UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____ to _____.
Commission file number: 0-28648
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Ohio State Bancshares, Inc.
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(Exact name of small business issuer as specified in its charter)
Ohio 34-1816546
- ------------------------------------ ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
111 South Main Street, Marion, Ohio 43302
-----------------------------------------
(Address of principal executive offices)
(740) 387-2265
---------------------------
(Issuer's telephone number)
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common stock, $10.00 par value 189,658 common shares
outstanding at November 1, 2002
Transitional Small Business Disclosure Format (check one):
Yes No X
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OHIO STATE BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 2002
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Changes in
Shareholders' Equity 5
Condensed Consolidated Statements of Cash Flows 6
Notes to the Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 13
Item 3. Controls and Procedures 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
EXECUTIVE CERTIFICATIONS 21
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
- --------------------------------------------------------------------------------
September 30, December 31,
2002 2001
---- ----
ASSETS
Cash and due from financial institutions $ 3,165,078 $ 3,698,341
Interest-earning demand deposits 3,996,250 2,613,055
Federal funds sold 2,394,000 1,891,000
------------ ------------
Cash and cash equivalents 9,555,328 8,202,396
Interest-earning deposits 859,785 449,387
Securities available for sale 20,978,813 17,758,732
Securities held to maturity (fair value September 30, 2002 -
$5,776,337, December 31, 2001 - $4,177,979) 5,478,829 4,159,220
Loans, net 60,597,650 57,493,391
Premises and equipment, net 1,394,628 1,469,560
Accrued interest receivable 614,099 526,682
Other assets 1,339,514 1,347,418
------------ ------------
$100,818,646 $ 91,406,786
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 7,078,818 $ 9,065,846
Interest-bearing 75,200,112 72,720,780
------------ ------------
Total 82,278,930 81,786,626
Borrowings 8,503,859 2,836,963
Accrued interest payable 124,067 233,542
Other liabilities 604,639 334,646
------------ ------------
Total liabilities 91,511,495 85,191,777
Shareholders' equity
Common stock, $10.00 par value; 500,000 shares authorized;
178,784 and 146,000 shares issued and outstanding 1,787,840 1,460,000
Additional paid-in capital 4,463,609 2,652,709
Retained earnings 2,798,340 2,058,427
Accumulated other comprehensive income 257,362 43,873
------------ ------------
Total shareholders' equity 9,307,151 6,215,009
------------ ------------
$100,818,646 $ 91,406,786
============ ============
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See accompanying notes to the condensed consolidated financial statements.
3.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Interest and dividend income
Loans, including fees $1,248,685 $1,276,264 $3,730,851 $3,748,745
Taxable securities 292,701 206,125 809,318 599,450
Nontaxable securities 67,184 53,682 186,695 145,120
Federal funds sold and other 18,351 14,659 46,232 82,312
---------- ---------- ---------- ----------
Total interest and dividend income 1,626,921 1,550,730 4,773,096 4,575,627
Interest expense
Deposits 509,596 694,955 1,577,584 2,170,419
Other borrowings 81,601 25,424 157,565 46,268
---------- ---------- ---------- ----------
Total interest expense 591,197 720,379 1,735,149 2,216,687
---------- ---------- ---------- ----------
Net interest income 1,035,724 830,351 3,037,947 2,358,940
Provision for loan losses 110,000 85,000 325,000 240,000
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 925,724 745,351 2,712,947 2,118,940
Noninterest income
Fees for customer services 161,146 113,225 422,789 323,093
Gain on sale of loan -- -- -- 68,232
Net gains on sales or calls of securities
available for sale 61,613 8,224 66,433 14,244
Other 17,950 10,375 51,044 40,779
---------- ---------- ---------- ----------
Total noninterest income 240,709 131,824 540,266 446,348
Noninterest expense
Salaries and employee benefits 363,430 308,622 1,050,515 890,086
Occupancy and equipment 130,843 130,076 384,536 372,725
Office supplies 35,450 31,334 103,246 94,466
Professional fees 35,637 44,631 105,105 143,013
Advertising and public relations 18,082 17,861 69,781 64,574
Taxes, other than income 23,115 16,422 62,775 49,417
Loan collection and repossessions 18,784 9,931 57,622 34,429
Credit card processing 22,192 15,393 60,675 45,723
Director expenses 12,897 12,366 38,297 37,496
Other 71,923 60,988 214,570 181,753
---------- ---------- ---------- ----------
Total noninterest expense 732,353 647,624 2,147,122 1,913,682
---------- ---------- ---------- ----------
Income before income taxes 434,080 229,551 1,106,091 651,606
Income tax expense 128,664 62,457 322,378 179,652
---------- ---------- ---------- ----------
Net income $ 305,416 $ 167,094 $ 783,713 $ 471,954
========== ========== ========== ==========
Basic and diluted earnings per share $ 1.95 $ 1.14 $ 5.24 $ 3.23
========== ========== ========== ==========
Weighted average shares outstanding 156,950 146,000 149,690 146,000
========== ========== ========== ==========
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See accompanying notes to the condensed consolidated financial statements.
