Registration No: 333-91378
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2/A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
(Amendment No. 1)
OHIO STATE BANCSHARES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
OHIO 6710 34-1816546
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(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
111 S. MAIN STREET
MARION, OHIO 43302
(740) 387-2265
(Address and telephone number of principal executive offices)
GARY E. PENDLETON COPIES OF COMMUNICATIONS TO:
PRESIDENT AND CHIEF EXECUTIVE OFFICER EDWIN L. HERBERT, ESQ.
OHIO STATE BANCSHARES, INC. WERNER & BLANK, LLC
111 S. MAIN STREET 7205 W. CENTRAL AVENUE
MARION, OHIO 43302 TOLEDO, OH 43617
(740) 387-2265 (419) 841-8051
(Name, address and telephone number of agent for service)
Approximate date of proposed sale to the public: AS SOON AS PRACTICABLE AFTER
THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Title of each class of Proposed maximum
Securities to be Proposed maximum aggregate offering
registered Amount to be offering price per price (1) Amount of
registered unit (1) Registration fee (1)
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Common Stock
$10.00 par value 44,000 $69.00 $3,036,000 $280.00
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(1) Calculated pursuant to Rule 457(e). The fee is based on the higher of the
offering price to existing security holders and the reoffering price to the
general public.
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PROSPECTUS [Logo]
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OHIO STATE BANCSHARES, INC.
UP TO 44,000 SHARES OF COMMON STOCK
RIGHTS OFFERING SUBSCRIPTION PRICE: $66.00 per share
COMMUNITY OFFERING SUBSCRIPTION PRICE: $68.00 per share to existing
shareholders; $69.00 per share to the general public; and $34.00 per share to
employees.
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We are offering up to 44,000 shares of common stock in this rights offering to
shareholders who owned common stock as of July 18, 2002. This is called the
rights offering. It continues until 5:00 p.m., Eastern time, on August 28, 2002.
If you are a current shareholder, you will receive, at no cost, a right to buy
0.3014 share of common stock for every share of common stock that you owned on
July 18, 2002 at a price of $66.00 per share.
We may offer any unsubscribed shares to members of the general public who reside
in the State of Ohio at a price of $69.00 per share, to existing shareholders at
a price of $68.00 per share and to employees at a price of $34.00 per share.
This is called the community offering. We are offering a total of 15 shares to
each of our employees at $34.00 a share. An employee who purchases more than 15
shares in the community offering will have to pay $68.00 per share for the
additional shares. If you want to participate in the community offering, you
must submit your subscription documents to us before November 27, 2002 or later,
if we extend the date, or to your broker or bank at least 10 days before that
deadline.
We will not hold your payment in escrow. You will not receive interest on the
funds you give us for subscriptions. We may return your funds, without interest,
if we cancel the offering before the expiration of the rights offering, or if we
do not accept your subscription in the community offering.
There is no minimum number of shares that we must sell in order to complete the
rights offering or the community offering.
Community Banc Investments, Inc. will act as our underwriter for the community
offering. This is a best efforts offering. The underwriter is not required to
sell any specific number or dollar amount of securities but will use its best
efforts to sell the securities offered.
The following table showing the proceeds we receive assumes that we sell all
44,000 shares. We may not. We have also shown the underwriter's commission on
the sale of all the shares. The underwriter's commission is $3.00 per share on
sales to the general public, but it is limited to a maximum of 3% of the total
offering price.
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PRICE TO PUBLIC UNDERWRITING FEES NET PROCEEDS TO COMPANY
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Per Share $69.00 $3.00 $66.00
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Total $3,036,000 $91,080 $2,944,920
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Our common stock is not listed on any exchange or the NASDAQ or regularly quoted
on the Over-The-Counter Electronic Bulletin Board.
INVESTING IN OUR SECURITIES INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 8.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS July 24, 2002.
TABLE OF CONTENTS
PROSPECTUS SUMMARY 3
RISK FACTORS 8
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 11
INFORMATION ABOUT US 11
USE OF PROCEEDS 11
WHERE YOU CAN FIND MORE INFORMATION 11
MARKET FOR COMMON SHARES AND DIVIDENDS 12
OUR FINANCIAL INFORMATION 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 13
BENEFICIAL OWNERSHIP 13
DIRECTORS AND EXECUTIVE OFFICERS 14
EXECUTIVE COMPENSATION AND OTHER INFORMATION 15
RELATIONSHIPS AND TRANSACTIONS WITH MANAGEMENT 16
DESCRIPTION OF COMMON SHARES 17
THE OFFERING 18
FEDERAL INCOME TAX CONSIDERATIONS 22
LEGAL PROCEEDINGS 23
PLAN OF DISTRIBUTION 23
LEGAL MATTERS 23
INDEMNIFICATION 23
EXPERTS 24
FINANCIAL STATEMENTS
ANNUAL REPORT FOR YEAR ENDED DECEMBER 31, 2001 ANNEX A-1
QUARTERLY REPORT ON FORM 10-QSB FOR QUARTER ENDED MARCH 31, 2002 ANNEX A-2
2
PROSPECTUS SUMMARY
This section summarizes the information contained in this prospectus. You should
read the following summary together with the information set forth under the
heading "Risk Factors."
We use the term "we", the "Company" or "Ohio State Bancshares" to refer to Ohio
State Bancshares, Inc., a business corporation organized under Ohio law. We use
the term "the Bank" to refer to The Marion Bank, a commercial bank organized
under the laws of the State of Ohio.
OHIO STATE BANCSHARES, INC.
We are a one-bank holding company. We were formed in May 1996 to own
the Bank, our wholly owned subsidiary. The Bank was organized in 1988. The Bank
is a full-service commercial bank providing the following services to our
customers:
- savings accounts and checking accounts;
- money market accounts;
- certificates of deposits;
- personal line of credit services;
- credit cards; and
- commercial, residential and real estate loans and other
banking services.
Our commitment to customer service in the Marion, Ohio area has enabled us to
increase our total assets by 25% and our net income by 98% from December 31,
2000 to December 31, 2001. As of March 31, 2002, our total assets were
$89,920,000. Since the opening of the Bank in 1988, we have focused our business
primarily on:
- pursuing a deposit gathering strategy of offering money market
checking and savings accounts; and
- serving small to mid-sized businesses, professionals and their
families with loans and other banking services.
We have experienced significant asset growth and achieved continuing
profitability:
- Total assets increased to $91.4 million at December 31, 2001
from $73 million at year- end 2000 and $69.1 million at
year-end 1999. At March 31, 2002, our total assets were $89.9
million.
- Net income increased to $653 thousand ($4.47 per share- basic
and diluted) for the year ended December 31, 2001 from $329
thousand ($2.26 per share - basic and diluted) for the same
period in 2000 and $436 thousand ($3.10 per share - basic and
diluted) for the same period in 1999. For the three months
ended March 31, 2002, our net income was $215 thousand ($1.47
per share - basic and diluted) as compared to $160 thousand
($1.10 per share- basic and diluted) for the three months
ended March 31, 2001.
- For the year ended December 31, 2001 our loan portfolio grew
by 10.2% or $5.3 million, as compared to December 31, 2000,
and increased by .5%, or $306 thousand, at March 31, 2002 as
compared to December 31, 2001.
Our principal executive offices are located at 111 South Main Street, Marion,
Ohio 43302. Our main telephone number is (740) 387-2265.
3
THE OFFERING
The offering....................... This offering consists of both a
rights offering and, to the extent
any shares offered by this
prospectus remain unsubscribed, a
community offering.
Offering price..................... $66.00 per share for the RIGHTS
OFFERING.
$68.00 per share to existing
shareholders, $69.00 per share to
the general public and $34.00 per
share to employees (up to a total of
15 shares per employee) for the
COMMUNITY OFFERING. Employees who
want to purchase more then 15 shares
in the community offering will pay
$68.00 per share for the additional
shares.
Rights Offering:
Eligible shareholders...... You are eligible to purchase stock
in the rights offering if you owned
shares of our common stock on
July 18, 2002.
Subscription rights........ If you are an eligible shareholder,
you will have the right to purchase
a 0.3014 share of our common stock
for every share of common stock you
owned as of July 18, 2002. There is
no minimum amount of shares you must
purchase using your subscription
rights.
When determining the number of
shares we will issue, multiply the
number of shares you own by 0.3014
and round down to the nearest whole
number. For example, if you own 175
shares, you may subscribe for 52
shares (175 shares x 0.3014 = 52.745
shares, rounded down to 52 shares,
the nearest whole number).
Non-transferability of
rights..................... Your subscription rights are not
transferable. Shares issued upon
exercise of your subscription rights
will be issued in the same
recordholder's name.
No fractional rights....... We will not issue fractional rights,
and we will not pay cash in place of
rights or fractional shares.
Persons wishing to exercise
rights for the benefit of
others..................... Brokers, banks, trustees, and other
individuals or entities that hold
common stock for the account of
others may, if authorized by the
beneficial owner, complete the
subscription agreement and submit it
to us with the proper payment.
Expiration of the rights
offering................... The rights offering will expire on
August 28, 2002, at 5:00 p.m.,
Eastern Time. After the expiration
date, you will no longer be able to
purchase shares through the exercise
of your subscription rights.
However, you will be able to
subscribe for shares in the
community offering.
4
Community Offering:
Community offering......... We may offer to the general public
in the State of Ohio shares that
have not been subscribed for, if any
remain. There is no minimum amount
of shares you must purchase.
Shares available........... We will first fill all subscriptions
received in the rights offering. Any
remaining shares may be offered to
the public in the community
offering, including our current
shareholders who want to purchase
additional shares. To the extent
shares are available, we will permit
our employees to purchase up to 15
shares each at a price of $34.00 per
share, in consideration of their
valuable services as our employees.
We estimate that this offer to our
employees will require at most 510
shares.
Expiration of the community
offering................... The community offering will expire
at the earlier of:
- a date determined by
the board of directors;
or
- November 27, 2002, unless
extended by us but not
later than February 12,
2003.
Both the rights offering and the
community offering are subject
to these additional conditions .... We reserve the right to cancel the
rights offering and the community
offering at any time before the
expiration date.
Subscriptions are irrevocable once
we receive them, unless we amend
this offering.
There is no minimum subscription
amount. However, each subscriber is
limited to purchasing a total of
$500,000 of our stock in the
community offering.
Subscription Procedures............ To subscribe for shares in the
offering, you should carefully
complete and sign the subscription
agreement. If you are an existing
shareholder please indicate the
number of shares you are purchasing
in the rights offering and indicate
any additional shares you wish to
purchase in the community offering.
Forward your completed subscription
agreement to our main office, which
address appears below. Be sure to
include a check or money order for
the full amount of your subscription
price. Checks and money orders will
not be cashed until we accept your
subscription.
If your subscription is not
completely filled, we will send you
a check for the difference. No
interest will be paid on returned
subscription funds. YOUR
SUBSCRIPTION IS IRREVOCABLE AFTER
YOU SUBMIT THE SUBSCRIPTION
DOCUMENTS.
5
Submit subscription agreements..... Deliver subscription AGREEMENTS TO:
By mail:
Ohio State Bancshares, Inc.
111 S. Main Street
Marion, Ohio 43302
Attn: Ms. Cynthia L. Sparling
By hand:
Ohio State Bancshares, Inc.
111 S. Main Street
Marion, Ohio 43302
Attn: Ms. Cynthia L. Sparling
By overnight courier:
Ohio State Bancshares, Inc.
111 S. Main Street
Marion, Ohio 43302
Attn: Ms. Cynthia L. Sparling
Ownership Limits................... Federal law prohibits you from
directly or indirectly, or through
or in concert with one or more
persons, acquiring "control" of Ohio
State Bancshares (defined to include
ownership, control or the power to
vote 10% or more of a class of Ohio
State Bancshares voting securities)
unless you provide at least 60 days'
prior written notice to the Federal
Reserve Board. A person is deemed to
have acquired shares that he or she
has the right to acquire through the
exercise of options, warrants and
rights. Therefore, any subscriptions
in this offering that are subject to
such Federal laws may, in our
discretion, be deemed void in their
entirety or in part, and not
accepted by us.
Termination........................ We may cancel the offering at any
time, in which case we will return
your subscription payment without
interest.
Stock certificates................. Certificates representing shares of
the common stock will be delivered
to subscribers as soon as
practicable after the completion of
the offering. We expect that this
may take two weeks or longer, due to
the need to allow checks to clear.
Risk Factors....................... An investment in shares of our
common stock involves a high degree
of risk. Please see "Risk Factors"
beginning on page 8.
Federal Income Tax Consequences.... Your receipt or exercise of the
subscription rights should not be
treated as a taxable event for
United States federal income tax
purposes, but may have other tax
effects. Employees who purchase our
stock in the community offering at
$34.00 per share will realize
ordinary income in an amount equal
to the difference between the then
fair market value of the stock and
the price paid.
6
Questions.......................... If you have any questions about the
rights offering, including questions
about subscription procedures and
requests for additional copies of
this prospectus or other documents,
please contact Ms. Cynthia L.
Sparling, our Corporate Secretary at
(740) 387-2265.
7
RISK FACTORS
In addition to the other information in this prospectus, you should
consider carefully the following factors in evaluating Ohio State Bancshares and
our business before purchasing our common stock.
RISKS RELATED TO THE OFFERING:
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IF YOU ARE AN EXISTING SHAREHOLDER AND DO NOT EXERCISE YOUR FULL SUBSCRIPTION
RIGHTS, YOUR PERCENTAGE OWNERSHIP AND VOTING RIGHTS OF OHIO STATE BANCSHARES
WILL DECREASE.
If you choose not to exercise your subscription rights in full, your
relative ownership interest in Ohio State Bancshares will be diluted to the
extent other shareholders exercise their subscription rights. Your voting rights
and percentage interest in any of Ohio State Bancshares' net earnings may also
be diluted if you don't exercise your rights. We are unable to determine the
number of shares, if any, that will be sold in the offering.
THE OFFERING PRICE WAS DETERMINED BY OUR BOARD OF DIRECTORS AND BEARS NO
RELATIONSHIP TO THE VALUE OF OUR ASSETS, FINANCIAL CONDITION OR OTHER
ESTABLISHED CRITERIA FOR VALUE. OUR COMMON STOCK MAY TRADE AT PRICES ABOVE OR
BELOW THIS PRICE.
Our board of directors determined the offering price after considering
a number of factors, including:
- Prices at which our stock has recently traded;
- book value and growth of our assets;
- past operations;
- cash flow;
- earnings trends;
- our overall financial condition; and
- our future prospects.
The book value of each share of Ohio State Bancshares common stock as
of March 31, 2002, was $43.37. The per share prices for the rights offering and
the community offering are greater than this amount. The board did not assign
weighting to any one factor in setting the offering price. After the date of
this prospectus, our common stock may trade at prices above or below the
offering price.
BECAUSE YOU MAY NOT REVOKE YOUR SUBSCRIPTION EXERCISE, YOU COULD BE COMMITTED TO
BUY SHARES ABOVE THE PREVAILING MARKET PRICE.
The public trading market price of our common stock may decline before
the subscription rights expire. If you exercise your subscription rights and,
afterwards, the public trading market price of our common stock decreases below
$66.00, then you will have committed to buy shares of common stock at a price
above the prevailing market price. Once you have exercised your subscription
rights, you may not revoke your exercise unless we amend the offering. Moreover,
you may be unable to sell your shares of common stock at a price equal to or
greater than the offering price.
BECAUSE WE MAY TERMINATE THE OFFERING AT ANY TIME, YOUR PARTICIPATION IN THE
OFFERING IS NOT ASSURED.
Once you exercise your subscription rights, you may not revoke the
exercise for any reason unless we amend the offering. We may terminate the
offering at any time. If we decide to terminate the offering, we will not have
any obligation with respect to the subscription rights except to return, without
interest, any subscription payments.
RISKS RELATED TO OHIO STATE BANCSHARES:
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WE MAY NOT BE ABLE TO CONTINUE TO GROW THE BANK'S ASSETS AND EARNINGS AS FAST AS
WE HAVE OVER THE LAST SEVERAL YEARS BECAUSE OF OUR LIMITED MARKET AREA.
The Bank has experienced significant growth in its assets and earnings
over the last several years. In the future it may be more difficult to continue
this rate of growth for a number of reasons, including the fact that the Bank
operates only in the Marion, Ohio area and faces significant competition in its
market.
8
TO DATE THERE HAS BEEN VERY LIMITED TRADING IN OUR COMMON STOCK. BECAUSE OUR
COMMON STOCK IS NOT LISTED ON AN EXCHANGE OR THE NASDAQ STOCK MARKET OR TRADED
ON THE OVER-THE-COUNTER ELECTRONIC BULLETIN BOARD, OUR SHARES MAY BE SUBJECT TO
EXTREME PRICE FLUCTUATIONS AND YOU MAY HAVE DIFFICULTY TRADING YOUR SHARES.
Persons who purchase our common stock may be unable to readily sell the
common stock. Our common stock is not listed on any exchange or the NASDAQ stock
market or traded on the Over-The-Counter Electronic Bulletin Board. Our common
stock trades infrequently and with limited volume. There can be no assurance
that the trading in our stock will increase. We do not currently intend to list
our securities on a national securities exchange or NASDAQ at any time in the
future.
BECAUSE WE FACE INTENSE AND SIGNIFICANT COMPETITION FROM MANY LARGE FINANCIAL
INSTITUTIONS, OUR ABILITY TO ATTRACT DEPOSITS, MAKE LOANS OR DEVELOP OTHER LINES
OF BUSINESS MAY BE ADVERSELY AFFECTED.
Our ability to achieve strong financial performance and return on
investment to shareholders will depend in part on our ability to expand our
available financial services. In addition to the challenge of attracting and
retaining customers for traditional banking services, our competitors now
include securities dealers, brokers, mortgage bankers, investment advisors and
finance and insurance companies who seek to offer one-stop financial services to
their customers that may include services that banks have not been able, or
allowed to, offer to their customers in the past. The increasingly competitive
environment is a result primarily of changes in regulation, changes in
technology and product delivery systems and the accelerating pace of
consolidation among financial services providers. If we fail to adequately
address each of the competitive pressures in the banking industry, our financial
condition and results of operations could be adversely affected.
OUR BUSINESS IS BASED UPON LENDING MONEY AND THERE IS A RISK WE WILL NOT BE
REPAID.
The risk of nonpayment of loans is inherent in commercial banking. The
failure to obtain repayment of our loans could have an adverse effect on our
earnings and our overall financial condition as well as the value of our common
stock. We attempt to reduce our credit exposure by carefully monitoring the
concentration of our loans within specific industries and through loan
application and approval procedures. However, we cannot assure you that our loan
underwriting standards and procedures will reduce our lending risks. Loan losses
can cause insolvency and failure of a financial institution. If that were to
happen to us, our shareholders could lose their entire investment.
BECAUSE WE ARE ENGAGED IN A HEAVILY REGULATED INDUSTRY, ANY CHANGES IN
GOVERNMENTAL LAWS AND REGULATION AND POLICY COULD LIMIT OUR FUTURE GROWTH.
Any changes to federal and state banking laws and regulations may
negatively impact our ability to expand services and to increase the value of
our business. We are subject to extensive state and federal regulation,
supervision, and legislation that govern almost all aspects of our operations.
These laws may change from time to time and are primarily intended for the
protection of consumers, depositors and the deposit insurance funds. In
addition, our earnings are affected by the monetary policies of the Federal
Reserve Board. These policies, which include regulating the national supply of
bank reserves and bank credit, can have a major effect upon the source and cost
of funds and the rates of return earned on loans and investments. The Federal
Reserve influences the size and distribution of bank reserves through its open
market operations and changes in cash reserve requirements against member bank
deposits. The Gramm-Leach-Bliley Act regarding financial modernization that
became effective in November 1999 removed many of the barriers to the
integration of the banking, securities and insurance industries and is likely to
increase the competitive pressures upon the Bank. We cannot predict what effect
the Gramm-Leach-Bliley Act and any presently contemplated or future changes in
the laws or regulations or their interpretations would have on us, but those
changes could be materially adverse to our financial performance.
