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 September 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
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 November 1, 2000
Transitional Small Business Disclosure Format (check one):
Yes No X
------- -----
2
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 2000
- -------------------------------------------------------------------------------------------------------------------
PAGE
----
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)
- -------------------------------------------------------------------------------
September 30, December 31,
2000 1999
---- ----
ASSETS
Cash and due from financial institutions $ 2,144,245 $ 2,255,869
Federal funds sold 48,000 876,000
--------------- ----------------
Cash and cash equivalents 2,192,245 3,131,869
Securities available for sale 10,334,278 11,552,953
Securities held to maturity (fair value September 30, 2000 -
$3,584,032, December 31, 1999 - $3,654,914) 3,666,176 3,819,444
Loans, net 52,058,204 48,478,479
Premises and equipment, net 1,026,577 1,076,551
Other real estate owned and repossessions 11,256 10,756
Accrued interest receivable 518,630 450,021
Other assets 590,805 586,692
--------------- ----------------
$ 70,398,171 $ 69,106,765
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 7,121,578 $ 7,718,439
Interest-bearing 57,431,735 55,012,757
--------------- ----------------
Total 64,553,313 62,731,196
Federal Home Loan Bank borrowings -- 1,000,000
Accrued interest payable 258,925 255,532
Other liabilities 208,263 102,742
--------------- ----------------
Total liabilities 65,020,501 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 1,532,159 1,250,970
Accumulated other comprehensive income (loss) (267,198) (346,384)
--------------- ----------------
Total shareholders' equity 5,377,670 5,017,295
--------------- ----------------
$ 70,398,171 $ 69,106,765
=============== ================
- --------------------------------------------------------------------------------
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 Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $ 1,218,656 $ 1,054,490 $ 3,473,740 $ 2,931,397
Taxable securities 156,212 204,043 524,815 557,293
Nontaxable securities 48,696 51,373 148,840 143,808
Federal funds sold and other 2,908 4,950 24,030 104,128
----------- ----------- ------------ ------------
Total interest income 1,426,472 1,314,856 4,171,425 3,736,626
INTEREST EXPENSE
Deposits 665,837 561,528 1,906,842 1,649,779
Other borrowings 29,220 5,184 43,702 5,208
----------- ----------- ------------ ------------
Total interest expense 695,057 566,712 1,950,544 1,654,987
----------- ----------- ------------ ------------
NET INTEREST INCOME 731,415 748,144 2,220,881 2,081,639
Provision for loan losses 75,000 70,000 225,000 222,000
----------- ----------- ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 656,415 678,144 1,995,881 1,859,639
NONINTEREST INCOME
Fees for customer services 67,565 70,215 196,841 184,609
Net gains (losses) on sales of securities available
for sale (1,547) 272 (1,547) 13,044
Other 3,830 5,092 25,910 35,815
----------- ----------- ------------ ------------
Total noninterest income 69,848 75,579 221,204 233,468
NONINTEREST EXPENSE
Salaries and employee benefits 254,225 257,105 815,682 748,330
Occupancy and equipment 131,882 94,542 342,680 271,692
Office supplies 21,040 23,475 76,545 72,873
FDIC and state assessments 11,950 1,758 26,157 11,227
Professional fees 75,884 18,880 161,495 61,326
Advertising and public relations 9,161 5,325 37,942 25,313
Taxes, other than income 13,820 15,750 43,911 47,319
Loss on other real estate owned and
repossessions -- 1,000 -- 27,000
Credit card processing expense 17,774 24,817 48,969 43,817
Director fees 11,351 14,100 37,733 42,300
Insurance 5,964 6,951 19,355 20,343
Other 49,373 70,375 177,946 172,009
----------- ----------- ------------ ------------
Total noninterest expense 602,424 534,078 1,788,415 1,543,549
----------- ----------- ------------ ------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING METHOD 123,839 219,645 428,670 549,558
Income tax expense 18,121 55,086 103,681 152,100
----------- ----------- ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING METHOD 105,718 164,559 324,989 397,458
Cumulative effect on prior years of a change in
accounting for start-up costs -- -- -- (24,061)
----------- ----------- ------------ ------------
NET INCOME $ 105,718 $ 164,559 $ 324,989 $ 373,397
=========== =========== ============ ============
- --------------------------------------------------------------------------------
(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 Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
BASIC AND DILUTED EARNINGS PER SHARE:
Before cumulative effect of a change in
accounting method $ .72 $ 1.13 $ 2.23 $ 2.86
Cumulative effect on prior years of a
change in accounting for start-up costs -- -- -- (.17)
----------- ----------- ------------ ------------
BASIC AND DILUTED EARNINGS PER SHARE $ .72 $ 1.13 $ 2.23 $ 2.69
=========== ========== ============ ============
Weighted average shares outstanding 146,000 146,000 146,000 138,852
=========== ========== ============ ============
- --------------------------------------------------------------------------------
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 Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Balance at beginning of period $ 5,200,727 $ 4,968,311 $ 5,017,295 $ 4,191,209
Proceeds from sale of 19,780
shares of common stock, net of
offering costs -- -- -- 843,582
Cash dividends ($.30 per share in 2000
and $.25 per share in 1999) -- -- (43,800) (36,500)
Comprehensive income:
Net income 105,718 164,559 324,989 373,397
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects 71,225 (62,711) 79,186 (301,529)
------------- ------------- ------------- ------------
Total comprehensive income 176,943 108,848 404,175 71,868
------------- ------------- ------------- ------------
Balance at end of period $ 5,377,670 $ 5,070,159 $ 5,377,670 $ 5,070,159
============= ============= ============= ============
- --------------------------------------------------------------------------------
See accompanying notes to the condensed consolidated financial statements.