4.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Balance at beginning of period $ 6,812,337 $ 5,889,236 $ 6,215,009 $ 5,531,871
Cash dividends ($.30 per share in 2002
and 2001) -- -- (43,800) (43,800)
Proceeds from sale of 32,784 shares
of common stock, net of offering
costs of $58,224 2,138,740 -- 2,138,740 --
Comprehensive income:
Net income 305,416 167,094 783,713 471,954
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects 50,658 160,053 213,489 256,358
----------- ----------- ----------- -----------
Total comprehensive income 356,074 327,147 997,202 728,312
----------- ----------- ----------- -----------
Balance at end of period $ 9,307,151 $ 6,216,383 $ 9,307,151 $ 6,216,383
=========== =========== =========== ===========
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See accompanying notes to the condensed consolidated financial statements.
5.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine Months Ended
September 30,
-------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 783,713 $ 471,954
Adjustments to reconcile net income to net cash from
operating activities
Net amortization of securities 21,386 22,041
Provision for loan losses 325,000 240,000
Depreciation and amortization 158,639 149,633
Gain on sale of loan -- (68,232)
Net realized gains on sales of securities (66,433) (14,244)
Federal Home Loan Bank stock dividends (9,200) (12,200)
Change in deferred loan costs (7,875) (40,092)
Change in accrued interest receivable (87,417) (29,107)
Change in accrued interest payable (109,475) (46,532)
Change in other assets and other liabilities 235,848 (619,982)
------------ ------------
Net cash from operating activities 1,244,186 53,239
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (9,962,988) (8,800,655)
Maturities, payments and calls 4,149,647 3,361,760
Sales 2,958,406 1,509,770
Securities held to maturity:
Purchases (1,321,333) (500,000)
Purchase of certificate of deposit (396,105) (444,717)
Loan originations and payments, net (3,489,314) (6,275,237)
Loan sale proceeds -- 1,722,342
Purchases of premises and equipment (83,707) (618,067)
------------ ------------
Net cash from investing activities (8,145,394) (10,044,804)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 492,304 8,582,350
Proceeds from advance of long-term borrowings 8,400,000 2,350,000
Principal repayments of long-term borrowings (2,233,104) (6,470)
Net changes in short-term borrowings (500,000) 300,000
Cash dividends paid (43,800) (43,800)
Proceeds from sale of stock, net of offering costs 2,138,740 --
------------ ------------
Net cash from financing activities 8,254,140 11,182,080
------------ ------------
Net change in cash and cash equivalents 1,352,932 1,190,515
Cash and cash equivalents at beginning of period 8,202,396 4,709,635
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,555,328 $ 5,900,150
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,844,624 $ 2,263,219
Income taxes paid 195,212 154,470
SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers from loans to other real estate owned and repossessions $ 67,930 $ 114,200
</Table>
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See accompanying notes to the condensed consolidated financial statements.
