1
UNITED STATES
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, 2001
/ / 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 August 1, 2001
Transitional Small Business Disclosure Format (check one):
Yes No X
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2
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2001
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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 ............................................................................ 5
Condensed Consolidated Statements of Cash Flows ................................................... 6
Notes to the Condensed Consolidated Financial Statements .......................................... 7
Item 2. Management's Discussion and Analysis................................................................ 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................. 17
Item 2. Changes in Securities.............................................................................. 17
Item 3. Defaults Upon Senior Securities.................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders................................................ 17
Item 5. Other Information.................................................................................. 17
Item 6. Exhibits and Reports on Form 8-K................................................................... 17
SIGNATURES ............................................................................................... 18
3
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
- -------------------------------------------------------------------------------
June 30, December 31,
2001 2000
---- ----
ASSETS
Cash and due from financial institutions $ 2,624,840 $ 2,295,635
Federal funds sold -- 2,414,000
--------------- ----------------
Cash and cash equivalents 2,624,840 4,709,635
Securities available for sale 13,804,166 10,397,644
Securities held to maturity (fair value June 30, 2001 -
$4,234,666, December 31, 2000 - $3,696,870) 4,162,080 3,664,874
Loans, net 54,772,526 52,166,770
Premises and equipment, net 1,295,434 1,002,708
Accrued interest receivable 557,887 492,098
Other assets 580,928 606,752
--------------- ----------------
$ 77,797,861 $ 73,040,481
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 7,539,017 $ 7,675,081
Interest-bearing 62,427,070 59,270,451
--------------- ----------------
Total 69,966,087 66,945,532
Federal funds purchased 48,000 --
Federal Home Loan Bank borrowings 1,350,000 --
Accrued interest payable 294,896 300,910
Other liabilities 249,642 262,168
--------------- ----------------
Total liabilities 71,908,625 67,508,610
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 1,753,801 1,492,741
Accumulated other comprehensive income (loss) 22,726 (73,579)
--------------- ----------------
Total shareholders' equity 5,889,236 5,531,871
--------------- ----------------
$ 77,797,861 $ 73,040,481
=============== ================
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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,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
Interest and dividend income
Loans, including fees $ 1,239,637 $ 1,157,874 $ 2,472,481 $ 2,255,084
Taxable securities 209,505 185,752 393,325 368,603
Nontaxable securities 51,603 49,451 91,438 100,144
Federal funds sold and other 31,008 8,816 67,653 21,122
----------- ----------- ------------ ------------
Total interest and dividend income 1,531,753 1,401,893 3,024,897 2,744,953
Interest expense
Deposits 739,020 627,819 1,475,464 1,241,005
Other borrowings 12,388 6,137 20,844 14,482
----------- ----------- ------------ ------------
Total interest expense 751,408 633,956 1,496,308 1,255,487
----------- ----------- ------------ ------------
Net interest income 780,345 767,937 1,528,589 1,489,466
Provision for loan losses 80,000 75,000 155,000 150,000
----------- ----------- ------------ ------------
Net interest income after provision for
loan losses 700,345 692,937 1,373,589 1,339,466
Noninterest income
Fees for customer services 114,493 64,685 209,868 129,276
Gain on sale of loan -- -- 68,232 --
Net gains on sales of securities available
for sale -- -- 6,020 --
Other 12,235 6,742 30,404 22,080
----------- ----------- ------------ ------------
Total noninterest income 126,728 71,427 314,524 151,356
Noninterest expense
Salaries and employee benefits 298,806 278,221 581,464 561,457
Occupancy and equipment 118,339 101,024 242,649 210,798
Office supplies 31,646 30,626 63,132 55,505
Professional fees 42,068 52,374 98,382 85,611
Advertising and public relations 21,705 12,952 46,713 28,781
Taxes, other than income 16,467 15,641 32,995 30,091
Loan collection and repossessions 13,811 18,726 24,498 43,975
Credit card processing 13,946 15,417 30,330 31,195
Director expenses 12,605 12,651 25,130 26,382
Other 60,515 64,364 120,765 112,196
----------- ----------- ------------ ------------
Total noninterest expense 629,908 601,996 1,266,058 1,185,991
----------- ----------- ------------ ------------
Income before income taxes 197,165 162,368 422,055 304,831
Income tax expense 52,412 43,955 117,195 85,560
----------- ----------- ------------ ------------
Net income $ 144,753 $ 118,413 $ 304,860 $ 219,271
=========== =========== ============ ============
Basic and diluted earnings per share $ .99 $ .81 $ 2.09 $ 1.50
=========== =========== ============ ============
Weighted average shares outstanding 146,000 146,000 146,000 146,000
=========== =========== ============ ============
- --------------------------------------------------------------------------------
See accompanying notes to the condensed consolidated financial statements.
