1
FORM 10-QSB
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from _____ to _____.
Commission file number: 0-28648
Ohio State Bancshares, Inc.
(Exact name of small business issuer as
specified in its charter)
Ohio 34-1579601
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
111 South Main Street, Marion, Ohio 43302
(Address of principal executive offices)
(614) 387-2265
(Registrant's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities 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 registrant's classes
of common stock, as of the latest practicable date.
Common stock, $10.00 par value Outstanding at August 5, 1996
121,200 common shares
2
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 1996
Part I - Financial Information
ITEM 1 - FINANCIAL STATEMENTS Page
----
Condensed Consolidated Balance Sheets . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Changes in
Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Condensed Consolidated Statements of Cash Flows . . . . . . . . . . . . 7
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . 8
ITEM 2 -MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 16
Part II - Other Information
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3
OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1996 1995
---- ----
ASSETS
Cash and due from banks $ 1,832,924 $ 2,089,430
Federal funds sold 1,361,000
--------------- ---------------
Total cash and cash equivalents 1,832,924 3,450,430
Interest-bearing deposits in other banks 499,000 500,000
Investment and mortgage-backed securities available for sale,
(Note 2) 10,288,134 11,889,413
Investment and mortgage-backed securities held to maturity
(Estimated fair values of $2,540,374 at June 30, 1996
and $1,776,875 at December 31, 1995) (Note 2) 2,631,422 1,814,058
Total loans and leases (Note 3) 25,859,140 23,117,113
Unearned lease income (2,080) (3,540)
Allowance for loan and lease losses (Note 4) (254,647) (252,174)
--------------- ---------------
Net loans and leases 25,602,413 22,861,399
Premises and equipment, net 747,679 767,618
Other real estate owned and repossessions 379 68,710
Accrued interest receivable and other assets 570,555 392,024
--------------- ---------------
Total assets $ 42,172,506 $ 41,743,652
=============== ==============
LIABILITIES
Deposits
Noninterest-bearing deposits $ 4,102,594 $ 4,360,153
Interest-bearing deposits 33,783,868 33,930,536
--------------- ---------------
Total deposits 37,886,462 38,290,689
Federal funds and other borrowed funds 954,000
Accrued interest payable and other liabilities 310,577 395,846
--------------- ---------------
Total liabilities 39,151,039 38,686,535
--------------- ---------------
SHAREHOLDERS' EQUITY
Common stock ($10.00 par value; 500,000
shares authorized; 121,200 shares issued and outstanding) 1,212,000 1,212,000
Additional paid-in capital 1,831,227 1,831,227
Retained earnings 114,222 13,936
Unrealized loss on investment securities
available for sale, net of tax (135,982) (46)
--------------- ---------------
Total shareholders' equity 3,021,467 3,057,117
--------------- ---------------
Total liabilities and shareholders' equity $ 42,172,506 $ 41,743,652
=============== ===============
See accompanying notes to consolidated financial statements.
3.
4
OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------- --------
1996 1995 1996 1995
---- ---- ---- ----
INTEREST INCOME
Interest and fees on loans $601,891 $566,974 $1,167,482 $1,090,037
Interest on investment and
mortgage-backed securities
Taxable 179,362 187,901 367,297 328,431
Nontaxable 19,758 334 35,975 334
Other interest income 13,264 41,162 34,320 54,289
-------- ------- ---------- ----------
Total interest income 814,275 796,371 1,605,074 1,473,091
-------- ------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 371,388 323,576 752,524 586,824
Other borrowings 4,349 4,436 2,502
-------- ------- ---------- ----------
Total interest expense 375,737 323,576 756,960 589,326
-------- ------- ---------- ----------
NET INTEREST INCOME 438,538 472,795 848,114 883,765
Provision for loan and lease
losses (Note 4) 25,000 30,000 60,000 47,000
-------- ------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 413,538 442,795 788,114 836,765
-------- ------- ---------- ----------
NONINTEREST INCOME
Fees for other customer
services 53,656 50,983 102,057 105,067
Gain on sale of loans 33,876 33,876
Investment security gains/
(losses) 3,442 (2,528) 6,879 (2,528)
Other income 5,174 11,854 20,969 18,922
-------- ------- ---------- ----------
Total noninterest income 62,272 94,185 129,905 155,337
-------- ------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 172,592 159,704 353,591 316,380
Occupancy expense 62,694 54,977 128,584 111,182
Office supplies 20,816 24,857 46,535 44,346
FDIC and state assessments 2,633 19,192 5,266 38,385
Taxes other than income 11,805 11,853 25,554 22,211
Legal and accounting 13,070 5,716 25,211 16,698
Advertising and public relations 12,680 16,037 21,778 22,195
Credit card processing expense 12,957 10,785 27,579 22,670
Other operating expense 54,334 80,908 117,173 144,435
-------- ------- ---------- ----------
Total noninterest expense 363,581 384,029 751,271 738,502
-------- ------- ---------- ----------
(Continued)
4.
