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, 2003
[ ] 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)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
---- ----
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 190,000 common shares
outstanding at November 1, 2003
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, 2003
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Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets ............................................................. 3
Condensed Consolidated Statements of Income........................................................ 4
Condensed Consolidated Statements of Changes in
Shareholders' Equity ............................................................................ 5
Condensed Consolidated Statements of Cash Flows ................................................... 6
Notes to the Condensed Consolidated Financial Statements .......................................... 7
Item 2. Management's Discussion and Analysis................................................................ 10
Item 3. Controls and Procedures............................................................................. 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................. 15
Item 2. Changes in Securities.............................................................................. 15
Item 3. Defaults Upon Senior Securities.................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders................................................ 15
Item 5. Other Information.................................................................................. 15
Item 6. Exhibits and Reports on Form 8-K................................................................... 15
SIGNATURES ............................................................................................... 16
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
- --------------------------------------------------------------------------------
September 30, December 31,
2003 2002
---- ----
ASSETS
Cash and due from financial institutions $ 4,265,895 $ 3,636,558
Interest-earning demand deposits 1,856,874 2,135,048
Federal funds sold 958,000 1,661,000
--------------- ----------------
Cash and cash equivalents 7,080,769 7,432,606
Interest-earning deposits 481,776 866,270
Securities available for sale 25,712,987 26,671,576
Securities held to maturity (fair value
December 31, 2002 - $6,016,890) -- 5,792,660
Loans, net 69,794,474 60,544,867
Premises and equipment, net 1,479,841 1,358,832
Accrued interest receivable 600,107 607,688
Other assets 1,729,589 1,458,422
--------------- ----------------
$ 106,879,543 $ 104,732,921
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 7,395,717 $ 6,813,332
Interest-bearing 79,700,356 78,076,143
--------------- ----------------
Total 87,096,073 84,889,475
Borrowings 8,596,192 8,928,208
Accrued interest payable 108,206 123,714
Other liabilities 391,346 572,438
--------------- ----------------
Total liabilities 96,191,817 94,513,835
Shareholders' equity
Common stock, $10.00 par value; 500,000 shares authorized;
190,000 shares issued and outstanding 1,900,000 1,900,000
Additional paid-in capital 5,045,227 5,045,227
Retained earnings 3,595,756 2,997,492
Accumulated other comprehensive income 146,743 276,367
--------------- ----------------
Total shareholders' equity 10,687,726 10,219,086
--------------- ----------------
$ 106,879,543 $ 104,732,921
=============== ================
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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,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Interest and dividend income
Loans, including fees $ 1,270,511 $ 1,248,685 $ 3,668,933 $ 3,730,851
Taxable securities 149,182 292,701 651,974 809,318
Nontaxable securities 89,611 67,184 231,309 186,695
Federal funds sold and other 15,103 18,351 53,896 46,232
----------- ----------- ------------ ------------
Total interest and dividend income 1,524,407 1,626,921 4,606,112 4,773,096
Interest expense
Deposits 430,805 509,596 1,357,033 1,577,584
Other borrowings 85,386 81,601 258,397 157,565
----------- ----------- ------------ ------------
Total interest expense 516,191 591,197 1,615,430 1,735,149
----------- ----------- ------------ ------------
Net interest income 1,008,216 1,035,724 2,990,682 3,037,947
Provision for loan losses 105,000 110,000 312,000 325,000
----------- ----------- ------------ ------------
Net interest income after provision for
loan losses 903,216 925,724 2,678,682 2,712,947
Noninterest income
Fees for customer services 161,318 161,146 450,728 422,789
Net gains on sales or calls of securities
available for sale 19,782 61,613 94,840 66,433
Other 11,870 17,950 57,673 51,044
----------- ----------- ------------ ------------
Total noninterest income 192,970 240,709 603,241 540,266
Noninterest expense
Salaries and employee benefits 424,668 363,430 1,195,418 1,050,515
Occupancy and equipment 147,608 130,843 429,486 384,536
Office supplies 33,838 35,450 111,018 103,246
Professional fees 30,311 35,637 93,143 105,105
Advertising and public relations 13,451 18,082 67,510 69,781
Taxes, other than income 24,386 23,115 75,615 62,775
Loan collection and repossessions 38,974 18,784 114,614 57,622
