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, 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
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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 August 10, 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 JUNE 30, 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............................................. 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 20
Item 2. Changes in Securities and Use of Proceeds................................. 20
Item 3. Defaults Upon Senior Securities........................................... 20
Item 4. Submission of Matters to a Vote of Security Holders....................... 20
Item 5. Other Information......................................................... 20
Item 6. Exhibits and Reports on Form 8-K.......................................... 20
SIGNATURES ...................................................................... 21
3
OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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June 30, December 31,
1998 1997
---- ----
ASSETS
Cash and due from banks $ 2,397,818 $ 2,669,486
Federal funds sold 902,000 1,057,000
----------- -----------
Total cash and cash equivalents 3,299,818 3,726,486
Interest-earning deposits in other banks -- 199,000
Securities available for sale 8,336,462 7,349,595
Securities held to maturity (Fair values of $2,961,103
at June 30, 1998 and $2,731,413 at December 31, 1997) 2,883,481 2,659,045
Loans, net of allowance for loan losses 37,242,146 34,395,874
Premises and equipment, net 792,954 837,187
Other real estate owned and repossessions 11,120 18,598
Accrued interest receivable 389,951 341,961
Other assets 289,766 266,124
----------- -----------
Total assets $53,245,698 $49,793,870
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 6,565,936 $ 7,012,228
Interest-bearing 42,541,740 38,896,495
----------- -----------
Total 49,107,676 45,908,723
Accrued interest payable 203,395 218,240
Other liabilities 199,494 104,092
----------- -----------
Total liabilities 49,510,565 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 693,551 523,078
Unrealized loss on securities available
for sale, net of tax (1,645) (3,490)
----------- -----------
Total shareholders' equity 3,735,133 3,562,815
----------- -----------
Total liabilities and shareholders' equity $53,245,698 $49,793,870
=========== ===========
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See accompanying notes to the condensed consolidated financial statements.
3.
4
OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $ 867,112 $710,192 $1,691,840 $1,383,534
Taxable securities 115,527 133,047 224,021 269,629
Nontaxable securities 31,254 26,950 60,395 54,600
Other 10,137 10,690 23,125 20,612
---------- -------- ---------- ----------
Total interest income 1,024,030 880,879 1,999,381 1,728,375
INTEREST EXPENSE
Deposits 459,467 385,900 889,959 762,231
Other borrowings 2,012 19,148 2,768 23,916
---------- -------- ---------- ----------
Total interest expense 461,479 405,048 892,727 786,147
---------- -------- ---------- ----------
NET INTEREST INCOME 562,551 475,831 1,106,654 942,228
Provision for loan losses 79,000 25,000 117,000 53,000
---------- -------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 483,551 450,831 989,654 889,228
NONINTEREST INCOME
Fees for other customer services 65,717 52,057 128,705 101,384
Net realized gain on sales of securities
available for sale -- 790 -- 790
Other income 13,643 6,015 21,145 15,001
---------- -------- ---------- ----------
Total noninterest income 79,360 58,862 149,850 117,175
NONINTEREST EXPENSE
Salaries and employee benefits 198,744 185,649 388,833 351,461
Occupancy expense 88,919 80,829 180,328 169,016
Office supplies 23,260 24,217 42,779 45,149
FDIC and state assessments 4,180 4,168 8,303 7,598
Taxes other than income 14,100 12,000 29,480 23,705
Legal and accounting 15,094 14,040 28,833 27,450
Advertising and public relations 12,304 12,852 23,257 32,429
Loss on other real estate owned
and repossessions 10,000 4,000 17,000 13,000
Insurance 6,885 6,892 13,470 13,257
Credit card processing expense 14,666 11,667 26,155 24,338
Director's fees 10,500 7,000 21,000 13,500
Other expenses 32,025 35,474 75,104 73,079
---------- -------- ---------- ----------
Total noninterest expense 430,677 398,788 854,542 793,982
---------- -------- ---------- ----------
Income before federal income taxes 132,234 110,905 284,962 212,421
Income taxes 38,576 30,200 84,189 57,200
---------- -------- ---------- ----------
NET INCOME $ 93,658 $ 80,705 $ 200,773 $ 155,221
========== ======== ========== ==========
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain (loss) on available for
sale securities arising during the period (2,910) 45,097 1,845 6,538
---------- -------- ---------- ----------
COMPREHENSIVE INCOME $ 90,748 $125,802 $ 202,618 $ 161,759
========== ======== ========== ==========
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ .77 $ .67 $ 1.66 $ 1.28
========== ======== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 121,200 121,200 121,200 121,200
========== ======== ========== ==========
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See accompanying notes to the condensed consolidated financial statements.
