THIS DOCUMENT IS A COPY OF THE FORM 10-KSB FILED ON APRIL 1, 1997 PURSUANT TO A
RULE 201 TEMPORARY HARDSHIP EXEMPTION.
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, 1997
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. $5,885,000
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 20, 1998, 412,285 shares of Common Stock of the Registrant
were outstanding. The aggregate market value of the voting stock held by non-
affiliates was $8,039,558 based upon the trading price of $19.50 per share.
Documents Incorporated by References
The following sections of the definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders of Exchange Bancshares, Inc. are incorporated by
reference into Part III of this Form 10-KSB:
1. Information Regarding Nominees and Continuing Directors
2. Summary Compensation Table
3. Indebtedness of and Transactions with Officers and Directors
Transitional Small Business Disclosure Format YES ___ NO _X_
<PAGE>
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 may 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 requirements 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.
1
<PAGE>
Employees
As of December 31, 1997, the Bank had 37 full and 7 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
associations, 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, 1997 and December 31, 1996
the legal lending limits were approximately $1,183,000 and $1,183,000
respectively. As of December 31, 1997 and 1996, 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 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.
2
<PAGE>
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 1997, McDonald & Company and Sweney Cartwright & Co. offered to
purchase shares of stock of the Corporation at prices ranging from $15,24 per
share, and was offering to sell such shares at prices ranging to $19.00 per
share. The offer to purchase shares, in some instances was conditional upon
their ability to sell the shares at a predetermined price. In addition to
shares traded through McDonald & Company and Sweney Cartwright & Co.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
shareholders of the Bank exchanged one share of Bank stock for four shares of
the Corporation. In 1997 the Corporation declared cash dividends of $.20 per
share payable on June 16, 1997 to shareholders of record on June 2, 1997 and a
cash dividend of $.30 per share payable on December 19, 1997 to shareholders of
record on December 1, 1997. The Corporation also declared a five percent stock
dividend to shareholders of record on June 2, 1997 payable on June 16, 1997. 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 payable 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 rights 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.
3
<PAGE>
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 Holding
Company acquired the Bank on January 1, 1994, and as of December 31, 1997 had
combined assets of $73 million, $46 million in net loans, and $64 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 (the "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 Consolidated Financial Statements and related Notes to Consolidated
Financial Statements, 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 on page 21of 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.
Three major areas of discussion that follow are an analysis of (a) assets
and liabilities including liquidity and interest rate sensitivity, (b)
shareholders' equity including dividends and risk-based capital, and (c) 1997
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, 1997. 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, 1997, 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 11.90% in 1997 to represent 65.29% of average
earning assets compared to 61.48% in 1996 and 59.847% in 1995. Year-end total
real estate loans of $37,523,000 represented approximately 80.05% of the total
loans outstanding. The portion of the loan portfolio represented by real estate
loans has increased from 74.03% at December 31, 1993 to 80.05% at December 31,
1997. Installment loans to individuals have increased moderately to 13.49% of
loans outstanding at December 31, 1997 after a steady decline since 1993 from
16.60%. The dollar amounts of commercial loans (including tax-exempt loans)
have remained constant, however, their relative portion of the loan portfolio
has decreased from 9.33% at December 31, 1993 to 6.46% at December 31, 1997.
The table entitled "Loan Portfolio" provides a five-year loan history.
4
<PAGE>
In addition to the loans reported in the Loan Portfolio table 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 $5.96 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 Note
I of the Notes to Consolidated Financial Statements for additional information
on off-balance sheet financial instruments.
<TABLE>
<CAPTION>
Funding Uses and Sources
(Dollars in thousands)
1997 1996 1995
--------------------------- -------------------------- -------
Increase Increase
Average (Decrease) Average (Decrease) Average
Balance Amount Percent Balance Amount Percent Balance
------- ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Funding uses:
Loans $44,265 $ 4,709 11.90% $39,556 $ 2,012 5.4% $37,544
Taxable investment securities 18,406 1,328 6.73 19,734 (707) (3.5) 20,441
Nontaxable investment securities 1,234 11 6.05 1,223 34 2.9 1,189
Equity securities 314 168 115.07 146 0 0.0 146
Federal funds sold 3,538 (140) (3.81) 3,678 261 7.6 3,417
Interest-bearing deposits 44 44 100.00 --- --- --- ---
Other 3,573 164 4.81 3,409 232 7.3 3,177
------ ------ ------ ------- ------ ----- ------
Total Uses $71,374 3,628 5.36% $67,746 1,832 2.8% $65,914
====== ====== ====== ====== ====== ===== ======
Funding sources:
Demand deposits $ 7,342 868 13.41% $ 6,474 1,385 27.2% $ 5,089
Savings deposits 24,828 (840) (3.27) 25,668 (2,171) (7.8) 27,839
Time deposits 30,744 3,009 10.85 27,735 2,038 7.9 25,697
Borrowed funds 107 107 100.00 --- --- --- ---
Other 8,353 714 9.07 7,869 580 8.0 7,289
------ ------ ----- ------ ------ ----- ------
Total Sources $71,374 3,628 5.36% $67,746 1,832 2.8% $65,914
====== ====== ====== ====== ====== ===== ======
</TABLE>
<TABLE>
<CAPTION>
Loan Portfolio
(Dollars in thousands)
December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial $ 1,664 $ 1,585 $ 1,794 $ 2,612 $ 2,238
Commercial real estate 10,192 9,285 8,241 6,862 6,777
Residential real estate 27,331 22,990 21,433 20,115 19,896
Consumer 6,322 6,067 6,132 6,476 5,982
Tax-exempt 1,360 1,533 798 1,013 1,123
All other 3 11 4 9 12
------ ------ ------ ------ ------
Total Gross Loans $46,872 $41,471 $38,402 $37,087 $36,028
====== ====== ====== ====== ======
</TABLE>
(Loan Portfolio table continued on next page.)
5
<PAGE>
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
Maturity of Loans (1)
Commercial $ 2,303 $ 601 $ 122 $ 3,026
Real estate 7,253 5,249 669 13,171
-------- -------- -------- --------
Total $ 9,556 $ 5,850 $ 791 $ 16,197
======== ======== ======== ========
Predetermined interest rates $ 1,705 $ 1,468 $ 741 $ 3,914
Floating interest rates 7,851 4,382 50 12,283
------- -------- -------- --------
Total $ 9,556 $ 5,850 $ 791 $ 16,197
======= ======== ======== ========
(1) Excludes consumer and residential mortgage loans of $30,675,000.
Non-Performing Assets
The Table entitled "Non-performing Loans" 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 foreclosure.
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 $121,000 or 61.73% as
of year-end 1997. Nonperforming assets at December 31, 1997 totaled $85,000 or
0.12% of total assets. This represents a decrease of $236,000 or 73.52 from
December 31, 1996.
6
<PAGE>
<TABLE>
<CAPTION>
Non-performing loans
(Dollars in thousands)
The following table shows information regarding past-due, non-accrual, and
renegotiated troubled debt.
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Impaired loans $ 17 $ 23 $ 0 $ 0 $ 0
Loans accounted for on a non-accrual basis 75 196 336 25 49
Accruing loans which are contractually past
due 90 days or more as to principal
or interest payments 10 125 57 162 31
Renegotiated troubled debt 0 0 0 0 0
Other real estate 0 0 0 26 23
Non-performing assets to:
Total assets 0.12% 0.47% 0.59% 0.28% 0.15%
Total loans and other real estate 0.19% 0.78% 1.04% 0.50% 0.29%
</TABLE>
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 the table entitled "Analysis of the Allowance for Loan
Losses" 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
payments 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 both internal and external 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 evaluations are used by Management and the Board of Directors in
determining the adequacy of the allowance for loan loss account on a quarterly
basis.
The entire allowance for loan losses is available to absorb any particular
loan loss. However, for analytical purposes, the allowance could be allocated
based upon net historical charge-offs of each loan type for the last five years.
