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 September 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.
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(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, 2001
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 2001
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets ................................... 3
Condensed Consolidated Statements of Income.............................. 4
Condensed Consolidated Statements of Changes in
Shareholders' Equity .................................................. 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........................................................ 18
Item 2. Changes in Securities.................................................... 18
Item 3. Defaults Upon Senior Securities.......................................... 18
Item 4. Submission of Matters to a Vote of Security Holders...................... 18
Item 5. Other Information........................................................ 18
Item 6. Exhibits and Reports on Form 8-K......................................... 18
SIGNATURES ..................................................................... 19
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
- --------------------------------------------------------------------------------
September 30, December 31,
2001 2000
---- ----
ASSETS
Cash and due from financial institutions $ 3,138,150 $ 2,295,635
Federal funds sold 2,762,000 2,414,000
--------------- ----------------
Cash and cash equivalents 5,900,150 4,709,635
Interest-earning deposits 444,717 --
Securities available for sale 14,723,869 10,397,644
Securities held to maturity (fair value September 30, 2001 -
$4,285,234, December 31, 2000 - $3,696,870) 4,160,597 3,664,874
Loans, net 56,473,789 52,166,770
Premises and equipment, net 1,471,142 1,002,708
Accrued interest receivable 521,205 492,098
Other assets 1,283,701 606,752
--------------- ----------------
$ 84,979,170 $ 73,040,481
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 6,814,835 $ 7,675,081
Interest-bearing 68,713,047 59,270,451
--------------- ----------------
Total 75,527,882 66,945,532
Other borrowings 2,643,530 --
Accrued interest payable 254,378 300,910
Other liabilities 336,997 262,168
--------------- ----------------
Total liabilities 78,762,787 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 1,920,895 1,492,741
Accumulated other comprehensive income (loss) 182,779 (73,579)
--------------- ----------------
Total shareholders' equity 6,216,383 5,531,871
--------------- ----------------
$ 84,979,170 $ 73,040,481
=============== ================
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See accompanying notes to the condensed consolidated financial statements.
3.
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,
------------- -------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Interest and dividend income
Loans, including fees $ 1,276,264 $ 1,218,656 $ 3,748,745 $ 3,473,740
Taxable securities 206,125 156,212 599,450 524,815
Nontaxable securities 53,682 48,696 145,120 148,840
Federal funds sold and other 14,659 2,908 82,312 24,030
----------- ----------- ----------- -----------
Total interest and dividend income 1,550,730 1,426,472 4,575,627 4,171,425
Interest expense
Deposits 694,955 665,837 2,170,419 1,906,842
Other borrowings 25,424 29,220 46,268 43,702
----------- ----------- ----------- -----------
Total interest expense 720,379 695,057 2,216,687 1,950,544
----------- ----------- ----------- -----------
Net interest income 830,351 731,415 2,358,940 2,220,881
Provision for loan losses 85,000 75,000 240,000 225,000
----------- ----------- ----------- -----------
Net interest income after provision for
loan losses 745,351 656,415 2,118,940 1,995,881
Noninterest income
Fees for customer services 113,225 67,565 323,093 196,841
Gain on sale of loan -- -- 68,232 --
Net gains (losses) on sales or calls of securities
available for sale 8,224 (1,547) 14,244 (1,547)
Other 10,375 3,830 40,779 25,910
----------- ----------- ----------- -----------
Total noninterest income 131,824 69,848 446,348 221,204
Noninterest expense
Salaries and employee benefits 308,622 254,225 890,086 815,682
Occupancy and equipment 130,076 131,882 372,725 342,680
Office supplies 31,334 21,040 94,466 76,545
Professional fees 44,631 75,884 143,013 161,495
Advertising and public relations 17,861 9,161 64,574 37,942
Taxes, other than income 16,422 13,820 49,417 43,911
Loan collection and repossessions 9,931 12,390 34,429 56,365
Credit card processing 15,393 17,774 45,723 48,969
Director expenses 12,366 11,351 37,496 37,733
Other 60,988 54,897 181,753 167,093
----------- ----------- ----------- -----------
Total noninterest expense 647,624 602,424 1,913,682 1,788,415
----------- ----------- ----------- -----------
Income before income taxes 229,551 123,839 651,606 428,670
Income tax expense 62,457 18,121 179,652 103,681
----------- ----------- ----------- -----------
Net income $ 167,094 $ 105,718 $ 471,954 $ 324,989
=========== =========== =========== ===========
Basic and diluted earnings per share $ 1.14 $ .72 $ 3.23 $ 2.23
=========== =========== =========== ===========
Weighted average shares outstanding 146,000 146,000 146,000 146,000
=========== =========== =========== ===========
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See accompanying notes to the condensed consolidated financial statements.
