1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(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, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
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)
(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 121,200 common shares
outstanding at November 9, 1998
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
2
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 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 ..................... 4
Condensed Consolidated Statements of Comprehensive Income ....... 5
Condensed Consolidated Statements of Changes in
Shareholders' Equity .......................................... 6
Condensed Consolidated Statements of Cash Flows ................. 7
Notes to the Consolidated Financial Statements .................. 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................. 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 22
Item 2. Changes in Securities and Use of Proceeds ..................... 22
Item 3. Defaults Upon Senior Securities ............................... 22
Item 4. Submission of Matters to a Vote of Security Holders ........... 22
Item 5. Other Information ............................................. 22
Item 6. Exhibits and Reports on Form 8-K .............................. 22
SIGNATURES ............................................................. 23
3
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
- ---------------------------------------------------------------------------------------------------
September 30, December 31,
1998 1997
---- ----
ASSETS
Cash and due from banks $ 2,602,037 $ 2,669,486
Federal funds sold 919,000 1,057,000
----------- -----------
Total cash and cash equivalents 3,521,037 3,726,486
Interest-earning deposits in other banks -- 199,000
Securities available for sale 8,800,900 7,349,595
Securities held to maturity (Fair value of $3,241,311
at September 30, 1998 and $2,731,413 at December 31, 1997) 3,099,227 2,659,045
Loans, net of allowance for loan losses 38,837,455 34,395,874
Premises and equipment, net 821,340 837,187
Other real estate owned and repossessions 51,206 18,598
Accrued interest receivable 419,716 341,961
Other assets 354,083 266,124
----------- -----------
Total assets $55,904,954 $49,793,870
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 6,942,862 $ 7,012,228
Interest-bearing 44,610,643 38,896,495
----------- -----------
Total 51,553,505 45,908,723
Accrued interest payable 233,434 218,240
Other liabilities 240,457 104,092
----------- -----------
Total liabilities 52,027,396 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 806,307 523,078
Unrealized gain (loss) on securities available
for sale, net of tax 28,034 (3,490)
----------- -----------
Total shareholders' equity 3,877,568 3,562,815
----------- -----------
Total liabilities and shareholders' equity $55,904,964 $49,793,870
=========== ===========
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See accompanying notes to the condensed consolidated financial statements.
3.
4
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $ 888,617 $786,422 $2,580,457 $2,169,956
Taxable securities 120,258 119,156 344,279 388,785
Nontaxable securities 37,464 26,922 97,859 81,522
Other 13,012 11,661 36,137 32,273
---------- -------- ---------- ----------
Total interest income 1,059,351 944,161 3,058,732 2,672,536
INTEREST EXPENSE
Deposits 487,143 420,098 1,377,102 1,182,329
Other borrowings 253 13,785 3,021 37,701
---------- -------- ---------- ----------
Total interest expense 487,396 433,883 1,380,123 1,220,030
---------- -------- ---------- ----------
NET INTEREST INCOME 571,955 510,278 1,678,609 1,452,506
Provision for loan losses 40,000 24,000 157,000 77,000
---------- -------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 531,955 486,278 1,521,609 1,375,506
NONINTEREST INCOME
Fees for other customer services 67,203 54,765 195,908 156,149
Net realized gain on sales of securities
available for sale -- (296) -- 494
Other income 538 3,381 21,683 18,382
---------- -------- ---------- ----------
Total noninterest income 67,741 57,850 217,591 175,025
NONINTEREST EXPENSE
Salaries and employee benefits 200,378 168,601 589,211 520,062
Occupancy expense 90,168 82,775 270,496 251,791
Office supplies 26,442 20,428 69,221 65,577
FDIC and state assessments 4,559 3,750 12,862 11,348
Taxes other than income 14,100 8,396 43,580 32,101
Legal and accounting 14,220 14,744 43,053 42,194
Advertising and public relations 10,186 13,513 33,443 45,942
Loss on other real estate owned
and repossessions 5,000 8,000 22,000 21,000
Insurance 6,681 6,629 20,151 19,886
Credit card processing expense 13,666 12,529 39,821 36,867
Directors' fees 14,100 9,825 35,100 23,325
Other expenses 38,578 45,247 113,682 118,326
---------- -------- ---------- ----------
Total noninterest expense 438,078 394,437 1,292,620 1,188,419
---------- -------- ---------- ----------
Income before federal income taxes 161,618 149,691 446,580 362,112
Income taxes 48,862 38,032 133,051 95,232
---------- -------- ---------- ----------
NET INCOME $ 112,756 $111,659 $ 313,529 $ 266,880
========== ======== ========== ==========
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ .93 $ .92 $ 2.59 $ 2.20
========== ======== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the condensed consolidated financial statements.
