ ______ ______ ______
Income before income taxes 280 185 236 145 299 264 266 287
Applicable income tax 88 55 72 43 93 82 81 89
______ ______ ______ ______ ______ ______ ______ ______
Net Income $ 192 $ 130 $ 164 $ 102 $ 206 $ 182 $ 185 $ 198
______ ______ ______ ______ ______ ______ ______ ______
Per share:
Net income $ 0.41 $ 0.27 $ 0.34 $ 0.21 $ 0.44 $ 0.40 $ 0.40 $ 0.40
Dividends declared $ 0.00 $ 0.00 $ 0.15 $ 0.13 $ 0.00 $ 0.00 $ 0.30 $ 0.24
</TABLE>
<TABLE>
<PAGE>
<CAPTION>
TABLE 1
1996 1995 1994
____ ____ ____
Increase Increase
Funding Uses and Sources Average (Decrease) Average (Decrease) Average
(Dollar Amounts in Thousands) Balance Amount Percent Balance Amount Percent Balance
_______ ______ _______ _______ ______ _______ _______
<S> <C> <C> <C> <C> <C> <C> <C>
Funding uses:
Loans $39,556 $ 2,012 5.4% $37,544 $ 1,319 3.6% $36,225
Taxable investment securities 19,734 (707) (3.5) 20,441 (3,425) (14.4) 23,866
Nontaxable investment securities 1,223 34 2.9 1,189 (7) (0.6) 1,196
Equity securities 146 0 0.0 146 0 0.0 146
Federal funds sold 3,678 261 7.6 3,417 239 7.5 3,178
Other 3,409 232 7.3 3,177 (292) (8.4) 3,469
_______ _______ ____ _______ _______ ____ _______
Total Uses $67,746 1,832 2.8% $65,914 (2,166) (3.2%) $68,080
_______ _______ ____ _______ _______ ____ _______
Funding sources:
Demand deposits $ 6,474 1,385 27.2% $ 5,089 (156) (3.0%) $ 5,245
Savings deposits 25,668 (2,171) (7.8) 27,839 (3,246) (10.4) 31,085
Time deposits 27,735 2,038 7.9 25,697 653 2.6 25,044
Other 7,869 580 8.0 7,289 583 8.7 6,706
_______ _______ ____ _______ _______ ____ _______
Total Sources $67,746 1,832 2.8% $65,914 (2,166) (3.2%) $68,080
_______ _______ ____ _______ _______ ____ _______
</TABLE>
<TABLE>
<PAGE>
<CAPTION>
TABLE 2
Loan Portfolio
(Dollar Amounts in Thousands)
December 31,
1996 1995 1994 1993 1992
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Commercial $ 1,585 $ 1,794 $ 2,612 $ 2,238 $ 2,458
Commercial real estate 9,285 8,241 6,862 6,777 6,553
Residential real estate 23,080 21,433 20,115 19,896 19,881
Consumer 6,046 6,132 6,476 5,982 7,083
Tax-exempt 1,533 798 1,013 1,123 338
All other 11 4 9 12 28
_______ _______ _______ _______ _______
Total Gross Loans $41,540 $38,402 $37,087 $36,028 $36,341
<CAPTION>
The following table shows the scheduled repricing of principal categorized by type of loan.
Repricing
_________
After One
Within But Within After
One Year Five Years Five Years Total
________ __________ __________ _____
<S> <C> <C> <C> <C>
Fixed rate:
Commercial $ 277 $ 997 $ 2,296 $ 3,570
Agri-Line loan 64 0 0 64
Residential real estate 435 419 1,299 2,153
Consumer 594 3,489 897 4,980
Tax exempt 1,145 387 0 1,532
_______ _______ _______ _______
Total fixed rate $ 2,515 $ 5,292 $ 4,492 $12,299
Variable rate:
Commercial $ 6,724 $ 2,536 $ 52 $ 9,312
Agri-Line loan 140 0 0 140
Residential real estate 12,908 3,956 1,909 18,773
Consumer 947 0 0 947
_______ _______ _______ _______
Total loans $23,234 $11,784 $ 6,453 $41,471
_______ _______ _______ _______
Loan repricing is shown net of net deferred loan origination fees of $69,000.
</TABLE>
<TABLE>
<PAGE>
<CAPTION>
TABLE 3
Non-performing loans
The following table shows information regarding past-due, non-accrual, and renegotiated troubled debt.
(Dollar Amounts in Thousands)
1996 1995 1994 1993 1992
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Impaired loans $ 23 $ 0 $ 0 $ 0 $ 0
Loans accounted for on a non-accrual basis 196 336 25 49 44
Accruing loans which are contractually past
due 90 days or more as to prin-
cipal or interest payments 125 57 162 31 188
Renegotiated troubled debt 0 0 0 0 0
Other real estate 0 0 26 23 0
Non-performing assets to:
Total assets 0.50% 0.59% 0.28% 0.15% 0.35%
Total loans and other real estate 0.83% 1.04% 0.50% 0.29% 0.64%
</TABLE>
<TABLE>
<PAGE>
<CAPTION>
TABLE 4
Analysis of the Allowance for Loan Losses
(Dollar Amounts in Thousands)
Year Ended December 31
1996 1995 1994 1993 1992
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at
beginning of year $483 $465 $469 $450 $485
Loans charged off:
Commercial 0 106 17 2 92
Installment loans to individuals 48 24 84 26 18
Credit card loans to individuals 20 6 8 15 12
Real estate loans 0 0 0 26 0
____ ____ ____ ____ ____
Total Charge-offs 68 136 109 69 122
____ ____ ____ ____ ____
Recovery of loans charged off:
Commercial 0 25 6 5 25
Installment loans to individuals 13 7 15 18 0
Credit card loans to individuals 3 1 4 5 2
Real estate loans 2 1 0 0 0
____ ____ ____ ____ ____
Total Recoveries 18 34 25 28 27
____ ____ ____ ____ ____
Net (charge-offs) recoveries (50) (102) (84) (41) (95)
Provisions charged to operations 75 120 80 60 60
____ ____ ____ ____ ____
Balance at end of period $508 $483 $465 $469 $450
____ ____ ____ ____ ____
Ratio of net (charge-offs) recoveries
during the period to average loans
outstanding during that period (0.13%) (0.27%) (0.23%) (0.11%) (0.27%)
Average allowance to average loans
outstanding 1.27% 1.26% 1.27% 1.34% 1.44%
</TABLE>
<TABLE>
<PAGE>
<CAPTION>
TABLE 5
Security Maturities and Yields
(Dollar Amounts in Thousands)
Maturity Schedule
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
_______________ _______________ _______________ _______________
PAR PAR PAR PAR
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 4,000 6.12% $ 8,600 6.40% $ - 0.00% $ - 0.00%
State and municipal
obligations 100 5.00% 1,160 5.26% - 0.00% - 0.00%
Mortgage backed
securities - 0.00% 920 6.97% 928 5.51% - 0.00%
Other debt securities 2,000 6.12% 2,705 5.14% - 0.00% - 0.00%
Equity investments - - - 8 4.75%
_______ _______ ______ ______
Total $ 6,100 $13,385 $ 928 $ 8
_______ _______ ______ ______
Tax equivalent
adjustment for
calculation for
yield <F1> $ 2 $ 21 $ 0 $ 0
_______ _______ ______ ______
<FN>
<F1>
Weighted average yields on tax-exempt obligations have been computed on a fully tax-equivalent basis
</FN> assuming a tax rate of 34%.