4.
5
OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
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Six Months Ended
June 30,
--------
1998 1997
---- ----
Balance at beginning of period $3,562,815 $3,225,980
Net income 200,773 155,221
Cash dividends ($.25 per share in 1998 and $.20 per share in 1997) (30,300) (24,240)
Change in unrealized loss on securities available for sale 1,845 6,538
---------- ----------
Balance at end of period $3,735,133 $3,363,499
========== ==========
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See accompanying notes to the condensed consolidated financial statements.
5.
6
OHIO STATE BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended
June 30,
--------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 200,773 $ 155,221
Adjustments to reconcile net income to net cash from operating
activities
Net amortization of premiums 18,801 8,561
Provision for loan losses 117,000 53,000
Depreciation and amortization 59,016 73,858
Net realized gains on securities available for sale -- (790)
Federal Home Loan Bank stock dividend (6,400) (5,000)
Loss on sale of other real estate owned and repossessions 17,000 13,000
Change in accrued interest receivable (47,990) 23,339
Change in accrued interest payable (14,845) (61,797)
Change in other assets and other liabilities 40,510 73,719
----------- -----------
Net cash from operating activities 383,865 333,111
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (2,053,422) (1,267,539)
Proceeds from maturities and principal paydowns 1,059,698 745,347
Proceeds from sales -- 319,915
Securities held to maturity
Purchases (227,185) --
Proceeds from maturities and principal paydowns -- 100,000
Net change in interest-earning deposits in other banks 199,000 100,000
Net change in loans (3,092,254) (2,839,048)
Proceeds from sale of other real estate owned and repossessions 119,460 79,850
Purchases of premises and equipment (14,783) (41,042)
----------- -----------
Net cash from investing activities (4,009,486) (2,802,517)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 3,198,953 1,201,331
Net change in borrowed funds -- 1,294,000
Cash dividends paid -- (24,240)
----------- -----------
Net cash from financing activities 3,198,953 2,471,091
----------- -----------
Net change in cash and cash equivalents (426,668) 1,685
Cash and cash equivalents at beginning of period 3,726,486 2,688,038
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,299,818 $ 2,689,723
=========== ===========
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See accompanying notes to the condensed 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
June 30, 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 flows are expected to be the 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 the 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 six months ended June 30, 1998 and 1997, cash paid for interest was
$907,572 and $847,944, and cash paid for income taxes was $60,000 and $0.
Noncash transfers from loans to other real estate owned and repossessions
totaled $128,982 and $90,788 for the six months ended June 30, 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.
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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.
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.
OSB adopted on January 1, 1998, SFAS No. 130, "Reporting Comprehensive Income,"
issued by the FASB in June 1997. 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.
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(Continued)
8.
9
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements. The Statement also 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.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". SFAS No. 132 amends the disclosure
requirements of previous pension and other postretirement benefit accounting
standards by requiring additional disclosures about such plans as well as
eliminating some disclosures no longer considered useful. SFAS No. 132 also
allows greater aggregation of disclosures for employers with multiple defined
benefit plans. Non-public companies are subject to reduced disclosure
requirements, however, such entities may elect to follow the full disclosure
requirements of SFAS No. 132. SFAS No. 132 will be effective for 1998 and is not
expected to have a significant impact on the OSB's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The key criterion for hedge accounting is that
the hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. SFAS No. 133 does not allow hedging of a
security which is classified as held to maturity, accordingly, upon adoption of
SFAS No. 133, companies may reclassify any security from held to maturity to
available for sale if they wish to be able to hedge the security in the future.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999 with
early adoption encouraged for any fiscal quarter beginning July 1, 1998 or
later, with no retroactive application.
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(Continued)
9.
10
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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NOTE 2 - SECURITIES
Securities at June 30, 1998 and December 31, 1997 were as follows:
June 30, 1998
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
U.S. Treasury securities $1,447,175 $ 5,547 $ -- $1,452,722
Obligations of U.S. government agencies 1,001,770 2,775 -- 1,004,545
Mortgage-backed securities 5,660,470 8,510 19,325 5,649,655
---------- ------- ------- ----------
Total debt securities available for sale 8,109,415 16,832 19,325 8,106,922
Other securities 229,540 -- -- 229,540
---------- ------- ------- ----------
Total securities available for sale $8,338,955 $16,832 $19,325 $8,336,462
========== ======= ======= ==========
HELD TO MATURITY
Obligation of U.S. government agencies $ 500,000 $ -- $ 2,125 $ 497,875
Obligations of states and political
subdivisions 2,383,481 83,284 3,537 2,463,228
---------- ------- ------- ----------
Total securities held to maturity $2,883,481 $83,284 $ 5,662 $2,961,103
========== ======= ======= ==========
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 or six
months ended June 30, 1998. Proceeds from sales of securities classified as
available for sale were $319,915 during the three and six months ended June 30,
1997. Gross gains of $790 were realized on sales in 1997.
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(Continued)
10.
