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: SEPTEMBER 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
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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 Identification Number)
incorporation or organization)
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 November 5, 1996
121,200 common shares
2
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 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........................................................................................... 20
Signatures ............................................................................................... 21
3
OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1996 1995
---- ----
ASSETS
Cash and due from banks $ 2,533,868 $ 2,089,430
Federal funds sold 1,361,000
---------------- ----------------
Total cash and cash equivalents 2,533,868 3,450,430
Interest-bearing deposits in other banks 499,000 500,000
Investment and mortgage-backed securities available for sale,
(Note 2) 8,862,069 11,889,413
Investment and mortgage-backed securities held to maturity
(Estimated fair values of $2,571,777 at September 30, 1996
and $1,776,875 at December 31, 1995) (Note 2) 2,630,337 1,814,058
Total loans and leases (Note 3) 27,733,520 23,117,113
Unearned lease income (1,477) (3,540)
Allowance for loan and lease losses (Note 4) (264,800) (252,174)
---------------- ----------------
Net loans and leases 27,467,244 22,861,399
Premises and equipment, net 748,027 767,618
Other real estate owned and repossessions 42,379 68,710
Accrued interest receivable and other assets 666,535 392,024
---------------- ----------------
Total assets $ 43,449,458 $ 41,743,652
================ ================
LIABILITIES
Deposits
Noninterest-bearing deposits $ 4,808,623 $ 4,360,153
Interest-bearing deposits 33,933,821 33,930,536
---------------- ----------------
Total deposits 38,742,444 38,290,689
Federal funds and other borrowed funds 1,233,000
Accrued interest payable and other liabilities 331,772 395,846
---------------- ----------------
Total liabilities 40,307,216 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 199,639 13,936
Unrealized loss on investment securities
available for sale, net of tax (100,624) (46)
---------------- ----------------
Total shareholders' equity 3,142,242 3,057,117
---------------- ----------------
Total liabilities and shareholders' equity $ 43,449,458 $ 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 Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
INTEREST INCOME
Interest and fees on loans $ 644,148 $ 567,621 $ 1,811,630 $ 1,657,658
Interest on investment and
mortgage-backed securities
Taxable 147,859 176,366 515,156 504,797
Nontaxable 27,819 8,901 63,794 9,235
Other interest income 7,933 29,756 42,253 84,045
--------------- -------------- -------------- ---------------
Total interest income 827,759 782,644 2,432,833 2,255,735
--------------- -------------- -------------- ---------------
INTEREST EXPENSE
Interest on deposits 372,691 363,619 1,125,215 950,443
Other borrowings 13,841 18,277 2,502
--------------- -------------- -------------- ---------------
Total interest expense 386,532 363,619 1,143,492 952,945
--------------- -------------- -------------- ---------------
NET INTEREST INCOME 441,227 419,025 1,289,341 1,302,790
Provision for loan and lease
losses (Note 4) 35,000 10,000 95,000 57,000
--------------- -------------- -------------- ---------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 406,227 409,025 1,194,341 1,245,790
--------------- -------------- -------------- ---------------
NONINTEREST INCOME
Fees for other customer
services 54,294 56,333 156,351 161,400
Gain on sale of loans 33,876
Investment security gains/
(losses) (1,982) 7,383 (2,528)
Other income 4,285 3,023 22,768 21,945
--------------- -------------- -------------- ---------------
Total noninterest income 56,597 59,356 186,502 214,693
--------------- -------------- -------------- ---------------
NONINTEREST EXPENSE
Salaries and employee benefits 164,329 163,991 517,920 480,371
Occupancy expense 62,096 55,676 190,680 166,858
Office supplies 19,262 19,372 65,797 63,718
FDIC and state assessments 1,068 (853) 6,334 37,532
Taxes other than income 11,766 17,145 37,320 39,356
Legal and accounting 13,596 11,773 38,807 28,471
Advertising and public relations 14,897 11,994 36,675 34,189
Credit card processing expense 14,719 10,655 42,298 33,325
Other operating expense 51,380 94,871 168,553 239,306
--------------- -------------- -------------- ---------------
Total noninterest expense 353,113 384,624 1,104,384 1,123,126
--------------- -------------- -------------- ---------------
(Continued)
4.
5
OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
Income before federal income taxes 109,711 83,757 276,459 337,357
Provision for income taxes 24,294 66,516
--------------- -------------- -------------- --------------
NET INCOME $ 85,417 $ 83,757 $ 209,943 $ 337,357
=============== ============== ============== ==============
Earnings per common share
(Note 1) $ .70 $ .69 $ 1.73 $ 2.78
============== ============== ============== ==============
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)
Nine Months Ended
September 30,
-------------
1996 1995
---- ----
Balance at beginning of period $ 3,057,117 $ 2,386,593
Net income 209,943 337,357
Cash dividends ($.20 per share in 1996 and 1995) (24,240) (24,240)
Change in unrealized gain/(loss) on investment
securities available for sale (100,578) 243,898
--------------- ----------------
Balance at end of period $ 3,142,242 $ 2,943,608
=============== ================
See accompanying notes to the consolidated financial statements.
