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: March 31, 1998
[ ] 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
Ohio State Bancshares, Inc.
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(Exact name of small business issuer as specified in its charter)
Ohio 34-1816546
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
111 South Main Street, Marion, Ohio 43302
-----------------------------------------
(Address of principal executive offices)
(740) 387-2265
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common stock, $10.00 par value Outstanding at May 12, 1998
121,200 common shares
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
2
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 1998
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets ...................................... 3
Condensed Consolidated Statements of Income and Comprehensive 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............................................. 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 18
Item 2. Changes in Securities and Use of Proceeds................................. 18
Item 3. Defaults Upon Senior Securities........................................... 18
Item 4. Submission of Matters to a Vote of Security Holders....................... 18
Item 5. Other Information......................................................... 18
Item 6. Exhibits and Reports on Form 8-K.......................................... 18
SIGNATURES ...................................................................... 19
3
OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1998 1997
---- ----
ASSETS
Cash and due from banks $ 1,986,409 $ 2,669,486
Federal funds sold 1,508,000 1,057,000
----------- -----------
Total cash and cash equivalents 3,494,409 3,726,486
Interest-earning deposits in other banks 100,000 199,000
Securities available for sale 7,257,139 7,349,595
Securities held to maturity (Fair values of $2,957,041
at March 31, 1998 and $2,731,413 at December 31, 1997) 2,884,857 2,659,045
Loans, net of allowance for loan losses 35,364,191 34,395,874
Premises and equipment, net 816,865 837,187
Other real estate owned and repossessions 14,463 18,598
Accrued interest receivable 352,327 341,961
Other assets 238,926 266,124
----------- -----------
Total assets $50,523,177 $49,793,870
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 6,185,692 $ 7,012,228
Interest-bearing 40,268,594 38,896,495
----------- -----------
Total 46,454,286 45,908,723
Accrued interest payable 239,017 218,240
Other liabilities 155,189 104,092
----------- -----------
Total liabilities 46,848,492 46,231,055
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 630,193 523,078
Unrealized gain (loss) on securities available
for sale, net of tax 1,265 (3,490)
----------- -----------
Total shareholders' equity 3,674,685 3,562,815
----------- -----------
Total liabilities and shareholders' equity $50,523,177 $49,793,870
=========== ===========
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See accompanying notes to the consolidated financial statements.
3.
4
OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
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Three Months Ended
March 31,
---------
1998 1997
---- ----
INTEREST INCOME
Loans, including fees $824,728 $673,342
Taxable securities 108,494 136,582
Nontaxable securities 29,141 27,650
Other 12,988 9,922
-------- --------
Total interest income 975,351 847,496
INTEREST EXPENSE
Deposits 430,492 376,331
Other borrowings 756 4,768
-------- --------
Total interest expense 431,248 381,099
-------- --------
NET INTEREST INCOME 544,103 466,397
Provision for loan losses 38,000 28,000
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 506,103 438,397
NONINTEREST INCOME
Fees for other customer services 62,988 49,327
Other income 7,502 8,986
-------- --------
Total noninterest income 70,490 58,313
NONINTEREST EXPENSE
Salaries and employee benefits 190,089 165,812
Occupancy expense 91,409 88,187
Office supplies 19,519 20,932
FDIC and state assessments 4,123 3,430
Taxes other than income 15,380 11,705
Legal and accounting 13,739 13,410
Advertising and public relations 10,953 19,577
Loss on other real estate owned and repossessions 7,000 9,000
Insurance 6,585 6,365
Credit card processing expense 11,489 12,671
Director's fees 10,500 6,500
Other expenses 43,079 37,605
-------- --------
Total noninterest expense 423,865 395,194
-------- --------
Income before federal income taxes 152,728 101,516
Income taxes 45,613 27,000
-------- --------
NET INCOME $107,115 $ 74,516
======== ========
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain/(loss) on available for sale securities
arising during the period 4,755 (38,559)
-------- --------
Comprehensive income $111,910 $ 35,957
======== ========
Basic and diluted earnings per common share $ .88 $ .61
======== ========
Weighted average shares outstanding 121,200 121,200
======== ========
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See accompanying notes to the consolidated financial statements.