4.
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,
------------- -------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Balance at beginning of period $ 5,889,236 $ 5,200,727 $ 5,531,871 $ 5,017,295
Cash dividends ($.30 per share in 2001
and 2000) -- -- (43,800) (43,800)
Comprehensive income:
Net income 167,094 105,718 471,954 324,989
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects 160,053 71,225 256,358 79,186
----------- ----------- ----------- -----------
Total comprehensive income 327,147 176,943 728,312 404,175
----------- ----------- ----------- -----------
Balance at end of period $ 6,216,383 $ 5,377,670 $ 6,216,383 $ 5,377,670
=========== =========== =========== ===========
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See accompanying notes to the condensed consolidated financial statements.
5.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine Months Ended
September 30,
-------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 471,954 $ 324,989
Adjustments to reconcile net income to net cash from
operating activities
Net amortization of securities 22,041 15,137
Provision for loan losses 240,000 225,000
Depreciation and amortization 149,633 127,198
Gain on sale of loan (68,232) --
Net realized (gains) losses on sales of securities (14,244) 1,547
Federal Home Loan Bank stock dividends (12,200) (11,100)
Change in deferred loan costs (40,092) 8,661
Change in accrued interest receivable (29,107) (68,609)
Change in accrued interest payable (46,532) 3,393
Change in other assets and other liabilities (619,982) 163,815
------------ ------------
Net cash from operating activities 53,239 790,031
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (8,800,655) (570,375)
Maturities, payments and calls 3,361,760 1,336,338
Sales 1,509,770 570,375
Securities held to maturity:
Purchases (500,000) --
Maturities and calls -- 150,000
Purchase of certificate of deposit (444,717) --
Loan originations and payments, net (6,275,237) (3,917,086)
Loan sale proceeds 1,722,342 --
Purchases of premises and equipment (618,067) (77,224)
------------ ------------
Net cash from investing activities (10,044,804) (2,507,972)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 8,582,350 1,822,117
Proceeds from advance of long-term borrowings 2,350,000 --
Principle repayments of long-term borrowings (6,470) --
Net changes in short-term borrowings 300,000 (1,000,000)
Cash dividends paid (43,800) (43,800)
------------ ------------
Net cash from financing activities 11,182,080 778,317
------------ ------------
Net change in cash and cash equivalents 1,190,515 (939,624)
Cash and cash equivalents at beginning of period 4,709,635 3,131,869
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,900,150 $ 2,192,245
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 2,263,219 $ 1,947,151
Income taxes paid 154,470 13,680
SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers from loans to other real estate owned and repossessions $ 114,200 $ 103,700
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See accompanying notes to the condensed consolidated financial statements.
6.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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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, 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.
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 Corporation'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 September 30, 2001 and December 31, 2000 were as follows:
September 30, 2001
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
U.S. Treasury $ 99,951 $ 1,384 $ -- $ 101,335
U.S. government and federal agencies 9,749,563 186,004 (755) 9,934,812
Mortgage-backed 4,320,177 92,908 (2,603) 4,410,482
-------------- ----------- ----------- ---------------
Total debt securities 14,169,691 280,296 (3,358) 14,446,629
Other securities 277,240 -- -- 277,240
-------------- ----------- ----------- ---------------
Total $ 14,446,931 $ 280,296 $ (3,358) $ 14,723,869
============== =========== =========== ===============
HELD TO MATURITY
State and municipal $ 4,160,597 $ 149,605 $ (24,968) $ 4,285,234
============== =========== =========== ===============
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(Continued)
8.
