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, 2004
[ ] 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)
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 August 10, 2004
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2004
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................................................. 11
Item 3. Controls and Procedures.............................................................. 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 17
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities..... 17
Item 3. Defaults Upon Senior Securities...................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders.................................. 17
Item 5. Other Information.................................................................... 17
Item 6. Exhibits and Reports on Form 8-K..................................................... 17
SIGNATURES................................................................................... 18
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2004 2003
------------- -------------
ASSETS
Cash and due from financial institutions $ 2,779,413 $ 3,090,640
Interest-earning demand deposits 650,580 704,650
Federal funds sold 265,000 --
------------- -------------
Cash and cash equivalents 3,694,993 3,795,290
Interest-earning deposits 495,636 486,447
Securities available for sale 28,489,679 27,019,911
Loans, net 79,560,676 75,357,763
Premises and equipment, net 2,270,070 1,720,562
Accrued interest receivable 559,585 523,737
Other real estate owned 285,765 188,649
Other assets 1,971,871 1,769,813
------------- -------------
$ 117,328,275 $ 110,862,172
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 8,120,286 $ 8,420,635
Interest-bearing 83,259,669 78,586,417
------------- -------------
Total 91,379,955 87,007,052
Federal funds purchased -- 1,248,000
Borrowings 11,376,668 11,019,597
Subordinated debentures 3,000,000 --
Accrued interest payable 160,882 121,517
Other liabilities 755,426 605,856
------------- -------------
Total liabilities 106,672,931 100,002,022
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 3,925,561 3,702,038
Accumulated other comprehensive income (loss) (215,444) 212,885
------------- -------------
Total shareholders' equity 10,655,344 10,860,150
------------- -------------
$ 117,328,275 $ 110,862,172
============= =============
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,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Interest and dividend income
Loans, including fees $1,358,818 $1,226,811 $2,691,810 $2,398,422
Taxable securities 176,514 229,309 338,745 502,792
Nontaxable securities 74,042 64,223 154,593 141,698
Federal funds sold and other 17,165 17,872 35,653 38,793
---------- ---------- ---------- ----------
Total interest and dividend income 1,626,539 1,538,215 3,220,801 3,081,705
Interest expense
Deposits 412,378 454,433 820,022 926,228
Federal Home Loan Bank advances 97,061 85,465 193,834 172,539
Subordinated debentures and other borrowings 30,250 472 46,858 472
---------- ---------- ---------- ----------
Total interest expense 539,689 540,370 1,060,714 1,099,239
---------- ---------- ---------- ----------
Net interest income 1,086,850 997,845 2,160,087 1,982,466
Provision for loan losses 107,800 102,000 198,100 207,000
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 979,050 895,845 1,961,987 1,775,466
Noninterest income
Fees for customer services 171,632 151,010 314,843 289,410
Net gains on sales of securities -- 75,058 13,134 75,058
Other 16,774 19,453 36,630 45,803
---------- ---------- ---------- ----------
Total noninterest income 188,406 245,521 364,607 410,271
Noninterest expense
Salaries and employee benefits 538,057 391,044 1,084,986 770,750
Occupancy and equipment 163,647 144,294 324,568 281,878
Office supplies 37,017 38,137 68,878 77,180
Professional fees 46,600 37,577 111,200 62,832
Advertising and public relations 34,684 26,592 54,927 54,059
Taxes, other than income 27,497 25,829 55,034 51,229
Loan collection and repossessions 21,351 47,611 41,209 75,640
Credit card processing 9,897 20,808 23,666 41,862
Director expenses 10,430 12,828 22,730 25,697
Other 79,278 70,769 165,976 142,938
---------- ---------- ---------- ----------
Total noninterest expense 968,458 815,489 1,953,174 1,584,065
---------- ---------- ---------- ----------
Income before income taxes 198,998 325,877 373,420 601,672
Income tax expense 37,511 76,412 73,897 132,209
---------- ---------- ---------- ----------
Net income $ 161,487 $ 249,465 $ 299,523 $ 469,463
========== ========== ========== ==========
Basic and diluted earnings per share $ 0.85 $ 1.31 $ 1.58 $ 2.47
========== ========== ========== ==========
Weighted average shares outstanding 190,000 190,000 190,000 190,000
========== ========== ========== ==========
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,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Balance at beginning of period $ 11,177,441 $ 10,370,898 $ 10,860,150 $ 10,219,086
Cash dividends ($.40 per share) (76,000) (76,000) (76,000) (76,000)
Comprehensive income:
Net income 161,487 249,465 299,523 469,463
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects (607,584) (42,858) (428,329) (111,044)
------------ ------------ ------------ ------------
Total comprehensive income (loss) (446,097) 206,607 (128,806) 358,419
------------ ------------ ------------ ------------
Balance at end of period $ 10,655,344 $ 10,501,505 $ 10,655,344 $ 10,501,505
============ ============ ============ ============
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,