</TABLE>
<TABLE>
<PAGE>
<CAPTION>
TABLE 6
Agency Structured Notes
(Dollar Amounts in Thousands)
December 31, 1996
Gross Gross Net
MARKET Unrealized Unrealized Unrealized
COST % VALUE % Gains Losses Gains/Losses %
__________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CMO's $ 950 4.58% $ 924 4.46% $ - $ (26) $ (26) 144.44%
All other 19,807 95.42% 19,815 95.54% 136 (128) 8 (44.44%)
_______ ______ _______ ______ _______ ______ ______ ______
Total $20,757 100.00% $20,739 100.00% $ 136 $ (154) $ (18) 100.00%
<CAPTION>
December 31, 1995
Gross Gross Net
MARKET Unrealized Unrealized Unrealized
COST % VALUE % Gains Losses Gains/Losses %
___________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CMO's $ 1,364 6.67% $ 1,338 6.53% $ - $ (26) $ (26) (42.62%)
All Other 19,073 93.33% 19,160 93.47% 216 (129) 87 142.62%
_______ ______ _______ ______ _______ ______ ______ ______
Total $20,437 100.00% $20,498 100.00% $ 216 $ (155) $ 61 100.00%
</TABLE>
<TABLE>
<PAGE>
<CAPTION>
TABLE 7
Agency Structured Notes Maturity
(Dollar Amounts in Thousands)
December 31, 1996
Due in Due in Due in Due in
One Year One to Five Five to Ten Over
or Less Years Years Ten Years
________________________________________________
<S> <C> <C> <C> <C>
CMO's $ 0 $ 0 $ 0 $ 950
All Other 6,105 13,556 0 146
_______ _______ _______ _______
Total $ 6,105 $13,556 $ 0 $ 1,096
_______ _______ _______ _______
<CAPTION>
Weighted average lives used to determine maturities of CMO's.
December 31, 1995
Due in Due in Due in Due in
One Year One to Five Five to Ten Over
or Less Years Years Ten Years
________________________________________________
<S> <C> <C> <C> <C>
CMO's $ 0 $ 0 $ 0 $ 1,364
All Other 8,442 10,485 0 146
_______ _______ _______ _______
Total $ 8,442 $10,485 $ 0 $ 1,510
_______ _______ _______ _______
Weighted average lives used to determine maturities of CMO's.
</TABLE>
<TABLE>
<PAGE>
<CAPTION>
TABLE 8
Deposits
The monthly average amount of deposits are summarized below:
(Dollar Amounts in Thousands)
Year Ended December 31,
1996 1995 1994
_________________ _________________ _________________
Cost of Cost of Cost of
Amount Funds Amount Funds Amount Funds
______ _____ ______ _____ ______ _____
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing deposits $ 6,474 0.00% $ 5,089 0.00% $ 5,245 0.00%
NOW & MMDA deposits 9,568 3.00 9,353 3.14 9,826 2.98
Savings deposits 16,100 2.61 18,486 2.50 21,259 2.68
Time deposits 27,735 5.29 25,697 4.99 25,044 4.11
_______ ____ _______ ____ _______ ____
Total Deposit $59,877 3.63% $58,625 3.48% $61,374 3.08%
_______ ____ _______ ____ _______ ____
<CAPTION>
Maturities of time deposits of $100,000 or more (in thousands) outstanding are summarized as follows:
December 31, 1996
<S> <C>
3 months or less $1,648
Over 3 through 12 months 1,106
Over one year through 5 years 1,241
______
$3,995
______
</TABLE>
<TABLE>
<CAPTION>
TABLE 9
Capital Resources
Year Ended December 31,
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Return on average assets 1.10% 0.93% 0.85%
Dividend payout ratio 27.71% 29.08% 32.07%
Average equity to average assets ratio 11.23% 10.71% 9.57%
Return on average equity 9.82% 8.67% 8.90%
Times
Earnings retained 72.29% 70.92% 67.93%
Equals
Internal capital growth 7.10% 6.15% 6.05%
</TABLE>
<TABLE>
<PAGE>
<CAPTION>
TABLE 10
Risk Based Capital
(Dollar Amounts in Thousands)
December 31,
1996 1995
____ ____
<S> <C> <C>
Tier I Capital:
Shareholders' equity $ 7,753 $ 7,270
Less unrealized gains on
securities available-for-sale (60) (94)
_______ _______
Total Tier I Capital $ 7,693 $ 7,176
Eligible amount of the
allowance for loan losses 451 443
_______ _______
Total Tier II Capital $ 8,144 $ 7,619
_______ _______
Risk adjusted assets $36,062 $35,425
Average assets $69,007 $65,914
Risk-based capital ratios:
Tier I 21.33% 20.26%
Tier II 22.58% 21.51%
Tier I leverage ratio 11.15% 10.71%
</TABLE>
<TABLE>
<PAGE>
<CAPTION>
TABLE 11
STOCK PRICES
1996 1995
___________________ __________________
High Low High Low
____ ____ ____ ____
<S> <C> <C> <C> <C>
First Quarter $16.00 $15.50 $15.68 $14.72
Second Quarter 16.00 15.50 15.68 14.72
Third Quarter 17.00 16.00 15.68 14.72
Fourth Quarter 17.00 16.00 15.68 14.72
<CAPTION>
DIVIDEND DECLARED AND PAID
1996 1995
___________________ __________________
Declared Paid Declared Paid
________ ____ ________ ____
<S> <C> <C> <C> <C>
First Quarter $ 0.00 $ 0.00 $ 0.00 $ 0.00
Second Quarter 0.15 0.15 0.13 0.13
Third Quarter 0.00 0.00 0.00 0.00
Fourth Quarter 0.30 0.30 0.24 0.24
The second quarter of 1995 has been restated to reflect a five percent stock dividend declared March 20, 1995 payable
June 15, 1995. The weighted average number of shares outstanding was 469,947 in 1996 and 452,028 in 1995 as restated.