4.
5
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,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
Balance at beginning of period $ 5,815,643 $ 5,129,226 $ 5,531,871 $ 5,017,295
Cash dividends ($.30 per share in 2001
and 2000) (43,800) (43,800) (43,800) (43,800)
Comprehensive income:
Net income 144,753 118,413 304,860 219,271
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects (27,360) (3,112) 96,305 7,961
------------- ------------- ------------- ------------
Total comprehensive income 117,393 115,301 401,165 227,232
------------- ------------- ------------- ------------
Balance at end of period $ 5,889,236 $ 5,200,727 $ 5,889,236 $ 5,200,727
============= ============= ============= ============
- --------------------------------------------------------------------------------
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 CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
Six Months Ended
JUNE 30,
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 304,860 $ 219,271
Adjustments to reconcile net income to net cash from
operating activities
Net amortization of securities 14,066 9,967
Provision for loan losses 155,000 150,000
Depreciation and amortization 98,280 84,459
Gain on sale of loan (68,232) --
Net realized (gains) losses on sales of securities (6,020) --
Federal Home Loan Bank stock dividends (8,100) (7,200)
Change in deferred loan costs (53,100) (2,594)
Change in accrued interest receivable (65,789) (42,231)
Change in accrued interest payable (6,014) (24,460)
Change in other assets and other liabilities (32,763) 194,333
-------------- ---------------
Net cash from operating activities 332,188 581,545
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (4,723,698) (570,375)
Maturities, payments and calls 959,920 1,096,082
Sales 506,020 --
Securities held to maturity:
Purchases (500,000) --
Maturities and calls -- 150,000
Loan originations and payments, net (4,409,116) (2,999,476)
Loan sale proceeds 1,722,342 --
Purchases of premises and equipment (391,006) (26,948)
-------------- ---------------
Net cash from investing activities (6,835,538) (2,350,717)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 3,020,555 (623,904)
Proceeds from advance of long-term borrowings 1,350,000 --
Net changes in short-term borrowings 48,000 1,094,000
Cash dividends paid -- (43,800)
-------------- ---------------
Net cash from financing activities 4,418,555 426,296
-------------- ---------------
Net change in cash and cash equivalents (2,084,795) (1,342,876)
Cash and cash equivalents at beginning of period 4,709,635 3,131,869
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,624,840 $ 1,788,993
============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,502,322 $ 1,279,947
Income taxes paid 121,470 --
SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers from loans to other real estate owned and repossessions $ 47,350 $ 73,200
- --------------------------------------------------------------------------------
See accompanying notes to the condensed consolidated financial statements.
6.
7
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,
2001, 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, 2000, included in
its 2000 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 2000 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 the 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 OSB 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.
Statement of Financial Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" was adopted by the Corporation on January 1,
2001. SFAS No. 133 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. SFAS
No. 133 does not allow hedging of a security which is classified as held to
maturity. The adoption of SFAS No. 133 on January 1, 2001 had no impact on the
Corporation's financial statements.
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(Continued)
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 (Continued)
In September 2000, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 140 replaces SFAS No. 125 and resolves
various implementation issues while carrying forward most of the provisions of
SFAS No. 125 without change. SFAS No. 140 revises standards for transfers of
financial assets by clarifying criteria and expanding guidance for determining
whether the transferor has relinquished control and the transfer is therefore
accounted for as a sale. SFAS No. 140 also adopts new accounting requirements
for pledged collateral and requires new disclosures about securitizations and
pledged collateral. SFAS No. 140 was effective for transfers occurring after
March 31, 2001 and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. The adoption of this
standard has not had a material effect on the Corporations's financial
statements.