4.
5
OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
- -------------------------------------------------------------------------------------------
Three Months Ended
March 31,
---------
1998 1997
---- ----
Balance at beginning of period $3,562,815 $3,225,980
Net income 107,115 74,516
Change in unrealized loss on securities available for sale 4,755 (38,559)
---------- ----------
Balance at end of period $3,674,685 $3,261,937
========== ==========
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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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Three Months Ended
March 31,
---------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 107,115 $ 74,516
Adjustments to reconcile net income to net cash from operating
activities
Net amortization of premiums 9,042 5,163
Provision for loan losses 38,000 28,000
Depreciation and amortization 30,083 31,904
Federal Home Loan Bank stock dividend (3,200) (2,400)
Loss on sale of other real estate owned and repossessions 7,000 9,000
Change in accrued interest receivable (10,366) 52,179
Change in accrued interest payable 20,777 (6,359)
Change in other assets and other liabilities 75,845 36,598
----------- -----------
Net cash from operating activities 274,296 228,601
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (417,079) (879,500)
Proceeds from maturities and principal paydowns 512,271 386,962
Securities held to maturity
Purchases (227,185)
Proceeds from maturities and principal paydowns 100,000
Net change in interest-earning deposits in other banks 99,000
Net change in loans (1,107,957) (702,431)
Proceeds from sale of other real estate owned and repossessions 98,775 62,150
Purchases of premises and equipment (9,761) (17,539)
----------- -----------
Net cash from investing activities (1,051,936) (1,050,358)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 545,563 (503,579)
Net change in borrowed funds 1,500,000
----------- -----------
Net cash from financing activities 545,563 996,421
----------- -----------
Net change in cash and cash equivalents (232,077) 174,664
Cash and cash equivalents at beginning of period 3,726,486 2,688,038
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,494,409 $ 2,862,702
=========== ===========
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See accompanying notes to the consolidated financial statements.
6.
7
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
March 31, 1998, 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 consolidated financial statements and notes thereto
of OSB for the year ended December 31, 1997, included in its 1997 Annual Report.
Reference is made to the accounting policies of OSB described in the notes to
consolidated financial statements contained in its 1997 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.
To prepare financial statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions based on available
information. These estimates and assumptions affect amounts reported in the
financial statements and disclosures provided and future results could differ.
The allowance for loan losses, fair values of financial instruments and the
status of contingencies are particularly subject to change.
For the three months ended March 31, 1998 and 1997, cash paid for interest was
$410,471 and $387,458, and cash paid for income taxes was $30,000 and $0.
Noncash transfers from loans to other real estate owned and repossessions
totaled $101,640 and $19,100 for the three months ended March 31, 1998 and 1997.
Basic earnings per share is based on weighted-average common shares outstanding.
Diluted earnings per share in not currently applicable since the OSB has no
common stock equivalents.
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(Continued)
7.
8
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.
The Financial Accounting Standards Board ("FASB") issued statement of Financial
Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," 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 transactions in 1997. 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 No. 125 continued to be effective January 1, 1997.
SFAS No. 125 did not have a material impact on OSB's financial statements for
transactions subject to the Statement beginning January 1, 1998.
Under a new accounting standard adopted on January 1, 1998, SFAS No. 130,
"Reporting Comprehensive Income," comprehensive income is reported for all
periods. Comprehensive income includes both net income and other comprehensive
income. Other comprehensive income includes the change in unrealized gains and
losses on securities available for sale.
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. No additional disclosure under
SFAS No. 131 was required for OSB.
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(Continued)
8.
