<PAGE> 1
OHIO STATE BANCSHARES, INC.
MARION, OHIO
ANNUAL REPORT
December 31, 1996
<PAGE> 2
OHIO STATE BANCSHARES, INC.
ANNUAL REPORT
December 31, 1996
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
President's Letter.......................................................................................... 1
Comparative Summary of Selected Financial Data.............................................................. 2
Form 10-KSB ............................................................................................. 3
INDEX
PART I
Item 1. Description of Business...................................................................... 5
Item 2. Description of Property...................................................................... 6
Item 3. Legal Proceedings............................................................................ 6
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 7
PART II
Item 5. Market for Common Equity and Related Stockholder Matters..................................... 7
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................ 8
Item 7. Financial Statements......................................................................... 23
Independent Auditors' Report................................................................. 23
Consolidated Financial Statements............................................................ 24
Notes to Consolidated Financial Statements................................................... 28
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................................... 44
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.......................................... 44
Item 10. Executive Compensation....................................................................... 44
Item 11. Security Ownership of Certain Beneficial Owners and Management............................... 44
Item 12. Certain Relationships and Related Transactions............................................... 44
Item 13. Exhibits List and Reports on Form 8-K........................................................ 45
Signatures............................................................................................. 46
Board of Directors.......................................................................................... 47
Officers ............................................................................................. 48
</TABLE>
<PAGE> 3
FROM THE PRESIDENT:
1996 was a year in which several major projects were completed. On May 16, 1996,
after several long and disappointing delays, Ohio State Bancshares, Inc. (OSB)
finally became a reality. The holding company formation resulted in the one for
one exchange of Bank stock for OSB stock. December 6, 1996 saw the opening of
our first Branch office located at 220 Richland Road. Of course, we believe the
Branch to be the most attractive and best located Banking office in Marion.
After the tremendous growth experienced in 1995 and the continual narrowing of
interest rate spreads due mainly to competitive factors, prudence seemed to
dictate a slower growth in 1996. The slower growth allowed shareholders' equity
as a percentage of total assets to increase along with the book value of the
stock, even though earnings were not at the 1995 level. The loan to deposit
ratio has increased from 59.70% to 69.86% over the last 12 months and the net
interest margin has been increasing steadily from a low in April of 1996.
Goals for 1997 include increasing earnings over 1996 levels while absorbing the
operational costs from the new Branch office and continually looking for ways to
control or lower operating costs. While cost control is always a must, we are
also looking for ways to increase revenue through off-balance sheet services.
I would like to personally thank our Directors, Employees and Customers for
their support, loyalty and confidence. We could not have realized our past
successes or accomplish our goals for the future without them.
Sincerely,
Gary E. Pendleton
President/CEO
1
<PAGE> 4
COMPARATIVE SUMMARY OF SELECTED FINANCIAL DATA
as of or for the Years Ending December 31, (000's except per share data)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total interest income $ 3,286 $ 3,084 $ 2,342 $ 2,199 $ 2,175
Total interest expense 1,540 1,340 819 766 915
----------- ---------- ---------- ---------- ----------
Net interest income 1,746 1,744 1,523 1,433 1,260
Provision for loan losses 163 82 56 169 83
----------- ---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 1,583 1,662 1,467 1,264 1,177
Noninterest income 241 279 293 278 216
Noninterest expense 1,465 1,513 1,435 1,338 1,279
----------- ---------- ---------- ---------- ----------
Income before income taxes 359 428 325 204 114
Provision for income taxes 100 55 -- -- --
----------- ---------- ---------- ---------- ----------
Net income $ 259 $ 373 $ 325 $ 204 $ 114
=========== ========== ========== ========== ==========
PER SHARE DATA:
Net income per common share $ 2.14 $ 3.08 $ 2.68 $ 1.69 $ 0.96
Book value per share at year-end 26.62(1) 25.22(1) 19.69(1) 19.97 18.64
Cash dividends per share 0.40 0.30 0.20 0.10 0.00
Number of shares used in net income
per share calculations 121,200 121,200 121,200 121,200 119,548
BALANCE SHEET DATA:
Total assets $ 43,056 $ 41,744 $ 34,836 $ 31,465 $ 29,285
Total securities 10,719 13,703 9,019 9,054 6,708
Total net loans 27,573 22,861 20,963 17,535 17,412
Allowance for loan losses 281 252 265 339 209
Total deposits 39,469 38,291 32,258 28,950 26,893
Shareholders' equity 3,226 3,057 2,387 2,420 2,228
OPERATING RATIOS:
Total net loans to total deposits 69.86% 59.70% 64.99% 60.57% 64.75%
Total shareholders' equity to total assets 7.49 7.32 6.85 7.69 7.61
Average shareholders' equity
to average assets 7.43 7.33 7.66 7.92 7.71
Return on average equity 8.32 13.38 13.22 8.71 5.41
Return on average assets 0.62 0.98 1.01 0.69 0.42
Total interest expense to interest income 46.86 43.45 34.97 34.83 42.07
Allowance for loan losses
to total loans 1.01 1.09 1.25 1.93 1.20
Average assets $ 41,994 $ 37,992 $ 32,073 $ 29,604 $ 27,412
Average shareholders' equity 3,119 2,786 2,458 2,346 2,113
<FN>
(1) Based on outstanding shares at the end of the period after considering the
unrealized loss on securities available for sale in 1996, 1995 and 1994.
Book value per share before this adjustment would have been $26.96, $25.22
and $22.45, respectively.
Averages used herein, unless indicated otherwise, are based on daily
averages.
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
2
<PAGE> 5
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from .................... to..................
Commission File No. 0-28648
OHIO STATE BANCSHARES, INC.
---------------------------
(Name of small business issuer in its charter)
OHIO 34-1579601
- ---- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
111 South Main Street, Marion, Ohio 43302
- ----------------------------------- -----
(Address of principal executive offices) (Zip code)
(614) 387-2265
- --------------
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Shares, $10.00 par value
(Title of class)
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenue for the year ended December 31, 1996 was: $3,526,434
At March 1, 1997, there were issued and outstanding 121,200 of the Issuer's
Common Shares.
The aggregate market value of the Issuer's voting stock held by nonaffiliates of
the Issuer as of March 1, 1997 was $3,546,076.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Issuer's Proxy Statement to be dated approximately March 21,
1997, are incorporated by reference into Item 9. Directors, Executive Officers,
Promoters and Control Persons; Compliance with Section 16(a) of the Exchange
Act; Item 10. Executive Compensation; Item 11. Security Ownership of Certain
Beneficial Owners and Management; and Item 12. Certain Relationships and Related
Transactions, of Part III.
Transitional Small Business Disclosure Form (check one):
Yes [ ] No [X]
- --------------------------------------------------------------------------------
3
<PAGE> 6
INDEX
FORM 10-KSB
<TABLE>
<CAPTION>
PART I
- ------
<S> <C> <C>
ITEM 1. Description of Business...................................................... 5
ITEM 2. Description of Property...................................................... 6
ITEM 3. Legal Proceedings............................................................ 6
ITEM 4. Submission of Matters to a Vote of Security Holders.......................... 7
PART II
- -------
ITEM 5. Market for Common Equity and Related Stockholder Matters..................... 7
ITEM 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 8
ITEM 7. Financial Statements......................................................... 23
ITEM 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................................... 44
PART III
- --------
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act............................ 44
ITEM 10. Executive Compensation....................................................... 44
ITEM 11. Security Ownership of Certain Beneficial Owners and Management............... 44
ITEM 12. Certain Relationships and Related Transactions............................... 44
ITEM 13. Exhibits and Reports on Form 8-K............................................. 45
SIGNATURES ............................................................................. 46
</TABLE>
- --------------------------------------------------------------------------------
4
<PAGE> 7
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
BUSINESS
- --------
At the annual shareholders' meeting held on April 13, 1995, the Marion Bank's
("Bank") shareholders approved a plan of reorganization whereby they would
exchange their shares of Bank stock for the common stock of Ohio State
Bancshares, Inc. ("Corporation"). The Corporation received approval from the
Board of Governors of the Federal Reserve System during early 1996 and the
reorganization was consummated on May 16, 1996. The principal business of the
Corporation is presently to operate the Bank, which is a wholly owned subsidiary
and its principal asset. The Corporation and the main office of the Bank are
located at 111 South Main Street, Marion, Ohio 43302. The Corporation's
telephone number is (614) 387-2265.
Although wholly owned by the Corporation, the Bank functions as an independent
community bank. The Bank was chartered as an Ohio banking corporation on March
24, 1988 and commenced operations on August 23, 1988. The Bank offers a full
range of commercial banking services, including commercial loans, real estate
loans and various types of consumer loans; checking, savings and time deposits;
money market accounts; travelers checks; pre-approved overdraft protection; safe
deposit boxes and other customary nondeposit banking services. The Bank is an
agent for Mastercard and Visa credit cards and is a merchant depository for
cardholder sales drafts. At the present time the Bank does not have a trust
department, but can provide access to this service through correspondent banks.
The Bank is a member of 24-hour automated teller networks. It also offers two
lanes of drive-up banking services at each banking location.
The nature of the Bank allows for full diversification of depositors and
borrowers so it is not dependent upon a single or a few customers. Most of the
Bank's deposits are attracted from individuals and moderate business related
sources. No material portion of the Bank's loans are concentrated within a
single industry or group of related industries. The business of the Bank is
somewhat seasonal in nature due to lending activities in the agricultural and
automobile markets.
The Corporation is not aware of any exposure to material costs associated with
environmental hazardous waste cleanup. Bank loan procedures require EPA studies
be obtained by Bank management prior to approving any commercial real estate
loan with such potential risk.
- --------------------------------------------------------------------------------
(Continued)
5
<PAGE> 8
ITEM 1 - DESCRIPTION OF BUSINESS (Continued)
SUPERVISION AND REGULATION
- --------------------------
REGULATION OF THE CORPORATION: The Corporation is a registered bank holding
company organized under the laws of the State of Ohio. As such, the Corporation
is subject to the laws of the State of Ohio and is under the jurisdiction of the
Securities Act of 1933, as amended, and various Securities and Exchange
Commission rules and regulations relating to the offering and sale of its
securities. The Corporation is also subject to regulation under the Bank Holding
Company Act of 1956 as amended. The Federal Reserve Board regulates bank holding
companies and may examine or inspect the books and records of the Corporation
and the Bank.
The Corporation is not aware of any current recommendations by regulatory
authorities that, if they were to be implemented, would have a material effect
on the Corporation.
REGULATION OF THE BANK: The Bank is chartered in the State of Ohio and regulated
by the Ohio Division of Financial Institutions. Further, the Bank's depositors
are insured by the Federal Deposit Insurance Corporation. These regulatory
agencies have the authority to examine the books and records of the Bank, and
the Bank is subject to their rules and regulations.
EMPLOYEES
- ---------
As of December 31, 1996, the Bank employed 19 full-time and 6 part-time
employees.
