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: SEPTEMBER 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 November 7, 1997
121,200 common shares
2
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1997
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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...................................................... 16
PART II - OTHER INFORMATION
Other Information............................................................ 20
Signatures ................................................................ 21
3
OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
- --------------------------------------------------------------------------------
September 30, December 31,
1997 1996
---- ----
ASSETS
Cash and due from banks $ 2,164,926 $ 1,972,038
Federal funds sold 654,000 716,000
----------- -----------
Total cash and cash equivalents 2,818,926 2,688,038
Interest-earning deposits in other banks 299,000 499,000
Securities available for sale 7,364,938 8,089,532
Securities held to maturity (Estimated fair values of $2,570,877
at September 30, 1997 and $2,609,268 at December 31, 1996) 2,525,397 2,629,280
Loans, net of allowance for loan losses 32,686,315 27,572,913
Premises and equipment, net 859,158 914,569
Other real estate owned and repossessions 41,788 52,780
Accrued interest receivable 333,828 347,580
Other assets 314,965 262,194
----------- -----------
Total assets $47,244,315 $43,055,886
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 5,582,086 $ 4,328,870
Interest-bearing 37,804,329 35,140,100
----------- -----------
Total 43,386,415 39,468,970
Accrued interest payable 216,984 236,798
Other liabilities 141,590 124,138
----------- -----------
Total liabilities 43,744,989 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 467,502 224,862
Unrealized loss on securities
available for sale, net of tax (11,403) (42,109)
----------- -----------
Total shareholders' equity 3,499,326 3,225,980
----------- -----------
Total liabilities and shareholders' equity $47,244,315 $43,055,886
=========== ===========
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See accompanying notes to the consolidated financial statements.
3.
4
OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $786,928 $644,148 $2,170,462 $1,811,630
Taxable securities 119,156 147,859 388,785 515,156
Nontaxable securities 26,922 27,819 81,522 63,794
Other 11,661 7,933 32,273 42,253
-------- -------- ---------- ----------
Total interest income 944,667 827,759 2,673,042 2,432,833
-------- -------- ---------- ----------
INTEREST EXPENSE
Deposits 420,098 372,691 1,182,329 1,125,215
Other borrowings 13,785 13,841 37,701 18,277
-------- -------- ---------- ----------
Total interest expense 433,883 386,532 1,220,030 1,143,492
-------- -------- ---------- ----------
NET INTEREST INCOME 510,784 441,227 1,453,012 1,289,341
Provision for loan losses 24,000 35,000 77,000 95,000
-------- -------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 486,784 406,227 1,376,012 1,194,341
NONINTEREST INCOME
Fees for other customer services 54,765 54,294 156,149 156,351
Net realized gain on sales of securities available for
sale (296) (1,982) 494 7,383
Other income 3,381 4,285 18,382 22,768
-------- -------- ---------- ----------
Total noninterest income 57,850 56,597 175,025 186,502
-------- -------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 167,173 164,329 517,056 517,920
Occupancy expense 82,775 62,096 251,791 190,680
Office supplies 20,428 19,262 65,577 65,797
FDIC and state assessments 3,750 1,068 11,348 6,334
Taxes other than income 8,396 11,766 32,101 37,320
Legal and accounting 14,744 13,596 42,194 38,807
Advertising and public relations 13,513 14,897 45,942 36,675
Loss on other real estate owned and repossessions 8,000 -- 21,000 16,000
Insurance 6,629 6,999 19,886 24,334
Credit card processing expense 12,529 14,719 36,867 42,298
Other expenses 57,006 44,381 145,163 128,219
-------- -------- ---------- ----------
Total noninterest expense 394,943 353,113 1,188,925 1,104,384
-------- -------- ---------- ----------
Income before federal income taxes 149,691 109,711 362,112 276,459
Income taxes 38,032 24,294 95,232 66,516
-------- -------- ---------- ----------
NET INCOME $111,659 $ 85,417 $ 266,880 $ 209,943
======== ======== ========== ==========
Earnings per common share $ .92 $ .70 $ 2.20 $ 1.73
======== ======== ========== ==========
Weighted average shares outstanding 121,200 121,200 121,200 121,200
======== ======== ========== ==========
- --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
4.
5
OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
-------------
1997 1996
---- ----
Balance at beginning of period $3,225,980 $3,057,117
Net income 266,880 209,943
Cash dividends ($.20 per share in 1997 and 1996) (24,240) (24,240)
Change in unrealized gain/(loss) on securities available for sale 30,706 (100,578)
---------- ----------
Balance at end of period $3,499,326 $3,142,242
========== ==========
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See accompanying notes to the consolidated financial statements.