6.
7
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
-------------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 324,989 $ 373,397
Adjustments to reconcile net income to net cash from
operating activities
Net amortization of securities 15,137 17,783
Provision for loan losses 225,000 222,000
Depreciation and amortization 127,198 101,147
Net realized (gains) losses on sales of securities 1,547 (13,044)
Federal Home Loan Bank stock dividends (11,100) (10,000)
Loss on other real estate owned and repossessions -- 27,000
Loss on sale of premises and equipment -- 785
Change in deferred loan costs 8,661 (162,473)
Change in accrued interest receivable (68,609) (99,415)
Change in accrued interest payable 3,393 (35,960)
Change in other assets and other liabilities 60,615 (652)
-------------- ---------------
Net cash from operating activities 686,831 420,568
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (570,375) (5,100,493)
Maturities, prepayments and calls 1,336,338 2,435,556
Sales 570,375 787,563
Securities held to maturity:
Purchases -- (626,250)
Maturities and calls 150,000 --
Loan originations and payments, net (3,917,086) (9,927,567)
Proceeds from sale of other real estate owned and repossessions 103,200 138,096
Proceeds from sale of premises and equipment -- 4,000
Purchases of premises and equipment (77,224) (259,808)
-------------- ---------------
Net cash from investing activities (2,404,772) (12,548,903)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 1,822,117 4,300,443
Net changes in short-term borrowings (1,000,000) 1,500,000
Cash dividends paid (43,800) (36,500)
Net proceeds from sale of stock -- 843,582
-------------- ---------------
Net cash from financing activities 778,317 6,607,525
-------------- ---------------
Net change in cash and cash equivalents (939,624) (5,520,810)
Cash and cash equivalents at beginning of period 3,131,869 8,015,195
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,192,245 $ 2,494,385
============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,947,151 $ 1,690,947
Income taxes paid 13,680 150,000
SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers from loans to other real estate owned and repossessions $ 103,700 $ 127,270
- --------------------------------------------------------------------------------
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 September
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.
- --------------------------------------------------------------------------------
(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 September 30, 2000 and December 31, 1999 were as follows:
September 30, 2000
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
U.S. Treasury $ 899,321 $ 183 $ (2,234) $ 897,270
U.S. government and federal agencies 4,768,033 -- (216,071) 4,551,962
Mortgage-backed 4,810,729 174 (186,897) 4,624,006
-------------- ----------- ----------- ---------------
Total debt securities 10,478,083 357 (405,202) 10,073,238
Other securities 261,040 -- -- 261,040
-------------- ----------- ----------- ---------------
Total $ 10,739,123 $ 357 $ (405,202) $ 10,334,278
============== =========== =========== ===============
HELD TO MATURITY
State and municipal $ 3,666,176 $ 37,262 $ (119,406) $ 3,584,032
============== =========== =========== ===============
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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
============== =========== =========== ===============
Sales of available for sale securities were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Proceeds $ 570,375 $ 300,375 $ 570,375 $ 787,563
Gross gains -- 272 -- 13,044
Gross losses 1,547 -- 1,547 --
The amortized cost and estimated fair values of securities at September 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 $ 799,458 $ 797,224 $ -- $ --
Due in one to five years 2,869,402 2,770,833 -- --
Due in five to ten years -- -- 1,078,493 1,102,923
Due after ten years 1,998,494 1,881,175 2,587,683 2,481,109
Mortgage-backed securities 4,810,729 4,624,006 -- --
Other securities 261,040 261,040 -- --
-------------- --------------- --------------- --------------
$ 10,739,123 $ 10,334,278 $ 3,666,176 $ 3,584,032
============== =============== =============== ==============
Securities with a carrying value of approximately $6,154,000 at September 30,
2000 and $6,496,000 at December 31, 1999 were pledged to secure deposits and for
other purposes.