ITEM 2 - DESCRIPTION OF PROPERTY
The Bank's main office is located in downtown Marion, Ohio. The Bank opened one
additional full service branch at 220 Richland Road, Marion, Ohio in December
1996. The branch provides a full range of financial services including two
drive-thru lanes, a full service ATM machine and night deposit capabilities. The
branch expanded the Bank into the eastern part of Marion to better serve its
existing customers in that area. The Bank opened two Customer-Bank Communication
Terminals (ATM sites) in Marion in 1995. The Bank owns all premises related to
its main office and leases its new branch under an operating lease. All such
premises are suitable for their intended use. Management believes all properties
are in excellent condition and are adequately covered by insurance.
ITEM 3 - LEGAL PROCEEDINGS
Corporation management is aware of no pending or threatened litigation in which
the Corporation or its subsidiary Bank faces potential loss or exposure which
will materially affect the consolidated financial statements or involves a claim
for damages exceeding ten percent of the assets of the Corporation.
- --------------------------------------------------------------------------------
(Continued)
6
<PAGE> 9
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Corporation's fiscal year ended December 31, 1996.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The common stock of the Corporation, and of the Bank preceding formation of the
Corporation, trades infrequently and is not traded on any established securities
market. Parties interested in buying or selling the Corporation's stock are
generally referred to Community Banc Investments, New Concord, Ohio (CBI).
For 1996 and 1995, bid and ask quotations were obtained from CBI which makes a
limited market in the Corporation's stock. The quotations are inter-dealer
prices, without retail markup, markdown or commission and may not represent
actual transactions.
<TABLE>
<CAPTION>
1996 (1) LOW BID HIGH BID LOW ASK HIGH ASK
---- ------- -------- ------- --------
<S> <C> <C> <C> <C>
1st Qtr. $ 30.00 $ 30.00 $ 32.00 $ 32.00
2nd Qtr. 30.00 30.00 32.00 32.00
3rd Qtr. 30.00 31.00 32.00 33.00
4th Qtr. 31.00 33.50 33.00 35.50
1995 (1) LOW BID HIGH BID LOW ASK HIGH ASK
---- ------- -------- ------- --------
1st Qtr $ 26.50 $ 26.50 $ 28.50 $ 28.50
2nd Qtr. 26.50 28.00 28.50 30.00
3rd Qtr. 28.00 28.00 30.00 30.00
4th Qtr. 28.00 30.00 30.00 32.00
<FN>
(1) All information presented above relates to the Corporation for the
period since its formation and to the Bank for the periods prior to
formation of the Corporation.
</TABLE>
Management does not have knowledge of the prices paid in all transactions and
has not verified the accuracy of those prices that have been reported. Because
of the lack of an established market for the Corporation's stock, these prices
may not reflect the prices at which the stock would trade in an active market.
The Corporation has 121,200 authorized and outstanding shares of common stock
held by approximately 494 shareholders as of December 31, 1996. The Corporation
paid cash dividends in June and December of each year, resulting in a total
amount of $0.40 per share in 1996 and $0.30 per share in 1995.
- --------------------------------------------------------------------------------
(Continued)
7
<PAGE> 10
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In the following pages, management presents an analysis of Ohio State
Bancshares, Inc.'s financial condition and results of operations as of and for
the year ended December 31, 1996 as compared to the prior year. This discussion
is designed to provide shareholders with a more comprehensive review of the
operating results and financial position than could be obtained from an
examination of the financial statements alone. This analysis should be read in
conjunction with the consolidated financial statements and related footnotes and
the selected financial data included elsewhere in this report.
RESULTS OF OPERATIONS
Net income for the Corporation was $259,000 in 1996 or $114,000 less than the
$373,000 earned in 1995. The reason for the decrease was threefold. First, the
Corporation was fully taxable in 1996 for the first time resulting in $99,000
being recorded as federal income tax expense versus only $55,000 in 1995.
Secondly, the Corporation increased the amount provided into reserve for loan
losses from $82,000 in 1995 to $163,000 in 1996, an $81,000 increase. This was
due to an increase in installment loan losses in 1996 and a substantial growth
in the installment loan portfolio. Thirdly, the Corporation earned $279,000 in
noninterest income in 1995, compared to $241,000 in 1996. This decrease in 1996
was the result of a one-time profit on the sale of small business administration
guaranteed loans in 1995.
- --------------------------------------------------------------------------------
(Continued)
8
<PAGE> 11
NET INTEREST INCOME
Net interest income is the amount of interest earned on loans and securities
that exceeds the interest cost of deposits and other borrowings. Net interest
income is affected by the volume and composition of earning assets and
interest-bearing liabilities, as well as indirectly affected by
noninterest-bearing liabilities and shareholders' equity totals. Additionally,
the market level of interest rates and the resultant competitive rate decisions
made by management can impact net interest income. Interest rates charged on
loans are affected principally by the demand for such loans, the supply of money
available for lending purposes and competitive factors. These factors are, in
turn, affected by general economic conditions and other factors beyond the
Corporation's control, such as federal economic policies, the general supply of
money in the economy, legislative tax policies, governmental budgetary matters
and the actions of the Board of Governors of the Federal Reserve System.
Net interest income increased only $2,000 from 1995 to 1996. The net interest
margin, which is net interest income divided by average earning assets, declined
41 basis points from 4.93% for 1995 to 4.52% for 1996. The margin decline was
offset by increased volumes of interest-earning assets.
Total interest income increased $202,000 despite the yield on earning assets
declining from 8.70% to 8.44%. Loans were the primary reason for both the
increase in total interest income and the decline in yield. Interest and fees on
loans increased $245,000 due to an increase in the average balance of $3,356,000
in 1996. However, the yield on loans declined from 10.12% to 9.75%. As loans are
the largest component of interest-earning assets, they were the primary
contributor to the decreased yield. Interest on nontaxable securities increased
from $26,000 in 1995 to $91,000 in 1996 as management employed strategies to
lessen the impact of the Corporation's first full year of being taxable.
Total interest expense increased by $200,000. The change was the result of
average interest-bearing liabilities increasing by $3,159,000 combined with the
rate paid on interest-bearing liabilities increasing by 19 basis points.
Interest on time deposits made up the majority of the increase in interest
expense as the average rate paid on certificates of deposits increased from
5.67% to 5.76% while average time deposits accounted for 58.7% of average total
interest-bearing liabilities in 1996 compared to 55.0% in 1995.
- --------------------------------------------------------------------------------
(Continued)
9
<PAGE> 12
NET INTEREST INCOME (Continued)
The following tables further illustrate the impact on net interest income from
changes in average balances and yields of the Corporation's assets and
liabilities.
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
(in thousands except percentages)
1996 1995
-------------------------------- -------------------------------
Average Interest Average Interest
Average Yield or Earned Average Yield or Earned
Balance Rate Paid or Paid Balance Rate Paid or Paid
------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
INTEREST-EARNING ASSETS:
Interest-earning deposits $ 546 5.86% $ 32 $ 572 5.59% $ 32
Federal funds sold 468 5.56 26 1,510 5.76 87
Securities
Taxable 10,911 5.91 651 10,606 6.45 698
Nontaxable 1,707 6.91 118 481 6.86 33
Loans 25,507 9.75 2,486 22,151 10.12 2,241
--------- -------- --------- ---------
TOTAL INTEREST-EARNING ASSETS 39,139 8.44 3,313 35,320 8.70 3,091
--------- -------- --------- ---------
NONINTEREST-EARNING ASSETS:
Cash and due from banks 1,737 1,670
Premises and equipment, net 803 758
Other real estate owned
and repossessions 27 95
Accrued interest and other assets 552 428
Less: Allowance for loan losses (264) (279)
--------- ---------
TOTAL NONINTEREST-EARNING ASSETS 2,855 2,672
--------- ---------
TOTAL ASSETS $ 41,994 $ 37,992
========= =========
LIABILITIES AND SHAREHOLDERS EQUITY:
INTEREST-BEARING LIABILITIES:
NOW deposits $ 5,238 1.91 100 $ 5,273 1.93 102
Savings and money market deposits 8,485 2.92 248 8,764 2.96 259
Time deposits:
Under $100,000 14,182 5.84 828 12,697 5.63 715
Over $100,000 5,987 5.58 334 4,507 5.79 261
Other borrowings 548 5.47 30 40 7.50 3
--------- -------- --------- ---------
TOTAL INTEREST-BEARING LIABILITIES 34,440 4.47 1,540 31,281 4.28 1,340
--------- -------- --------- ---------
NONINTEREST-BEARING LIABILITIES:
Demand deposits 4,036 3,645
Accrued interest payable
and other liabilities 399 280
--------- ---------
TOTAL NONINTEREST-BEARING LIABILITIES 4,435 3,925
--------- ---------
TOTAL LIABILITIES 38,875 35,206
TOTAL SHAREHOLDERS' EQUITY 3,119 2,786
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 41,994 $ 37,992
========= =========
NET INTEREST INCOME $ 1,773 $ 1,751
======== =========
NET INTEREST SPREAD 3.97% 4.42%
====== =======
NET YIELD ON INTEREST
EARNING ASSETS 4.52% 4.93%
====== =======
</TABLE>
Yields and amounts earned on loans include loan fees and late charges of $11,324
and $6,091 for the years ended December 31, 1996 and 1995, respectively.
Nonaccruing loans are included in the daily average loan amounts outstanding.
Yields on nontaxable investment securities have been computed on a fully tax
equivalent basis utilizing a 34% tax rate. The historical amortized cost average
balance of $11,006,000 for 1996 and $10,824,000 for 1995 was used to calculate
yields for taxable securities. The average balance for securities represents the
carrying value of securities. The net yield on interest-earning assets was
computed by dividing net interest income by total interest-earning assets
without the market value adjustment related to available-for-sale securities.
- --------------------------------------------------------------------------------
(Continued)
10
<PAGE> 13
NET INTEREST INCOME (Continued)
The following table presents the changes in the Corporation's interest income
and interest expense resulting from changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities. Changes
attributable to both rate and volume which cannot be segregated have been
allocated in proportion to the changes due to rate and volume.
INTEREST RATES AND INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
Increase/(Decrease) Increase/(Decrease)
------------------- -------------------
(In thousands)
Change Change Change Change
Total due to due to Total due to due to
Change Volume Rate Change Volume Rate
------ ------ ---- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits $ -- $ (1) $ 1 $ (10) $ (10) $ --
Federal funds sold (61) (58) (3) 65 44 21
Securities
Taxable (47) 12 (59) 194 96 98
Nontaxable (1) 85 85 -- 33 33 --
Loans (2) 245 330 (85) 467 251 216
------- ------- -------- -------- -------- --------
Total interest income 222 368 (146) 749 414 335
------- ------- -------- -------- -------- --------
Deposits
NOW accounts (2) (1) (1) 16 6 10
Savings deposits (11) (8) (3) (15) (30) 15
Time deposits less than $100,000 113 86 27 359 203 156
Time deposits greater than $100,000 73 83 (10) 187 111 76
Other borrowings 27 28 (1) (26) (36) 10
------- ------- -------- -------- -------- --------
Total interest expense 200 188 12 521 254 267
------- ------- -------- -------- -------- --------
Net interest income $ 22 $ 180 $ (158) $ 228 $ 160 $ 68
======= ======= ======== ======== ======== ========
<FN>
(1) Nontaxable income is adjusted to a fully tax equivalent basis utilizing a
34% tax rate.