6.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the consolidated financial position of Ohio State Bancshares, Inc. at September
30, 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 did not impact 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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendments of FASB Statement No. 13, and Technical Corrections".
This Statement eliminates inconsistency between the required accounting for
certain lease modifications that have economic effects similar to sale-leaseback
transactions and sale-leaseback transactions. The Corporation does not believe
this statement will have a material effect on its financial position or results
of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This Statement addresses the timing of
recognition of a liability for exit and disposal cost at the time a liability is
incurred, rather than at a plan commitment date, as previously required. Exit or
disposal costs will be measured at fair value, and the recorded liability will
be subsequently adjusted for changes in estimated cash flows. This Statement is
required to be effective for exit or disposal activities entered after December
31, 2002, and early adoption is encouraged. The Corporation does not believe
this statement will have a material effect on its financial position or results
of operations.
SFAS No. 147, "Acquisitions of Certain Financial Institutions" became effective
October 1, 2002. This standard requires any unidentifiable intangible asset
previously recorded as the result of a business combination to be reclassified
as goodwill and the amortization of this asset will cease. The effect of this
standard on the financial position and results of operations of the Corporation
was not material, as the Corporation does not have any unidentified intangible
assets.
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(Continued)
7.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
Securities at September 30, 2002 and December 31, 2001 were as follows:
September 30, 2002
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
U.S. Treasury $ 100,850 $ 8,894 $ -- $ 109,744
U.S. government and federal agencies 6,515,391 212,294 -- 6,727,685
Mortgage-backed 12,340,037 198,712 (29,780) 12,508,969
Corporate bonds 1,146,152 1,273 (1,450) 1,145,975
----------- ----------- ----------- -----------
Total debt securities 20,102,430 421,173 (31,230) 20,492,373
Other securities 486,440 -- -- 486,440
----------- ----------- ----------- -----------
Total $20,588,870 $ 421,173 $ (31,230) $20,978,813
=========== =========== =========== ===========
HELD TO MATURITY
State and municipal $ 5,478,829 $ 297,508 $ -- $ 5,776,337
=========== =========== =========== ===========
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 Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Proceeds $2,958,406 $1,003,750 $2,958,406 $1,509,770
Gross gains 61,172 5,191 61,172 11,211
Gross losses -- -- -- --
Gross gains from calls 441 3,033 5,261 3,033
- --------------------------------------------------------------------------------
(Continued)
8.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
The amortized cost and estimated fair values of securities at September 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 without penalties.
Available-for-Sale Securities Held-to-Maturity Securities
----------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Due in one year or less $ 3,720,071 $ 3,781,652 $ 687,879 $ 696,968
Due in one to five years 12,955,058 13,204,347 855,916 914,158
Due in five to ten years 2,979,913 3,054,961 1,372,643 1,482,955
Due after ten years 447,388 451,413 2,562,391 2,682,256
Other securities 486,440 486,440 -- --
----------- ----------- ----------- -----------
$20,588,870 $20,978,813 $ 5,478,829 $ 5,776,337
=========== =========== =========== ===========
Securities with a carrying value of approximately $10,183,000 at September 30,
2002 and $9,425,000 at December 31, 2001 were pledged to secure deposits and for
other purposes.
NOTE 3 - LOANS
Loans at September 30, 2002 and December 31, 2001 were as follows:
September 30, December 31,
2002 2001
------------- ------------
Commercial $ 7,999,608 $ 8,539,061
Installment 23,805,444 23,759,858
Real estate 28,296,187 24,550,130
Credit card 734,468 758,579
Other 33,373 50,538
------------ ------------
60,869,080 57,658,166
Net deferred loan costs 557,088 549,213
Allowance for loan losses (828,518) (713,988)
------------ ------------
$ 60,597,650 $ 57,493,391
============ ============
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(Continued)
9.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
Activity in the allowance for loan losses was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2000
---- ---- ---- ----
Balance - beginning of period $ 780,532 $ 677,454 $ 713,988 $ 609,753
Loans charged-off (90,897) (78,474) (268,901) (214,950)
Recoveries 28,883 20,935 58,431 70,112
Provision for loan losses 110,000 85,000 325,000 240,000
--------- --------- --------- ---------
Balance - September 30 $ 828,518 $ 704,915 $ 828,518 $ 704,915
========= ========= ========= =========
The balance of impaired loans on at September 30, 2002 was $704,000. The balance
of impaired loans at December 31, 2001 and for the three and nine months ended
September 30, 2002 and 2001 was not material. $117,000 of the $704,000 of
impaired loans at September 30, 2002 was also included in the nonaccrual number
listed below.