If applied, commercial loans would require 28.22% of the reserve while the
installment (consumer) and real estate loans would require 65.91% and 5.87%,
respectively. Currently, the allowance for loan losses has been allocated
based upon the results of the loan reviews and management's assessment of the
overall portfolio and other factors as follows; commercial loans - 25.16%,
7
<PAGE>
real estate loans - 25.80% and consumer loans - 11.54%. The remaining 37.50%
of the allowance is currently "unallocated". The losses experienced, combined
with the type and market value of the collateral securing the various loans
within the portfolio, is the primary reason for the percentage allocation of
the allowance to the individual loan types.
Management believes significant factors affecting the allowance are
reviewed regularly and that the allowance is adequate to cover potentially
uncollectible loans at December 31, 1997. The Bank has noe exposure from
troubled debts tolesser developed countries nor from significant amounts of
agricultural, real estate or energy related loans.
The average allowance to average loans outstanding ratio increased to 1.38%
in 1997 from 1.27% and 1.26% in 1996 and 1995, respectively. The allowance for
loan losses to loan balances outstanding at year-end was 1.33%, 1.22% and 1.25%
for years 1997, 1996 and 1995, respectively.
The Bank experienced net recoveries in 1997 of $116,000 as compared to net
charge-offs in 1997 in the two preceding years. The 1997 net recovery position
is primarily attributed to a single borrower. Net charge-offs in 1996 decreased
to $50,000 form $102,000 in 1995. The yearly average net charge-offs for the
last five-year period (1993-1997) were $32,000.
The absence of a provision for loan losses in 1997 was due to the net
recoveries realized, the improved over-all qualtiy of the loan portfolio and
management's assessment of the local economic conditions. The decrease in the
provision for the allowance for loan loss in 1996 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 by 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.
8
<PAGE>
<TABLE>
<CAPTION>
Analysis of the Allowance for Loan Losses
(Dollars in thousands)
Year Ended December 31
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at
beginning of year $ 508 $ 483 $ 465 $ 469 $ 450
Loans charged off:
Commercial 0 0 106 17 2
Installment loans to individuals 38 48 24 84 26
Credit card loans to individuals 31 20 6 8 15
Real estate loans 0 0 0 0 26
------ ------ ------ ------ ------
Total Charge-offs 69 68 136 109 69
------ ------ ------ ------ ------
Recovery of loans charged off:
Commercial 156 0 25 6 5
Installment loans to individuals 25 13 7 15 18
Credit card loans to individuals 2 3 1 4 5
Real estate loans 2 2 1 0 0
------ ------ ------ ------ ------
Total Recoveries 185 18 34 25 28
------ ------ ------ ------ ------
Net (charge-offs) recoveries (116) 50 102 84 41
Provisions charged to operations 0 75 120 80 60
------ ------ ------ ------ ------
Balance at end of period $ 624 $ 508 $ 483 $ 465 $ 469
====== ====== ====== ====== ======
Ratio of net (charge-offs)
recoveries during the period to
average loans outstanding during
that period (0.26)% 0.13% 0.27% 0.23% 0.11%
Average allowance to average loan
outstanding 1.38% 1.27% 1.26% 1.27% 1.34%
</TABLE>
Investments
Investments represent the second largest use of financial resources. The
investment portfolio, shown in the table "Security Maturities and Yields",
includes United States securities, state and municipal obligations, mortgage-
backed securities, other securities consisting of collateralized mortgage
obligations ("CMO's"), corporate debt securities 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 market value, 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
Investments 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 as fair value, with unrealized gains and losses exluded from
earnings and reported in a separate component of shareholders' equity. At
December 31, 1997 and 1996 the Holding Company's shareholders' equity contained
$75,000 and $60,000, respectively, in unrealized gains on securities
available-for-sale.
9
<PAGE>
Investment securities at year-end 1997 decreased $2.1 million or 9.98% from
year-end 1996 while federal funds sold increased $1.7 million from 1996.
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 the investment portfolio, proceeds from investment securities 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.
<TABLE>
<CAPTION>
Securities Maturities and Yields
(Dollars in thousands)
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
----------------- ---------------- ----------------- ------------------
Carring Carrying Carrying Carrying
Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 2,611 6.71% $ 9,666 6.24% $ 0 0.00% $ 0 0.00%
State and municipal
obligations 108 6.34 1,063 7.09 0 0.00 0 0.00
Mortgage backed
securities 0 0.00 765 4.66 0 0.00 470 4.27
Other debt securities 2,213 5.18 1,505 6.27 0 0.00 0 0.00
------- ------- ------- --------
Total $ 4,932 6.24% $12,999 6.22% $ 0 0.00% $ 470 4.27%
======= ======= ======= ========
Equity investments <F1> $ 367 5.41%
========
Tax equivalent adjustment
For calculation of yield<F2> $ 2 $ 26 $ 0 $ 0
======= ======= ======= ========
</TABLE>
[FN]
<F1> No fixed maturity.
<F2> Weighted-average yields on tax-exempt obligations have been computed on a
fully tax-equivalent basis assuming a tax rate of 34%.
</FN>
10
<PAGE>
<TABLE>
<CAPTION>
Agency Structured Notes
(Dollars in thousands)
December 31, 1997
Available-For-Sale Securities
Gross Gross Net
Market Unrealized Unrealized Unrealized
Cost % Value % Gains Losses Gains/Losses %
---- --- ----- --- ----- ------ ------------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CMO's $ 0 0.00% $ 0 0.00% $ 0 $ 0 $ 0 0.00%
All Other 16,248 100.00 16,362 100.00 116 (2) 114 100.00
------- ------ ------- ------ ---- ----- ---- ------
Total $16,248 100.00% $16,362 100.00% $116 $ (2) $114 100.00%
======= ====== ======= ====== ==== ===== ==== ======
<CAPTION>
Agency Structured Notes
(Dollars in thousands)
December 31, 1997
Held-To-Maturity Securities
Gross Gross Net
Market Unrealized Unrealized Unrealized
Cost % Value % Gains Losses Gains/Losses %
---- --- ----- --- ----- ------ ------------ ---
<S> <C> <C> <C> <C> <C> <C> <C>
CMO's $ 470 19.59% $ 464 19.29% $ 0 $ (6) $ (6) (600.00)%
All Other 1,936 80.41 1,941 80.71 18 (13) 5 500.00
------- ------ ------- ------ ---- ----- ---- ------
Total $ 2,406 100.00% $ 2,405 100.00% $ 18 $ (19) $ (1) (100.00)%
======= ====== ======= ====== ==== ===== ==== ======
<CAPTION>
Agency Structured Notes Maturity
(Dollars in thousands)
December 31, 1997
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 $ 470
All Other 4,932 12,999 0 0
------ ------- ------- -------
Total $4,932 $12,999 $ 0 $ 470
====== ======= ======= =======
</TABLE>
Weighted-average lives used to determine maturities of CMO's.
11
<PAGE>
Deposits
The "Deposits" table highlights average deposits and interest rates during
the last three years. Average deposits have increased in 1997, approximately
$3,037,000 or 5.07% from 1996 which had decreased from 1994, approximately
$2,749,000 or 4.69%. The average cost of funds for the bank was approximately
3.78% for the year ended December 31, 1997 compared to 3.63% and 3.48% for 1996
and 1995, respectively.
The Bank's deposit structure can be categorized as somewhat cyclical,
increasing as public depositors receive tax allocations and decreasing as
disbursements are made. During 1997 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 decreased by 3 basis points since December 31, 1996.
<TABLE>
<CAPTION>
Deposits
(Dollars in thousands)
The monthly average amount of deposits are summarized below:
Year Ended December 31,
1997 1996 1995
----------------- ----------------- -----------------
Cost of Cost of Cost of
Amount Funds Amount Funds Amount Funds
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing deposits $ 7,342 0.00% $ 6,474 0.00% $ 5,089 0.00%
NOW deposits 8,500 3.18 7,910 3.07 7,272 3.27
Money market deposits 1,470 2.65 1,658 2.65 2,081 2.69
Savings deposits 14,858 2.60 16,100 2.61 18,486 2.50
Time deposits 30,744 5.47 27,735 5.29 25,697 4.99
------- ---- ------- ---- ------- ----
Total Deposits $62,914 3.78% $59,877 3.63% $58,625 3.48%
======= ==== ======= ==== ======= ====
</TABLE>
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 the "Capital Resources" table, reveal that the Bank has been
able to maintain an average equtiy to average asset ratio of greater than 9% for
the past three years. It should be noted that this ratio increased by 44 basis
points in 1996 to 11.15% and decreased in 1997 by 125 basis points to 9.90%.