(2) Nonaccrual loan balances are included for purposes of computing the rate
and volume effects although interest on these balances has been excluded.
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
11
<PAGE> 14
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The Corporation maintains an allowance for loan losses that management considers
adequate to provide for any potential losses in the loan portfolio. A grading
system is utilized for the commercial loan portfolio. The Loan Review Committee
of the Board reviews, on a quarterly basis, the status of all credit
relationships of $100,000 or more excluding residential mortgages and assigns or
reassigns judgmental grades based on a mathematical system. The grades indicate
the risk level of the loans to the Corporation and loss allowances are, in part,
established from this analysis. Management analyzes loans on an individual basis
and classifies a loan as impaired when an analysis of the borrower's operating
results and financial condition indicates that underlying cash flows are not
adequate to meet the debt service requirements. Often this is associated with a
delay or shortfall in payments of 30 days or more. Smaller-balance homogeneous
loans are evaluated for impairment in total. Such loans include residential
first mortgage loans secured by one- to four-family residences, residential
construction loans, consumer automobile, home equity and credit card loans with
balances less than $300,000. In addition, leases are excluded from impairment
consideration. The Corporation evaluates the remaining loan portfolio and
establishes loss allowances based on historical loan loss data, which the
Corporation has been accumulating since its inception, as well as anticipated
credit losses. At year-end 1996, the allowance had a balance of $281,142 (1.01%
of total loans).
The following table sets forth the amount of loans which were on nonaccrual
status, were past due 90 days or more (in payment of interest or principal), or
were impaired.
<TABLE>
<CAPTION>
Nonaccrual, Past Due and Impaired Loans at December 31,
-------------------------------------------------------
(In thousands)
1996 1995
---- ----
<S> <C> <C>
Nonaccrual loans $ 29 $ 15
Loans past due 90 days or more,
excluding nonaccrual loans 40 40
Impaired loans -- --
------------ ------------
Total $ 69 $ 55
============ ============
</TABLE>
The Corporation's policy for placing loans on nonaccrual status is that the
Corporation will not accrue interest income on loans (other than consumer loans)
which are contractually past due as to principal or interest by 60 days, unless
collection is assured.
The following chart presents only those watchlist loans at December 31, 1996,
that are not reported above as delinquent or nonaccrual. Watchlist loans include
the majority of loans 90 days or more delinquent, all commercial loans with an
internal loan grade of E (substandard) or less, and all nonaccrual loans unless
the loans are well secured or in the process of collection. Additionally, loan
officers may request a loan be added to the watchlist if they suspect payback
problems may arise and feel the need for frequent reviews.
<TABLE>
<CAPTION>
Type of Loan: Number of Loans Watchlist Amount
----------------------------------------------------------------------
<S> <C> <C>
Installment 5 $ 26,860
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
12
<PAGE> 15
ALLOWANCE AND PROVISION FOR LOAN LOSSES (Continued)
The following table shows activity in the allowance for loan losses and
pertinent ratios during the years indicated.
<TABLE>
<CAPTION>
1996 1995
(in thousands)
<S> <C> <C>
Allowance for loan losses:
Balance at beginning of period $ 252 $ 265
Loans charged off:
Commercial (7) --
Real estate -- --
Installment (159) (118)
------------ ------------
Total loans charged off: (166) (118)
------------ ------------
Recoveries of loans previously charged off:
Commercial -- 3
Real estate -- --
Installment 32 20
------------ ------------
Total loan recoveries 32 23
------------ ------------
Net loans charged off (134) (95)
Provision charged to operating expense 163 82
------------ ------------
Balance at end of period $ 281 $ 252
============ ============
</TABLE>
<TABLE>
<CAPTION>
Ratios:
<S> <C> <C>
Net loans charged off to average loans 0.53% 0.43%
Net loans charged off to total loans at end of period 0.48% 0.41%
Allowance for loan losses to average loans 1.10% 1.14%
Allowance for loan losses to total loans at end of period 1.01% 1.09%
Net loans charged off to allowance for loan losses at end of period 47.69% 37.70%
Net loans charged off to provision for loan losses 82.21% 115.85%
</TABLE>
The following schedule is a breakdown of the allowance for loan losses allocated
by type of loan.
<TABLE>
<CAPTION>
-----------Allocation of the Allowance for Loan Losses-----------
Percentage of Percentage of
Loans in Each Loans in Each
Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C> <C> <C>
Commercial $ 7,581 37.51% $ 49,774 39.12%
Real Estate 2,288 9.96 14,805 12.68
Installment 114,156 50.40 162,768 45.10
Credit Cards 10,793 2.00 22,030 2.88
Other 116 .13 2,797 0.22
Unallocated 146,208 N/A 0 N/A
------------- --------- -------------- ---------
Total Allocation $ 281,142 100.00% $ 252,174 100.00%
============= ======== ============== =========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
13
<PAGE> 16
NONINTEREST INCOME
Noninterest income decreased from $279,000 in 1995 to $241,000 in 1996, a 13.74%
decrease. Noninterest income consists of fees on deposits and checking accounts,
fees on other services and gains resulting from the sale of loans or securities.
Fees on deposits and checking were on plan in 1996 and similar to 1995 levels.
In 1995, the Corporation had gains on the sale of guaranteed portions of small
business administration loans of approximately $35,000. No gains were recognized
in 1996 as there were not similar sales.
NONINTEREST EXPENSE
These expenses are broken into three major categories which include personnel
expense, occupancy expense and other operating expenses. Noninterest expense to
total assets decreased from 3.62% in 1995 to 3.40% in 1996. Personnel expense
increased 4.09% from 1995 to 1996, as a result of normal salary increases.
Occupancy expenses increased from $225,000 in 1995 to $257,000 in 1996, a 14.53%
increase. This was due primarily to expenses incurred at the Bank's new Richland
Road branch in November and December of 1996. All other operating expenses
decreased 16.91% from $633,000 in 1995 to $526,000 in 1996. Decreases in FDIC
deposit insurance assessments and the completion of a one-time severance pay
agreement were the main factors in the operating expense decrease.
INCOME TAXES
The Corporation was fully taxable for the first time in its history in 1996
resulting in an increase in federal income tax from $55,000 in 1995 to $99,000
in 1996. The Corporation reduced its effective tax rate from the statutory rate
of 34% to 27.7% by investing in tax free municipal bonds.
FINANCIAL CONDITION
TOTAL ASSETS
Total assets grew from $41,744,000 on December 31, 1995 to $43,056,000 on
December 31, 1996, a 3.14% increase. Management felt it prudent to slow growth
in 1996 in order to maintain a strong capital to asset ratio. The loan to
deposit ratio of the Corporation increased from 59.70% on December 31, 1995 to
69.86% on December 31, 1996. The goal of the Corporation is to increase this
ratio to 75.00%.
LOANS
Total gross loans increased 20.33% from $23,031,000 on December 31, 1995 to
$27,713,000 on December 31, 1996. Installment loans increased 34.49% from
$10,386,000 in 1995 to $13,968,000 in 1996. Commercial loans increased from
$9,009,000 on December 31, 1995 to $10,396,000 on December 31, 1996, a 15.39%
increase during the period. The installment loan growth was due to obtaining an
increased market share of the indirect automobile loan business in Marion.
Management's strategy has been to be very competitive with interest rates on
high quality loans. Commercial loan growth was primarily due to local economic
factors.
- --------------------------------------------------------------------------------
(Continued)
14
<PAGE> 17
The Corporation's loan portfolio consists primarily of commercial and
agricultural loans, consumer loans (loans to individuals for household, family
and other personal expenses) and real estate loans. These categories accounted
for approximately 38%, 52% and 10%, respectively, of the Corporation's total
loan portfolio on December 31, 1996. The Corporation's present policy regarding
diversity in the loan portfolio is based on local economic conditions and
indicators in order to optimize income.
With certain exceptions the Corporation is permitted under applicable law to
make loans to individual borrowers in aggregate amounts of up to 15% of the
Corporation's total capital. As of December 31, 1996, the lending limit for the
Corporation was approximately $482,000. The Corporation sells participations in
its loans where necessary to stay within its legal lending limits.
The following is a schedule of maturities of fixed and variable rate loans,
rounded to the nearest thousand, as of December 31, 1996. Fixed rate loans are
placed in the proper category based upon contractual maturity. Variable rate
loans are placed by next repricing date.
<TABLE>
<CAPTION>
One One
Year Through After Five
or Less Five Years Years Total
------- ---------- ----- -----
<S> <C> <C> <C>
REAL ESTATE
Variable Rate $ 990 $ 1,771 $ 2,761
COMMERCIAL
Fixed Rate 765 246 1,011
Variable Rate 8,655 730 9,385
------------ ------------ ------------
Total Commercial 9,420 976 10,396
INSTALLMENT
Fixed Rate 2,856 9,942 $ 194 12,992
Variable Rate 974 2 976
------------ ------------ ------------ ------------
Total Installment 3,830 9,944 194 13,968
CREDIT CARDS
Fixed Rate 344 344
Variable Rate 211 211
------------ ------------
Total Credit Card 555 555
OTHER
Fixed Rate 18 18
Variable Rate 15 15
------------ ------------ ------------ ------------
Total Other 33 33
TOTAL ALL LOANS $ 14,828 $ 12,691 $ 194 $ 27,713
============ ============ ============ ============
FIXED RATE $ 3,983 $ 10,188 $ 194 $ 14,365
VARIABLE $ 10,845 $ 2,503 $ 13,348
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
15
<PAGE> 18
SECURITIES
In order to maintain appropriate assets to meet the Corporation's liquidity and
asset/liability management requirements, the Corporation purchases United States
Treasury securities and obligations of federal agencies. Purchases of such
securities, as well as sales of federal funds (short-term loans to other banks)
and placement of funds in certificates of deposit with other financial
institutions, are made as investments pending the utilization of funds for loans
and other purposes.
The Corporation's policy is to stagger the maturities of its securities to meet
the overall liquidity requirements of the Corporation. The Corporation has
classified the majority of its securities portfolio as available for sale to
provide flexibility should funding be required for loan demand.
During 1996, net loan balances increased $3,533,000 more than deposit balances
increased. The funding for this increase was provided by maturities of
securities and the sale of available for sale securities. Because the
Corporation's net operating loss carryforwards were fully utilized during 1995,
management increased its holdings of tax free municipal bonds in 1996 from
$1,215,000 to $2,029,000.
