1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____ to _____.
Commission file number: 0-28648
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Ohio State Bancshares, Inc.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Ohio 34-1816546
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
111 South Main Street, Marion, Ohio 43302
-----------------------------------------
(Address of principal executive offices)
(740) 387-2265
---------------------------
(Issuer's telephone number)
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common stock, $10.00 par value 146,000 common shares
outstanding at July 31, 2000
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
2
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2000
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets ........................... 3
Condensed Consolidated Statements of Income ..................... 4
Condensed Consolidated Statements of Changes in
Shareholders' Equity .......................................... 6
Condensed Consolidated Statements of Cash Flows ................. 7
Notes to the Condensed Consolidated Financial Statements ........ 8
Item 2. Management's Discussion and Analysis ............................ 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 19
Item 2. Changes in Securities and Use of Proceeds ...................... 19
Item 3. Defaults Upon Senior Securities ................................ 19
Item 4. Submission of Matters to a Vote of Security Holders ............ 19
Item 5. Other Information .............................................. 19
Item 6. Exhibits and Reports on Form 8-K ............................... 19
SIGNATURES .............................................................. 20
3
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
- --------------------------------------------------------------------------------
June 30, December 31,
2000 1999
---- ----
ASSETS
Cash and due from financial institutions $ 1,788,993 $ 2,255,869
Federal funds sold -- 876,000
----------- -----------
Cash and cash equivalents 1,788,993 3,131,869
Securities available for sale 11,039,251 11,552,953
Securities held to maturity (fair value June 30, 2000 -
$3,525,749, December 31, 1999 - $3,654,914) 3,666,734 3,819,444
Loans, net 51,257,349 48,478,479
Premises and equipment, net 1,019,040 1,076,551
Other real estate owned and repossessions 11,956 10,756
Accrued interest receivable 492,252 450,021
Other assets 566,986 586,692
----------- -----------
$69,842,561 $69,106,765
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 7,458,911 $ 7,718,439
Interest-bearing 54,648,381 55,012,757
----------- -----------
Total 62,107,292 62,731,196
Federal funds purchased 594,000 --
Federal Home Loan Bank borrowings 1,500,000 1,000,000
Accrued interest payable 231,072 255,532
Other liabilities 209,470 102,742
----------- -----------
Total liabilities 64,641,834 64,089,470
Shareholders' equity
Common stock, $10.00 par value; 500,000 shares authorized;
146,000 shares issued and outstanding 1,460,000 1,460,000
Additional paid-in capital 2,652,709 2,652,709
Retained earnings 1,426,441 1,250,970
Accumulated other comprehensive income (loss) (338,423) (346,384)
----------- -----------
Total shareholders' equity 5,200,727 5,017,295
----------- -----------
$69,842,561 $69,106,765
=========== ===========
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See accompanying notes to the condensed consolidated financial statements.
3.
4
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $1,157,874 $1,008,293 $2,255,084 $1,876,907
Taxable securities 185,752 201,724 368,603 353,250
Nontaxable securities 49,451 50,765 100,144 92,435
Federal funds sold and other 8,816 31,738 21,122 99,178
---------- ---------- ---------- ----------
Total interest income 1,401,893 1,292,520 2,744,953 2,421,770
INTEREST EXPENSE
Deposits 627,819 554,966 1,241,005 1,088,251
Other borrowings 6,137 -- 14,482 24
---------- ---------- ---------- ----------
Total interest expense 633,956 554,966 1,255,487 1,088,275
---------- ---------- ---------- ----------
NET INTEREST INCOME 767,937 737,554 1,489,466 1,333,495
Provision for loan losses 75,000 120,000 150,000 152,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 692,937 617,554 1,339,466 1,181,495
NONINTEREST INCOME
Fees for customer services 64,685 57,299 129,276 114,394
Net gains on sales of securities available
for sale -- -- -- 12,772
Other 6,742 24,287 22,080 30,723
---------- ---------- ---------- ----------
Total noninterest income 71,427 81,586 151,356 157,889
NONINTEREST EXPENSE
Salaries and employee benefits 278,221 249,966 561,457 491,225
Occupancy and equipment 100,836 86,319 210,036 177,150
Office supplies 30,814 29,238 56,267 49,398
FDIC and state assessments 7,624 4,747 14,207 9,469
Professional fees 35,047 24,835 57,649 42,446
Advertising and public relations 12,952 12,900 28,781 19,988
Taxes, other than income 15,641 15,769 30,091 31,569
Loss on other real estate owned and
repossessions -- 7,000 -- 26,000
Credit card processing expense 15,417 7,741 31,195 19,000
Director fees 12,651 14,100 25,985 28,200
Insurance 6,617 6,751 13,391 13,392
Other 86,176 44,553 156,932 101,634
---------- ---------- ---------- ----------
Total noninterest expense 601,996 503,919 1,185,991 1,009,471
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING METHOD 162,368 195,221 304,831 329,913
Income tax expense 43,955 57,531 85,560 97,014
---------- ---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING METHOD 118,413 137,690 219,271 232,899
Cumulative effect on prior years of a change in
accounting for start-up costs -- -- -- (24,061)
---------- ---------- ---------- ----------
NET INCOME $ 118,413 $ 137,690 $ 219,271 $ 208,838
========== ========== ========== ==========
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(Continued)
4.
