1
FORM 10-QSB
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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, 1997
/ / TRANSITION REPORT UNDER 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 34-1816546
------------------------------- ---------------------------------------
(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)
(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 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 Outstanding at August 4, 1997
121,200 common shares
2
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 1997
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED) Page
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 Consolidated Financial Statements ............................... 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...................................................... 15
PART II - OTHER INFORMATION
Other Information ........................................................... 19
Signatures ................................................................ 20
3
OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1997 1996
---- ----
ASSETS
Cash and due from banks $ 2,689,723 $ 1,972,038
Federal funds sold 716,000
------------ ------------
Total cash and cash equivalents 2,689,723 2,688,038
Interest-earning deposits in other banks 399,000 499,000
Securities available for sale 8,301,483 8,089,532
Securities held to maturity (Estimated fair values of $2,540,283
at June 30, 1997 and $2,609,268 at December 31, 1996) 2,526,741 2,629,280
Loans, net of allowance for loan losses 30,268,173 27,572,913
Premises and equipment, net 881,753 914,569
Other real estate owned and repossessions 50,718 52,780
Accrued interest receivable 324,241 347,580
Other assets 269,489 262,194
------------ ------------
Total assets $ 45,711,321 $ 43,055,886
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 5,086,064 $ 4,328,870
Interest-bearing 35,584,237 35,140,100
------------ ------------
Total 40,670,301 39,468,970
Federal funds and other borrowed funds 1,294,000
Accrued interest payable 175,001 236,798
Other liabilities 208,520 124,138
------------ ------------
Total liabilities 42,347,822 39,829,906
Shareholders' equity
Common stock ($10.00 par value; 121,200
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 355,843 224,862
Unrealized loss on securities
available for sale, net of tax (35,571) (42,109)
------------ ------------
Total shareholders' equity 3,363,499 3,225,980
------------ ------------
Total liabilities and shareholders' equity $ 45,711,321 $ 43,055,886
============ ============
See accompanying notes to the 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,
-------- --------
1997 1996 1997 1996
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $710,192 $601,891 $1,383,534 $1,167,482
Taxable securities 133,047 179,362 269,629 367,297
Nontaxable securities 26,950 19,758 54,600 35,975
Other 10,690 13,264 20,612 34,320
-------- -------- ---------- ----------
Total interest income 880,879 814,275 1,728,375 1,605,074
-------- -------- ---------- ----------
INTEREST EXPENSE
Deposits 385,900 371,388 762,231 752,524
Other borrowings 19,148 4,349 23,916 4,436
-------- -------- ---------- ----------
Total interest expense 405,048 375,737 786,147 756,960
-------- -------- ---------- ----------
NET INTEREST INCOME 475,831 438,538 942,228 848,114
Provision for loan losses 25,000 25,000 53,000 60,000
-------- -------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 450,831 413,538 889,228 788,114
NONINTEREST INCOME
Fees for other customer services 52,057 53,656 101,384 102,057
Net realized gain on sales of securities available for sale 790 3,442 790 6,879
Other income 6,015 5,174 15,001 20,969
-------- -------- ---------- ----------
Total noninterest income 58,862 62,272 117,175 129,905
-------- -------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 184,071 172,592 349,883 353,591
Occupancy expense 80,829 62,694 169,016 128,584
Office supplies 24,217 20,816 45,149 46,535
FDIC and state assessments 4,168 2,633 7,598 5,266
Taxes other than income 12,000 11,805 23,705 25,554
Legal and accounting 14,040 13,070 27,450 25,211
Advertising and public relations 12,852 12,680 32,429 21,778
Loss on other real estate owned and repossessions 4,000 4,000 13,000 16,000
Insurance 6,892 8,651 13,257 17,335
Credit card processing expense 11,667 12,957 24,338 27,579
Other expenses 44,052 41,683 88,157 83,838
-------- -------- ---------- ----------
Total noninterest expense 398,788 363,581 793,982 751,271
-------- -------- ---------- ----------
Income before federal income taxes 110,905 112,229 212,421 166,748
Income taxes 30,200 24,222 57,200 42,222
-------- -------- ---------- ----------
NET INCOME $ 80,705 $ 88,007 $ 155,221 $ 124,526
======== ======== ========== ==========
Earnings per common share $ .67 $ .73 $ 1.28 $ 1.03
======== ======== ========== ==========
Weighted average shares outstanding 121,200 121,200 121,200 121,200
======== ======== ========== ==========
See accompanying notes to the consolidated financial statements.
