UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 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 146,281 common shares
outstanding at August 1, 2002
Transitional Small Business Disclosure Format (check one):
Yes | | No |X|
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 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.............. 16
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)
June 30, December 31,
2002 2001
---- ----
ASSETS
Cash and due from financial institutions $ 3,571,858 $ 3,698,341
Interest-earning demand deposits -- 2,613,055
Federal funds sold 1,612,000 1,891,000
----------- -----------
Cash and cash equivalents 5,183,858 8,202,396
Interest-earning deposits 458,576 449,387
Securities available for sale 22,940,889 17,758,732
Securities held to maturity (fair value June 30, 2002 -
$5,088,785, December 31, 2001 - $4,177,979) 4,940,614 4,159,220
Loans, net 59,863,504 57,493,391
Premises and equipment, net 1,437,475 1,469,560
Accrued interest receivable 578,927 526,682
Other assets 1,290,512 1,347,418
----------- -----------
$96,694,355 $91,406,786
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 7,692,432 $ 9,065,846
Interest-bearing 74,601,355 72,720,780
----------- -----------
Total 82,293,787 81,786,626
Borrowings 6,878,658 2,836,963
Accrued interest payable 195,828 233,542
Other liabilities 513,745 334,646
----------- -----------
Total liabilities 89,882,018 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 2,492,924 2,058,427
Accumulated other comprehensive income 206,704 43,873
----------- -----------
Total shareholders' equity 6,812,337 6,215,009
----------- -----------
$96,694,355 $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 Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Interest and dividend income
Loans, including fees $1,258,720 $1,239,637 $2,482,166 $2,472,481
Taxable securities 281,234 209,505 516,617 393,325
Nontaxable securities 61,076 51,603 119,511 91,438
Federal funds sold and other 13,517 31,008 27,881 67,653
---------- ---------- ---------- ----------
Total interest and dividend income 1,614,547 1,531,753 3,146,175 3,024,897
Interest expense
Deposits 519,078 739,020 1,067,988 1,475,464
Other borrowings 51,867 12,388 75,964 20,844
---------- ---------- ---------- ----------
Total interest expense 570,945 751,408 1,143,952 1,496,308
---------- ---------- ---------- ----------
Net interest income 1,043,602 780,345 2,002,223 1,528,589
Provision for loan losses 115,000 80,000 215,000 155,000
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 928,602 700,345 1,787,223 1,373,589
Noninterest income
Fees for customer services 142,229 114,493 261,643 209,868
Gain on sale of loan -- -- -- 68,232
Net gains on sales or calls of securities
available for sale 4,820 -- 4,820 6,020
Other 13,234 12,235 33,094 30,404
---------- ---------- ---------- ----------
Total noninterest income 160,283 126,728 299,557 314,524
Noninterest expense
Salaries and employee benefits 346,435 298,806 687,085 581,464
Occupancy and equipment 125,434 118,339 253,693 242,649
Office supplies 30,798 31,646 67,796 63,132
Professional fees 33,660 42,068 69,468 98,382
Advertising and public relations 34,705 21,705 51,699 46,713
Taxes, other than income 21,910 16,467 39,660 32,995
Loan collection and repossessions 20,524 13,811 38,838 24,498
Credit card processing 19,554 13,946 38,483 30,330
Director expenses 12,920 12,605 25,400 25,130
Other 69,090 60,515 142,647 120,765
---------- ---------- ---------- ----------
Total noninterest expense 715,030 629,908 1,414,769 1,266,058
---------- ---------- ---------- ----------
Income before income taxes 373,855 197,165 672,011 422,055
Income tax expense 110,570 52,412 193,714 117,195
---------- ---------- ---------- ----------
Net income $ 263,285 $ 144,753 $ 478,297 $ 304,860
========== ========== ========== ==========
Basic and diluted earnings per share $ 1.80 $ .99 $ 3.28 $ 2.09
========== ========== ========== ==========
Weighted average shares outstanding 146,000 146,000 146,000 146,000
========== ========== ========== ==========
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 Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Balance at beginning of period $ 6,331,557 $ 5,815,643 $ 6,215,009 $ 5,531,871
Cash dividends ($.30 per share in 2002
and 2001) (43,800) (43,800) (43,800) (43,800)
Comprehensive income:
Net income 263,285 144,753 478,297 304,860
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects 261,295 (27,360) 162,831 96,305
----------- ----------- ----------- -----------
Total comprehensive income 524,580 117,393 641,128 401,165
----------- ----------- ----------- -----------
Balance at end of period $ 6,812,337 $ 5,889,236 $ 6,812,337 $ 5,889,236
=========== =========== =========== ===========
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)
Six Months Ended