4.
5
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
NET INCOME $112,756 $111,659 $313,529 $266,880
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain (loss) on available for
sale securities arising during the period 29,679 23,975 31,524 31,032
Reclassification for realized amount -- 193 -- (326)
-------- -------- -------- --------
COMPREHENSIVE INCOME $142,435 $135,827 $345,053 $297,586
======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------
See accompanying notes to the condensed consolidated financial statements.
5.
6
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
- -------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
-------------
1998 1997
---- ----
Balance at beginning of period $3,562,815 $3,225,980
Net income 313,529 266,880
Cash dividends ($.25 per share in 1998 and $.20 per share in 1997) (30,300) (24,240)
Change in fair value of securities available for sale 31,524 30,706
---------- ----------
Balance at end of period $3,877,568 $3,499,326
========== ==========
- -------------------------------------------------------------------------------------------------------
See accompanying notes to the condensed consolidated financial statements.
6.
7
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- -----------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
-------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 313,529 $ 266,880
Adjustments to reconcile net income to net cash from
operating activities
Net amortization of premiums 27,880 16,102
Provision for loan losses 157,000 77,000
Depreciation and amortization 86,944 104,830
Net realized gains on securities available for sale -- (494)
Federal Home Loan Bank stock dividend (9,700) (8,100)
Loss on sale of other real estate owned and repossessions 22,000 21,000
Change in accrued interest receivable (77,755) 13,752
Change in accrued interest payable 15,194 (19,814)
Change in other assets and other liabilities 32,166 (51,137)
----------- -----------
Net cash from operating activities 567,258 420,019
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (3,121,323) (1,694,598)
Proceeds from maturities and principal paydowns 1,703,713 1,142,488
Proceeds from sales -- 1,319,603
Securities held to maturity
Purchases (944,293) --
Proceeds from maturities and principal paydowns 500,000 100,000
Net change in interest-earning deposits in other banks 199,000 200,000
Net change in loans (4,806,659) (5,305,690)
Proceeds from sale of other real estate owned and repossessions 153,470 105,280
Purchases of premises and equipment (71,097) (49,419)
----------- -----------
Net cash from investing activities (6,387,189) (4,182,336)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 5,644,782 3,917,445
Cash dividends paid (30,300) (24,240)
----------- -----------
Net cash from financing activities 5,614,482 3,893,205
----------- -----------
Net change in cash and cash equivalents (205,449) 130,888
Cash and cash equivalents at beginning of period 3,726,486 2,688,038
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,521,037 $ 2,818,926
=========== ===========
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See accompanying notes to the condensed consolidated financial statements.
7.
8
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
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, 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 the accounts of OSB
and its wholly-owned subsidiary, The Marion Bank ("Bank"). All significant
intercompany transactions and balances have been eliminated.
Commercial, real estate, and installment loans are made to customers primarily
in Marion County, Ohio. Substantially all loans are secured by specific items of
collateral including business assets, consumer assets and real estate.
Commercial loans are expected to be repaid from cash flow from operations of
businesses. Real estate loans are secured by both residential and commercial
real estate. All operations are in the banking industry.
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 nine months ended September 30, 1998 and 1997, cash paid for interest
was $1,364,929 and $1,239,844, and cash paid for income taxes was $60,000 and
$5,000. Noncash transfers from loans to other real estate owned and
repossessions totaled $208,078 and $115,288 for the nine months ended September
30, 1998 and 1997.