9
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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NOTE 2 - SECURITIES
Securities at March 31, 1998 and December 31, 1997 were as follows:
March 31, 1998
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
U.S. Treasury securities $ 650,226 $ 5,276 $ 655,502
Obligations of U.S. government agencies 501,962 3,013 504,975
Mortgage-backed securities 5,876,693 10,641 $17,012 5,870,322
---------- -------- ------- ----------
Total debt securities available for sale 7,028,881 18,930 17,012 7,030,799
Other securities 226,340 226,340
---------- -------- ------- ----------
Total securities available for sale $7,255,221 $ 18,930 $17,012 $7,257,139
========== ======== ======= ==========
HELD TO MATURITY
Obligation of U.S. government agencies $ 500,000 $ 5,000 $ 495,000
Obligations of states and political
subdivisions 2,384,857 $ 77,191 7 2,462,041
---------- -------- ------- ----------
Total securities held to maturity $2,884,857 $ 77,191 $ 5,007 $2,957,041
========== ======== ======= ==========
December 31, 1997
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
U.S. Treasury securities $ 650,291 $ 3,897 $ 654,188
Obligations of U.S. government agencies 502,203 1,772 503,975
Mortgage-backed securities 5,979,249 11,438 $22,395 5,968,292
---------- -------- ------- ----------
Total debt securities available for sale 7,131,743 17,107 22,395 7,126,455
Other securities 223,140 223,140
---------- -------- ------- ----------
Total securities available for sale $7,354,883 $ 17,107 $22,395 $7,349,595
========== ======== ======= ==========
HELD TO MATURITY
Obligation of U.S. government agencies $ 500,000 $ 8,410 $ 491,590
Obligations of states and political
subdivisions 2,159,045 $ 80,778 2,239,823
---------- -------- ------- ----------
Total securities held to maturity $2,659,045 $ 80,778 $ 8,410 $2,731,413
========== ======== ======= ==========
No securities classified as available for sale were sold during the three months
ended March 31, 1998 or 1997.
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(Continued)
9.
10
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 March 31, 1998, 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 $ 495,000
Due in one to five years $1,152,188 $1,160,477
Due in five to ten years 464,711 494,272
Due after ten years 1,920,146 1,967,769
Mortgage-backed securities 5,876,693 5,870,322
Other securities 226,340 226,340
---------- ---------- ---------- ----------
$7,255,221 $7,257,139 $2,884,857 $2,957,041
========== ========== ========== ==========
Securities with a carrying value of approximately $3,608,000 at March 31, 1998
and $3,938,000 at December 31, 1997 were pledged to secure deposits and for
other purposes.
NOTE 3 - LOANS
Loans at March 31, 1998 and December 31, 1997 were as follows:
March 31, 1998 December 31, 1997
-------------- -----------------
Commercial $13,839,770 $13,059,019
Installment 17,594,534 17,474,294
Real estate 3,333,431 3,307,311
Credit card 549,959 595,324
Other 13,704 15,330
----------- -----------
35,331,398 34,451,278
Net deferred loan costs 302,811 255,691
Allowance for loan losses (270,018) (311,095)
----------- -----------
$35,364,191 $34,395,874
=========== ===========
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(Continued)
10.
11
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Activity in the allowance for loan losses for the three months ended March 31,
1998 and 1997 is as follows:
1998 1997
---- ----
Balance - January 1 $311,095 $281,142
Loan charged-off (95,074) (30,111)
Recoveries 15,997 9,236
Provision for loan losses 38,000 28,000
-------- --------
Balance - March 31 $270,018 $288,267
======== ========
Impaired loans at March 31, 1998 and December 31, 1997 were as follows:
March 31, 1998 December 31, 1997
-------------- -----------------
Period-end impaired loans with allowance for loan
losses allocated $279,000 $282,000
Amount of allowance allocated 28,000 32,000
Impaired loans for the three months ended March 31, 1998 were as follows:
1998
----
Average of impaired loans during the period $280,000
Total interest income recognized during impairment 0
Cash-basis interest income recognized 0
During the three months ended March 31, 1997, the Corporation had no loans for
which impairment was required to be evaluated on an individual basis. Loans on
which the accrual of interest has been discontinued because circumstances
indicate that collection is questionable amounted to $290,361 and $316,880 at
March 31, 1998 and December 31, 1997. All impaired loans are also included in
nonaccrual loans.
NOTE 4 - 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.
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(Continued)
11.
12
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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NOTE 4 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
(Continued)
At March 31, 1998 and December 31, 1997, reserves of $424,000 and $370,000 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 March 31, 1998 and December 31, 1997
was approximately $2,575,000 and $2,952,000 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 more than 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.
