U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
__________ TO __________
Commission file number - 33-53596
EXCHANGE BANCSHARES, INC.
----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
OHIO 34-1721453
- ------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
237 Main Street
P.O.Box 177, Luckey, Ohio 43443
- --------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(419) 833-3401
-------------------------
(Issuer's telephone number)
N/A
-------
(Former name, former address and former fiscal year, if
changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
----- ----
As of April 30, 1998, 491,095 shares of Common Stock of the Registrant were
outstanding. There were no preferred shares outstanding.
<PAGE>
EXCHANGE BANCSHARES, INC.
LUCKEY, OHIO
FORM 10-QSB
INDEX
================================================================================
Page Number
PART I FINANCIAL INFORMATION
Item. 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- 3
March 31, 1998, and December 31, 1997
Condensed consolidated statements of income
and comprehensive income -- 4
Three months ended March 31, 1998 and 1997
Condensed consolidated statements of cash flows -- 5
Three months ended March 31, 1998 and 1997
Notes to condensed consolidated financial 6
statements -- March 31, 1998, and December 31, 1997
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
<TABLE>
<CAPTION>
EXCHANGE BANCSHARES, INC.
Luckey, Ohio
CONSOLIDATED BALANCE SHEETS
=============================================================================================
(Dollars in thousands)
(Unaudited) (Unaudited)
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Assets
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 2,132 $ 2,224
Interest-bearing demand deposits in banks 38 42
Federal funds sold 5,667 3,926
------- -------
Total cash and cash equivalents 7,837 6,192
Investment securities:
Securities being held-to-maturity 1,757 2,406
(Fair value of $1,760 in 1998 and $2,405 in 1997)
Securities available-for-sale, at fair value 15,977 16,362
------- -------
Total investment securities 17,734 18,768
Loans 48,457 46,872
Allowance for loan losses (613) (624)
------- -------
Net loans 47,844 46,248
Premises and equipment, net 856 844
Accrued interest receivable 637 625
Deferred income taxes 14 10
Other assets 148 108
------- -------
Total assets $75,070 $72,795
======= =======
Liabilities
Deposits
Noninterest-bearing $ 6,504 $ 6,371
Now & MMDA accounts 10,741 9,756
Savings passbook accounts 14,991 14,591
Time deposits of $100,000 or more 5,076 5,091
Other interest-bearing 28,605 28,119
------- -------
Total deposits 65,917 63,928
Borrowed funds 196 198
Accrued interest payable 150 149
Accrued federal income taxes 103 28
Other liabilities 46 49
------- -------
Total liabilities 66,412 64,352
------- -------
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 499,534 shares issued 2,498 2,498
Additional paid-in capital 3,370 3,370
Retained earnings 2,834 2,626
Treasury stock at cost, 8,439 and 8,439 shares (126) (126)
Accumulated other comprehensive income 82 75
------- -------
Total shareholders' equity 8,658 8,443
------- -------
Total liabilities and shareholders' equity $75,070 $72,795
======= =======
- -----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
EXCHANGE BANCSHARES, INC.
Luckey, Ohio
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
===============================================================================================
(Dollars in thousands, except per share data)
(Unaudited)
3 Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Interest and dividend income
Interest and fees on loans $1,110 $ 975
Interest on investment securities:
Taxable 250 293
Exempt from federal income tax 12 17
Dividend income 4 0
Interest on federal funds sold 59 29
Interest on deposits with banks 1 0
------ ------
Total interest income 1,436 1,314
------ ------
Interest expense
Interest on interest-bearing checking accounts 63 68
Interest on savings deposits 100 98
Interest on time deposit 460 386
Interest on FHLB advances 3 0
------ ------
Total interest expense 626 552
------ ------
Net interest income 810 762
Provision for loan losses 0 0
------ ------
Net interest income after provision for loan loss 810 762
Noninterest income
Service charges on deposit accounts 62 48
Gain on sale of other assets 0 2
Other income 18 24
------ ------
Total noninterest income 80 74
------ ------
Noninterest expense
Salaries and employee benefits 277 254
Net occupancy expense 39 39
Equipment expense 42 35
FDIC deposit insurance assessment 2 1
State and other taxes 17 29
Other expense 209 179
------ ------
Total noninterest expense 586 537
------ ------
Income before income taxes 304 299
Federal income tax expense 96 92
------ ------
Net income 208 207
Other comprehensive income 7 19
------ ------
Total comprehensive income $ 215 $ 226
====== ======
Per common share data:
Basic net income 0.42 0.42
Diluted net income 0.42 0.42
- ----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
EXCHANGE BANCSHARES, INC.