June 30,
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 478,297 $ 304,860
Adjustments to reconcile net income to net cash from
operating activities
Net amortization of securities 23,841 14,066
Provision for loan losses 215,000 155,000
Depreciation and amortization 105,471 98,280
Gain on sale of loan -- (68,232)
Net realized gains on sales or calls of securities (4,820) (6,020)
Federal Home Loan Bank stock dividends (5,800) (8,100)
Change in deferred loan costs (710) (53,100)
Change in accrued interest receivable (52,245) (65,789)
Change in accrued interest payable (37,714) (6,014)
Change in other assets and other liabilities 203,527 (32,763)
----------- -----------
Net cash from operating activities 924,847 332,188
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (6,863,038) (4,723,698)
Maturities, prepayments and calls 1,908,384 959,920
Sales -- 506,020
Securities held to maturity:
Purchases (784,593) (500,000)
Loan originations and payments, net (2,635,808) (4,409,116)
Loan sale proceeds -- 1,722,342
Purchases of premises and equipment (73,386) (391,006)
----------- -----------
Net cash from investing activities (8,448,441) (6,835,538)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 507,161 3,020,555
Proceeds from advance of long-term borrowings 4,100,000 1,350,000
Principal repayments of long-term borrowings (1,058,305) --
Net changes in short-term borrowings 1,000,000 48,000
Cash dividends paid (43,800) --
----------- -----------
Net cash from financing activities 4,505,056 4,418,555
----------- -----------
Net change in cash and cash equivalents (3,018,538) (2,084,795)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,202,396 4,709,635
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,183,858 $ 2,624,840
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,181,666 $ 1,502,322
Income taxes paid 115,000 121,470
SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers from loans to other real estate owned and repossessions $ 51,405 $ 47,350
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 June 30,
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 June 30, 2002 and December 31, 2001 were as follows:
June 30, 2002
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ---- ------ -----
AVAILABLE FOR SALE
U.S. Treasury $ 100,869 $ 532 $ -- $ 101,401
U.S. government and federal agencies 10,917,343 208,600 -- 11,125,943
Mortgage-backed 11,244,248 119,914 (15,857) 11,348,305
----------- ----------- ----------- -----------
Total debt securities 22,262,460 329,046 (15,857) 22,575,649
Other securities 365,240 -- -- 365,240
----------- ----------- ----------- -----------
Total $22,627,700 $ 329,046 $ (15,857) $22,940,889
=========== =========== =========== ===========
HELD TO MATURITY
State and municipal $ 4,940,614 $ 155,578 $ (7,407) $ 5,088,785
=========== =========== =========== ===========
(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 Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Proceeds $ -- $ -- $ -- $506,020
Gross gains -- -- -- 6,020
Gross losses -- -- -- --
Gross gains from calls 4,820 -- 4,820 --
The amortized cost and estimated fair values of securities at June 30, 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 $ 1,679,740 $ 1,702,151 $ 688,802 $ 701,830
Due in one to five years 12,332,820 12,517,856 856,688 899,211
Due in five to ten years 7,056,978 7,155,484 1,372,740 1,435,302
Due after ten years 1,192,922 1,200,158 2,022,384 2,052,442
Other securities 365,240 365,240 -- --
----------- ----------- ----------- -----------
$22,627,700 $22,940,889 $ 4,940,614 $ 5,088,785
=========== =========== =========== ===========
Securities with a carrying value of approximately $9,695,000 at June 30, 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 June 30, 2002 and December 31, 2001 were as follows:
June 30, December 31,
2002 2001
---- ----
Commercial $ 7,651,940 $ 8,539,061
Installment 23,576,331 23,759,858
Real estate 28,070,692 24,550,130
Credit card 735,210 758,579
Other 59,940 50,538
------------ ------------
60,094,113 57,658,166
Net deferred loan costs 549,923 549,213
Allowance for loan losses (780,532) (713,988)
------------ ------------
$ 59,863,504 $ 57,493,391
============ ============
Activity in the allowance for loan losses was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Balance - beginning of period $ 713,092 $ 632,567 $ 713,988 $ 609,753
Loans charged-off (103,327) (66,170) (219,635) (136,476)
Recoveries 55,767 31,057 71,179 49,177
Provision for loan losses 115,000 80,000 215,000 155,000
--------- --------- --------- ---------
Balance - June 30 $ 780,532 $ 677,454 $ 780,532 $ 677,454
========= ========= ========= =========
The balance of loans evaluated for impairment on an individual basis at June 30,
2002 and December 31, 2001 and for the three and six months ended June 30, 2002
and 2001 was not material.