In June 2001, FASB issued SFAS No. 141, "Business Combinations." SFAS No. 141
requires all business combinations within its scope to be accounted for using
the purchase method, rather than the pooling-of-interests method. The provisions
of this Statement apply to all business combinations initiated after June 30,
2001. The adoption of this statement will only impact the Company's financial
statements if it enters into a business combination.
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which addresses the accounting for such assets arising from prior and
future business combinations. Upon the adoption of this Statement, goodwill
arising from business combinations will no longer be amortized, but rather will
be assessed regularly for impairment, with any such impairment recognized as a
reduction to earnings in the period identified. The Company is required to adopt
this Statement on January 1, 2002 and early adoption is not permitted. The
adoption of this Statement will not impact the Company's financial statements,
as it has no intangible assets.
NOTE 2 - SECURITIES
Securities at June 30, 2001 and December 31, 2000 were as follows:
JUNE 30, 2001
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
---- ----- ------ -----
AVAILABLE FOR SALE
U.S. Treasury $ 99,937 $ 1,682 $ -- $ 101,619
U.S. government and federal agencies 9,276,671 63,009 (50,211) 9,289,469
Mortgage-backed 4,119,985 23,532 (3,579) 4,139,938
-------------- ----------- ----------- ---------------
Total debt securities 13,496,593 88,223 (53,790) 13,531,026
Other securities 273,140 -- -- 273,140
-------------- ----------- ----------- ---------------
Total $ 13,769,733 $ 88,223 $ (53,790) $ 13,804,166
============== =========== =========== ===============
HELD TO MATURITY
State and municipal $ 4,162,080 $ 109,297 $ (36,711) $ 4,234,666
============== =========== =========== ===============
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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 2 - SECURITIES (Continued)
DECEMBER 31, 2000
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
AVAILABLE FOR SALE
U.S. Treasury $ 99,891 $ 798 $ -- $ 100,689
U.S. government and federal agencies 5,559,398 6,017 (66,328) 5,499,087
Mortgage-backed 4,584,798 1,519 (53,489) 4,532,828
-------------- ----------- ----------- ---------------
Total debt securities 10,244,087 8,334 (119,817) 10,132,604
Other securities 265,040 -- -- 265,040
-------------- ----------- ----------- ---------------
Total $ 10,509,127 $ 8,334 $ (119,817) $ 10,397,644
============== =========== =========== ===============
HELD TO MATURITY
State and municipal $ 3,664,874 $ 73,726 $ (41,730) $ 3,696,870
============== =========== =========== ===============
Sales of available for sale securities were as follows:
Three Months Ended Six Months Ended
JUNE 30, JUNE 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
Proceeds $ -- $ -- $ 506,020 $ --
Gross gains -- -- 6,020 --
Gross losses -- -- -- --
The amortized cost and estimated fair values of securities at June 30, 2001, 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 $ 99,937 $ 101,619 $ -- $ --
Due in one to five years 2,258,413 2,301,054 -- --
Due in five to ten years 4,474,473 4,459,923 1,304,997 1,376,930
Due after ten years 2,543,785 2,528,492 2,857,083 2,857,736
Mortgage-backed securities 4,119,985 4,139,938 -- --
Other securities 273,140 273,140 -- --
-------------- --------------- --------------- --------------
$ 13,769,733 $ 13,804,166 $ 4,162,080 $ 4,234,666
============== =============== =============== ==============
Securities with a carrying value of approximately $6,772,000 at June 30, 2001
and $6,521,000 at December 31, 2000 were pledged to secure deposits and for
other purposes.