BECAUSE OUR PROFITABILITY IS DIRECTLY RELATED TO INTEREST RATES, ANY CHANGES IN
THESE RATES MAY ADVERSELY AFFECT OUR EARNINGS AND FINANCIAL CONDITION.
Changes in interest rates affect our operating performance and
financial condition in diverse ways. Our profitability depends in substantial
part on our "net interest spread," which is the difference between the rates we
receive on loans and investments and the rates we pay for deposits and other
sources of funds. Our net interest spread will depend on many factors that are
partly or entirely outside our control, including competition, federal economic,
monetary and fiscal policies, and economic conditions generally. Historically,
net interest spreads for other financial
9
institutions have widened and narrowed in response to these and other factors,
which are often collectively referred to as "interest rate risk."
BECAUSE WE DEPEND ON OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL, ANY LOSS
OF, OR OUR INABILITY TO ATTRACT, THESE PERSONNEL COULD ADVERSELY AFFECT US.
Our success depends upon the continued service of our senior management
team and upon our ability to attract and retain qualified financial services
personnel. Competition for qualified employees is intense. In our experience, it
can take a significant period of time to identify and hire personnel with the
combination of skills and attributes required in carrying out our strategy. If
we lose the services of our key personnel, or are unable to attract additional
qualified personnel, our business, financial condition, results of operations
and cash flows could be materially adversely affected.
BECAUSE OUR ABILITY TO PAY DIVIDENDS IS SUBJECT TO REGULATORY LIMITATIONS, THERE
IS NO ASSURANCE THAT WE WILL CONTINUE TO PAY DIVIDENDS.
Although we have paid dividends on our common stock in the past, there
is no assurance that we may or will continue to pay dividends in the future.
Dividends are subject to determination and declaration by our board of
directors, which takes into account many factors. The declaration of dividends
by us on our common stock is subject to the discretion of our board and to
applicable federal and state regulatory limitations. We cannot guarantee that
dividends will not be reduced or eliminated in future periods. Our ability to
pay dividends on our common stock depends on our receipt of dividends from the
Bank. The Bank is subject to federal and state regulatory restrictions and
limitations on the amount and timing of the dividends it may pay to us.
THE OHIO DIVISION OF FINANCIAL INSTITUTIONS HAS THE AUTHORITY TO ASSESS THE
SHARES OF THE BANK IF THE BANK'S CAPITAL WERE TO BECOME IMPAIRED, WHICH COULD
SUBSTANTIALLY REDUCE THE VALUE OF YOUR OWNERSHIP INTERESTS IN OHIO STATE
BANCSHARES.
Under Ohio law, the Ohio Division of Financial Institutions may assess
the Bank's shares if the Bank's capital becomes impaired from losses or other
causes. If we were to fail to pay the assessment, the Ohio Division of Financial
Institutions could auction the Bank's shares to satisfy the assessment. While
the common stock of Ohio State Bancshares cannot be assessed directly, in the
event that we were required to invest more funds in the Bank, we might not have
the funds available.
WE WILL NEED TO CONTINUE TO UPGRADE OUR TECHNOLOGY TO OPERATE EFFECTIVELY, WHICH
IS EXPENSIVE.
The banking industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Our future
success will depend in part on our ability to address the needs of our customers
by using technology to provide products and services. Many of our competitors
have substantially greater resources to invest in technological improvements.
This technology may permit our competitors to perform certain functions at a
lower cost than us. There can be no assurance that we will be able to
effectively implement new technology-driven products and services or be
successful in marketing these products and services to our customers.
WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS, ANY OF WHICH MAY DISCOURAGE
TAKEOVER ATTEMPTS AND COULD REDUCE THE MARKET PRICE OF OUR COMMON STOCK.
Provisions of our Articles of Incorporation and Code of Regulations and
Ohio law could have the effect of discouraging takeover attempts which certain
shareholders might deem to be in their interest. For example, our board of
directors is divided into three classes and each class is elected for a
three-year term. These provisions could make it more difficult for our
shareholders to remove members of our board of directors and may also make it
more difficult for a third party to acquire us, even if the acquisition would be
beneficial to you. Additional anti-takeover provisions in our Articles include
"supermajority" vote and "fair price" requirements in connection with certain
transactions.
10
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus, including the above risk
factors section, contains "forward-looking statements" that involve risks and
uncertainties. "Forward-looking statements" are statements that relate to future
events or our future financial performance. In many cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," or "continue," or the negative of such terms and other comparable
terminology.
You should not place undue reliance on these statements, which speak
only as of the date that they were made. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including the risks faced by us described above and
elsewhere in this prospectus. We do not undertake any obligation to publicly
update or make any revisions to forward-looking statements after completion of
this offering to reflect later events or circumstances or to reflect the
occurrence of unanticipated events.
We believe it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
predict accurately or over which we have no control. The risk factors listed
above, as well as any cautionary language in this prospectus, provide examples
of risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Before you invest in our common stock, you should be aware that the occurrence
of the events described in these risk factors and elsewhere in this prospectus
could have a material adverse effect on our business, operating results and
financial condition.
INFORMATION ABOUT US
Ohio State Bancshares was organized in 1996 as an Ohio corporation to
own and operate the Bank. The Bank is our principal asset. The Bank offers a
full range of commercial banking services. The Bank does not provide trust
services but can provide access to trust services through its correspondent
banks.
Ohio State Bancshares is a bank holding company and is regulated by the
Federal Reserve under the Bank Holding Company Act. The Bank is a commercial
bank chartered under Ohio Law. The Bank is examined and regulated by the Ohio
Division of Financial Institutions. The Federal Deposit Insurance Corporation
also examines and regulates the Bank, and insures the Bank's deposits, up to
applicable limits for each depositor. At May 31, 2002, we employed 29 full-time
and 5 part-time employees.
The Bank's main banking office is located in downtown Marion, Ohio. The
Bank also operates a full service branch banking office at 220 Richland Road,
Marion, Ohio. The Banks owns the premises for its main offices. The Bank leases
the premises for its branch office under a long-term lease that expires in 2016.
The Bank has two options to renew this lease for an additional five years each.
These properties are suitable for our use. We believe that these properties are
in excellent condition and are adequately covered by insurance.
USE OF PROCEEDS
We plan to use the net proceeds from this offering first to repay a
$500,000 line of credit with a variable interest rate of 2% over daily LIBOR
that matures on demand. We obtained that loan to provide capital to the Bank to
support its growth. We plan to use the balance of the net proceeds from this
offering to further capitalize the Bank, for working capital and general
corporate purposes.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any document we file at
the SEC's public reference facilitates at 450 Fifth Street, N.W. Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room. The SEC maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC and the site address is http:\\www.sec.gov.
11
MARKET FOR COMMON SHARES AND DIVIDENDS
Our common stock is not traded on any established securities market.
For 2002 year-to-date, 2001 and 2000, we obtained the high and low bid
quotations shown below from Community Banc Investments, which makes a limited
market in our common stock. These quotations are inter-dealer prices, without
retail markup, markdown or commission and may not represent actual transactions.
2002 LOW BID HIGH BID
---- ------- --------
1st Quarter $62.00 $62.00
2001 LOW BID HIGH BID
---- ------- --------
1st Quarter $55.00 $55.00
2nd Quarter 55.00 57.50
3rd Quarter 57.50 57.50
4th Quarter 57.50 62.00
2000 LOW BID HIGH BID
---- ------- --------
1st Quarter $51.00 $51.00
2nd Quarter 51.00 51.00
3rd Quarter 51.00 53.00
4th Quarter 53.00 55.00
We do not know what prices were actually paid. We have not verified the
accuracy of those prices that have been reported. Because of the lack of an
established market for our stock, these prices may not reflect the prices at
which the stock would trade in an active market.
We do not have any outstanding options or warrants to purchase, or
securities convertible into, shares of our common stock. As of April 30, 2002,
directors and executive officers of Ohio State Bancshares beneficially owned
46,415 shares of common stock of the Company which could be sold by them in the
manner provided for the sale of securities by affiliates under SEC Rule 144. No
agreement exists for Ohio State Bancshares to register its common stock held by
any shareholder.
We have 500,000 authorized and 146,000 outstanding shares of common
stock held by 476 shareholders as of March 31, 2002. We paid cash dividends of
$.30 per share in June and December of 2001 and 2000, resulting in a total
amount of $.60 per share in each of 2001 and 2000. Our ability to pay future
dividends is dependent on the ability of the Bank to pay dividends to Ohio State
Bancshares. The Bank's ability to pay dividends is subject to regulatory limits
and oversight. See "Risk Factors" beginning at page 9.
12
OUR FINANCIAL INFORMATION
Our audited balance sheets as of December 31, 2001 and 2000, and our
audited statements of income, cash flows and changes in shareholders' equity for
the years then ended are included in our Annual Report 2001 at pages 3 through
21. A comparative summary of our selected financial data for the last 5 fiscal
years is set forth at page 2 of our Annual Report 2001. Our unaudited interim
financial statements for the quarter ended March 31, 2002 are set forth in Item
1 of our 10-QSB for the quarter ended March 31, 2002. Both our Annual Report
2001 and our 10-QSB for the quarter ended March 31, 2002 are attached to this
prospectus and incorporated into this prospectus. Our Annual Report 2001 is
attached as Annex A-1. Our 10-QSB for the quarter ended March 31, 2002 is
attached as Annex A-2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Management's discussion and analysis of our financial condition and
results of operation for our fiscal years ended December 31, 2001 and 2000, and
the quarter ended March 31, 2002, is set forth under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" at
pages 22 through 35 of our Annual Report 2001, and Item 2 of our 10-QSB for the
quarter ended March 31, 2002, both of which are attached as Annex A-1 and Annex
A-2 and incorporated into this prospectus.
BENEFICIAL OWNERSHIP
As of April 30, 2002, the following persons were known to the Company
to be beneficial owners of more than five percent of the Company's Common Stock.
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership Percent of Class
------------------------ -------------------- ----------------
Theodore L. Graham 10,777 (1) 7.38%
c/o Ohio State Bancshares, Inc.
111 S. Main Street
Marion, Ohio 43302
Thurman R. Mathews 13,827 (2) 9.47%
c/o Ohio State Bancshares, Inc.
111 S. Main Street
Marion, Ohio 43302
Peter B. Miller 8,857 (3) 6.07%
c/o Ohio State Bancshares, Inc.
111 S. Main Street
Marion, Ohio 43302
(1) Includes 10,537 shares owned by partnership of which Mr. Graham is a
general partner.
(2) Includes 12,717 shares owned by spouse.
(3) Includes 8,797 shares owned jointly with spouse.
13
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
The following table sets forth the name, age, and principal
occupation(s) during the past five years of each director, along with the year
he or she first became a director, year of expiration of the proposed or current
term as a director, and the number of shares of the Company beneficially owned
by each.
Shares of Company
Stock Beneficially
Director Owned as of % of
Name Age Occupation Since 04-30-02 Class
---- --- ---------- ----- -------- -----
=========================================================================================================================
Samuel J. Birnbaum 85 Retired, Director of Real Estate 1988 600 0.41%
Lodgekeeper Group
F. Winton Lackey 69 Partner, HLS Racks Inc. (10) 1995 2,707 (1) 1.85%
John D. Owens 71 Retired Owner, Owens Electric 1994 680 (3) 0.47%
THE RESPECTIVE TERMS OF EACH OF THE FOREGOING THREE DIRECTORS EXPIRE IN 2004
Peter B. Miller 65 President, Pete Miller, Inc. 1997 8,857 (8) 6.07%
Gary E. Pendleton 57 Banker, Ohio State Bancshares, Inc. 1990 1,359 (9) 0.93%
Lloyd L. Johnston 69 President, Johnston Supply Co. 1989 6,065 (2) 4.15%
(Wholesale Plumbing Supplies)
THE RESPECTIVE TERMS OF EACH OF THE FOREGOING THREE DIRECTORS EXPIRE IN 2005
Theodore L. Graham 56 Managing Partner, Graham 1991 10,777 (4) 7.38%
Investment Co. (Warehousing and Real
Estate Development)
Lois J. Fisher 53 Commercial Real Estate Development 1994 660 (5) 0.45%
Thurman R. Mathews 73 Owner, Mathews, Kennedy Ford 1994 13,827 (6) 9.47%
Lincoln Mercury, Marion
Fred K. White 67 Real Estate Agent, HER Kinney 1994 362 (7) 0.25%
Properties (11)
THE RESPECTIVE TERMS OF EACH OF THE FOREGOING FOUR DIRECTORS EXPIRE IN 2003
=========================================================================================================================
Executive Officers and Directors as a Group (12 Persons) 46,415 31.79%
=========================================================================================================================
(1) Includes 902 shares owned jointly with spouse.
(2) Includes 5,665 shares owned by a controlled company.
(3) Includes 240 shares owned by spouse.
(4) Includes 10,537 shares owned by partnership of which Mr. Graham is a
general partner.
(5) Includes 500 shares held in a trust of which Ms. Fisher is the Trustee.
(6) Includes 12,717 shares owned by spouse.
(7) Includes 362 shares owned by Fred K. White Living Trust.
(8) Includes 8,797 shares held jointly with spouse.
(9) Includes 300 shares owned jointly with spouse.
(10) Prior to his HLS Racks Partnership, Mr. Lackey was owner of Mid Ohio
Packaging, Inc.
(11) Prior to joining HER Kinney Properties, Mr. White was Division Manager of
Ohio Edison (utility company).
14
EXECUTIVE OFFICERS
The following table sets forth the name and age of each of the
Company's executive officers, and provides an account of the positions held by
each with the Company and their business experience during the past five years.
Name Age Positions held with the Company Business Experience
---- --- ------------------------------- -------------------
===================================================================================================================================
Gary E. Pendleton 57 President and Treasurer Banker and Chief Executive Officer of Company
Cynthia L. Sparling 47 Secretary Banker and Administrative Officer of Company
Todd M. Wanner 28 Chief Financial Officer Principal financial and accounting officer for the
Company since August 2000; prior to August 2000,
audit consultant with Crowe, Chizek and Company
LLP, an independent public accounting firm.
Steven M. Strine 47 Senior Vice President and Banker and Chief Lending Officer of The Marion Bank
Chief Lending Officer, since December 1998; prior to December 1998, loan
The Marion Bank. officer with another commercial bank.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The Company is required to provide certain summary information
concerning compensation paid or accrued by the Company, to or on behalf of the
Company's Chief Executive Officer and the four highest paid executive officers
whose base salary and bonus exceeded $100,000, for the fiscal years ended
December 31, 2001, 2000, and 1999. As applied to the Company, the Company's
Chief Executive Officer's compensation is required to be disclosed as follows:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Name and Principal Position Salary ($) Bonus ($) Other Annual All Other Compensation
Year Compensation ($) (1) ($) (2)
- ---------------------------------- -------- ------------ ------------- ------------------------ ------------------------
GARY E. PENDLETON, President 2001 93,600 80,000 15,169 5,933
Ohio State Bancshares, Inc. 2000 86,100 26,838 13,784 5,317
1999 86,100 37,310 12,544 5,391
- ---------------------------
(1) Includes payments in the amount of $6,913 for use of an automobile,
payments in the amount of $4,900 for memberships in various clubs used
primarily for Company business, and premiums in the amount of $3,356 for
certain specified medical insurance benefits.
(2) Includes premiums in the amount of $1,258 paid by the Company for the
benefit of Mr. Pendleton in connection with a split dollar life insurance
policy, and contributions in the amount of $4,675 made by the Company on
behalf of Mr. Pendleton pursuant to the Company's 401(k) plan.
15
CHANGE OF CONTROL AGREEMENT
During calendar year 2000, the Company entered into a Change in Control
Agreement with Mr. Pendleton. The terms of the agreement provide that in the
event of a sale, merger or similar transaction of the Company in which the
Company is not the surviving corporation, Mr. Pendleton is entitled a severance
payment equal to three times his annual compensation, which is defined to
include his then current Salary plus his previous year's cash bonus. The
severance payment is payable in the event of his involuntary termination of
employment within two years of the Change in Control or his voluntary
termination during the period beginning three months following the Change in
Control and ending six months after the Change in Control. In addition, Mr.
Pendleton is entitled under the terms of the Agreement to receive certain
health, disability, dental and life insurance, and other benefits, for a
two-year period following a Change in Control. The agreement provides for the
reimbursement of certain excise taxes imposed upon payments received by Mr.
Pendleton, which are deemed "excess parachute" payments under the provisions of
Section 280G of the Internal Revenue Code.
"Change of Control of the Company" is defined in the Change of Control
Agreement to mean: (i) the acquisition by a person or persons acting in concert
with the power to vote 35 percent or more of a class of the Company's voting
securities; (ii) during any period of two (2) consecutive years during the term
of the Change of Control Agreement individuals who, at the beginning of such
period, constituted the Board of Directors of the Company cease for any reason
to constitute at least a majority of the Board; (iii) any merger, consolidation
or similar reorganization the consequences of which cause members of the Board
of Directors in office immediately prior to such transaction to constitute less
than a majority of the Board thereafter; and, (iv) any merger, consolidation or
reorganization is consummated with another corporation which causes the
shareholders of the Company to own less than 50% of the combined voting power of
the merged, consolidated or reorganized entity.
SUPPLEMENTAL RETIREMENT PLAN
During 1996, the Corporation entered into an Executive Indexed Salary
Continuation Plan (the "Supplemental Plan") with Mr. Pendleton. The purpose of
the Supplemental Plan is to supplement Mr. Pendleton's retirement income.
Pursuant to the terms of the Supplemental Plan, annually the Company will accrue
a non-qualified pension benefit for the benefit of Mr. Pendleton in an amount
equal to the excess return earned on a Company owned insurance product (the
"Policy") over the Bank's opportunity cost as defined in the Supplemental Plan.
At Mr. Pendleton's retirement he will be entitled to receive the accrued
deferred benefits in a lump sum cash payment or on an annuity basis. It is
impossible to predict the future value of such deferred compensation due to the
uncertainty of the future Policy yield. The Policy is currently valued at
$1,144,458 upon which a guaranteed rate of 4% is called for under its terms. For
2001 the Company accrued approximately $37,000 of expense under the terms of
this plan for the benefit of Mr. Pendleton. The benefits accrued under the
Supplemental Plan are subject to a vesting schedule except in the case of death,
disability or a change of control of the Company.
DIRECTORS' COMPENSATION
Directors are paid $ 400 per month, other than the Chairman of the
Board, $100 of which is retained and paid at year end provided Board attendance
is not less than 75%. The Chairman of the Board receives $475 per month, $125 of
which is retained and paid at year end provided Board attendance is not less
than 75%.
RELATIONSHIPS AND TRANSACTIONS WITH MANAGEMENT
Some of the directors of the Company, as well as the companies with
which such directors are associated, are customers of, and have had transactions
with the Company (through The Marion Bank) in the ordinary course of the
Company's business in 2001. In addition to deposit accounts with The Marion
Bank, these transactions consisted of extensions of credit in the ordinary
course of business and were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and did not involve more than normal risk of
collection or present other unfavorable features.
The Company, through its subsidiary, expects to have in the future,
banking transactions, in the ordinary course of its business with directors,
officers, principal shareholders, and their associates, on substantially the
same
16
terms, including interest rates and collateral on loans, as those prevailing at
the same time for comparable transactions with others and which do not involve
more than the normal risk of collectibility or present other unfavorable
features.
DESCRIPTION OF COMMON SHARES
GENERAL
We are authorized to issue 500,000 common shares, $10 par value per
share. As of April 30, 2002, 146,000 shares were issued and outstanding.