Luckey, Ohio
CONSOLIDATED STATEMENTS OF CASH FLOWS
====================================================================================================
(Dollars in thousands)
(Unaudited) (Unaudited)
3 Months Ended 3 Months Ended
March 31, March 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 208 $ 207
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 30 30
Provision for loan losses 0 0
Deferred income taxes (7) (3)
Net loss on sale of other assets 0 (2)
Amortization/Accretion - net 22 27
Changes in operating assets and liabilities:
(Increase) decrease in accrued income receivable (12) 39
Increase in other assets (40) (32)
Increase in accrued interest payable 0 8
Decrease in other liabilities (3) (12)
Increase in taxes payable 75 29
------ ------
Total adjustments 65 84
------ ------
Net cash provided by operations 273 291
Cash flows from investing activities:
Purchase of held-to-maturity securities 0 0
Purchase of available-for-sale securities (1,519) (2,738)
Payments on maturities on held-to-maturity securities 641 100
Proceeds from maturities on available-for-sale securities 1,900 3,000
Net increase in loans (1,881) (2,086)
Capital purchases (43) (7)
Proceeds from sale of other real estate 0 2
Proceeds from sale of other assets 286 0
------ ------
Net cash used in investing activities (616) (1,729)
Cash flows from financing activities:
Net increase in deposits 1,989 2,357
Decrease in short-term borrowings (1) 0
Sale of treasury stock 0 0
Purchase of treasury stock 0 (36)
Dividends paid 0 0
------ ------
Net cash provided by financing activities 1,988 2,321
------ ------
Net increase in cash and cash equivalents 1,645 883
Cash and cash equivalents at beginning of period 6,192 4,694
------ ------
Cash and cash equivalents at end of period $7,837 $5,577
====== ======
Supplemental information:
Cash paid for:
Interest $ 626 $ 554
Net income taxes 28 66
- --------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
EXCHANGE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, and December 31, 1997
(Unaudited)
================================================================================
NOTE 1. BASIS OF PRESENTATION
In the opinion of Management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary for a fair presentation
of Exchange Bancshares, Inc.'s ("Company") financial condition as of March 31,
1998, and December 31, 1997, and the results of operations for the three
months ended March 31, 1998 and 1997, and the cash flows for the three months
ended March 31, 1998 and 1997. Certain information and note disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. It is
suggested that these consolidated financial statements be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB. The results of operations for the
three months ended March 31, 1998, are not necessarily indicative of the
results which may be expected for the entire fiscal year.
NOTE 2. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Three months ended Year ended
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Balance, beginning of period $624 $508
Provision for loan losses 0 0
Charge-offs (16) (69)
Recoveries 5 185
---- ----
Balance, end of period $613 $624
==== ====
</TABLE>
NOTE 3. ADVANCES FROM FEDERAL HOME LOAN BANK
Borrowings at March 31, 1998, consisted of one long-term advance totaling
$196,000 and from the Federal Home Loan Bank of Cincinnati ("FHLB"). The
advance is collateralized by all shares of FHLB stock owned by The Exchange
Bank, Luckey, Ohio, ("Bank") and by the Bank's qualified mortgage loan
portfolio.
6
<PAGE>
Scheduled maturity of the advance from the FHLB is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
At March 31, 1998 At December 31, 1997
--------------------------------- ---------------------------------
Range of Weighted- Range of Weighted-
interest average interest average
Amount rates interest rate Amount rates interest rate
------ ----- ------------- ------ ----- -------------
<S> <C> <C> <C> <C> <C> <C>
After five years $ 196 6.85% 6.85% $ 198 6.85% 6.85%
</TABLE>
The aggregate minimum future annual principal payments on borrowings are
$3,000 in 1998, $5,000 in 1999, $6,000 in 2000, $6,000 in 2001, and $176,000
after 2001.