4.
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OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
Six Months Ended
June 30,
--------
1997 1996
---- ----
Balance at beginning of period $ 3,225,980 $ 3,057,117
Net income 155,221 124,526
Cash dividends ($.20 per share in 1997 and 1996) (24,240) (24,240)
Change in unrealized gain/(loss) on securities available for sale 6,538 (135,936)
----------- -----------
Balance at end of period $ 3,363,499 $ 3,021,467
=========== ===========
See accompanying notes to the consolidated financial statements.
5.
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OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
--------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 155,221 $ 124,526
Adjustments to reconcile net income to net cash from
operating activities
Net amortization of premiums 8,561 20,316
Provision for loan losses 53,000 60,000
Depreciation and amortization 73,858 53,418
Net realized gains on securities available for sale (790) (6,879)
Federal Home Loan Bank stock dividend (5,000) (4,400)
Loss on sale of other real estate owned and repossessions 13,000 16,000
Change in accrued interest receivable 23,339 (16,217)
Change in accrued interest payable (61,797) (51,526)
Change in other assets and other liabilities 73,719 (150,269)
----------- -----------
Net cash from operating activities 333,111 44,969
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (1,267,539) (1,508,557)
Proceeds from maturities and principal paydowns 745,347 1,351,020
Proceeds from sales 319,915 1,545,249
Securities held to maturity
Purchases (818,798)
Proceeds from maturities and principal paydowns 100,000
Net change in interest-earning deposits in other banks 100,000 1,000
Net change in loans (2,839,048) (2,836,643)
Proceeds from sale of other real estate owned and repossessions 79,850 87,960
Purchases of premises and equipment (41,042) (33,479)
----------- -----------
Net cash from investing activities (2,802,517) (2,212,248)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 1,201,331 (404,227)
Net change in borrowed funds 1,294,000 954,000
Cash dividends paid (24,240)
Net cash from financing activities 2,471,091 549,773
----------- -----------
Net change in cash and cash equivalents 1,685 (1,617,506)
Cash and cash equivalents at beginning of period 2,688,038 3,450,430
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,689,723 $ 1,832,924
=========== ===========
See accompanying notes to the consolidated financial statements.
6.
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OHIO STATE BANCSHARES, INC.
NOTES TO 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. ("OSB") at
June 30, 1997, 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 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 OSB for
the year ended December 31, 1996, included in its 1996 Annual Report. Reference
is made to the accounting policies of OSB described in the notes to financial
statements contained in its 1996 Annual Report. OSB has consistently followed
these policies in preparing this Form 10-QSB.
The accompanying consolidated financial statements include accounts of OSB and
its wholly-owned subsidiary, The Marion Bank (the "Bank"). All significant
intercompany transactions and balances have been eliminated. At the annual
shareholders 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 the historical basis of assets and liabilities have been carried forward
without change.
OSB's and the Bank's revenues, operating income and assets are primarily from
the banking industry. Loan customers are mainly located in Marion County, Ohio,
and include a wide range of individuals, businesses and other organizations. A
major portion of loans are secured by various forms of collateral including real
estate, business assets, consumer property and other items, although borrower
cash flow may also be a primary source of repayment.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
based on available information. These estimates and assumptions affect amounts
reported in the financial statements and disclosures provided. Future results
could differ from these estimates. Collectibility of loans, fair values of
financial instruments and status of contingencies are particularly subject to
change.