- --------------------------------------------------------------------------------
(Continued)
10.
11
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS
Loans at September 30, 2000 and December 31, 1999 were as follows:
September 30, December 31,
2000 1999
---- ----
Commercial $ 14,317,629 $ 14,880,924
Installment 25,523,716 25,293,544
Real estate 11,503,031 7,543,953
Credit card 657,566 683,629
Other 17,936 27,841
---------------- ----------------
52,019,878 48,429,891
Net deferred loan costs 546,469 555,130
Allowance for loan losses (508,143) (506,542)
---------------- ----------------
$ 52,058,204 $ 48,478,479
================ ================
Activity in the allowance for loan losses for the nine months ended September
30, 2000 and 1999 was as follows:
2000 1999
---- ----
Balance - January 1 $ 506,542 $ 360,093
Loans charged-off (311,414) (244,238)
Recoveries 88,015 73,496
Provision for loan losses 225,000 222,000
------------ ------------
Balance - September 30 $ 508,143 $ 411,351
============ ============
Loans evaluated for impairment on an individual basis during the nine months
ended September 30, 2000 and 1999 were as follows:
Average of impaired loans during the period $ -- $ 320,664
Interest income recognized during impairment -- 54,251
Cash-basis interest income recognized -- 54,251
The balance of loans evaluated for impairment on an individual basis at
September 30, 2000 and December 31, 1999 was not material.
Nonperforming loans were as follows:
September 30, December 31,
2000 1999
---- ----
Loans past due over 90 days still on accrual $ 192,691 $ 172,052
Loans on nonaccrual 213,472 227,851
Nonperforming loans include smaller balance homogeneous loans such as
residential real estate, installment and credit card loans that are collectively
evaluated for impairment.
- --------------------------------------------------------------------------------
(Continued)
11.
12
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
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 the 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 the
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 12.50% at September 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 September
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 September 30, 2000 and December 31, 1999 follows:
September 30, December 31,
2000 1999
---- ----
Commitments to extend credit $ 2,188,000 $ 4,400,000
Credit card arrangements 2,548,000 2,394,000
Letters of credit -- 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 September 30, 2000 and December 31, 1999, the Bank had a line of credit
enabling it to borrow up to $4,500,000 and $4,196,000 with the Federal Home Loan
Bank of Cincinnati. No borrowings were outstanding at September 30, 2000.
Borrowings of $1,000,000 were outstanding on this line of credit as of 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 September 30, 2000 and 1999, and $29,061 for the nine
months ended September 30, 2000 and June 30, 1999.
Rental commitments under these noncancelable operating leases are:
Year ending September 30,
2001 $ 38,748
2002 40,336
2003 40,685
2004 40,685
2005 40,685
Thereafter 485,892
------------
$ 687,031
============
NOTE 5 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows for the
three and nine months ended September 30, 2000 and 1999:
Three Months ended Nine Months Ended
September 30 September 30
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
Unrealized holding gains and losses on
available-for-sale securities $ 106,370 $ (94,744) $ 118,432 $ (443,817)
Reclassification adjustments for (gains)
and losses later recognized as income 1,547 (272) 1,547 (13,044)
---------- ----------- ---------- -----------
Net unrealized gains and losses 107,917 (95,016) 119,979 (456,861)
Tax effect (36,692) 32,305 (40,793) 155,332
---------- ----------- ---------- -----------
Other comprehensive income (loss) $ 71,225 $ (62,711) $ 79,186 $ (301,529)
========== =========== ========== ===========
- --------------------------------------------------------------------------------
(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 the Bank's 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. Additionally, OSB may not pay dividends to shareholders without the prior
written approval of the Federal Reserve Bank. 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
- --------------------------------------------------------------------------------
INTRODUCTION
The following discussion focuses on the consolidated financial condition of Ohio
State Bancshares, Inc. at September 30, 2000, compared to December 31, 1999, and
the consolidated results of operations for the three and nine months ended
September 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 1.87% asset growth since December 31, 1999, as
total assets increased $1,291,000 from $69,107,000 at December 31, 1999 to
$70,398,000 at September 30, 2000. Most of this growth is attributable to the
$3,580,000 growth in net loans offset by a decrease of $940,000 in cash and cash
equivalents and a decrease of $1,219,000 on securities available for sale.