5
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
BASIC AND DILUTED EARNINGS PER SHARE:
Before cumulative effect of a change in
accounting method $ .81 $ .98 $ 1.50 $ 1.72
Cumulative effect on prior years of a
change in accounting for start-up costs -- -- -- (.18)
-------- -------- -------- --------
BASIC AND DILUTED EARNINGS PER SHARE $ .81 $ .98 $ 1.50 $ 1.54
======== ======== ======== ========
Weighted average shares outstanding 146,000 140,392 146,000 135,218
======== ======== ======== ========
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See accompanying notes to the condensed consolidated financial statements.
5.
6
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
Balance at beginning of period $5,129,226 $4,495,361 $5,017,295 $4,191,209
Proceeds from sale of 11,942 and 19,780
shares of common stock, net of
offering costs -- 533,190 -- 843,582
Cash dividends ($.30 per share in 2000
and $.25 per share in 1999) (43,800) (36,500) (43,800) (36,500)
Comprehensive income:
Net income 118,413 137,690 219,271 208,838
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects (3,112) (161,430) 7,961 (238,818)
---------- ---------- ---------- ----------
Total comprehensive income (loss) 115,301 (23,740) 227,232 (29,980)
---------- ---------- ---------- ----------
Balance at end of period $5,200,727 $4,968,311 $5,200,727 $4,968,311
========== ========== ========== ==========
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See accompanying notes to the consolidated financial statements.
6.
7
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
Six Months Ended
June 30,
--------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 219,271 $ 208,838
Adjustments to reconcile net income to net cash from
operating activities
Net amortization of securities 9,967 10,341
Provision for loan losses 150,000 152,000
Depreciation and amortization 84,459 61,892
Net realized gains on sales of securities -- (12,772)
Federal Home Loan Bank stock dividends (7,200) (6,600)
Loss on other real estate owned and repossessions -- 26,000
Loss on sale of premises and equipment -- 785
Change in deferred loan costs (2,594) 119,735
Change in accrued interest receivable (42,231) (79,159)
Change in accrued interest payable (24,460) (46,131)
Change in other assets and other liabilities 122,333 (95,278)
----------- ------------
Net cash from operating activities 509,545 339,651
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (570,375) (5,100,493)
Maturities, prepayments and calls 1,096,082 1,791,931
Sales -- 487,188
Securities held to maturity:
Purchases -- (626,250)
Maturities and calls 150,000 --
Loan originations and payments, net (2,999,476) (7,294,828)
Proceeds from sale of other real estate owned and repossessions 72,000 105,275
Proceeds from sale of premises and equipment -- 4,000
Purchases of premises and equipment (26,948) (107,828)
----------- ------------
Net cash from investing activities (2,278,717) (10,741,005)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (623,904) 5,051,483
Net changes in short-term borrowings 1,094,000 --
Cash dividends paid (43,800) --
Net proceeds from sale of stock -- 843,582
----------- ------------
Net cash from financing activities 426,296 5,895,065
----------- ------------
Net change in cash and cash equivalents (1,342,876) (4,506,289)
Cash and cash equivalents at beginning of period 3,131,869 8,015,195
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,788,993 $ 3,508,906
=========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,279,947 $ 1,134,406
Income taxes paid -- 135,000
SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers from loans to other real estate owned and repossessions $ 73,200 $ 75,320
- --------------------------------------------------------------------------------
See accompanying notes to the condensed consolidated financial statements.