United States Government securities may be pledged to meet security requirements
imposed as a condition to receive the public funds. At December 31, 1996, the
Corporation had $4,946,000 pledged to secure public deposits compared to
$5,925,000 on December 31, 1995. The Corporation has no securities of an
"issuer" where the aggregate carrying value of such securities exceeds ten
percent of shareholders' equity.
The following tables summarize the amounts and distribution of the Corporation's
securities held as of the dates indicated and the weighted average yields as of
December 31, 1996 and December 31, 1995:
- --------------------------------------------------------------------------------
(Continued)
16
<PAGE> 19
SECURITIES (Continued)
<TABLE>
<CAPTION>
1996 1995
----------------------------------- ---------------------------------
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD COST VALUE YIELD
---- ----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. TREASURY SECURITIES:
3 months or less $ 250 $ 250 4.18%
Over 3 months through
12 months 1,151 1,162 7.10
--------- ---------- -------
TOTAL U.S. TREASURY
SECURITIES 1,401 1,412 6.58
--------- ---------- -------
U.S. GOVERNMENT AGENCIES:
3 months or less $ 210 $ 211 6.82%
Over 3 months through
12 months 250 252 6.95
Over 1 year through 5 years 1,503 1,497 6.02 2,218 2,228 5.61
---------- ---------- -------- --------- ---------- -------
TOTAL U.S. GOVERNMENT
AGENCIES 1,713 1,708 6.12 2,468 2,480 5.74
---------- ---------- -------- --------- ---------- -------
OTHER DEBT SECURITIES
Over 5 years through
10 years 346 344 6.39
--------- ---------- -------
MORTGAGE-BACKED SECURITIES 6,258 6,200 6.46 7,501 7,480 5.93
OTHER SECURITIES 182 182 6.21 173 173 6.43
---------- ---------- -------- --------- ---------- -------
TOTAL SECURITIES
AVAILABLE FOR SALE $ 8,153 $ 8,090 6.38% $ 11,889 $ 11,889 5.98%
========== ========== ======== ========= ========== =======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
17
<PAGE> 20
SECURITIES (Continued)
<TABLE>
<CAPTION>
1996 1995
----------------------------------- ---------------------------------
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD COST VALUE YIELD
---- ----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY
U.S. TREASURY SECURITIES:
3 months or less $ 100 $ 100 6.25%
Over 1 year through 5 years $ 99 $ 101 6.69%
U.S. GOVERNMENT AGENCIES:
Over 1 year through 5 years 500 467 6.05 500 455 6.05
OBLIGATIONS OF STATES AND
POLITICAL SUBDIVISIONS
Over 10 years 2,029 2,042 5.73 1,215 1,221 5.33
TOTAL SECURITIES
HELD TO MATURITY $ 2,629 $ 2,609 5.81% $ 1,814 $ 1,777 5.61%
========== ========== ======== ========= ========== =======
CERTIFICATES OF DEPOSIT:
Over 3 months through
12 months $ 300 $ 301 5.88% $ 100 $ 100 4.60%
Over 1 year through
5 years 199 201 6.20 400 403 6.11
---------- ---------- -------- --------- ---------- -------
TOTAL CERTIFICATES OF
DEPOSIT $ 499 $ 502 6.01% $ 500 $ 503 5.81%
========== ========== ======== ========= ========== =======
</TABLE>
The weighted average interest rates are based on coupon rates for securities
purchased at par value and on effective interest rates considering amortization
or accretion if the securities were purchased at a premium or discount. The
weighted average yield on tax exempt obligations has not been determined on a
tax equivalent basis. Other securities consists of Federal Home Loan Bank and
Independent State Bank stock that bear no stated maturities and do not reflect
principal prepayment assumptions. Available for sale yields are based on
amortized cost balances.
- --------------------------------------------------------------------------------
(Continued)
18
<PAGE> 21
DEPOSITS
Deposits are the Corporation's primary source of funds. The Corporation can
obtain additional funds when needed through the overnight purchase of federal
funds to meet occasional declines in deposits, to satisfy cash reserve
requirements, or for other short-term liquidity needs. At times, when the
Corporation has more funds than it needs for its reserve requirements or
short-term liquidity needs, it increases its investment in securities, sells
federal funds to other financial institutions or places funds in short-term
certificates of deposit with other financial institutions. The distribution of
the Corporation's deposits in terms of maturity and applicable interest rates is
a primary determinant of the Corporation's cost of funds and the relative
stability of its supply of funds. The maximum rates of interest which may be
paid on deposits by banks have, for most accounts, been removed. Thus, most
accounts are not subject to interest rate limitations and, therefore, tend to
reflect current market rates of interest available to depositors at a given
time. At December 31, 1996, the aggregate amount of time, savings and
interest-bearing demand deposits was 89.03% of total deposits. The Corporation
does not have any foreign deposits, nor does it have any material concentration
of deposits.
Total deposits increased from $38,291,000 on December 31, 1995 to $39,469,000 on
December 31, 1996, a 3.08% increase. Interest-bearing demand deposits increased
$857,000 or 16.80% from $5,100,000 to $5,957,000 during the period. Savings
account balances decreased 5.02% from $8,791,000 on December 31, 1995 to
$8,350,000 on December 31, 1996. Certificates of deposit increased from
$20,040,000 at the end of 1995 to $20,834,000 at the end of 1996, a 3.96%
increase. The Corporation did not aggressively pursue deposits due to its
strategy of slowing growth while increasing its loan to deposit ratio.
ASSET/LIABILITY MANAGEMENT
Asset/liability management includes GAP measurement which determines, over
various time periods, interest-earning assets and interest-bearing liabilities
which are due to reprice at current market rates. A financial institution will
have a negative interest rate sensitivity GAP for a given period of time if the
amount of its interest-bearing liabilities maturing or repricing within that
period is greater than the total of the interest-earning assets maturing or
repricing within the same period. When interest rates increase, financial
institutions with a negative interest rate sensitivity GAP will be more likely
to experience increases in the cost of their liabilities faster than the
corresponding yields generated by their earning assets. Following the same
concept, as interest rates decrease, the cost of funds of financial institutions
with a negative interest rate sensitivity GAP usually will decrease more rapidly
than the yields on the earning assets. As a general rule, the same changes in
interest rates will usually have the opposite effect on financial institutions
structured with a positive interest rate sensitivity GAP.
Interest rate sensitivity varies with various types of interest-earning assets
and interest-bearing liabilities. Overnight federal funds on which the rates
change daily and loans which are tied to variable indices differ markedly from
long-term securities and fixed-rate loans. Time deposits over $100,000 and money
market certificates are more interest rate sensitive than passbook savings
accounts. The shorter-term interest rate sensitivities are critical to
reasonable measurement of interest rate sensitivity GAP.
- --------------------------------------------------------------------------------
(Continued)
19
<PAGE> 22
ASSET/LIABILITY MANAGEMENT (Continued)
The following table presents the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996, which are
scheduled to reprice or mature in each of the indicated time periods. Except as
noted, the amount of assets and liabilities which reprice or mature during a
particular period were calculated in relation to the actual contractual terms of
the asset or liability. The table, however, does not necessarily indicate the
impact of general interest rate changes on the Corporation's net interest income
in part because the repricing of certain categories of assets and liabilities is
subject to competition and other factors beyond the control of the Corporation.
Because of this limitation, certain assets and liabilities depicted as maturing
or repricing within a specific period may in fact mature or reprice at other
times and at different volumes.
INTEREST RATE SENSITIVITY GAP AS OF DECEMBER 31, 1996 (IN THOUSANDS)
<TABLE>
<CAPTION>
One Over
0-3 3-12 Through Five
Months Months Five Years Years Total
------ ------ ---------- ----- -----
<S> <C> <C> <C> <C> <C>
Assets
Loans (1) $ 10,862 $ 3,966 $ 12,691 $ 194 $ 27,713
Securities (1) 310 216 1,997 8,196 10,719
Federal funds sold 716 716
Interest-earning deposits 300 199 499
----------- ----------- ----------- ----------- -----------
Rate sensitive assets (RSA) 11,888 4,482 14,887 8,390 39,647
Liabilities
Interest-bearing demand (2) 5,957 5,957
Savings (2) 8,350 8,350
Time deposits 5,719 11,265 3,850 20,834
----------- ----------- ----------- ----------- -----------
Rate sensitive liabilities (RSL) 20,026 11,265 3,850 35,141
----------- ----------- ----------- ----------- -----------
Period GAP (3) $ (8,138) $ (6,783) $ 11,037 $ 8,390 $ 4,506
=========== =========== =========== =========== ===========
Cumulative GAP $ (8,138) $ (14,921) $ (3,884) $ 4,506
=========== =========== =========== ===========
Percentage of total assets (18.90)% (34.65)% (9.02)% 10.47%
=========== =========== =========== ===========
<FN>
(1) Loans and mortgage-backed securities are assumed to adjust based on their
contractual terms, with no assumptions as to prepayments. Securities also
include Federal Home Loan Bank stock and Independent State Bank stock that
have no stated maturities and have been included in the over five years
category.
(2) Management has included these accounts in the 0-3 month or less time
horizon based on past experience with rate adjustments on these accounts.
(3) GAP is defined as rate sensitive assets less rate sensitive liabilities and
may be expressed in dollars or as a percentage.
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
20
<PAGE> 23
CAPITAL RESOURCES
Shareholders' equity totaled $3,226,000 on December 31, 1996, compared to
$3,057,000 on December 31, 1995. At December 31, 1996 and December 31, 1995, the
ratio of shareholders' equity to assets was 7.49% and 7.32%, respectively. The
Corporation and the Bank complied with the capital requirements established by
Federal Reserve System at each of these dates.
Under "Prompt Corrective Action" regulations, the FDIC has defined five
categories of capitalization (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically under
capitalized). The Bank meets the "well capitalized" definition which requires a
total risk-based capital ratio of at least 10%, a Tier 1 risk-based ratio of at
least 6%, and a leverage ratio of at least 5% and the absence of any written
agreement, order, or directive from a regulatory agency. "Well-capitalized"
status affords the Bank the ability to operate with the greatest flexibility
under current laws and regulations.
LIQUIDITY
Liquidity management focuses on the Corporation's ability to have funds
available to meet the loan and depository transaction needs of its customers and
the Corporation's other financial commitments. Cash and cash equivalent assets
(which include deposits the Corporation maintains at other banks, federal funds
sold and other short-term investments) totaled $2,688,000 at year-end 1996 and
$3,450,000 at year-end 1995. 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 Corporation is a member of the Federal Home Loan
Bank of Cincinnati. The fair value of securities classified as available for
sale was $8,090,000 and $11,889,000 as of December 31, 1996 and December 31,
1995, respectively.