5.
6
OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine Months Ended
September 30,
-------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 266,880 $ 209,943
Adjustments to reconcile net income to net cash from
operating activities
Net amortization of premiums 16,102 28,429
Provision for loan losses 77,000 95,000
Depreciation and amortization 104,830 80,153
Net realized gains on securities available for sale (494) (7,383)
Federal Home Loan Bank stock dividend (8,100) (6,800)
Loss on sale of other real estate owned and repossessions 21,000 16,000
Change in accrued interest receivable 13,752 (72,795)
Change in accrued interest payable (19,814) (47,782)
Change in other assets and other liabilities (51,137) (166,194)
----------- -----------
Net cash from operating activities 420,019 128,571
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (1,694,598) (1,519,203)
Proceeds from maturities and principal paydowns 1,142,488 1,667,802
Proceeds from sales 1,319,603 2,714,626
Securities held to maturity
Purchases -- (818,798)
Proceeds from maturities and principal paydowns 100,000 --
Net change in interest-earning deposits in other banks 200,000 1,000
Net change in loans (5,305,690) (4,794,242)
Proceeds from sale of other real estate owned and repossessions 105,280 103,729
Purchases of premises and equipment (49,419) (60,562)
----------- -----------
Net cash from investing activities (4,182,336) (2,705,648)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 3,917,445 451,755
Net change in borrowed funds -- 1,233,000
Cash dividends paid (24,240) (24,240)
----------- -----------
Net cash from financing activities 3,893,205 1,660,515
----------- -----------
Net change in cash and cash equivalents 130,888 (916,562)
Cash and cash equivalents at beginning of period 2,688,038 3,450,430
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,818,926 $ 2,533,868
=========== ===========
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See accompanying notes to the consolidated financial statements.
6.
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OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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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
September 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 nine months ended September 30, 1997 and 1996, OSB paid interest of
$1,239,844 and $1,191,274, and income taxes of $5,000 and $87,327. Noncash
transfers from loans to other real estate owned and repossessions totaled
$115,288 for the nine months ended September 30, 1997, and $93,398 for the nine
months ended September 30, 1996.
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(Continued)
7.
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OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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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.
In February 1997, the FASB issued SFAS No. 129, "Disclosures of Information
about Capital Structure." SFAS No. 129 consolidated existing accounting guidance
relating to disclosure about a company's capital structure. Public companies
generally have always been required to make disclosures now required by SFAS No.
129 and, therefore, SFAS No. 129 should have no impact on OSB. SFAS No. 129 is
effective for financial statements for periods ending after December 15, 1997.
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(Continued)
8.
9
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This Statement significantly changes the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about reportable segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
uses a "management approach" to disclose financial and descriptive information
about an enterprise's reportable operating segments which is based on reporting
information the way that management organizes the segments within the enterprise
for making operating decisions and assessing performance. For many enterprises,
the management approach will likely result in more segments being reported. In
addition, the Statement requires that selected information be reported in
interim financial statements. SFAS No. 131 is effective for financial statements
for periods beginning after December 15, 1997.
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(Continued)
9.
10
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
Securities at September 30, 1997 and December 31, 1996 were as follows:
September 30, 1997
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
U.S. Treasury securities $ 349,562 $ 2,407 $ 351,969
Obligations of U.S.
government agencies 1,003,060 241 $ 41 1,003,260
Mortgage-backed securities 5,809,654 9,558 29,443 5,789,769
---------- -------- ------- ----------
Total debt securities available
for sale 7,162,276 12,206 29,484 7,144,998
Other securities 219,940 219,940
---------- -------- ------- ----------
Total securities
available for sale $7,382,216 $ 12,206 $29,484 $7,364,938
========== ======== ======= ==========
HELD TO MATURITY
Obligation of U.S.
government agencies $ 500,000 $10,550 $ 489,450
Obligations of states and
political subdivisions 2,025,397 $ 57,061 1,031 2,081,427
---------- -------- ------- ----------
Total securities
held to maturity $2,525,397 $ 57,061 $11,581 $2,570,877
========== ======== ======= ==========
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(Continued)
10.
11
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
$1,319,603 and $2,714,626 during the nine months ended September 30, 1997 and
1996. Gross gains of $946 and gross losses of $452 were realized on sales in
1997. Gross gains of $16,025 and gross losses of $8,642 were realized on sales
in 1996.