7.
8
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the consolidated financial position of Ohio State Bancshares, Inc. at June 30,
2000, and its results of operations and cash flows for the periods presented.
All such adjustments are normal and recurring in nature. The accompanying
consolidated financial statements have been prepared in accordance with the
instructions of Form 10-QSB and, therefore, do not purport to contain all
necessary financial disclosures required by generally accepted accounting
principles that might otherwise be necessary in the circumstances, and should be
read in conjunction with the consolidated financial statements and notes thereto
of Ohio State Bancshares, Inc. for the year ended December 31, 1999, included in
its 1999 Annual Report. Reference is made to the accounting policies of Ohio
State Bancshares, Inc. described in the notes to consolidated financial
statements contained in its 1999 Annual Report. Ohio State Bancshares, Inc. has
consistently followed these policies in preparing this Form 10-QSB.
The accompanying consolidated financial statements include the accounts of Ohio
State Bancshares, Inc. ("OSB") and its wholly-owned subsidiary, The Marion Bank
("Bank"), together referred to as the Corporation. Intercompany transactions and
balances have been eliminated.
The Corporation provides financial services through its main and branch office
in Marion, Ohio. Its primary deposit products are checking, savings, and term
certificate accounts, and its primary lending products are residential mortgage,
commercial, and installment loans. Substantially all loans are secured by
specific items of collateral including business assets, consumer assets and real
estate. Commercial loans are expected to be repaid from cash flow from
operations of businesses. Real estate loans are secured by both residential and
commercial real estate. The Corporation is primarily organized to operate in the
banking industry. Substantially all revenues and services are derived from
banking products and services in Marion County and contiguous counties.
Accordingly, the Corporation's operations are considered by management to be
aggregated in one reportable operating segment.
To prepare financial statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions based on available
information. These estimates and assumptions affect amounts reported in the
financial statements and the disclosures provided, and future results could
differ. The allowance for loan losses, fair values of financial instruments and
the status of contingencies are particularly subject to change.
Basic earnings per share is net income divided by the weighted average number of
common shares outstanding during the period. Diluted earnings per share is not
currently applicable since the Corporation has no potentially dilutive common
shares.
Income tax expense is based on the effective tax rate expected to be applicable
for the entire year. Income tax expense is the total of the current year income
tax due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax amounts for the
temporary differences between the carrying amounts and tax basis of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
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(Continued)
8.
9
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Corporation adopted Statement of Position ("SOP") 98-5, "Reporting on the
Costs of Start-Up Activities" effective January 1, 1999. It requires costs of
start-up activities and organizational costs be expensed as incurred. As a
result, the Corporation expensed, at January 1, 1999, the remaining unamortized
organizational costs associated with the formation of the holding company in
1996. The amount is shown on the Statement of Income as a cumulative effect of a
change in accounting method.
Statement of Financial Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" requires companies to record derivatives on
the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. SFAS No. 133 does not allow hedging of a security which is
classified as held to maturity. Upon adoption of SFAS No. 133, companies may
reclassify any security from held to maturity to available for sale if they wish
to be able to hedge the security in the future. SFAS No. 133, as amended by SFAS
No. 137, is effective for fiscal years beginning after June 15, 2000, with early
adoption encouraged for any fiscal quarter beginning July 1, 1998 or later, with
no retroactive application. Management does not expect the adoption of SFAS No.
133 to have a significant impact on the Corporation's financial statements.