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 Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Proceeds $ 1,003,750 $ 570,375 $ 1,509,770 $ 570,375
Gross gains 5,191 -- 11,211 --
Gross losses -- 1,547 -- 1,547
Gross gains from calls prior to maturity 3,033 -- 3,033 --
Contractual maturities of securities at September 30, 2001were as follows.
Securities not due at a single maturity date, primarily mortgage-backed
securities, are shown separately.
Available-for-Sale Securities Held-to-Maturity Securities
----------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Due in one year or less $ 99,951 $ 101,335 $ -- $ --
Due in one to five years 3,279,790 3,375,668 -- --
Due in five to ten years 4,412,342 4,499,982 1,304,565 1,391,875
Due after ten years 2,057,431 2,059,162 2,856,032 2,893,359
Mortgage-backed securities 4,320,177 4,410,482 -- --
Other securities 277,240 277,240 -- --
-------------- --------------- --------------- --------------
$ 14,446,931 $ 14,723,869 $ 4,160,597 $ 4,285,234
============== =============== =============== ==============
Securities with a carrying value of approximately $5,640,000 at September 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.
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, 2001 and December 31, 2000 were as follows:
September 30, December 31,
2001 2000
---- ----
Commercial $ 8,250,167 $ 6,770,072
Installment 24,666,279 24,891,651
Real estate 22,937,737 19,801,041
Credit card 715,117 743,022
Other 34,131 35,556
---------------- ----------------
56,603,431 52,241,342
Net deferred loan costs 575,273 535,181
Allowance for loan losses (704,915) (609,753)
---------------- ----------------
$ 56,473,789 $ 52,166,770
================ ================
Activity in the allowance for loan losses was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Balance - beginning of period $ 677,454 $ 503,799 $ 609,753 $ 506,542
Loans charged-off (78,474) (101,851) (214,950) (311,414)
Recoveries 20,935 31,195 70,112 88,015
Provision for loan losses 85,000 75,000 240,000 225,000
------------ ------------ ------------ ------------
Balance - September 30 $ 704,915 $ 508,143 $ 704,915 $ 508,143
============ ============ ============ ============
The balance of loans evaluated for impairment on an individual basis at
September 30, 2001 and December 31, 2000 and for the three and nine months ended
September 30, 2001 and 2000 was not material.
Nonperforming loans were as follows:
September 30, December 31,
2001 2000
---- ----
Loans past due over 90 days still on accrual $ 50,854 $ 6,013
Loans on nonaccrual 332,046 140,027
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.
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 balance of this borrowing at
September 30, 2001 was $343,530.
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.
Besides the long-term advances listed above, the Bank has a 3.77%, $1,000,000,
6-month advance due January 23, 2002. As of September 30, 2001, the Bank has
approximately $6,280,000 still available for future advances.
In July of 2001, OSB established a line of credit for $1,500,000 with a large
national bank. OSB will use this borrowing to infuse capital into the Bank to
meet short-term capital needs. At September 30, 2001, OSB had $300,000 drawn on
this line at 4.45%.
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 5.25% to 12.00% at September 30,
2001 and 6.25% to 12.50% at December 31, 2000. Outstanding commitments for
credit cards had interest rates ranging from 11.50% to 17.90% as of September
30, 2001 and from 12.00% to 18.00% as of December 31, 2000.
- --------------------------------------------------------------------------------
(Continued)
11.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (Continued)
A summary of the contractual amounts of financial instruments with
off-balance-sheet risk at September 30, 2001 and December 31, 2000 follows:
September 30, December 31,
2001 2000
---- ----
Commitments to extend credit $ 4,243,000 $ 2,328,000
Credit card arrangements 2,581,000 2,443,000
Overdraft protection 838,000 --
Letters of credit -- 10,000
NOTE 6 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows for the
three and nine months ended September 30, 2001 and 2000:
Three Months ended Nine Months Ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
Unrealized holding gains and losses on
available-for-sale securities $ 250,729 $ 106,370 $ 402,665 $ 118,432
Reclassification adjustments for (gains)
and losses later recognized as income (8,224) 1,547 (14,244) 1,547
---------- ----------- ---------- -----------
Net unrealized gains and losses 242,505 107,917 388,421 119,979
Tax effect (82,452) (36,692) (132,063) (40,793)
---------- ----------- ---------- -----------
Other comprehensive income $ 160,053 $ 71,225 $ 256,358 $ 79,186
========== =========== ========== ===========
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 September 30, 2001 was 7.56%.