For the six months ended June 30, 1997 and 1996, OSB paid interest of $847,944
and $808,486, and income taxes of $0 and $69,127. Noncash transfers from loans
to other real estate owned and repossessions totaled $90,788 for the six months
ended June 30, 1997, and $35,629 for the six months ended June 30, 1996.
(Continued)
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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 on the effective tax rate expected to be
applicable for the entire year. Income tax expense is the sum of the current
year income tax due or refundable and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are expected future tax
consequences of temporary differences between the carrying amounts and tax basis
of assets and liabilities, computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be
realized.
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinquishments of Liabilities,"
was issued by the Financial Accounting Standards Board ("FASB") in 1996. It
revises the accounting for transfers of financial assets, such as loans and
securities, and for distinguishing between sales and secured borrowings. It was
originally effective for some transactions in 1997 and others in 1998. SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125" was issued in December 1996. SFAS 127 defers, for one year, the effective
date of provisions related to securities lending, repurchase agreements and
other similar transactions. The remaining portions of SFAS 125 will continue to
be effective January 1, 1997. SFAS 125 did not have a material impact on OSB's
financial statements.
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which is
effective for financial statements for periods ending after December 15, 1997,
including interim periods. SFAS 128 simplifies the calculation of earnings per
share by replacing primary EPS with basic EPS. It also requires dual
presentation of basic EPS and diluted EPS for entities with complex capital
structures. Basic EPS includes no dilution and is computed by dividing income
available to common shareholders by the weighted- average common shares
outstanding for the period. Diluted EPS reflects the potential dilution of
securities that could share in earnings such as stock options, warrants or other
common stock equivalents. All prior period EPS data will be restated to conform
with the new presentation. This statement will not impact OSB as the Company has
no common stock equivalents at the present time.
(Continued)
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OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - SECURITIES
Securities at June 30, 1997 and December 31, 1996 were as follows:
June 30, 1997
-------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
U.S. Treasury securities $ 349,538 $ 367 $ 171 $ 349,734
Obligations of U.S.
government agencies 2,003,381 215 9,026 1,994,570
Mortgage-backed securities 5,785,620 4,928 50,209 5,740,339
---------- ------- ------- ----------
Total debt securities available
for sale 8,138,539 5,510 59,406 8,084,643
Other securities 216,840 -- -- 216,840
---------- ------- ------- ----------
Total securities
available for sale $8,355,379 $ 5,510 $59,406 $8,301,483
========== ======= ======= ==========
HELD TO MATURITY Obligation of U.S.
government agencies $ 500,000 -- $22,870 $ 477,130
Obligations of states and
political subdivisions 2,026,741 $39,991 3,579 2,063,153
---------- ------- ------- ----------
Total securities
held to maturity $2,526,741 $39,991 $26,449 $2,540,283
========== ======= ======= ==========
(Continued)
9.
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OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - SECURITIES (Continued)
December 31, 1996
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
Obligations of U.S.
government agencies $1,713,884 $ 739 $ 7,264 $1,707,359
Mortgage-backed securities 6,257,609 3,872 61,148 6,200,333
---------- -------- -------- ----------
Total debt securities available
for sale 7,971,493 4,611 68,412 7,907,692
Other securities 181,840 181,840
---------- -------- -------- ----------
Total securities
available for sale $8,153,333 $ 4,611 $ 68,412 $8,089,532
========== ======== ======== ==========
HELD TO MATURITY
U.S. Treasury securities $ 99,912 $ 213 $100,125
Obligation of U.S.
government agencies 500,000 $ 32,755 467,245
Obligations of states and
political subdivisions 2,029,368 21,692 9,162 2,041,898
---------- -------- -------- ----------
Total securities
held to maturity $2,629,280 $ 21,905 $ 41,917 $2,609,268
========== ======== ======== ==========
Proceeds from sales of securities classified as available for sale were $319,915
and $1,545,249 during the six months ended June 30, 1997 and 1996. Gross gains
of $790 were realized on sales in 1997. Gross gains of $15,892 and gross losses
of $9,013 were realized on sales in 1996.