Basic earnings per share is based on weighted-average common shares outstanding.
Diluted earnings per share is not currently applicable since OSB has no common
stock equivalents. The weighted average number of shares outstanding for all
periods presented is 121,200.
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(Continued)
8.
9
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
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 deferred, 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 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)
9.
10
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
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)
10.
11
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
Securities at September 30, 1998 and December 31, 1997 were as follows:
September 30, 1998
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
AVAILABLE FOR SALE
U.S. Treasury securities $1,447,345 $ 25,330 $ -- $1,472,675
Obligations of U.S. government agencies 1,001,523 11,932 -- 1,013,455
Mortgage-backed securities 6,076,716 20,672 15,458 6,081,930
---------- -------- ------- ----------
Total debt securities available for sale 8,525,584 57,934 15,458 8,568,060
Other securities 232,840 -- -- 232,840
---------- -------- ------- ----------
Total securities available for sale $8,758,424 $ 57,934 $15,458 $8,800,900
========== ======== ======= ==========
HELD TO MATURITY
Obligations of states and political
subdivisions $3,099,227 $142,084 $ -- $3,241,311
========== ======== ======= ==========
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
nine months ended September 30, 1998. Proceeds from sales of securities
classified as available for sale were $999,688 and $1,319,603 during the three
and nine months ended September 30, 1997. Gross gains of $156 and gross losses
of $452 were realized on sales during the three month period ending September
30, 1997. Gross gains of $946 and gross losses of $452 were realized on sales
during the nine month period ending September 30, 1997.
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(Continued)
11.
12
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
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,
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 $ 249,968 $ 252,265 $ -- $ --
Due in one to five years 2,198,900 2,233,865 -- --
Due in five to ten years -- -- 960,012 1,017,829
Due after ten years -- -- 2,139,215 2,223,482
Mortgage-backed securities 6,076,716 6,081,930 -- --
Other securities 232,840 232,840 -- --
---------- ---------- ---------- ----------
$8,758,424 $8,800,900 $3,099,227 $3,241,311
========== ========== ========== ==========
Securities with a carrying value of approximately $2,436,000 at September 30,
1998 and $3,938,000 at December 31, 1997 were pledged to secure deposits and for
other purposes.
NOTE 3 - LOANS
Loans at September 30, 1998 and December 31, 1997 were as follows:
September 30, December 31,
1998 1997
---- ----
Commercial $15,057,162 $13,059,019
Installment 19,674,480 17,474,294
Real estate 3,457,838 3,307,311
Credit card 586,779 595,324
Other 27,210 15,330
----------- -----------
38,803,469 34,451,278
Net deferred loan costs 380,394 255,691
Allowance for loan losses (346,408) (311,095)
----------- -----------
$38,837,455 $34,395,874
=========== ===========
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(Continued)
12.
13
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
Activity in the allowance for loan losses for the nine months ended September
30, 1998 and 1997 is as follows:
1998 1997
---- ----
Balance - January 1 $ 311,095 $ 281,142
Loan charged-off (148,207) (118,953)
Recoveries 26,520 29,118
Provision for loan losses 157,000 77,000
--------- ---------
Balance - June 30 $ 346,408 $ 268,307
========= =========
Impaired loans at September 30, 1998 and December 31, 1997 were as follows:
September 30, December 31,
1998 1997
---- ----
Period-end impaired loans with allowance
for loan losses allocated $662,000 $282,000
Amount of allowance allocated 66,000 32,000
Impaired loans for the nine months ended September 30, 1998 were as follows:
1998
----
Average of impaired loans during the period $362,000
Total interest income recognized during impairment --
Cash-basis interest income recognized --
During the nine months ended September 30, 1997, OSB 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 $913,075 and $316,880 at September
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.
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(Continued)
13.