The decrease resulted primarily from a large dividend being declared to the
holding company as a tax sabings strategy by the Bank. It should also be noted
that the return on average assets increased in 1997 to 1.17% from 1.10% in 1996.
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 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 1.38%, 1.27% and 1.26% for years
1997, 1996, and 1995, 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
disallowed 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, 1997, the Bank's risk-based
12
<PAGE>
capital ratio for Tier I and Tier II capital was 16.10% and 17.30% respectively,
thus surpassing the required 4% and 8% for Tier I and Tier II capital. The
"Risk-Based Capital" table contains a summary of both the Bank's risk-based
capital and leverage components and ratios.
<TABLE>
<CAPTION>
Capital Resources
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Return on average assets 1.17% 1.10% 0.93%
Dividend payout ratio 28.65 28.48 28.69
Average equity to average assets ratio 11.38 11.23 10.71
Return on average equity 10.28 9.82 8.67
Times
Earnings retained 71.35 71.52 71.31
Equals
Internal capital growth 7.33 7.02 6.18
</TABLE>
<TABLE>
<CAPTION>
Risk-Based Capital
(Dollars in thousands)
December 31,
1997 1996
---- ----
<S> <C> <C>
Tier I Capital:
Shareholders' equity $ 7,337 $ 7,753
Less unrealized gains on securities available-for-sale (75) (60)
------- -------
Total Tier I Capital $ 7,262 $ 7,693
Eligible amount of the allowance for loan losses 566 451
------- -------
Total Tier II Capital $ 7,828 $ 8,144
======= =======
Risk adjusted assets $45,131 $36,062
Average assets $73,720 $69,007
Risk-based capital ratios:
Tier I 16.10% 21.33%
Tier II 17.30% 22.58%
Tier I leverage ratio 9.90% 11.15%
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Stock Prices
1997 1996
--------------- ---------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $16.19 $15.24 $15.24 $14.76
Second Quarter 17.14 16.19 15.24 14.76
Third Quarter 18.75 17.50 16.19 15.24
Fourth Quarter 19.00 17.50 16.19 15.24
<CAPTION>
Dividends Declared and Paid
1997 1996
----------------- -----------------
Declared Paid Declared Paid
-------- ---- -------- ----
<S> <C> <C> <C> <C>
First Quarter $ 0.00 $ 0.00 $ 0.00 $ 0.00
Second Quarter 0.19 0.19 0.14 0.14
Third Quarter 0.00 0.00 0.00 0.00
Fourth Quarter 0.30 0.30 0.29 0.29
</TABLE>
The second quarter of 1997 and prior quarters presented have been restated to
reflect the five percent stock dividend declared June 2,1997 payable June 16,
1997. The weighted-average number of shares outstanding was 488,891 in 1997
and 493,386 in 1996 as restated.
14
<PAGE>
<TABLE>
<CAPTION>
Average Balances and Interest Rates On a Fully Taxable-Equivalent Basis
(Dollars in thousands)
1997 1996 1995
------------------------- ------------------------ ------------------------
Balance Interest Yield Balance Interest Yield Balance Interest Yield
------- -------- ----- ------- -------- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans, net of unearned income $44,265 $4,180 9.44% $39,556 $3,773 9.54% $37,544 $3,505 9.34%
Interest-bearing deposits in banks 44 2 4.55 -- -- -- -- -- --
Investment securities:
Taxable debt securities 18,406 1,130 6.14 19,734 1,189 6.03 20,441 1,187 5.81
Tax-free debt securities 1,234 87 7.05 1,223 86 7.03 1,189 84 7.06
Equity securities 314 17 5.41 146 9 6.16 146 8 5.48
Federal funds sold 3,538 182 5.43 3,678 193 5.25 3,417 192 5.62
------- ------ ------- ------ ------- ------
Total Interest-Earning Assets 67,801 5,608 8.27 64,337 5,250 8.16 62,737 4,976 7.93
Non-interest-earning assets:
Cash and due from banks 2,480 2,103 1,840
Other assets 1,705 1,809 2,809
Less allowance for loan losses (612) (503) (472)
------- ------- -------
Total Assets $71,374 $67,746 $65,914
======= ======= =======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 8,500 $ 270 3.18% $ 7,910 $ 243 3.07% $ 7,272 $ 238 3.27%
Money market accounts 1,470 39 2.65 1,658 44 2.65 2,081 56 2.69
Savings accounts 14,858 387 2.60 16,100 421 2.61 18,486 462 2.50
Time accounts 30,744 1,683 5.47 27,735 1,466 5.29 25,697 1,282 4.99
------- ------ ------- ------ ------- ------
Total interest-bearing deposits 55,572 2,379 4.28 53,403 2,174 4.07 53,536 2,038 3.81
Borrowed funds 107 8 7.48 -- -- -- -- -- --
------- ------ ------- ------ ------- ------
Total interest-bearing liabilities 55,679 2,387 4.29 53,403 2,174 4.07 53,536 2,038 3.81
Non interest-bearing liabilities:
Demand deposits 7,342 6,474 5,089
Other 230 263 227
Shareholders' equity 8,123 7,606 7,062
------- ------- -------
Total Liabilities and
Shareholders' Equity $71,374 $67,746 $65,914
======= ======= =======
Net interest earnings $3,221 $3,076 $2,938
====== ====== ======
Net interest spread 3.98% 4.09% 4.12%
===== ===== =====
Net interest yield<F1> 4.75% 4.78% 4.68%
===== ===== =====
Interest-bearing liabilities to
earning assets 82.12% 83.01% 85.35%
===== ===== =====
</TABLE>
[FN]
<F1> Net interest yield, also referred to as net interst margin, is calculated
by dividing net interest earnings by total interest-earning assets. The
table above includes non-performing loans in average amounts outstanding.
</FN>
15
<PAGE>
II - RESULTS OF OPERATIONS
The Holding Company had consolidated net income of $835,000 or $1.71 basic
earnings per share, for the year ended December 31, 1997 as compared to $747,000
or $1.51 basic earnings per share for 1996 and $612,000 or $1.22 basic earnings
per share for 1995. Return on average assets ratio (ROAA) was 1.11%, 1.10% and
0.93% in 1997, 1996, and 1995, respectively.
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 the tables entitled "Average Balances and Interest
Rates", "Rate/Volume Analysis of Changes in Interest Income and Interest
Expenses", and "Interest Sensitive Assets and Liabilities" for all years
presented using the Federal statutory rate of 34%. These tables have been
prepared on a tax-equivalent basis. The stated (pre-tax) yield on tax-exempt
loans and securites are lower than the yield on taxable assets of similar risk
and maturity. The average balances were calculated on a monthly basis.
<TABLE>
<CAPTION>
Net Interest Income (Taxable-Equivalent Basis)
(Dollars in thousands)
Year Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income per summary of
operation $5,565 $5,211 $4,958 $4,673 $4,862
Adjustment to fully taxable basis 43 39 21 21 21
------ ------ ------ ------ ------
Adjusted interest income 5,608 5,250 4,979 4,694 4,883
Interest expense 2,387 2,174 2,038 1,892 2,142
------ ------ ------ ------ ------
Net interest income adjusted to a
fully taxable-equivalent basis* $3,221 $3,076 $2,941 $2,802 $2,741
====== ====== ====== ====== ======
</TABLE>
(*) 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 1993 through
1997.
The net yield on interest-earning assets has decreased to 4.75% in 1997
from 4.78% in 1996 and increased from 4.68% in 1995. Net interest income
increased $145,000, or 4.71%, in 1997 and $135,000, or 4.70%, in 1996, while
earnings increased $88,000, or 11.78%, in 1997 from $747,000 in 1996 and
increased $135,000, or 22.06%, in 1996 from $612,000 in 1995. The "Rate Volume
Analysis of Changes in Interest Income and Interest Expense" table 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 to $3,464,000 and average interest-bearing liabilities
increased to $2,276,000 in 1997 which resulted in increased earnings of $278,000
(due to volume); while rates increased for categories of assets; and rates
increased for NOW accounts and time deposits which resulted in a net decrease of
$133,000 (due to rate) in net interest income. The net effect of the changes in
volume and interest rates was to increase interest earnings by $145,000 during
1997.