Proceeds from sales of securities classified as available for sale were $319,915
and $1,041,811 during the three months ended June 30, 1997 and 1996. Gross gains
of $790 were realized on sales in 1997. Gross gains of $12,455 and gross losses
of $9,013 were realized on sales in 1996.
(Continued)
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OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - SECURITIES (Continued)
The amortized cost and estimated fair values of securities at June 30, 1997, 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.
Available-for-Sale Securities Held-to-Maturity Securities
----------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Due in one to five years $2,352,919 $2,344,304 $ 500,000 $ 477,130
Due after ten years 2,026,741 2,063,153
Mortgage-backed securities 5,785,620 5,740,339
Other securities 216,840 216,840
---------- ---------- ---------- ----------
$8,355,379 $8,301,483 $2,526,741 $2,540,283
========== ========== ========== ==========
Securities with a carrying value of approximately $4,644,000 at June 30, 1997
and $4,946,000 at December 31, 1996 were pledged to secure deposits and for
other purposes.
NOTE 3 - LOANS
Loans at June 30, 1997 and December 31, 1996 were as follows:
June 30, 1997 December 31, 1996
------------- -----------------
Commercial $ 10,482,823 $ 10,395,804
Installment 16,081,758 13,967,939
Real estate 3,197,166 2,761,119
Credit card 547,943 554,928
Other 27,522 33,708
------------ ------------
30,337,212 27,713,498
Net deferred loan costs 210,299 140,557
Allowance for loan losses (279,338) (281,142)
------------ ------------
$ 30,268,173 $ 27,572,913
============ ============
(Continued)
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OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the six months ended June 30, 1997
and 1996 is as follows:
1997 1996
---- ----
Balance - January 1 $ 281,142 $ 252,174
Loan charged off (69,008) (71,397)
Recoveries 14,204 13,870
Provision for loan losses 53,000 60,000
--------- ---------
Balance - June 30 $ 279,338 $ 254,647
========= =========
Loans considered impaired under the provisions of SFAS 114 were not material as
of or during the six months ended June 30, 1997 and 1996. Loans on which the
accrual of interest has been discontinued because circumstances indicate that
collection is questionable amounted to $26,870 and $29,147 at June 30, 1997 and
December 31, 1996.
NOTE 5 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
Various contingent liabilities are not reflected in the financial statements,
including claims and legal actions arising in the ordinary course of business.
In the opinion of management, after consultation with legal counsel, the
ultimate disposition of these matters is not expected to have a material affect
on the financial condition or results of operations.
At June 30, 1997 and December 31, 1996, reserves of $365,000 and $313,000 were
required as deposits with the Federal Reserve or as cash on hand. These reserves
do not earn interest.
Included in cash and cash equivalents at June 30, 1997 and December 31, 1996 was
approximately $1,864,000 and $1,547,000 on deposit with the Independent State
Bank of Ohio.
Some financial instruments are used in the normal course of business to meet
financing needs of customers and to reduce exposure to interest rate changes.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. These involve, to varying degrees,
credit and interest-rate risk in excess of the amount reported in the financial
statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit, standby letters of
credit and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans.
(Continued)
12.
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OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
(Continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many commitments are expected to expire
without being used, total commitments do not necessarily represent future cash
requirements. Standby letters of credit and financial guarantees written are
commitments to guarantee a customer's performance to a third party.
Commitments to extend credit (primarily in the form of undisbursed portions of
approved lines of credit) consist primarily of variable rate commitments. The
interest rates on these commitments ranged from 5.90% to 11.50% at June 30, 1997
and 5.9% to 10.9% at December 31, 1996. Outstanding commitments for credit card
rates ranged from 14.25% to 17.90% and 14.25% and 16.75% as of June 30, 1997 and
December 31, 1996. Of the total outstanding balances on these credit cards at
June 30, 1997, 60% were fixed and 40% were variable rate and at December 31,
1996, 62% were fixed rate and 38% were variable rate.