5
OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------- --------
1996 1995 1996 1995
---- ---- ---- ----
Income before federal income taxes 112,229 152,951 166,748 253,600
Provision for income taxes 24,222 42,222
-------- -------- -------- --------
NET INCOME $ 88,007 $152,951 $124,526 $253,600
======= ======== ======== ========
Earnings per common share
(Note 1) $ .73 $ 1.26 $ 1.03 $ 2.09
======= ======== ======== ========
Weighted average shares
outstanding 121,200 121,200 121,200 121,200
======= ======== ======== ========
See accompanying notes to the consolidated financial statements
5.
6
OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
Six Months Ended
June 30,
--------
1996 1995
---- ----
Balance at beginning of period $3,057,117 $2,386,593
Net income 124,526 253,600
Cash dividends ($.20 per share in 1996) (24,240)
Change in unrealized gain/(loss) on investment
securities available for sale (135,936) 255,989
---------- ----------
Balance at end of period $3,021,467 $2,896,182
========== ==========
See accompanying notes to the consolidated financial statements.
6.
7
OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
--------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES $ 124,526 $ 253,600
Net income
Adjustments to reconcile net income to net cash from
operating activities
Net amortization of premiums 20,316 6,124
Provision for loan and lease losses 60,000 47,000
Depreciation and amortization 53,418 50,163
Gain on sale of loans (33,876)
Investment and mortgage-backed securities gains, net (6,879) 2,528
Federal Home Loan Bank stock dividend (4,400) (3,900)
Loss on sale of other real estate owned and repossessions 16,000 15,000
Change in accrued interest receivable (16,217) (85,748)
Change in accrued interest payable (51,526) 64,563
Change in other assets and other liabilities (150,269) (13,623)
----------- -----------
Net cash from operating activities 44,969 301,831
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment and mortgage-backed securities available for sale
Purchases (1,508,557) (2,469,778)
Proceeds from maturities and principal paydowns 1,351,020 165,630
Proceeds from sales 1,545,249 497,188
Investment and mortgage-backed securities held to maturity
Purchases (818,798) (248,372)
Proceeds from maturities and principal paydowns 29,085
Net change in interest-bearing deposits in other banks 1,000
Net change in loans (2,836,643) (1,269,863)
Proceeds from loan sales 448,820
Proceeds from sale of other real estate owned and
repossessions 87,960 32,153
Purchases of premises and equipment (33,479) (109,174)
----------- -----------
Net cash from investing activities (2,212,248) (2,924,311)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts (404,227) 3,252,358
Net change in federal funds and other borrowed funds 954,000
----------- -----------
Net cash from financing activities 549,773 3,252,358
----------- -----------
Net change in cash and cash equivalents (1,617,506) 629,878
Cash and cash equivalents at beginning of period 3,450,430 3,019,864
------------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,832,924 $ 3,649,742
============= ===========
See accompanying notes to the consolidated financial statements.
7.
8
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of Ohio
State Bancshares, Inc. ("OSB") and its wholly owned subsidiary, The Marion Bank
(the "Bank"). All significant intercompany transactions and balances have been
eliminated.