</TABLE>
<TABLE>
<PAGE>
<CAPTION>
TABLE 12
Average Balances and Interest Rates
On a Fully Taxable-Equivalent Basis
(Dollar Amounts in Thousands)
1996 1995 1994
____ ____ ____
Balance Int. Yield Balance Int. Yield Balance Int. Yield
_______ ____ _____ _______ ____ _____ _______ ____ _____
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans, net of unearned income $39,556 $ 3,773 9.54% $37,544 $ 3,505 9.34% $36,225 $ 3,171 8.75%
Investment securities:
Taxable debt securities 19,734 1,189 6.03% 20,441 1,187 5.81% 23,866 1,302 5.46%
Tax-free debt securities 1,223 86 7.03% 1,189 84 7.06% 1,196 84 7.02%
Equity securities 146 9 6.16% 146 8 5.48% 146 8 5.48%
Federal funds sold 3,678 193 5.25% 3,417 192 5.62% 3,178 129 4.06%
_______ _______ ____ _______ _______ ____ _______ _______ ____
Total Interest-Earning Assets $64,337 $ 5,250 8.16% $62,737 $ 4,976 7.93% $64,611 $ 4,694 7.27%
Non-interest-earning assets:
Cash and due from banks 2,103 1,840 2,011
Bank premises and equipment,
net 917 967 1,058
Other assets 892 842 862
Less allowance for loan losses (503) (472) (462)
Investment valuation
_______ _______ _______
Total Assets $67,746 $65,914 $68,080
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities:
Savings/NOW accounts/
MMDA 25,668 708 2.76% 27,839 756 2.72% 31,085 862 2.77%
Time deposits 27,735 1,466 5.29% 25,697 1,282 4.99% 25,044 1,030 4.11%
_______ _______ ____ _______ _______ ____ _______ _______ ____
Total Interest-Bearing
Liabilities $53,403 $ 2,174 4.07% $53,536 $ 2,038 3.81% $56,129 $ 1,892 3.37%
Non-interest-bearing
liabilities:
Demand deposits 6,474 5,089 5,245
Other 263 227 188
Shareholders' equity 7,606 7,062 6,518
_______ _______ _______
Total Liabilities and
Shareholders' Equity $67,746 $65,914 $68,080
_______ _______ _______
Net interest earnings $ 3,076 $ 2,938 $ 2,802
_______ _______ _______
Net yield on interest
earning assets <F1> 4.78% 4.68% 4.34%
____ ____ ____
<FN>
<F1>
(1) Net yield is calculated by dividing net interest earnings by total interest-earning assets.
The table above includes non-performing loans in average amounts outstanding.
</FN>
</TABLE>
<TABLE>
<PAGE>
<CAPTION>
TABLE 13
Net Interest Income (Taxable-Equivalent Basis)
(Dollar Amounts in Thousands)
Year Ended December 31,
1996 1995 1994 1993 1992
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Interest income per summary of
operation $ 5,211 $ 4,955 $ 4,673 $ 4,862 $ 5,204
Adjustment to fully taxable basis 39 21 21 21 12
_______ _______ _______ _______ _______
Adjusted interest income 5,250 4,976 4,694 4,883 5,216
Interest expense 2,174 2,038 1,892 2,142 2,628
_______ _______ _______ _______ _______
Net interest income adjusted to a
fully taxable-equivalent basis <F1> $ 3,076 $ 2,938 $ 2,802 $ 2,741 $ 2,588
_______ _______ _______ _______ _______
<FN>
<F1>
*The adjustment to fully taxable basis for income on tax-exempt obligations has been computed assuming a
federal tax rate of 34% for the years 1992 through 1996.
</FN></TABLE>
<TABLE>
<PAGE>
<CAPTION>
TABLE 14
Rate/Volume Analysis of Changes in Interest Income and
Interest Expense on a Fully Taxable-Equivalent Basis
(Dollar Amounts in Thousands)
1996 Compared to 1995 1995 Compared to 1994
________________________ ________________________
Volume Rate Net Volume Rate Net
______ ____ ____ ______ ____ ____
<S> <C> <C> <C> <C> <C> <C>
Income earned on:
Loans $ 188 $ 80 $ 268 $ 115 $ 219 $ 334
Investment securities:
Taxable (41) 44 3 (187) 72 (115)
Tax-exempt 2 0 2 0 0 0
Federal funds sold 15 (14) 1 10 53 63
_____ _____ _____ _____ _____ _____
Total Interest-Earning
Assets 164 110 274 (62) 344 28
Interest paid on:
Savings and NOW accounts (59) 11 (4) (90) (16) (106)
Time deposits 102 82 184 27 225 252
_____ _____ _____ _____ _____ _____
Total Interest-Bearing
Liabilities 43 93 136 (63) 209 146
_____ _____ _____ _____ _____ _____
Changes in Net Interest
Income $ 121 $ 17 $ 138 $ 1 $ 135 $ 136
_____ _____ _____ _____ _____ _____
The analysis of year-to-year changes in net interest income is segregated into amounts attributable to both
volume and rate variances. In calculating the variances, the changes are first segregated into (1) changes
in volume (change in volume times old rate), (2) changes in rate (change in rate times new volume) and (3)
changes in rate/volume (change in rate times the change in volume). The latter change in rate/volume has been
allocated 100% to the change in rate variances.
</TABLE>
<TABLE>
<PAGE>
<CAPTION>
TABLE 15
Sources of Per Share Earnings
The major sources of per share earnings increases and decreases are shown below:
Changes in: 1996/1995 1995/1994
_________ _________
<S> <C> <C>
Net interest income $ 0.26 $ 0.28
Provision for loan losses 0.10 (0.09)
Investment security gains 0.08 (0.15)
Other income 0.08 0.01
Salaries and benefits (0.14) (0.04)
Occupancy and equipment (0.02) 0.02
Other expense 0.08 0.07
Applicable income tax (0.13) (0.04)
______ ______
Net Income $ 0.31 $ 0.06
______ ______
Changes in year 1995/1994 have been restated to reflect a five percent dividend declared in March 1995..
</TABLE>
<TABLE>
<PAGE>
<CAPTION>
TABLE 16
Other Income and Other Expenses
A summary of items included in other income and other expenses is listed below:
(Dollar Amounts in Thousands)
Other Income: 1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Service charges on deposit accounts $ 221 $ 224 $ 213
Net gains on investment securities 0 (38) 34
Other income 95 53 60
______ ______ ______
Total Other Income $ 316 $ 239 $ 307
______ ______ ______
<CAPTION>
Other Expenses: 1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Salaries and employee benefits $1,079 $1,011 $ 991
Net occupancy and equipment 284 274 282
Bank and ATM charges 77 69 76
Data processing 88 81 77
Exam and accounting fees 97 92 85
Federal deposit insurance 2 70 138
State and other taxes 109 102 97
Postage and courier 58 57 56
Supplies 88 75 81
Other expense 315 324 292
______ ______ ______
Total Other Expense $2,197 $2,155 $2,175
______ ______ ______
</TABLE>
<TABLE>
<PAGE>
<CAPTION>
TABLE 17
Interest-Sensitive Assets and Liabilities
(Dollar Amounts in Thousands)
December 31, 1996
Over Three
Within Through Over Over
Three Twelve One Five
Months Months Year Years Total
______ ______ ____ _____ _____
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans $ 9,636 $13,598 $11,787 $ 6,450 $41,471
Investment securities (at cost) 3,002 3,103 13,556 950 20,611
Federal funds sold 2,254 - 0 - 2,254
_______ _______ _______ _______ _______
Total Interest-Earning Assets $14,892 $16,701 $25,343 $ 7,400 $64,336
_______ _______ _______ _______ _______
Interest-Bearing Liabilities
Interest-bearing demand deposits $ 9,303 $ 0 $ 0 $ 0 $ 9,303
Savings deposits 15,225 0 0 0 15,225
Time deposits 6,352 11,135 11,423 0 28,910
_______ _______ _______ _______ _______
Total Interest-Bearing Liabilities $30,880 $11,135 $11,423 $ 0 $53,438
_______ _______ _______ _______ _______
Interest Sensitivity Gap (15,986) 5,587 13,985 7,403
Cumulative Interest
Sensitivity Gap (15,986) (10,399) 3,586 10,989
Cumulative Gap Ratio 48.23 75.25 106.71 120.56
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Exchange Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Exchange
Bancshares, Inc. as of December 31, 1996 and 1995, and the related statements
of income, changes in shareholders' equity and cash flows for the years ended
December 31, 1996 and 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Exchange Bancshares, Inc.