NOTE 2 - SECURITIES
Securities at June 30, 2000 and December 31, 1999 were as follows:
June 30, 2000
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
U.S. Treasury $ 899,099 $ -- $ (4,787) $ 894,312
U.S. government and federal agencies 5,344,338 156 (270,547) 5,073,947
Mortgage-backed 5,051,436 -- (237,584) 4,813,852
----------- ------- ---------- -----------
Total debt securities 11,294,873 156 (512,918) 10,782,111
Other securities 257,140 -- -- 257,140
----------- ------- ---------- -----------
Total $11,552,013 $ 156 $(512,918) $11,039,251
=========== ======= ========= ===========
HELD TO MATURITY
State and municipal $ 3,666,734 $22,407 $(163,392) $ 3,525,749
=========== ======= ========= ===========
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(Continued)
9.
10
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
December 31, 1999
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
U.S. Treasury $ 898,475 $ 261 $ (4,579) $ 894,157
U.S. government and federal agencies 5,279,823 -- (244,788) 5,035,035
Mortgage-backed 5,649,539 -- (275,718) 5,373,821
----------- ------- --------- -----------
Total debt securities 11,827,837 261 (525,085) 11,303,013
Other securities 249,940 -- -- 249,940
----------- ------- --------- -----------
Total $12,077,777 $ 261 $(525,085) $11,552,953
=========== ======= ========= ===========
HELD TO MATURITY
State and municipal $ 3,819,444 $19,882 $(184,412) $ 3,654,914
=========== ======= ========= ===========
Proceeds from sales of securities classified as available for sale were $487,188
during the six-month period ended June 30, 1999. Gross gains of $12,772 were
realized on the sales during the six-month period ending June 30, 1999. There
were no security sales during the three or six-month period ended June 30, 2000
and the three months ended June 30, 1999.
The amortized cost and estimated fair values of securities at June 30, 2000, by
contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because certain borrowers may have the right to call or
repay obligations with or without penalties.
Available-for-Sale Securities Held-to-Maturity Securities
----------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Due in one year or less $ 799,252 $ 794,812 $ -- $ --
Due in one to five years 3,445,690 3,310,447 -- --
Due in five to ten years -- -- 1,078,030 1,087,335
Due after ten years 1,998,495 1,863,000 2,588,704 2,438,414
Mortgage-backed securities 5,051,436 4,813,852 -- --
Other securities 257,140 257,140 -- --
----------- ----------- ---------- ----------
$11,552,013 $11,039,251 $3,666,734 $3,525,749
=========== =========== ========== ==========
Securities with a carrying value of approximately $6,393,000 at June 30, 2000
and $6,496,000 at December 31, 1999 were pledged to secure deposits and for
other purposes.
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(Continued)
10.
11
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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NOTE 3 - LOANS
Loans at June 30, 2000 and December 31, 1999 were as follows:
June 30, December 31,
2000 1999
---- ----
Commercial $14,706,278 $14,880,924
Installment 25,788,644 25,293,544
Real estate 10,018,868 7,543,953
Credit card 664,857 683,629
Other 24,777 27,841
----------- -----------
51,203,424 48,429,891
Net deferred loan costs 557,724 555,130
Allowance for loan losses (503,799) (506,542)
----------- -----------
$51,257,349 $48,478,479
=========== ===========
Activity in the allowance for loan losses for the six months ended June 30, 2000
and 1999 was as follows:
2000 1999
---- ----
Balance - January 1 $ 506,542 $ 360,093
Loans charged-off (209,563) (197,230)
Recoveries 56,820 69,678
Provision for loan losses 150,000 152,000
--------- ---------
Balance - June 30 $ 503,799 $ 384,541
========= =========
Impaired loans during the six months ended June 30, 2000 and 1999 were as
follows:
Average of impaired loans during the period $ -- $416,767
Interest income recognized during impairment -- 54,251
Cash-basis interest income recognized -- 54,251
The balance of impaired loans at June 30, 2000 and December 31, 1999 was not
material.
Nonperforming loans were as follows:
June 30, December 31,
2000 1999
---- ----
Loans past due over 90 days still on accrual $ 13,065 $172,052
Loans on nonaccrual 174,439 227,851
Nonperforming loans include smaller balance homogeneous loans such as
residential real estate, installment and credit card loans that are collectively
evaluated for impairment.
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(Continued)
11.
12
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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NOTE 4 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
Various contingent liabilities are not reflected in the financial statements,
including claims and legal actions arising in the ordinary course of business.