At the annual shareholder meeting held April 13, 1995, the Bank's shareholders
approved a plan of reorganization whereby they would exchange their shares of
Bank stock for the common stock of a bank holding company. The reorganization
was consummated May 16, 1996. The transaction represented an internal
reorganization and has been accounted for in a manner similar to a pooling of
interest and the historical basis of assets and liabilities have been carried
forward without change.
These interim financial statements are prepared without audit and reflect all
adjustments of a normal recurring nature which, in the opinion of management,
are necessary to present fairly the consolidated financial position of OSB at
June 30, 1996, 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 the necessary financial disclosures required by generally accepted
accounting principles that might otherwise be necessary in the circumstances
and should be read in conjunction with the financial statements and notes
thereto of The Marion Bank for the year ended December 31, 1995 included in its
1995 Annual Report. Reference is made to the accounting policies of OSB
described in the notes to financial statements contained in the Bank's 1995
annual report. OSB has consistently followed these policies in preparing this
Form 10-QSB.
OSB is a bank holding company engaged in the business of commercial and retail
banking services with operations conducted through its main office in Marion,
Ohio. Marion county provides the source for substantially all of OSB's deposit
and lending activities. The majority of OSB's income is derived from
commercial and consumer lending activities.
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions in
preparing the consolidated financial statements that effect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
For the six months ended June 30, 1996 and 1995, OSB paid interest of $808,486
and $524,763, respectively, and income taxes of $69,127 and $0, respectively.
Noncash transfers from loans to other real estate owned and repossessions
totaled $35,629 for the six months ended June 30, 1996 and $20,200 for the six
months ended June 30, 1995.
(Continued)
8.
9
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The provision for income taxes is based upon the effective tax rate expected to
be applicable for the entire year. OSB follows the liability method of
accounting for income taxes. The liability method provides that deferred tax
assets and liabilities are recorded based on the difference between the tax
basis of assets and liabilities and their carrying amounts for financial
reporting purposes.
The allowance for loan and lease losses is increased by charges to income and
decreased by charge-offs, net of recoveries. Management's periodic evaluation
of the adequacy of the allowance is based on past loan loss experience, known
and inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral
and current economic conditions.
SFAS No 114, "Accounting by Creditors for Impairment of a loan," as amended by
SFAS No. 118, was adopted at January 1, 1995. Under this standard, loans
considered to be impaired are reduced to the present value of expected future
cash flows or to the fair value of collateral, by allocating a portion of the
allowance for loan and lease losses to such loans. If these allocations cause
the allowance for loan and lease losses to require an increase, such increase
is reported as bad debt expense. The effect of adopting this standard did not
materially affect the allowance for loan and lease losses at January 1, 1995.
Smaller-balance homogenous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one-to-four family
residences, residential construction loans and automobile, home equity and
second mortgage loans. In addition, leases are excluded from impairment
consideration. Commercial loans and mortgage loans secured by other properties
are evaluated individually for impairment. When analysis of borrower operating
results and financial condition indicates that the underlying cash flows of the
borrower's business are not adequate to meet its debt service requirements, the
loan is evaluated for impairment. Often this is associated with a delay or
shortfall in payments of 30 days or more. Loans are generally moved to
nonaccrual status when 60 days of more past due unless collection is assured.
These loans are often also considered impaired. Impaired loans, or portions
thereof, are charged off when deemed uncollectible. The nature of disclosures
for impaired loans is considered generally comparable to prior nonaccrual loan
disclosures.
(Continued)
9.
10
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest on loans is accrued over the term of the loans based upon the
principal outstanding. Management reviews loans delinquent 60 days or more to
determine if the interest accrual should be discontinued. Under SFAS No. 114,
as amended by SFAS No. 118, the carrying value of impaired loans is
periodically adjusted to reflect cash payments, revised estimates of future
cash flows and increases in the present value of expected cash flows due to the
passage of time. Cash payments representing interest income are reported as
such and other cash payments are reported as reductions in carrying value.
Increases or decreases in carrying value due to changes in estimates of future
payments or the passage of time are reported as reductions or increases in bad
debt expense.
Fees and costs associated with originating or acquiring loans are deferred and
amortized as an adjustment to the loan yield over the life of the respective
loans. The net amount of fees and costs deferred is reported in the balance
sheet as part of loans.