as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for the years ended December 31, 1996 and 1995, and 1994, in con-
formity with generally accepted accounting principles.
ROBB, DIXON
FRANCIS, DAVIS, ONESON
& COMPANY
Granville, Ohio
February 14, 1997
<PAGE>
<TABLE>
<CAPTION>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED BALANCE SHEETS
___________________________________________________________________________________________
(Dollars in thousands)
December 31,
1996 1995
____ ____
<S> <C> <C>
Cash and cash equivalents
Cash and amounts due from depository institutions $ 2,440 $ 2,197
Federal funds sold 2,254 3,895
________ ________
Total cash and cash equivalents 4,694 6,092
Investment securities
Securities held-to-maturity 3,184 3,703
Securities available-for-sale 17,533 16,745
Loans, net 40,963 37,856
Accrued interest receivable 646 588
Premises and equipment, net 892 913
Investment required by law-
stock in Federal Reserve Bank, at cost 131 131
Deferred income taxes 22 7
Other assets 141 105
________ ________
TOTAL ASSETS $ 68,206 $ 66,140
LIABILITIES
Deposits $ 60,158 $ 58,511
Accrued interest payable 152 126
Other liabilities 79 74
________ ________
TOTAL LIABILITIES 60,389 58,711
SHAREHOLDERS' EQUITY
Preferred stock of $25.00 par value; 750 shares
authorized; 0 shares issued 0 0
Common stock of $5.00 par value; 750,000 shares
authorized; 475,747 shares issued 2,379 2,265
Additional paid-in capital 3,050 2,801
Retained earnings 2,459 2,282
Treasury stock at cost, 8,395 and 898 shares (131) (13)
Unrealized gain on securities available-for-sale,
net of applicable deferred income taxes 60 94
________ ________
TOTAL SHAREHOLDERS' EQUITY 7,817 7,429
________ ________
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 68,206 $ 66,140
________ ________
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF INCOME
_____________________________________________________________________________________________________________
(Dollars in thousands except per share data)
Years ended December 31,
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $3,756 $3,505 $3,171
Interest on taxable investment securities 1,189 1,187 1,302
Interest on tax free investment securities 64 63 63
Dividends on investment securities 9 8 8
Interest on federal funds sold 193 192 129
______ ______ ______
TOTAL INTEREST INCOME 5,211 4,955 4,673
INTEREST EXPENSE
Interest on interest-bearing checking accounts 287 293 293
Interest on passbook accounts 421 463 569
Interest on certificates of deposits 1,466 1,282 1,030
______ ______ ______
TOTAL INTEREST EXPENSE 2,174 2,038 1,892
NET INTEREST INCOME 3,037 2,917 2,781
Provision for loan losses 75 120 80
______ ______ ______
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,962 2,797 2,701
OTHER INCOME
Service charges 221 224 213
Gain (loss) from sales of investment securities, net 0 (38) 34
Other 95 53 60
______ ______ ______
TOTAL OTHER INCOME 316 239 307
OTHER EXPENSES
Salaries and employee benefits 1,070 1.011 991
Net occupancy and equipment 284 274 282
Other operating expenses 834 870 902
______ ______ ______
TOTAL OTHER EXPENSES 2,197 2,155 2,175
INCOME BEFORE FEDERAL INCOME TAX EXPENSE 1,081 881 833
Federal income tax expense 334 269 253
______ ______ ______
NET INCOME $ 747 $ 612 $ 580
______ ______ ______
PER SHARE DATA:
Net income $ 1.59 $ 1.28 $ 1.22
______ ______ ______
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
___________________________________________________________________________________________________________________________________
(Dollars in thousands)
Unrealized
Gain (Loss) Total
Additional On Securitis Share-
Common Stock Paid-In Retained Treasury Available holders'
Shares Amount Capital Earnings Stock For Sale Equity
______ _____ _______ ________ _____ ________ ______
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at 12/31/93 409,640 $2,048 $2,315 $2,132 $ 0 $ 0 $6,495
Net income 580 580
Cash dividend declared
($.39 per share) (186) (186)
Sale of common stock 1,328 7 18 25
5% stock dividend declare 20,548 103 (103) 0
Purchase of 3,530 shares
of treasury stock (57) (57)
Sale of 3,050 shares of
treasury stock 49 49
Adopt SFAS No. 115 to record
net unrealized gain on
securities available for sale 227 227
Change in unrealized
gain (loss) on securities
available-for-sale (559) (559)
Transfer 333 (333) 0
_______ ______ ______ ______ _____ ______ ______
Balance at 12/31/94 431,516 2,158 2,563 2,193 (8) (332) 6,574
Net income 612 612
Cash dividends declared
($.37 per share) (178) (178)
5% stock dividend declared 21,576 107 238 (345) 0
Purchase of 342 shares of
treasury stock (5) (5)
Change in unrealized
gain (loss) on securities
available-for-sale 426 426
_______ ______ ______ ______ _____ ______ ______
Balance of 12/31/95 453,092 2,265 2,801 2,282 (13) 94 7,429
Net income 747 747
Cash dividends declared
($.45 per share) (207) (207)
5% stock dividend declared 22,655 114 249 (363) 0
Purchase of 7,372 shares of
treasury stock (118) (118)
Change in unrealized
gain (loss) on securities
available-for-sale (34) (34)
_______ ______ ______ ______ _____ ______ ______
Balances at 12/31/96 475,747 $2,379 $3,050 $2,459 $(131) $ 60 $7,817
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF CASH FLOWS
_____________________________________________________________________________________________________________
(Dollars in thousands)
Years ending December 31,
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 747 $ 612 $ 580
Adjustments to reconcile net income to net cash
provided by operating activities:
Premium amortization net of discount accretion 134 124 158
Provision for loan losses 75 120 80
(Gain) loss from sale of foreclosed assets 0 4 (2)
(Gain) loss from sales of investment securities, net 0 38 (34)
Gain on sales of equipment (1) 0 (10)
Depreciation 131 126 125
Deferred income taxes 2 (2) 4
Changes in operating assets and liabilities:
(Increase) decrease in accrued interest receivable (58) 25 (70)
(Increase) decrease in other assets (36) (27) (30)
Increase (decrease) in accrued interest payable 26 9 (16)
Increase (decrease) in other liabilities 5 118 (33)
______ ______ ______
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,025 1,147 752
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of held-to-maturity securities (100) 0 (2,004)
Proceeds from maturities of held-to-maturity securities 605 253 759
Purchases of available-for-sale securities (9,360) (3,624) (4,616)
Proceeds from sales of available-for-sale securities 0 4,066 4,049
Proceeds from maturities of available-for-sale securities 8,400 2,000 3,500
Net increase in loans (3,182) (1,393) (1,174)
Purchases of premises and equipment (110) (21) (52)
Proceeds from sale of equipment 1 5 14
Proceeds from sale of foreclosed assets 0 22 25
______ ______ ______
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (3,746) 1,308 501
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 1,648 326 (2,587)
Payments on long term debt 0 0 (77)
Purchase of treasury stock (118) (5) (57)
Proceeds from sale of common stock 0 0 25
Proceeds from sale of treasury stock 0 0 49
Dividends paid (207) (178) (186)
______ ______ ______
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,323 143 (2,833)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,398) 2,598 (1,580)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,092 3,494 5,074
______ ______ ______
CASH AND CASH EQUIVALENTS AT END OF YEAR $4,694 $6,092 $3,494
______ ______ ______
See accompanying notes.