----------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 299,523 $ 469,463
Adjustments to reconcile net income to net cash from
operating activities
Net amortization of securities 39,860 102,916
Provision for loan losses 198,100 207,000
Depreciation and amortization 119,339 113,992
Net realized gains on sales or calls of securities (13,134) (75,058)
Federal Home Loan Bank stock dividends (9,400) (11,000)
Change in deferred loan costs 72,972 23,830
Change in accrued interest receivable (35,848) 96,128
Change in accrued interest payable 39,365 3,451
Change in other assets and other liabilities 162,809 (375,887)
------------ ------------
Net cash from operating activities 873,586 554,835
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (6,268,481) (12,494,605)
Maturities, prepayments and calls 1,730,110 11,585,746
Sales 2,393,105 3,100,945
Securities held to maturity:
Purchases -- (1,060,533)
Maturities and calls -- 485,000
Loan originations and payments, net (4,565,744) (5,101,688)
Maturities of certificates of deposit -- 401,016
Purchases of premises and equipment (668,847) (194,841)
------------ ------------
Net cash from investing activities (7,379,857) (3,278,960)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 4,372,903 2,704,942
Proceeds from issuance of subordinated debentures 3,000,000 --
Net change in federal funds purchased (1,248,000) --
Proceeds from advance of long-term borrowings 600,000 --
Principal repayments of long-term borrowings (242,929) (256,274)
Cash dividends paid (76,000) (76,000)
------------ ------------
Net cash from financing activities 6,405,974 2,372,668
------------ ------------
Net change in cash and cash equivalents (100,297) (351,457)
Cash and cash equivalents at beginning of period 3,795,290 7,432,606
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,694,993 $ 7,081,149
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,021,349 $ 1,095,788
Income taxes paid 100,000 518,000
SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers from loans to other real estate owned and repossessions $ 91,759 $ 45,150
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,
2004, 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, 2003, included in its 2003 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 2003 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.
NOTE 2 - SECURITIES
Securities at June 30, 2004 and December 31, 2003 were as follows:
June 30, 2004
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
AVAILABLE FOR SALE
U.S. Treasury $ 100,709 $ 3,072 $ -- $ 103,781
U.S. government and federal agencies 11,904,563 39,361 (260,293) 11,683,631
Mortgage-backed 7,350,756 14,283 (150,776) 7,214,263
State and municipal 7,358,021 135,803 (99,455) 7,394,369
Corporate 1,574,319 770 (9,194) 1,565,895
----------- ----------- ----------- -----------
Total debt securities 28,288,368 193,289 (519,718) 27,961,939
Other securities 527,740 -- -- 527,740
----------- ----------- ----------- -----------
Total $28,816,108 $ 193,289 $ (519,718) $28,489,679
=========== =========== =========== ===========
(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, 2003
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
AVAILABLE FOR SALE
U.S. Treasury $ 100,751 $ 6,890 $ -- $ 107,641
U.S. government and federal agencies 8,685,708 85,679 (78,782) 8,692,605
Mortgage-backed 7,195,484 57,066 (9,443) 7,243,107
State and municipal 8,835,518 287,454 (32,639) 9,090,333
Corporate 1,365,857 6,328 -- 1,372,185
----------- ----------- ----------- -----------
Total debt securities 26,183,318 443,417 (120,864) 26,505,871
Other securities 514,040 -- -- 514,040
----------- ----------- ----------- -----------
Total $26,697,358 $ 443,417 $ (120,864) $27,019,911
=========== =========== =========== ===========
Sales of available for sale securities were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2004 2003 2004 2003
------------ ----------- ----------- -----------
Proceeds $ -- $ 3,100,945 $ 2,393,105 $ 3,100,945
Gross gains -- 82,753 29,721 82,753
Gross losses -- (8,765) (16,587) (8,765)
Gross gains from calls -- 1,070 -- 1,070
Securities with a carrying value of approximately $12,575,000 at June 30, 2004
and $11,761,000 at December 31, 2003 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, 2004 and December 31, 2003 were as follows:
June 30, December 31,
2004 2003
------------ ------------
Commercial $ 9,740,407 $ 10,000,448
Installment 21,535,202 23,147,507
Real estate 47,982,505 41,754,926
Credit card 746,472 777,901
Other 49,104 32,586
------------ ------------
80,053,690 75,713,368
Net deferred loan costs 415,599 488,569
Allowance for loan losses (908,613) (844,174)
------------ ------------
$ 79,560,676 $ 75,357,763
============ ============
Activity in the allowance for loan losses was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Balance - beginning of period $ 863,895 $ 832,438 $ 844,174 $ 793,318
Loans charged-off (77,898) (106,735) (180,472) (194,693)
Recoveries 14,816 33,031 46,811 55,109
Provision for loan losses 107,800 102,000 198,100 207,000
--------- --------- --------- ---------
Balance - June 30 $ 908,613 $ 860,734 $ 908,613 $ 860,734
========= ========= ========= =========
Nonperforming loans were as follows:
June 30, December 31,
2004 2003
-------- ------------
Loans past due over 90 days still on accrual $220,736 $248,580
Loans on nonaccrual 326,132 483,314
Nonperforming loans include both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified impaired
loans. At December 31, 2003 and June 30, 2004, individually classified impaired
loans were not material.