6.
7
OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
September 30,
-------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES $ 209,943 $ 337,357
Net income
Adjustments to reconcile net income to net cash from
operating activities
Net amortization of premiums 28,429 13,956
Provision for loan and lease losses 95,000 57,000
Depreciation and amortization 80,153 76,607
Gain on sale of loans (33,876)
Investment and mortgage-backed
securities (gains)/losses, net (7,383) 2,528
Federal Home Loan Bank stock dividend (6,800) (4,000)
Loss on sale of other real estate owned and repossessions 16,000 30,000
Change in accrued interest receivable (72,795) (203,183)
Change in accrued interest payable (47,782) 96,869
Change in other assets and other liabilities (166,194) (24,800)
--------------- ----------------
Net cash from operating activities 128,571 348,458
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment and mortgage-backed securities available for sale
Purchases (1,519,203) (3,524,339)
Proceeds from maturities and principal paydowns 1,667,802 280,293
Proceeds from sales 2,714,626 497,188
Investment and mortgage-backed securities held to maturity
Purchases (818,798) (1,215,973)
Proceeds from maturities and principal paydowns 46,090
Net change in interest-bearing deposits in other banks 1,000
Net change in loans (4,794,242) (1,544,181)
Proceeds from loan sales 448,820
Proceeds from sale of other real estate owned and
repossessions 103,729 48,623
Purchases of premises and equipment (60,562) (169,588)
--------------- ----------------
Net cash from investing activities (2,705,648) (5,133,067)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (24,240) (24,240)
Net change in deposit accounts 451,755 5,362,751
Net change in federal funds and other borrowed funds 1,233,000
--------------- ----------------
Net cash from financing activities 1,660,515 5,338,511
--------------- ----------------
Net change in cash and cash equivalents (916,562) 553,902
Cash and cash equivalents at beginning of period 3,450,430 3,019,864
--------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,533,868 $ 3,573,766
=============== ================
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
September 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 nine months ended September 30, 1996 and 1995, OSB paid interest of
$1,191,274 and $856,076, respectively, and income taxes of $87,327 and $30,000,
respectively. Noncash transfers from loans and leases to other real estate owned
and repossessions totaled $93,398 for the nine months ended September 30, 1996
and $49,861 for the nine months ended September 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.
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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 September 30, 1996 and December
31, 1995 are as follows:
September 30, 1996
----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
U.S. Treasury securities $ 650,087 $ 963 $ 651,050
Obligations of U.S.
government agencies 1,714,073 871 $ (34,413) 1,680,531
Mortgage-backed securities 6,470,829 13 (119,894) 6,350,948
-------------- -------------- ------------ ----------------
Total debt securities available
for sale 8,834,989 1,847 (154,307) 8,682,529
Other securities 179,540 179,540
---------------- -------------- ------------ ----------------
Total investment and
mortgage-backed securities
available for sale $ 9,014,529 $ 1,847 $ (154,307) $ 8,862,069
================ ============== ============ ================
(Continued)
10.
11
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - INVESTMENT AND MORTGAGE-BACKED SECURITIES (Continued)
September 30, 1996
-----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
HELD TO MATURITY
U.S. Treasury securities $ 99,687 $ 564 $ 100,251
Obligation of U.S.
government agencies 500,000 $ (36,315) 463,685
Obligations of states and
political subdivisions 2,030,650 103 (22,912) 2,007,841
---------------- -------------- ------------ ----------------
Total investment and
mortgage-backed securities
held to maturity $ 2,630,337 $ 667 $ (59,227) $ 2,571,777
================ ============== ============ ================
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
172,840 172,840
Other securities ---------------- ------------- ---------- ----------------
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 $2,714,626 and $497,188 during the nine months ended
September 30, 1996 and 1995. Gross gains of $16,025 and gross losses of $8,642
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 $1,169,377 during the three months ended September 30,
1996. Gross gains of $64 and gross losses of $2,046 were realized on those sales
in 1996. No investment securities were sold during the three months ended
September 30, 1995.
The amortized cost and estimated fair values of investment and mortgage-backed
securities at September 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 $ 860,062 $ 861,896
Due in one to five years 1,504,098 1,469,685
---------------- ----------------
Subtotal 2,364,160 2,231,581
Mortgage-backed securities 6,470,829 6,350,948
Other securities 179,540 179,540
---------------- ----------------
Total securities available for sale $ 9,014,529 $ 8,862,069
================ ================
(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 $ 99,687 $ 100,251
Due in one to five years 500,000 463,685
Due after ten years 2,030,650 2,007,841
-------------- --------------
Total securities held to maturity $ 2,630,337 $ 2,571,777
============== ==============
Investment securities with a carrying value of approximately $4,599,000 at
September 30, 1996 and $5,925,000 at December 31, 1995 were pledged to secure
deposits and for other purposes.