</TABLE>
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
Notes to Consolidated Financial Statements
________________________________________________________________________________
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of Exchange Banc-
shares, Inc. and its wholly-owned subsidiary, The Exchange Bank. All material
intercompany balances and transactions have been eliminated in consolidation.
Nature of Operations
The Bank provides a variety of financial services to individuals and corporate
customers, through its three branches in Luckey, Walbridge and Holland, Ohio,
which are primarily agricultural areas. The Bank's primary source of revenue
is from interest and fees on loans.
Approximately 99% of consolidated assets relate to the Bank.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans. In connection
with the determination of the estimated losses on loans, management obtains
independent appraisals for significant properties.
A majority of the Bank's loan portfolio consists of single family residential
and commercial mortgage loans in the Wood County and Lucas County, Ohio area.
The regional economy depends heavily on the agricultural industry. Accordingly,
the ultimate collectibility of a substantial portion of the Bank's loan
portfolio is susceptible to changes in local market conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, further reductions in the carrying amounts of loans
and foreclosed assets may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the estimated losses on loans and fore-
closed real estate. Such agencies may require the Bank to recognize additional
losses based on their judgments about information available to them at the time
of their examination. Because of these factors, it is reasonably possible that
the allowances for losses on loans may change materially in the near term.
However the amount of the change that is reasonably possible cannot be
estimated.
Investment Securities
Securities Held-to-Maturity: Debt securities that management has the positive
intent and ability to hold to maturity are reported at cost, adjusted for
amortization of premiums and accretion of discounts that are recognized in
interest income using methods approximating the interest method over the period
to maturity. Mortgage-backed securities represent participating interest in
pools of long-term mortgage loans originated and serviced by issuers of the
securities. Mortgage-backed securities are carried at unpaid principal
balances, adjusted for unamoritized premiums and unearned discounts. Premiums
and discounts are amortized using methods approximating the interest method
over the remaining period to contractual maturity, adjusted for anticipated
prepayments.
<PAGE>
Securities Available-for-Sale: Available-for-sale securities consist of invest-
ment securities not classified as held-to- maturity securities. Unrealized
holding gains and losses, net of tax, on available-for-sale securities are
reported as a net amount in a separate component of shareholders' equity until
realized. Gains and losses on the sale of available-for-sale securities are
determined using the specific-identification method. The amortization of
premiums and the accretion of discounts are recognized in interest income using
methods approximating the interest method over the period of maturity.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary result in write-downs
of the individual securities to their fair value. The related write-downs are
included in earnings as realized losses.
Loans
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan fees.
Loan origination fees, as well as certain direct origination costs, are deferred
and amortized as a yield adjustment over the lives of the related loans using
the interest method. Amortization of deferred loan fees is discontinued when a
loan is placed on nonaccrual status.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest
income on other nonaccrual loans is recognized only when the principal balance
is reduced to zero.
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the collect-
ibility of the loan portfolio, including the nature of the portfolio, credit
concentrations, trends in historical loss experience, specific impaired loans,
and economic conditions and other risks inherent in the portfolio. Allowances
for impaired loans are generally determine based on collateral values or the
present value of estimated cash flows. The allowance is increased by a
provision for loan losses, which is charged to expense, and reduced by charge-
offs, net of recoveries.
Premises and Equipment
Land is carried at cost. Other premises and equipment are recorded at cost and
are depreciated on the straight-line method. Depreciation is provided over the
estimated useful lives of the respective assets.
Foreclosed Real Estate
Foreclosed real estate includes both formally foreclosed property and in-
substance foreclosed property. In-substance foreclosed properties are those
properties for which the institution has taken physical possession, regardless
of whether formal foreclosure proceedings have taken place.
At the time of foreclosure, foreclosed real estate is recorded at the lower of
the carrying amount or fair value less cost to sell, which becomes the
property's new basis. Any write-downs based on the asset's fair value at date
of acquisition are charged to the allowance for loan losses. After foreclosure,
these assets are carried at the lower of their new cost basis or fair value
less cost to sell. Costs incurred in maintaining foreclosed real estate and
subsequent adjustments to the carrying amount of the property are included in
income (loss) on foreclosed real estate.
Income Taxes
Income taxes are provided for the tax effects of the transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of available-for-sale
securities, allowance for loan losses, nonaccural loan interest, accumulated
depreciation, and net deferred loan fees for financial and income tax reporting.
The deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or deductible
when the assets liabilities are reflected at income tax rates applicable to
the period in which the deferred tax assets and liabilities are expected to
be realized or settled. As changes in tax laws or rates are enacted, deferred
tax assets and liabilities are adjusted through the provision for income taxes.
<PAGE>
Pension Plan
Pension costs are charged to salaries and benefits and are accrued as funded.
Statements of Cash Flows
The Bank considers all cash and demand amounts due from depository institutions,
and federal funds sold to be cash equivalents for purposes of the statements
of cash flows.
The following is supplemental information supporting the Statements of Cash
Flows for the years ending December 31:
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Cash paid during the year for interest $2,148 $2,029 $1,908
Cash paid during the year for income taxes 300 197 290
</TABLE>
Net Income Per Share of Common Stock
Net income per share of common stock is computed by dividing by the weighted
average number of shares of common stock outstanding during the period, after
giving retroactive effect to stock dividends.
Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107,"Disclosures about Fair
Value of Financial Instruments",requires disclosure of fair value information
about financial instruments, whether or not recognized in the statement of
financial condition. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Statement No. 107 excluded certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Bank.