Net loan income increased $403,000, or 10.73% over the prior year primarily
as a result of the increased yields resulting from the changes in the
composition of the portfolio, increased competition from financical and non-
financial sources, and Management's strengthening of loan underwriting
standards. Average loan yields have decreased 10 basis points in 1997 after a
20 basis point increase in 1996. As of year-end 1997 approximately $24,805,000,
or 52.92%, 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 flexibility in a changing rate environment.
16
<PAGE>
Interest rates on tax-free investment securities have increased two basis
points in 1997, from an average portfolio yield of 7.03% ro 7.05%, and interest
rates on equity investment securities have decreased 75 basis points from an
average portfolio yield of 6.16% to 5.41%, resulting in a $20,000 increase in
taxable income due to rates. Additionally, a $70,000 decline in income due to
the volume, resulted in net decrease in income of $50,000. Approximately
$6,738,000 of securities matured in 1997. Reinvestment yields on approximately
$4,930,000 of maturing securities in 1998 will be used to determine appropriate
maturities or alternative investments.
Federal funds sold income decreased by $1,000 or 052% in 1997 after a
$1,000 or 0.52% increase in 1996. Volume decreased earnings $7,000 and rates
increased earnings $1,000 in 1997. Federal funds are primarily used as an
investment mechanism for short-term liquidity purposes.
Interest-bearing deposit expense increased $213,000 or approximately 9.480
in 1997 after a $136,000 or 6.67% increase in 1996. The volume increase caused
interest expense to increase $88,000 while changes in rates caused a $117,000
increase in interest expense in 1997. Rates paid on NOW deposits and time
deposits increased 11 and 18 basis points respectively in 1997, compared to a
decrease of four basis points for NOW deposits and an increase of 30 basis
points for time deposits in 1996. The yields on money market and savings
accounts remained virtually unchanged in 1997. Also, competition from non-
financial institutions has continued to be a factor which is causing a shifting
of depositors' resources.
In summary, the "Rate Volume Analysis of Changes in Interest Income and
Interest Expense" table discloses the reasons for changes in interest income and
interest expense. It should be noted that the changes, or restructing, in the
Bank's interest-earning assets (loans, investments, federal funds and interest-
bearing deposits) and the interest-bearing liabilities (NOW, money market,
savings, time deposits and borrowed funds) combined with the repricing of each
resulted in an increase in net interest margins.
The changes in both asset and liability volumes in 1997 coupled with
repricing of both interest-earning assets and interest-bearing liabilities
resulted in a net increase of $145,000 net interest income. Changes in volume
accounted for a $278,000 increase in net interest income, while changes in rates
decreased net interest income $133,000.
The increases in both asset and liability volumes in 1996 had more of an
effect on the net interest margin, $138,000 increase, than the changes in the
yields on assets and liabilities, a $20,000 decrease.
17
<PAGE>
<TABLE>
<CAPTION>
Rate/Volume Analysis of Changes in Interest Income and
Interest Expense on a Fully Taxable-Equivalent Basis
(Dollars in thousands)
1997 Compared to 1996 1996 Compared to 1995
------------------------ ----------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
Income earned on:
Interest-bearing deposits $ 2 $ -- $ 2 $ -- $ -- $ --
Loans 449 (42) 407 188 80 268
Investment securities (70) 20 (50) (39) 44 5
Federal funds sold (7) 6 (1) 15 (14) 1
----- ----- ----- ----- ----- -----
Total Interest-Earning Assets 374 (16) 358 164 110 274
----- ----- ----- ----- ----- -----
Interest paid on:
Interest-bearing deposits 88 117 205 (59) 11 (48)
Borrowed funds 8 -- 8 102 82 184
----- ----- ----- ----- ----- -----
Total Interest-Bearing Liabilities 96 117 213 43 93 136
----- ----- ----- ----- ----- -----
Changes in Net Interest Income $ 278 $(133) $ 145 $ 121 $ 17 $ 138
===== ===== ===== ===== ===== =====
</TABLE>
The analysis of year-to-year changes in net interest income is segregated into
amounts attributable to both volume and rate variances. In calcutating 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.
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, 1997, 1996, and 1995.
Income Taxes
Applicable income taxes of $375,000 in 1997 consist of federal taxes only.
For the previous two years the fedeeral tax rate was 34%.
Impacting the tax provisions for the three years covered in this report is
the level of the provision for possible loan losses ($-0- in 1997, $75,000 in
1996 and $120,000 in 1995) and the level of tax-exempt income on securities
which was $65,000, $64,000, and $63,000 for the three years presented.
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes" requires 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 defered 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 reserve. An annual adjustment of the deferred tax liability or
asset is made for any subsequent change in tax rates.
18
<PAGE>
<TABLE>
<CAPTION>
Other Expenses
(Dollars in thousands)
A summary of items included in other expenses is listed below:
Other Expenses: 1997 Change 1996 Change 1995
---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
Salaries and benefits
Salaries $ 912 3.28% $ 883 6.64% $ 828
Benefits 200 2.04 196 7.10 183
------ ---- ------ ---- ------
Total $1,112 3.06% $1,079 6.73% $1,101
====== ==== ====== ==== ======
Occupancy and equipment
Depreciation $ 119 (9.16)% $ 131 3.97% $ 126
Maintenance and repairs 95 25.00 76 0.00 76
Real estate taxes 18 5.88 17 0.00 17
Insurance 15 (6.25) 16 14.29 14
Utilities 48 2.13 47 6.82 44
------ ----- ------ ----- ------
Total $ 295 2.79% $ 287 3.61% $ 277
====== ===== ====== ===== ======
Other expenses
Advertising $ 36 (23.40)% $ 47 (2.08)% $ 48
Dues and subscriptions 16 23.08 13 62.50 8
Telephone 35 (10.26) 39 11.43 35
Organization expense 13 0.00 13 00.00 13
Insurance 18 0.00 18 (30.77) 26
Credit card 56 12.00 50 (1.96) 51
Other 95 20.25 79 (9.20) 87
------ ----- ------ ----- ------
Total $ 269 3.88% $ 259 (3.36)% $ 268
====== ===== ====== ===== ======
</TABLE>
Effects of Inflation/Changing Prices
The effects of inflation on operation 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 yeaar maturities, and
federal funds sold are the principal components of asset liquidity. Referring
to " Interest Sensitive Assets and Liabilities" table, the Bank is in a
liability sensitive positon 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 NOW savings
and, money market accounts 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.
19
<PAGE>
<TABLE>
<CAPTION>
Interest-Sensitive Assets and Liabilities
(Dollars in thousands)
December 31, 1997
Over Three
Within Through Over Over After
Three Twelve One Five Ten
Months Months Year Years Years
______ ______ ______ ______ ______
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans $ 9,648 $ 15,157 $ 6,975 $ 4,371 $ 10,721
Investment securities (carrying value) 1,905 3,025 12,900 570 368
Other earning assets 3,698 -- -- -- --
Other assets -- -- -- -- --
------ ------ ------ ------ ------
Total Assets $ 15,521 $ 18,182 $ 19,875 $ 4,941 $ 14,276
====== ====== ====== ====== ======
Interest-Bearing Liabilities
Non interest-bearing deposits $ 6,371 $ -- $ -- $ -- $ --
Interest-bearing deposits 32,429 16,790 7,985 353 --
Borrowed funds 1 4 11 13 169
Other liabilities and equity -- -- -- -- 8,669
------ ------ ------ ------ ------
Total Liabilities and Equity $ 38,801 $ 16,794 $ 7,996 $ 366 $ 8,838
====== ====== ====== ====== ======
Interest Sensitivity Gap <F1> $(33,280) $ 1,388 $ 11,879 $ 4,575 $ 5,438
Cummulative Interest Sensitivity Gap (23,280) (21,892) 13,267 16,454 10,013
Cummulative Gap Ratio <F2> (31.98)% (30.07)% 18.23 % 22.60 % 13.76 %
</TABLE>
[FN]
<F1> Rate-sensitive assets less rate-sensitive liabilities
<F2> Cummulative gap divided by total assets
</FN>
20
<PAGE>
ITEM 7. Financial Statements
(Accountant's Letterhead)
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Exchange Bancshares, Inc.