Holders of shares are entitled to dividends when and if declared by our
board of directors out of legally available funds. Voting rights are vested in
holders of the shares, each share being entitled to one vote. Holders of shares
have cumulative voting rights in electing directors. Holders of shares have
preemptive rights to subscribe to additional shares that we may issue, with some
exceptions. Those exceptions include the sale of our shares that have been
repurchased by us and held in treasury or shares issued on the exercise of stock
options where shareholder approval has been obtained for the stock options.
ANTITAKEOVER PROVISIONS
The Articles of Incorporation of Ohio State Bancshares require the
affirmative vote of 80% of our outstanding voting power to approve certain
business transactions (such as mergers or a disposition of substantially all of
its assets) involving an "interested shareholder", defined as another person or
entity owning ten percent or more of the outstanding capital stock of the
holding company, unless first approved by two-thirds of our directors not
affiliated with the interested shareholder. The Articles of Incorporation also
require the approval of two-thirds of the outstanding shares, exclusive of
shares held by the interested shareholder, or the payment of a "fair price," as
defined in the Articles of Incorporation, for any shares acquired by an
interested shareholder, unless approved by two-thirds of the directors who are
not affiliated with the interested shareholder.
Under Ohio law, a merger involving the Company where it is not the
surviving corporation requires the affirmative approval of shareholders holding
at least two-thirds of the voting power of the Company.
We believe that encouraging a prospective acquirer of the Company to
negotiate directly with our board of directors is beneficial to all
shareholders. However, these provisions may have the effect of discouraging
takeover attempts of the Company which are not supported by management.
We are also subject to the "Ohio Control Share Acquisition Act" which
gives significant rights to shareholders. This Act provides that certain notice
and informational filings and special shareholder meetings and voting procedures
must occur prior to consummation of a proposed "control share acquisition,"
which is defined as any acquisition of shares of an "issuing public corporation"
that would entitle the acquirer, directly or indirectly, alone or with others,
to exercise or direct the voting power of the issuing public corporation in the
election of directors within any of the following ranges:
- one-fifth or more but less than one-third of the voting power;
- one-third or more but less than a majority of the voting power;
or
- a majority or more of the voting power.
Ohio State Bancshares is an "issuing public corporation". Assuming
compliance with the notice and informational filing requirements prescribed by
the Ohio Control Share Acquisition Act, the proposed control share acquisition
may take place only if, at a special meeting of shareholders at which at least a
majority of the voting power is represented in person or by proxy, the
acquisition is approved by both:
- a majority of the voting power of the corporation represented in
person or by proxy at the meeting, and
- a majority of the voting power at the meeting exercised by
shareholders, excluding:
17
- the acquiring shareholder,
- directors of the corporation who are also employees,
- executive officers appointed by directors of the Company, and
- persons who acquire specified amounts of shares after the first
public disclosure of the proposed control share acquisition.
CLASSIFICATION OF BOARD OF DIRECTORS AND SUPERMAJORITY REMOVAL PROVISION
Our board of directors is divided into three classes of approximately
equal numbers of directors, with the term of office of one class expiring each
year. This provides a greater likelihood of continuity, knowledge and experience
on the Company's Board of Directors. This also means that any person who may
attempt to take over Ohio State Bancshares would have to deal with the current
board of directors because even if that person acquires a majority of the
outstanding voting shares, that person might be unable to change the majority of
the board of directors at any one shareholder meeting.
LIQUIDATION RIGHTS
In the event of liquidation, the holders of our common stock are
entitled to certain rights as to assets distributable to shareholders on a pro
rata basis after satisfaction of our debts.
PREEMPTIVE RIGHTS
Our shareholders have preemptive rights. Preemptive rights permit a
shareholder to subscribe to a sufficient number of shares so as to maintain
their relative pro rata ownership upon the issuance of additional shares by a
corporation, except in certain circumstances. If a current shareholder elects to
purchase their pro rata number of shares under this offering, they will have
achieved the effect of preemptive rights in connection with this offering of our
stock.
DISSENTERS' RIGHTS
Our shareholders have dissenters' rights in certain transactions
pursuant to Ohio law, which includes mergers and consolidations.
CUMULATIVE VOTING
Our shareholders have the right to elect cumulative voting in the
election of directors. A shareholder voting cumulatively may cast the number of
shares he owns times the number of directors to be elected in favor of one
nominee or allocate such votes among the nominees as he determines.
THE OFFERING
THE RIGHTS OFFERING
We are offering our shareholders the right to subscribe for and
purchase up to an aggregate of 44,000 shares of common stock at $66.00 per
share. Only those shareholders that owned common stock on July 18, 2002,
will receive subscription rights to purchase stock in the rights offering. You
do not have to buy any minimum number of shares to participate in the offering.
Each subscription right provides you with the opportunity to purchase
0.3014 share of common stock for every share of common stock you owned at the
close of business on July 18, 2002. In determining the number of shares
of common stock a shareholder will have the right to buy, we will round down to
the nearest whole number. We will not issue fractional subscription rights and
we will not pay cash in place of subscription rights or fractional shares.
18
THE COMMUNITY OFFERING
If there are any shares that are not subscribed for in the rights
offering, we may offer them to the public within the State of Ohio at $69.00 per
share, to shareholders at $68.00 per share and employees at $34.00 per share,
starting on August 29, 2002. Employees may only purchase 15 shares at $34.00 per
share. Employees may purchase additional shares at $68.00 per share. You do not
need to be a current shareholder in order to participate in the community
offering. You do not have to buy a minimum number of shares to participate. We
reserve the right to accept or reject, for any reason, any subscription for
shares tendered to us in the community offering. We may also determine not to
proceed with the community offering even if we have conducted the rights
offering.
If there is an oversubscription of shares in this community offering,
we will allocate the shares among the subscribers. We will be taking into
account the following factors:
- the timing of receipt of your subscription;
- the amount of the subscription;
- whether the subscriber is an existing shareholder or employee;
and
- whether the subscriber is an existing customer of the Bank.
It is our intention to encourage broad ownership of our stock among
persons who live or work in our primary market area. We also want to encourage
ownership of our stock by our employees.
If you request and pay for more shares than we allocate to you, we will
refund your overpayment, without interest.
No subscriber will be able to purchase more than $500,000 of stock in
the community offering.
CERTIFICATES FOR SHARES
You will receive certificates representing the shares that you purchase
as soon as practicable after the closing of the offering.
EXPIRATION DATES
RIGHTS OFFERING
The rights offering will expire at 5:00 p.m., Eastern Time, on August
28, 2002. IF YOU DO NOT EXERCISE YOUR SUBSCRIPTION RIGHTS ON OR BEFORE THAT
TIME, YOUR SUBSCRIPTION RIGHTS WILL EXPIRE AND THEREFORE BE NULL AND VOID. ANY
SUBSCRIPTION AGREEMENT RECEIVED AFTER THAT TIME WILL BE TREATED AS A
SUBSCRIPTION IN THE COMMUNITY OFFERING AND WILL BE SUBJECT TO SHARE AVAILABILITY
AND OVERSUBSCRIPTION PROCEDURES IF NECESSARY.
We may reject any subscription agreement submitted in the rights
offering that we receive after 5:00 p.m. on the expiration date, regardless of
when the documents were originally mailed. Shareholders who wish to participate
in the rights offering should submit their subscription agreement to us by the
expiration date, or to their broker, bank or other record holder at least 10
days before the expiration date, to allow the broker, bank or other record
holder sufficient time to carry out those instructions.
COMMUNITY OFFERING
The community offering will commence on August 29, 2002 and will expire
at the earlier of:
- a date selected by the board of directors; or
- November 27, unless extended by us, but no later than February
12, 2003.
DETERMINATION OF OFFERING PRICE
19
Our board of directors determined the offering prices after considering
the following factors:
- prices at which our stock has recently traded;
- the book value of our assets;
- the growth of our assets;
- our past operations;
- our cash flow;
- our earnings;
- the growth of our earnings;
- our overall financial condition; and
- our future prospects.
We also want to encourage ownership of our stock by our employees. The
board did not consider any one factor to be more important than any other in
determining the offering prices.
SUBSCRIPTION PROCEDURES
You should follow these procedures to purchase stock in the offering.
To participate in the offering, you must submit a subscription agreement for the
appropriate offering, together with full payment of the offering price for all
your desired shares. Those who hold common stock for the account of others, such
as brokers, banks, trustees or depositories, should notify the beneficial owners
of those shares as soon as possible to ascertain the beneficial owners'
intentions and to obtain instructions with respect to the rights offering.
RIGHTS OFFERING. A subscription agreement exercising rights under the
rights offering must be properly executed and received by us, together with full
payment for these shares, before 5:00 p.m., Eastern time, on August 28, 2002.
You should also indicate on the same form the number of shares you would like to
purchase in the community offering. You must enclose full payment for all shares
ordered when submitting the subscription agreement. If received late, the entire
number of shares ordered in the subscription agreement will be treated solely as
a subscription in the community offering.
COMMUNITY OFFERING. A subscription agreement for shares in the
community offering must be properly executed and received by us, together with
full payment for these shares, before 5:00 p.m., Eastern time, on November 27,
2002, unless we extend the expiration date or close the offering at an earlier
date.
Payment of the offering price must be made by cashier's check, personal
check or bank draft drawn upon a U.S. bank or money order, in all cases payable
to "Ohio State Bancshares, Inc."
If you wish to pay by uncertified personal check, please note that your
check may take five business days or more to clear and, therefore, we may hold
the processing of your certificates for up to ten business days following the
closing of the offering. You are urged to arrange for payment by certified,
cashier's check or money order.
Deliver the subscription agreements and payments by mail, hand delivery
or overnight courier, as follows:
BY MAIL: BY HAND: BY OVERNIGHT COURIER:
- -------- -------- ---------------------
Ohio State Bancshares, Inc. Ohio State Bancshares, Inc. Ohio State Bancshares, Inc.
111 S. Main Street 111 S. Main Street 111 S. Main Street
Marion, Ohio 43302 Marion, Ohio 43302 Marion, Ohio 43302
Attention: Cynthia L. Sparling Attention: Cynthia L. Sparling Attention: Cynthia L. Sparling
If you are an existing shareholder and do not indicate the number of
shares to be purchased or do not forward full payment of the offering price, you
will be deemed to have exercised your subscription rights only to the extent of
the payment received. If there are any remaining funds from your payment, we
will treat them as your payment toward a subscription in the community offering.
New investors will be deemed to have subscribed for the number of shares for
which payment is delivered.
The delivery method used for the subscription agreement and payment for
the related shares will be at your election and risk. If sent by
20
mail, it is recommended that your subscription agreement and payment be sent by
registered mail, properly insured, with return receipt requested, and that a
sufficient number of days be allowed to ensure delivery and clearance of payment
prior to the expiration date.
Our answers to all questions concerning the timeliness, validity, form
and eligibility of any subscription will be final and binding. We may, in our
sole discretion, waive any defect or irregularity, permit a defect or
irregularity to be corrected within any time as we may determine, or reject the
purported exercise of any right. Subscriptions are not deemed received or
accepted until all irregularities are waived or cured within the time that we
determine in our discretion. We have no duty to notify you of any defect or
irregularity in connection with the submission of your subscription agreement or
incur any liability for failure to give notification.
If you have any questions concerning the rights offering or these
subscription procedures, or if you would like additional copies of this
prospectus or other documents, please contact: Ms. Cynthia L. Sparling,
Secretary at (740) 387-2265.
NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS
Only you may exercise your subscription rights. You may not sell, give
away or otherwise transfer your subscription rights.
NO REVOCATION AFTER EXERCISE OF RIGHTS OR SUBSCRIPTION IN COMMUNITY OFFERING
After you exercise your subscription rights or subscribe for shares in
the community offering, you may not revoke that exercise or subscription unless
we amend the terms of this offering (as described below). You should not
exercise your subscription rights or submit a subscription in the community
offering unless you are certain that you wish to purchase shares of our common
stock.
AMENDMENT AND TERMINATION OF OFFERING
We reserve the right to amend the terms and conditions of this offering
at any time. If we make an amendment that we consider significant, we will:
- mail notice of the amendment to all shareholders who owned shares
of common stock on July 18, 2002;
- extend the expiration date of the offering by at least 14 days;
and
- allow you at least 10 days to revoke any prior subscriptions, in
whole or in part.
In all other cases, subscriptions will be irrevocable.
We also reserve the right to terminate the rights offering at any time,
in our discretion, in which case all subscriptions will be canceled, and we will
return all subscription payments to subscribers. If we terminate the rights
offering, we will also terminate the community offering. We may also determine
not to proceed with the community offering even if we have conducted the rights
offering.
SHARES OF COMMON STOCK OUTSTANDING AFTER THE OFFERING
Assuming we issue all of the 44,000 shares of common stock being
offered by this prospectus, we will then have 190,000 shares of common stock
issued and outstanding. This would represent a 30% increase in the number of
outstanding shares of our common stock. If you are an existing shareholder and
you do not exercise your subscription rights, the percentage of common stock
that you hold could significantly decrease after the offering.
CERTAIN OWNERSHIP LIMITS AND REPORTING REQUIREMENTS
Federal law prohibits you from directly or indirectly, or through or in
concert with one or more persons, acquiring "control" of us (defined to include
ownership, control or the power to vote 10% or more of a class of our voting
securities) unless you provide at least 60 days' prior written notice to the
Federal Reserve Board. A person is deemed to have acquired shares that he or she
has the right to acquire through the exercise of options, warrants and
21
rights. Therefore, any subscriptions in this offering that are subject to such
Federal laws may, in our discretion, be deemed void in their entirety or in
part, and not accepted by us.
Any person or group that acquires direct or indirect beneficial
ownership of more than 5% of the outstanding shares of our common stock will be
subject to SEC reporting requirements under Section 13(d) or 13(g) of the
Securities Exchange Act of 1934. In addition, any person or group that acquires
direct or indirect beneficial ownership of more than 10% of the outstanding
shares of our common stock will be subject to further SEC reporting requirements
under Section 16(a) of the Exchange Act and may become liable under Section
16(b) of the Exchange Act for reimbursement of any "short-swing profits." Please
consult with your attorney to see if these rules will apply to you.
NO RECOMMENDATIONS
We are not making any recommendation as to whether or not you should
exercise your subscription rights. You should make your decision based on your
own assessment of your best interests.
FEDERAL INCOME TAX CONSIDERATIONS
The following summarizes the material federal income tax consequences
of the rights offering. This summary is based on current law, which is subject
to change at any time, possibly with retroactive effect. This summary is not a
complete discussion of all federal income tax consequences of the rights
offering, and, in particular, may not address federal income tax consequences
applicable to shareholders subject to special treatment under federal income tax
law. In addition, this summary does not address the tax consequences of the
rights offering under applicable state, local or foreign tax laws. This
discussion assumes that your shares of Ohio State Bancshares stock and the
subscription rights and shares issued to you pursuant to the rights offering
constitute capital assets.
Receipt and exercise of the subscription rights distributed pursuant to
the rights offering is intended to be nontaxable to shareholders, and the
following summary assumes you will qualify for such nontaxable treatment. We
have not sought, nor do we intend to seek, any ruling from the IRS related to
the tax matters described below. This discussion is included for your general
information only. You should consult your tax advisor to determine the tax
consequences to you of the rights offering in light of your particular
circumstances, including any state, local and foreign tax consequences.
TAXATION OF SHAREHOLDERS
OHIO STATE BANCSHARES INTENDS THAT THE RIGHTS OFFERING WILL QUALIFY AS
NONTAXABLE TO YOU. YOU SHOULD NOT RECOGNIZE ANY GAIN OR OTHER INCOME UPON
RECEIPT OF A SUBSCRIPTION RIGHT, ANY LOSS UPON THE EXPIRATION OF A SUBSCRIPTION
RIGHT, OR ANY GAIN OR LOSS ON THE EXERCISE OF A SUBSCRIPTION RIGHT.
The Company has received an opinion of Werner & Blank, LLC, to the
effect that, for federal income tax purposes: (i) neither the receipt nor the
exercise of the rights will result in taxable income to shareholders; (ii) no
deductible loss will be realized if rights are allowed to expire without
exercise; (iii) the tax basis of shares acquired upon the exercise of rights
will be the subscription price; and (iv) there is no allocation of an existing
shareholder's tax basis in current shares held to such rights, whether or not
such rights are exercised, because (based upon the limited time period in which
shareholders have the option to exercise their rights and the fact that the
purchase price per share paid upon the exercise of a right is substantially
equal to the per share price of the shares sold in the community offering) the
Company has determined that such value is zero. No independent determination of
the value of the rights distributed has been made.
EMPLOYEES
Employees who purchase shares of common stock in the community offering
at $34.00 per share will realize ordinary income at the time of purchase in an
amount equal to the difference between the then fair market value of the shares
purchased at that price and the price paid for the shares. The Company will be
entitled to a deduction in the same amount, which will not exceed $17,340 in
total.
22
LEGAL PROCEEDINGS
We are not currently a party to any litigation nor are we aware of any
threatened litigation against the Bank or us other than routine litigation
incidental to the conduct of our business.
PLAN OF DISTRIBUTION
On or about July 24, 2002, we will commence the rights offering by
distributing the subscription rights and copies of this prospectus, together
with a copy of subscription agreements, to individuals who owned shares of our
common stock on July 18, 2002. If you wish to exercise your subscription
rights and purchase shares of common stock, you should complete the subscription
agreement and return it, with payment for the shares to us. If you have any
questions, you should contact Ms. Cynthia L. Sparling at (740) 387-2265. See
"The Offering - Subscription Procedures."
At the same time, we will commence the community offering by
distributing copies of this prospectus and the community offering subscription
agreements to interested investors who are not already our stockholders. Persons
who wish to purchase stock in the community offering must complete the
subscription agreement and return it, with the required payment for the shares,
to us. See "The Offering - Subscription Procedures."
We will hold all subscription agreements received in the offering and
will be responsible for processing refunds, in case of cancellation of the
offering, to stockholders. Our transfer agent, the Bank, will be responsible for
delivering stock certificates at the conclusion of the offering. We will pay all
fees and expenses of our transfer agent in connection with the offering. You
will be responsible for paying any other commissions, fees, taxes or other
expenses incurred in connection with the purchase of stock in this offering.
Our total expenses for this offering, other than commissions paid to
Community Banc Investments, Inc. will approximate $65,280.
LEGAL MATTERS
Werner & Blank, LLC, will deliver an opinion to us about the validity
of the issuance of shares of our common stock in this offering.
INDEMNIFICATION
The Articles of Incorporation of the Company and Ohio law contain
certain indemnification provisions which provide that directors and officers
will be indemnified against expenses actually and reasonably incurred by them if
they are successful on the merits of a claim or proceeding.
Even when a case or dispute is not ultimately determined on its merits
(i.e. settled), the indemnification provisions of the Articles of Incorporation
and Ohio law provide that the Company will indemnify directors and officers when
they meet the applicable standard of conduct. The applicable standard of conduct
is met if the officer or director acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the Company
or, with respect to any criminal action or proceeding, if the director had no
reasonable cause to believe his or her conduct was unlawful. Whether the
applicable standard of conduct has been met is determined by the board of
directors, a disinterested committee of the board, the shareholders or
independent legal counsel in each specific case.
The Articles of Incorporation of the Company and Ohio law provide that
these indemnification right are not exclusive of any other indemnification
rights to which an officer or director may be entitled under any resolution or
agreement approved by a majority vote of shareholders. The Company may also
provide for greater indemnification if it chooses to do so.
Subject to the limits described below, the Articles of Incorporation
require that the Company indemnify its present and past directors for personal
liability for monetary damages resulting from breach of their fiduciary duty as
directors. Notwithstanding the above, no indemnification for personal liability
shall be provided for: (i) any breach of
23
the directors' duty of loyalty to the Company or its shareholders; (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) illegal distribution of dividends; and (iv) any
transaction from which the director derived an improper personal benefit.