The following methods and assumptions were used by the Bank in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair values.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans (for example, fixed rate commercial real
estate and rental property mortgage loans and commercial and industrial loans)
are estimated using discounted cash flow analysis, based on interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. Loan fair value estimates include judgments regarding future
expected loss experience and risk characteristics. Fair value for impaired
loans are estimated using discounted cash flow analysis or underlying
collateral values, where applicable.
<PAGE>
Deposits: The fair values disclosed for demand deposits are, by definition,
equal to the amount payable on demand at the reporting date (that is, their
carrying amounts). The carrying amounts of variable-rate, fixed-term money-
market accounts and certificates of deposit approximate their fair values.
Fair values for fixed-rate certificates of deposit are estimates using a
discounted cash flow calculation that applies interest rates currently offered
on certificates to a schedule of aggregated contractual expected monthly
maturities on time deposits.
Accrued interest: The carrying amounts of accrued interest approximate the
fair values.
Reclassifications
Certain amounts in 1995 and 1994 have been reclassified to conform with the
1996 presentation.
NOTE B - RESERVE BALANCE REQUIREMENTS
The Bank is required to maintain certain cash and due from bank reserve balances
aily in accordance with regulatory requirements. The balance maintained under
such requirements was $534,000 at December 31, 1996.
NOTE C - INVESTMENT SECURITIES
Investment securities have been classified according to management's intent.
The amortized cost of securities and their approximate fair values are as
follows:
<TABLE>
<CAPTION>
Securities held-to-maturity
___________________________
(Dollars in thousands)
December 31, 1996 December 31, 1995
_________________________________________ __________________________________________
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
____ _____ ______ _____ ____ _____ ______ _____
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage
obligations
securities $1,906 $ 0 $ (56) $1,850 $2,518 $ 0 $ (56) $2,462
State & local
governments 1,278 21 0 1,299 1,185 43 0 1,228
______ ______ ______ ______ ______ ______ ______ ______
$3,184 $ 21 $ (56) $3,149 $3,703 $ 43 $ (56) $3,690
</TABLE>
<TABLE>
<CAPTION>
Securities available-for-sale
_____________________________
December 31, 1996 December 31, 1995
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
____ _____ ______ _____ ____ _____ ______ _____
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.
government
& federal
agencies $12,692 $ 108 $ (1) $12,799 $12,664 $ 147 $ (23) $12,788
Corporate
debt securities 4,735 5 (21) 4,719 3,924 23 (5) 3,942
Equity securities 15 0 0 15 15 0 0 15
_______ ______ ______ _______ _______ ______ ______ _______
$17,442 $ 113 $ (22) $17,533 $16,603 $ 170 $ (28) $16,745
_______ ______ ______ _______ _______ ______ ______ _______
</TABLE>
The following is a summary of maturities of securities held-to-maturity and
available-for-sale as of December 31, 1996:
<TABLE>
<CAPTION>
(Dollars in thousands)
Securities held-to-maturity Securities available-for-sale
___________________________ _____________________________
Amounts maturing in: Amortized Fair Amortized Fair
Cost Value Cost Value
____ _____ ____ _____
<S> <C> <C> <C> <C>
One year or less $ 100 $ 101 $ 6,005 $ 6,028
After one year through five years 2,134 2,049 11,422 11,490
After five years through ten years 0 0 0 0
After ten years 950 999 0 0
Equity securities 0 0 15 15
______ ______ _______ _______
$3,184 $3,149 $17,442 $17,533
______ ______ _______ _______
</TABLE>
During 1996, the Bank did not sell any securities available-for-sale. During
1995 the Bank sold securities available-for-sale for total proceeds of approx-
imately $4,066,000, resulting in no gross realized gains and gross realized
losses of approximately $38,000. During 1994, the Bank sold securities avail-
able-for-sale for total proceeds of approximately $4,049,000, resulting in gross
realized gains of approximately $37,000, and gross realized losses of approx-
imately $3,000.
In 1995, debt securities with an amortized cost of $1,497,000 were transferred
from held-to-maturity to available- for-sale because of favorable tax treatment
on available-for-sale securities and to improve the Bank's asset liability
management position. The securities had an unrealized gain of approximately
$14,000. There were no securities transferred between classifications during
1996 or 1995.
Investment securities with a carrying amount of approximately $9,200,000 and
$9,200,000 were pledged to secure deposits as required or permitted by law at
December 31, 1996 and 1995, respectively.
<PAGE>
NOTE D - LOANS
Loans at December 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1995
____ ____
<S> <C> <C>
Commercial $ 1,585 $ 1,794
Commercial real estate 9,285 8,241
Residential real estate 23,080 21,433
Consumer 6,046 6,132
Tax exempt 1,533 798
Other 11 4
_______ _______
41,540 38,402
Allowance for loan losses (508) (483)
Net deferred loan origination fees (69) (63)
_______ _______
Total $40,963 $37,856
_______ _______
</TABLE>
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Balance, beginning of year $483 $465 $469
Loans charged off (68) (136) (109)
Recoveries 18 34 25
Provision for losses 75 120 80
____ ____ ____
Balance, end of year $508 $483 $465
____ ____ ____
</TABLE>
At December 31, 1996 and 1995, the total recorded investment in impaired loans,
all of which had allowances determined in accordance with SFAS No. 114 and No.
118, amounted to approximately $23,000 and $0, respectively. The average
recorded investment in impaired loans amounted to approximately $5,000 and
$0 for the years ended December 31, 1996 and 1995, respectively. The allowance
for loan losses related to impaired loans amounted to approximately $23,000
and $0 at December 31, 1996 and 1995, respectively. Interest income on impaired
loans of $2,000 and $0 was recognized for cash payments received in 1996 and
1995, respectively.
The Bank has no commitments to loan additional funds to the borrowers whose
loans have been classified as impaired.
In the ordinary course of business, the Bank has and expects to continue to
have transactions, including borrowings, with its officers, directors, share-
holders, and their affiliates. In the opinion of management, such transactions
were on substantially the same terms, including interest rates and collateral,
as those prevailing at the time of comparable transactions with other persons
and did not involve more than a normal risk of collectibility or present any
other unfavorable features to the Bank. Loans to such borrowers are summarized
as follows:
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Balance, December 31, 1995 $283 $510 $321
New loans 186 10 270
Payments (127) (237) (81)
____ ____ ____
Balance, December 31, 1996 $342 $283 $510
____ ____ ____
</TABLE>
Loans with carrying amounts of $0, $0, and $26,000 were transferred to fore-
closed real estate in 1996, 1995 and 1994, respectively.