An additional measure of liquidity is the amount of loans carried in relation to
total deposits. Lower ratios can indicate greater liquidity. Management's goal
is to maintain a loan to deposit ratio of approximately 75%, or great enough to
maximize the earnings potential of the Corporation while maintaining adequate
liquidity levels. The Corporation's loan to deposit ratio on December 31, 1996
was 69.86%, up from 59.70% on December 31, 1995.
IMPACT OF INFLATION
The Corporation's balance sheet is typical of financial institutions and
reflects a net positive monetary position whereby monetary assets exceed
monetary liabilities. Monetary assets and liabilities are those which can be
converted to a fixed number of dollars and include cash assets, securities,
loans, money market instruments, deposits and borrowed funds.
During periods of inflation, a net positive monetary position may result in an
overall decline in purchasing power of an entity. No clear evidence exists of a
relationship between the purchasing power of an entity's net positive monetary
position and its future earnings. Moreover, the Corporation's ability to
preserve the purchasing power of its net positive monetary position will be
partly influenced by the effectiveness of its asset/liability management
program. Management does not believe that the affect of inflation on its
nonmonetary assets (primarily bank premises and equipment) is material as such
assets are not held for resale and significant disposals are not anticipated.
- --------------------------------------------------------------------------------
(Continued)
21
<PAGE> 24
ANTICIPATED IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," was
issued by the Financial Accounting Standards Board (FASB) in 1996. It revises
the accounting for transfers of financial assets, such as loans and securities,
and for distinguishing between sales and secured borrowings. It was originally
effective for some transactions in 1997 and others in 1998. SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125"
was issued in December 1996. SFAS No. 127 defers for one year the effective date
of provisions related to securities lending, repurchase agreements and other
similar transactions. The remaining portions of SFAS 125 will continue to be
effective January 1, 1997. The effect on the financial statements has not yet
been determined.
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which is
effective for financial statements beginning with year-end 1997. SFAS No. 128
simplifies the calculation of earnings per share by replacing primary EPS with
basic EPS. It also requires dual presentation of basic EPS and diluted EPS for
entities with complex capital structures. This statement will not currently
impact the Corporation as it has no common stock equivalents.
- --------------------------------------------------------------------------------
22
<PAGE> 25
ITEM 7 - FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Ohio State Bancshares, Inc.
Marion, Ohio
We have audited the accompanying consolidated balance sheets of Ohio State
Bancshares, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ohio State
Bancshares, Inc. as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Crowe, Chizek and Company LLP
Columbus, Ohio
January 31, 1997
- --------------------------------------------------------------------------------
23
<PAGE> 26
OHIO STATE BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,972,038 $ 2,089,430
Federal funds sold 716,000 1,361,000
--------------- ----------------
Total cash and cash equivalents 2,688,038 3,450,430
Interest-earning deposits 499,000 500,000
Securities available for sale 8,089,532 11,889,413
Securities held to maturity (Fair value of
$2,609,268 in 1996 and $1,776,875 in 1995) 2,629,280 1,814,058
Loans, net of allowance for loan losses 27,572,913 22,861,399
Premises and equipment, net 914,569 767,618
Other real estate owned and repossessions 52,780 68,710
Accrued interest receivable 347,580 304,384
Other assets 262,194 87,640
--------------- ---------------
Total assets $ 43,055,886 $ 41,743,652
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 4,328,870 $ 4,360,153
Interest-bearing 35,140,100 33,930,536
--------------- ----------------
Total 39,468,970 38,290,689
Accrued interest payable 236,798 236,674
Other liabilities 124,138 159,172
--------------- ----------------
Total liabilities 39,829,906 38,686,535
Shareholders' equity
Common stock, $10.00 par value,
121,200 shares authorized; 121,200 shares
issued and outstanding 1,212,000 1,212,000
Additional paid-in capital 1,831,227 1,831,227
Retained earnings 224,862 13,936
Unrealized loss on securities
available for sale, net of tax (42,109) (46)
--------------- ----------------
Total shareholders' equity 3,225,980 3,057,117
--------------- ----------------
Total liabilities and
shareholders' equity $ 43,055,886 $ 41,743,652
=============== ================
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
24
<PAGE> 27
OHIO STATE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 2,486,077 $ 2,240,592
Taxable securities 651,024 698,102
Nontaxable securities 90,778 25,820
Federal funds sold 25,522 87,230
Certificates of deposit 32,098 31,976
-------------- ---------------
Total interest income 3,285,499 3,083,720
INTEREST EXPENSE
Deposits 1,509,093 1,337,415
Other borrowings 30,427 2,502
-------------- ---------------
Total interest expense 1,539,520 1,339,917
-------------- ---------------
NET INTEREST INCOME 1,745,979 1,743,803
Provision for loan losses 163,000 82,000
-------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,582,979 1,661,803
NONINTEREST INCOME
Fees for other customer services 208,353 217,423
Net realized gain on sales of securities available for sale 7,314 3,722
Other income 25,268 58,166
-------------- ---------------
Total noninterest income 240,935 279,311
NONINTEREST EXPENSE
Salaries and employee benefits 681,441 654,656
Occupancy 257,493 224,821
Office supplies 92,634 84,331
FDIC and state assessments 7,724 43,135
Professional fees 47,471 40,233
Advertising and public relations 46,747 43,552
Taxes, other than income 48,874 50,304
Loss on other real estate owned and repossessions 18,000 45,000
Credit card processing expense 56,385 44,593
Insurance 30,699 28,921
Other expenses 177,655 253,177
-------------- ---------------
Total noninterest expense 1,465,123 1,512,723
-------------- ---------------
INCOME BEFORE INCOME TAXES 358,791 428,391
Income tax expense 99,385 55,476
-------------- ---------------
NET INCOME $ 259,406 $ 372,915
============== ===============
Net income per share $ 2.14 $ 3.08
============== ===============
Average shares outstanding 121,200 121,200
============== ===============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
25
<PAGE> 28
OHIO STATE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized Loss
Additional on Securities Total
Common Paid in Retained Available Shareholders'
Stock Capital Earnings for Sale Equity
----- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1995 $ 1,212,000 $ 1,831,227 $ (322,619) $ (334,015) $ 2,386,593
Net income 372,915 372,915
Cash dividends declared
($0.30 per share) (36,360) (36,360)
Change in unrealized
loss on securities
available for sale 333,969 333,969
-------------- -------------- ------------- ------------ ---------------
Balance, December 31,
1995 1,212,000 1,831,227 13,936 (46) 3,057,117
Net income 259,406 259,406
Cash dividends declared
($0.40 per share) (48,480) (48,480)
Change in unrealized
loss on securities
available for sale (42,063) (42,063)
-------------- -------------- ------------- ------------ ---------------
Balance, December 31,
1996 $ 1,212,000 $ 1,831,227 $ 224,862 $ (42,109) $ 3,225,980
============== ============== ============= ============ ===============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
26
<PAGE> 29
OHIO STATE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 259,406 $ 372,915
Adjustment to reconcile net income to net cash
from operating activities:
Depreciation and amortization 100,529 103,825
Net amortization of premiums 33,209 22,781
Gain on sale of loans (33,876)
Provision for loan losses 163,000 82,000
Deferred taxes 53,876 (14,159)
Net realized gains on securities available for sale (7,314) (3,722)
Loss on other real estate owned and repossessions 18,000 45,000
FHLB stock dividends (9,000) (8,100)
Net changes in:
Interest receivable (43,196) (113,743)
Interest payable 124 146,906
Other assets and liabilities (241,725) 41,797
-------------- ---------------
Net cash from operating activities 326,909 641,624
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 2,714,626 1,003,438
Proceeds from maturities and principal paydowns 2,527,337 639,953
Purchases (1,519,203) (4,681,422)
Securities held to maturity:
Proceeds from maturities and principal paydowns 64,406
Purchases (818,798) (1,215,973)
Net change in interest-earning deposits in other banks 1,000 100,000
Net change in loans (5,029,413) (2,479,322)
Proceeds from loan sales 448,820
Purchases of premises and equipment (247,480) (177,382)
Proceeds from sale of other real estate owned and repossessions 152,829 89,962
-------------- ---------------
Net cash from investing activities (2,219,102) (6,207,520)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 1,178,281 6,032,822
Cash dividends paid (48,480) (36,360)
-------------- ---------------
Net cash from financing activities 1,129,801 5,996,462
-------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (762,392) 430,566
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,450,430 3,019,864
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,688,038 $ 3,450,430
============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 1,539,396 $ 1,193,011
Income taxes paid 105,527 40,000
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
27
<PAGE> 30
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Ohio State Bancshares, Inc. (Corporation) and its wholly owned
subsidiary, the Marion Bank (Bank). All significant intercompany transactions
and balances have been eliminated in the consolidation. At the annual
shareholders' meeting held on 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 on May 16, 1996. The transaction represented an internal
reorganization and the historical basis of assets and liabilities have been
carried forward without change.
NATURE OF OPERATIONS: The Corporation's and the Bank's revenues, operating
income and assets are primarily from the banking industry. Loan customers are
mainly located in Marion County, Ohio and include a wide range of individuals,
businesses and other organizations. A major portion of loans are secured by
various forms of collateral including real estate, business assets, consumer
property and other items, although borrower cash flow may also be a primary
source of repayment.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided. Future results could differ from these estimates. The collectibility
of loans, fair values of financial instruments and the status of contingencies
are particularly subject to change.
CASH FLOW REPORTING: Cash and cash equivalents are defined as cash and due from
banks and federal funds sold, as well as investments with original maturities
under 90 days. Net cash flows are reported for customer loan and deposit
transactions and interest bearing deposits with other banks.
SECURITIES: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately in shareholders'
equity, net of tax. Securities are classified as trading when held for short
term periods in anticipation of market gains, and are carried at fair value.
Securities are written down to fair value when a decline in fair value is not
temporary.
Gains and losses on sales are determined using the amortized cost of the
specific security sold. Interest income includes amortization of purchase
premiums and discounts.
- --------------------------------------------------------------------------------
(Continued)
28
<PAGE> 31
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOANS: Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs and the allowance for loan losses. Interest income is
reported on the interest method and includes amortization of net deferred loan
fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 60 days. Payments received on such loans are
reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer and credit card loans and on an
individual basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loans are reported, net, at the present value
of estimated future cash flows using the loan's existing rate. Loans are
evaluated for impairment when payments are delayed, typically 60 days or more,
or when the internal grading system indicates a doubtful classification.
PREMISES AND EQUIPMENT: Asset cost is reported net of accumulated depreciation.
Depreciation expense is calculated generally on the straight-line method over
asset useful lives. These assets are reviewed for impairment under Statement of
Financial Accounting Standards (SFAS) No. 121 when events indicate the carrying
amount may not be recoverable. Maintenance and repairs are expensed and major
improvements are capitalized.