NOTE 3 - LOANS AND LEASES
Total loans and leases at September 30, 1996 and December 31, 1995 net of
deferred fees and costs consisted of the following:
September 30, 1996 December 31, 1995
------------------ -----------------
Commercial $ 10,305,327 $ 8,992,934
Installment 14,010,527 10,504,087
Real estate 2,779,366 2,901,133
Credit card 604,044 663,544
Leases 25,359 43,589
Other 8,897 11,826
---------------- ----------------
Total loans $ 27,733,520 $ 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 nine
months ended September 30, 1996 and 1995 is as follows:
1996 1995
---- ----
Balance - January 1 $ 252,174 $ 265,489
Loan and leases charged off (104,718) (84,651)
Recoveries 22,344 20,348
Provision for loan and lease losses 95,000 57,000
-------------- --------------
Balance - September 30 $ 264,800 $ 258,186
============== ==============
(Continued)
13.
14
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES (Continued)
As of and for the nine months ended September 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
$35,756 and $15,476 at September 30, 1996 and December 31, 1995, respectively.
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 September 30, 1996 and December 31,
1995 was approximately $1,571,000 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 September 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
$1,274,000 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 September 30, 1996 and 6.2% to 11.1% at December 31, 1995. Outstanding
commitments for credit cards were approximately $946,000 and $916,000 as of
September 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 September 30, 1996, 64% were fixed and 36% were variable rate
and at December 31, 1995, 58% were fixed rate and 42% were variable rate.
(Continued)
14.
15
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK (Continued)
The Bank was also required to maintain aggregate cash reserve amounting to
$108,000 and $79,000 at September 30, 1996 and December 31, 1995, respectively,
to satisfy federal regulatory requirements. These amounts do not earn interest.
At September 30, 1996 or December 31, 1995, the Bank had a line of credit
enabling it to borrow up to $2,170,000 and $1,932,000, respectively, with the
Federal Home Loan Bank of Cincinnati. Borrowings under this line totaled
$1,000,000 at September 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.
15.
16
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 September 30, 1996, compared to December 31,
1995, and the consolidated results of operations for the three and nine months
ended September 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 modest asset growth since December 31, 1995 as total assets
increased $1,705,000 or 4.09%, from $41,744,000 at December 31, 1995 to
$43,449,000 at September 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 $2,212,000 in total since December 31, 1995. A
decrease of $152,000 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 $2,060,000 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 $4,606,000 or 20.15% 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 $3,506,000 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 increased $452,000, or 1.18%, 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 $1,233,000 at September 30, 1996 to fund loan growth.
16.
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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 nine months ended September 30, 1996 was $209,943 or $127,000
less than the same period in 1995. Net income for the three months ended
September 30, 1996 was $85,417 or $2,000 more than the same period in 1995. The
reasons for the decline in year-to-date earnings were a decrease in net interest
income, an increase in the provision for loan and lease losses, a decline in
noninterest income, and the provision for income taxes. The reasons for the
slight increase in the current quarter's earning over the prior year were an
increase in net interest income and a reduction of noninterest expense
overcoming increased provisions for loan and lease losses 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 $13,000 for the nine months ended September 30,
1996 compared to the same respective period 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. Net interest income
increased $22,000 for the three months ended September 30, 1996 compared to the
same respective period in 1995.
Noninterest income for the three and nine months ended September 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.
17.
18
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Noninterest expense for the three and nine months ended September 30, 1996
declined compared to the same 1995 periods. Primary differences were increased
salary and employee benefits due to normal salary increases and increased
occupancy costs due to an upgrade in the Bank's computer system being offset by
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 part of 1995. As a result, OSB
paid taxes and recognized federal income tax expense for the first time in its
history in the last part 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 $3,142,000 at September 30, 1996, compared to
$3,057,000 at December 31, 1995. At September 30, 1996 and December 31, 1995,
the ratio of shareholders' equity to assets was 7.23% 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%, 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.
18.
19
The following table reflects the various leverage and risk-based capital ratios
for the Bank:
Leverage and Risk-based Capital Ratios
--------------------------------------
September 30, 1996 December 31, 1995
------------------ -----------------
LEVERAGE RATIO:
Total Leverage Ratio 7.33% 7.32%
RISK-BASED CAPITAL
RATIOS:
Core (Tier 1) Ratio 10.51% 11.86%
Total Risk-Based
Capital Ratio 11.38% 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 in December of the current year.
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 $2,534,000 at September 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 and
mortgage-backed 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.
19.
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OHIO STATE BANCSHARES, INC.
FORM 10-QSB
Quarter ended September 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: 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 27
(b) There are no matters required to be reported under this item.
20.
21
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: /s/ Gary E. Pendleton
------------------ ---------------------------
(Signature)
Gary E. Pendleton
President and Chief Executive
Officer
Date: /s/ William H. Harris
------------------ ---------------------------
(Signature)
William H. Harris
Executive Vice President and Cashier
21.
22
OHIO STATE BANCSHARES, INC.
Index to Exhibits
g
Item No. Description
- -------- -----------
27 Financial Data Schedule
22.