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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)
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NOTE 3 - LOANS
Loans at June 30, 2001 and December 31, 2000 were as follows:
June 30, December 31,
2001 2000
---- ----
Commercial $ 14,344,861 $ 14,484,055
Installment 25,713,577 24,891,651
Real estate 14,036,426 12,087,058
Credit card 710,695 743,022
Other 56,140 35,556
---------------- ----------------
54,861,699 52,241,342
Net deferred loan costs 588,281 535,181
Allowance for loan losses (677,454) (609,753)
---------------- ----------------
$ 54,772,526 $ 52,166,770
================ ================
Activity in the allowance for loan losses was as follows:
Three Months Ended Six Months Ended
JUNE 30, JUNE 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
Balance - beginning of period $ 632,567 $ 497,382 $ 609,753 $ 506,542
Loans charged-off (66,170) (89,966) (136,476) (209,563)
Recoveries 31,057 21,383 49,177 56,820
Provision for loan losses 80,000 75,000 155,000 150,000
------------ ------------ ------------ ------------
Balance - June 30 $ 677,454 $ 503,799 $ 677,454 $ 503,799
============ ============ ============ ============
The balance of loans evaluated for impairment on an individual basis at June 30,
2001 and December 31, 2000 and for the three and six months ended June 30, 2001
and 2000 was not material.
Nonperforming loans were as follows:
June 30, December 31,
2001 2000
---- ----
Loans past due over 90 days still on accrual $ 71,097 $ 6,013
Loans on nonaccrual 229,226 140,027
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)
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 4 - BORROWINGS
On January 24, 2001, the Bank borrowed $1,000,000 from the Federal Home Loan
Bank (FHLB). This borrowing matures on January 24, 2011, and has a fixed rate of
4.68% for one year. After one year, the FHLB may continue the fixed rate or
convert the borrowing to a variable rate tied to the three-month LIBOR index. If
the borrowing is converted to a variable rate, the Bank may payoff the debt with
no penalty. At no time is the borrowing callable by the FHLB.
On June 15, 2001, the Bank borrowed $350,000 from the FHLB in order to reduce
the interest rate risk associated with a long-term, fixed-rate commercial real
estate loan. This borrowing requires payment of principal and interest monthly
for 120 months and has a fixed rate of 5.91%.
The Bank has a line of credit agreement with the FHLB, which is collateralized
by a blanket pledge on eligible real estate loans and the Bank's FHLB stock. As
of June 30, 2001, the Bank has approximately $5,339,000 available for future
advances.
NOTE 5 - 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 5.50% to 12.00% at June 30, 2001
and 6.25% to 12.50% at December 31, 2000. Outstanding commitments for credit
cards had interest rates ranging from 12.00% to 17.90% as of June 30, 2001 and
from 12.00% to 18.00% as of December 31, 2000.
A summary of the contractual amounts of financial instruments with
off-balance-sheet risk at June 30, 2001 and December 31, 2000 follows:
June 30, December 31,
2001 2000
---- ----
Commitments to extend credit $ 3,293,000 $ 2,328,000
Credit card arrangements 2,502,000 2,443,000
Overdraft protection 845,000 --
Letters of credit -- 10,000
- --------------------------------------------------------------------------------
(Continued)
11.
12
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 6 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows for the
three and six months ended June 30, 2001 and 2000:
Three Months ended Six Months Ended
JUNE 30 JUNE 30
------- -------
2001 2000 2001 2000
---- ---- ---- ----
Unrealized holding gains and losses on
available-for-sale securities $ (41,455) $ (4,715) $ 151,936 $ 12,062
Reclassification adjustments for (gains)
and losses later recognized as income -- -- (6,020) --
---------- ----------- ---------- -----------
Net unrealized gains and losses (41,455) (4,715) 145,916 12,062
Tax effect 14,095 1,603 (49,611) (4,101)
---------- ----------- ---------- -----------
Other comprehensive income (loss) $ (27,360) $ (3,112) $ 96,305 $ 7,961
========== =========== ========== ===========
NOTE 7 - 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, whereby the Bank had agreed to
comply with certain directives which were intended to correct operational
deficiencies and improve overall financial condition. Throughout 2000,
management satisfactorily completed all provisions of the MOU and on January 18,
2001, this agreement was dissolved. However, in order to continue operational
efficiencies and improve the financial condition of the Bank, the Board of
Directors resolved to, among other things, develop a long-term strategic plan,
maintain a tier 1 capital to average assets ratio of at least 7.0%, and reduce
concentrations in indirect automobile lending. If at the end of any quarter this
ratio falls below 7.0%, management will provide, in writing, a plan to restore
this ratio to the Ohio Division of Financial Institutions and the FDIC. The
actual tier 1 capital to average assets ratio for the Bank for the quarter
ending June 30, 2001 was 7.41%.