OTHER REAL ESTATE AND REPOSSESSIONS: Real estate and repossessions acquired in
settlement of loans is reported at estimated fair value at acquisition. After
acquisition, a valuation allowance reduces the reported amount to the lower of
the initial amount or fair value less costs to sell. Expenses, gains and losses
on disposition and changes in the valuation allowance are reported as net loss
on other real estate owned and repossessions.
- --------------------------------------------------------------------------------
(Continued)
29
<PAGE> 32
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES: 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 the 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.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates. The fair value estimates of existing on- and off-balance sheet
financial instruments does not include the value of anticipated future business
or the values of assets and liabilities not considered financial instruments.
EARNINGS PER SHARE: Earnings per share of common stock is based on
weighted-average outstanding shares during the year.
RECLASSIFICATIONS: Some items in prior financial statements have been
reclassified to conform with the current presentation.
- --------------------------------------------------------------------------------
(Continued)
30
<PAGE> 33
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
Securities at December 31 were as follows:
<TABLE>
<CAPTION>
1996
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Obligations of U.S. government
agencies $ 1,713,884 $ 739 $ 7,264 $ 1,707,359
Mortgage-backed securities 6,257,609 3,872 61,148 6,200,333
------------- ------------ ----------- -------------
Total debt securities available
for sale 7,971,493 4,611 68,412 7,907,692
Other securities 181,840 181,840
------------- ------------ ----------- -------------
Total securities
available for sale $ 8,153,333 $ 4,611 $ 68,412 $ 8,089,532
============= ============ =========== =============
HELD TO MATURITY
U.S. Treasury securities $ 99,912 $ 213 $ 100,125
Obligations of U.S.
government agencies 500,000 $ 32,755 467,245
Obligations of state and political
subdivisions 2,029,368 21,692 9,162 2,041,898
------------- ------------ ----------- -------------
Total securities held to
maturity $ 2,629,280 $ 21,905 $ 41,917 $ 2,609,268
============= ============ =========== =============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
31
<PAGE> 34
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury securities $ 1,401,125 $ 11,433 $ 358 $ 1,412,200
Obligations of U.S. government
agencies 2,468,456 17,583 6,334 2,479,705
Other debt securities 345,600 1,290 344,310
Mortgage-backed securities 7,501,461 27,202 48,305 7,480,358
--------------- ----------- ---------- ---------------
Total debt securities available
for sale 11,716,642 56,218 56,287 11,716,573
Other securities 172,840 172,840
--------------- ----------- ---------- ---------------
Total securities
available for sale $ 11,889,482 $ 56,218 $ 56,287 $ 11,889,413
=============== =========== ========== ===============
HELD TO MATURITY
U.S. Treasury securities $ 99,078 $ 1,882 $ 100,960
Obligations of U.S.
government agencies 500,000 $ 45,100 454,900
Obligations of state and political
subdivisions 1,214,980 9,752 3,717 1,221,015
--------------- ----------- ---------- ---------------
Total securities held to
maturity $ 1,814,058 $ 11,634 $ 48,817 $ 1,776,875
=============== =========== ========== ===============
Sales of available for sale securities were:
1996 1995
---- ----
Proceeds $ 2,714,626 $ 1,003,438
Gross gains 15,956 6,250
Gross losses 8,642 2,528
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
32
<PAGE> 35
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Contractual maturities of securities at December 31, 1996 were as follows.
Securities not due at a single maturity date, primarily mortgage-backed
securities, are shown separately.
<TABLE>
<CAPTION>
Held-to-maturity securities Available-for-sale securities
--------------------------- -----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 99,912 $ 100,125 $ 209,975 $ 210,714
Due from one to five years 500,000 467,245 1,503,909 1,496,645
Due after ten years 2,029,368 2,041,898
Mortgage-backed 6,257,609 6,200,333
Other securities 181,840 181,840
------------- ------------- ------------- -------------
$ 2,629,280 $ 2,609,268 $ 8,153,333 $ 8,089,532
============= ============= ============= =============
</TABLE>
Securities with carrying values of $4,946,000 and $5,925,000 at December 31,
1996 and 1995 were pledged to secure public deposits and for other purposes.
During 1995, $325,000 of securities were reclassified from held to maturity to
available for sale based on new interpretations issued for SFAS No. 115. The
unrealized gain at the time the securities were transferred was approximately
$18,000.
NOTE 3 - LOANS
December 31 loans were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commercial $ 10,395,804 $ 9,009,212
Installment 13,967,939 10,386,065
Real estate 2,761,119 2,920,096
Credit card 554,928 663,544
Other 33,708 51,874
--------------- ----------------
27,713,498 23,030,791
Net deferred loan costs 140,557 82,782
Allowance for loan losses (281,142) (252,174)
--------------- ----------------
$ 27,572,913 $ 22,861,399
=============== ================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
33
<PAGE> 36
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Beginning balance $ 252,174 $ 265,489
Loans charged off (165,534) (118,755)
Recoveries of previous charge-offs 31,502 23,440
Provision for loan losses 163,000 82,000
-------------- --------------
Ending balance $ 281,142 $ 252,174
============== ==============
</TABLE>
As of and for the years ended December 31, 1996 and 1995, 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 $29,147 and
$15,476 at December 31, 1996 and 1995.
Loans with carrying values of $154,899 and $84,010 were transferred to other
real estate owned and repossessions in 1996 and 1995.
NOTE 4 - PREMISES AND EQUIPMENT
Premises and equipment at December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 115,875 $ 115,875
Premises 415,079 415,079
Equipment 1,279,995 1,075,123
Building improvements 104,273 65,917
-------------- --------------
Total cost 1,915,222 1,671,994
Less accumulated depreciation (1,000,653) (904,376)
-------------- --------------
$ 914,569 $ 767,618
============== ==============
</TABLE>
The Bank's new branch is leased under an operating lease. The lease term is for
twenty years. At the conclusion of the fifth, tenth and fifteenth years of the
lease, the rent shall be adjusted by 50% of the cumulative increase in the
Consumer Price Index over the previous five years with a minimum of 5% increase
and a maximum of 10% increase for any one five-year period. Rental expense was
$2,708 in 1996.
- --------------------------------------------------------------------------------
(Continued)
34
<PAGE> 37
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 4 - PREMISES AND EQUIPMENT (Continued)
Rental commitments under noncancelable operating leases are:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 38,748
1998 38,748
1999 38,748
2000 38,748
2001 38,883
Thereafter 638,460
------------
$ 832,335
============
</TABLE>
NOTE 5 - DEPOSITS
At December 31, total interest-bearing deposits are comprised of the following
classifications:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Demand $ 5,956,981 $ 5,099,946
Savings 8,349,565 8,790,740
Time:
In denominations under $100,000 14,665,983 13,884,961
In denominations of $100,000 or more 6,167,571 6,154,889
--------------- ----------------
Total interest-bearing deposits $ 35,140,100 $ 33,930,536
=============== ================
</TABLE>
At December 31, 1996, stated maturities of time deposits were:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 16,983,902
1998 1,948,705
1999 1,606,295
2000 294,652
----------------
$ 20,833,554
================
</TABLE>
Following is a summary of certificates of deposit of $100,000 or more by
remaining maturities:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Three months or less $ 1,615,757 $ 1,207,737
Three through six months 2,317,897 2,584,065
Six through twelve months 1,933,917 1,420,000
Over twelve months 300,000 943,087
-------------- --------------
Totals $ 6,167,571 $ 6,154,889
============== ==============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
35
<PAGE> 38
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 6 - BORROWINGS
Federal funds purchased and a line of credit from the Federal Home Loan Bank are
financing arrangements. Information concerning borrowings is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Maximum month-end balance during the year $ 1,000,000 $ 1,000,000
Average month-end balance during the year 548,376 39,693
Average interest rate during the year 5.47% 7.50%
</TABLE>
The Bank's maximum line of credit with the Federal Home Loan Bank of Cincinnati
was $2,100,000 and $1,932,000, at December 31, 1996 and 1995, respectively. No
borrowings were outstanding on this line of credit as of December 31, 1996 or
1995. 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.
NOTE 7 - EMPLOYEE BENEFIT PLANS
The Corporation provides a profit sharing plan which covers substantially all
employees. Eligible employees may contribute up to 15% of their compensation
subject to a maximum statutory limitation. The Corporation matches 50% of all
employee contributions not to exceed 6% of the participant's base compensation.
In addition, the Corporation may make an additional discretionary contribution
allocated to all eligible participants on the basis of compensation.
Contributions by the Corporation were $15,100 and $14,300 for the years ended
December 31, 1996 and 1995.
- --------------------------------------------------------------------------------
(Continued)
36
<PAGE> 39
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current $ 45,509 $ 69,635
Deferred 53,876 62,996
Change in valuation allowance (77,155)
-------------- --------------
$ 99,385 $ 55,476
============== ==============
</TABLE>
The sources of gross deferred tax assets and gross deferred tax liabilities at
December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Items giving rise to deferred tax assets
Allowance for loan losses $ 61,486 $ 51,008
Net operating loss carry forward 9,894
Leases 8,586
Unrealized loss on securities
available for sale 21,692 23
Other 1,587 8,279
-------------- --------------
Total deferred tax assets 94,659 67,896
Items giving rise to deferred tax liabilities
Depreciation (24,879) (11,218)
Leases (27)
Accrual to cash conversion (76,928) (33,353)
Other (10,850) (9,143)
-------------- --------------
Total deferred tax liabilities (112,684) (53,714)
-------------- --------------
Net deferred tax asset (liability) $ (18,025) $ 14,182
============== ==============
</TABLE>
The difference between the financial statement tax provision and amounts
computed by applying the statutory federal income tax to income before taxes is
as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Income tax expense at the statutory
federal tax rate $ 121,989 $ 145,653
Tax exempt interest (26,548) (7,594)
Other items 3,944 (5,428)
Change in valuation allowance (77,155)
------------ ------------
Total provision for income taxes $ 99,385 $ 55,476
============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
37
<PAGE> 40
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 9 - RELATED PARTIES
Certain directors, executive officers and companies with which they are
affiliated were loan customers during 1996. Following is an analysis of such
loans:
<TABLE>
<CAPTION>
<S> <C>
Total loans at January 1, 1996 $ 276,054
New loans 365,090
Repayments (95,129)
---------------
Total loans at December 31, 1996 $ 546,015
===============
</TABLE>
NOTE 10 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTIGENCIES
Various contingent liabilities are not reflected in the financial statements,
including claims and legal actions arising in the ordinary course of business.
In the opinion of management, after consultation with legal counsel, the
ultimate disposition of these matters is not expected to have a material affect
on the financial condition or results of operations.
At December 31, 1996 and 1995, reserves of $313,000 and $279,000 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 December 31, 1996 and December 31, 1995
was approximately $1,547,000 and $2,743,000, respectively, on deposit with the
Independent State Bank of Ohio.
Some financial instruments are used in the normal course of business to meet the
financing needs of customers and to reduce exposure to interest rate changes.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. These involve, to varying degrees,
credit and interest-rate risk in excess of the amount reported in the financial
statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit, standby letters of
credit and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans.