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12.
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, 2001, compared to December 31, 2000, and
the consolidated results of operations for the three and nine months ended
September 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 16.35% asset growth since December 31, 2000, as
total assets increased $11,939,000 from $73,040,000 at December 31, 2000 to
$84,979,000 at September 30, 2001. Most of this growth is attributable to a
$5,267,000 net increase in securities and interest-earning deposits, a
$4,307,000 net increase in loans, a $1,191,000 increase in cash and cash
equivalents, a $468,000 increase in premises and equipment, and a $677,000
increase in other assets. The increase in premises and equipment was the result
of constructing a 1,300 square foot addition and adding a sprinkler system to
the Main Street location. The increase in other assets was caused by a $668,000
payment to a Bank owned life insurance policy that will be used as an investment
to pay for executive post-retirement benefits. This asset growth was funded
through $8,582,000 growth in total deposits and $2,644,000 growth in FHLB
borrowings.
Securities available for sale and securities held to maturity increased
$4,821,000 from $14,063,000 at December 31, 2000 to $18,884,000 at September 30,
2001. The increase was primarily the result of $9,301,000 in purchases due to
excess cash on hand early in the first quarter and again late in the third
quarter of 2001 partially offset by $4,872,000 of calls, principle paydowns and
sales. Also contributing to the change in securities was $388,000 in
appreciation of available for sale securities and a $445,000 increase in
interest-earning deposits in other financial institutions. The interest-earning
deposits are in the form of FDIC insured certificate of deposit accounts and
were purchased due to their favorable yield compared to other investments of
similar maturity.
Net loans increased $4,307,000, or 8.26% during the period from December 31,
2000 to September 30, 2001. This is primarily due to net loan originations less
payments of $6,275,000 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
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13.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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("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 $1,480,000, or 21.86%, increase
in commercial loans and a $3,137,000, or 15.84%, increase in real estate loans.
These large increases were due to management's strategy to de-emphasize the
installment portfolio as a percent of total loans. This strategy is aimed at
increasing the diversity of the total loan portfolio and softens the impact of
the credit risk inherent in an installment portfolio.
The allowance for loan losses increased to $705,000, or 1.23%, of total loans as
of September 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 $240,000
compared to actual net charge-offs of $145,000. 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 $8,582,000, or 12.82%, from December 31, 2000 to
September 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 in interest-bearing demand deposits of $4,637,000, an
increase in time deposits of $3,904,000, an increase in savings accounts of
$901,000 and a decrease in noninterest-bearing demand deposits of $860,000.
Total borrowings from the Federal Home Loan Bank have increased $2,344,000 from
December 31, 2000 to September 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. $1,000,000 was used to purchase a fixed rate bond with a similar
maturity. The remaining $1,000,000 is a six month advance that was taken when
loan growth temporarily exceeded deposit growth. 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.
Included in other borrowings at September 30, 2001 is $300,000 drawn on a
$1,500,000 line of credit from a large national bank. This line is maintained at
OSB and is used to fund short-term capital needs at the Bank when asset growth
exceeds capital growth obtained through retained earnings alone. OSB has no
immediate plans to increase this borrowing.
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.
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14.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
Net income for the nine months ended September 30, 2001 was $472,000, or
$147,000, more than the same period in 2000. The reason for the increase in
earnings was primarily due to an increase in noninterest income of $225,000 and
an increase of net interest income of $138,000 partially offset by an increase
in noninterest expense of $126,000 and an increase $76,000 in federal income tax
expense relating to higher 2001 earnings.