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12.
13
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 June 30, 2001, compared to December 31, 2000, and the
consolidated results of operations for the three and six months ended June 30,
2001, compared to the same periods in 2000. 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 6.51% asset growth since December 31, 2000, as
total assets increased $4,758,000 from $73,040,000 at December 31, 2000 to
$77,798,000 at June 30, 2001. Most of this growth is attributable to a
$3,903,000 net increase in securities and a $2,606,000 net increase in loans.
This growth was funded through the $3,021,000 growth in total deposits and the
$1,350,000 growth in FHLB borrowings accompanied with the use of $2,085,000 in
cash equivalents.
Securities available for sale and securities held to maturity increased
$3,903,000 from $14,063,000 at December 31, 2000 to $17,966,000 at June 30,
2001. The increase was primarily the result of $5,224,000 in purchases due to
excess cash on hand early in 2001 and $146,000 in appreciation of available for
sale securities due to general declines in interest rates, partially offset by
$1,466,000 of calls, principle paydowns and sales.
Net loans increased $2,606,000, or 5.00% during the period from December 31,
2000 to June 30, 2001. This is primarily due to net loan originations less
payments of $4,409,000 offset by a loan sale of $1,722,000. On February 16, 2001
the Bank sold a commercial loan guaranteed by the United States Department of
Agriculture ("USDA") for a pre-tax profit of $68,000. The Bank is not obligated
to repurchase this loan and is not subject to a penalty if the loan prepays.
Contributing to the net increase in loans was a $822,000, or 3.30%, increase in
consumer installment loans and a $1,949,000, or 16.13%, increase in real estate
loans. The commercial loan decrease of only $139,000 since year-end was caused
by the loan sale nearly being offset by loan originations.
13.
14
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The allowance for loan losses increased to $677,000, or 1.22% of total loans as
of June 30, 2001 compared to $610,000, or 1.16% of total loans at December 31,
2000. The increase is due to a provision for loan losses of $155,000 compared to
actual net charge-offs of $87,000. 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 $3,021,000, or 4.51% from December 31, 2000 to June 30,
2001. The increase in deposits was primarily due to the cyclical cash needs of
customers and current market conditions. The additional cash was used to fund
securities and loan growth. Making up the net deposit growth for the period is
an increase of $2,770,000 in time deposits and $501,000 in savings and a
decrease in interest-bearing demand deposits of $114,000 and noninterest-bearing
demand of $136,000.
Total borrowings from the Federal Home Loan Bank have increased $1,350,000 from
December 31, 2000 to June 30, 2001. $350,000 of this total was used to fund a
fixed rate commercial real estate loan. Funding this loan with a fixed rate
borrowing helped offset the interest rate risk associated with a long-term fixed
rate loan. The remaining $1,000,000 was used to purchase a fixed rate bond with
a similar maturity. For further discussion regarding the use of these funds and
the terms relating to these borrowings see Note 4 of the condensed consolidated
financial statements.
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, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Net income for the six months ended June 30, 2001 was $305,000, or $86,000 more
than the same period in 2000. The reason for the increase in earnings was
primarily due to an increase in noninterest income of $163,000 and an increase
of net interest income of $39,000 partially offset by an increase in noninterest
expense of $80,000.
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 $39,000, or 2.63% for the six months ended June 30, 2001 compared
to the same period in 2000. The increase in net interest income is attributable
to the Corporation's earning assets increasing $6,775,000, or 10.27% from June
30, 2000 to June 30, 2001.
Noninterest income was up $163,000, or 107.80%, for the six months ended June
30, 2001 versus the same period in 2000. $81,000 of the increase relates to
increased fees for customer service and $68,000 is attributable to the
14.
15
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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USDA guaranteed loan sale. Fees for customer service have increased due to the
Bank's new Bounce Protection program that allows all checking customers to
overdraw their accounts from $100 to $500, based upon the type of account,
without getting checks returned. The Bounce Protection program has resulted in
customers overdrafting more checks. However, the Bank's overdraft balances have
not significantly increased and are currently maintaining an average balance of
$50,000. The remaining $14,000 in increased noninterest income relates to
security gains and other noninterest income.