The Company also maintains a directors' and officers' liability
insurance policy, including reimbursement of the Company, in order to provide
indemnification to directors and officers.
Our underwriting agreement with Community Banc Investments, Inc. for
the community offering also provides that the Company will indemnify Community
Banc Investments, Inc. against liabilities, including civil liabilities under
the Securities Act of 1933, that are based on the actions of the Company or its
other agents in connection with the offering.
EXPERTS
The audited consolidated financial statements in this registration
statement from our Annual Report 2001 included in Annex A-1 have been audited by
Crowe, Chizek and Company LLP and have been included in reliance on their report
given on their authority as experts in accounting and auditing.
24
Annex A-1
OHIO STATE BANCSHARES
Marion, Ohio
ANNUAL REPORT
December 31, 2001
OHIO STATE BANCSHARES, INC.
ANNUAL REPORT
December 31, 2001
TABLE OF CONTENTS
President's Letter................................................... 1
Comparative Summary of Selected Financial Data....................... 2
Financial Statements................................................. 3
Report of Independent Auditors............................... 3
Consolidated Financial Statements............................ 4
Notes to Consolidated Financial Statements................... 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 22
Board of Directors................................................... 36
Officers............................................................. 37
FROM THE PRESIDENT:
As I predicted, 2001 was one of the best years ever for Ohio State Bancshares,
Inc. and The Marion Bank. The work invested in reorganizing upper management and
the implementation of new operating procedures is beginning to pay big
dividends. The Corporation closed 2001 with over $90 million in total assets,
which represents a 1-year increase of more than 25%. Net income also climbed to
$653,000, its highest level ever. To our shareholders, 2001 net income
represents a 10.99% return on average shareholders' equity. This is a
significant improvement when compared to our five-year average, which is a
respectable 9.37%.
In June of 2001, we finished our renovations to the main office. This needed
expansion provides a more comfortable and private atmosphere for our customers
when conducting business with our lending officers. This upgrade in facility has
also created more space for our growing bookkeeping department, which will
shortly be marketing our internet banking products including total bill paying
capabilities.
I am energized with the thought of a new year. My primary goal is to utilize the
success of 2001 as the building block of a more successful 2002 and beyond. We
will continue our impressive growth rates through increased exposure to our
community. Whether saving for the next holiday shopping season to saving for
retirement, we offer some of the best rates in town. Also, no matter what your
financing needs, from a new or used car to a first time homebuyer, we can help.
Good financial products and services have a positive impact on the growth and
success of our community. At Ohio State Bancshares, Inc. and The Marion Bank, we
wish to do all we can to offer these products and services that allow our
businesses and families to grow. As always, if you have concerns, questions or
just want to chat, my door is always open, and I look forward to seeing you
soon.
Sincerely,
/s/ Gary E. Pendleton
Gary E. Pendleton
President/CEO
1
COMPARATIVE SUMMARY OF SELECTED FINANCIAL DATA
As of or for the years ending December 31,
(Dollars in 000's except per share data)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA
Total interest income $ 6,148 $ 5,631 $ 5,083 $ 4,187 $ 3,649
Total interest expense 2,924 2,661 2,252 1,890 1,646
-------- -------- -------- -------- --------
Net interest income 3,224 2,970 2,831 2,297 2,003
Provision for loan losses 336 365 446 230 139
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses 2,888 2,605 2,385 2,067 1,864
Noninterest income 598 294 298 294 239
Noninterest expense 2,582 2,484 2,085 1,766 1,630
Income tax expense 251 86 138 170 126
Cumulative effect of accounting changes -- -- 24 -- --
-------- -------- -------- -------- --------
Net income $ 653 $ 329 $ 436 $ 425 $ 347
======== ======== ======== ======== ========
PER SHARE DATA:
Basic and diluted earnings per
common share $ 4.47 $ 2.26 $ 3.10 $ 3.51 $ 2.86
Book value per share at year-end 42.57 37.89 34.37 33.21 29.40
Cash dividends per share 0.60 0.60 0.50 0.50 0.40
Number of shares used in earnings per
share calculations 146,000 146,000 140,799 121,242 121,200
BALANCE SHEET DATA:
Total assets $ 91,407 $ 73,040 $ 69,107 $ 60,740 $ 49,794
Total securities 21,918 14,063 15,372 13,757 10,009
Total net loans 57,493 52,167 48,478 37,272 34,418
Allowance for loan losses 714 610 507 360 311
Total deposits 81,787 66,946 62,731 56,069 45,909
Borrowings 2,837 -- 1,000 -- --
Shareholders' equity 6,215 5,532 5,017 4,191 3,563
OPERATING RATIOS:
Total net loans to total deposits 70.30% 77.92% 77.28% 66.47% 74.97%
Total shareholders' equity to total assets 6.80 7.57 7.26 6.90 7.16
Average shareholders' equity to
average assets 7.36 7.48 7.18 7.16 7.42
Return on average equity 10.99 6.28 9.18 11.17 10.26
Return on average assets 0.81 0.47 0.66 0.80 0.76
Dividend payout ratio 13.41 26.60 16.73 14.25 13.98
Total interest expense to interest income 47.55 47.26 44.30 45.14 45.11
Allowance for loan losses
to total loans 1.23 1.16 1.03 0.96 0.90
Average assets $ 80,744 $ 70,108 $ 66,125 $ 53,185 $ 45,598
Average shareholders' equity 5,942 5,244 4,748 3,808 3,383
Averages used herein, unless indicated otherwise, are based on daily averages.
- --------------------------------------------------------------------------------
2
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Ohio State Bancshares, Inc.
Marion, Ohio
We have audited the accompanying consolidated balance sheets of Ohio State
Bancshares, Inc. as of December 31, 2001 and 2000, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ohio State
Bancshares, Inc. as of December 31, 2001 and 2000, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
Crowe, Chizek and Company LLP
Columbus, Ohio
January 30, 2002
- --------------------------------------------------------------------------------
3
OHIO STATE BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
2001 2000
---- ----
ASSETS
Cash and due from financial institutions $ 3,698,341 $ 2,295,635
Interest-earning demand deposits 2,613,055 --
Federal funds sold 1,891,000 2,414,000
------------ ------------
Cash and cash equivalents 8,202,396 4,709,635
Interest-earning deposits 449,387 --
Securities available for sale 17,758,732 10,397,644
Securities held to maturity (fair value 2001 - $4,177,979;
2000 - $3,696,870) 4,159,220 3,664,874
Loans, net 57,493,391 52,166,770
Premises and equipment, net 1,469,560 1,002,708
Accrued interest receivable 526,682 492,098
Other assets 1,347,418 606,752
------------ ------------
$ 91,406,786 $ 73,040,481
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 9,065,846 $ 7,675,081
Interest-bearing 72,720,780 59,270,451
------------ ------------
Total 81,786,626 66,945,532
Borrowings 2,836,963 --
Accrued interest payable 233,542 300,910
Other liabilities 334,646 262,168
------------ ------------
Total liabilities 85,191,777 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 2,058,427 1,492,741
Accumulated other comprehensive income (loss) 43,873 (73,579)
------------ ------------
Total shareholders' equity 6,215,009 5,531,871
------------ ------------
$ 91,406,786 $ 73,040,481
============ ============
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
OHIO STATE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2001 and 2000
- --------------------------------------------------------------------------------
2001 2000
---- ----
Interest and dividend income
Loans, including fees $ 5,009,636 $ 4,706,582
Taxable securities 820,413 692,632
Nontaxable securities 198,909 198,328
Federal funds sold and other 118,749 33,810
----------- -----------
Total interest and dividend income 6,147,707 5,631,352
Interest expense
Deposits 2,846,959 2,614,842
Other borrowings 76,575 46,354
----------- -----------
Total interest expense 2,923,534 2,661,196
----------- -----------
Net interest income 3,224,173 2,970,156
Provision for loan losses 336,500 365,000
----------- -----------
Net interest income after provision for loan losses 2,887,673 2,605,156
Noninterest income
Fees for customer services 457,828 265,255
Gain on sale of loan 68,232 --
Net gains (losses) on sales or calls of securities 16,277 (2,106)
Other 55,413 30,446
----------- -----------
Total noninterest income 597,750 293,595
Noninterest expense
Salaries and employee benefits 1,210,910 1,087,229
Occupancy and equipment 494,918 456,489
Professional fees 185,404 233,108
Office supplies 123,578 101,743
Litigation settlement -- 82,500
Loan collection and repossessions 55,377 72,812
Advertising and public relations 87,793 51,219
Taxes, other than income 65,990 52,042
Credit card processing 65,676 66,987
Director expenses 49,796 51,891
Other 242,417 227,326
----------- -----------
Total noninterest expense 2,581,859 2,483,346
----------- -----------
Income before income taxes 903,564 415,405
Income tax expense 250,278 86,034
----------- -----------
Net income $ 653,286 $ 329,371
=========== ===========
Basic and diluted earnings per share $ 4.47 $ 2.26
=========== ===========
Weighted average shares outstanding 146,000 146,000
=========== ===========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5
OHIO STATE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2001 and 2000
- --------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Shareholders'
Stock Capital Earnings Income (Loss) Equity
----- ------- -------- ------------- ------
Balance, January 1, 2000 $ 1,460,000 $ 2,652,709 $ 1,250,970 $ (346,384) $ 5,017,295
Comprehensive income:
Net income 329,371 329,371
Change in net unrealized
gain (loss) on securities
available for sale, net of
reclassification and tax
effects 272,805 272,805
-------------
Total comprehensive
income 602,176
Cash dividends declared
($0.60 per share) (87,600) (87,600)
------------- ------------- ----------- ----------- -------------
Balance, December 31, 2000 1,460,000 2,652,709 1,492,741 (73,579) 5,531,871
Comprehensive income:
Net income 653,286 653,286
Change in net unrealized
gain (loss) on securities
available for sale, net of
reclassification and tax
effects 117,452 117,452
-------------
Total comprehensive
income 770,738
Cash dividends declared
($0.60 per share) (87,600) (87,600)
------------- ------------- ----------- ----------- -------------
Balance, December 31, 2001 $ 1,460,000 $ 2,652,709 $ 2,058,427 $ 43,873 $ 6,215,009
============= ============= =========== =========== =============
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6
OHIO STATE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001 and 2000
- --------------------------------------------------------------------------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 653,286 $ 329,371
Adjustment to reconcile net income to net cash from
operating activities:
Depreciation and amortization 201,645 171,973
Net amortization of securities 32,578 17,690
Provision for loan losses 336,500 365,000
Deferred taxes 58,055 (39,436)
Net realized (gains) losses on sales of securities (16,277) 2,106
Gain on sale of loan (68,232) --
Federal Home Loan Bank stock dividends (16,300) (15,100)
Change in deferred loan costs (14,032) 19,949
Change in accrued interest receivable (34,584) (42,077)
Change in accrued interest payable (67,368) 45,378
Change in other assets and other liabilities 71,745 315,272
------------ ------------
Net cash from operating activities 1,137,016 1,170,126
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Sales 1,509,770 1,369,478
Maturities, payments and calls 3,776,381 1,564,453
Purchases (12,468,298) (1,365,407)
Securities held to maturity
Maturities and calls -- 150,000
Purchases (500,000) --
Loan sale proceeds 1,722,342 --
Loan originations and payments, net (7,463,693) (4,221,490)
Purchases of premises and equipment (668,497) (98,130)
Purchase of certificate of deposit (444,717) --
Purchase of bank owned life insurance (698,000) (118,000)
------------ ------------
Net cash from investing activities (15,234,712) (2,719,096)
CASH FLOWS FROM FINANCING ACTIVITIES
Net changes in deposits 14,841,094 4,214,336
Proceeds from advance of long-term borrowings 2,350,000 --
Principle repayments of long-term borrowings (13,037) --
Net changes in short-term borrowings 500,000 (1,000,000)
Cash dividends paid (87,600) (87,600)
------------ ------------
Net cash from financing activities 17,590,457 3,126,736
------------ ------------
Net change in cash and cash equivalents 3,492,761 1,577,766
Beginning cash and cash equivalents 4,709,635 3,131,869
------------ ------------
Ending cash and cash equivalents $ 8,202,396 $ 4,709,635
============ ============
Supplemental cash flow information:
Interest paid $ 2,990,902 $ 2,615,818
Income taxes paid 187,470 32,680
Supplemental noncash disclosures:
Transfers from loans to other real estate owned
and repossessions $ 160,494 $ 148,250
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
7
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The 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 are eliminated in consolidation.
NATURE OF OPERATIONS: 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.
USE OF ESTIMATES: To prepare financial statements in conformity with accounting
principles generally accepted in the United States of America, 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.
CASH FLOW REPORTING: Cash and cash equivalents include cash, deposits with other
financial institutions with maturities under 90 days and federal funds sold. Net
cash flows are reported for loan and deposit transactions, interest-bearing time
deposits with other financial institutions and short-term borrowings with
maturities of 90 days or less.
SECURITIES: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported in other comprehensive income.
Other securities such as FHLB stock are carried at cost.
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is not temporary.
LOANS: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of net deferred loan costs and the allowance for loan
losses.
Interest income is reported on the interest method and includes amortization of
net deferred loan costs over the loan term. Interest income is not reported when
full loan repayment is in doubt, typically when the loan is impaired or payments
are past due over 90 days. Payments received on such loans are reported as
principal reductions.
- --------------------------------------------------------------------------------
(Continued)
8
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions and other factors. Allocations
of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be charged-off.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan is confirmed.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer and credit card loans, and on an
individual basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is calculated generally on the
straight-line method over asset useful lives. Maintenance and repairs are
expensed and major improvements are capitalized.
FORECLOSED ASSETS: Assets acquired through or instead of loan foreclosure are
initially recorded at fair value when acquired, establishing a new cost basis.
If fair value declines, a valuation allowance is recorded through expense. Costs
after acquisition are expensed.
LONG-TERM ASSETS: Premises and equipment and other long-term assets are reviewed
for impairment when events indicate their carrying amount may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
discounted amounts.
INCOME TAXES: 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.
FINANCIAL INSTRUMENTS: Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and standby letters of credit,
issued to meet customer financing needs. The face amounts for these items
represents the exposure to loss, before considering customer collateral or
ability to repay. Such financial instruments are recorded when they are funded.
EARNINGS PER COMMON SHARE: Basic earnings per common 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.
DIVIDEND RESTRICTION: Banking regulations require maintaining certain capital
levels and may limit the amount of
dividends paid by the Bank to OSB or by OSB to shareholders.
- --------------------------------------------------------------------------------
(Continued)
9
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOSS CONTINGENCIES: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there are now such matters that will have
a material effect on the financial statements.
RESTRICTIONS ON CASH: The Corporation was required to have $218,000 and $458,000
of cash on hand or on deposit with the Federal Reserve Bank to meet regulatory
reserve and clearing requirements at year-end 2001 and 2000. These balances do
not earn interest.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale, which are also recognized as a separate
component of shareholders' equity.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
NEW ACCOUNTING PRONOUNCEMENTS: 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.
In June 2001, the Financial Accounting Standards Board ("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.
RECLASSIFICATIONS: Certain reclassifications have been made to the 2000
financial statements to be comparable to the 2001 presentation.
- --------------------------------------------------------------------------------
(Continued)
10
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
Year-end securities are as follows.
2001
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Available for sale
U.S. Treasury $ 99,978 $ 542 $ -- $ 100,520
U.S. government and federal
agencies 11,233,019 133,398 (61,948) 11,304,469
Mortgage-backed 6,077,920 34,650 (40,167) 6,072,403
----------- ----------- ----------- -----------
Total debt securities 17,410,917 168,590 (102,115) 17,477,392
Other securities 281,340 -- -- 281,340
----------- ----------- ----------- -----------
Total $17,692,257 $ 168,590 $ (102,115) $17,758,732
=========== =========== =========== ===========
Held to maturity
State and municipal $ 4,159,220 $ 78,354 $ (59,595) $ 4,177,979
=========== =========== =========== ===========
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
=========== =========== =========== ===========
Proceeds from the sales of securities available for sale during 2001 and 2000
were $1,509,770 and $1,369,478. Gross gains of $11,211 were realized on the
sales in 2001 and gross losses of $2,106 were realized on the sales in 2000. In
2001, an additional $5,066 in gains were realized relating to calls of certain
securities.
- --------------------------------------------------------------------------------
(Continued)
11
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Contractual maturities of securities at year-end 2001 were as follows.
Securities not due at a single maturity date, primarily mortgage-backed
securities, are shown separately.
Available for sale Held to Maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- ----
Due in one year or less $ 99,978 $ 100,520 $ -- $ --
Due from one to five years 4,861,791 4,936,248 -- --
Due from five to ten years 5,314,931 5,331,602 1,508,626 1,578,295
Due after ten years 1,056,297 1,036,619 2,650,594 2,599,684
Mortgage-backed 6,077,920 6,072,403 -- --
Other securities 281,340 281,340 -- --
----------- ----------- ----------- -----------
$17,692,257 $17,758,732 $ 4,159,220 $ 4,177,979
=========== =========== =========== ===========
Securities with carrying values of $9,425,000 and $6,521,000 at December 31,
2001 and 2000 were pledged to secure public deposits and for other purposes.
NOTE 3 - LOANS
Year-end loans were as follows.
2001 2000
---- ----
Commercial $ 8,539,061 $ 6,770,072
Installment 23,759,858 24,891,651
Real estate 24,550,130 19,801,041
Credit card 758,579 743,022
Other 50,538 35,556
------------ ------------
57,658,166 52,241,342
Net deferred loan costs 549,213 535,181
Allowance for loan losses (713,988) (609,753)
------------ ------------
$ 57,493,391 $ 52,166,770
============ ============
Activity in the allowance for loan losses was as follows.
2001 2000
---- ----
Beginning balance $ 609,753 $ 506,542
Loans charged-off (327,187) (387,556)
Recoveries of previous charge-offs 94,922 125,767
Provision for loan losses 336,500 365,000
--------- ---------
Ending balance $ 713,988 $ 609,753
========= =========
- --------------------------------------------------------------------------------
(Continued)
12
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
The balance of loans evaluated for impairment on an individual basis at December
31, 2001 and 2000 and for the periods then ending was not material.
Nonperforming loans were as follows.
2001 2000
---- ----
Loans past due over 90 days still on accrual $167,839 $ 6,013
Loans on nonaccrual 225,473 140,027
Nonperforming loans include smaller balance homogeneous loans such as
residential real estate, installment and credit card loans that are collectively
evaluated for impairment.
NOTE 4 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows.
2001 2000
---- ----
Land $ 115,875 $ 115,875
Building and improvements 1,012,345 559,834
Furniture, fixtures and equipment 1,361,143 1,145,157
Leasehold improvements 57,559 57,559
----------- -----------
Total cost 2,546,922 1,878,425
Less accumulated depreciation (1,077,362) (875,717)
----------- -----------
$ 1,469,560 $ 1,002,708
=========== ===========
The Bank's branch facility is leased under an operating lease. The lease term is
for twenty years. At the conclusion of the fifth, tenth and fifteenth years of
the lease, the rent shall be adjusted by 50% of the cumulative increase in the
Consumer Price Index over the previous five years with a minimum of 5% increase
and a maximum of 10% increase for any one five-year period. Total rental expense
was $38,748 in 2001 and in 2000.
Rental commitments for the Bank's branch facility noncancelable operating lease
were as follows.
2002 $ 40,685
2003 40,685
2004 40,685
2005 40,685
2006 40,828
Thereafter 434,891
----------
$ 638,460
==========
- --------------------------------------------------------------------------------
(Continued)
13
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 5 - DEPOSITS
Year-end interest-bearing deposits were as follows.