In the opinion of management, after consultation with legal counsel, the
ultimate disposition of these matters is not expected to have a material effect
on the financial condition or results of operations.
Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support he credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used. Off-balance-sheet
risk to credit loss exists up to the face amount of these instruments, although
material losses are not anticipated. The same credit policies are used to make
such commitments as are used for loans, including obtaining collateral at
exercise of the commitment.
Commitments to extend credit, primarily in the form of undisbursed portions of
approved lines of credit, consist primarily of variable rate commitments. The
interest rates on these commitments ranged from 6.25% to 18.00% at June 30, 2000
and 8.00% to 14.25% at December 31, 1999. Outstanding commitments for credit
cards had interest rates ranging from 12.00% to 18.00% as of June 30, 2000 and
from 12.00% to 16.25% as of December 31, 1999.
A summary of the contractual amounts of financial instruments with
off-balance-sheet risk at June 30, 2000 and December 31, 1999 follows:
June 30, December 31,
2000 1999
---- ----
Commitments to extend credit $2,867,000 $4,400,000
Credit card arrangements 2,486,000 2,394,000
Letters of credit 10,000 30,000
- --------------------------------------------------------------------------------
(Continued)
12.
13
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (Continued)
At June 30, 2000 and December 31, 1999 the Bank had a line of credit enabling it
to borrow up to $4,346,000 and $4,196,000 with the Federal Home Loan Bank of
Cincinnati. Borrowings of $1,500,000 and $1,000,000 were outstanding on this
line of credit as of June 30, 2000 and December 31, 1999. Advances under the
agreement are collateralized by a blanket pledge of the Bank's real estate
mortgage loan portfolio and Federal Home Loan Bank stock.
The Bank's branch facility is leased under an operating lease. The lease term is
for twenty years. At the conclusion of the fifth, tenth and fifteenth years, the
rent shall be adjusted by 50% of the cumulative increase in the Consumer Price
Index over the previous five years with a minimum of 5% increase and a maximum
of 10% increase for any one five-year period. Total rental expense was $9,687
for the three months ended June 30, 2000 and 1999, and $19,374 for the six
months ended June 30, 2000 and June 30, 1999.
Rental commitments under these noncancelable operating leases are:
Year ending June 30,
2001 $ 38,748
2002 39,852
2003 40,685
2004 40,685
2005 40,685
Thereafter 496,063
--------
$696,718
========
NOTE 5 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows for the
six months ended June 30, 2000 and 1999:
Three Months ended Six Months Ended
June 30 June 30
------- -------
2000 1999 2000 1999
---- ---- ---- ----
Unrealized holding gains and losses on
available-for-sale securities $(4,715) $(244,414) $12,062 $(349,073)
Reclassification adjustments for (gains)
and losses later recognized as income -- -- -- (12,772)
------- --------- ------- ---------
Net unrealized gains and losses (4,715) (244,414) 12,062 (361,845)
Tax effect 1,603 82,984 (4,101) 123,027
======= ========= ======= =========
Other comprehensive income (loss) $(3,112) $(161,430) $ 7,961 $(238,818)
======= ========= ======= =========
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(Continued)
13.
14
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 6 - REGULATORY MATTERS
On February 10, 2000, the Corporation entered into a Memorandum of Understanding
("MOU") by and among The Marion Bank, Ohio Division of Financial Institutions
and the Federal Deposit Insurance Corporation ("FDIC"), whereby the Bank has
agreed to comply with certain directives which are intended to correct
operational deficiencies and improve overall financial condition.
Under the terms of the MOU, the Bank may not pay dividends to OSB without the
prior written approval of the Ohio Division of Financial Institutions and the
FDIC. However, this restriction does not prevent OSB from paying dividends to
its shareholders from its available assets. Additionally, the MOU requires the
Bank to, among other things, retain an independent consulting firm to prepare a
findings and recommendations report on the effectiveness of Bank's management
and Board of Directors and engage an independent public accounting firm to
perform an attestation engagement on the Bank's assessment of the internal
control structure for 2000 and 2001 and to review certain general ledger
accounts and internal checking accounts. Finally, the Bank must implement a risk
monitoring system related to certain types of loans and maintain adequate
allowance for loan losses, correct weaknesses in internal control as identified
by examiners from the Ohio Division of Financial Institutions and establish
written policies and procedures to ensure that transactions with Bank insiders,
and their related interests, are handled in a proper manner. The Bank is
implementing corrective actions to comply with the provisions discussed above.