Proceeds from sales of securities classified as available for sale were $999,688
and $1,169,377 during the three months ended September 30, 1997 and 1996. Gross
gains of $156 and gross losses of $452 were realized on sales in 1997. Gross
gains of $64 and gross losses of $2,046 were realized on sales in 1996.
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(Continued)
11.
12
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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NOTE 2 - SECURITIES (Continued)
The amortized cost and estimated fair values of securities at September 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 year or less $ 500,000 $ 489,450
Due in one to five years $1,352,622 $1,355,229
Due after ten years 2,025,397 2,081,427
Mortgage-backed securities 5,809,654 5,789,769
Other securities 219,940 219,940
---------- ---------- ---------- ----------
$7,382,216 $7,364,938 $2,525,397 $2,570,877
========== ========== ========== ==========
Securities with a carrying value of approximately $4,259,000 at September 30,
1997 and $4,946,000 at December 31, 1996 were pledged to secure deposits and for
other purposes.
NOTE 3 - LOANS
Loans at September 30, 1997 and December 31, 1996 were as follows:
September 30, 1997 December 31, 1996
------------------ -----------------
Commercial $12,013,829 $10,395,804
Installment 16,879,289 13,967,939
Real estate 3,215,100 2,761,119
Credit card 577,226 554,928
Other 37,182 33,708
----------- -----------
32,722,626 27,713,498
Net deferred loan costs 231,996 140,557
Allowance for loan losses (268,307) (281,142)
----------- -----------
$32,686,315 $27,572,913
=========== ===========
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(Continued)
12.
13
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the nine months ended September
30, 1997 and 1996 is as follows:
1997 1996
---- ----
Balance - January 1 $ 281,142 $ 252,174
Loan charged off (118,953) (104,718)
Recoveries 29,118 22,344
Provision for loan losses 77,000 95,000
--------- ---------
Balance - June 30 $ 268,307 $ 264,800
========= =========
Loans considered impaired under the provisions of SFAS 114 were not material as
of or during the nine months ended September 30, 1997 and 1996. Loans on which
the accrual of interest has been discontinued because circumstances indicate
that collection is questionable amounted to $36,950 and $29,147 at September 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 September 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 September 30, 1997 and December 31,
1996 was approximately $1,855,000 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)
13.
14
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 6.20% to 11.50% at September 30,
1997 and 5.90% to 10.90% at December 31, 1996. Outstanding commitments for
credit card rates ranged from 12.00% to 17.90% and 14.25% and 16.75% as of
September 30, 1997 and December 31, 1996. Of the total outstanding balances on
these credit cards at September 30, 1997, 59% were fixed and 41% 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 September 30, 1997 and December 31, 1996 follows:
September 30, 1997 December 31, 1996
------------------ -----------------
Commitments to extend $3,754,000 $3,770,000
Credit card arrangements 963,000 1,010,000
At September 30, 1997 and December 31, 1996, the Bank had a line of credit
enabling it to borrow up to $2,200,000 and $2,100,000 with the Federal Home Loan
Bank of Cincinnati. No borrowings were outstanding on this line of credit as of
September 30, 1997 or 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 branch, which opened in December 1996, 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 $29,061 for the nine months ended September 30, 1997.
- --------------------------------------------------------------------------------
(Continued)
14.
15
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 September 30,
1998 $ 38,748
1999 38,748
2000 38,748
2001 38,748
2002 40,336
Thereafter 607,946
--------
$803,274
========
- --------------------------------------------------------------------------------
15.
16
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
INTRODUCTION
The following discussion focuses on the consolidated financial condition of Ohio
State Bancshares, Inc. ("OSB") at September 30, 1997, compared to December 31,
1996, and the consolidated results of operations for the three and nine months
ended September 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 that involve risks and
uncertainties. Economic circumstances, OSB's operations and OSB's actual results
could differ significantly from those discussed in the forward-looking
statements. Some of the 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 9.73% asset growth since December 31, 1996 as total assets
increased $4,188,000 from $43,056,000 at December 31, 1996 to $47,244,000 at
September 30, 1997. Maintaining a moderate growth rate while increasing the loan
to deposit ratio continues to be OSB's primary strategy.
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16.
17
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Interest-earning deposits in other banks, securities available for sale and
securities held to maturity decreased 1,028,000, or 9.17% from December 31, 1996
to September 30, 1997. This decline is primarily the result of management using
excess funds as they become available, plus proceeds from maturing securities
and principle repayments from mortgage-backed securities to fund current loan
demand and future loan commitments.