Securities available for sale and securities held to maturity decreased
$1,372,000 from $15,372,000 at December 31, 1999 to $14,000,000 at September 30,
2000. The decrease was due to maturities or calls of $650,000 and principal
repayments on mortgage-backed securities of $836,000.
Net loans increased $3,580,000, or 7.38% during the period from December 31,
1999 to September 30, 2000. This growth was funded primarily from the $2,312,000
decrease in cash and securities and partially from the $1,822,000 increase in
deposits. The loan growth was primarily attributable to real estate loans which
increased $3,959,000, or 52.48% 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
$563,000, or 3.79% and installment loans increased $230,000, or 0.91% for the
nine-month period ending September 30, 2000.
The allowance for loan losses decreased to .97% of loans as of June 30, 2000
compared to 1.03% at December 31, 1999. The decline occurred due to the moderate
loan growth combined with provisions for loan losses for the nine-month period
ending September 30, 2000 exceeding net charge-offs by only $2,000. All
charge-offs during the nine
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15.
16
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
months ended September 30, 2000 except for $21,000 were either installment or
credit cards. Management is actively monitoring problem loans and has increased
collection efforts to reduce charge-offs in future periods. Should charge-offs,
classified loans or delinquencies significantly change, 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 increased $1,822,000, or 2.90% from December 31, 1999 to
September 30, 2000. The increase in deposits was primarily due to the cyclical
cash needs of customers. The additional cash was used to fund loan growth and to
pay down a line of credit held with the Federal Home Loan Bank. This borrowing
had a balance of $1,000,000 at December 31, 1999 and was completely paid down as
of September 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.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Net income for the nine months ended September 30, 2000 was $325,000, or $48,000
less than the same period in 1999. The reason for the decrease in earnings was
primarily due to an increase in noninterest expense of $245,000 partially offset
by an increase in net interest income of $139,000.
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 $139,000, or 6.69% for the nine months ended September 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 $5,098,000
or 8.48% from the nine months ended September 30, 1999 to the nine months ended
September 30, 2000.
Noninterest expense was up $245,000, or 15.86% for the nine months ended
September 30, 2000 versus the nine months ended September 30, 1999. $100,000 of
this change can be attributed to a short-term increase in outside professional
service expenses. These services are currently being used to aid management in
improving operational procedures to comply with the provisions of the Memorandum
of Understanding as discussed in the next paragraph. Also contributing to the
increase in noninterest expense is an increase in occupancy expense of $71,000
as compared to the same nine-month period ending in September 30, 1999. This
increase was due to amortization of the new software for the core operating
system, which the Bank converted to in April 1999, and expensing architectural
fees related to potential future expansion of the main banking office that did
not materialize due to estimated costs exceeding management's expectations.
Salaries and employee benefits increased $67,000 due to implementation of
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16.
17
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
a supplemental retirement plan for executive officers, additional personnel to
support the Bank's operations and normal wage increases.
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 Condensed Consolidated Financial Statements.
Management recognizes the importance of complying with the provisions of the
above mentioned MOU and have taken significant steps to meet all requirements
and deadlines as they come due.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Net income for the three months ended September 30, 2000 was $106,000, or
$59,000 less than the same period in 1999. The reason for the decrease in
earnings was primarily due to an increase in noninterest expense and a slight
decrease in net interest income.
Net interest income decreased by $17,000 for the three months ended September
30, 2000 compared to the same period in 1999. The decrease in net interest
income is attributable to an increase in the Bank's rate on interest-bearing
liabilities influenced by competing deposit products.
Noninterest expense was up $68,000, or 12.80% for the three months ended
September 30, 2000 versus the three months ended September 30, 1999. Occupancy
and equipment expense increased due to the amortization of the new software for
the core operating system and expensing of architectural fees. Professional fees
increased due to implementation of corrective actions to comply with the MOU.
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 September 30, 2000 and December 31, 1999, the actual capital ratios for the
Bank were:
September 30, December 31,
2000 1999
---- ----
Total capital to risk-weighted assets 10.6% 10.4%
Tier 1 capital to risk-weighted assets 9.6 9.4
Tier 1 capital to average assets 7.1 6.8
At September 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 $2,192,000 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.
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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:
---------------------------------------------------
There are no matters required to be reported under this item.
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 September 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: November 9, 2000 /s/ Gary E. Pendleton
---------------------- ------------------------------------------
(Signature)
Gary E. Pendleton
President and Chief Executive Officer
Date: November 9, 2000 /s/ Todd M. Wanner
---------------------- ------------------------------------------
(Signature)
Todd M. Wanner
Vice President and Chief Financial Officer
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20.
21
OHIO STATE BANCSHARES, INC.
Index to Exhibits
- --------------------------------------------------------------------------------
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.