11
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 June 30, 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 $ 497,875
Due in one to five years 2,448,945 2,457,267 -- --
Due in five to ten years -- -- 811,418 856,038
Due after ten years -- -- 1,572,063 1,607,190
Mortgage-backed securities 5,660,470 5,649,655 -- --
Other securities 229,540 229,540 -- --
---------- ---------- ---------- ----------
$8,338,955 $8,336,462 $2,883,481 $2,961,103
========== ========== ========== ==========
Securities with a carrying value of approximately $3,352,000 at June 30, 1998
and $3,938,000 at December 31, 1997 were pledged to secure deposits and for
other purposes.
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at June 30, 1998 and December 31, 1997 were as follows:
June 30, 1998 December 31, 1997
------------- -----------------
Commercial $14,586,946 $13,059,019
Installment 18,711,247 17,474,294
Real estate 3,343,819 3,307,311
Credit card 553,192 595,324
Other 14,696 15,330
----------- -----------
37,209,900 34,451,278
Net deferred loan costs 339,406 255,691
Allowance for loan losses (307,160) (311,095)
----------- -----------
$37,242,146 $34,395,874
=========== ===========
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(Continued)
11.
12
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 six months ended June 30, 1998
and 1997 is as follows:
1998 1997
---- ----
Balance - January 1 $ 311,095 $281,142
Loan charged-off (139,908) (69,008)
Recoveries 18,973 14,204
Provision for loan losses 117,000 53,000
--------- --------
Balance - June 30 $ 307,160 $279,338
========= ========
Impaired loans at June 30, 1998 and December 31, 1997 were as follows:
June 30, 1998 December 31, 1997
------------- -----------------
Period-end impaired loans with allowance
for loan losses allocated $205,000 $282,000
Amount of allowance allocated 20,000 32,000
Impaired loans for the six months ended June 30, 1998 were as follows:
1998
----
Average of impaired loans during the period $269,000
Total interest income recognized during impairment --
Cash-basis interest income recognized --
During the six months ended June 30, 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 $387,754 and $316,880 at
June 30, 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.
- --------------------------------------------------------------------------------
(Continued)
12.
13
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (Continued)
At June 30, 1998 and December 31, 1997, reserves of $382,000 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 June 30, 1998 and December 31, 1997 was
approximately $2,308,000 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 in excess of the amounts 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 June 30, 1998
and at December 31, 1997. Outstanding commitments for credit card rates ranged
from 12.0% to 17.9% as of June 30, 1998 and December 31, 1997. Of the total
outstanding balances on these credit cards at June 30, 1998, 61% were fixed and
39% 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 June 30, 1998 and December 31, 1997 follows:
June 30, 1998 December 31, 1997
------------- -----------------
Commitments to extend $2,446,000 $3,272,000
Credit card arrangements 1,018,000 1,203,000
- --------------------------------------------------------------------------------
(Continued)
13.
14
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (Continued)
At June 30, 1998 and December 31, 1997, the Bank had a line of credit enabling
it to borrow up to $3,716,000 and 3,588,000 with the Federal Home Loan Bank of
Cincinnati. No borrowings were outstanding on this line of credit as of June 30,
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 1998. Upon
expiration, the lease will be continued, rewritten, or terminated. Total rental
expense was $27,774 and $19,374 for the six months ended June 30, 1998.
Rental commitments under these noncancelable operating leases are:
Year ending June 30,
1999 $ 45,748
2000 38,748
2001 38,748
2002 39,852
2003 40,685
Thereafter 577,432
--------
$781,213
========
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14.
15
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 June 30, 1998, compared to December 31, 1997,
and the consolidated results of operations for the three and six months ended
June 30, 1998, compared to the same periods 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.
When used in this Form 10-QSB or future filings by OSB with the Securities and
Exchange Commission, in OSB's press releases or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project," "believe," or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. OSB wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made, and to advise readers that
various factors, including regional and national economic conditions, changes in
levels of market interest rates, credit risks of lending activities and
competitive and regulatory factors, could affect OSB's financial performance and
could cause OSB's actual results for future periods to differ materially from
those anticipated or projected. OSB does not undertake, and specifically
disclaims, any obligation to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
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 6.93% asset growth since December 31, 1997, as total assets
increased $3,452,000 from $49,794,000 at December 31, 1997 to $53,246,000 at
June 30, 1998. Maintaining a moderate growth rate while increasing the loan to
deposit ratio continues to be OSB's primary operating strategy.