Noninterest expense was up $80,000, or 6.75% for the six months ended June 30,
2001 versus the six months ended June 30, 2000. The largest fluctuations in this
category came from professional fees, occupancy and equipment expense,
advertising and public relations expense, and loan collection and repossession
expense. Professional fees have increased $13,000 compared to the prior year due
to increased internal audit costs and final legal bills relating to a lawsuit
settlement recorded in fiscal year 2000. Occupancy and equipment expenses have
increased $32,000 due to the addition of a new check sorter and software
relating to statement preparation and internet services. Advertising and public
relations expense increased $18,000 primarily due to the campaign for the
Corporation's Bounce Protection program. Loan collection and repossession
expense has decreased by $19,000 due to decreased repossession activity due to
better collection efforts in prior periods. Also contributing to increased
noninterest expense is an increase in salaries and employee benefits of $20,000,
or 3.57%.
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Net income for the three months ended June 30, 2001 was $145,000, or $26,000
more than the same period in 2000. The reason for the increase in earnings was
primarily due to an increase in noninterest income and an increase of net
interest income partially offset by an increase in noninterest expense.
Noninterest income increased by $55,000 for the three months ended June 30, 2001
compared to the same period in 2000. Most of this increase was due to the Bounce
Protection program and increased customer service fees.
Net interest income increased by $12,000 for the three months ended June 30,
2001 compared to the same period in 2000. The increase in net interest income is
attributable to an increase in the Bank's interest-earning assets and
interest-bearing liabilities.
Noninterest expense was up $28,000, or 4.64% for the three months ended June 30,
2001 versus the three months ended June 30, 2000. Salaries and employee benefits
were up $21,000 due to the addition of one employee and higher bonus accruals
relating to higher overall 2001 earnings. Occupancy and equipment costs were up
$18,000 due to the addition of a check sorter and internet services software.
Other noninterest expenses were down approximately $21,000 due to various
reasons including the non-renewal of certain services, a temporary reduction in
employee training costs and reduced expenses relating to debit card services.
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
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15.
16
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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%
At June 30, 2001 and December 31, 2000, the actual capital ratios for the Bank
were:
June 30, December 31,
2001 2000
---- ----
Total capital to risk-weighted assets 11.4% 10.6%
Tier 1 capital to risk-weighted assets 10.2 9.4
Tier 1 capital to average assets 7.4 7.1
At June 30, 2001 and December 31, 2000, the Bank was categorized as well
capitalized. However, OSB must obtain prior written approval from the Federal
Reserve Bank before paying dividends to its shareholders.
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 $2,625,000 at June 30, 2001 and
$4,710,000 at December 31, 2000. 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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16.
17
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 19, 2001, Ohio State Bancshares, Inc. held the Annual
Meeting of Shareholders at which shareholders voted upon the
election of three directors for a term expiring in 2004. The
results of the voting on these matters were as follows:
NOMINEE VOTES FOR WITHHELD
------- --------- --------
Samuel J. Birnbaum 89,781 4,249
F. Winton Lackey 89,165 4,865
John D. Owens 89,991 4,039
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
Lois J. Fisher
Lloyd L. Johnston
Theodore L. Graham
Peter B. Miller
Thurman R. Mathews
Fred K. White
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 99 - Safe Harbor Under Private Securities
Litigation Reform Act of 1995.
(b) No current reports on Form 8-K were filed by the small
business issuer during the quarter ended June 30, 2001.
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17.
18
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 1, 2001 /S/ GARY E. PENDLETON
---------------------- ---------------------------------------------
(Signature)
Gary E. Pendleton
President and Chief Executive Officer
Date: AUGUST 1, 2001 /S/ TODD M. WANNER
---------------------- ---------------------------------------------
(Signature)
Todd M. Wanner
Vice President and Chief Financial Officer
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18.
19
OHIO STATE BANCSHARES, INC. 19.
Index to Exhibits
- --------------------------------------------------------------------------------
EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
- -------------- ----------- -----------
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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19.