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 $138,000, or 6.22% for the nine months ended September 30, 2001
compared to the same period in 2000. The increase in net interest income is
attributable to the Corporation's average earning assets increasing $6,603,000,
or 9.90%, from the nine months ended September 30, 2000 to the nine months ended
September 30, 2001.
Noninterest income was up $225,000, or 101.78%, for the nine months ended
September 30, 2001 versus the same period in 2000. $126,000 of the increase
relates to increased fees for customer service, $68,000 is attributable to the
USDA guaranteed loan sale, and $16,000 relates to gains from the sale and calls
of securities available for 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
$40,000.
Noninterest expense was up $125,000, or 7.00% for the nine months ended
September 30, 2001 versus the nine months ended September 30, 2000. The largest
fluctuations in this category came from increases in salaries and employee
benefits, occupancy and equipment expense, and advertising and public relations
expense partially offset by decreases in loan collection and repossession
expense and professional fees. Salaries and employee benefits have increased
$74,000 compared to the prior year due to normal raises, the addition of a
branch manager, and higher executive bonus accruals tied to the Bank's increased
earnings performance. Occupancy and equipment expenses have increased $30,000
due to the addition of a new check sorter and software relating to statement
preparation and internet services. Advertising and public relations expense
increased $27,000 primarily due to the campaign for the Corporation's Bounce
Protection program and increased television and billboard adds. Loan collection
and repossession expense has decreased by $22,000 due to decreased repossession
activity due to better collection efforts in prior periods. Professional fees
have decreased $18,000 compared to the prior year due to higher legal and
accounting fees in 2000 associated with a legal settlement and fulfillment of
the Memorandum Of Understanding ("MOU"). Both the legal settlement and the MOU
are discussed in greater detail within the 2000 annual report.
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Net income for the three months ended September 30, 2001 was $167,000, or
$61,000 more than the same period in 2000. The reason for the increase in
earnings was primarily due to an increase in net interest income and an increase
of noninterest income partially offset by an increase in noninterest expense.
Net interest income increased by $99,000 for the three months ended September
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 income increased by $62,000 for the three months ended September 30,
2001 compared to the same period in 2000. Most of this increase was due to the
Bounce Protection program, increased customer service fees, and the gains from
sales and call of available for sale securities.
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15.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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Noninterest expense was up $45,000, or 7.50%, for the three months ended
September 30, 2001 versus the three months ended September 30, 2000. Salaries
and employee benefits were up $55,000 due to the addition of one employee and
higher bonus accruals relating to higher overall 2001 earnings. Office supply
expenses were up $10,000 due to various reasons including a higher volume of
customer mailings and more sophisticated office equipment. Advertising expenses
were up $9,000 due to increased television and billboard advertising.
Professional fees have decreased for the three months ending September 30, 2001
as compared to the same period in the previous year by $31,000. This was due to
the increased costs in 2000 related to the MOU and legal bills associated with a
lawsuit settlement.
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%
At September 30, 2001 and December 31, 2000, the actual capital ratios for the
Bank were:
September 30, December 31,
2001 2000
---- ----
Total capital to risk-weighted assets 11.5% 10.6%
Tier 1 capital to risk-weighted assets 10.3 9.4
Tier 1 capital to average assets 7.6 7.1
At September 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)
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16.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
totaled $5,900,000 at September 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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17.
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
Quarter ended June 30, 2000
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
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 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 September 30, 2001.
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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: November 7, 2001 /s/ Gary E. Pendleton
---------------------- ------------------------------------------
(Signature)
Gary E. Pendleton
President and Chief Executive Officer
Date: November 7, 2001 /s/ Todd M. Wanner
---------------------- ------------------------------------------
(Signature)
Todd M. Wanner
Vice President and Chief Financial Officer
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19.
OHIO STATE BANCSHARES, INC.
Index to Exhibits
- --------------------------------------------------------------------------------
EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
- -------------- ----------- -----------
99 Safe Harbor Under the Private Incorporated by reference to Exhibit 99 to
Securities Litigation Reform Act Annual Report on Form 10-KSB for the year
of 1995 ended December 31, 1999 filed by the Small
Business Issuer on March 29, 2000.
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20.