NOTE 4. REGULATORY CAPITAL
The following table illustrates the compliance by the Bank with currently
applicable regulatory capital requirements at March 31, 1998.
<TABLE>
<CAPTION>
(Dollars in thousands)
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Risk-Based Capital $ 8,095 16.45% $ 3,824 8.0% $ 4,920 10.0%
(to Risk-Weighted Assets)
Tier I Capital 7,481 15.21% N/A N/A 2,952 6.0%
(to Risk-Weighted Assets)
Tier I Capital 7,481 10.20% 2,933 4.0% 3,666 5.0%
(to Total Assets)
Tier I Capital 7,481 10.20% 2,199 3.0% N/A N/A
(to Total Assets)
</TABLE>
NOTE 5. EARNINGS PER SHARE
Earnings per share ("EPS") is computed in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which
was adopted by the Company as of December 31, 1997. Common stock equivalents
would include shares held by the company's Employee Stock Ownership Plan
("ESOP") that are committed for release, shares awarded but not released under
the company's Recognition and Retention Plan ("RRP"), and stock options
granted under the company's Stock Option Plan ("SOP"). Currently the Company
has no such plans in existence.
7
<PAGE>
Following is a reconciliation of the numerators and denominators of the basic
and diluted EPS calculations.
<TABLE>
<CAPTION>
For the Quarter Ended March 31, 1998
------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS
Income available to
common shareholders $207,782 491,095 $0.42
=====
Effect of dilutive securities:
None 0 0
-------- -------
Diluted EPS
Income available to
common shareholders +
assumed conversions $207,782 491,095 $0.42
======== ======= =====
<CAPTION>
For the Quarter Ended March 31, 1997
------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS
Income available to
common shareholders $206,898 488,824 $0.42
=====
Effect of dilutive securities:
None 0 0
-------- -------
Diluted EPS
Income available to
common shareholders +
assumed conversions $206,898 488,824 $0.42
======== ======= =====
</TABLE>
NOTE 6. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income", effective
January 1, 1998, which establishes standards for reporting comprehensive
income and its components (revenues, expenses, gains and losses). Components
of comprehensive income are net income and all other non-owner changes in
equity. SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement
of financial position. Reclassification of financial statements for earlier
periods provided for comparative purposes is required.
8
<PAGE>
The Company has chosen to disclose comprehensive income. Components of
comprehensive income are displayed net of income taxes. The following table
sets forth the related tax effects allocated to each element of comprehensive
income for the three months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
(Dollars in thousands)
Three months ended March 31, 1998
------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
<S> <C> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period $ 11 $ (4) $ 7
Less: reclassification adjustment
for (gains) losses realized in
net income 0 0 0
------ ------ ------
Net unrealized gains (losses) 11 (4) 7
------ ------ ------
Other comprehensive income $ 11 $ (4) $ 7
====== ====== ======
<CAPTION>
(Dollars in thousands)
Three months ended March 31, 1997
------------------------------------
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
<S> <C> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period $ 29 $ (10) $ 19
Less: reclassification adjustment
for (gains) losses realized in
net income 0 0 0
------ ------ ------
Net unrealized gains (losses) 29 (10) 19
------ ------ ------
Other comprehensive income $ 29 $ (10) $ 19
====== ====== ======
</TABLE>
The following table sets forth the components of accumulated other
comprehensive income for the three months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
(Dollars in thousands)
Three months ended
March 31,
---------
1998 1997
---- ----
<S> <C> <C>
Beginning balance $ 75 $ 280
Unrealized gains (losses) on securities, net 7 19
------ ------
Ending balance $ 82 $ 299
====== ======
</TABLE>
9
<PAGE>
NOTE 7. RECLASSIFICATIONS
Certain amounts in the prior period's financial statements have been
reclassified to be consistent with the current period's presentation. The
reclassifications have no effect on net income.