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14.
15
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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INTRODUCTION
The following discussion focuses on the consolidated financial condition of Ohio
State Bancshares, Inc. at June 30, 2000, compared to December 31, 1999, and the
consolidated results of operations for the three and six months ended June 30,
2000, compared to the same periods in 1999. The purpose of this discussion is to
provide the reader with a more thorough understanding of the consolidated
financial statements than what could be obtained from an examination of the
financial statements alone. This discussion should be read in conjunction with
the interim consolidated financial statements and related footnotes.
When used in this Form 10-QSB or future filings by the Corporation with the
Securities and Exchange Commission, in press releases or other public or
shareholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project,"
"believe," or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The Corporation wishes to caution readers not to place undue reliance
on any such forward-looking statements, which speak only as of the date made,
and to advise readers that various factors, including regional and national
economic conditions, changes in levels of market interest rates, credit risks of
lending activities and competitive and regulatory factors, could affect the
Corporation's financial performance and could cause the Corporation's actual
results for future periods to differ materially from those anticipated or
projected. The Corporation does not undertake, and specifically disclaims, any
obligation to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
See Exhibit 99, which is incorporated herein by reference.
The Corporation is not aware of any trends, events or uncertainties that will
have or are reasonably likely to have a material effect on the liquidity,
capital resources or operations except as discussed herein.
FINANCIAL CONDITION
The Corporation has experienced 1.06% asset growth since December 31, 1999, as
total assets increased $736,000 from $69,107,000 at December 31, 1999 to
$69,843,000 at June 30, 2000. Most of this growth is attributable to the
$2,779,000 growth in net loans offset by a decrease of $1,343,000 of cash and
cash equivalents for the same period.
Securities available for sale and securities held to maturity decreased $666,000
from $15,372,000 at December 31, 1999 to $14,706,000 at June 30, 2000. The
decrease was due to maturities or calls and principal repayments on
mortgage-backed securities. There were no sales of securities during this
six-month period.
Net loans increased $2,779,000, or 5.73% during the period from December 31,
1999 to June 30, 2000. This growth was funded primarily from available cash and
increased borrowings from the Federal Home Loan Bank. The loan growth was
primarily attributable to real estate loans which increased $2,475,000, or
32.81% from December 31, 1999. The real estate loan growth was primarily due to
the hiring of a new loan officer in the first quarter of 1999 who focuses
exclusively on the real estate portfolio. This has resulted in steady growth
since the new loan officer was hired and improved the diversity of the
Corporation's loan portfolio. Commercial loans decreased 1.17% from $14,881,000
on December 31, 1999 to $14,706,000 on June 30, 2000. Installment loans
increased 1.96% from $25,294,000 on December 31, 1999 to $25,789,000 on June 30,
2000.
The allowance for loan losses decreased to .98% of loans as of June 30, 2000
compared to 1.05% at December 31, 1999. The decline occurred due to net
charge-offs exceeding the provision for loan losses for the six months ended
June 30, 2000 and loan growth. All but $21,000 of loans charged-off during the
six months ended June 30, 2000 were either installment or credit cards.
Management is actively monitoring problem loans and has increased
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15.
16
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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collection efforts to reduce charge-offs in future periods. As a result,
nonperforming loans have declined from $400,000 at December 31, 2000 to $188,000
at June 30, 2000. Should charge-offs continue, management will increase the
provision for loan losses in order to maintain the allowance for loan losses at
a level adequate to absorb probable losses in the loan portfolio.
Total deposits decreased $624,000, or .99% from December 31, 1999 to June 30,
2000. The decrease in deposits was primarily due to the cyclical cash needs of
customers. To compensate for the slight decrease in deposits, management
utilized short term borrowings to fund loan growth increasing total borrowings
from $1,000,000 at December 31, 1999 to $2,094,000 at June 30, 2000.