Credit card processing 25,914 22,192 67,776 60,675
Director expenses 13,878 12,897 39,575 38,297
Other 69,256 71,923 212,194 214,570
----------- ----------- ------------ ------------
Total noninterest expense 822,284 732,353 2,406,349 2,147,122
----------- ----------- ------------ ------------
Income before income taxes 273,902 434,080 875,574 1,106,091
Income tax expense 69,101 128,664 201,310 322,378
----------- ----------- ------------ ------------
Net income $ 204,801 $ 305,416 $ 674,264 $ 783,713
=========== =========== ============ ============
Basic and diluted earnings per share $ 1.08 $ 1.95 $ 3.55 $ 5.24
=========== ========== ============ ============
Weighted average shares outstanding 190,000 156,950 190,000 149,690
=========== =========== ============ ============
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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,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Balance at beginning of period $ 10,501,505 $ 6,812,337 $ 10,219,086 $ 6,215,009
Cash dividends ($.40 per share in 2003
and $.30 in 2002) -- -- (76,000) (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 204,801 305,416 674,264 783,713
Change in net unrealized gain (loss) on
securities available for sale, net of
tax effects and reclassifications on
realized gains (71,034) 50,658 (182,078) 213,489
Unrealized gain on securities transferred
from held to maturity to available for
sale during the period, net of tax 52,454 -- 52,454 --
------------- ------------- ------------- ------------
Total comprehensive income 186,221 356,074 544,640 997,202
------------- ------------- ------------- ------------
Balance at end of period $ 10,687,726 $ 9,307,151 $ 10,687,726 $ 9,307,151
============= ============= ============= ============
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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)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
-------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 674,264 $ 783,713
Adjustments to reconcile net income to net cash from
operating activities
Net amortization of securities 146,270 21,386
Provision for loan losses 312,000 325,000
Depreciation and amortization 174,740 158,639
Net realized gains on sales of securities (94,840) (66,433)
Federal Home Loan Bank stock dividends (15,500) (9,200)
Change in deferred loan costs 33,098 (7,875)
Change in accrued interest receivable 7,581 (87,417)
Change in accrued interest payable (15,508) (109,475)
Change in other assets and other liabilities (320,133) 235,848
-------------- ---------------
Net cash from operating activities 901,972 1,244,186
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (15,595,926) (9,962,988)
Maturities, payments and calls 20,334,850 4,149,647
Sales 4,166,398 2,958,406
Securities held to maturity:
Purchases (2,887,925) (1,321,333)
Maturities and calls 485,000 --
Purchase of certificate of deposit -- (396,105)
Loan originations and payments, net (9,660,055) (3,489,314)
Maturities of certificates of deposit 401,016 --
Purchases of premises and equipment (295,749) (83,707)
-------------- ---------------
Net cash from investing activities (3,052,391) (8,145,394)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 2,206,598 492,304
Proceeds from advance of long-term borrowings -- 8,400,000
Principal repayments of long-term borrowings (332,016) (2,233,104)
Net changes in short-term borrowings -- (500,000)
Cash dividends paid (76,000) (43,800)
Proceeds from sale of stock, net of offering costs -- 2,138,740
-------------- ---------------
Net cash from financing activities 1,798,582 8,254,140
-------------- ---------------
Net change in cash and cash equivalents (351,837) 1,352,932
Cash and cash equivalents at beginning of period 7,432,606 8,202,396
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,080,769 $ 9,555,328
============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,630,938 $ 1,844,624
Income taxes paid 593,000 195,212
SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers from loans to other real estate owned and repossessions $ 65,350 $ 67,930
Transfer of securities from held to maturity to available for sale 8,201,627 --
- --------------------------------------------------------------------------------
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 September
30, 2003, 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, 2002, included in its 2002 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 2002 Annual Report.
Except where noted, 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 previous financial statements, the Corporation has carried securities
classified as held to maturity and as available for sale. To aid in liquidity
and risk management, the Corporation reclassified all securities from held to
maturity to available for sale on August 31, 2003. Securities available for sale
are carried at fair value, with unrealized holding gains and losses reported in
other comprehensive income. Securities with a carrying value of $8,202,000 and
unrealized gains of $79,000 were reclassified. The Corporation's equity
increased $52,000, net of tax effects, as a result of the transfer. Management
expects that all securities purchased in the future will be classified as
available for sale.