Luckey, Ohio
We have audited the consolidated balance sheets of Exchange Bancshares,
Inc. and Subsidiary as of December 31, 1997, and 1996, and the related
statements of income, changes in shareholders' equity and cash flow for each of
the years in the three-year period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based upon
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 misstatements. 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 consolidated financial position of Exchange
Bancshares, Inc. and Subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 1997, in conformity with generally
accepted accounting principles.
Robb, Dixon,
Francis, Davis, Oneson
& Company
Granville, Ohio
March 4, 1998
21
<PAGE>
<TABLE>
<CAPTION>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- ----------------------------------------------------------------------------------------------
(Dollars in thousands)
1997 1996
________ ________
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 2,234 $ 2,440
Interest bearing demand deposits in banks 42 0
Federal funds sold 3,926 2,254
-------- --------
Total cash and cash equivalents 6,192 4,694
Investment securities:
Securities available-for-sale 16,362 17,664
Securities held-to-maturity, fair values of $2,405 and $3,149 2,406 3,184
-------- --------
Total investment securities 18,768 20,848
Loans 46,872 41,471
Allowance for loan losses (624) (508)
-------- --------
Net loans 46,248 40,963
Premises and equipment, net 844 892
Accrued interest receivable 625 646
Deferred income taxes 10 22
Other assets 108 141
-------- --------
TOTAL ASSETS $ 72,795 $ 68,206
======== ========
LIABILITIES
Deposits:
Noninterest-bearing $ 6,371 $ 6,720
Interest-bearing 57,557 53,438
-------- --------
Total deposits 63,928 60,158
Borrowed funds 198 0
Accrued interest payable 149 121
Other Liabilities 77 110
-------- --------
TOTAL LIABILITIES 64,352 60,389
SHAREHOLDERS' EQUITY
Preferred shares ($25.00 par value) 750 shares
authorized, no shares issued 0 0
Common shares ($5.00 par value) 750,000 shares
authorized, 499,534 and 475,747 shares issued 2,498 2,379
Additional paid-in capital 3,370 3,050
Retained earnings 2,626 2,459
Treasury stock at cost, 8,439 and 8,395 shares (126) (131)
Unrealized gain on securities available-for-sale,
net of applicable deferred income taxes 75 60
-------- --------
TOTAL SHAREHOLDERS' EQUITY 8,443 7,817
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 72,795 $ 68,206
======== ========
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
22
<PAGE>
<TABLE>
<CAPTION>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996 and 1995
- ------------------------------------------------------------------------------------------
(Dollars in thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $4,159 $3,756 $3,508
Interest and dividends on investment securities 1,212 1,262 1,258
Interest on federal funds sold 192 193 192
Interest on due from banks deposits 2 0 0
------ ------ ------
TOTAL INTEREST INCOME 5,565 5,211 4,958
------ ------ ------
INTEREST EXPENSE
Interest on deposits 2,379 2,174 2,038
Interest on advances from Federal Home Loan Bank 8 0 0
------ ------ ------
TOTAL INTEREST EXPENSE 2,387 2,174 2,038
------ ------ ------
NET INTEREST INCOME 3,178 3,037 2,920
Provision for loan losses 0 75 120
------ ------ ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,178 2,962 2,800
OTHER INCOME
Service charges on deposits 260 260 223
Loss from sale of investment securities 0 0 (38)
Other income 60 54 45
------ ------ ------
TOTAL OTHER INCOME 320 314 230
------ ------ ------
OTHER EXPENSES
Salaries and employee benefits 1,112 1,079 1,011
Occupancy and equipment, net 295 287 277
Bank and ATM charges 79 77 69
Data processing 87 88 81
Directors fees 62 51 48
Examination and accounting fees 116 97 91
FDIC deposit insurance 7 2 70
State and other taxes 108 109 103
Postage and courier 61 58 57
Supplies 92 88 75
Other expenses 269 259 268
------ ------ ------
TOTAL OTHER EXPENSES 2,288 2,195 2,150
------ ------ ------
INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 1,210 1,081 880
Federal income tax expense 375 334 268
------ ------ ------
NET INCOME $ 835 $ 747 $ 612
====== ====== ======
EARNINGS PER SHARE:
Basic $ 1.71 $ 1.51 $ 1.22
Diluted $ 1.71 $ 1.51 $ 1.22
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
23
<PAGE>
<TABLE>
<CAPTION>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Unrealized
gain (loss) Total
Additional on securities Share-
Common Shares paid-in Retained Treasury available holders'
# of Amount capital earnings stock for sale Equity
---- -------- ------- -------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 431,516 $2,158 $2,563 $2,193 $ (8) $ (332) $6,574
Net income 612 612
Cash dividends declared
($.36 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
------- ------ ------ ------ ----- ------- ------
Balances at December 31, 1995 453,092 2,265 2,801 2,282 (13) 94 7,429
Net income 747 747
Cash dividends declared
($.42 per share) (207) (207)
5% stock dividend declared 22,655 114 249 (363) 0
Purchase of 7,373 shares of
treasury stock (118) (118)
Change in unrealized
gain (loss) on securities
available-for-sale (34) (34)
------- ------ ------ ------ ----- ------- ------
Balances at December 31, 1996 475,747 2,379 3,050 2,459 (131) 60 7,817
Net income 835 835
Cash dividends declared
($.49 per share) (240) (240)
5% stock dividend declared 23,787 119 309 (428) 0
Purchase of 2,620 shares of
treasury stock (42) (42)
sale of 3,108 shares of
treasury stock 11 47 58
Change in unrealized
gain (loss) on securities
available-for-sale 15 15
------- ------ ------ ------ ----- ------- ------
Balances at December 31, 1997 499,534 $2,498 $3,370 $2,626 $(126) $ 75 $8,443
======= ====== ====== ====== ===== ======= ======
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
24
<PAGE>
<TABLE>
<CAPTION>
EXHANGE BANCSHARES, INC.
LUCKEY, OHIO
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
Year ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 835 $ 747 $ 612
Adjustment to reconcile net income to net cash
provided by operatiing activities:
Provision for loan losses 0 75 120
Loss from sale of investment securities 0 0 38
Loss on sale of other real estate owned 1 0 4
Gain on sale of premises and equipment 0 (1) 0
Depreciation 119 131 126
Deferred income taxes 5 2 (2)
Investment securities amortization (accretion) 107 134 124
Changes in operating assets and liabilities:
Accrued interest receivable 21 (58) 25
Accrued interest payable 28 26 9
Other assets 33 (36) (27)
Other liabilities (33) 5 118
------ ------ ------
Net cash provided by operating activities 1,116 1,025 1,147
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of held-to-maturity securities 0 (100) 0
Proceeds from maturities of held-to-maturity securities 738 605 253
Purchases of available-for-sale securities (4,742) (9,360) (3,624)
Proceeds from sales of available-for-sale securities 0 0 4,066
Proceeds from maturities of available-for-sale securities 6,000 8,400 2,000
Net increase in loans (5,307) (3,182) (1,393)
Purchases of premises and equipment (71) (110) (21)
Proceeds from sale of equipment 0 1 5
Proceeds from sale of other real estate owned 21 0 22
------ ------ ------
Net cash used in investing activities (3,361) (3,746) 1,308
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Noninterest-bearing, interest-bearing demand,
and savings deposit (530) (302) (2,029)
Certificates of deposit 4,299 1,950 2,355
Proceeds from long-term Federal Home Loan Bank advances 200 0 0
Payments on long-term Federal Home Loan Bank advances (2) 0 0
Purchase of treasury stock (42) (118) (5)
Sale of treasury stock 58 0 0
Dividends paid (240) (207) (178)
------ ------ ------
Net cash provided by financing activities 3,743 1,323 143
------ ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,498 (1,398) 2,598
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,694 6,092 3,494
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $6,192 $4,694 $6,092
====== ====== ======
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for interest 2,359 2,148 2,029
Cash paid during the year for income taxes 406 300 197
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
25
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Exchange Bancshares, Inc. (the "Bancorp") is a bank holding company whose
principal activity is the ownership and management of its wholly-owned
subsidiary, The Exchange Bank, (the "Bank"). The Bank generates commercial
(including agricultural), mortgage and consumer loans and receives deposits from
customers located primarily in portions of Lucas and Wood Counties in Northwest
Ohio. The Bank operates under a state bank charter and provides full banking
services. As a state bank, the Bank is subject to regulation by the State of
Ohio Division of Financial Institutions and the Federal Reserve System through
the Federal Reserve Bank of Cleveland (FRB).