2001 2000
---- ----
Demand $22,496,141 $16,307,920
Savings 13,114,630 9,864,102
Time:
In denominations under $100,000 24,330,652 22,536,570
In denominations of $100,000 or more 12,779,357 10,561,859
----------- -----------
Total interest-bearing deposits $72,720,780 $59,270,451
=========== ===========
Scheduled maturities of time deposits were as follows.
2002 $ 29,119,392
2003 5,892,902
2004 506,861
2005 1,516,848
2006 28,152
Thereafter 45,854
------------
$ 37,110,009
============
Year-end stated maturities of certificates of deposit of $100,000 or more were
as follows.
2001 2000
---- ----
Three months or less $ 2,830,437 $ 2,255,277
Three through six months 1,931,969 2,432,235
Six through twelve months 6,438,388 4,227,335
Over twelve months 1,578,563 1,647,012
----------- -----------
$12,779,357 $10,561,859
=========== ===========
NOTE 6 - BORROWINGS
Federal funds purchased, borrowings from the Federal Home Loan Bank of
Cincinnati and a line of credit with a large national bank are financing
arrangements used by the Corporation. Information concerning borrowings was as
follows.
2001 2000
---- ----
Maximum month-end balance during the year $2,846,000 $1,700,000
Average balance during the year 1,726,000 671,000
Average interest rate during the year 4.44% 6.91%
- --------------------------------------------------------------------------------
(Continued)
14
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 6 - BORROWINGS (Continued)
Borrowings at year-end 2001 were as follows. No borrowings were outstanding at
year-end 2000.
Short-term borrowing under line of credit of $1,500,000, 3.95%
at December 31, 2001 $ 500,000
Fixed-rate FHLB advance, 3.77% due January 23, 2002 1,000,000
Convertible fixed-rate FHLB advance until January 24, 2002,
4.68%, due January 24, 2011 1,000,000
Mortgage-matched FHLB advance, 5.91%, maturity June 14, 2011 336,963
------------
$ 2,836,963
============
The interest rate on the convertible advance is fixed for a specific period of
time, then convertible to a variable rate at the option of the FHLB. If the
convertible option is exercised, the advance may be prepaid without penalty. The
mortgage-matched advance requires monthly principal and interest payments.
Maturities of borrowings for the next five years and thereafter were:
Year ended December 31,
2002 $ 1,527,121
2003 28,768
2004 30,515
2005 32,369
2006 34,334
Thereafter 1,183,856
------------
$ 2,836,963
============
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 December 31, 2001, the Bank has approximately $7,162,000 still available for
future advances.
NOTE 7 - EMPLOYEE BENEFITS
The Corporation provides a profit sharing plan that covers substantially all
employees. Eligible employees may contribute up to 15% of their compensation
subject to a maximum statutory limitation. The Corporation matches 50% of all
employee contributions not to exceed 4% of the participant's base compensation.
In addition, the Corporation may make an additional discretionary contribution
allocated to all eligible participants based on compensation. Contributions by
the Corporation were $22,500 and $13,600 for the years ended December 31, 2001
and 2000.
The Corporation also provides a supplemental retirement plan for current and
past officers. Benefits under the plan are based on the performance of life
insurance contracts purchased by the Corporation. Upon retirement, participants
receive 15 equal annual installments representing the cumulative increase in the
cash surrender value of the related life insurance policy in excess of an
opportunity cost, as defined in the plan, from the inception of the plan until
retirement. Participants also receive the annual increase in cash surrender
value in excess of the opportunity cost from retirement until death. The
officers vest 10% annually. The total liability for prior service upon adoption
of the plan was $160,571 and is being amortized over the estimated future
service period of 13 years. Expense related to this plan was $43,632 and $39,996
in 2001 and 2000.
- --------------------------------------------------------------------------------
(Continued)
15
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES
Income tax expense was as follows.
2001 2000
---- ----
Current $ 192,223 $ 125,470
Deferred 58,055 (39,436)
--------- ---------
$ 250,278 $ 86,034
========= =========
Effective tax rates differ from federal statutory rates applied to financial
statement income due to the following.
2001 2000
---- ----
Federal statutory rate times financial
statement income at 34% $ 307,212 $ 141,238
Effect of:
Tax exempt interest (57,772) (57,753)
Other, net 838 2,549
--------- ---------
Total $ 250,278 $ 86,034
========= =========
Effective tax rate % 27.7% 20.7%
========= =========
Year-end deferred tax assets and liabilities relate to the following items.
2001 2000
---- ----
Deferred tax assets
Allowance for loan losses $ 153,102 $ 125,508
Unrealized loss on securities available for sale -- 37,904
Deferred compensation 33,534 18,699
Organizational costs -- 912
--------- ---------
Total deferred tax assets 186,636 183,023
Deferred tax liabilities
Depreciation (75,609) (61,402)
Accrual to cash conversion (302,758) (225,411)
FHLB stock dividend (32,504) (26,962)
Unrealized gain on securities available for sale (22,602) --
Other (2,923) (447)
--------- ---------
Total deferred tax liabilities (436,396) (314,222)
--------- ---------
Net deferred tax liability $(249,760) $(131,199)
========= =========
- --------------------------------------------------------------------------------
(Continued)
16
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 9 - RELATED PARTIES
Loans to principal officers, directors, and their affiliates in 2001 were as
follows.
Beginning balance $ 1,543,608
New loans 397,920
Repayments (1,129,390)
-------------
Ending balance $ 812,138
=============
Deposits from principal officers, directors, and their affiliates at year-end
2001 and 2000 were $5,426,096 and $6,907,393.
NOTE 10 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
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 of credit loss exists up to the face amount of these instruments, although
material losses are not anticipated. The same credit policies are used to make
such commitments as are used for loans, including obtaining collateral at
exercise of the commitment.
Commitments to extend credit, primarily in the form of undisbursed portions of
approved lines of credit, are principally variable rate commitments. The
interest rates on these commitments ranged from 4.00% to 12.00% at year-end 2001
and 6.25% to 12.50% at year-end 2000. Outstanding commitments for credit cards
had interest rates ranging from 12.00% to 17.90% at year-end 2001 and 12.00% to
18.00% at year-end 2000.
Year-end contractual amounts of financial instruments with off-balance-sheet
risk were as follows.
2001 2000
---- ----
Commitments to extend credit $ 3,528,000 $ 2,328,000
Credit card arrangements 2,589,000 2,443,000
Overdraft protection 824,000 --
Letters of credit -- 10,000
Included in cash and cash equivalents at year-end 2001 and 2000 was
approximately $2,476,000 and $3,832,000 on deposit with the Great Lakes Bankers'
Bank.
- --------------------------------------------------------------------------------
(Continued)
17
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 11 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial instruments at year-end were as follows.
2001 2000
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets
Cash and cash equivalents $ 8,202,396 $ 8,202,396 $ 4,709,635 $ 4,709,635
Interest-earning deposits 449,387 457,090 -- --
Securities available for sale 17,758,732 17,758,732 10,397,644 10,397,644
Securities held to maturity 4,159,220 4,177,979 3,664,874 3,696,870
Loans, net 57,493,391 58,065,202 52,166,770 51,877,409
Accrued interest receivable 526,682 526,682 492,098 492,098
Financial liabilities
Demand and savings
deposits (44,676,617) (44,676,617) (33,847,103) (33,847,103)
Time deposits (37,110,009) (37,944,744) (33,098,429) (33,259,784)
Other borrowings (2,836,963) (2,912,558) -- --
Accrued interest payable (233,542) (233,542) (300,910) (300,910)
The estimated fair value approximates the carrying amount for all items except
those described below. Estimated fair value for securities is based on quoted
market values for the individual securities or for equivalent securities. For
fixed rate loans or deposits and for variable rate loans or deposits with
infrequent repricing or repricing limits, fair value is based on discounted cash
flows using current market rates applied to the estimated life and credit risk.
The fair value of off-balance-sheet items is based on the current fees or cost
that would be charged to enter into or terminate such arrangements and is
considered nominal.
NOTE 12 - CAPITAL REQUIREMENTS, RESTRICTIONS ON RETAINED EARNINGS AND REGULATORY
MATTERS
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. Failure to meet capital requirements can initiate regulatory action.
Prompt corrective action regulations provide five classifications: 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 capital restoration plans are required.
At year-end 2001 and 2000, the Bank was categorized as well capitalized. No
conditions or events have occurred subsequent to the latest notification by
regulators that management believes would have changed the Bank's category.
Actual capital levels for the Bank and minimum required were as follows.
- --------------------------------------------------------------------------------
(Continued)
18
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 12 - CAPITAL REQUIREMENTS, RESTRICTIONS ON RETAINED EARNINGS AND REGULATORY
MATTERS (Continued)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
2001 (Dollars in thousands)
Total capital (to risk weighted
assets) $7,192 11.9% $4,846 8.0% $6,058 10.0%
Tier 1 capital (to risk weighted
assets) 6,478 10.7 2,423 4.0 3,635 6.0
Tier 1 capital (to average assets) 6,478 7.2 3,608 4.0 4,510 5.0
2000
Total capital (to risk weighted
assets) $5,620 10.6% $4,242 8.0% $5,303 10.0%
Tier 1 capital (to risk weighted
assets) 5,010 9.4 2,121 4.0 3,182 6.0
Tier 1 capital (to average assets) 5,010 7.1 2,830 4.0 3,538 5.0
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 FDIC, whereby the Bank has agreed to comply with certain directives
which are 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 to the Ohio Division of Financial Institutions and the FDIC a
written plan to restore this ratio.
OSB's primary source of funds with which to pay dividends is dividends received
from the Bank. The payment of dividends by the Bank to OSB is subject to
restrictions by its regulatory agency. These restrictions generally limit
dividends to current and prior two years retained earnings as defined by the
regulations. In addition, dividends may not reduce capital levels below the
minimum regulatory requirements and the Board of Directors resolution disclosed
above. Under the most restrictive dividend limitations described, approximately
$164,000 is available to pay dividends to OSB and still maintain a tier 1
capital ratio of 7.0%. Currently, OSB must obtain prior written approval from
the Federal Reserve Bank before paying dividends to its shareholders.
- --------------------------------------------------------------------------------
(Continued)
19
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 13 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows.
2001 2000
---- ----
Unrealized holding gains on available-for-sale
securities $ 194,235 $ 411,235
Reclassification adjustments for (gains) and losses later
recognized in income (16,277) 2,106
--------- ---------
Net unrealized gains and losses 177,958 413,341
Tax effect (60,506) (140,536)
--------- ---------
Other comprehensive income $ 117,452 $ 272,805
========= =========
NOTE 14 - LITIGATION SETTLEMENT
Throughout 2000, the Bank was involved in a civil lawsuit with a former loan
customer. On January 5, 2001, the Bank accepted an offer to settle the case for
$82,500. This expense was recorded in 2000 because the event occurred prior to
December 31, 2000 and the loss was probable and measurable prior to the issuance
of the consolidated financial statements.
NOTE 15 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
Condensed parent company only financial statements for OSB follows.
CONDENSED BALANCE SHEETS
December 31, 2001 and 2000
2001 2000
---- ----
Assets
Cash and cash equivalents $ 162,956 $ 575,392
Investment in bank subsidiary 6,522,164 4,935,660
Other assets 29,889 20,819
---------- ----------
Total assets $6,715,009 $5,531,871
========== ==========
Liabilities and shareholders' equity
Other borrowings $ 500,000 $ --
Shareholders' equity 6,215,009 5,531,871
---------- ----------
Total liabilities and shareholders' equity $6,715,009 $5,531,871
========== ==========
- --------------------------------------------------------------------------------
(Continued)
20
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
Years ended December 31, 2001 and 2000
2001 2000
---- ----
Interest expense $ 3,496 $ --
Professional fees 17,007 4,116
Other expenses 3,385 50
--------- ---------
Total expenses 23,888 4,166
--------- ---------
Income (loss) before income tax and undistributed
subsidiary income (23,888) (4,166)
Income tax benefit 8,122 1,416
Equity in undistributed subsidiary income 669,052 332,121
--------- ---------
Net income 653,286 329,371
Other comprehensive income 117,452 272,805
--------- ---------
Total comprehensive income $ 770,738 $ 602,176
========= =========
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001 and 2000
2001 2000
---- ----
Cash flows from operating activities
Net income $ 653,286 $ 329,371
Adjustments:
Equity in undistributed subsidiary income (669,052) (332,121)
Change in other assets (9,070) (1,416)
--------- ---------
Net cash from operating activities (24,836) (4,166)
Cash flows from investing activities
Capital contribution to subsidiary (800,000) --
--------- ---------
Net cash from investing activities (800,000) --
Cash flows from financing activities
Net changes in short-term borrowings 500,000 --
Dividends paid (87,600) (87,600)
--------- ---------
Net cash from financing activities 412,400 (87,600)
--------- ---------
Net change in cash and cash equivalents (412,436) (91,766)
Beginning cash and cash equivalents 575,392 667,158
--------- ---------
Ending cash and cash equivalents $ 162,956 $ 575,392
========= =========
- --------------------------------------------------------------------------------
21
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Annual Report 2001
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In the following pages, management presents an analysis of Ohio State
Bancshares, Inc.'s financial condition and results of operations as of and for
the year ended December 31, 2001 as compared to the prior year. This discussion
is designed to provide shareholders with a more comprehensive review of the
operating results and financial position than could be obtained from an
examination of the consolidated financial statements alone. This analysis should
be read in conjunction with the consolidated financial statements and related
footnotes and the selected financial data included elsewhere in this report.
When used in this discussion or future filings by the Corporation with the
Securities and Exchange Commission, in the Corporation's 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.
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.
RESULTS OF OPERATIONS
Net income for the Corporation was $653,000 in 2001, or $324,000 more than the
$329,000 earned in 2000. The primary reason for the increase in earnings for
2001 was due to increases in noninterest income of $304,000 and net interest
income of $254,000, partially offset by increases in noninterest expense of
$99,000 and income taxes of $164,000. Noninterest income was up due to a 72.60%
increase in customer service fees relating to the introduction of the Bank's
Bounce Protection program and a $68,000 one-time gain relating to the sale of a
government guaranteed loan. Noninterest expenses were up due to increased
occupancy expenses, advertising expenses and normal salary increases. A detailed
discussion of the components of net interest income is provided in the following
paragraphs.
- --------------------------------------------------------------------------------
(Continued)
22
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Annual Report 2001
- --------------------------------------------------------------------------------
NET INTEREST INCOME
Net interest income is the amount of interest earned on loans, securities, and
other investments that exceeds the interest cost of deposits and other
borrowings. Net interest income is affected by the volume and composition of
earning assets and interest-bearing liabilities, as well as indirectly affected
by noninterest-bearing liabilities and shareholders' equity totals.
Additionally, the market level of interest rates and the resultant competitive
rate decisions made by management can impact net interest income. Interest rates
charged on loans are affected principally by the demand for such loans, the
supply of money available for lending purposes and competitive factors. These
factors are, in turn, affected by general economic conditions and other factors
beyond the Corporation's control, such as federal economic policies, the general
supply of money in the economy, legislative tax policies, governmental budgetary
matters and the actions of the Board of Governors of the Federal Reserve System.
Net interest income increased $254,000 from 2000 to 2001. The increase was the
result of higher average balances of interest-earning assets more than
offsetting a lower net interest margin. The net interest margin, which is net
interest income divided by average earning assets, decreased 20 basis points
from 4.52% for 2000 to 4.32% for 2001. This decrease was not the result of a
decrease in net interest spread but the result of a change in the mix of
interest-bearing liabilities to interest earning assets. Net interest spread is
the difference between the average yield of interest-earning assets to
interest-bearing liabilities and only decreased from 3.83% in 2000 to 3.82% in
2001. However, average interest-bearing liabilities as a percentage of
interest-earning assets increased from 85.8% to 88.4% from 2000 to 2001. This
change in mix is the major cause of the 20 basis point drop and was caused by a
larger increase in deposits than could be put into loans or securities during
the same period of time. Management also made an intentional effort to maintain
higher liquidity levels should interest rates rise during 2002.
Total interest income increased $517,000 and was the result of a 14.26% increase
in interest-earning assets, partially offset by a 32 basis point decrease in
average yield. The decrease in average yield was directly effected by the
interest rate environment of 2001 when the Federal Reserve Bank dropped the
Federal Funds rate 475 basis points and the average three-year treasury rate
dropped 132 basis points.
Total interest expense increased $263,000 in 2001. Again, this was due to volume
with average interest-bearing liabilities increasing from 2000 to 2001 by 17.8%.
The average rates paid dropped from 4.66% in 2000 to 4.35% in 2001.
The following tables further illustrate the impact on net interest income from
changes in average balances and yields of the Corporation's assets and
liabilities.
- --------------------------------------------------------------------------------
(Continued)
23
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Annual Report 2001
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
FOR THE YEARS ENDED DECEMBER 31,
(in thousands except percentages)
2001 2000
--------------------------------- ---------------------------------
Average Interest Average Interest
Average Yield or Earned Average Yield or Earned
Balance Rate Paid or Paid Balance Rate Paid or Paid
------- --------- ------- ------- --------- -------
ASSETS:
INTEREST-EARNING ASSETS:
Federal funds sold $ 2,480 3.91% $ 97 $ 620 5.45% $ 34
Interest-earning deposits 641 3.40 22 -- 0.00 --
Taxable securities 13,700 6.02 820 10,905 6.09 693
Nontaxable securities 3,976 6.46 257 3,706 6.91 256
Loans 55,206 9.07 5,010 51,284 9.18 4,706
-------- ------ -------- -------
TOTAL INTEREST-EARNING ASSETS 76,003 8.17 6,206 66,515 8.49 5,689
-------- ------ -------- -------
NONINTEREST-EARNING ASSETS:
Cash and due from
financial institutions 2,783 1,985
Premises and equipment, net 1,298 1,036
Accrued interest and other assets 1,333 1,086
Less: Allowance for loan losses (673) (514)
-------- --------
Total Noninterest-Earning Assets 4,741 3,593
-------- --------
TOTAL ASSETS $ 80,744 $ 70,108
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES:
Demand deposits $ 18,702 2.74 512 $ 14,315 3.24 464
Savings deposits 10,578 2.47 262 10,230 2.99 305
Time deposits:
Under $100,000 27,633 5.80 1,601 23,037 5.74 1,323
$100,000 and over 8,572 5.51 472 8,825 5.92 523
Other borrowings 1,726 4.44 77 671 6.91 46
-------- ------ -------- -------
TOTAL INTEREST-BEARING LIABILITIES 67,211 4.35 2,924 57,078 4.66 2,661
-------- ------ -------- -------
NONINTEREST-BEARING LIABILITIES:
Demand deposits 7,033 7,307
Accrued interest payable
and other liabilities 558 479
-------- --------
Total Noninterest-Bearing Liabilities 7,591 7,786
-------- --------
TOTAL LIABILITIES 74,802 64,864
TOTAL SHAREHOLDERS' EQUITY 5,942 5,244
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 80,744 $ 70,108
======== ========
NET INTEREST INCOME $3,282 $ 3,028
====== =======
NET INTEREST SPREAD 3.82% 3.83%
==== ====
NET YIELD ON INTEREST
EARNING ASSETS 4.32% 4.52%
==== ====
- --------------------------------------------------------------------------------
(Continued)
24
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Annual Report 2001
- --------------------------------------------------------------------------------
Yields and amounts earned on loans include loan costs, net of loan fees and late
charges of $43,777 for the year ended December 31, 2001, and $80,696 for the
year ended December 31, 2000. Nonaccruing loans are included in the daily
average loan amounts outstanding. Yields on nontaxable securities have been
computed on a fully tax equivalent basis using a 34% tax rate. The historical
amortized cost average balance of $13,624,000 for 2001 and $11,379,000 for 2000
was used to calculate yields for taxable securities. The average balance for
securities represents the carrying value of securities. The net yield on
interest-earning assets was computed by dividing net interest income by total
interest-earning assets without the market value adjustment related to
available-for-sale securities.