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 of the commitments are expected to
expire without being used, the total commitments do not necessarily represent
future cash requirements. Standby letters of credit and financial guarantees
written are conditional commitments to guarantee a customer's performance to a
third party.
- --------------------------------------------------------------------------------
(Continued)
38
<PAGE> 41
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTIGENCIES
(Continued)
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 5.9% to 10.9% at December 31,
1996 and 6.2% to 11.1% at December 31, 1995. Outstanding commitments for credit
cards had rates ranging from 14.25% to 16.75% at December 31, 1996 and 15.9% to
17.9% at December 31, 1995. Of the total outstanding balances on credit cards at
December 31, 1996, 62% were fixed rate and 38% were variable rate and at
December 31, 1995, 58% were fixed rate and 42% were variable rate.
A summary of the contractual amounts of financial instruments with
off-balance-sheet risk at December 31, follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commitments to extend credit $ 3,770,000 $ 1,469,000
Credit card arrangements 1,010,000 916,000
</TABLE>
NOTE 11 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair values for
financial instruments. The carrying amount is considered to estimate fair value
for cash and cash equivalents, demand and savings deposits, accrued interest and
variable rate loans or deposits that reprice frequently and fully. Securities
fair values are based on quoted market prices or, if no quotes are available, on
the rate and term of the security and on information about the issuer. For fixed
rate loans or deposits and for variable rate loans or deposits with infrequent
repricing or repricing limits, the fair value is estimated by discounted cash
flow analysis using current market rates for the estimated life and credit risk.
Fair values for impaired loans are estimated using discounted cash flow analysis
or underlying collateral values, where applicable. The fair value of
off-balance-sheet items is based on the fees or cost that would currently be
charged to enter into or terminate such arrangements and are not material.
- --------------------------------------------------------------------------------
(Continued)
39
<PAGE> 42
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 11 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The estimated December 31 fair values of financial instruments were:
<TABLE>
<CAPTION>
1996 1995
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 2,688,038 $ 2,688,038 $ 3,450,430 $ 3,450,430
Interest-earning deposits 499,000 501,860 500,000 503,075
Securities available for sale 8,089,532 8,089,532 11,889,413 11,889,413
Securities held to maturity 2,629,280 2,609,268 1,814,058 1,776,875
Loans receivable, net 27,572,913 27,511,265 22,861,399 22,713,128
Accrued interest receivable 347,580 347,580 304,384 304,384
Financial liabilities
Demand and savings
deposits (18,635,416) (18,635,416) (18,250,839) (18,250,839)
Time deposits (20,833,554) (20,963,699) (20,039,850) (20,233,369)
Accrued interest payable (236,798) (236,798) (236,674) (236,674)
</TABLE>
NOTE 12 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities and certain
off-balance sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the financial statements.
- --------------------------------------------------------------------------------
(Continued)
40
<PAGE> 43
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 12 - REGULATORY MATTERS (Continued)
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:
<TABLE>
<CAPTION>
Capital to risk-
weighted assets
--------------- Tier 1 capital
Total Tier 1 to average assets
----- ------ -----------------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
</TABLE>
At December 31, 1996, actual capital levels for the Bank (in thousands) and
minimum required levels were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1996
Total capital (to risk weighted
assets) $ 3,499 11.4% $ 2,446 8.0% $ 3,058 10.0%
Tier 1 capital (to risk weighted
assets) $ 3,218 10.5% $ 1,223 4.0% $ 1,835 6.0%
Tier 1 capital (to average assets) $ 3,218 7.4% $ 1,729 4.0% $ 2,161 5.0%
1995
Total capital (to risk weighted
assets) $ 3,310 12.8% $ 2,062 8.0% $ 2,578 10.0%
Tier 1 capital (to risk weighted
assets $ 3,057 11.9% $ 1,031 4.0% $ 1,547 6.0%
Tier 1 capital (to average assets) $ 3,057 8.0% 1,519 4.0% $ 1,899 5.0%
</TABLE>
At December 31, 1996 and 1995, the Bank was categorized as well capitalized.
- --------------------------------------------------------------------------------
(Continued)
41
<PAGE> 44
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 13 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
Earnings for Ohio State Bancshares, Inc., for 1996 include its equity in the
earnings of the Bank for the period beginning May 16, 1996, the effective date
of the holding company formation. The following are condensed parent company
only financial statements for Ohio State Bancshares, Inc.
CONDENSED BALANCE SHEET
December 31, 1996
<TABLE>
<CAPTION>
1996
----
Assets:
<S> <C>
Cash and cash equivalents $ 469
Investment in bank subsidiary 3,176,164
Organizational costs, net 43,972
Other assets 5,375
-------------
Total assets $ 3,225,980
=============
Shareholders' equity $ 3,225,980
=============
</TABLE>
CONDENSED STATEMENTS OF INCOME
May 16 - December 31, 1996
<TABLE>
<CAPTION>
1996
----
<S> <C>
Dividends from bank subsidiary $ 107,240
-------------
Total income 107,240
Total expense 10,559
-------------
Income before income tax and equity in undistributed net income 96,681
Income tax benefit 1,615
Equity in undistributed net income of subsidiary 102,378
-------------
Net income $ 200,674
=============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
42
<PAGE> 45
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 13 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENT OF CASH FLOWS
May 16 - December 31, 1996
<TABLE>
<CAPTION>
1996
-------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 200,674
Adjustments:
Equity in undistributed net income
of subsidiary (102,378)
Change in other assets (55,155)
Amortization 5,808
-------------
Net cash from operating activities 48,949
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends (48,480)
-------------
Net cash from financing activities (48,480)
-------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 469
CASH AT BEGINNING OF PERIOD 0
-------------
CASH AT END OF PERIOD $ 469
=============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
43
<PAGE> 46
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No changes in or disagreements with the Corporation's independent accountants on
accounting and financial disclosure have occurred during the two most recent
fiscal year.
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information concerning Directors and Executive Officers of the Corporation
appears on pages 3 and 4 under the captions Continuing Directors and Nominees in
the Corporation's Definitive Proxy Statement dated March 21, 1997 for the Annual
Meeting of Shareholders to be held on April 10, 1997 and is incorporated herein
by reference.
ITEM 10 - EXECUTIVE COMPENSATION
Information concerning executive compensation appears on page 6 under the
captions Executive Compensation and Other Information in the Corporation's
Definitive Proxy Statement dated March 21, 1997 for the Annual Meeting of
Shareholders to be held on April 10, 1997 and is incorporated herein by
reference.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is contained on pages 3 and 4 under the captions Continuing Directors
and Nominees in the Corporation's Definitive Proxy Statement dated March 21,
1997 for the Annual Meeting of Shareholders to be held on April 10, 1997 and is
incorporated herein by reference.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
contained on page 8 under the caption Certain Transactions in the Corporation's
Definitive Proxy Statement dated March 21, 1997 for the Annual Meeting of
Shareholders to be held on April 10, 1996 and is incorporated herein by
reference.
- --------------------------------------------------------------------------------
(Continued)
44
<PAGE> 47
ITEM 13 - EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
Reference to
Regulation S-B Prior Filing
Exhibit Exhibit Number
Number Description of Document Attached Hereto
------ ----------------------- ---------------
<S> <C> <C>
3.1 Amended Articles of Incorporation of
the Corporation * 1
3.2 Code of Regulations of the
Corporation * 2
4 Form of Shares Certificate of Common
Shares * 3
10.1 Lease Agreement Between Henney and
Cooper, Inc. and The Marion Bank for
New Branch on Richland Road in
Marion, Ohio ** 4
10.2 Executive Indexed Salary Continuation
Plan Agreement ** 5
21 Subsidiaries of the Registrant ** 6
27 Financial Data Schedule ** 7
99 Safe Harbor under the Private Securities
Litigation Reform Act of 1995 ** 8
<FN>
* Indicates documents which have been previously filed as part of the
Issuer's Registration Statement Under the Securities Act of 1933 on Form
S-4 (file number 33-75866) dated April 18, 1994 and amended and declared
effective April 16, 1995. All of such previously filed documents are hereby
incorporated by reference in accordance with Item 601 of Regulation S-B.
Such documents are available to shareholders without charge upon request
from the Issuer.
** The indicated exhibit has been filed as separate pages of the 1996 Form
10-KSB and is available to shareholders upon request.
</TABLE>
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the period covered
by this report.
- --------------------------------------------------------------------------------
45
<PAGE> 48
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
OHIO STATE BANCSHARES, INC.
MARCH 7, 1997 By: /S/GARY E. PENDLETON
- -------------------- ---------------------------------
Date Gary E. Pendleton, President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of registrant and in the capacities indicated on
March 7, 1997.
<TABLE>
<CAPTION>
Signatures Signatures
---------- ----------
<S> <C>
/s/GARY E. PENDLETON /s/THEODORE L. GRAHAM
- ----------------------------------------------- ---------------------------------
Gary E. Pendleton Theodore L. Graham
President and Chief Executive Officer Director
/s/WILLIAM H. HARRIS /s/LLOYD L. JOHNSTON
- ----------------------------------------------- ---------------------------------
William H. Harris Lloyd L. Johnston
Executive Vice President and Cashier, Principal Director
Financial Officer, Principal Accounting Officer
and Director
/s/FRED K. WHITE /s/F. WINTON LACKEY
- ----------------------------------------------- ---------------------------------
Fred K. White F. Winton Lackey
Director, Chairman of the Board Director
/s/SAMUEL J. BIRNBAUM /s/THURMAN R. MATHEWS
- ----------------------------------------------- ---------------------------------
Samuel J. Birnbaum Thurman R. Mathews
Director Director
/s/JOHN E. BALDAUF /s/JOHN OWENS
- ----------------------------------------------- ---------------------------------
John E. Baldauf John Owens
Director Director
/s/LOIS J. FISHER
- -----------------------------------------------
Lois J. Fisher
Director
</TABLE>
- --------------------------------------------------------------------------------
46
<PAGE> 49
BOARD OF DIRECTORS (1)
Fred K. White - Chairman................... Division Manager, Ohio Edison
Marion, Ohio
Gary E. Pendleton.......................... President and CEO of
The Marion Bank
Marion, Ohio
Samuel J. Birnbaum......................... Director of Real Estate,
Lodgekeeper, Inc.
Prospect, Ohio
John E. Baldauf............................ President, Baldauf Construction
Co, Inc.
Marion, Ohio
Lois J. Fisher ............................ Owner, Harding Motor Lodge
Marion, Ohio
Theodore L. Graham......................... Managing Partner, Graham
Investment Co.