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains and losses and estimated fair values
of investment and mortgage-backed securities at June 30, 1996 and December 31,
1995 are as follows:
June 30, 1996
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ----------- -----------
AVAILABLE FOR SALE
U.S. Treasury securities $ 650,585 $2,180 $ 652,765
Obligations of U.S.
government agencies 2,216,555 1,248 $ (41,481) 2,176,322
Mortgage-backed securities 7,449,787 1,171 169,151) 7,281,807
----------- ------- --------- -----------
Total debt securities available
for sale 10,316,927 4,599 (210,632) 10,110,894
Other securities 177,240 177,240
----------- ------- --------- -----------
Total investment and
mortgage-backed securities
available for sale $10,494,167 $ 4,599 $(210,632) $10,288,134
=========== ======= ========= ===========
(Continued)
10.
11
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES (Continued)
June 30, 1996
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
HELD TO MATURITY
U.S. Treasury securities $ 99,491 $879 $ 100,370
Obligation of U.S.
government agencies 500,000 $(42,890) 457,110
Obligations of states and
political subdivisions 2,031,931 (49,037) 1,982,894
---------- --- -------- ----------
Total investment and
mortgage-backed securities
held to maturity $2,631,422 $879 $(91,927) $2,540,374
========== ==== ======== ==========
December 31, 1995
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
AVAILABLE FOR SALE
U.S. Treasury securities $ 1,401,125 $11,433 $ (358) $ 1,412,200
Obligations of U.S.
government agencies 2,468,456 17,583 (6,334) 2,479,705
Other debt securities 345,600 (1,290) 344,310
Mortgage-backed securities 7,501,461 27,202 (48,305) 7,480,358
----------- ------- -------- -----------
Total debt securities available
for sale 11,716,642 56,218 (56,287) 11,716,573
Other securities 172,840 172,840
----------- ------- -------- -----------
Total investment and mortgage-
backed securities available
for sale $11,889,482 $56,218 $(56,287) $11,889,413
=========== ======= ======== ===========
(Continued)
11.
12
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES (Continued)
December 31, 1995
----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
HELD TO MATURITY
U.S. Treasury securities $ 99,078 $ 1,882 $ 100,960
Obligation of U.S.
government agencies 500,000 $ (45,100) 454,900
Obligations of states and
political subdivisions 1,214,980 9,752 (3,717) 1,221,015
------------- ---------- ----------- --------------
Total investment and
mortgage-backed
securities held
to maturity $ 1,814,058 $ 11,634 $ (48,817) $ 1,776,875
============= ========== =========== ==============
Proceeds from sales of investment and mortgage-backed securities classified as
available for sale were $1,545,249 and $497,188 during the six months ended
June 30, 1996 and 1995. Gross gains of $15,892 and gross losses of $9,013 were
realized on those sales in 1996. Gross losses of $2,528 were realized on those
sales in 1995.
Proceeds from sales of investment and mortgage-backed securities classified as
available for sale were $1,041,811 and $497,188 during the three months ended
June 30, 1996 and 1995. Gross gains of $12,455 and gross losses of $9,013 were
realized on those sales in 1996. Gross losses of $2,528 were realized on those
sales in 1995.
The amortized cost and estimated fair values of investment and mortgage-backed
securities at June 30, 1996, by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because certain borrowers may
have the right to call or repay obligations with or without penalties.
Estimated
Amortized Fair
Cost Value
---- -----
AVAILABLE FOR SALE
Due in one year or less $ 1,361,701 $ 1,364,027
Due in one to five years 1,505,439 1,465,060
---------------- ---------------
Subtotal 2,867,140 2,829,087
Mortgage-backed securities 7,449,787 7,281,807
Other securities 177,240 177,240
---------------- ---------------
Total securities available for sale $ 10,494,167 $ 10,288,134
================ ===============
(Continued)
12.