RESULTS OF OPERATIONS
The operating results of the Corporation are affected by general economic
conditions, the monetary and fiscal policies of federal agencies and the
regulatory policies of agencies that regulate financial institutions. The
Corporation's cost of funds is influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
influenced by consumer and business demand, which, in turn, is affected by the
interest rates at which such loans are made, general economic conditions and the
availability of funds for lending activities.
The Corporation's net income is primarily dependent upon its net interest
income, which is the difference between interest income generated on
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Provisions for loan losses, service charges, gains on the sale of
assets and other income, noninterest expense and income taxes also affect net
income.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Net income for the six months ended June 30, 2000 was $219,000 or $10,000 more
than the same period in 1999. The reason for the increase in earnings was
primarily due to an increase in net interest income of $156,000 and the
write-off of remaining organization costs of $24,000 taken during the first
quarter of 1999 were offset by an increase in noninterest expense of $177,000.
Net interest income is the largest component of Corporation's income and is
affected by the interest rate environment and the volume and composition of
interest-earning assets and interest-bearing liabilities. Net interest income
increased by $156,000 for the six months ended June 30, 2000 compared to the
same period in 1999. The increase in net interest income is attributable to the
Corporation's average earning assets increasing from $59,933,000 for the six
months ended June 30, 1999 to $65,956,000 for the six months ended June 30, 2000
combined with a slight increase in the Corporation's net interest margin.
Noninterest expense was up $177,000, or 17.5% for the six months ended June 30,
2000 versus the six months ended June 30, 1999. Normal salary increases and the
hiring of additional personnel, increased occupancy and equipment expense due to
the amortization of the Jack Henry Associates 20/20 software which the Bank
converted to in April 1999, increased advertising expenses, added professional
fees, and increased other expenses primarily due to loan collection expense were
the major reasons for the increase in noninterest expense.
The Bank entered into a Memorandum of Understanding ("MOU") with the Ohio
Division of Financial Institutions and Federal Deposit Insurance Corporation on
February 10, 2000. The MOU imposes certain restrictions, which are more fully
discussed in Note 6 to the Consolidated Financial Statements.
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16.
17
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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Management recognizes the importance of complying with the provisions of the
above mentioned MOU. As management's focus has turned towards internal matters,
such as internal controls and asset quality, growth has slowed as compared to
the past few years. Additionally, operating expenses such as professional fees
and other expenses have increased in 2000 to comply with this matter.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Net income for the three months ended June 30, 2000 was $118,000 or $19,000 less
than the same period in 1999. The reason for the decrease in earnings was
primarily due to an increase in non-interest expense partially offset by an
increase in net interest income and a decrease in the provision for loan losses.
Net interest income increased by $30,000 for the three months ended June 30,
2000 compared to the same period in 1999. The increase in net interest income is
attributable to the Corporation's average earning assets increasing from
$61,439,000 for the three months ended June 30, 1999 to $67,251,000 for the
three months ended June 30, 2000.
The provision for loan losses decreased due to charge-offs experienced in the
second quarter of 1999. Management had to increase the provision in order to
maintain an adequate allowance for loan losses with the growth of the loan
portfolio and to offset the charge-offs which were occurring. As a result,
management increased collection efforts to reduce future charge-offs.
Management's efforts have been successful in reducing loan delinquencies.
However, charge-offs have remained consistent with the prior year.
Noninterest expense was up $98,000, or 19.5% for the three months ended June 30,
2000 versus the three months ended June 30, 1999. Normal salary increases and
the addition of personnel compared to the prior year, increased occupancy and
equipment expense due to the amortization of the Jack Henry Associates 20/20
software which the Bank converted to in April 1999, and added professional fees
and other expenses associated with implementation of corrective actions to
comply with the MOU were the major reasons for the increase in noninterest
expense.
CAPITAL RESOURCES
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective-action
regulations involve quantitative measures of assets, liabilities and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings and other factors, and regulators
can lower classifications in certain cases. Failure to meet various capital
requirements can initiate regulatory action having a direct material affect on
the operations of the Bank.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
Capital to risk-
weighted assets Tier 1 capital
--------------- --------------
Total Tier 1 to average assets
----- ------ -----------------
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
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17.