Net loans increased from $27,573,000 on December 31, 1996 to $32,686,000 on
September 30, 1997, an increase of $5,113,000, or 18.55%. This growth was funded
primarily by deposit growth and the proceeds from maturing securities and
principle repayments received from mortgage-backed securities. Installment loan
growth continued to be strong and increased $2,911,000, or 20.84% during the
period from December 31, 1996 to September 30, 1997. Commercial loans increased
$1,618,000, or 15.56% and real estate loans increased $454,000, or 16.44% during
the period.
Total deposits increased $3,917,000, or 9.93% from December 31, 1996 to
September 30, 1997. The increase in deposits was due to the 28.95% increase in
noninterest-bearing deposits which grew from $4,329,000 on December 31, 1996 to
$5,582,000 on September 30, 1997, an increase of $1,253,000. Interest-bearing
deposits increased $2,664,000 from $35,140,000 on December 31, 1996 to
$37,804,000 on September 30, 1997, an increase of 7.58%. OSB plans to be active
in attracting new deposits as needed to fund current and future loan demand.
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 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 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, 1997 was $267,000, or $57,000
more than the same period in 1996. The reason for the increase in earnings was
due to improved 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 September 30, 1997 was
$112,000, or $26,000 more than the same period in 1996. The improvement over the
three-month period is due to the same reasons as discussed previously for the
nine-month period.
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17.
18
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 increased by
$164,000 for the nine-month period ending September 30, 1997 compared to the
same period in 1996. The increase in net interest income is attributable to OSB
increasing its net loan to deposit ratio from 69.86% on December 31, 1996 to
75.33% as of September 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
nine-month period ending September 30, 1997 increased 6.69% over the prior year
nine-month period compared to a 9.87% increase in interest income for the same
period.
Net interest income increased by $70,000 for the three months ended September
30, 1997 compared to the same period in 1996. The improvement was the result of
the same factors which were discussed above.
Noninterest income for the three months and nine months ended September 30, 1997
was comparable to the same periods in the prior year. Noninterest expense was up
$85,000, or 7.66% for the nine months ending September 30, 1997 versus the nine
months ending September 30, 1996 and $42,000, or 11.85% for the three months
ended September 30, 1997 compared to the same period in the prior year. The
increase occurred due to the overhead expense 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 ceases. Failure to meet various
capital requirements can initiate regulatory action having a direct material
effect on the operations of the Bank.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
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18.
19
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Capital to risk-
weighted assets
--------------- Tier 1 capital
Total Tier 1 to average assets
----- ------ -----------------
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
At September 30, 1997 and December 31, 1996, the actual capital ratios for the
Bank were:
September 30, 1997 December 31, 1996
------------------ -----------------
Total capital to risk-weighted assets 10.7% 11.4%
Tier 1 capital to risk-weighted assets 9.9% 10.5%
Tier 1 capital to average assets 7.4% 7.4%
At September 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 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 $2,819,000 at September 30, 1997 and $2,688,000 at December
31, 1996. These assets provided the primary source of funds for loan demand and
deposit balance fluctuations. Additional sources of liquidity are securities
classified as available for sale and access to Federal Home Loan Bank advances,
as the Bank is a member of the Federal Home Loan Bank of Cincinnati.
Taking into account the capital adequacy, profitability and reputation
maintained by OSB, available liquidity sources are considered adequate to meet
current and projected needs.
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19.
20
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
Quarter ended September 30, 1997
PART II - OTHER INFORMATION
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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 - 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 September 30,
1997.
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20.
21
OHIO STATE BANCSHARES, INC.
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OHIO STATE BANCSHARES, INC.
(Registrant)
Date: November 12, 1997 /s/ Gary E. Pendleton
--------------------------- ---------------------
(Signature)
Gary E. Pendleton
President and Chief Executive
Officer
Date: November 12, 1997 /s/ William H. Harris
--------------------------- ---------------------
(Signature)
William H. Harris
Executive Vice President and Cashier
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21.
22
OHIO STATE BANCSHARES, INC.
Index to Exhibits
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EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
-------------- ----------- -----------
27 Financial Data Schedule 23
99 Safe Harbor Under the Private Incorporated by reference
Securities Litigation Reform Act to Exhibit 99 to Annual
of 1995 Report on Form 10-KSB for the Year
Ended December 31, 1996 filed by
the Small Business Issuer on March
24, 1997.
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22.