Nonperforming loans were as follows:
June 30, December 31,
2002 2001
---- ----
Loans past due over 90 days still on accrual $118,964 $167,839
Loans on nonaccrual 182,001 225,473
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 June 30, 2002 and December
31, 2001 were as follows.
June 30, December 31,
2002 2001
---- ----
Short-term borrowing under line of credit of $1,500,000, 3.88% at
June 30, 2002 $ 500,000 $ 500,000
Short-term FHLB advance, 1.99% due July 23, 2002 1,000,000 --
Fixed-rate FHLB advance, 3.77% due January 23, 2002 -- 1,000,000
Convertible fixed-rate FHLB advance until January 24, 2002,
4.60%, due January 24, 2011 1,000,000 1,000,000
Mortgage-matched FHLB advance, 5.91%, maturity June 14, 2011 323,536 336,963
5 year constant monthly payment FHLB advance, 4.43%,
maturity May 1, 2007 970,106 --
2.25 year fixed rate FHLB advance, 4.09% due July 23, 2004 1,000,000 --
5 year constant monthly payment FHLB advance, 4.33%,
maturity May 1, 2007 485,016 --
4 year fixed rate FHLB advance, 4.90% due April 28, 2006 500,000 --
100 day fixed rate FHLB advance, 2.03% due August 21, 2002 1,100,000 --
---------- ----------
$6,878,658 $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 and constant monthly payment advances require 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 June 30, 2002, the Bank has approximately $4,596,000 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 June 30, 2002 and December 31, 2001 follows:
(Continued)
10
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (Continued)
June 30, December 31,
2002 2001
---- ----
Commitments to extend credit $4,084,000 $3,528,000
Credit card arrangements 2,545,000 2,589,000
Overdraft protection 833,000 824,000
NOTE 6 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows for the
three and six months ended June 30, 2002 and 2001:
Three Months ended Six Months Ended
June 30 June 30
------- -------
2002 2001 2002 2001
---- ---- ---- ----
Unrealized holding gains and losses on
available-for-sale securities $ 400,723 $ (41,455) $ 251,534 $ 151,936
Reclassification adjustments for (gains)
and losses later recognized as income (4,820) -- (4,820) (6,020)
---------- ----------- ---------- -----------
Net unrealized gains and losses 395,903 (41,455) 246,714 145,916
Tax effect (134,608) 14,095 (83,883) (49,611)
---------- ----------- ---------- -----------
Other comprehensive income (loss) $ 261,295 $ (27,360) $ 162,831 $ 96,305
========== =========== ========== ===========
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 June 30, 2002, compared to December 31, 2001, and the
consolidated results of operations for the three and six months ended June 30,
2002, compared to the same periods 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 5.78% asset growth since December 31, 2001, as
total assets increased $5,287,000 from $91,407,000 at December 31, 2001 to
$96,694,000 at June 30, 2002. Most of this growth is attributable to a
$5,964,000 net increase in securities and a $2,370,000 net increase in loans
offset by a $3,019,000 decrease in cash and cash equivalents. This growth was
funded through the previously mentioned reduction of cash and cash equivalents,
$507,000 growth in total deposits and $4,042,000 growth in borrowings.