13
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES (Continued)
HELD TO MATURITY
Due in one year or less $ 99,491 $ 100,370
Due in one to five years 500,000 457,110
Due after ten years 2,031,931 1,892,894
---------------- ---------------
Total securities held to maturity $ 2,631,422 $ 2,540,374
================ ===============
NOTE 3 - LOANS AND LEASES
Total loans and leases at June 30, 1996 and December 31, 1995 net of deferred
fees and costs consisted of the following:
June 30, 1996 December 31, 1995
------------- -----------------
Commercial $ 9,519,324 $ 8,992,934
Installment 12,872,649 10,504,087
Real estate 2,843,761 2,901,133
Credit card 578,669 663,544
Leases 30,732 43,589
Other 14,005 11,826
--------------- ---------------
Total loans $ 25,859,140 $ 23,117,113
=============== ===============
NOTE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES
A summary of activity in the allowance for loan and leases losses for the six
months ended June 30, 1996 and 1995 is as follows:
1996 1995
---- ----
Balance - January 1 $ 252,174 $ 265,489
Loan and leases charged off (71,397) (27,794)
Recoveries 13,870 18,658
Provision for loan and lease losses 60,000 47,000
-------------- -------------
Balance - June 30 $ 254,647 $ 303,353
============== =============
As of and for the six months ended June 30, 1996 and 1995, there were no loans
for which impairment was required to be evaluated on an individual loan-by-loan
basis. Loans on which the accrual of interest has been discontinued because
circumstances indicate that collection is questionable amounted to $5,159 and
$15,476 at June 30, 1996 and December 31, 1995, respectively.
(Continued)
13.
14
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK
The Bank grants residential, consumer, and commercial loans, as well as lease
financing, to customers primarily in Marion County, Ohio. Although the Bank
has a diversified loan portfolio, a substantial portion of the debtors' ability
to honor their contracts is dependent upon local and State of Ohio economic
conditions. Substantially all loans are secured by specific items of
collateral including business assets, consumer assets, commercial real estate
and residential real estate.
Included in cash and cash equivalents at June 30, 1996 and December 31, 1995
was approximately $1,153,000 and 2,743,000 respectively, on deposit with the
Independent State Bank of Ohio.
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, standby letters of
credit and financial guarantees. The Bank's exposure to credit loss in the
event of nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit, and financial
guarantees written, is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for instruments recorded on the balance
sheet. Since commitments to make loans and lines of credit may expire without
being used, the amounts do not necessarily represent future cash commitments.
As of June 30, 1996 and December 31, 1995, commitments to make loans (primarily
in the form of undisbursed portions of approved lines of credit) amounted to
approximately $1,687,000 and $1,469,000, respectively, which consists primarily
of variable rate commitments. The interest rates on these commitments ranged
from 4.5% to 11.9% at June 30, 1996 and 6.2% to 11.1% at December 31, 1995.
Outstanding commitments for credit cards were approximately $1,036,000 and
$916,000 as of June 30, 1996 and December 31, 1995, respectively, with rates
ranging from 14.8% to 17.9% and 15.9% to 17.9%. Of the total outstanding
balances on these credit cards at June 30, 1996, 62% were fixed and 38% were
variable rate and at December 31, 1995, 58% were fixed rate and 42% were
variable rate.
The Bank was also required to maintain aggregate cash reserve amounting to
$81,000 and $79,000 at June 30, 1996 and December 31, 1995, respectively, to
satisfy federal regulatory requirements. These amounts do not earn interest.
At June 30, 1996 or December 31, 1995, the Bank had a line of credit enabling
it to borrow up to $2,109,000 at $1,932,000, respectively, with the Federal
Home Loan Bank of Cincinnati. Borrowings under this line totaled $500,000 at
June 30, 1996. There were no borrowings outstanding on this line of credit as
of December 31, 1995. Advances under the agreement are collateralized by a
blanket pledge of the Bank's real estate mortgage loan portfolio and Federal
Home Loan Bank stock.
14.
15
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
The following discussion focuses on the consolidated financial condition of
Ohio State Bancshares, Inc. (OSB) at June 30, 1996, compared to December 31,
1995, and the consolidated results of operations for the three and six months
ended June 30, 1996 compared to the same periods in 1995. The purpose of this
discussion is to provide the reader with a more thorough understanding of the
consolidated financial statements. This discussion should be read in
conjunction with the interim consolidated financial statements and related
footnotes.