Basis of Consolidation
The consolidated financial statements include the accounts of Exchange
Bancshares, Inc. and its wholly-owned subsidiary, The Exchange Bank, after
elimination of all material intercompany transactions and balances.
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.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. In connection with the
determination of the estimated losses on loans, management obtains independent
appraisals for significant collateral.
The Bank's loans are generally secured by specific items of collateral including
real property, consumer assets, and business assets. Although the Bank has a
diversified loan portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent on local economic conditions in the
agricultural industry.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans 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. 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
estimated losses on loans may change materially in the near term. However the
amount of change that is reasonably possible cannot be estimated.
Investment Securities
Debt securities are classified as held-to-maturity when the Bank has the
positive intent and ability to hold the securities to maturity. Securities
held-to-maturity are carried at amortized cost. The amortization of premiums
and accretions of discounts are recognized using methods approximating the
interest method over the remaining period to maturity.
Debt securities not classified as held-to-maturity are classified as available-
for-sale. Securities available-for-sale are carried at fair value with
unrealized gains and losses reported separately net of tax, through a separate
component of shareholders' equity. Gains and losses on the sale of securities
are determined using the specific-identification method.
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.
26
<PAGE>
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 to the extent of interest payments
received.
Allowance for Loan Losses
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
collectibility 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. Although management uses
available information to recognize losses on loans, because of uncertainties
associated with local economic conditions, collateral values, and future cash
flows on impaired loans, it is reasonably possible that a material change could
occur in the allowance for loan losses in the near term. However, the amount of
the change that is reasonably possible cannot be estimated. The allowance is
increased by a provision for loan losses, which is charged to expense, and
reduced by charge-offs, net of recoveries. Changes in the allowance related
to impaired loans are charged or credited to the provision for loan losses.
Premises and Equipment
Land is carried at cost. Other premises and equipment are recorded at cost net
of accumulated depreciation. Depreciation is computed using the straight-line
method based principally on the estimated useful lives of assets. Maintenance
and repairs are expensed as incurred while major additions and improvements are
capitalized.
Other Real Estate Owned
Real estate properties acquired through or in lieu of foreclosure are initially
recorded at the lower of the Bank's carrying amount or fair value less estimated
selling cost at the date of foreclosure. Any write-downs based on the asset's
fair value at the date of acquisition are charged to the allowance for loan
losses. After foreclosure, these assets are carried at the lower of their new
basis or fair value less cost to sell. Costs of significant property
improvements are capitalized, whereas costs relating to holding property are
expensed. The portion of interest costs related to development of real estate
is capitalized. Valuations are periodically performed by management, and any
subsequent write-downs are recorded as a charge to operations, if necessary, to
reduce the casrrying value of a property to the lower of its cost or fair value
less cost to sell.
Income Taxes
Income taxes are provided for the tax effects 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, accumulated depreciation, non-accrual loan interest
and net deferred loan fees. 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 and liabilities are recovered or settled.
Deferred tax assets and 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 the tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for
income taxes. The Bancorp files consolidated income tax returns with its
subsidiary.
Statement of Cash Flows
The Bancorp considers all cash and amounts due from depository institutions,
interest-bearing deposits in banks, and federal funds sold to be cash
equivalents for purposes of the statements of cash flows.
Reclassifications
Certain amounts in 1996 and 1995 have been reclassified to conform with 1997
presentation.
27
<PAGE>
NOTE B - RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve funds in cash or on deposit with the
Federal Reserve Bank and another correspondent bank. The required reserve at
December 31, 1997 and 1996, was $560,000 and $534,000, respectively.
NOTE C - INVESTMENT SECURITIES
The amortized cost of securities and their approximate fair values are as
follows:
<TABLE>
<CAPTION>
Available-for-sale
- ------------------
(Dollars in thousands)
December 31, 1997 December 31, 1996
--------------------------------------- ----------------------------------------
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 $12,169 $108 $ 0 $12,277 $12,692 $108 $ (1) $12,799
Corporate
debt securities 3,712 8 (2) 3,718 4,735 5 (21) 4,719
Equity
securities 367 0 0 367 146 0 0 146
------- ---- ---- ------- ------- ---- ----- -------
Total $16,248 $116 $ (2) $16,362 $17,753 $113 $ (22) $17,664
======= ==== ==== ======= ======= ==== ===== =======
<CAPTION>
Held-to-maturity
- ----------------
(Dollars in thousands)
December 31, 1997 December 31, 1996
-------------------------------------- ----------------------------------------
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>
State &
municipal
securities $ 1,171 $ 18 $ 0 $ 1,189 $ 1,278 $ 21 $ 0 $ 1,299
Mortgage-
backed
securities 1,235 0 (19) 1,216 1,906 0 (56) 1,850
------- ---- ---- ------- ------- ---- ----- -------
Total $ 2,406 $ 18 $(19) $ 2,405 $ 3,184 $ 21 $ (56) $ 3,149
======= ==== ==== ======= ======= ==== ===== =======
</TABLE>
The amortized cost and estimate fair value of securities held-to-maturity and
available-for-sale at December 31, 1997, be contractual maturity, are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Available-for-sale Held-to-maturity
------------------ -------------------
Amortized Fair Amortized Fair
Amounts maturing in: Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
One year or less $ 4,817 $ 4,823 $ 108 $ 109
After one year through five years 11,064 11,172 1,063 1,080
Mortgage-backed securities 0 0 1,235 1,216
Equity securities 367 367 0 0
------- ------- ------- -------
Total $16,248 $16,362 $ 2,406 $ 2,405
======= ======= ======= =======
</TABLE>
28
<PAGE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or repay obligations without call or prepayment
penalties.
During 1997, and 1996, the Bank did not sell any securities available-for-sale.
During 1995 the Bank sold securities available-for-sale for total proceeds of
approximately $4,066,000, resulting in no gross gains and gross losses of
approximately $38,000.
Investment securities with a carrying value of approximately $8,500,000 and
$9,200,000 were pledged at December 31, 1997 and 1996 to certain deposits.
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
and to improve the Bank's asset liability management position. The securities
had an unrealized gain of approximately $14,000.
NOTE D - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996
---- ----
<S> <C> <C>
Loans secured by real estate:
Farmland $ 2,978 $ 2,164
One-to-four family residental properties 24,353 20,826
Multifamily (5 or more) residential properties 1,337 1,177
Nonfarm nonresidential properties 8,855 8,108
Agricultural production 709 802
Commercial and industrial 955 783
Consumer 6,322 6,067
Municipal 1,360 1,533
Other 3 11
------- -------
Total $46,872 $41,471
======= =======
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Allowance for loan losses:
Balance beginning of year $508 $483 $465
Loans charged off (69) (68) (136)
Recoveries 185 18 34
Provsion for losses 0 75 120
---- ---- ----
Balance, end of year $624 $508 $483
==== ==== ====
</TABLE>
At December 31, 1997 and 1996, 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 $17,000 and $23,000, respectively. The average
recorded investment in impaired loans amounted to approximately $17,000 and
$5,000 for the years ended December 31, 1997 and 1996, respectively. The
allowance for loan losses related to impaired loans amounted to approximately
$15,000 and $23,000 at December 31, 1997 and 1996, respectively. Interest
income on impaired loans of $1,000 and $2,000 was recognized for cash payments
received in 1997 and 1996, respectively. The bank has no commitments to loan
additional funds to borrowers whose loans have been classified as impaired.