Nonperforming loans were as follows:
September 30, December 31,
2002 2001
---- ----
Loans past due over 90 days still on accrual $ 48,324 $167,839
Loans on nonaccrual 527,441 225,473
Nonperforming loans include smaller balance homogeneous loans such as
residential real estate, installment and credit card loans that are collectively
evaluated for impairment.
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(Continued)
10.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
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 September 30, 2002 and
December 31, 2001 were as follows.
September 30, December 31,
2002 2001
---- ----
Short-term borrowing under line of credit of $1,500,000 $ -- $ 500,000
Fixed-rate FHLB advance, 3.77% due January 23, 2002 -- 1,000,000
Convertible fixed-rate FHLB advance until January 24, 2002,
4.60%, due January 24, 2011 1,000,000 1,000,000
Mortgage-matched FHLB advance, 5.91%, maturity June 14, 2011 316,675 336,963
5 year constant monthly payment FHLB advance, 4.43%,
maturity May 1, 2007 924,849 --
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 462,335 --
4 year fixed rate FHLB advance, 4.90% due April 28, 2006 500,000 --
3 year fixed rate FHLB advance, 3.59% due July 22, 2005 1,500,000 --
3.5 year fixed rate FHLB advance, 3.99% due January 30, 3006 1,500,000 --
2 year fixed rate FHLB advance, 2.64% due August 13, 2004 500,000 --
2.25 year fixed rate FHLB advance, 2.89% due November 19, 2004 800,000 --
---------- ----------
$8,503,859 $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 September 30, 2002, the Bank has approximately $2,950,000 still available for
future advances based upon current eligible real estate loans.
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.
- --------------------------------------------------------------------------------
(Continued)
11.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (Continued)
A summary of the contractual amounts of financial instruments with
off-balance-sheet risk at September 30, 2002 and December 31, 2001 follows:
September 30, December 31,
2002 2001
---- ----
Commitments to extend credit $4,270,000 $3,528,000
Credit card arrangements 2,504,000 2,589,000
Overdraft protection 851,000 824,000
- --------------------------------------------------------------------------------
12.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
INTRODUCTION
The following discussion focuses on the consolidated financial condition of Ohio
State Bancshares, Inc. at September 30, 2002, compared to December 31, 2001, and
the consolidated results of operations for the three and nine months ended
September 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 10.30% asset growth since December 31, 2001, as
total assets increased $9,412,000 from $91,407,000 at December 31, 2001 to
$100,819,000 at September 30, 2002. Most of this growth is attributable to a
$4,540,000 net increase in securities, a $3,104,000 net increase in loans, and a
$1,353,000 increase in cash and cash equivalents. This asset growth was funded
through $5,667,000 growth in borrowings, $2,139,000 of net proceeds received
through a common stock offering, and $492,000 of net growth in deposits.
Securities available for sale and securities held to maturity increased
$4,540,000, or 20.71%, from $21,918,000 at December 31, 2001 to $26,458,000 at
September 30, 2002. 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
minimal credit risk and at the same time adds to the size of the Corporation
with almost no increase in overhead. Due to the uncertainty of the future
interest rate environment, cash flows from mortgage-backed securities have not
been reinvested in the security portfolio but transferred to interest-earning
cash equivalents.