14
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (Continued)
At September 30, 1998 and December 31, 1997, reserves of $425,000 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 September 30, 1998 and December 31,
1997 was approximately $2,409,000 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 5.73% to 15.50% at September 30,
1998 and 6.20% to 11.50% at December 31, 1997. Outstanding commitments for
credit card rates ranged from 12.00% to 17.90% as of September 30, 1998 and
December 31, 1997. Of the total outstanding balances on these credit cards at
September 30, 1998, 56% were fixed and 44% 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 September 30, 1998 and December 31, 1997 follows:
September 30, December 31,
1998 1997
---- ----
Commitments to extend credit $2,083,000 $3,272,000
Credit card arrangements 999,000 1,203,000
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(Continued)
14.
15
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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NOTE 4 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (Continued)
At September 30, 1998 and December 31, 1997, the Bank had a line of credit
enabling it to borrow up to $3,782,000 and $3,588,000 with the Federal Home Loan
Bank of Cincinnati. No borrowings were outstanding on this line of credit as of
September 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 facility, 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 $13,887 and $41,661 for the
three and nine months ended September 30, 1998 and $9,687 and $29,061 for the
three and nine months ended September 30, 1997.
Rental commitments under these noncancelable operating leases are:
Year ending September 30,
1999 $ 41,548
2000 38,748
2001 38,748
2002 40,336
2003 40,685
Thereafter 567,261
--------
$767,326
========
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15.
16
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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INTRODUCTION
The following discussion focuses on the consolidated financial condition of Ohio
State Bancshares, Inc. ("OSB") at September 30, 1998, compared to December 31,
1997, and the consolidated results of operations for the three and nine months
ended September 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 12.27% asset growth since December 31, 1997, as total assets
increased $6,111,000 from $49,794,000 at December 31, 1997 to $55,905,000 at
September 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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16.
17
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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
$11,900,000 at September 30, 1998, an increase of $1,692,000, or 16.58%. 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 $4,442,000, or 12.91% during the period from December 31,
1997 to September 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 15.30% from $13,059,000 on December 31,
1997 to $15,057,000 on September 30, 1998. Installment loans grew from
$17,474,000 on December 31, 1997 to $19,674,000 on September 30, 1998, a 12.59%
increase.
The allowance for loan losses remained almost unchanged at 0.89% of loans as of
September 30, 1998 compared to 0.90% at December 31, 1997. The slight decline
occurred despite increasing the provision for loan losses by $80,000 over the
prior year nine-month period due to net charge-offs increasing $32,000 over the
prior year nine-month period and loan growth. All loans charged-off during the
nine months ended September 30, 1998 were either installment or credit cards.
$21,000 of the allowance at September 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 $5,645,000, or 12.30% from December 31, 1997 to
September 30, 1998. The increase in deposits was primarily due to the 14.69%
increase in interest-bearing deposits from $38,896,000 on December 31, 1997 to
$44,611,000 on September 30, 1998. Noninterest-bearing deposits declined
$69,000, or 0.99% from December 31, 1997 to September 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 during 1998 is primarily
due to changes in the 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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17.
18
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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 nine months ended September 30, 1998 was $113,000
and $314,000, or $1,000 and $47,000 more than the same periods in 1997. The
reason for the increase in earnings was primarily due to improved net interest
income partially offset by increases in the provision for loan losses and
noninterest expense.
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
$62,000 and $226,000 for the three and nine months ended September 30, 1998
compared to the same periods in 1997. The increase in net interest income is
attributable to OSB's earning assets increasing from $43,798,000 at September
30, 1997 to $52,003,000 at September 30, 1998. OSB increased its net loan to
deposit ratio from 74.92% on December 31, 1997 to 75.33% as of September 30,
1998 which also contributed to the increase in net interest income. Increasing
the loan to deposit ratio usually improves the net interest margin as loans
typically earn a higher yield than other investing alternatives.
Noninterest income increased $10,000, or 17.10% for the three months ended
September 30, 1998, and $43,000, or 24.32% for the nine months ended September
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 $44,000, or 11.06% for the three months ended
September 30, 1998 versus the three months ended September 30, 1997. Noninterest
expense increased $104,000, or 8.77% for the nine months ended September 30,
1998, compared to the same period in the prior year. Normal salary increases and
the hiring of additional personnel plus higher occupancy costs were the major
reasons for the increase in noninterest expense.