The Bank has entered into transactions with certain directors, executive
officers, significant shareholders, and their affiliates. Such transactions
were on substantially the same terms, including interest rates and collateral,
as those prevailing at the time of comparable transactions with other customers,
and did not, in the opinion of management, involve more than a normal credit
29
<PAGE>
risk or present any other unfavorable features. The aggregate amount of loans
to such related parties at December 31, 1997 was $440,000. During 1997, new
loans made to such related parties amounted to $136,000 and payments amounted
to $38,000.
(Dollars in thousands)
1997 1996 1995
---- ---- ----
Beginning balance $342 $283 $510
New loans 136 186 10
Payments (38) (127) (237)
---- ---- ----
Ending balance $440 $342 $283
==== ==== ====
Loans with carrying amounts of $22,000 were transferred to other real estate
owned in 1997. No loans were transferred to other real estate owned in 1996
or in 1995.
NOTE E - PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1997 and 1996 follows:
(Dollars in thousands)
1997 1996
---- ----
Land $ 105 $ 105
Buildings 1,250 1,233
Equipment 853 797
------ ------
2,208 2,135
Accumulated depreciation (1,364) (1,243)
------ ------
Total $ 844 $ 892
====== ======
NOTE F - DEPOSITS
Deposit account balances at December 31, 1997 and 1996, are summarized as
follows:
(Dollars in thousands)
1997 1996
---- ----
Noninterest-bearing $ 6,371 $ 6,720
Interest-bearing demand 9,757 9,303
Savings accounts 14,591 15,225
Certificates of deposit 33,209 28,910
------- -------
Total $63,928 $60,158
======= =======
The aggregate amount of short-term jumbo certificates of deposit with a
minimum denomination of $100,000 was approximately $5,091,000 and $3,995,000
at December 31, 1997 and 1996.
30
<PAGE>
Certificates maturing in years ending December 31, as of December 31, 1997:
(Dollars in thousands)
1998 $24,871
1999 6,532
2000 1,453
2001 198
2002 and thereafter 155
------
Total $33,209
======
The Bank held related party deposits of approximately $465,000 and $986,000 at
December 31, 1997 and 1996, respectively.
Overdrawn demand deposits reclassified as loans totaled $3,000 and $11,000 at
December 31, 1997 and 1996, respectively.
NOTE G - OTHER BORROWINGS
Other borrowings are comprised of the following at December 31:
<TABLE>
<CAPTION>
(Dollars in thousands)
Current
Interest Balance
Rate 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Federal Home Loan Bank advances
Fixed rate advances, with monthly principal
and interest payments
Advance due July 1, 2017 6.85% $ 198 $ 0
======== ======== ========
</TABLE>
Federal Home Loan Bank ("FHLB") advances are collateralized by all shares of
FHLB stock owned by the Bank (totaling $222,000) and by 100% of the Bank's
qualified mortgage loan portfolio (totaling approximately $24,353,000). Based
on the carrying amount of FHLB stock owned by the Bank, total FHLB advances are
limited to approximately $4,432,000.
The aggregate minimum future annual principal payments on borrowings are $5,000
in 1998, $5,000 in 1999, $6,000 in 2000, $6,000 in 2001, and $176,000 after
2001.
NOTE H - FEDERAL INCOME TAXES
The consolidated provision for income taxes for 1997, 1996 and 1995 consists of
the following:
(Dollars in thousands)
1997 1996 1995
-------- -------- --------
Income tax expense
Current tax expense $ 370 $ 332 $ 270
Deferred tax expense 5 2 (2)
------ ------ ------
Total $ 375 $ 334 $ 268
====== ====== ======
31
<PAGE>
The consolidated 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:
(Dollars in thousands)
1997 1996 1995
-------- -------- --------
Federal statutory income tax at 34% $ 411 $ 368 $ 299
Tax exempt income (46) (39) (35)
Other 10 5 4
------ ------ ------
Total $ 375 $ 334 $ 268
====== ====== ======
A cumulative net deferred tax asset is included in other assets. The components
of the asset are as follows:
(Dollars in thousands)
1997 1996
-------- --------
Differences in available-for-sale securities $ (39) $ (31)
Differences in depreciation methods (57) (53)
Differences in accounting for loan losses 111 111
Differences in accounting for loan fees (2) (8)
Differences in interest income for nonaccrual loans 4 9
Other (7) (6)
-------- --------
Total $ 10 $ 22
======== ========
Deferred tax asset $ 115 $ 120
Deferred tax liabilities (105) (98)
-------- --------
Net deferred tax asset $ 10 $ 22
======== ========
NOTE I - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Bank has outstanding commitments and
contingent liabilities, such as commitments to extend credit , which are not
included in the accompanying consolidated financial statements. 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 or notional amount of those
instruments. The Bank uses the same credit policies in making such commitments
as it does for instruments that are included in the consolidated balanmce sheet.
Financial instruments whose contract amount represents credit risk were as
follows:
(Dollars in thousands)
1997 1996
---- ----
Home equity lines $1,155 $1,124
Credit card lines 2,160 1,987
Commitments to extend credit 2,642 2,869
----- -----
Total $5,957 $5,980
===== =====
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
32
<PAGE>
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
creditworthiness on a case-by-case basis. The amount and type of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based
on management's credit evaluation. Collateral held varies but may include
accounts receivable, inventory, property and equipment, and income-producing
commercial properties.
The Bank has not been required to perform on any financial guarantees during the
past three years. The Bank has not incurred any losses on its commitments in
1997, 1996 or 1995.
The Bank has had due from bank balances in excess of $100,000 with the following
banks as of December 31, 1997:
(Dollars in thousands)
Independent State Bank of Ohio $795
Federal Reserve Bank 150
The Bancorp and Bank periodically are subject to claims and lawsuits which arise
in the ordinary course of business. It is the opinion of management that the
disposition or ultimate resolution of such claims and lawsuits will not have a
material adverse effect on the consolidated financial position of the Bancorp.
NOTE J - RESTRICTION ON DIVIDENDS
The Bank is subject to certain restrictions on the amount of dividends that it
may pay without prior regulatory approval. The Bank normally restricts
dividends to a lesser amount. At December 31, 1997, retained earnings of
approximately $657,000 was available for the payment of dividends without prior
regulatory approval.
NOTE K - EMPLOYEE BENEFIT PLANS
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
contributed five percent of net income after provision for taxes, adjustments
for chargeoffs and recoveries, and after provision for cash dividend to the
shareholders. Early in 1994 this Profit Sharing Plan was changed to a Prototype
Cash ro Deferred Profit Sharing Plan and Trust/Custodial Account Plan. This
new plan includes a 401 (k) 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 1997, 1996 and
1995 were $30,000 each year. Thirty-five employees participated in the plan
during 1997, twenty-eight in 1996, and thirty-six employees particitpated in the
plan during 1995.
NOTE L - STOCK DIVIDEND
On June 16, 1997, the Company distributed 23,787 shares of common stock in
connection with a 5% stock dividend. As a result of the stock dividend, common
stock was increased by $119,000, additional paid-in capital was increased by
$309,000, and retained earnings was decreased by $428,000. All references in
the accompanying financial statements to the number of common shares and per
share amounts for 1996 and 1995 have been restated to reflect the stock
dividend.
33
<PAGE>
NOTE M - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the Federal Reserve Bank (FRB). Failure to meet
minimum capital requirements cna initiate certain mandatory, and possible
additional discretionary actions by regulators that, if undertaken, could have
a direct material affect on the Bancorp 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.
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), and Tier I capital to average assets (as defined). Management
believes, as of December 31, 1997, that the Bank meets all of the capital
adequacy requirements to which it is subject.
As of December 31, 1997, the mwas categorized as well capitalized under the
regulatory framework for prompt corrective action. To remain categorized as
well capitalized, the Bank will have to maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as disclosed in the table below.
There are no conditions or events since the most recent notification that
management believes have changed the Bank's promt corrective action category.