The registrant 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. Also, the
Registrant is not aware of any current recommendations by regulatory
authorities which would have such effect if implemented.
FINANCIAL CONDITION
OSB has experienced minimal asset growth since December 31, 1995 as total
assets increased only $429,000, or 1.03%, from $41,744,000 at December 31, 1995
to $42,173,000 at June 30, 1996. OSB's overall strategy in 1996 has been to
maintain its current size but increase its loan to deposit ratio.
Interest-bearing deposits in other banks, investment and mortgage-backed
securities available for sale and investment and mortgage-backed securities
held to maturity have decreased $785,000 in total since December 31, 1995.
$206,000 of the decrease is related to the decline in fair value of investment
and mortgage-backed securities available for sale during the period due to an
overall increase in bond prices. The remaining decrease of $579,000 represents
sales and maturities in excess of purchases during the period. OSB did
increase its investment in state and political subdivisions which are
classified as held to maturity during the period to reduce its tax obligation
now that all of its net operating loss carry forwards from the initial years of
operation of the Bank have been used.
Net loans and leases increased $2,741,000 or 11.99% during the period. The
growth was funded by security sales and maturities, reduction in federal funds
sold and short-term borrowings from the Federal Reserve and the Federal Home
Loan Bank. Installment loans constituted $2,369,000 of the growth. The growth
was due to obtaining an increased market share of the indirect automobile loan
business in Marion. Management's strategy has been to be very competitive with
interest rates on high quality loans. Commercial loans made up the majority of
the remaining increase in loans. This growth was due to local economic
factors.
Total deposits declined $404,000, or 1.06%, since December 31, 1995. OSB did
not aggressively pursue deposits due to its strategy of maintaining its current
size while increasing its loan to deposit ratio. As a result, OSB had short
term borrowings of $954,000 at June 30, 1996 to fund loan growth.
15.
16
OHIO STATE BANCSHARES, INC.
MANAGEMENT S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The operating results of OSB are affected by general economic conditions, the
monetary and fiscal policies of federal agencies and the regulatory policies of
agencies that regulate financial institutions. OSB'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.
OSB'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. Net income is
also affected by provisions for loan and lease losses, service charges, gains
on the sale of assets and other income, noninterest expense and income taxes.
Net income for the six months ended June 30, 1996 was $125,000, or $129,000
less than the same period in 1995. Net income for the three months ended June
30, 1996 was $88,000, or $65,000 less than the same period in 1995. The
reasons for the decline in earnings were a decrease in net interest income, a
decline in noninterest income, and the provision for income taxes.
Net interest income is the largest component of OSB'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 $34,000 and $36,000 for the three and six
months ended June 30, 1996 compared to the same respective periods in 1995.
The decline in net interest income is attributable to OSB's decreased net
interest spread. The decline began in the latter part of 1995 and continued
through the first part of 1996. The decline in OSB's net interest spread
resulted from a higher cost of funds. During the first part of 1995, OSB
experienced an influx of personal and public funds which were invested in
certificates of deposit at the Bank. The trend of a declining net interest
spread is now reversing as funds are shifting from lower earning assets into
higher yielding loans during 1996.
Noninterest income for the three and six months ended June 30, 1996 were
comparable to the same periods in 1995 except for the gain on sale of loans.
During the second quarter of 1995, OSB recognized a gain from the sale of the
guaranteed portion of SBA loans. This was the reason for the higher
noninterest income in 1995.
16.
17
OHIO STATE BANCSHARES, INC.
MANAGEMENT S DISCUSSION AND ANALYSIS
Noninterest expense for the three and six months ended June 30, 1996 has
remained comparable to the 1995 periods. Primary differences are increased
salary and employee benefits due to normal salary increases; increased
occupancy costs due to an upgrade in the Bank's computer system; decreased FDIC
and state assessments attributable to the reduction in deposit insurance
premiums which began in the last half of 1995; and decreased other operating
expenses associated with the completion in January, 1996 of a one-time
severance and consulting agreement.
OSB's net operating loss carryforward for tax purposes from the initial years
of operation was fully utilized during the first half of 1995. As a result,
OSB paid taxes and recognized federal income tax expense for the first time in
its history in the last half of 1995. 1996 is the first year of being fully
taxable which explains the lack of comparability in income tax expense between
the periods presented.