NOTE E - PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1995
____ ____
<S> <C> <C>
Land $ 105 $ 105
Buildings and improvements 1,233 1,226
Furniture, fixtures, and equipment 797 698
______ ______
2,135 2,029
Accumulated depreciation and amortization (1,243) (1,116)
______ ______
Total $ 892 $ 913
______ ______
</TABLE>
NOTE F - DEPOSITS
Deposit account balances at December 31, 1996 and 1995, are summarized as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1995
____ ____
Amount % Amount %
______ ___ ______ ___
<S> <C> <C> <C> <C>
Non-interest bearing checking accounts $ 6,720 11.2% $ 5,777 9.8%
NOW and MMDA accounts 9,303 15.5 9,053 15.5
Passbook accounts 15,225 25.3 16,721 28.6
Certificates of deposit 28,910 48.0 26,960 46.1
_______ _____ _______ _____
$60,158 100.0% $58,511 100.0%
_______ _____ _______ _____
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $3,995,000 and $2,913,000 at December
31, 1996 and 1995.
<PAGE>
At December 31, 1996, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $17,487
1998 9,784
1999 1,434
2000 147
2001 58
_______
$28,910
_______
</TABLE>
The Bank held deposits of approximately $986,000 and $429,000 for related
parties at December 31, 1996 and 1995, respectively.
Overdrawn demand deposits reclassified as loans totaled $11,000 and $4,000 at
December 31, 1996 and 1995, respectively.
NOTE G - FEDERAL INCOME TAXES
The Company and Subsidiary file a consolidated federal income tax return. The
consolidated provision for income taxes for 1996, 1995 and 1994 consists of the
following:
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Current federal income tax expense $332 $271 $249
Deferred federal tax expense 2 (2) 4
____ ____ ____
$334 $269 $253
____ ____ ____
</TABLE>
The provision for federal income taxes differs from that computed by applying
federal statutory rates to income before federal income tax expense, as
indicated in the following analysis:
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Expected tax provision at a 34% rate $368 $300 $283
Effect of tax-exempt income (39) (35) (35)
Interest and other nondeductible expenses 5 4 5
____ ____ ____
$334 $269 $253
____ ____ ____
</TABLE>
<PAGE>
The sources of gross deferred tax assets and liabilities at December 31, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1995
____ ____
<S> <C> <C>
Items giving rise to deferred tax assets:
Allowance for loan losses $112 $103
Nonaccrual loan interest 9 9
____ ____
121 112
____ ____
Items giving rise to deferred tax liabilities:
Unrealized gain on securities available-for-sale (31) (48)
Depreciation (53) (51)
Deferred loan fees (8) (5)
Other (7) (1)
____ ____
(99) (105)
____ ____
Net deferred tax asset $ 22 $ 7
____ ____
</TABLE>
NOTE H - DIVIDEND RESTRICTION
The Bank as a State Bank is subject to the dividend restrictions set forth by
the State Division of Financial Institutions. Under such restrictions, the
bank may not, without the prior approval of the Superintendent of Banks,
declare dividends in excess of the sum of the current year's earnings (as
defined) plus the retained earnings (as defined) from the prior two years.
The dividends as of December 31, 1996, that the Bank could declare, without the
approval of the State Division of Financial Institutions, amounted to approx-
imately $1,426,000.
NOTE I -EMPLOYEE BENEFITS
In 1968 The Exchange Bank initiated a Profit Sharing Plan which includes all
employees who have been employed by the Bank for at least one year and those
who work at least one thousand hours per year. Under the plan the Bank contri-
buted five percent of net income after provisions for taxes, adjustments for
charge-offs and recoveries, and after provision for cash dividend to the share-
holders. Early in 1994 this Profit Sharing Plan was changed to a Prototype
Cash or Deferred Profit Sharing Plan and Trust/Custodial Account Plan. This
new plan includes a 401K plan, also. Under the new plan the Bank will match
fifty cents for each dollar which the employee voluntarily contributes to the
plan. This match by the Bank is limited to three percent of the employee's
annual salary. The contributions made by the bank for the years 1996, and 1995
and 1994 were $30,000 each year. Thirty-six employees participated in the
plan during 1994 and 1995 and 29 employees participated in the plan during 1996.
NOTE J - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the Federal Deposit Insurance Corporation (FDIC).
Failure to meet minimum capital requirements can initiate certain mandatory,
and possible additional discretionary actions by regulators that, if undertaken,
could have a direct material affect on the Bank 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.
<PAGE>
Qualitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of: total risk-based
capital and Tier I capital to risk-weighted assets (as defined in the
regulations), Tier I capital to adjusted average assets (as defined). As
discussed in greater detail below, as of December 31, 1996, the Bank meets all
of the capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the FDIC, the Bank
was categorized as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as adequately capitalized, the Bank has
to maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table below. There are no conditions or events
since the most recent notification that management believes have changed the
Bank's current category.
<TABLE>
<CAPTION>
(Dollars in thousands)
To Be 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>
As of December 31, 1996:
Total Risk-Based Capital
(to Risk Weighted Assets) $8,144 22.6% $2,885 8.0% $3,606 10.0%
Tier I Capital
(to Risk Weighted Assets) 7,693 21.3 1,442 4.0 1,803 6.0
Tier I Capital
(to Average Assets) 7,693 11.1 2,760 4.0 3,450 5.0
As of December 31, 1995:
Total Risk-Based Capital
(to Risk Weighted Assets) $7,619 21.5% $2,834 8.0% $3,542 10.0%
Tier I Capital
(to Risk Weighted Assets) 7,176 20.3 1,417 4.0 2,126 6.0
Tier I Capital
(to Average Assets) 7,176 10.7 2,681 4.0 3,352 5.0
</TABLE>
NOTE K - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank has various outstanding commitments
and contingent liabilities that are not reflected in the accompanying con-
solidated financial statements.
<PAGE>
The Bank had outstanding commitments to originate loans as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1995
____ ____
<S> <C> <C>
Home equity lines of credit $1,124 $ 648
Consumer and other loans 2,869 2,546
Credit card loans 1,987 1,910
______ ______
Total $5,980 $5,104
______ ______
</TABLE>
In addition, the Bank periodically is a defendant in various legal proceedings
arising in connection with its business. It is the best judgment of management
that neither the financial position nor results of operations of the Bank will
be materially affected by the final outcome of these legal proceedings.
NOTE L - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amounts recognized in the consolidated
balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual notional amount of those
instruments (see NOTE K). The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit-
worthiness on a case-by-case basis. The amount and type of collateral obtained,
if deemed necessary by the Bank upon extension of credit, varies and is based
on management's credit evaluation of the counterparty.
The Bank has due from bank balances in excess of $100,000 with the following
financial institutions as of December 31, 1996:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
The Independent State Bank of Ohio $820
Federal Reserve Bank 150
</TABLE>
<PAGE>
NOTE M - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
1996 1995
_____________________ ______________________
Carrying Fair Carrying Fair
Amount Value Amount Value
______ _____ ______ _____
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 4,694 $ 4,694 $ 6,092 $ 6,092
Investment securities 20,717 20,608 20,448 20,364
Loans 40,963 41,119 37,856 37,926
Accrued interest receivable 646 646 588 588
Financial liabilities:
Deposits 60,158 60,077 58,511 58,535
Accrued interest payable 152 152 126 126
</TABLE>
The carrying amounts in the preceding table are included in the balance sheet
under the applicable captions. The contract or notional amounts of the Bank's
financial instruments with off-balance-sheet risk are disclosed in NOTE K. It
is not practicable to estimate the fair value of Federal Reserve Bank stock
because it is not marketable. The carrying amount of that investment in
reported in the balance sheet.