Securities available for sale and securities held to maturity increased
$5,964,000 from $21,918,000 at December 31, 2001 to $27,882,000 at June 30,
2001. The increase was primarily the result of a leveraged purchase of
$5,000,000 in U.S. government agency and mortgage backed securities funded
entirely through Federal Home Loan Bank borrowings. This was done due to a
positive interest spread between borrowing rates and investment securities.
Management feels that this type of growth is positive, when the interest rate
environment accommodates it, because it allows for increased earnings with
almost no credit risk and at the same time adds to the size of the Corporation
with almost no increase in overhead.
Net loans increased $2,370,000, or 4.12% during the period from December 31,
2001 to June 30, 2002. Contributing to the net increase in loans was a
$3,521,000, or 14.34%, increase in real estate loans partially offset by a
$887,000 decrease in commercial loans. The continued growth in real estate loans
is the result of management's strategy to increase this portfolio in order 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.
12
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The allowance for loan losses increased to $781,000, or 1.29% of total loans as
of June 30, 2002 compared to $714,000, or 1.23% of total loans at December 31,
2001. The increase is due to a provision for loan losses of $215,000 compared to
actual net charge-offs of $148,000. Management is actively monitoring problem
loans and has increased collection efforts to reduce charge-offs in future
periods. Should charge-offs, classified loans or delinquencies significantly
change, management will increase the provision for loan losses in order to
maintain the allowance for loan losses at a level adequate to absorb probable
losses in the loan portfolio.
Total deposits increased $507,000, or 0.62% from December 31, 2001 to June 30,
2002. The increase in deposits was primarily due to the cyclical cash needs of
customers and current market conditions. The additional cash was used to fund
securities and loan growth.
Total borrowings from the Federal Home Loan Bank have increased $4,042,000 from
December 31, 2001 to June 30, 2002. As mentioned previously in this discussion,
$5,000,000 was borrowed from the Federal Home Loan Bank to purchase AAA rated
securities of similar structure and maturity. The reduction in net growth of
borrowed funds was a $1,000,000 advance taken in the prior year that matured
early in 2002. For further discussion regarding the use of these funds and the
terms relating to these borrowings see Note 4 of the condensed consolidated
financial statements.
RESULTS OF OPERATIONS
The operating results of the Corporation are affected by general economic
conditions, the monetary and fiscal policies of federal agencies and the
regulatory policies of agencies that regulate financial institutions. The
Corporation's cost of funds is influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
influenced by consumer and business demand, which, in turn, is affected by the
interest rates at which such loans are made, general economic conditions and the
availability of funds for lending activities.
The Corporation's net income is primarily dependent upon its net interest
income, which is the difference between interest income generated on
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Provisions for loan losses, service charges, gains on the sale of
assets and other income, noninterest expense and income taxes also affect net
income.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Net income for the six months ended June 30, 2002 was $478,000, or $173,000 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 $473,000 partially offset
by increases in provision for loan losses of $60,000, noninterest expenses of
$149,000, and applicable taxes.
Net interest income is the largest component of Corporation's income and is
affected by the interest rate environment and the volume and composition of
interest-earning assets and interest-bearing liabilities. Net interest income
increased by $473,000, or 30.99% for the six months ended June 30, 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 for deposits,
and the utilization of more advanced analytical tools to monitor liquidity
levels and maturity gaps between interest sensitive assets and liabilities.
Noninterest expense was up $149,000, or 11.75% for the six months ended June 30,
2002 versus the six months ended June 30, 2001. The largest fluctuations in this
category came from salaries and employee benefits, occupancy expense,
professional fees, loan collection expense and other noninterest expenses.
Salaries and employee benefits
13
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
is up $106,000, or 18.16%, due to the addition of a middle management position
and four entry level positions, normal raises and higher executive bonuses tied
to company performance. Occupancy expense is up $11,000, or 4.55%, due to a
building addition costing roughly $500,000 that was completed in the second half
of 2001. Professional fees are down $29,000, or 29.39%, due to higher attorney
and accounting fees in the first quarter of 2001 relating to a lawsuit and a
federal tax audit. Loan collection expenses were up $14,000, or 58.54%, due to
increased charge-off activity. Other expenses were up $22,000, or 18.12%, due to
increased Federal Reserve service charges, commissions on Bounce Protection
program, and employee education.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Net income for the three months ended June 30, 2002 was $263,000, or $119,000
more than the same period in 2001. The reason for the increase in earnings was
primarily due to increases in net interest income and noninterest income
partially offset by increases in noninterest expenses and provisions for loan
losses.