(Continued)
9.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - SUBORDINATED DEBENTURES
In February 2004, Ohio State Bancshares, Inc. ("Corporation") formed a special
purpose entity, Ohio State Bancshares Capital Trust I ("Trust"). The sole
purpose of the Trust was to issue $3,000,000 of variable-rate trust preferred
securities as part of a pooled offering of such securities. The Trust then
delivered the proceeds to the Corporation in exchange for subordinated
debentures with the same provisions and payment terms as the issued trust
preferred securities. In accordance with accounting principles generally
accepted in the U.S., the Trust is not consolidated in the financial statements
of the Corporation. However, the trust will have no operating activities or cash
flows outside of the trust preferred securities.
The subordinated debentures have the following terms:
Maturity: April 23, 2034
Coupon Payment: Quarterly at 285 basis points over the 3-month LIBOR rate
Call Options: Callable quarterly by the Corporation starting April 2009 at
par. May be called prior to 2009, at par, if a material change
in tax treatment or the Federal Reserve capital requirements
occurs.
Put Options: None
10.
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, 2004, compared to December 31, 2003, and the
consolidated results of operations for the three and six months ended June 30,
2004, compared to the same periods in 2003. 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 5.83% increase in total assets since December
31, 2003, as total assets increased $6,466,000. Most of this growth is
attributable to an increase of $4,203,000 in loans, $1,470,000 in securities,
and $549,000 in premises and equipment. Funding this net growth in assets was a
$4,373,000 increase in total deposits and origination of $3,000,000 in
subordinated debt, partially offset by a $1,248,000 decrease in federal funds
purchased.
Net loans increased $4,203,000, or 5.58%, from December 31, 2003 to June 30,
2004. Real estate loans increased $6,228,000 and were partially offset by
decreases in installment loans of $1,613,000 and commercial loans of $260,000.
Management expects loan growth throughout 2004 to be roughly 10% to 12%, on an
annual basis, with the majority of the demand in real estate loans. This is the
result of a wider geographical lending focus and staffing changes made in 2003.
Management previously had the strategy to de-emphasize the installment portfolio
as a percentage of total loans. This portfolio is made of primarily consumer
automobile loans. At year-end 2000 and 2001, installment loans as a percentage
of total loans were approximately 48% and 41%. As of June 30, 2004 this same
percentage was approximately 27%. Management is more comfortable with the
current loan diversification and is no longer actively reducing installment
concentrations. A snapshot of the major loan classifications as a percentage of
total gross loans is as follows:
11.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Approximate Percentage
of Gross Loans at
June 30, 2004 December 31, 2003
------------- -----------------
Commercial 12% 13%
Installment 27 31
Real Estate - Residential 29 29
Real Estate - Commercial, Farm and Other 31 26
Credit Card and Other 1 1
Securities available for sale increased $1,470,000, or 5.44%, from December 31,
2003 to June 30, 2004. This growth came in two stages. In the first quarter of
2004, securities decreased by $2,086,000 mainly due to the sale of certain
securities with long durations and average lives around 10 years. In the second
quarter of 2004, securities increased by $3,556,000 mainly due to purchases of
securities with weighted average lives around 3 years. This was done to shorten
the duration on interest-earning assets and help protect net interest income if
interest rates rise. Both actions have been positive since the 10 year average
Treasury yield was 4.00% in the first quarter and 4.57% in the second quarter
and the 3 year average Treasury yield increased from 2.10% in the first quarter
to 2.90% in the second quarter.