NOTE N - STOCK DIVIDEND
On June 15, 1996, the Company distributed 22,655 shares of common stock in
connection with a 5% stock dividend. As a result of the stock dividend, common
stock was increased by $114,000, additional paid-in capital was increased by
$249,000, and retained earnings was decreased by $363,000. All references in
the accompanying financial statements to the number of common shares and per
share amounts for 1995 and 1994 have been restated to reflect the stock
dividend.
NOTE O - OTHER EXPENSE
The components of other expense in the consolidated statements of income were
as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Bank and ATM charges $ 77 $ 69 $ 76
Data processing 88 81 77
Exam and accounting fees 97 92 85
FDIC assessments 2 70 138
State and other taxes 109 102 97
Postage and courier 58 57 56
Supplies 88 75 81
Other 315 324 292
_____ _____ _____
Total $ 834 $ 870 $ 902
_____ _____ _____
</TABLE>
<PAGE>
NOTE P - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
<TABLE>
<CAPTION>
Condensed Balance Sheets
December 31,
1996 1995
____ ____
<S> <C> <C>
Assets
Cash and due from banks $ 9 $ 58
Investment in subsidiary 7,753 7,270
Other assets 55 100
______ ______
Total assets $7,817 $7,428
______ ______
Shareholders' equity $7,817 $7,428
______ ______
<CAPTION>
Condensed Statements of Income
Year ended December 31,
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Income
Dividends from subsidiary $ 287 $ 315 $ 354
Expenses
Salaries and benefits 21 19 35
Occupancy 5 5 5
Other 59 69 56
_____ _____ _____
85 93 96
Income before income tax benefit
and equity in undistributed net
income of subsidiary 202 222 258
Income tax benefit 29 32 33
_____ _____ _____
231 254 291
_____ _____ _____
Equity in undistributed net
income of subsidiary 516 358 289
_____ _____ _____
Net income $ 747 $ 612 $ 580
_____ _____ _____
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
Year ended December 31,
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Operating activities
Net income $ 747 $ 612 $ 580
Adjustments to reconcile
net income to
net cash provided operating
activities:
Change in other assets 45 (15) (31)
Equity in undistributed
income of subsidiary (516) (358) (289)
_____ _____ _____
Net cash provided by operating
activities 276 239 260
_____ _____ _____
Investing activities
Purchase of subsidiary 0 0 (1)
_____ _____ _____
Financing activities
Payments on long-term debt 0 0 (77)
Purchase of treasury stock (118) (5) (57)
Sale of common stock 0 0 21
Redemption of common stock 0 0 (7)
Sale of Treasury stock 0 0 49
Cash dividends paid (207) (178) (186)
_____ _____ _____
Net cash used in financing estimates (325) (183) (257)
_____ _____ _____
Net increase (decrease) in cash
and due from banks (49) 56 2
Cash and due from banks at
beginning of year 58 2 0
_____ _____ _____
Cash and due from banks at
end of year $ 9 $ 58 $ 2
_____ _____ _____
</TABLE>
NOTE Q - QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousand, except per share data)
1996
4th 3rd 2nd 1st
_____ _____ _____ _____
<S> <C> <C> <C> <C>
Interest income $1,328 $1,312 $1,300 $1,271
Interest expense 555 547 541 531
Net interest income 773 765 759 740
Provision for loan loss 10 20 22 23
Security gains, net 0 0 0 0
Net income 185 206 164 192
Earnings per share .40 .44 .34 .41
<CAPTION>
1995
4th 3rd 2nd 1st
_____ _____ _____ _____
<S> <C> <C> <C> <C>
Interest income $1,320 $1,255 $1,182 $1,198
Interest expense 534 528 509 467
Net interest income 786 727 673 731
Provision for loan loss 30 30 30 30
Security gains, net 0 0 0 (38)
Net income 198 182 102 130
Earnings per share .40 .40 .21 .27
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1996 AND 1995, AND SEPTEMBER 30, 1996 AND 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>
<PERIOD-TYPE> 3-MOS 3-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1996 DEC-31-1995
<PERIOD-START> OCT-01-1996 OCT-01-1995 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995 DEC-31-1996 DEC-31-1995
<EXCHANGE-RATE> 1 1 1 1
<CASH> 2,440 2,197 2,440 2,197
<INT-BEARING-DEPOSITS> 0 0 0 0
<FED-FUNDS-SOLD> 2,254 3,895 2,254 3,895
<TRADING-ASSETS> 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 17,533 16,876 17,533 16,876
<INVESTMENTS-CARRYING> 3,184 3,703 3,184 3,703
<INVESTMENTS-MARKET> 3,075 3,619 3,075 3,619
<LOANS> 41,471 38,339 41,471 38,339
<ALLOWANCE> (508) (483) (508) (483)
<TOTAL-ASSETS> 68,206 66,140 68,206 66,140
<DEPOSITS> 60,158 58,511 60,158 58,511
<SHORT-TERM> 0 0 0 0
<LIABILITIES-OTHER> 231 200 231 200
<LONG-TERM> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 2,379 2,265 2,379 2,265
<OTHER-SE> 5,438 5,164 5,438 5,164
<TOTAL-LIABILITIES-AND-EQUITY> 68,206 66,140 68,206 66,140
<INTEREST-LOAN> 951 923 3,756 3,505
<INTEREST-INVEST> 319 313 1,262 1,258
<INTEREST-OTHER> 58 59 193 192
<INTEREST-TOTAL> 1,328 1,295 5,211 4,955
<INTEREST-DEPOSIT> 555 534 2,174 2,038
<INTEREST-EXPENSE> 555 534 2,174 2,038
<INTEREST-INCOME-NET> 773 761 3,037 2,917
<LOAN-LOSSES> 10 30 75 120
<SECURITIES-GAINS> 0 (38) 0 (38)
<EXPENSE-OTHER> 575 553 2,197 2,155
<INCOME-PRETAX> 266 261 1,081 881
<INCOME-PRE-EXTRAORDINARY> 185 202 747 612
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 185 202 747 612
<EPS-PRIMARY> 0.40 0.40 1.59 1.28
<EPS-DILUTED> 0.40 0.40 1.59 1.28
<YIELD-ACTUAL> 4.58 4.51 4.78 4.68
<LOANS-NON> 196 336 196 336
<LOANS-PAST> 125 57 125 57
<LOANS-TROUBLED> 23 0 23 0
<LOANS-PROBLEM> 0 0 0 0
<ALLOWANCE-OPEN> 531 462 483 465
<CHARGE-OFFS> 35 14 68 136
<RECOVERIES> 2 3 51 34
<ALLOWANCE-CLOSE> 508 483 508 483
<ALLOWANCE-DOMESTIC> 508 483 508 483
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 315 280 315 280
</TABLE>