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15.
16
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 increased from $10,208,000 at December 31, 1997 to
$11,220,000 at June 30, 1998, an increase of $1,012,000, or 9.92%. It is
management's strategy to maintain securities and other liquid assets at about
their current level as a percentage of total assets.
Net loans increased $2,846,000, or 8.28% during the period from December 31,
1997 to June 30, 1998. This growth was funded primarily by increases in deposit
accounts and when necessary, short-term advances from the Federal Home Loan
Bank. Commercial loans increased 11.70% from $13,059,000 on December 31, 1997 to
$14,587,000 on June 30, 1998. Installment loans grew from $17,474,000 on
December 31, 1997 to $18,711,000 on June 30, 1998, a 7.08% increase.
The allowance for loan losses as a percentage of loans declined to 0.82% at June
30, 1998 compared to 0.90% at December 31, 1997. The decline occurred despite
increasing the provision for loan losses by $54,000 over the prior year
six-month period due to net charge-offs increasing $66,000 over the prior year
six-month period. All loans charged-off during the six months ended June 30,
1998 were either installment or credit cards. Despite the decrease in the
allowance for loan losses, $57,000 of the allowance at June 30, 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 $3,199,000, or 6.97% from December 31, 1997 to June 30,
1998. The increase in deposits was primarily due to the 9.37% increase in
interest-bearing deposits from $38,896,000 on December 31, 1997 to $42,542,000
on June 30, 1998. Noninterest-bearing deposits declined $446,000, or 6.36% from
December 31, 1997 to June 30, 1998. This decrease was due to cyclical cash needs
by the OSB's large commercial customers.
The loan and deposit growth that OSB has experienced is primarily due to changes
in the Company's local market conditions resulting from financial institution
consolidation. Due to the local market conditions, OSB has obtained several new
loan and deposit customers despite spending less money on advertising and, in
certain circumstances, being less interest rate competitive.
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16.
17
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 and six months ended June 30, 1998 was $94,000 and
$201,000, or $13,000 and $46,000 more than the same periods in 1997. The reason
for the increase in earnings was due to improved net interest income.
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
$87,000 and $164,000 for the three and six months ended June 30, 1998 compared
to the same periods 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 75.84% as of June 30, 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
$41,775,000 at June 30, 1997 to $49,671,000 at June 30, 1998, and also
contributed to the increase in net interest income.
Noninterest income increased $20,000, or 34.82% for the three months ended June
30, 1998, and $33,000, or 27.89% for the six months ended June 30, 1998, over
the same periods in the prior year. The increase over the prior periods is
primarily due to ATM surcharge fees for noncustomers of the Bank and commissions
from credit life insurance.
Noninterest expense was up $32,000, or 8.00% for the three months ended June 30,
1998 versus the three months ended June 30, 1997. Noninterest expense increased
$61,000, or 7.63% for the six months ended June 30, 1998, compared to the same
period in the prior year. Normal salary increases plus higher occupancy costs
were the major reasons for the increase in noninterest expense.
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17.
18
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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%
At June 30, 1998 and December 31, 1997, the actual capital ratios for the Bank
were:
June 30, 1998 December 31, 1997
------------- -----------------
Total capital to risk-weighted assets 10.02% 10.20%
Tier 1 capital to risk-weighted assets 9.26 9.45
Tier 1 capital to average assets 7.15 7.33
At June 30, 1998 and December 31, 1997, the Bank was categorized as well
capitalized.
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18.
19
OHIO STATE BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 $3,300,000 at June 30, 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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19.
20
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
Quarter ended June 30, 1998
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
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:
---------------------------------------------------
On April 9, 1998, Ohio State Bancshares, Inc. held the Annual
Meeting of Shareholders at which shareholders voted upon the
election of four directors for a term expiring in 2001. The
results of the voting on these matters were as follows:
Nominee Votes for Withheld
------- --------- --------
Samuel J. Birnbaum 81,203 1,203
Lloyd L. Johnston 81,203 1,203
F. Winton Lackey 81,203 1,203
John D. Owens 81,203 1,203
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: 82,006 AGAINST: 300 ABSTAIN: 100
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, 1998.
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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: August 10, 1998 /s/ Gary E. Pendleton
------------------------------ ------------------------------------
(Signature)
Gary E. Pendleton
President and Chief Executive
Officer
Date: August 10, 1998 /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
- --------------------------------------------------------------------------------
EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
- -------------- ----------- -----------
27 Financial Data Schedule 23
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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22.