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 6.2% to 11.5% at March 31, 1998
and at December 31, 1997. Outstanding commitments for credit card rates ranged
from 12.0% to 17.9% as of March 31, 1998 and December 31, 1997. Of the total
outstanding balances on these credit cards at March 31, 1998, 62% were fixed and
38% were variable rate and at December 31, 1997, 59% were fixed rate and 41%
were variable rate.
A summary of the contractual amounts of financial instruments with
off-balance-sheet risk at March 31, 1998 and December 31, 1997 follows:
March 31, 1998 December 31, 1997
-------------- -----------------
Commitments to extend $3,001,000 $3,272,000
Credit card arrangements 1,005,000 1,203,000
- --------------------------------------------------------------------------------
(Continued)
12.
13
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
(Continued)
At March 31, 1998 and December 31, 1997, the Bank had a line of credit enabling
it to borrow up to $3,716,000 with the Federal Home Loan Bank of Cincinnati. No
borrowings were outstanding on this line of credit as of March 31, 1998 or
December 31, 1997. 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. The
Corporation also leases space for one of its automated teller machines under an
operating lease. The lease term is for one year expiring in November 1988. Upon
expiration, the lease will be continued, rewritten, or terminated. Total rental
expense was $13,887 for the three months ended March 31, 1998.
Rental commitments under this noncancelable operating lease are:
Year ending March 31,
1999 $ 49,948
2000 38,748
2001 38,748
2002 39,368
2003 40,685
Thereafter 587,603
--------
$795,100
========
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13.
14
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 March 31, 1998, compared to December 31, 1997,
and the consolidated results of operations for the three months ended March 31,
1998, compared to the same period in 1997. 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 the allowance for loan
losses and the provision for loan losses;
The sufficiency of OSB's liquidity and capital reserves.
See Exhibit 99, which is incorporated herein by reference.
OSB 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. In addition, OSB is not aware of any
current recommendations by regulatory authorities that would have such effect if
implemented.
FINANCIAL CONDITION
OSB has experienced 1.46% asset growth since December 31, 1997, as total assets
increased $729,000 from $49,794,000 at December 31, 1997 to $50,523,000 at March
31, 1998. Maintaining a moderate growth rate while increasing the loan to
deposit ratio continues to be OSB's primary operating strategy.
Interest-earning deposits in other banks, securities available for sale and
securities held to maturity remained basically unchanged during the period from
December 31, 1997 to March 31, 1998, increasing from $10,208,000 to only
$10,242,000. It is management's strategy to maintain securities and other liquid
assets at about their current level as a percentage of total assets.
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14.
15
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Net loans increased $968,000, or 2.82% during the period from December 31, 1997
to March 31, 1998. This growth was funded primarily by increases in deposit
accounts and cash on hand. Commercial loans accounted for most of the increase
in loans as they increased $781,000 during the three-month period from December
31, 1997 to March 31, 1998.
The allowance for loan losses as a percentage of loans declined to 0.76% at
March 31, 1998 compared to 0.90% at December 31, 1997. The decline occurred
despite increasing the provision for loan losses by $10,000 over the prior year
three-month period due to net charge-offs increasing $58,000 over the prior year
three-month period. All loans charged-off during the three months ended March
31, 1998 were either installment or credit cards. Despite the decrease in the
allowance for loan losses, $78,000 of the allowance at March 31, 1998 remains
unallocated to any specific loan or loan category. Management is actively
monitoring problem loans and has increased collection efforts to reduce
charge-offs in future periods. Should charge-offs continue, management will
increase the provision for loan losses in order to maintain the allowance for
loan losses at a level adequate to absorb reasonably foreseeable losses in the
loan portfolio.
Total deposits increased $546,000, or 1.19% from December 31, 1997 to March 31,
1998. The increase in deposits was primarily due to the 3.53% increase in
interest-bearing deposits from $38,896,000 on December 31, 1997 to $40,269,000
on March 31, 1998. Noninterest-bearing deposits declined $826,536, or 11.82%,
from December 31, 1997 to March 31, 1998. This decrease was due to cyclical cash
needs by the OSB's large commercial customers.
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. Provisions for loan
losses, service charges, gains on the sale of assets and other income,
noninterest expense and income taxes also affect net income.