The following table presents the changes in the Corporation's interest income
and interest expense resulting from changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities. Changes
attributable to both rate and volume, which cannot be segregated, have been
allocated in proportion to the changes due to rate and volume.
INTEREST RATES AND INTEREST DIFFERENTIAL
2001 Compared to 2000 2000 Compared to 1999
Increase/(Decrease) Increase/(Decrease)
------------------- -------------------
(In thousands)
Change Change Change Change
Total due to due to Total due to due to
Change Volume Rate Change Volume Rate
------ ------ ---- ------ ------ ----
Interest-earning deposits $ 22 $ 22 $ -- $ -- $ -- $ --
Federal funds sold 63 75 (12) (81) (91) 10
Taxable securities 127 135 (8) (51) (52) 1
Nontaxable securities (1) 1 18 (17) 3 4 (1)
Loans (2) 304 357 (53) 677 664 13
----- ----- ----- ----- ----- -----
Total interest income 517 607 (90) 548 525 23
----- ----- ----- ----- ----- -----
Demand deposits 48 128 (80) 110 49 61
Savings deposits (43) 10 (53) 2 -- 2
Time deposits <$100,000 278 266 12 202 118 84
Time deposits >$100,000 (51) (15) (36) 66 7 59
Other borrowings 31 52 (21) 30 18 12
----- ----- ----- ----- ----- -----
Total interest expense 263 441 (178) 410 192 218
----- ----- ----- ----- ----- -----
Net interest income $ 254 $ 166 $ 88 $ 138 $ 333 $(195)
===== ===== ===== ===== ===== =====
(1) Nontaxable income is adjusted to a fully tax equivalent basis using a 34%
tax rate.
(2) Nonaccrual loan balances are included for purposes of computing the rate
and volume effects although interest on these balances has been excluded.
- --------------------------------------------------------------------------------
(Continued)
25
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Annual Report 2001
- --------------------------------------------------------------------------------
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The Corporation maintains an allowance for loan losses that management considers
adequate to provide for probable credit losses in the loan portfolio. A grading
system is utilized for the commercial loan portfolio. The Loan Review Committee
of the Board reviews the status of all credit relationships of $200,000 or more
excluding residential mortgages and assigns or reassigns grades based on a
mathematical grading system. The grades indicate the risk level of the loans to
the Corporation and loss allowances are, in part, established from this
analysis. Management analyzes loans on an individual basis and classifies a loan
as impaired when an analysis of the borrower's operating results and financial
condition indicates that underlying cash flows are not adequate to meet the debt
service requirements. Often this is associated with a delay or shortfall in
payments of 60 days or more. Smaller-balance homogeneous loans are evaluated for
impairment in total. Such loans include residential first mortgage loans secured
by one- to four-family residences, residential construction loans, consumer
automobile, home equity and credit card loans with balances less than $100,000.
The Corporation evaluates the remaining loan portfolio and establishes loss
allowances based on historical loan loss data, which the Corporation has been
accumulating since its inception, as well as anticipated credit losses. At
year-end 2001, the allowance had a balance of $713,988, or 1.23% of total loans,
compared to $609,753, or 1.16% of total loans, at year-end 2000. The provision
for loan losses was $336,500 for the year ended December 31, 2001, compared to
$365,000 for the year ended December 31, 2000. The decrease in provision was the
result of better collection efforts and a change in the overall mix of the
portfolio. More effective collection efforts have decreased net charge-offs by
11.3% in 2001 as compared to 2000. The Bank is continuing to change the mix of
the loan portfolio to lessen the impact of the installment loan portfolio. The
installment loan portfolio is made up of over 85% indirect auto loans and makes
up approximately 89% of net charge-offs over the past five years. As a percent
of total loans, the installment portfolio has decreased from 47.6% in 2000 to
41.2% in 2001. The process to diversify the portfolio to an acceptable level of
installment loans is a slow process that management believes will take the next
two to three years. The Bank does not plan to get out of the indirect auto loan
business entirely because of the positive effects it has on the local community,
as well as the financial results of the Corporation when the risks are managed
appropriately.
The following table sets forth the amount of loans that were on nonaccrual
status, were past due 90 days or more (in payment of interest or principal), or
were impaired.
Nonaccrual, Past Due and Impaired Loans at December 31,
-------------------------------------------------------
2001 2000
---- ----
(In thousands)
Nonaccrual loans not included in impaired loans $225 $140
Loans past due 90 days or more,
excluding nonaccrual loans 168 6
Impaired loans (all also on nonaccrual) -- --
---- ----
Total $393 $146
==== ====
The Corporation's policy for placing loans on nonaccrual status is that the
Corporation will not accrue interest income on loans (other than consumer loans)
that are contractually past due as to principal or interest by 90 days, unless
collection is reasonably assured. In 2001, management put installment loans on
nonaccrual if informed of any bankruptcy activity by the borrower. Many loans
were placed on nonaccrual status that were still performing as agreed. This new
policy is more conservative in identifying potential problem loans and is a
major factor in the increase in nonaccrual loans from 2000 to 2001.
Watchlist loans include the majority of loans 90 days or more delinquent, all
commercial loans with an internal loan grade of substandard or less, and all
nonaccrual loans. Additionally, loan officers may request a loan be added to the
watchlist if they suspect repayment problems may arise and feel the need for
frequent reviews. Watchlist loans that
- --------------------------------------------------------------------------------
(Continued)
26
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Annual Report 2001
- --------------------------------------------------------------------------------
were not reported above as nonaccrual, delinquent or impaired had balances at
December 31, 2001 of $162,000 and $220,000 at December 31, 2000.
The following table shows activity in the allowance for loan losses and
pertinent ratios during the years indicated.
2001 2000
---- ----
(in thousands)
Allowance for loan losses:
Balance at beginning of period $ 610 $ 507
Loans charged-off:
Commercial -- (21)
Real estate -- --
Installment (327) (367)
----- -----
Total loans charged-off: (327) (388)
----- -----
Recoveries of loans previously charged-off:
Commercial -- 20
Real estate -- --
Installment 95 106
----- -----
Total loan recoveries 95 126
----- -----
Net loans charged-off (232) (262)
Provision for loan losses 336 365
----- -----
Balance at end of period $ 714 $ 610
===== =====
Ratios: 2001 2000
---- ----
Net loans charged-off to average loans 0.42% 0.51%
Net loans charged-off to total loans at end of period 0.40 0.50
Allowance for loan losses to average loans 1.29 1.19
Allowance for loan losses to total loans at end of period 1.23 1.16
Net loans charged-off to allowance for loan losses at end of period 32.53 42.93
Net loans charged-off to provision for loan losses 69.02 71.72
Allowance for loan losses to nonperforming loans (1) 181.55 417.52
(1) Nonperforming loans consist of loans on nonaccrual, loans past due 90 days
or more and still accruing interest, and impaired loans.
- --------------------------------------------------------------------------------
(Continued)
27
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Annual Report 2001
- --------------------------------------------------------------------------------
The following schedule is a breakdown of the allowance for loan losses allocated
by type of loan.
Percentage of Percentage of
Loans in Each Loans in Each
Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
December 31, 2001 December 31, 2000
----------------- -----------------
Commercial $ 38,157 14.81% $ 15,389 12.96%
Real Estate 45,918 42.58 1,418 37.91
Installment 534,056 41.21 498,765 47.65
Credit Cards 20,967 1.32 16,595 1.42
Other -- 0.08 -- 0.06
Unallocated 74,890 N/A 77,586 N/A
-------- ------ -------- ------
Total $713,988 100.00% $609,753 100.00%
======== ====== ======== ======
NONINTEREST INCOME
Noninterest income increased from $294,000 in 2000 to $598,000 in 2001, a
$304,000 or 103.60% increase. Noninterest income consists of fees on deposits
and checking accounts, fees on other services and gains resulting from the sale
of loans or securities. $193,000 of this increase relates to fees for customer
services and is primarily the result of the Bank's new Bounce Protection
program. This new program allows all checking customers to overdraw their
accounts from $200 to $500, based upon the type of account, without getting
checks returned. The Bounce Protection program has resulted in customers
overdrafting more checks.
Also contributing to higher noninterest income was the gain on the sale of a
loan. On February 16, 2001, the Bank sold a commercial loan guaranteed by the
United States Department of Agriculture 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.
NONINTEREST EXPENSE
Noninterest expense increased $99,000, or 3.97%, in 2001 as compared to the
previous year. Contributing to higher noninterest expenses were increases in
salaries and employee benefits of $124,000, or 11.38%, occupancy expense of
$38,000, or 8.42%, advertising of $37,000, or 71.41% and supply expenses of
$22,000, or 21.46%. In general, these increases are the direct result of the
Bank's asset growth and expanded operations. Throughout 2001, the Bank's assets
grew 25% causing additional employees to be hired while others were promoted due
to a greater range of responsibility. The Bank also built a 1,350 square foot
addition to its main office to primarily expand the loan operations area.
Contributing to lower noninterest expenses were decreases in professional fees
of $48,000, or 20.46%, litigation settlement expense of $83,000, or 100% and
loan collection expense of $17,000, or 23.95%. The decreases in professional
fees and litigation settlement were the result of temporary expenses related to
management studies and a legal dispute in 2000 that did not carry over to 2001.
The decrease in loan collections is directly related with the activity of gross
charge-offs which decreased 18.45% from 2000 to 2001.
- --------------------------------------------------------------------------------
(Continued)
28
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Annual Report 2001
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
TOTAL ASSETS
Total assets grew from $73,040,000 on December 31, 2000 to $91,407,000 on
December 31, 2001, a $18,367,000, or 25.15% increase. Most of the growth came
from a $7,361,000, or 70.80% increase in securities available for sale, a
$5,327,000, or 10.21% increase in loans and a $3,493,000, or 74.16% increase in
cash and cash equivalents. This was funded by a net increase in deposits and
other borrowings of $17,678,000, or 26.41%.
LOANS
Total net loans increased 10.21% from $52,167,000 on December 31, 2000 to
$57,493,000 on December 31, 2001. Real estate loans increased 23.98% from
$19,801,000 on December 31, 2000 to $24,550,000 on December 31, 2001. Commercial
loans increased 26.13% from $6,770,000 on December 31, 2000 to $8,539,000 on
December 31, 2001. Installment loans decreased 4.55% from $24,892,000 on
December 31, 2000 to $23,760,000 on December 31, 2001. The decrease in
installment loans along with the large increases in real estate and commercial
loans is 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 Corporation's loan portfolio consists primarily of commercial, consumer
loans (loans to individuals for automobiles, family and other personal expenses)
and real estate loans. These categories accounted for approximately 15%, 41%,
and 43% of the Corporation's total loan portfolio on December 31, 2001. The
Corporation's present policy regarding diversity in the loan portfolio is based
on local economic conditions, competitive forces, supply of funds and indicators
in order to optimize income.
With certain exceptions, the Bank is permitted under applicable law to make
loans to individual borrowers in aggregate amounts of up to 15% of the Bank's
total capital. As of December 31, 2001, the lending limit for the Bank was
approximately $1,079,000. The Bank would sell participations in its loans where
necessary to stay within legal lending limits.
The following is a schedule of contractual maturities of fixed and variable rate
loans, rounded to the nearest thousand, as of December 31, 2001.
- --------------------------------------------------------------------------------
(Continued)
29
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Annual Report 2001
- --------------------------------------------------------------------------------
(In thousands)
One One
Year Through After Five
or Less Five Years Years Total
------- ---------- ----- -----
REAL ESTATE
Fixed Rate $ 132 $ 1,138 $ 752 $ 2,022
Variable Rate 2,395 1,175 18,958 22,528
------- ------- ------- -------
Total Real Estate 2,527 2,313 19,710 24,550
COMMERCIAL
Fixed Rate 214 2,079 24 2,317
Variable Rate 2,668 888 2,666 6,222
------- ------- ------- -------
Total Commercial 2,882 2,967 2,690 8,539
INSTALLMENT
Fixed Rate 552 21,377 1,589 23,518
Variable Rate 109 123 10 242
------- ------- ------- -------
Total Installment 661 21,500 1,599 23,760
CREDIT CARDS
Fixed Rate -- -- -- --
Variable Rate 758 -- -- 758
------- ------- ------- -------
Total Credit Card 758 -- -- 758
OTHER
Fixed Rate -- -- -- --
Variable Rate 51 -- -- 51
------- ------- ------- -------
Total Other 51 -- -- 51
------- ------- ------- -------
TOTAL ALL LOANS $ 6,879 $26,780 $23,999 $57,658
======= ======= ======= =======
FIXED RATE $ 898 $24,594 $ 2,365 $27,857
VARIABLE 5,981 2,186 21,634 29,801
SECURITIES
In order to maintain appropriate assets to meet the Corporation's liquidity and
asset/liability management requirements, the Corporation purchases U.S. Treasury
securities, U.S. government and federal agency securities, mortgage-backed
securities, and state and municipal securities. Purchases of such securities, as
well as sales of federal funds (short-term loans to other banks) and placement
of funds in certificates of deposit with other financial institutions, are made
as investments pending the utilization of funds for loans and other purposes.
The Corporation's policy is to stagger the maturities of its securities to meet
the overall liquidity requirements of the Corporation. The Corporation has
classified the majority of its securities portfolio as available for sale to
provide flexibility should funding be required for loan demand or deposit
withdrawals.
Securities available for sale and securities held to maturity increased from
$14,063,000 at December 31, 2000 to $21,918,000 at December 31, 2001, an
increase of $7,855,000, or 55.86%. The increase was primarily due to an increase
is deposits that was slightly greater than the current demand for loans and
managements decision to maintain higher liquidity levels.
- --------------------------------------------------------------------------------
(Continued)
30
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Annual Report 2001
- --------------------------------------------------------------------------------
Securities may be pledged to meet security requirements imposed as a condition
to receive public funds. At December 31, 2001, the Corporation had $9,425,000
pledged to secure public deposits compared to $6,521,000 on December 31, 2000.
The Corporation has no securities of an "issuer" where the aggregate carrying
value of such securities exceeds ten percent of shareholders' equity.
The following tables summarize the amounts and distribution of the Corporation's
securities and the weighted average yields as of December 31, 2001 and 2000.
2001 2000
----------------------------------- ------------------------------------
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
---- ----- ----- ---- ----- -----
(Dollars in thousands)
AVAILABLE FOR SALE
U.S. Treasury
Less than one year $ 100 $ 101 6.35% $ -- $ --
Over 1 year through 5 years -- -- 100 101 6.35%
------- ------- ------- -------
Total U.S. Treasury 100 101 6.35 100 101 6.35
U.S. GOVERNMENT AND
FEDERAL AGENCIES:
Over 1 year through 5 years 4,862 4,936 4.50 3,266 3,234 5.55
Over 5 year through 10 years 5,315 5,332 6.20 295 298 6.86
Over 10 years 1,056 1,037 5.68 1,998 1,967 7.13
------- ------- ------- -------
TOTAL U.S. GOVERNMENT AND
FEDERAL AGENCIES 11,233 11,305 5.42 5,559 5,499 6.19
MORTGAGE-BACKED SECURITIES 6,078 6,072 5.68 4,585 4,533 6.82
OTHER SECURITIES 281 281 6.68 265 265 6.64
------- ------- ------- -------
TOTAL SECURITIES
AVAILABLE FOR SALE $17,692 $17,759 5.53% $10,509 $10,398 6.48%
======= ======= ======= =======
HELD TO MATURITY
STATES AND MUNICIPALS
Over 5 year through 10 years $ 1,509 $ 1,578 5.32% $ 1,306 $ 1,360 5.50%
Over 10 years 2,650 2,600 5.08 2,359 2,337 5.69
------- ------- ------- -------
TOTAL HELD TO MATURITY $ 4,159 $ 4,178 5.16% $ 3,665 $ 3,697 5.59%
======= ======= ======= =======
The weighted average interest rates are based on coupon rates for securities
purchased at par value and on effective interest rates considering amortization
or accretion if the securities were purchased at a premium or discount. The
weighted average yield on tax-exempt obligations has not been determined on a
tax equivalent basis. Other securities consist of Federal Home Loan Bank and
Great Lakes Bankers' Bank stock that bear no stated maturities. Available for
sale yields are based on amortized cost balances.
- --------------------------------------------------------------------------------
(Continued)
31
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Annual Report 2001
- --------------------------------------------------------------------------------
FUNDING
Deposits are the Corporation's primary source of funds. The Corporation can
obtain additional funds when needed through the overnight purchase of federal
funds or obtaining advances from the Federal Home Loan Bank to meet occasional
declines in deposits, to satisfy cash reserve requirements, or for other
short-term liquidity needs. At times, when the Corporation has more funds than
it needs for its reserve requirements or short-term liquidity needs, it
increases its investment in securities, sells federal funds to other financial
institutions or places funds in short-term certificates of deposit with other
financial institutions. The distribution of the Corporation's deposits in terms
of maturity and applicable interest rates is a primary determinant of the
Corporation's cost of funds and the relative stability of its supply of funds.
Most accounts are not subject to interest rate limitations and, therefore, tend
to reflect current market rates of interest available to depositors at a given
time. At December 31, 2001, the aggregate amount of time, savings and
interest-bearing demand deposits was 88.92% of total deposits. The Corporation
does not have any foreign deposits, nor does it have any material concentration
of deposits.
Total deposits increased from $66,946,000 on December 31, 2000 to $81,787,000 on
December 31, 2001, a 22.17% increase. The primary reason for the deposit growth
was the opening of new accounts due to continuing exposure in the local
community and current market conditions. Noninterest-bearing demand accounts
increased from $7,675,000 on December 31, 2000 to $9,066,000 on December 31,
2001. Interest-bearing demand deposits increased $6,188,000, or 37.95%, from
$16,308,000 at year-end 2000 to $22,496,000 at year-end 2001. Savings account
balances increased 32.95% from $9,864,000 on December 31, 2000 to $13,115,000 on
December 31, 2001. Certificates of deposit increased from $33,098,000 at the end
of 2000 to $37,110,000 at the end of 2001, a 12.12% increase.
Other borrowings increased $2,837,000 from year-end 2000 to 2001. Most of this
borrowing was not due to liquidity needs but used to meet a specific purpose.
$1,337,000 of the borrowings represents longer fixed rate advances and were used
to offset the risk of longer fixed rate asset investments. $500,000 represents a
borrowing that is used to supply capital to the Bank. The remaining borrowing
represents a short-term advance taken when loan growth temporarily exceeded
deposit growth. For more information to these borrowings see Note 6 of the 2001
consolidated financial statements.
ASSET/LIABILITY MANAGEMENT
Asset/liability management includes gap measurement that determines, over
various time periods, interest-earning assets and interest-bearing liabilities
which are due to reprice at current market rates. A financial institution will
have a negative interest rate sensitivity gap for a given period of time if the
amount of its interest-bearing liabilities maturing or repricing within that
period is greater than the total of the interest-earning assets maturing or
repricing within the same period. When interest rates increase, financial
institutions with a negative interest rate sensitivity gap will be more likely
to experience increases in the cost of their liabilities faster than the
corresponding yields generated by their earning assets. Following the same
concept, as interest rates decrease, the cost of funds of financial institutions
with a negative interest-rate sensitivity gap usually will decrease more rapidly
than the yields on the earning assets. As a general rule, the same changes in
interest rates will usually have the opposite effect on financial institutions
structured with a positive interest-rate sensitivity gap.
Interest rate sensitivity varies with various types of interest-earning assets
and interest-bearing liabilities. Overnight federal funds on which the rates
change daily and loans, which are tied to variable indices, differ markedly from
long-term securities and fixed-rate loans. Time deposits over $100,000 and money
market certificates are more interest rate sensitive than passbook savings
accounts. The shorter-term interest rate sensitivities are critical to
reasonable measurement of interest rate sensitivity gap.