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Action Provisions
----------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Risk-Based Capital
(to Risk Weighted Assets) $7,827 $3,610 $4,513
Tier I Capital
(to Risk Weighted Assets) 7,262 16.1 1,805 4.0 2,708 6.0
Tier I Capital
(to Average Assets) 7,262 9.9 2,212 3.0 3,686 5.0
As of December 31, 1996:
Total Risk-Based Capital
(to Risk Weighted Assets) $8,144 $2,885 $3,606
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 1.1 2,070 3.0 3,450 5.0
</TABLE>
NOTE N - 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, includeing the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
34
<PAGE>
to independent markets and, in many cases, could not be realized in immediate
settlements from the instruments. Statement No. 107 exclude certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregrate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used by the Company 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 values for impaired loans are
estimated using discounted cash flow analysis or underlying collateral values,
where applicable.
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.
Borrowed funds: The carrying amounts of borrowed funds are estimated using
discounted cash flow analysis based on interest rates currently being offered
borrowed funds.
The estimated fair values of the Company's financial instruments are as follows:
(Dollars in thousands)
1997 1996
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------- ------- ------- -------
Financial assets:
Cash and cash equivalents $ 6,192 $ 6,192 $ 4,694 $ 4,694
Investments 18,768 18,767 20,848 20,813
Loans 46,248 46,265 40,963 41,119
Accrued interest receivable 625 625 646 646
Financial liabilities:
Deposits 63,928 63,858 60,158 60,077
Borrowed funds 198 203 0 0
Accrued interest payable 149 149 121 121
The carrying amounts in the preceding table are included in the balance sheets
under the applicable captions. The contract or notional amounts of the Bank's
financial instruments with off-balance-sheet risk are disclosed in NOTE I.
No derivatives were held by the Bank for trading purposes.
35
<PAGE>
NOTE O - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Condensed Balance Sheets
(Dollars in thousands)
1997 1996
------ ------
Assets
Cash and due from banks $ 58 $ 9
Time deposits in banks 1,000 0
Investment in subsidiary 7,337 7,753
Other assets 48 55
------ ------
Total assets $ 8,443 $ 7,817
====== ======
Shareholders' equity $ 8,443 $ 7,817
====== ======
Condensed Statements of Income
(Dollars in thousands)
Year ended December 31,
1997 1996 1995
------ ------ ------
Income
Dividends from subsidiary $ 1,335 $ 287 $ 315
Expenses
Salaries and benefits 22 21 19
Occupancy 5 5 5
Other 76 59 69
------ ------ ------
103 85 93
------ ------ ------
Income before income tax benefit
and equity in undistributed net
income of subsidiary 1,232 202 222
Income tax benefit 35 29 32
------ ------ ------
1,267 231 254
Equity in undistributed net
income of subsidiary (432) 516 358
------ ------ ------
Net income $ 835 $ 747 $ 612
====== ====== ======
36
<PAGE>
Condensed Statements of Cash Flows
(Dollars in thousands)
Year ended December 31,
1997 1996 1995
------ ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 835 $ 747 $ 612
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in other assets 6 45 (15)
Equity in undistributed income of subsidiary 432 (516) (358)
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,273 276 239
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of time deposit (1,000) 0 0
------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (42) (118) (5)
Sale of treasury stock 58 0 0
Cash dividends paid (240) (207) (178)
------ ------ ------
NET CASH USED IN FINANCING ACTIVITIES (224) (325) (183)
------ ------ ------
NET INCREASE (DECREASE) IN CASH AND DUE
FROM BANKS 49 (49) 56
CASH AND DUE FROM BANKS AT BEGINNING
OF YEAR 9 58 2
------ ------ ------
CASH AND DUE FROM BANKS AT END OF YEAR $ 58 $ 9 $ 58
====== ====== ======
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
37
<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 15, 1998 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 15,
1998 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 15, 1998 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
TRANSACTIONS WITH OFFICERS AND DIRECTORS" of the Proxy Statement of the Holding
Company to be filed prior to April 15, 1998 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) Exhibits
3(i) The Amended and Restated Articles of Incorporation of Exchange
Bancshares, Inc. (Incorporated by reference.)
3(ii) Code of Regulations of Exchange Bancshares, Inc.
(Incorporated by reference.)
21 Subsidiaries
27 Financial Data Schedule
99.1 Proxy Statement (Incorporated by reference.)
(b) Report on Form 8-K
The Registrant did not file any reports on Form 8-K during the
quarter ended December 31, 1997.
38
<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.
Principle Executive Officer: Principle Accounting and
Financial Officer:
/s/Marion Layman____________ /s/Marion Layman_____________
Marion Layman Marion Layman
Chairman, President, and Chairman, President, and
Chief Executive Officer Chief Executive Officer
March 27, 1998______________ March 27, 1998_______________
Date Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following Directors in the capacities indicated.
/s/Marion Layman____________ /s/Rolland I. Huss___________
Marion Layman, Chairman Rolland I. Huss, Vice-Chairman
March 27, 1998______________ March 27, 1998_______________
Date Date
____________________________ /s/Cecil R. Adkins___________
Donald H. Lusher, Director Cecil R. Adkins, Director
____________________________ March 27, 1998_______________
Date Date
/s/Joseph R. Hirzel_________ /s/David G. Marsh____________
Joseph R. Hirzel, Director David G. Marsh, Director
Secretary and Treasurer
March 27, 1998______________ March 27, 1998_______________
Date Date
/s/Donald A. Gerke__________ /s/Edmund J. Miller__________
Donald A. Gerke, Director Edmund J. Miller, Director
March 27, 1998______________ March 27, 1998_______________
Date Date
/s/Norma J. Christen________
Norma J. Christen, Director
March 27, 1998______________
Date
39
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
3(i) The Amended and Restated Incorporated by reference to the
Articles of Incorporation Registrant's Quarterly Report on
Form 10-QSB for the Quarter
Ended June 30, 1995.
3(ii) Code of Regulations of Exchange Incorporated by reference to the
Bancshares, Inc. Registrant's Registration Statement
on Form S-4 dated November 16,
1992, as amended on Amendment No.
1 to the Company's Registration
Statement on Form S-4 dated
January 14, 1993,
Registration Number 3305466.
21 Subsidiaries of Exchange
Bancshares, Inc.
27 Financial Data Schedule
99.1 Proxy Statement Incorporated by reference to the
definitive Proxy Statement of the
Registrant for the 1998 Annual
Meeting of Shareholders of
Exchange Bancshares, filed with the
Securities and Exchange Commission
40
EXHIBIT 21
----------
SUBSIDIARIES
------------
NAME JURISDICTION OF INCORPORATION
---- -----------------------------
The Exchange Bank Ohio
Luckey, Ohio
41
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Balance Sheets as of December 31, 1997 and 1996, and the related
Consolidated Income Statements for the twelve months ended December 31, 1997 and
1996, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000720912
<NAME> EXCHANGE BANCSHARES, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,224
<INT-BEARING-DEPOSITS> 42
<FED-FUNDS-SOLD> 3,926
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,362
<INVESTMENTS-CARRYING> 2,406
<INVESTMENTS-MARKET> 2,405
<LOANS> 46,872
<ALLOWANCE> 624
<TOTAL-ASSETS> 72,795
<DEPOSITS> 63,928
<SHORT-TERM> 0
<LIABILITIES-OTHER> 226
<LONG-TERM> 198
0
0
<COMMON> 2,498
<OTHER-SE> 5,945
<TOTAL-LIABILITIES-AND-EQUITY> 72,795
<INTEREST-LOAN> 4,159
<INTEREST-INVEST> 1,212
<INTEREST-OTHER> 194
<INTEREST-TOTAL> 5,565
<INTEREST-DEPOSIT> 2,379
<INTEREST-EXPENSE> 2,387
<INTEREST-INCOME-NET> 3,178
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,288
<INCOME-PRETAX> 1,210
<INCOME-PRE-EXTRAORDINARY> 835
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 835
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.17
<YIELD-ACTUAL> 4.75
<LOANS-NON> 75
<LOANS-PAST> 10
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 17
<ALLOWANCE-OPEN> 508
<CHARGE-OFFS> 69
<RECOVERIES> 185
<ALLOWANCE-CLOSE> 624
<ALLOWANCE-DOMESTIC> 624
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 234
</TABLE>