NOTE 2 - SECURITIES
Securities at September 30, 2003 and December 31, 2002 were as follows:
September 30, 2003
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
U.S. Treasury $ 100,771 $ 6,323 $ -- $ 107,094
U.S. government and federal agencies 9,286,840 86,090 (97,378) 9,275,552
Mortgage-backed 5,843,985 52,763 (13,929) 5,882,819
State and municipal 8,265,595 252,503 (83,257) 8,434,841
Corporate 1,484,019 19,222 -- 1,503,241
-------------- ----------- ----------- ---------------
Total debt securities 24,981,210 416,901 (194,564) 25,203,547
Other securities 509,440 -- -- 509,440
-------------- ----------- ----------- ---------------
Total $ 25,490,650 $ 416,901 $ (194,564) $ 25,712,987
============== =========== =========== ===============
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See accompanying notes to the condensed consolidated financial statements.
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, 2002
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
U.S. Treasury $ 100,831 $ 7,674 $ -- $ 108,505
U.S. government and federal agencies 7,976,371 189,449 (725) 8,165,095
Mortgage-backed 16,228,816 235,214 (5,041) 16,458,989
Corporate 1,452,881 115 (7,949) 1,445,047
-------------- ----------- ----------- ---------------
Total debt securities 25,758,899 432,452 (13,715) 26,177,636
Other securities 493,940 -- -- 493,940
-------------- ----------- ----------- ---------------
Total $ 26,252,839 $ 432,452 $ (13,715) $ 26,671,576
============== =========== =========== ===============
Gross Gross
Carrying Unrecognized Unrecognized Fair
Amount Gains Losses Value
------ ----- ------ -----
HELD TO MATURITY
State and municipal $ 5,792,660 $ 232,171 $ (7,941) $ 6,016,890
============== =========== =========== ===============
Sales of available for sale securities were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Proceeds $ 1,065,453 $ 2,958,406 $ 4,166,398 $ 2,958,406
Gross gains 19,782 61,172 102,535 61,172
Gross losses -- -- (8,765) --
Gross gains from calls -- 441 1,070 5,261
The amortized cost and estimated fair values of securities at September 30,
2003, 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.
Amortized Fair
Cost Value
---- -----
Due in one year or less $ 5,540,883 $ 5,548,592
Due in one to five years 8,355,277 8,540,159
Due in five to ten years 7,936,345 7,927,313
Due after ten years 3,148,705 3,187,483
Other securities 509,440 509,440
-------------- --------------
$ 25,490,650 $ 25,712,987
============== ==============
Securities with a carrying value of approximately $11,236,000 at September 30,
2003 and $9,707,000 at December 31, 2002 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 September 30, 2003 and December 31, 2002 were as follows:
September 30, December 31,
2003 2002
---- ----
Commercial $ 9,769,657 $ 8,261,356
Installment 23,060,808 23,107,796
Real estate 36,488,985 28,587,569
Credit card 755,293 791,877
Other 45,484 50,295
---------------- ----------------
70,120,227 60,798,893
Net deferred loan costs 506,194 539,292
Allowance for loan losses (831,947) (793,318)
---------------- ----------------
$ 69,794,474 $ 60,544,867
================ ================
Activity in the allowance for loan losses was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Balance - beginning of period $ 860,734 $ 780,532 $ 793,318 $ 713,988
Loans charged-off (165,056) (90,897) (359,749) (268,901)
Recoveries 31,269 28,883 86,378 58,431
Provision for loan losses 105,000 110,000 312,000 325,000
------------ ------------ ------------ ------------
Balance - September 30 $ 831,947 $ 828,518 $ 831,947 $ 828,518
============ ============ ============ ============
Impaired loans were as follows:
September 30, December 31,
2003 2002
---- ----
Balance of impaired loans with allocated allowance $ 154,484 $ 624,886
Amount of allowance allocated 7,724 31,244
Balance of accrued interest on impaired loans -- 35,804
Nonperforming loans were as follows:
September 30, December 31,
2003 2002
---- ----
Loans past due over 90 days still on accrual $ 218,094 $ 706,505
Loans on nonaccrual 500,040 227,801
Nonperforming loans include both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified impaired
loans.