Net loans increased $3,104,000, or 5.40% during the period from December 31,
2001 to September 30, 2002. Contributing to the net increase in loans was a
$3,746,000, or 15.26%, increase in real estate loans partially offset by a
$539,000 decrease in commercial loans. The continued growth in real estate loans
is the result of management's strategy to increase this portfolio while reducing
the installment portfolio as a percent of total loans.
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13.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
This strategy is aimed at increasing the diversity of the total loan portfolio
and softens the impact of the credit risk inherent in an installment portfolio.
The allowance for loan losses increased to $829,000, or 1.35%, of total loans as
of September 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 $325,000
compared to actual net charge-offs of $210,000. Management has increased the
allowance for loan losses due to increased charge off activity and the existence
of commercial loans classified as impaired at September 30, 2002, with a total
balance of $704,000. Based upon collateral securing these loans, management
believes that no material loss will be realized through the collection process.
Management is actively monitoring problem loans and has increased collection
efforts to reduce charge-offs in future periods.
Total borrowings from the Federal Home Loan Bank have increased $6,167,000 from
December 31, 2001 to September 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 additional
borrowings of $1,167,000 were taken to lengthen the duration of interest-bearing
funds in a period that management believes to be a relatively low interest rate
environment. 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.
In late July of 2002, a public offering of the Corporation's stock began. As of
September 30, 2002, 32,784 of the 44,000 shares authorized were sold providing
net funds of $2,139,000. Offsetting the gross proceeds of this sale was $58,000
in offering costs. As of November 1, 2002, the Corporation has sold 43,658
shares and expects to have the offering fully subscribed by its close on
November 27, 2002.
Total deposits increased $492,000, or 0.60%, from December 31, 2001 to September
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.
RESULTS OF OPERATIONS
The operating results of the Corporation are affected by general economic
conditions, the monetary and fiscal policies of federal agencies and the
regulatory policies of agencies that regulate financial institutions. The
Corporation's cost of funds is influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
influenced by consumer and business demand, which, in turn, is affected by the
interest rates at which such loans are made, general economic conditions and the
availability of funds for lending activities.
The Corporation's net income is primarily dependent upon its net interest
income, which is the difference between interest income generated on
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Provisions for loan losses, service charges, gains on the sale of
assets and other income, noninterest expense and income taxes also affect net
income.
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14.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001
Net income for the nine months ended September 30, 2002 was $784,000, or
$312,000, more than the same period in 2001. The reason for the increase in
earnings was due to increases in net interest income of $679,000 and noninterest
income of $94,000 partially offset by increases in noninterest expense by
$233,000, provision for loan losses of $85,000 and applicable taxes.
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 $679,000, or 28.78% for the nine months ended September 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 income was up $94,000, or 21.04%, for the nine months ended
September 30, 2002 versus the same period in 2001. The largest fluctuation in
this category comes from fees for customer services which are up $100,000. This
is due to increased volume of transaction accounts, lower earnings credits
applied to commercial accounts, and the continued success of the Bounce
Protection program. There was also a gain recognized on the sale of a loan for
$68,000 in 2001 that was not repeated in 2002. This loss in revenues was mostly
replaced with gains from the sale or call of securities in 2002 of $66,000.
Management sold out of medium term bonds because of the gain to be recognized
while at the same time shortening the duration of the portfolio in preparation
of rising interest rates.
Noninterest expense was up $233,000, or 12.20% for the nine months ended
September 30, 2002 versus the nine months ended September 30, 2001. The largest
fluctuations in this category came from salaries and employee benefits,
professional fees, loan collection expense and other noninterest expenses.
Salaries and employee benefits is up $160,000, or 18.02%, due to the addition of
a middle management position and four entry level positions, normal raises and
higher executive bonuses tied to the improved Company performance in 2002.
Professional fees are down $38,000, or 26.51%, 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 $23,000, or 67.36%, due to increased
charge-off activity. Other expenses were up $33,000, or 18.06%, due to increased
Federal Reserve service charges, commissions on the Bounce Protection program,
and employee education.