A summary of the contractual amounts of financial instruments with
off-balance-sheet risk at June 30, 1997 and December 31, 1996 follows:
June 30, 1997 December 31, 1996
------------- -----------------
Commitments to extend $ 4,415,000 $ 3,770,000
Credit card arrangements 1,008,000 1,010,000
At both June 30, 1997 and December 31, 1996, the Bank had a line of credit
enabling it to borrow up to $2,100,000 with the Federal Home Loan Bank of
Cincinnati. Borrowings under this line totaled $1,200,000 at June 30, 1997. No
borrowings were outstanding on this line of credit as of December 31, 1996.
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.
The Bank's new branch is leased under an operating lease. The lease term is for
twenty years. At the conclusion of the fifth, tenth and fifteenth years, the
rent shall be adjusted by 50% of the cumulative increase in the Consumer Price
Index over the previous five years with a minimum of 5% increase and a maximum
of 10% increase for any one five-year period. Rental expense was $19,374 for the
six months ended June 30, 1997.
(Continued)
13.
14
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
(Continued)
Rental commitments under this noncancelable operating lease are:
Year ending June 30,
1998 $ 38,748
1999 38,748
2000 38,748
2001 38,748
2002 39,852
Thereafter 618,117
----------
$ 812,961
==========
14.
15
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
The following discussion focuses on the consolidated financial condition of OSB
at June 30, 1997, compared to December 31, 1996, and the consolidated results of
operations for the three and six months ended June 30, 1997, compared to the
same periods in 1996. 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.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements involving risks and
uncertainties. Economic circumstances, OSB's operations and actual results could
differ significantly from those discussed in the forward-looking statements.
Some factors that could cause or contribute to such differences are discussed
herein, but also include changes in the economy and interest rates in the nation
and in OSB's general market area.
Some of the forward-looking statements included herein are the statements
regarding the following:
Management's determination of the amount of loan loss allowance and the
amount of the loan loss provision;
The sufficiency of the Corporation's liquidity and capital reserves.
See Exhibit 99, which is incorporated herein by reference.
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 a 6.17% asset growth since December 31, 1996 as total assets
increased $2,655,000 from $43,056,000 at December 31, 1996 to $45,711,000 at
June 30, 1997. Maintaining a moderate growth rate while increasing the loan to
deposit ratio continues to be OSB's primary strategy.
Interest-earning deposits in other banks, securities available for sale and
securities held to maturity increased only $9,000, or 0.08%, from December 31,
1996 to June 30, 1997. This is primarily the result of management's intent to
use excess funds as they become available, plus proceeds from maturing
securities and principle repayments from mortgage-backed securities to retire
short term Federal Home Loan Bank advances or fund future loan commitments.
15.
16
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Net loans increased $2,695,000, or 9.78%, during the period from December 31,
1996 to June 30, 1997. This growth was funded primarily by Federal Home Loan
Bank short-term borrowings and deposit growth. Installment loan demand continued
to be strong and constituted $2,114,000 of the total loan growth.
Total deposits increased $1,201,000, or 3.04%, from December 31, 1996 to June
30, 1997. The increase in deposits was primarily due to the 17.49% increase in
noninterest-bearing deposits which grew from $4,329,000 on December 31, 1996 to
$5,086,000 on June 30, 1997, an increase of $757,000. OSB plans to be active in
attracting new deposits to fund current and future loan demand.