CAPITAL RESOURCES
Shareholders' equity totaled $3,027,000 at June 30, 1996, compared to
$3,057,000 at December 31,1995. The decline was the result of upward movements
in interest rates in relation to OSB's available-for-sale investment and
mortgage-backed securities portfolio. This resulted in a larger net-of-tax,
unrealized loss on those securities recorded as a part of shareholders' equity.
At June 30, 1996 and December 31, 1995, the ratio of shareholders' equity to
assets was 7.16% and 7.32%, respectively. OSB's subsidiary Bank complied with
the capital requirements established by the Federal Reserve System at each of
those dates.
Under "Prompt Corrective Action" regulations, the FDIC has defined five
categories of capitalization (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized). The Bank meets the "well capitalized" definition which
requires a total risk-based capital ratio of at least 10%, a Tier 1 risk-based
ratio of at least 6%, and a leverage ratio of at least 5%, and the absence of
any written agreement, order or directive from a regulatory agency.
"Well-capitalized" status affords the Bank the ability to operate with the
greatest flexibility under current laws and regulations.
Under a current regulatory proposal, interest rate risk would become an
additional element in measuring risk-based capital. This proposed change is
not expected to significantly impact the Bank's compliance with capital
guidelines.
17.
18
OHIO STATE BANCSHARES, INC.
MANAGEMENT S DISCUSSION AND ANALYSIS
The following table reflects the various leverage and risk-based capital ratios
for the Bank:
Leverage and Risk-based Capital Ratios
June 30, 1996 December 31, 1995
------------- -----------------
LEVERAGE RATIO:
Total Leverage Ratio 7.58% 7.32%
RISK-BASED CAPITAL
RATIOS:
Core (Tier 1) Ratio 10.99% 11.86%
Total Risk-Based
Capital Ratio 11.88% 12.84%
LIQUIDITY
On February 23, 1996, the Bank received approval from the State of Ohio,
Division of Financial Institutions and the Federal Deposit Insurance
Corporation to build a full service branch at 220 Richland Road, Marion, Ohio.
The branch will initially be staffed by three full-time employees and one
part-time employee and will provide a full range of financial services
including two drive-thru lanes, a full service ATM machine and night deposit
capabilities. The branch will expand the Bank into the eastern part of Marion
and better serve its existing customers. The Branch is currently under
construction and is expected to be completed by October 15, 1996.
Liquidity management focuses on the ability to have funds available to meet the
loan and depository transaction needs of the Bank's customers and OSB'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 $1,833,000 at June 30, 1996 and $3,450,000 at December 31,
1995. These assets provide the primary source of funds for loan demand and
deposit balance fluctuations. Additional sources of liquidity are investment
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 OSB available liquidity sources are considered adequate to meet
current and projected needs.
18.
19
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
Quarter ended June 30, 1996
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:
On April 11, 1996 the Bank held the Annual Meeting of
Shareholders at which shareholders voted upon the election
of three directors for a term expiring in 1999. The results
of the voting on these matters were as follows:
Nominee Votes for Withheld
- - ------- --------- --------
John E. Baldauf 85,581 2,590
William H. Harris 83,781 4,390
Gary E. Pendleton 85,561 2,610
Other matters submitted to the Shareholders, for which the
following votes were cast:
1) Ratification of the selection of Crowe, Chizek and
Company LLP as the auditors of the Corporation for
the current fiscal year.
FOR: 86,896 AGAINST: 100 ABSTAIN: 1,175
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 27
(b) There are no matters required to be reported under
this item.
19.
20
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 8, 1996 /s/ Gary E. Pendleton
------------------- ----------------------------------
(Signature)
Gary E. Pendleton
President and Chief Executive
Officer
Date: August 8, 1996 /s/ William H. Harris
------------------- ----------------------------------
(Signature)
William H. Harris
Executive Vice President and Cashier
20.
21
OHIO STATE BANCSHARES, INC.
Index to Exhibits
Item No. Description
- - -------- -----------
27 Financial Data Schedule
21.