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
Net income for the three months ended September 30, 2002 was $305,000, or
$138,000 more than the same period in 2001. The reason for the increase in
earnings was primarily due to an increase in net interest income and noninterest
income partially offset by increases in noninterest expenses and provisions for
loan losses.
Net interest income increased by $205,000 for the three months ended September
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 income increased by $109,000 for the three months ended September
30, 2002 compared to the same period in 2001. Most of this increase was due to
the continued success of the Bounce Protection program, increased customer
service fees, and the gains from sales and calls of available for sale
securities.
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15.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Noninterest expense was up $85,000, or 13.08%, for the three months ended
September 30, 2002 versus the three months ended September 30, 2001. Salaries
and employee benefits were up $55,000 due to the addition of a middle management
position and four entry level positions, normal raises and higher executive
bonuses tied to the improved Company performance in 2002. Loan collection and
repossessions expense was up $9,000 due to increased charge-off activity. Other
noninterest expenses were up $11,000 due to increased Federal Reserve service
charges, commissions on the Bounce Protection program, and employee education.
CAPITAL RESOURCES
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings and other factors, and regulators
can lower classifications in certain cases. Failure to meet various capital
requirements can initiate regulatory action having a direct material affect on
the operations of the Bank.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
Capital to risk-
weighted assets
--------------- Tier 1 capital
Total Tier 1 to average assets
----- ------ -----------------
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
At September 30, 2002 and December 31, 2001, the actual capital ratios for the
Bank were:
September 30, December 31,
2002 2001
---- ----
Total capital to risk-weighted assets 12.5% 11.9%
Tier 1 capital to risk-weighted assets 11.2 10.7
Tier 1 capital to average assets 7.4 7.2
At September 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.
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16.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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 $9,555,000 at September 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.
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17.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 3. CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
Within the 90 days prior to the filing date of this report, the Corporation
carried out an evaluation, under the supervision and with the participation of
the Corporation's management, including the Corporation's President and Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Corporation's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14(c) and 15d-14(c). Based upon that
evaluation, the President and Chief Executive Officer and Chief Financial
Officer concluded that the Corporation's disclosure controls and procedures are,
to the best of their knowledge, effective to ensure that information required to
be disclosed by the Corporation in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
Subsequent to the date of their evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that there were no significant changes in
the Corporation's internal controls or in other factors that could significantly
affect its internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
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18.
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
Quarter ended September 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:
---------------------
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) Exhibit 99.1 - Chief Executive Officer Certification
(c) Exhibit 99.2 - Chief Financial Officer Certification
(d) No current reports on Form 8-K were filed by the small
business issuer during the quarter ended September 30,
2002.
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19.
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: November 4, 2002 /s/ Gary E. Pendleton
---------------------- ------------------------------------------
(Signature)
Gary E. Pendleton
President and Chief Executive Officer
Date: November 4, 2002 /s/ Todd M. Wanner
---------------------- ------------------------------------------
(Signature)
Todd M. Wanner
Vice President and Chief Financial Officer
- --------------------------------------------------------------------------------
20.
OHIO STATE BANCSHARES, INC.
EXECUTIVE CERTIFICATIONS
- --------------------------------------------------------------------------------
I, Gary E. Pendleton, President and Chief Executive Officer of Ohio State
Bancshares, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Ohio State
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date or our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Gary E. Pendleton
Gary E. Pendleton
Chief Executive Officer
November 4, 2002
- --------------------------------------------------------------------------------
21.
OHIO STATE BANCSHARES, INC.
EXECUTIVE CERTIFICATIONS
- --------------------------------------------------------------------------------
I, Todd M. Wanner, Chief Financial Officer of Ohio State Bancshares, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Ohio State
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
d) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
e) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
f) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
c) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
d) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date or our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Todd M. Wanner
Todd M. Wanner
Chief Financial Officer
November 4, 2002
- --------------------------------------------------------------------------------
22.
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.
- --------------------------------------------------------------------------------
23.