Net income for the three months ended March 31, 1998 was $107,000, or $33,000
more than the same period in 1997. The reason for the increase in earnings was
due to improved net interest income.
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15.
16
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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
$78,000 for the three-month period ending March 31, 1998 compared to the same
period in 1997. The increase in net interest income is attributable to OSB
increasing its net loan to deposit ratio from 74.92% on December 31, 1997 to
76.13% as of March 31, 1998. 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 earning assets increased from
$40,315,000 at March 31, 1997 to $47,114,000 and also contributed to the
increase in net interest income.
Noninterest income for the three months ended March 31, 1998 increased $12,000,
or 20.88%, over the same period in the prior year. Noninterest expense was up
$29,000, or 7.25% for the period ending March 31, 1998, versus the three months
ending March 31, 1997. ATM surcharge fees for non customers of the Bank
primarily accounted for the increase in noninterest income. Normal salary
increases plus a change to accrual accounting for OSB's payroll expense resulted
in the increase in noninterest expense.
CAPITAL RESOURCES
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings and other factors, and regulators
can lower classifications in certain ceases. Failure to meet various capital
requirements can initiate regulatory action having a direct material affect on
the operations of the Bank.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
Capital to risk-
weighted assets
---------------- Tier 1 capital
Total Tier 1 to average assets
----- ------ -----------------
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
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17
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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At March 31, 1998 and December 31, 1997, the actual capital ratios for the Bank
were:
March 31, 1998 December 31, 1997
-------------- -----------------
Total capital to risk-weighted assets 10.17% 10.20%
Tier 1 capital to risk-weighted assets 9.47 9.45
Tier 1 capital to average assets 7.42 7.33
At March 31, 1998 and December 31, 1997, 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 $3,494,000 at March 31, 1998 and $3,726,000 at December 31,
1997. These assets provide the primary source of funds for loan demand and
deposit balance fluctuations. Additional sources of liquidity are securities
classified as available for sale and access to Federal Home Loan Bank advances,
as the Bank is a member of the Federal Home Loan Bank of Cincinnati.
Taking into account the capital adequacy, profitability and reputation
maintained by OSB, available liquidity sources are considered adequate to meet
current and projected needs.
YEAR 2000
OSB's strategy and operating plan is to achieve operating readiness to ensure
that its customers are provided uninterrupted services and OSB is able to comply
with all applicable consumer protection statutes as they relate to Year 2000
Compliance.
In January 1998, a committee of its corporate officers was formed to identify
all software systems, equipment and vendors that could possibly be affected by
the Year 2000 century change, devise a detailed testing and confirmation system
that will ensure that all affected systems are tested or certified by the vendor
as of December 31, 1998 and develop contingency plans including the possibility
of changing vendors for any application that OSB is unable to test or certify to
be Year 2000 compliant. The committee will also review all commercial loans to
determine if and to what extent their ability to do business and to repay their
loans will be affected by the Year 2000 century change. Should the committee
determine a business will be affected by the Year 2000 issue, the committee will
notify that customer of its concerns and monitor the progress of that customer
towards the goal of being Year 2000 compliant. Management does not believe that
the associated costs relating to the Year 2000 effort will materially affect
OSB's results of operations, liquidity and capital resources.
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OHIO STATE BANCSHARES, INC.
FORM 10-QSB
Quarter ended March 31, 1998
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 and Use of Proceeds:
-----------------------------------------
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 March 31, 1998.
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18.
19
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: May 13, 1998 /s/ GARY E. PENDLETON
-------------------- ------------------------------------
(Signature)
Gary E. Pendleton
President and Chief Executive
Officer
Date: May 13, 1998 /s/ WILLIAM H. HARRIS
-------------------- ------------------------------------
(Signature)
William H. Harris
Executive Vice President and Cashier
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20
OHIO STATE BANCSHARES, INC.
Index to Exhibits
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EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
- -------------- ----------- -----------
27 Financial Data Schedule 21
99 Safe Harbor Under the Private Incorporated by reference to
Securities Litigation Reform Act Exhibit 99 to Annual Report
of 1995 on Form 10-KSB for the year ended
December 31, 1997 filed by the
Small Business Issuer on March
27, 1998.
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20.