9.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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INTRODUCTION
The following discussion focuses on the consolidated financial condition of Ohio
State Bancshares, Inc. at September 30, 2003, compared to December 31, 2002, and
the consolidated results of operations for the three and nine months ended
September 30, 2003, compared to the same periods in 2002. 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 2.05% increase in total assets since December
31, 2002, as total assets increased $2,147,000 from $104,733,000 at December 31,
2002 to $106,880,000 at September 30, 2003. This growth is attributable to a
$9,249,000 net increase in loans partially offset by a $6,752,000 decrease in
total securities. Funding this net growth in assets was a $2,207,000, or 2.60%,
increase in total deposits.
Securities available for sale and securities held to maturity had a net decrease
of $6,752,000, or 20.80%, from December 31, 2002 through September 30, 2003.
Throughout the fourth quarter of 2002 and the first quarter of 2003, the
Corporation was investing in short-term U.S. government and federal agency
securities in order to pick up yield over the federal funds market. This was
done to maintain higher levels of liquidity for future loan growth while
increasing the yield over a federal funds market that for the first three
quarters of 2003 had an average rate of 1.17% prior to correspondent bank
transaction costs. During the second and third quarters of 2003, the Corporation
used the cash flows from these short-term investments to help fund loan growth.
To aid in liquidity and risk management, the Corporation reclassified all
securities from held to maturity to available for sale on August 31, 2003.
Securities with a carrying value of $8,202,000 and unrealized gains of $79,000
were reclassified. Management expects that all securities purchased in the
future will be classified as available for sale.
Net loans increased $9,249,000, or 15.28%, from December 31, 2002 through
September 30, 2003. Approximately 86% of this net loan growth occurred after May
of 2003 as the result of the addition of two loan officers and increased loan
participation activity with other banks. Contributing to the net increase in
loans was a $7,901,000, or 27.64%, increase in real estate loans and a
$1,508,000, or 18.26%, increase in commercial loans. Management
10.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
expects real estate loans, especially commercial real estate, to continue to
grow over the next one to two years because of the added emphasis created by the
two new loan officers.
The allowance for loan losses increased to $832,000, or 1.18% of total loans as
of September 30, 2003 compared to $793,000, or 1.29% of total loans at December
31, 2002. The decrease in allowance as a percentage of total loans is due to
strong loan growth in commercial and real estate loans. The allocation of
allowance for these types of loans is less than consumer loans which have
historically made up the majority of charge-off activity. Additionally,
nonperforming loans declined from $934,000, or 1.52% of loans, to $718,000, or
1.02% of loans. Should charge-offs, classified loans or delinquencies
significantly change, management will change 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 $2,207,000, or 2.60%, from December 31, 2002 to
September 30, 2003. The increase in deposits was primarily due to the cyclical
cash needs of customers, current market conditions, and the addition of $668,000
in out of town brokered deposits. Management accepts brokered deposits when they
are priced favorable compared to the local market. Brokered deposits are not a
significant source of funds and only represent 2.77% of total funding at
September 30, 2003.
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.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
Net income for the nine months ended September 30, 2003 was $674,000, or
$110,000 less than the same period in 2002. The reasons for the decrease in
earnings was primarily due to a decrease in net interest income of $47,000 and
an increase in noninterest expenses of $259,000 partially offset by an increase
in noninterest income of $63,000 and a decrease in federal income taxes of
$121,000. Federal income taxes have decreased by 37.55% over the periods being
presented due to lower effective tax rates caused by an increase in nontaxable
interest income and increases in the cash surrender value of life insurance
policies in 2003 over 2002. Also, with decreasing costs of interest-bearing
liabilities, a higher percentage of the nontaxable interest income is
permanently excluded for federal income tax purposes.
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
decreased by $47,000, or 1.56% for the nine months ended September 30, 2003
compared to the same period in 2002. The decrease in net interest income is
attributable to a decrease in the net yield on interest-earning assets. The
decrease in the net yield on interest earning assets is due to a shorter average
life of interest-earning assets compared to highly competitive certificate of
deposit rates used to encourage customers to invest in longer term deposit
11.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
products. Management expects this net yield and net interest income to improve
in the future as liquidity gets absorbed through loan growth. The following
table shows the average balances and net yields on interest-earning assets for
the nine months ended September 30, 2003 and 2002.