- --------------------------------------------------------------------------------
(Continued)
32
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Annual Report 2001
- --------------------------------------------------------------------------------
The following table presents the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2001, which are
scheduled to reprice or mature in each of the indicated time periods. Except as
noted, the amount of assets and liabilities that reprice or mature during a
particular period were calculated in relation to the actual contractual terms of
the asset or liability. The table, however, does not necessarily indicate the
impact of general interest rate changes on the Corporation's net interest income
in part because the repricing of certain categories of assets and liabilities is
subject to competition and other factors beyond the control of the Corporation.
Because of this limitation, certain assets and liabilities depicted as maturing
or repricing within a specific period may in fact mature or reprice at other
times and at different volumes.
Interest Rate Sensitivity Gap as of December 31, 2001 (in thousands)
One Over
0-3 3-12 Through Five
Months Months Five Years Years Total
------ ------ ---------- ----- -----
Assets
Loans (1) (4) $ 9,698 $ 6,223 $ 39,372 $ 2,365 $ 57,658
Securities (1) 207 598 7,982 13,131 21,918
Interest-earning deposits 2,613 -- 449 -- 3,062
Federal funds sold 1,891 -- -- -- 1,891
-------- -------- -------- -------- --------
Rate sensitive assets (RSA) 14,409 6,821 47,803 15,496 84,529
Liabilities
Interest-bearing demand (2) 22,496 -- -- -- 22,496
Savings (2) 13,115 -- -- -- 13,115
Time deposits 9,937 19,182 7,945 46 37,110
Other borrowings 1,507 20 1,126 184 2,837
-------- -------- -------- -------- --------
Rate sensitive liabilities (RSL) 47,055 19,202 9,071 230 75,558
-------- -------- -------- -------- --------
Period gap (3) $(32,646) $(12,381) $ 38,732 $ 15,266 $ 8,971
======== ======== ======== ======== ========
Cumulative gap $(32,646) $(45,027) $ (6,295) $ 8,971
======== ======== ======== ========
Percentage of RSA (38.62)% (53.27)% (7.45)% 10.61%
======== ======== ======== ========
(1) Loans and mortgage-backed securities are assumed to adjust based on their
contractual terms, with no assumptions as to prepayments. Securities also
include Federal Home Loan Bank stock and Great Lakes Bankers' Bank stock
that have no stated maturities and have been included in the over five
years category.
(2) Management has included these accounts in the 0-3 month or less time
horizon based on past experience with rate adjustments on these accounts.
(3) Gap is defined as rate sensitive assets less rate sensitive liabilities and
may be expressed in dollars or as a percentage.
(4) Loans are presented gross and do not include net deferred loan costs and
the allowance for loan losses.
- --------------------------------------------------------------------------------
(Continued)
33
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Annual Report 2001
- --------------------------------------------------------------------------------
CAPITAL RESOURCES
Shareholders' equity totaled $5,532,000 on December 31, 2000 compared to
$6,215,000 on December 31, 2001. At December 31, 2000 and December 31, 2001, the
ratio of shareholders' equity to assets was 7.57% and 6.80%.
Under "Prompt Corrective Action" regulations that impact the Bank, the FDIC has
defined five categories of capitalization (well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
under capitalized). The Bank meets the "well capitalized" definition which
requires a total risk-based capital ratio of at least 10%, a Tier 1 risk-based
ratio of at least 6%, and a leverage ratio of at least 5%. For further
discussion of capital ratios, capital resources, and events that could affect
the Company's ability to pay dividends, see Note 12 of the 2001 consolidated
financial statements.
LIQUIDITY
Liquidity management focuses on the Corporation's ability to have funds
available to meet the loan and depository transaction needs of its customers and
the Corporation's other financial commitments. Cash and cash equivalent assets
(which include deposits the Corporation maintains at other banks, federal funds
sold and other short-term investments) totaled $4,710,000 at year-end 2000 and
$8,202,000 at year-end 2001. 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, access to Federal
Home Loan Bank advances, as the Bank is a member of the Federal Home Loan Bank
of Cincinnati, and agreements with correspondent banks for buying and selling
Federal Funds. The fair value of securities classified as available for sale was
$17,759,000 and $10,398,000 as of December 31, 2001 and December 31, 2000. The
Corporation has approximately $7,162,000 available as a line of credit with the
Federal Home Loan Bank.
An additional measure of liquidity is the amount of loans carried in relation to
total deposits. Lower ratios can indicate greater liquidity. Management's goal
is to maintain a loan to deposit ratio of approximately 75%, or great enough to
maximize the earnings potential of the Corporation while maintaining adequate
liquidity levels. The Corporation's loan to deposit ratio on December 31, 2001
was 70.30%, down from 77.92% on December 31, 2000. For a detailed analysis of
Corporation's sources and uses of cash, refer to the 2001 Consolidated
Statements of Cash Flows.
IMPACT OF INFLATION
The Corporation's balance sheet is typical of financial institutions and
reflects a net positive monetary position whereby monetary assets exceed
monetary liabilities. Monetary assets and liabilities are those which can be
converted to a fixed number of dollars and include cash assets, securities,
loans, money market instruments, deposits and borrowed funds.
During periods of inflation, a net positive monetary position may result in an
overall decline in purchasing power of an entity. No clear evidence exists of a
relationship between the purchasing power of an entity's net positive monetary
position and its future earnings. Moreover, the Corporation's ability to
preserve the purchasing power of its net positive monetary position will be
partly influenced by the effectiveness of its asset/liability management
program. Management does not believe that the effect of inflation on its
nonmonetary assets (primarily bank premises and equipment) is material as such
assets are not held for resale and significant disposals are not anticipated.
- --------------------------------------------------------------------------------
(Continued)
34
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Annual Report 2001
- --------------------------------------------------------------------------------
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The common stock of the Corporation trades infrequently and is not traded on any
established securities market. Parties interested in buying or selling the
Corporation's stock are generally referred to Community Banc Investments, New
Concord, Ohio (CBI).
For 2001 and 2000, bid and ask quotations were obtained from CBI, which handles
a limited amount of the Corporation's stock transactions. The quotations are
inter-dealer prices, without retail markup, markdown or commission and may not
represent actual transactions.
2001 Low Bid High Bid Low Ask High Ask
---- ------- -------- ------- --------
1(st) Qtr. $ 55.00 $ 55.00 $ 57.00 $ 57.00
2(nd) Qtr. 55.00 57.50 59.50 59.50
3(rd) Qtr. 57.50 57.50 59.50 59.50
4(th) Qtr. 57.50 62.00 59.50 64.00
2000
1(st) Qtr. $ 51.00 $ 51.00 $ 53.00 $ 53.00
2(nd) Qtr. 51.00 51.00 53.00 53.00
3(rd) Qtr. 51.00 53.00 53.00 55.00
4(th) Qtr. 53.00 55.00 55.00 57.00
Management does not have knowledge of the prices paid in all transactions and
has not verified the accuracy of those prices that have been reported. Because
of the lack of an established market for the Corporation's stock, these prices
may not reflect the prices at which the stock would trade in an active market.
The Corporation has 500,000 authorized and 146,000 outstanding shares of common
stock held by approximately 481 shareholders as of December 31, 2001. The
Corporation paid cash dividends of $0.30 per share in June and December of 2001
and 2000, resulting in a total amount of $0.60 per share in 2001 and 2000.
- --------------------------------------------------------------------------------
35
OHIO STATE BANCSHARES, INC.
BOARD OF DIRECTORS
Annual Report 2001
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS (1)
Fred K. White - Chairman............................... Retired, Division Manager,
Ohio Edison
Real Estate Sales,
HER Kinney Properties
Marion, Ohio
Gary E. Pendleton...................................... President and CEO,
The Marion Bank
Marion, Ohio
Samuel J. Birnbaum..................................... Retired director of Real Estate,
Lodgekeeper, Inc.
Prospect, Ohio
Lois J. Fisher......................................... Real Estate Developer
Marion, Ohio
Theodore L. Graham..................................... Managing Partner, Graham
Investment Co.
Marion, Ohio
Lloyd L. Johnston...................................... Chairman of the Board, Johnston Supply
Company
Marion, Ohio
F. Winton Lackey....................................... Partner, HLS Racks, LLC
Marion, Ohio
Thurman R. Mathews..................................... Owner, Mathews-Kennedy Ford/
Lincoln Mercury
Marion, Ohio
Peter B. Miller........................................ Owner, Pete Miller, Inc.
Marion, Ohio
John D. Owens.......................................... Retired Owner, Owens Electric
Marion, Ohio
(1) All are Directors of Ohio State Bancshares, Inc. and The Marion Bank
- --------------------------------------------------------------------------------
36
OHIO STATE BANCSHARES, INC.
EXECUTIVE OFFICERS
Annual Report 2001
- --------------------------------------------------------------------------------
OHIO STATE BANCSHARES, INC.
EXECUTIVE OFFICERS
Fred K. White, Chairman of the Board
Gary E. Pendleton, President and Treasurer
Cynthia L. Sparling, Secretary
Todd M. Wanner, Chief Financial Officer
THE MARION BANK
EXECUTIVE OFFICERS
Gary E. Pendleton, President and Chief Executive Officer
Steven M. Strine, Senior Vice President and Chief Lending Officer
Cynthia L. Sparling, Senior Vice President and Chief Operations Officer
Todd M. Wanner, Vice President and Chief Financial Officer
TRANSFER AGENT, REGISTRAR & DIVIDEND DISBURSING AGENT
The Marion Bank
111 South Main Street
Marion, Ohio 43302
(740) 387-2265
ANNUAL MEETING
The annual shareholders' meeting will be held April 18, 2002, at 5 p.m. in the
main office of The Marion Bank, 111 South Main Street, Marion, Ohio.
FORM 10-KSB
A copy of Ohio State Bancshares, Inc.'s 2001 annual report on Form 10-KSB filed
with the Securities and Exchange Commission is available upon written request to
shareholders without charge. To obtain a copy, direct your written request to
Todd M. Wanner, 111 South Main Street, Marion, Ohio 43302.
- --------------------------------------------------------------------------------
37
Annex A-2
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 March 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____ to _____.
Commission file number: 0-28648
-------
Ohio State Bancshares, Inc.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Ohio 34-1816546
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
111 South Main Street, Marion, Ohio 43302
-----------------------------------------
(Address of principal executive offices)
(740) 387-2265
--------------------------------
(Issuer's telephone number)
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common stock, $10.00 par value 146,000 common shares
outstanding at May 10, 2002
Transitional Small Business Disclosure Format (check one):
Yes No X
------- -------
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 2002
- -------------------------------------------------------------------------------
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..............................12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................16
Item 2. Changes in Securities............................................16
Item 3. Defaults Upon Senior Securities..................................16
Item 4. Submission of Matters to a Vote of Security Holders..............15
Item 5. Other Information................................................16
Item 6. Exhibits and Reports on Form 8-K.................................16
SIGNATURES................................................................17
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
- --------------------------------------------------------------------------------
March 31, December 31,
2002 2001
---- ----
ASSETS
Cash and due from financial institutions $ 2,559,442 $ 3,698,341
Interest-earning demand deposits -- 2,613,055
Federal funds sold 2,898,000 1,891,000
------------ ------------
Cash and cash equivalents 5,457,442 8,202,396
Interest-earning deposits 453,956 449,387
Securities available for sale 18,042,503 17,758,732
Securities held to maturity (fair value March 31, 2002 -
$4,717,069, December 31, 2001 - $4,177,979) 4,691,754 4,159,220
Loans, net 57,799,579 57,493,391
Premises and equipment, net 1,447,769 1,469,560
Accrued interest receivable 591,182 526,682
Other assets 1,435,366 1,347,418
------------ ------------
$ 89,919,551 $ 91,406,786
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 7,863,598 $ 9,065,846
Interest-bearing 73,337,421 72,720,780
------------ ------------
Total 81,201,019 81,786,626
Borrowings 1,830,300 2,836,963
Accrued interest payable 197,251 233,542
Other liabilities 359,424 334,646
------------ ------------
Total liabilities 83,587,994 85,191,777
============ ============
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 2,273,439 2,058,427
Accumulated other comprehensive income (loss) (54,591) 43,873
------------ ------------
Total shareholders' equity 6,331,557 6,215,009
------------ ------------
$ 89,919,551 $ 91,406,786
============ ============
- --------------------------------------------------------------------------------
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
March 31,
---------
2002 2001
---- ----
Interest and dividend income
Loans, including fees $1,223,446 $1,232,844
Taxable securities 235,383 183,820
Nontaxable securities 58,435 39,835
Federal funds sold and other 14,364 36,645
---------- ----------
Total interest and dividend income 1,531,628 1,493,144
Interest expense
Deposits 548,910 736,444
Other borrowings 24,097 8,456
---------- ----------
Total interest expense 573,007 744,900
---------- ----------
Net interest income 958,621 748,244
Provision for loan losses 100,000 75,000
---------- ----------
Net interest income after provision for loan losses 858,621 673,244
Noninterest income
Fees for customer services 119,414 95,375
Gain on sale of loan -- 68,232
Net gains on sales or calls of securities -- 6,020
Other 19,860 18,169
---------- ----------
Total noninterest income 139,274 187,796
Noninterest expense
Salaries and employee benefits 340,650 282,658
Occupancy and equipment 128,259 124,310
Office supplies 36,998 31,486
Professional fees 35,808 56,314
Advertising and public relations 16,994 25,008
Taxes, other than income 17,750 16,528
Loan collection and repossessions 18,314 10,687
Credit card processing 18,929 16,384
Director expenses 12,480 12,525
Other 73,557 60,250
---------- ----------
Total noninterest expense 699,739 636,150
---------- ----------
Income before income taxes 298,156 224,890
Income tax expense 83,144 64,783
---------- ----------
Net income $ 215,012 $ 160,107
========== ==========
Basic and diluted earnings per share $ 1.47 $ 1.10
========== ==========
Weighted average shares outstanding 146,000 146,000
- --------------------------------------------------------------------------------
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
March 31,
---------
2002 2001
---- ----
Balance at beginning of period $ 6,215,009 $ 5,531,871
Comprehensive income:
Net income 215,012 160,107
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects (98,464) 123,665
----------- -----------
Total comprehensive income 116,548 283,772
----------- -----------
Balance at end of period $ 6,331,557 $ 5,815,643
=========== ===========
- --------------------------------------------------------------------------------
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)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
---------
2002 2001
---- ----
Cash flows from operating activities
Net income $ 215,012 $ 160,107
Adjustments to reconcile net income to net cash from
operating activities
Net amortization of securities 12,304 6,657
Provision for loan losses 100,000 75,000
Depreciation and amortization 52,808 47,155
Gain on sale of loan -- (68,232)
Net realized gains on sales of securities -- (6,020)
Federal Home Loan Bank stock dividends (3,200) (4,100)
Change in deferred loan costs 2,224 (41,264)
Change in accrued interest receivable (64,500) (27,016)
Change in accrued interest payable (36,291) 38,098
Change in other assets and other liabilities 25,008 (154,928)
----------- -----------
Net cash from operating activities 303,365 25,457
Cash flows from investing activities
Securities available for sale:
Purchases (1,012,349) (2,584,148)
Maturities, prepayments and calls 567,317 681,789
Sales -- 506,020
Securities held to maturity:
Purchases (534,133) --
Loan originations and payments, net (445,867) (2,051,459)
Loan sale proceeds -- 1,722,342
Purchases of premises and equipment (31,017) (133,530)
----------- -----------
Net cash from investing activities (1,456,049) (1,858,986)
Cash flows from financing activities
Net change in deposits (585,607) 3,203,429
Proceeds from advance of long-term borrowings -- 1,000,000
Principle repayments of long-term borrowings (1,006,663) --
----------- -----------
Net cash from financing activities (1,592,270) 4,203,429
----------- -----------
Net change in cash and cash equivalents (2,744,954) 2,369,900
Cash and cash equivalents at beginning of period 8,202,396 4,709,635
----------- -----------
Cash and cash equivalents at end of period $ 5,457,442 $ 7,079,535
=========== ===========
Supplemental cash flow information:
Interest paid $ 609,298 $ 706,802
Income taxes paid 60,000 70,000
Supplemental noncash disclosures:
Transfers from loans to other real estate owned and repossessions $ 37,455 $ 24,000
- --------------------------------------------------------------------------------
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)
- --------------------------------------------------------------------------------
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 March 31,
2002, 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 accounting principles generally
accepted in the United States of America 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, 2001, included in its 2001 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 2001 Annual Report.
Ohio State Bancshares, Inc. ("Corporation") has consistently followed these
policies in preparing this Form 10-QSB. Income tax expense is based on the
effective tax rate expected to be applicable for the entire year.
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Standards ("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 Corporation adopted this
Statement on January 1, 2002. The adoption of this Statement has not impacted
the Corporation's financial statements, as it has no intangible assets.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which amends SFAS No. 121 by addressing business
segments accounted for as a discontinued operation under Accounting Principles
Board Opinion No. 30. This Statement was effective beginning January 1, 2002.
The effect of this Statement on the financial position and results of operations
of the Corporation was not material.
NOTE 2 - SECURITIES
Securities at March 31, 2002 and December 31, 2001 were as follows:
March 31, 2002
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Available for sale
U.S. Treasury $ 100,889 $ -- $ (4,186) $ 96,703
U.S. government and federal agencies 10,716,976 85,304 (106,494) 10,695,786
Mortgage-backed 7,022,812 10,510 (67,848) 6,965,474
----------- ----------- ----------- -----------
Total debt securities 17,840,677 95,814 (178,528) 17,757,963
Other securities 284,540 -- -- 284,540
----------- ----------- ----------- -----------
Total $18,125,217 $ 95,814 $ (178,528) $18,042,503
=========== =========== =========== ===========
Held to maturity
State and municipal $ 4,691,754 $ 76,289 $ (50,974) $ 4,717,069
=========== =========== =========== ===========
- --------------------------------------------------------------------------------
(Continued)
7.
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, 2001
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Available for sale
U.S. Treasury $ 99,978 $ 542 $ -- $ 100,520
U.S. government and federal agencies 10,722,076 133,398 (48,905) 10,806,569
Mortgage-backed 6,588,863 34,650 (53,210) 6,570,303
----------- ----------- ----------- -----------
Total debt securities 17,410,917 168,590 (102,115) 17,477,392
Other securities 281,340 -- -- 281,340
----------- ----------- ----------- -----------
Total $17,692,257 $ 168,590 $ (102,115) $17,758,732
=========== =========== =========== ===========
Held to maturity
State and municipal $ 4,159,220 $ 78,354 $ (59,595) $ 4,177,979
=========== =========== =========== ===========
Sales of available for sale securities were as follows:
Three Months Ended
March 31,
---------
2002 2001
---- ----
Proceeds $ -- $ 506,020
Gross gains -- 6,020
Gross losses -- --
The amortized cost and estimated fair values of securities at March 31, 2002, by
expected maturity, are shown below. Actual maturities may differ from expected
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 $ 1,260,726 $ 1,261,267 $ 203,787 $ 208,822
Due in one to five years 7,956,817 7,960,700 1,092,839 1,134,363
Due in five to ten years 6,929,785 6,876,307 1,167,808 1,194,968
Due after ten years 1,693,349 1,659,689 2,227,320 2,178,916
Other securities 284,540 284,540 -- --
----------- ----------- ----------- -----------
$18,125,217 $18,042,503 $ 4,691,754 $ 4,717,069
=========== =========== =========== ===========
Securities with a carrying value of approximately $9,343,000 at March 31, 2002
and $9,425,000 at December 31, 2001 were pledged to secure deposits and for
other purposes.