10
<PAGE>
EXCHANGE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
Safe Harbor Clause
This report contains certain "forward-looking statements." The Company
desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for
the express purpose of availing itself of the protection of such safe harbor
with respect to all such forward-looking statements. These forward-looking stat
ements, which are included in Management's Discussion and Analysis, describe
future plans or strategies and include the Company's expectations of future
financial results. The words "believe," "expect," "anticipate," "estimate,"
"project," and similar expressions identify forward-looking statements. The
Company's ability to predict results or the effect of future plans or
strategies is inherently uncertain. Factors which could affect actual results
include interest rate trends, the general economic climate in the Company's
market area and the country as a whole, loan delinquency rates, and changes in
federal and state regulations. These factors should be considered in
evaluating the forward-looking statements, and undue reliance should not be
placed on such statements.
General
The Company is a bank holding company whose activities are primarily
limited to holding the stock of The Exchange Bank, Luckey, Ohio, ("Bank").
The Bank conducts a general banking business in northwest Ohio which consists
of attracting deposits from the general public and applying those funds to the
origination of loans for residential, consumer and non-residential purposes.
The Bank's profitability is significantly dependent on net interest income
which is the difference between interest income generated from
interest-earning assets (i.e., loans and investments) and the interest expense
paid on interest-bearing liabilities (i.e., customer deposits and borrowed
funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and interest received
or paid on these balances. The level of interest rates paid or received by
the Company can be significantly influenced by a number of environmental
factors, such as governmental monetary policy, that are outside of management
control.
Earnings per common share were computed by dividing net income by the
weighted-average number of shares outstanding for the three-month period ended
March 31, 1998.
The consolidated financial information presented herein has been prepared
in accordance with generally accepted accounting principles ("GAAP") and
general accounting practices within the financial services industry. In
preparing consolidated financial statements in accordance with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could differ from
such estimates.
The Company is subject to regulation by the Board of Governors of the
Federal Reserve System which limits the activities in which the Company and
the Bank may engage. The Bank is supervised by the State of Ohio, Division of
Financial Institutions and its deposits are insured up to applicable limits
under the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is a member of the Federal Reserve System and
is subject to its supervision. The 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.
The Bank conducts its business through its three offices located in Wood
and Lucas Counties, Ohio. The primary market area of the Bank is Wood and
Lucas and contiguous counties in northwest Ohio.
11
<PAGE>
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") also
issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 redefines how operating segments are determined
and requires disclosure of certain financial and descriptive information about
the Company's operating segments. This statement supercedes SFAS No. 14,
"Financial Reporting for Segments of Business Enterprises." The new standard
becomes effective for years beginning after December 15, 1997, and requires
that comparative information from earlier periods be restated to conform to
the requirements of this standard. The adoption of this statement is not
expected to be material to the Company.
Changes in Financial Condition
At March 31, 1998, the consolidated assets of the Company totaled $75.1
million, an increase of $2.3 million, or 3.13%, from $72.8 million at December
31, 1997. The increase in total assets was primarily the result of a $1.6
million increase in loans being supported by a $2.0 million increase in
deposits.
Net loans receivable increased by $1.6 million, or 3.46%, to $47.8
million at March 31, 1998, compared to $46.2 million at December 31, 1997.
The increase was primarily in the real estate loan portfolio and in the
commercial loan portfolio where the new loan demand continued to exceed loan
repayments.
Investment securities decreased $1.0 million, or 5.51%, from $18.8
million at December 31, 1997, to $17.7 million at March 31, 1998. The
decrease was primarily the result of scheduled maturities of short-term
investment being rolled into higher earning real estate and commercial loan
production as a part of the Company's strategy to expand their loan product
base.
Funds received from the deposit increases and the investment decreases
were temporally invested in federal funds which increased $1.7 million, or
44.35%, from $3.9 million at December 31, 1997, to $5.7 million at March 31,
1998.
Deposit liabilities increased $2.0 million, or 3.11%, from $63.9 million
at December 31, 1997, to $65.9 million at March 31, 1998. Management
attributes the increase to the maintaining of competitive rates in our market
area. Interest credited on accounts also contributed to the increase.