18
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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At June 30, 2000 and December 31, 1999, the actual capital ratios for the Bank
were:
June 30, December 31,
2000 1999
---- ----
Total capital to risk-weighted assets 10.5% 10.4%
Tier 1 capital to risk-weighted assets 9.5 9.4
Tier 1 capital to average assets 7.0 6.8
At June 30, 2000 and December 31 1999, the Bank was categorized as well
capitalized. However, the MOU requires the Bank to, among other things, obtain
prior written approval from the Ohio Division of Financial Institutions and
Federal Deposit Insurance Corporation before paying dividends from the Bank to
OSB. The provisions of the MOU are more fully discussed in Note 6 to the
Condensed Consolidated Financial Statements.
LIQUIDITY
Liquidity management focuses on the ability to have funds available to meet the
loan and depository transaction needs of the Bank's customers and the
Corporation's other financial commitments. Cash and cash equivalent assets
(which include deposits this Bank maintains at other banks, federal funds sold
and other short-term investments) totaled $1,789,000 at June 30, 2000 and
$3,132,000 at December 31, 1999. These assets provide the primary source of
funds for loan demand and deposit balance fluctuations. Additional sources of
liquidity are securities classified as available for sale and access to Federal
Home Loan Bank advances, as the Bank is a member of the Federal Home Loan Bank
of Cincinnati.
Taking into account the capital adequacy, profitability and reputation
maintained by the Corporation, available liquidity sources are considered
adequate to meet current and projected needs. See the Condensed Consolidated
Statements of Cash Flows for a more detailed review of the Corporation's sources
and uses of cash.
YEAR 2000
The Corporation experienced no problems in their computer application systems,
nor has management been made aware of any system problems of the Corporation's
major customers and vendors, related to Year 2000 issues. In addition, the
Corporation did not experience unusual deposit withdrawals related to the Year
2000. The Corporation does not anticipate any additional significant expenses in
regards to Year 2000 issues.
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18.
19
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
Quarter ended June 30, 2000
PART II - OTHER INFORMATION
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Item 1 - Legal Proceedings:
There are no matters required to be reported under this item.
Item 2 - Changes in Securities and Use of Proceeds:
There are no matters required to be reported under this item.
Item 3 - Defaults Upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders:
On April 20, 2000, Ohio State Bancshares, Inc. held the Annual Meeting
of Shareholders at which shareholders voted upon the election of four
directors for a term expiring in 2003. The results of the voting on
these matters were as follows:
Nominee Votes for Withheld
------- --------- --------
Lois J. Fisher 99,307 3,168
Theodore L. Graham 101,130 1,345
Thurman R. Mathews 100,989 1,486
Fred K. White 100,989 1,486
The following are directors who were not up for election at the
meeting and whose terms of office as directors continued after the
meeting:
Gary E. Pendleton
Samuel J. Birnbaum
Lloyd L. Johnston
F. Winton Lackey
Peter B. Miller
John D. Owens
William H. Harris
Item 5 - Other Information:
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibit 27 - Financial Data Schedule.
(b) Exhibit 99 - Safe Harbor Under Private Securities Litigation
Reform Act of 1995.
(c) No current reports on Form 8-K were filed by the small
business issuer during the quarter ended June 30, 2000.
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19.
20
OHIO STATE BANCSHARES, INC.
SIGNATURES
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Pursuant to 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.
OHIO STATE BANCSHARES, INC.
---------------------------
(Registrant)
Date: August 10, 2000 /s/ Gary E. Pendleton
--------------- ---------------------
(Signature)
Gary E. Pendleton
President and Chief Executive Officer
Date: August 10, 2000 /s/ Cynthia L. Sparling
--------------- -----------------------
(Signature)
Cynthia L. Sparling
Vice President and Chief Operations Officer
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20.
21
OHIO STATE BANCSHARES, INC.
Index to Exhibits
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EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
- -------------- ----------- -----------
27 Financial Data Schedule 22
99 Safe Harbor Under the Private Incorporated by reference to
Securities Litigation Reform Act Exhibit 99 to Annual Report
of 1995 on Form 10-KSB for the year
ended December 31, 1999
filed by the Small Business
Issuer on March 29, 2000.
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21.