Net interest income increased by $264,000 for the three months ended June 30,
2002 compared to the same period in 2001. The increase in net interest income is
attributable to increased average earning asset balances, better deposit 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 increased by $33,000 for the three months ended June 30, 2002
compared to the same period in 2001. Most of this increase was due to the Bounce
Protection program and gain recognized on calls of securities purchased with
discounts.
Noninterest expense was up $85,000, or 13.51% for the three months ended June
30, 2002 versus the three months ended June 30, 2001. Salaries and employee
benefits were up $48,000 due to the addition of a middle management position and
four entry level positions, normal raises and higher executive bonuses tied to
company performance. Advertising and public relations expenses were up $13,000
due to increased public donations and advertising related to new checking
account programs. Occupancy expense was up $7,000 due to building additions and
loan collection expenses were also up $7,000 due to increased charge-off
activity.
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:
14
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Capital to risk-
weighted assets
--------------- Tier 1 capital
Total Tier 1 to average assets
----- ------ -----------------
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
At June 30, 2002 and December 31, 2001, the actual capital ratios for the Bank
were:
June 30, December 31,
2002 2001
---- ----
Total capital to risk-weighted assets 12.4% 11.9%
Tier 1 capital to risk-weighted assets 11.1 10.7
Tier 1 capital to average assets 7.4 7.2
At June 30, 2002 and December 31, 2001, the Bank was categorized as well
capitalized. However, due to the success in asset growth the Corporation has
seen in the past several years, the Board of Directors has found it necessary to
raise additional capital to support future growth. For this reason, a public
offering of the Corporation's stock commenced in late July of 2002. Important
information relating to this offering can be found in the offering material,
which includes a prospectus, and can be obtained at our corporate office at 111
S. Main St, Marion, Ohio, or as part of a filing with the Securities and
Exchange Commission on July 19, 2002 at www.sec.gov.
LIQUIDITY
Liquidity management focuses on the ability to have funds available to meet the
loan and depository transaction needs of the Bank's customers and the
Corporation's other financial commitments. Cash and cash equivalent assets
(which include deposits this Bank maintains at other banks, federal funds sold
and other short-term investments) totaled $5,184,000 at June 30, 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 June 30, 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 and Use of Proceeds:
There are no matters required to be reported under this item.
Item 3 - Defaults Upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders:
On April 18, 2002, Ohio State Bancshares, Inc. held the Annual Meeting
of Shareholders at which shareholders voted upon the election of three
directors for a term expiring in 2005. The results of the voting on
these matters were as follows:
Nominee Votes for Withheld
------- --------- --------
Peter B. Miller 99,080 444
Gary E. Pendleton 99,080 444
Lloyd L. Johnston 99,080 444
The following are directors who were not up for election at the
meeting and whose terms of office as directors continued after the
meeting:
Samuel J. Birnbaum
Lois J. Fisher
F. Winton Lackey
Theodore L. Graham
John D. Owens
Thurman R. Mathews
Fred K. White
Item 5 - Other Information:
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibit 99 - Safe Harbor Under Private Securities Litigation
Reform Act of 1995.
(b) Exhibit 99.1 - Chief Executive Officer Certification
(c) Exhibit 99.2 - Chief Financial Officer Certification
(d) A report on Form 8-K was filed on June 26, 2002 relating to
change of control contracts entered into with certain
executive officers.
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: August 9, 2002 /s/ Gary E. Pendleton
---------------------------
(Signature)
Gary E. Pendleton
President and Chief Executive Officer
Date: August 9, 2002 /s/ Todd M. Wanner
------------------------
(Signature)
Todd M. Wanner
Vice President and Chief Financial Officer
17
OHIO STATE BANCSHARES, INC.
Index to Exhibits
EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
- -------------- ----------- -----------
99 Safe Harbor Under the Private Incorporated by reference to
Securities Litigation Reform Act Exhibit 99 to Annual Report
of 1995 on Form 10-KSB for the year ended
December 31, 1999
filed by the Small
Business Issuer on
March 29, 2000.
18