Year-to-date Year-to-date
2003 2002
---- ----
(A) Average interest-earning assets $ 100,924,000 $ 88,073,000
(B) Annualized net interest income 3,999,000 4,062,000
Net Yield on interest-earning assets (B/A) 3.96% 4.61%
Noninterest income was up $63,000, or 11.69% for the nine months ended September
30, 2003 versus the same period in 2002 due to increases in fees for customer
service and gains on the sale of securities. Fees for customer services are up
$28,000, or 6.61%, due to growth in deposit accounts and larger realized fees on
commercial deposit accounts due to lower earnings credit. Throughout 2002 and
2003, interest rates have been low causing a strong bond market. Management has
used this opportunity to sell some securities, at a profit, that do not meet
optimal credit or interest rate risk characteristics. For the nine months ended
September 30, 2003, the gain from these sales was $28,000 higher than the same
period in 2002.
Noninterest expense was up $259,000, or 12.07% for the nine months ended
September 30, 2003 versus the nine months ended September 30, 2002. The largest
fluctuations in this category came from salaries and employee benefits,
occupancy expense and loan collection expense. Salaries and employee benefits is
up $145,000, or 13.79%, due to higher supplemental retirement plan expense
accruals, higher group medical premiums and the addition of three employees.
Occupancy expense is up $45,000, or 11.69%, due to software and hardware
additions relating to a new data imaging system. Loan collection expenses are up
$57,000, or 98.91%, due to increased bankruptcy filings, increased charge-off
activity, and a review by legal council on the status of all uncollected loans.
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
Net income for the three months ended September 30, 2003 was $205,000, or
$100,000 less than the same period in 2002. The reason for the decrease in
earnings was primarily due to decreases in net interest income and noninterest
income and increases in noninterest expense partially offset by decreases in
federal income taxes. All major fluctuations in income between the three months
ended and nine months ended September 30, 2002 and 2003 are similar in nature,
and discussed in the previous section.
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:
12.
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 September 30, 2003 and December 31, 2002, the actual capital ratios for the
Bank were:
September 30, December 31,
2003 2002
---- ----
Total capital to risk-weighted assets 12.4% 12.7%
Tier 1 capital to risk-weighted assets 11.3 11.5
Tier 1 capital to average assets 7.7 7.3
At September 30, 2003 and December 31, 2002, the Bank was categorized as well
capitalized.
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) and cash flows expected from the securities
portfolio within 90 days at September 30, 2003 and December 31, 2002 are listed
below. 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.
September 30, December 31,
2003 2002
---- ----
Cash and cash equivalent assets $ 7,081,000 $ 7,433,000
Security portfolio cashflows expected
to be received within 90 days 2,475,000 2,527,000
-------------- --------------
$ 9,556,000 $ 9,960,000
============== ==============
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.
13.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 3. CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
The Corporation carried out an evaluation, under the supervision and with the
participation of the Corporation's management, including the Corporation's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the disclosure controls and procedures as of September
30, 2003, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
Corporation's disclosure controls and procedures were effective as of September
30, 2003, in timely alerting them to material information relating to the
Corporation (including its consolidated subsidiary) required to be included in
the periodic SEC filings.
There was no change in the Corporation's internal control over financial
reporting that occurred during the fiscal quarter ended September 30, 2003, that
has materially affected, or is reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
14.
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
Quarter ended September 30, 2003
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 31.1 - Rule 13a-14(a)/15d-14(a) Certification.
(b) Exhibit 31.2 - Rule 13a-14(a)/15d-14(a) Certification.
(c) Exhibit 32.1 - Chief Executive Officer Certification.
(d) Exhibit 32.2 - Chief Financial Officer Certification.
(e) Exhibit 99 - Safe Harbor Under Private Securities
Litigation Reform Act of 1995.
(f) No current reports on Form 8-K were filed by the small
business issuer during the quarter ended September 30,
2003.
15.
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 7, 2003 /s/ G. E. Pendleton
------------------ --------------------------------------------------
(Signature)
Gary E. Pendleton
President and Chief Executive Officer
Date: November 7, 2003 /s/ Todd Wanner
------------------ --------------------------------------------------
(Signature)
Todd M. Wanner
Senior Vice President and Chief Financial Officer
16.
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.
31.1 Rule 13a-14(a)/15d-14(a) Attached
Certification -
Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Attached
Certification -
Chief Financial Officer
32.1 Section 906 certification of the Attached
Sarbanes-Oxley Act of 2002 -
Chief Executive Officer
32.2 Section 906 certification of the Attached
Sarbanes-Oxley Act of 2002 -
Chief Financial Officer
17.