RESULTS OF OPERATIONS
Operating results of OSB are affected by general economic conditions, monetary
and fiscal policies of federal agencies and regulatory policies of agencies
regulating 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 on 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, 1997 was $155,000, or $31,000 more
than the same period in 1996. The reason for the increase in earnings was due to
improved net interest income resulting from a higher loan to deposit ratio over
the prior period, offset somewhat by increased occupancy costs from the new
branch facility. Net income for the three months ended June 30, 1997 was
$81,000, or $7,000 less than the same period in 1996. The reason for the decline
in earnings was increased occupancy costs from the new branch more than
offsetting the improved net interest income. Net interest income for the three
months ended June 30, 1997 had less percentage improvement than the six months
ended June 30, 1997 over the comparable prior periods due to an increase in the
cost of funding loan growth through borrowings and new deposits.
Net interest income is the largest component of OSB's income and is affected by
the interest rate environment and volume and composition of interest-earning
assets and interest-bearing liabilities.
16.
17
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Net interest income increased by $94,000 for the six month period ending June
30, 1997, compared to the same period in 1996. The increase in net interest
income is attributable to OSB continuing to increase its loan to deposit ratio.
The loan to deposit ratio was 59.7% on December 31, 1995. It improved throughout
1996 to be 69.9% at December 31, 1996 and has continued to climb to 74.4% as of
June 30, 1997. The increase in the loan to deposit ratio has resulted in an
improved net interest margin as loans typically earn a higher yield than other
investing alternatives. OSB's interest expense during the six month period
ending June 30, 1997 increased 3.86% over the prior year six month period,
compared to a 7.68% increase in interest income.
Net interest income increased by $37,000 for the three months ended June 30,
1997 compared to the same period in 1996. The improvement was the result of the
same factors which were discussed above. However, the impact was not as
significant due to an increase in the cost of funds for the three months ended
June 30, 1997 compared to the same period in 1996.
Noninterest income for the three and six months ended June 30, 1997 was
comparable to the same periods in the prior year. Noninterest expense was up
$43,000, or 5.69%, for the six months ending June 30, 1997 versus the six months
ending June 30, 1996 and $35,000, or 9.68%, for the three months ending June 30,
1997 compared to the same period in the prior year. The increases occurred due
to overhead expenses associated with the new branch, which opened December 6,
1996.
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 the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the operations of the Bank.
17.
18
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
Capital to risk-
weighted assets
--------------- Tier 1 capital
Total Tier 1 to average assets
----- ------ -----------------
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
At June 30, 1997 and December 31, 1996, the actual capital ratios for the Bank
were:
June 30, 1997 December 31, 1996
------------- -----------------
Total capital to risk-weighted assets 10.9% 11.4%
Tier 1 capital to risk-weighted assets 10.0% 10.5
Tier 1 capital to average assets 7.6% 7.4
At June 30, 1997 and December 31, 1996, the Bank was categorized as well
capitalized.
LIQUIDITY
Liquidity management focuses on the ability to have funds available to meet 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 $2,690,000 at June 30, 1997 and $2,688,000 at December 31,
1996. 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,
1997 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 10, 1997, Ohio State Bancshares, Inc. held the Annual
Meeting of Shareholders at which shareholders voted upon the
election of three directors for a term expiring in 2000. The
results of the voting on these matters were as follows:
Nominee Votes for Withheld
------- --------- --------
Theodore L. Graham 72,905 2,455
Lois J. Fisher 72,905 2,455
Thurman Mathews 72,905 2,455
Fred K. White 72,905 2,455
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: 75,110 AGAINST: 100 ABSTAIN: 250
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 - Financial Data Schedule.
(b) Exhibit 99 - Safe Harbor Under Private Securities Litigation
Reform Act of 1995.
(c) No current reports on Form 8-K were filed by the small
business issuer during the quarter ended June 30, 1997.
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
EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
- -------------- ----------- -----------
27 Financial Data Schedule 24
99 Safe Harbor Under the Private Incorporated by reference
Securities Litigation Reform to Exhibit 99 to Annual
Act of 1995 Report on Form 10-KSB for the
Year Ended December 31, 1996
filed by the Small Business
Issuer on March 24, 1997.