Premises and equipment increased $549,000, or 31.94%, from December 31, 2003 to
June 30, 2004. This is mainly due to renovations of the loan operations area and
entire second floor of the main office. This project is expected to be finished
in the third quarter of 2004 and will net 6,000 square feet of new office space.
The total project is expected to cost approximately $895,000 including new
furniture and equipment.
Total deposits increased $4,373,000, or 5.03%, from December 31, 2003 to June
30, 2004. The increase in deposits was primarily due to a general increase in
balances of the core deposit base, increases in public fund deposits of
$608,000, and out-of-market time deposits of $612,000. Public fund deposits
represent deposits from local government and public entities such as libraries
and schools. Out-of-market deposits, also known as brokered deposits, are used
mainly by the Corporation to meet interest-bearing liability maturity needs not
met through local demand. At June 30, 2004, out-of-market time deposits totaled
$3,665,000 and are not considered a material source of funding.
Subordinated debentures of $3,000,000 were issued in February of 2004. This was
done to provide operating capital for future expansion without ownership
dilution of existing common shareholders. For regulatory capital purposes, the
subordinated debt is counted as tier 1 capital at the Corporation. For further
details about this transaction see Note 4 of the June 30, 2004 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.
12.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Net income for the six months ended June 30, 2004 was $300,000, or $169,000 less
than the same period in 2003. The decrease in earnings was primarily due to
increases in noninterest expenses that exceeded the growth in revenue. The
following paragraphs will discuss the major fluctuations in income.
Net Interest Income
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 $178,000, or 8.96%, for the six months ended June 30, 2004 compared
to the same period in 2003. The increase in net interest income is attributable
to increased average earning asset balances. The following table shows the
average balances and net yields on interest-earning assets for the six months
ended June 30, 2004 and 2003.
Year-to-date Year-to-date
2004 2003
------------ ------------
(A) Average interest-earning assets $109,811,000 $100,603,000
(B) Annualized net interest income 4,320,000 3,998,000
Net Yield on interest-earning assets (B/A) 3.93% 3.97%
Noninterest Income
Noninterest income decreased $45,000 for the six months ended June 30, 2004
versus the same period in 2003. The only material fluctuation in this category
was a decrease of $62,000 in gains on sales of securities. Security sales are
dependent on management's risk management goals and market interest rate
fluctuations. As the general level of market interest rates rise, management
expects the net gains from the sale of securities to decrease.
Noninterest Expense
Noninterest expense was up $369,000, or 23.30%, for the six months ended June
30, 2004 versus the same period in 2003. The difference was mainly due to
increases in salaries and employee benefits, occupancy and equipment, and
professional fees. Salaries and employee benefits increased by $314,000, or
40.77%. $183,000 of this increase was due to higher supplemental retirement
accruals caused by lower discount rates, a change in the service period of a
covered executive, and a change in projected benefits. The remaining change in
salaries and employee benefits was due to the addition of three middle
management positions and normal pay increases. Occupancy and equipment was up
$43,000, or 15.14%, and was due to the addition of a main frame computer system
added late in 2003, increased utility costs and normal growth. Some of the
occupancy expense includes costs related to the main office renovations but most
of these costs have been capitalized and depreciation will start late in the
third quarter of 2004. Professional fees increased $48,000, or 76.98%, and were
the result of fees for an amendment to the Corporation's Code of Regulations and
fees relating to growth strategies currently being considered by the Board of
Directors.
Income Tax Expense
Income tax expense decreased $58,000 for the six months ended June 30, 2004
versus the same period in 2003. This was primarily the result of lower income
before income taxes. The effective tax rate was approximately 20% for the six
months ended June 30, 2004 and 22% for the same period in 2003.
13.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
Net income for the three months ended June 30, 2004 was $161,000, or $88,000
less than the same period in 2003. The decrease in earnings was primarily due to
increases in noninterest expenses that exceeded the growth in revenue. All major
fluctuations in income between the three months ended and six months ended June
30, 2003 and 2004 are similar in nature, and discussed in the previous section,
except for credit card processing expenses.