Total shareholders' equity increased $215,000, or 2.55%, from $8.4
million at December 31, 1997, to $8.7 million at March 31, 1998. This
increase was primarily the result of $208,000 in earnings for the first
quarter and a $7,000 increase in the unrealized gains on securities
available-for-sale during the three months ended March 31, 1998.
The Bank's liquidity, primarily represented by cash and cash equivalents,
is a result of its operating, investing and financing activities. Principal
sources of funds are deposits, loan and mortgage-backed security repayments,
maturities of securities and other funds provided by operations. The Bank
also has the ability to borrow from the FHLB. While scheduled loan repayments
and maturing investments are relatively predictable, deposit flows and early
loan and mortgage-backed security prepayments are more influenced by interest
rates, general economic conditions and competition. The Bank maintains
investments in liquid assets based upon management's assessment of (i) the
need for funds, (ii) expected deposit flows, (iii) the yields available on
short-term liquid assets and (iv) the objectives of the asset/liability
management program. In the ordinary course of business, part of such liquid
investments portfolio is composed of deposits at correspondent banks.
Although the amount on deposit at such banks often exceeds the $100,000 limit
covered by FDIC insurance, the Bank monitors the capital of such institutions
to ensure that such deposits do not expose the Bank to undue risk of loss.
The Asset/Liability Management Committee of the Bank is responsible for
liquidity management. This committee, which is comprises of various managers,
has an Asset/Liability Policy that covers all assets and liabilities, as well
as off-balance sheet items that are potential sources and uses of liquidity.
The Bank's liquidity management objective is to maintain the ability to meet
commitments to fund loans and to purchase securities, as well as to repay
deposits and other liabilities in accordance with their terms. The Bank's
overall approach to liquidity management is to ensure that sources of
liquidity are sufficient in amounts and diversity to accommodate changes in
12
<PAGE>
loan demand and deposit fluctuations without a material adverse impact on net
income. The Committee monitors the Bank's liquidity needs on an ongoing
basis. Currently the Bank has several sources available for both short- and
long-term liquidity needs. These include, but are not restricted to advances
from the FHLB, Federal Funds and borrowings from the Federal Reserve Bank and
other correspondent banking arrangements.
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 can initiate certain
mandatory, and possible additional discretionary actions by regulators that,
if undertaken, could have a material affect on the Company 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 the regulation to ensure capital
adequacy requires the Bank to maintain minimum amounts and ratios of: total
risk-based capital and Tier I capital to risk-weighted assets (as defined by
the regulations), and Tier I capital to average assets (as defined).
Management believes, as of March 31, 1998, that the Bank meets all of the
capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the FDIC, the
Bank was 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 Note 4 - Regulatory Capital. There are no
conditions or events since the most recent notification that management
believes have changed the Bank's prompt corrective action category.
At March 31, 1998, Exchange Bancshares had no material commitments for
capital expenditures.
Results of Operations
Comparison of Three Months Ended March 31, 1998 and 1997
General. Net income remained relatively constant for the three months
ended March 31, 1998, $208,000, as compared to the three months ended March
31, 1997, $207,000, an increase of $1,000. This increase was primarily
attributed to an increase in net interest income being off-set by an increase
in non-interest expense.
Interest Income. The $6.0 million increase in average earning assets
contributed to an increase in interest income of $122,000, or 9.28%, for the
three months ended March 31, 1998 compared to 1997. The increase was
attributed to the additional loan income of $135,000 resulting from an
increase in loans receivable and $30,000 increase in federal funds sold which
was offset by a decrease of $43,000 in interest income as a result of the
decrease in all other categories of earning assets.
Interest Expense. Interest expense on deposit liabilities increased
$71,000 for the three months ended March 31, 1998, as compared to the same
period in 1997. Total deposits increased by $2.0 million comparing March 31,
1998 to 1997, the average interest paid on interest-bearing deposits increased
by 8 basis points from 4.11% for the three months ended March 31, 1997, to
4.19% for the same period ended March 31, 1998. The FHLB advance outstanding
during the three-month period ended March 31, 1998, resulted in an increase in
interest expense of $3,000 in 1998 compared to no interest expense for the
same period ended March 31, 1997.