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18.
19
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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 September 30, 1998 and December 31, 1997, the actual capital ratios for the
Bank were:
September 30, December 31,
1998 1997
---- ----
Total capital to risk-weighted assets 9.87% 10.20%
Tier 1 capital to risk-weighted assets 9.05 9.45
Tier 1 capital to average assets 7.02 7.33
At September 30, 1998, the Bank was categorized as adequately capitalized rather
than well capitalized due to the growth of the Bank exceeding capital retention.
OSB is in the process of filing the required Registration Statements to sell
approximately $1,166,000 of its stock. The proceeds from the stock offering will
be infused into the Bank. As a result, management anticipates the Bank will
regain its well capitalized classification at December 31, 1998. Federal deposit
insurance premiums are assessed based upon regulatory capital ratios at June 30
and December 31 of each year. Thus, the Bank's status as adequately capitalized
at September 30, 1998 will not result in increased deposit insurance premiums.
At December 31, 1997, the Bank was categorized as well capitalized.
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19.
20
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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 $3,521,000 at September 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 subsidiary Bank's lending and deposit activities are almost entirely
dependent on computer systems which process and record transactions. In addition
to its basic operating activities, OSB's facilities and infrastructure, such as
security systems and communications equipment, are dependent to varying degrees
on computer systems. Management is aware of the potential Year 2000 related
problems that may affect the computers that control or operate OSB's operating
systems, facilities and infrastructure. 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
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.
Management has evaluated its computer hardware and software and has contacted
the companies that supply or service OSB's computer-operated or -dependent
systems to obtain confirmation that each such system that is material to the
operations of the Bank is either currently Year 2000 compliant or is expected to
be Year 2000 compliant. The Bank uses software of a nationally recognized
software provider that specializes in financial institutions which somewhat
mitigates the risk associated with the Year 2000 issue. As of September 30,
1998, OSB has incurred costs of approximately $60,000 related to Year 2000
compliance. The primary expenditures have been for upgraded teller software and
new personal computers. Management estimates another $40,000 will be expended in
1999 for onsite and offsite software testing and additional personal computers.
With respect to systems that cannot presently be
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20.
21
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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confirmed as Year 2000 compliant, management will continue to work with the
appropriate supplier or servicer to ensure that all such systems will be
rendered compliant in a timely manner, with minimal expense to OSB or disruption
of the Bank's operations. Management anticipates Year 2000 compliance testing
will be completed by the first quarter of 1999 for its mission critical systems.
If the test results exhibit noncompliance with Year 2000 with respect to any
systems, the failure of which would have a material adverse effect on the Bank's
operations, financial condition or results, OSB would then identify and contract
with suppliers and servicers who are able to certify Year 2000 compliance.
In addition to possible expense related to its own systems, the Bank could incur
losses if loan payments are delayed due to Year 2000 problems affecting any of
the Bank's significant borrowers or impairing the payroll systems of large
employers in the Bank's primary market area. As a result, the Year 2000
committee will 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. Because the Bank's loan portfolio is highly diversified
with regard to individual borrowers and types of businesses and the Bank's
primary market area is not significantly dependent upon one employer or
industry, the Bank does not expect any significant or prolonged Year 2000
related difficulties that will affect net earnings or cash flow.
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21.
22
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
Quarter ended September 30, 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 September 30,
1998.
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22.
23
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, 1998 /s/ Gary E. Pendleton
---------------------- --------------------------------
(Signature)
Gary E. Pendleton
President and Chief Executive
Officer
Date: November 12, 1998 /s/ William H. Harris
---------------------- --------------------------------
(Signature)
William H. Harris
Executive Vice President and Cashier
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23.
24
OHIO STATE BANCSHARES, INC.
Index to Exhibits
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EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
- -------------- ----------- -----------
27 Financial Data Schedule 25
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,
1997 filed by the Small
Business Issuer on March
27, 1998.
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24.