Credit card processing expenses decreased $11,000, or 52.44%, for the three
month period ending June 30, 2004 compared to the same period in 2003. The
Corporation no longer offers merchant credit card services to its commercial
customers but will instead offer this service through a large national credit
card processor. The merchant credit card service is an accounts receivable
service that allows retailers, who accept credit cards, to get clearing of
transactions as direct deposits to their deposit accounts. This change will save
the Corporation approximately $50,000 per year and not materially affect the
service we provide to our commercial customers. The remaining credit card
processing expenses relate to the processing of credit cards directly offered to
individual and commercial customers of the Corporation.
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%
14.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
At June 30, 2004 and December 31, 2003, the actual capital ratios for the Bank
were:
June 30, December 31,
2004 2003
-------- ------------
Total capital to risk-weighted assets 13.5% 11.8%
Tier 1 capital to risk-weighted assets 12.4 10.8
Tier 1 capital to average assets 8.8 7.6
At June 30, 2004 and December 31, 2003, the Bank was categorized as well
capitalized. On March 30, 2004, the Corporation added $1,600,000 in capital to
the Bank as additional paid-in capital from some of the proceeds of the
subordinated debt.
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 June 30, 2004 and December 31, 2003 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.
June 30, December 31,
2004 2003
---------- ------------
Cash and cash equivalent assets $3,695,000 $3,795,000
Security portfolio cashflows expected
to receive within 90 days 1,017,000 1,026,000
---------- ----------
$4,712,000 $4,821,000
========== ==========
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.
15.
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 3. CONTROLS AND PROCEDURES
Any control system, no matter how well designed and operated, can provide only
reasonable (not absolute) assurance that its objectives will be met.
Furthermore, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected.
DISCLOSURE CONTROLS AND PROCEDURES
The Corporation's management, with the participation of the Corporation's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of its disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange
Act)) as of the end of the period covered by this report. Based on such
evaluation, the Corporation's Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, the Corporation's
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by the Corporation in the reports that it files or submits under the
Exchange Act.
INTERNAL CONTROL OVER FINANCIAL REPORTING
There have not been any changes in the Corporation's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially affect,
the Corporation's internal control over financial reporting.
16.
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2004
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
There are no matters required to be reported under this item.
Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity 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:
On April 15, 2004, Ohio State Bancshares, Inc. held the Annual
Meeting of Shareholders at which shareholders voted upon the
election of seven directors for terms expiring in 2005 and 2006.
Shareholders also voted on amendments to the Articles of
Incorporation that would change the classification system for the
election of directors. The results of the voting on these matters
were as follows:
Nominee Votes for Withheld
- ------------------- --------- --------
Theodore L. Graham 130,948 5,497
Lois J. Fisher
Thurman R. Mathews
Fred K. White
Peter B. Miller
Gary E. Pendleton
Lloyd L. Johnston
Votes for Against Withheld
--------- ------- ---------
Amendment to director classes 122,161 6,013 2,774
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) See index to exhibits for listing of exhibits
(b) No current reports on Form 8-K were filed by the small
business issuer during the quarter ended June 30, 2004.
17.
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 10, 2004 /s/ Gary E. Pendleton
--------------------------------------------------
(Signature)
Gary E. Pendleton
President and Chief Executive Officer
Date: August 10, 2004 /s/ Todd M. Wanner
--------------------------------------------------
(Signature)
Todd M. Wanner
Senior Vice President and Chief Financial Officer
18.
OHIO STATE BANCSHARES, INC.
Index to Exhibits
EXHIBIT NUMBER DESCRIPTION DATE FILED
- -------------- ----------------------------------------- ----------
3.1 Amended Articles of Incorporation of
the Corporation 03/29/2000
3.2 Code of Regulations of the Corporation 03/29/2000
10.1 Lease Agreement Between Henney and
Cooper, Inc. and The Marion Bank for
Branch on Richland Road in Marion, Ohio 03/24/1997
10.2 Executive Indexed Salary Continuation
Plan Agreement for President 03/24/1997
10.3 Executive Indexed Salary Continuation
Plan Agreement for Executive Officers 03/27/1998
10.4 Executive Change of Control Agreement 03/30/2001
31.1 Section 302 Certification of the
Chief Executive Officer Attached
31.2 Section 302 Certification of the
Chief Financial Officer Attached
32.1 Section 906 Certification of the
Chief Executive Officer Attached
32.2 Section 906 Certification of the
Chief Financial Officer Attached
99.1 Safe Harbor under the Private Securities
Litigation Reform Act of 1995 03/26/1999
19.