- --------------------------------------------------------------------------------
(Continued)
8.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS
Loans at March 31, 2002 and December 31, 2001 were as follows:
March 31, December 31,
2002 2001
---- ----
Commercial $ 8,223,641 $ 8,539,061
Installment 23,365,207 23,759,858
Real estate 25,621,751 24,550,130
Credit card 696,998 758,579
Other 58,085 50,538
------------ ------------
57,965,682 57,658,166
Net deferred loan costs 546,989 549,213
Allowance for loan losses (713,092) (713,988)
------------ ------------
$ 57,799,579 $ 57,493,391
============ ============
Activity in the allowance for loan losses for the three months ended March 31,
2002 and 2001 was as follows:
2002 2001
Balance - January 1 $ 713,988 $ 609,753
Loans charged-off (116,308) (70,306)
Recoveries 15,412 18,120
Provision for loan losses 100,000 75,000
------------ ------------
Balance - March 31 $ 713,092 $ 632,567
============ ============
The balance of loans evaluated for impairment on an individual basis at March
31, 2002 and December 31, 2001 and for the three months ended March 31, 2002 and
2001 was not material
Nonperforming loans were as follows:
March 31, December 31,
2002 2001
---- ----
Loans past due over 90 days still on accrual $ 49,590 $ 167,839
Loans on nonaccrual 160,421 225,473
Nonperforming loans include smaller balance homogeneous loans such as
residential real estate, installment and credit card loans that are collectively
evaluated for impairment.
- --------------------------------------------------------------------------------
(Continued)
9.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - BORROWINGS
Federal funds purchased, borrowings from the Federal Home Loan Bank of
Cincinnati and a line of credit with a large national bank are financing
arrangements used by the Corporation. Borrowings at March 31, 2002 and December
31, 2001 were as follows.
March 31, December 31,
2002 2001
---- ----
Short-term borrowing under line of credit of $1,500,000, 3.95% at
March 31, 2002 $ 500,000 $ 500,000
Fixed-rate FHLB advance, 3.77% due January 23, 2002 -- 1,000,000
Convertible fixed-rate FHLB advance until January 24, 2002,
4.68%, due January 24, 2011 1,000,000 1,000,000
Mortgage-matched FHLB advance, 5.91%, maturity June 14, 2011 330,300 336,963
---------- ----------
$1,830,300 $2,836,963
========== ==========
The interest rate on the convertible advance is fixed for a specific period of
time, then convertible to a variable rate at the option of the FHLB. If the
convertible option is exercised, the advance may be prepaid without penalty. The
mortgage-matched advance requires monthly principal and interest payments.
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 March 31, 2002, the Bank has approximately $7,925,000 still 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.
A summary of the contractual amounts of financial instruments with
off-balance-sheet risk at March 31, 2002 and December 31, 2001 follows:
March 31, December 31,
2002 2001
---- ----
Commitments to extend credit $ 3,416,000 $ 3,528,000
Credit card arrangements 2,694,000 2,589,000
Overdraft protection 823,000 824,000
- --------------------------------------------------------------------------------
(Continued)
10.
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 months ended March 31, 2002 and 2001:
Three Months Ended
March 31
--------
2002 2001
---- ----
Unrealized holding gains and losses on
available-for-sale securities $(149,189) $ 193,391
Reclassification adjustments for (gains)
and losses later recognized as income -- (6,020)
--------- ---------
Net unrealized gains and losses (149,189) 187,371
Tax effect 50,725 (63,706)
--------- ---------
Other comprehensive income (loss) $ 98,464 $ 123,665
========= =========
- --------------------------------------------------------------------------------
11.
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 March 31, 2002, compared to December 31, 2001, and the
consolidated results of operations for the three months ended March 31, 2002,
compared to the same period in 2001. 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 a 1.63% decrease in total assets since December
31, 2001, as total assets decreased $1,487,000 from $91,407,000 at December 31,
2001 to $89,920,000 at March 31, 2002. Most of this decrease in total assets is
attributable to the $1,593,000 decrease in total deposits and FHLB borrowings.
This decrease in funding along with an increase in securities of $816,000 and a
net increase in loans of $306,000 led to the decrease in cash and cash
equivalents of $2,745,000. For a detailed analysis of the Corporation's sources
and uses of cash, refer to the March 31, 2002 Condensed Consolidated Statements
of Cash Flows contained within this Form 10-QSB.
Securities available for sale and securities held to maturity increased $816,000
from $21,918,000 at December 31, 2001 to $22,734,000 at March 31, 2002. The
increase was primarily the result of $1,546,000 in purchases partially offset by
$567,000 of maturities and principal paydowns and a $149,000 decrease in the
fair market value of securities available for sale.
Net loans increased $306,000, or 0.53% during the period from December 31, 2001
to March 31, 2002. This is primarily due to an increase of $1,072,000 in real
estate loans partially offset by decreases in commercial loans of $315,000,
installment loans of $395,000, and credit card loans of $62,000. The moderate
decrease in commercial and installment loans is a combination of economic
conditions, large incentives and "zero" percent financing offers from auto
makers, and the Corporation's strategy to emphasize the real estate portfolio.
The allowance for loan losses decreased slightly to $713,000, or 1.22% of total
loans, as of March 31, 2002 compared to $714,000, or 1.23% of total loans, at
December 31, 2001. Management is actively monitoring problem
- --------------------------------------------------------------------------------
12.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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 decreased $586,000, or 0.72% from December 31, 2001 to March 31,
2002. The decrease in deposits was primarily due to the cyclical cash needs of
customers and current market conditions. Borrowings decreased $1,007,000, or
35.48% during the same time period. $1,000,000 of this decrease was due to a
scheduled maturity of a Federal Home Loan Bank borrowing on January 23, 2002.
Due to management's knowledge of the borrowing maturity and expectations of some
commercial deposit run-off, caused by tax payments and lower interest rates,
liquidity levels at December 31, 2001 were purposefully higher than usual.
Liquidity levels at March 31, 2002 are more in line with management goals to
manage trade-offs between liquidity and profitability.
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.
Net income for the three months ended March 31, 2002 was $215,000, or $55,000
more than the same period in 2001. The reason for the increase in earnings was
primarily due to an increase in net interest income of $211,000 partially offset
by an increase in provisions for loan losses of $25,000, a decrease in
noninterest income of $49,000, an increase in noninterest expense of $64,000,
and an increase in federal income taxes of $18,000.
Net interest income is the largest component of the 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 $211,000, or 28.12% for the three months ended March 31, 2002
compared to the same period in 2001. The increase in net interest income is
attributable to increased average earning asset balances, better rate pricing,
and the utilization of more advanced analytical tools to monitor liquidity
levels and maturity gaps between interest sensitive assets and liabilities.
Noninterest income was down $49,000, or 25.84%, for the three months ended March
31, 2002 versus the same period in 2001. $68,000 of the decrease is attributable
to the USDA guaranteed loan sale which was a one time gain recognized early in
2001. Adding to noninterest income was fees for customer services, which was up
$24,000, or 25.20% compared to the same period in 2001. This increase was due to
the Bank's Bounce Protection program which was not fully implemented until
February of 2001. This program has been very successful in providing fee income
for the Bank while providing many Bank customers with a cheaper and more
convenient alternative to the local check cashing associations.
Noninterest expense was up $64,000, or 10.00%, for the three months ended March
31, 2002 versus the same period in 2001. The largest fluctuations in this
category came from salaries and employee benefits, professional fees,
advertising and public relations expense, and loan collection and repossessions
expense. Salaries and employee benefits are up $58,000, or 20.52% from the
previous year. This is mainly due to the increase of 5 full-time
- --------------------------------------------------------------------------------
13.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
equivalent employees from 26 at March 31, 2001 to 31 full-time equivalent
employees at March 31, 2002 and higher compensation based incentive plans for
Bank management. Professional fees decreased $21,000, or 36.41% due to higher
attorney and accounting fees in the first quarter of 2001 relating to a lawsuit
and a federal tax audit. Advertising and public relations expense decreased by
$8,000, or 32.05% due to an advertising campaign in 2001 to promote the Bounce
Protection program and a new line of checking products. Loan collection and
repossessions expense increased $8,000, or 71.37% from the previous year due to
increased charge off activity. Gross charge-offs for the first quarter of 2001
were $70,000 compared to $116,000 during the same period in 2002. The increased
charge-offs also were the underlying reason for an increase to loan loss
provisions of $25,000 from 2001 to 2002.
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 March 31, 2002 and December 31, 2001, the actual capital ratios for the Bank
were:
March 31, December 31,
2002 2001
---- ----
Total capital to risk-weighted assets 12.2% 11.9%
Tier 1 capital to risk-weighted assets 11.1 10.7
Tier 1 capital to average assets 7.5 7.2
At March 31, 2002 and December 31, 2001, 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)
- --------------------------------------------------------------------------------
14.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
totaled $5,457,000 at March 31, 2002 and $8,202,000 at December 31, 2001. 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.
- --------------------------------------------------------------------------------
15.
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
Quarter ended March 31, 2002
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1 - LEGAL PROCEEDINGS:
There are no matters required to be reported under this item.
Item 2 - CHANGES IN SECURITIES:
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 March 31, 2002.
- --------------------------------------------------------------------------------
16.
OHIO STATE BANCSHARES, INC.
SIGNATURES
- --------------------------------------------------------------------------------
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: May 10, 2002 /s/ Gary E. Pendleton
----------------------- ---------------------------------------
(Signature)
Gary E. Pendleton
President and Chief Executive Officer
Date: May 10, 2002 /s/ Todd M. Wanner
----------------------- ---------------------------------------
(Signature)
Todd M. Wanner
Vice President and Chief Financial Officer
- --------------------------------------------------------------------------------
17.
Index to Exhibits
- --------------------------------------------------------------------------------
EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
- -------------- ----------- -----------
99 Safe Harbor Under the Incorporated by reference to
Private Securities Exhibit 99 to Annual Report
Litigation Reform Act on Form 10-KSB for the year ended
of 1995 December 31, 1999 filed by the
Small Business Issuer on March 29,
2000.
- --------------------------------------------------------------------------------
18.
OHIO STATE BANCSHARES
[BACK COVER OF PROSPECTUS]
OHIO STATE BANCSHARES, INC.
111 S. MAIN STREET
MARION, OHIO 43302
(740) 387-2265
- - NONE OF THE SECURITIES OFFERED BY THIS PROSPECTUS ARE DEPOSITS OR ACCOUNTS.
THEY ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENTAL AGENCY.
- - WE HAVE NOT AUTHORIZED ANYONE TO GIVE YOU ANY INFORMATION THAT DIFFERS FROM
THE INFORMATION IN THIS PROSPECTUS. IF YOU RECEIVE ANY DIFFERENT
INFORMATION, YOU SHOULD NOT RELY ON IT.
- - THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION
OF ANY OFFER TO BUY, ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT
RELATES.
- - THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY, THE SECURITIES TO WHICH IT RELATES IN ANY CIRCUMSTANCES IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Ohio General Corporation Law ("OGCL") provides that Ohio corporations
may indemnify an individual made a party to any threatened, pending, or
completed action, suit or proceeding whether civil, criminal, administrative or
investigative, because the individual is or was a director, officer, employee or
agent of the corporation or is serving at the request of the corporation as
director, trustee, officer, employer or agent of another corporation, trust or
other enterprise, against liability incurred in the proceeding if the person:
(i) acted in good faith and (ii) the individual believed his conduct was in the
corporation's best interest or was not opposed to the corporation's best
interest and with respect to any criminal proceeding, if he had no reasonable
cause to believe his conduct was unlawful. Certain additional limitations apply
to the right to indemnification when the lawsuit is brought by or in the name of
the corporation.
The OGCL further provides that a corporation shall indemnify an
individual who was fully successful on the merits or otherwise in any proceeding
to which the director, officer, employee or agent was a party because the
individual was or is a director, officer, employee or agent of the corporation,
for reasonable expenses incurred by the director in connection with the
proceeding. The OGCL also provides that a corporation may purchase and maintain
insurance on behalf of the individual who is or was a director, officer,
employee or agent of the corporation or who, while a director, officer, employee
or agent of the corporation is or was serving at the request of the corporation
as a director, officer, partner, trustee, employer or agent of another foreign
or domestic corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise, against liability asserted against or incurred by the
individual in that capacity or arising from the individual's status as a
director, officer, employee, or agent.
The Registrant's Articles of Incorporation provide that the
directors and officers of the Registrant are entitled to be indemnified to the
full extent permitted by law in connection with their service to the Registrant
or to another organization at the request of the Registrant. The Registrant's
Articles of Incorporation also provide for indemnification of the directors of
the Registrant for personal liability for monetary damages resulting from breach
of their fiduciary duty as directors except for: (i) any breach of the
directors' duty of loyalty to the Registrant business issuer or its shareholder;
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law; (iii) illegal distribution of dividends; and (iv)
any transaction from which the director derived an improper personal benefit.
Registrant maintains a directors' and officers' liability insurance
policy, including reimbursement of Registrant, for the purpose of providing
indemnification to its directors and officers in the event of such a threatened,
pending or completed action.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with
the sale and distribution of the common shares being registered. All amounts
shown are estimates, except the SEC registration fee, and assume the sale of
44,000 shares, the maximum number of shares offered.
---------------------------------------------------------------
SEC registration fee $280
---------------------------------------------------------------
EDGAR, printing and mailing costs 3,000
---------------------------------------------------------------
Fees and expenses of counsel 50,000
---------------------------------------------------------------
Accounting and related expenses 5,000
---------------------------------------------------------------
Blue Sky fees and expenses 2,000
---------------------------------------------------------------
Miscellaneous 5,000
---------------------------------------------------------------
Total $65,280
---------------------------------------------------------------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has not sold any securities within the past three years
without registering them under the Securities Act.
ITEM 27. EXHIBITS
The following exhibits are filed with or incorporated by reference into
this Registration Statement on Form SB-2:
Exhibit Number Description
- -------------- -----------
1 Underwriting Agreement with Community Banc Investments, Inc.*****
3.1 Amended Articles of Incorporation of the Company*
3.2 Code of Regulations of the Company*
4 Instruments defining the rights of shareholders,
including indentures
A. Instruments defining the rights of Company's
shareholders are included in the Articles of
Incorporation and Code of Regulations*
5 Opinion of Werner & Blank, LLC, regarding
Ohio State Bancshares, Inc. common shares, and
consent
8 Opinion of Werner & Blank, LLC, regarding
tax matters, and consent
10.1 Lease Agreement Between Henney and Cooper, Inc.
and The Marion Bank for Branch on Richland Road
in Marion, Ohio**
10.2 Executive Indexed Salary Continuation Plan
Agreement for President**
10.3 Change in Control Agreement between Company
and Gary E. Pendleton***
10.4 Change in Control Agreement between Company and Steven M. Strine****
10.5 Change in Control Agreement between Company and Todd M. Wanner****
10.6 Change in Control Agreement between Company and Cynthia L. Sparling****
21 Description of Subsidiary of the Company**
23.1 Consent of Crowe, Chizek and Company LLP
23.2 Consent of Werner & Blank, LLC (the
consent is contained in that firm's opinion filed
as Exhibit (5))
23.3 Consent of Werner & Blank, LLC
(the consent is contained in that firm's opinion filed
as Exhibit (8))
24 Power of Attorney*****
99.1 Form of Subscription Agreement for Rights Offering
99.2 Form of Subscription Agreement for Community Offering
99.3 Cover letter to accompany prospectus delivery to shareholders
* Incorporated by reference from the Registrant's filing on Form S-4 (File
No. 33-75866) Amendment No. 2 to Registration Statement, effective
March 16, 1995.
** Incorporated by reference from the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1996 (File No. 000-28648).
*** Incorporated by reference from the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 2000 (File No. 000-28648).
**** Incorporated by reference from the Registrant's Current Report on
Form 8-K filed June 26, 2002 (File No. 000-28648).
***** Incorporated by reference from the Registrant's filing on Form SB-2
(File No. 333-91378).
ITEM 28. UNDERTAKINGS.
(a) The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
which, individually or together, represent a
fundamental change in the information set forth in
the Registration Statement; and
(iii) To include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act of 1933,
each post-effective amendment shall be deemed to be a new
registration statement of the securities offered, and the
offering of the securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the
offering.
(b) The small business issuer undertakes to supplement the
prospectus, after the end of the initial subscription period for
existing shareholders of the small business issuer, to include
the results of the subscription offer, the transactions by the
underwriter during the subscription period, the amount of
unsubscribed securities that the underwriter will purchase and
the terms of any later reoffering. If the underwriter makes any
public offering of the securities on terms different from those
on the cover page of the prospectus, the small business issuer
will file a post-effective amendment to state the terms of such
offering.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to officers,
directors, and controlling persons of the small business issuer
pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer
of expenses incurred or paid by a director, officer, or
controlling person of the small business issuer in the successful
defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the
securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized Amendment No. 1 to
this Registration Statement to be signed on its behalf by the undersigned, in
the City of Marion, State of Ohio on July 18, 2002.
Ohio State Bancshares, Inc.
By: /s/ Gary E. Pendleton
-------------------------------------------
Gary E. Pendleton
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement was signed by the following persons in
the capacities and on the dates stated.
/s/ Gary E. Pendleton /s/ Todd M. Wanner
- ------------------------------------------ -----------------------------------------
Gary E. Pendleton, President, Todd M. Wanner
Chief Executive Officer and Director Chief Financial Officer
Dated: July 18, 2002 (Principal Financial and Principal
Accounting Officer)
Dated: July 18, 2002
*Samuel J. Birnbaum, Director *Theodore L. Graham, Director
*John D. Owens, Director *F. Winton Lackey, Director
*Lois J. Fisher, Director *Fred K. White, Director
*Thurman R. Mathews, Director *Lloyd L. Johnston, Director
*Peter B. Miller, Director
* Gary E. Pendleton hereby signs this Amendment No. 1 to Registration Statement
on July 18, 2002 on behalf of each of the persons so indicated for whom he is
attorney-in-fact pursuant to a power of attorney filed herewith, which persons
together with Mr. Pendleton, constituted a majority of the members of the
registrant's Board of Directors.
/s/ Gary E. Pendleton
-----------------------------------------
Gary E. Pendleton
Exhibit Index
Exhibit 1 Underwriting Agreement with Community Banc Investments, Inc.*
Exhibit 3.1 Amended Articles of Incorporation of the Company. *
Exhibit 3.2 Code of Regulations of the Company.*
Exhibit 4 Instruments defining the rights of shareholders, including indentures
A. Instruments defining the rights of Company's shareholders are included in the
Articles of Incorporation and Code of Regulations*.
Exhibit 5 Opinion of Werner & Blank, LLC, regarding Ohio State Bancshares, Inc. Common Stock, and Consent
Exhibit 8 Opinion of Werner & Blank LLC, regarding tax matters, and Consent
Exhibit 10.1 Lease Agreement Between Henney and Cooper, Inc. and The Marion Bank for Branch on Richland
Road in Marion, Ohio*
Exhibit 10.2 Executive Indexed Salary Continuation Plan Agreement for President*
Exhibit 10.3 Change in Control Agreement between the Company and Gary E. Pendleton*
Exhibit 10.4 Change in Control Agreement between Company and Steven M. Strine*
Exhibit 10.5 Change in Control Agreement between Company and Todd M. Wanner*
Exhibit 10.6 Change in Control Agreement between Company and Cynthia L. Sparling*
Exhibit 21 Description of Subsidiary of the Company*
Exhibit 23.1 Consent of Crowe, Chizek and Company LLP
Exhibit 23.2 Consent of Werner & Blank, LLC (the consent is contained in that firm's opinions filed as
Exhibit (5))
Exhibit 23.3 Consent of Werner & Blank, LLC. (the consent is contained in that firm's opinion filed as
Exhibit (8))
Exhibit 24 Power of Attorney*
Exhibit 99.1 Form of Subscription Agreement for Rights Offering
Exhibit 99.2 Form of Subscription Agreement for Community Offering
Exhibit 99.3 Cover letter to accompany prospectus delivery to shareholders
* Incorporated by reference