Provision for Loan Losses. There were no provisions for loan losses and
there were net charge-offs of $11,000 during the three months ended March 31,
1998, compared to no provisions and net recoveries of $116,000 during the
three months ended March 31, 1997. The absence of a provision was based upon
the results of the ongoing loan reviews and composition of the loan portfolio,
primarily loans secured by one-to four-family residential properties and other
forms of collateral, which are considered to have less risk.
13
<PAGE>
Non-Interest Income. Non-interest income increased $6,000, or 8.11%, to
$80,000 for the three months ended March 31, 1998, from $74,000 for the three
months ended March 31, 1997. The increase was primarily attributable to a
$14,000 increase in service charges on deposit accounts being off-set by a
decrease in other income of $6,000 and a $2,000 loss recognized on the sale of
fixed assets in the three months ended March 31, 1997.
Non-Interest Expense. Non-interest expense increased $49,000, or 9.12%,
to $586,000 for the three months ended March 31, 1998, from $537,000 in the
comparable period in 1997. Of this increase, $23,000 was attributable to an
increase in compensation and benefit expense in 1998, reflecting normal salary
benefit adjustments. Legal, accounting and examination expenses remained
relatively constant with the remainder of the general expenses increasing
slightly over the levels experienced during the first quarter of 1997. The
ratio of non-interest expense to average total assets was 3.18% and 3.09% for
the three months ended March 31, 1998 and 1997, respectively.
Income Taxes. The provision for income taxes increased $4,000 for the
three months ended March 31, 1998, compared with the prior year, primarily as
a result of higher taxable income for the quarter.
14
<PAGE>
EXCHANGE BANCSHARES, INC.
PART II - OTHER INFORMATION
================================================================================
ITEM 1 - LEGAL PROCEEDINGS
Not Applicable
ITEM 2 - CHANGES IN SECURITIES
Not Applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5 - OTHER INFORMATION
Not Applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit 27: Financial Data Schedule
b. No reports on Form 8-K were filed during the quarter
ended March 31, 1998.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
EXCHANGE BANCSHARES, INC.
Date /s/ May 14, 1998 /s/ Marion Layman
--------------------- -------------------------
Marion Layman
Chairman, President, and Chief Executive
Officer
Date /s/ May 14, 1998 /s/ Marion Layman
--------------------- -------------------------
Marion Layman
Principal Accounting and Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997 and the
related Consolidated Statements of Income and Comprehensive Income for the three
months ended March 31, 1998 and 1997, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000720912
<NAME> EXCHANGE BANCSHARES, INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 2,132
<INT-BEARING-DEPOSITS> 38
<FED-FUNDS-SOLD> 5,667
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,977
<INVESTMENTS-CARRYING> 1,757
<INVESTMENTS-MARKET> 1,760
<LOANS> 48,457
<ALLOWANCE> 613
<TOTAL-ASSETS> 75,070
<DEPOSITS> 65,917
<SHORT-TERM> 0
<LIABILITIES-OTHER> 299
<LONG-TERM> 196
0
0
<COMMON> 2,498
<OTHER-SE> 6,160
<TOTAL-LIABILITIES-AND-EQUITY> 75,070
<INTEREST-LOAN> 1,110
<INTEREST-INVEST> 266
<INTEREST-OTHER> 60
<INTEREST-TOTAL> 1,436
<INTEREST-DEPOSIT> 623
<INTEREST-EXPENSE> 3
<INTEREST-INCOME-NET> 810
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 587
<INCOME-PRETAX> 304
<INCOME-PRE-EXTRAORDINARY> 208
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 208
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.42
<YIELD-ACTUAL> 4.64
<LOANS-NON> 16
<LOANS-PAST> 10
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 624
<CHARGE-OFFS> 16
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 613
<ALLOWANCE-DOMESTIC> 613
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 230
</TABLE>