Marion, Ohio
William H. Harris.......................... Executive Vice President and
Cashier, The Marion Bank
Marion, Ohio
Lloyd L. Johnston.......................... President, Johnston Supply
Company
Marion, Ohio
F. Winton Lackey........................... President, Mid-Ohio Packaging
Marion, Ohio
Thurman R. Matthews........................ Owner, Mathews-Kennedy Ford/
Lincoln Mercury
Marion, Ohio
John Owens ............................ Retired Owner, Owens Electric
Marion, Ohio
(1) All are Directors of Ohio State Bancshares, Inc. and The Marion Bank
- --------------------------------------------------------------------------------
47
<PAGE> 50
OHIO STATE BANCSHARES, INC.
EXECUTIVE OFFICERS
Fred K. White, Chairman of the Board
Gary E. Pendleton, President and Chief Executive Officer
William H. Harris, Secretary/Treasurer
THE MARION BANK OFFICERS
EXECUTIVE OFFICERS
Gary E. Pendleton, President and Chief Executive Officer
William H. Harris, Executive Vice President and Cashier
Kevin C. Smith, Senior Vice President
TRANSFER AGENT, REGISTRAR & DIVIDEND DISBURSING AGENT
The Marion Bank
111 South Main Street
Marion, Ohio 43302
(614) 387-2265
ANNUAL MEETING
The annual shareholders' meeting will be held Thursday, April 10, 1997, at 5:00
p.m. in the main office of The Marion Bank, 111 South Main Street, Marion, Ohio.
- --------------------------------------------------------------------------------
48
<PAGE> 1
Exhibit 10.1
LEASE AGREEMENT
This Lease Agreement is made and entered into this 20th day of June,
1996, by and between Henney and Cooper, Inc., an Ohio corporation of Marion,
Ohio, hereinafter called Lessor, and The Marion Bank, an Ohio corporation of
Marion, Ohio, hereinafter called Lessee.
WHEREAS, Lessor owns certain vacant land located on Richland Road in
Marion, Ohio on which it is willing to cause the construction of a building to
suit Lessee's needs; and
WHEREAS, Lessee is engaged in general banking business in Marion, Ohio
and the surrounding counties and wishes to enter into a long term lease for the
land owned and the building to be built by Lessor and located on Richland Road,
and
WHEREAS, the parties desire to enter into a long term lease on the
terms and conditions hereinafter provided,
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein set forth, and other good and valuable consideration, Lessor does hereby
demise and lease to Lessee and Lessee does hereby lease from Lessor the premises
situated on Richland Road in Marion, Marion County, Ohio and more particularly
described in Exhibit A attached hereto and hereinafter called the "Leased
Premises."
ARTICLE 1. CONSTRUCTION OF BUILDING
1.01. Lessor agrees to cause to be constructed a building on the Leased
Premises substantially in accordance with a set of construction drawings
prepared by the architectural firm of Jester, Jones, Schifer and Feltham dated
March 15, 1996, said drawings being incorporated herein for reference for
purposes of establishing the building and other improvements to be constructed
on the Leased Premises (hereinafter referred to as the "Drawings".) The entire
cost of land, buildings, improvements, labor, equipment and all other items
shown on the Drawings shall be born by Lessor. The estimated completion date is
October 31, 1996.
ARTICLE 2. TERM
2.01. The term of this lease shall be twenty (20) years commencing on
the date a certificate of occupancy is delivered to Lessee.
<PAGE> 2
ARTICLE 3. RENT
3.01. Lessee agrees to pay to Lessor without any prior demand therefor
and without any deduction or set-off whatsoever, and as a fixed minimum rent, a
-------
sum equal to all cost of construction in accordance with the Drawings amortized
over twenty (20) years at the rate of eight percent (8%) payable in monthly
installments ($8.36 per thousand per month). The parties agree that the cost of
construction shall be the sum of Four Hundred Eight Thousand Dollars
($408,000.00). Any deletions or additions to the cost of construction shall be
approved in advance and in writing by Lessee. The anticipated cost of
construction as hereinabove stated shall be adjusted in accordance with approved
deletions or additions with a corresponding adjustment of the rent. Except for
the first month which shall be prorated, the rent shall be due and payable on
the first day of each month in advance. Rent not paid by the tenth (10th) of the
month shall be assessed a penalty equal to ten percent (10%) of the monthly rent
due. Any installment of rent and penalty not paid within thirty (30) days of its
due date shall bear interest at the rate of ten percent (10%) per annum. Rent
shall commence on the date a certificate of occupancy is delivered to Lessee and
shall continue for a period of twenty (20) years. At the time the payment of
rent commences, the parties agree that an Addendum to this lease shall be signed
by Lessor and Lessee which states the fixed minimum rent to be paid each month
over the term of the Lease, calculated as heretofore stated, using the final
cost of construction.
3.02. At the conclusion of the fifth (5th), tenth (10th) and fifteenth
(15th) years of this lease, the rent shall be adjusted by a percentage equal to
fifty percent (50%) of the cumulative total of the CPI for the previous five
(5)-year period as determined by the Consumer Price Index for Urban Wage Earners
and Clerical Workers-- U.S. City Average published by the Bureau of Labor
Statistics, United States Department of Labor, or if not then published, then by
the most similar economic indicator then published, with a maximum increase of
ten percent (10%) for any one five (5)-year period and a minimum of five percent
(5 %) for any one five (5)-year period.
ARTICLE 4. TAXES AND ASSESSMENTS
PAYMENT BY LESSEE
4.01. Lessee shall, as further consideration for this lease, pay and
discharge all taxes, general and special assessments and other charges of every
description which during the term of this lease may be levied on or assessed
against the Leased Premises and all interests therein and all improvements and
other property thereon, whether belonging to Lessor or to Lessee, or to which
either of them may become liable in relation thereto.
HOLD HARMLESS CLAUSE
4.02. Lessee agrees to and shall protect and hold harmless Lessor and
the Leased Premises from liability for any and all such taxes, assessments, and
charges, together with any interest, penalties, or other sums thereby imposed.
and from any sale or other proceeding to enforce payment thereof.
2
<PAGE> 3
PRORATION OF FIRST AND LAST YEAR TAXES
4.03. All such taxes and assessments for the first and last years of
this lease shall be prorated between Lessor and Lessee on the basis of the ratio
between the time the premises are leased to lessee and the time the premises are
not so leased.
TIME OF PAYMENT
4.04. Lessor agrees to provide Lessee with the tax and assessment bills
not less than fifteen (15) days before they are due. Lessee agrees to and shall
pay all such foregoing taxes, assessments, and charges prior to the delinquency
thereof and give notice of each such payment to Lessor. If Lessor fails to give
Lessee the tax bills fifteen (15) days before they are due, Lessor shall be
responsible for any delinquency thereon.
PAYMENT BY LESSOR ON LESSEE'S DEFAULT
4.05. If Lessee fails to pay such taxes, assessments, or charges, or
fails to give written notice of any payment thereof as herein provided, Lessor
may, at its option, pay such taxes, assessments, or charges, together with all
penalties and interest which may have been added thereto because of Lessee's
delinquency or default, and may likewise redeem the Leased Premises, or any part
thereof, or the buildings or improvements situated thereon, from any tax sale or
sales. Any such amounts so paid by Lessor shall become immediately due and
payable as rent by Lessee to Lessor, together with interest thereon at the rate
of ten percent (10%) per annum from the date of payment by Lessor until paid by
Lessee. Any such payment by Lessor shall not be deemed to be a waiver of any
other rights which Lessor may have under the provisions of this lease or as
provided by law.
CONTESTING LEVY, ASSESSMENT, OR CHARGE
4.06. Lessee shall have the privilege, acting in the name of the
Lessor, before delinquency occurs, of protesting, contesting, objecting to, or
opposing the legality or amount of any such taxes, assessments, or public
charges to be paid by Lessee hereunder. If Lessee shall, in good faith, deem the
same to be illegal or excessive, and in the event of any such contest, he may to
the extent provided by law defer payment of any such tax, assessment, fee, or
charge so long as the legality or the amount thereof is so contested in good
faith; provided, however, that if any time payment of the whole or any part
thereof shall become necessary in order to prevent the termination, by sale or
otherwise, of the right of redemption of any property affected thereby, or to
prevent eviction of either Lessor or Lessee because of nonpayment thereof,
Lessee shall pay the same in order to prevent such termination of the right of
redemption or such eviction. Any such contest, whether before or after payment,
may be made in the name of Lessor or Lessee, or both, as Lessee may determine,
but if such contest is made by Lessee in the name of Lessor, then Lessor shall
be notified thereof at least five (5) days prior to the commencement of the
3
<PAGE> 4
proceeding and Lessor shall cooperate, reasonably, in such contest. Any such
contest shall be at the sole cost and expense of Lessee. Each refund of any tax,
assessment, fee, or charge so contested shall be paid to Lessee. Lessor shall
not, without the prior approval of Lessee, make or enter into or finally agree
to any settlement, compromise, or any disposition of any contest, or discontinue
or withdraw any contest, or accept any refund, other adjustment, or credit of or
from any such tax or assessment as a result of any contest.
TAXES EXCLUDED
4.07. Nothing herein contained requires, or shall be construed to
require, Lessee (or any of its subtenants) to pay any personal property, gift,
estate, inheritance, or other tax assessed against Lessor, his heirs or
successors and assigns or any income or other tax assessment charge, or levy on
the rent payable by Lessee under this lease.
ARTICLE 5. INSURANCE
LESSOR'S OBLIGATION
5.01. Lessor agrees to and shall secure from a good and responsible
company or companies doing insurance business in the State of Ohio, and maintain
during the entire term of this lease, the following coverage:
(a) Fire and extended coverage insurance in an amount not less
than one hundred percent (100%) of the value of the Leased Premises and
other improvements on the Leased Premises, provided that insurance in
that percentage can be obtained, and, if not, than to the highest
percentage that can be obtained less than the said one-hundred percent
(100%).
(b) Lessee shall annually reimburse Lessor the actual cost of
the above-described insurance. Said reimbursement shall be due within
thirty (30) days of receipt of notice from Lessor of the amount due
with supporting documentation. Any reimbursement not paid within thirty
(30) days of the due date shall bear interest at the rate of ten
percent (10%) per annum.
(c) Upon sixty (60) days notice to Lessor, and consistent with
the cancellation provisions of any policy then in effect, Lessee may
elect to directly obtain the above described insurance in compliance
with the terms hereof and to pay the premium therefor directly to the
carrier. If Lessee elects to obtain fire and extended coverage
directly, Lessor agrees to cooperate and execute all applications,
policies or other documents that may be required to obtain such
insurance.
4
<PAGE> 5
LESSEE'S OBLIGATION
5.02. Lessee agrees to secure from a good and responsible company or
companies doing insurance business in the State of Ohio and maintain during the
term of this lease, the following insurance coverage:
(a) Public liability insurance in the minimum amount of Three
Million Dollars ($3,000,000.00) for loss from an accident resulting in
bodily injury to or death of persons, and One Million Dollars
($1,000,000.00) for loss from an accident resulting in damage to or
destruction of property. Lessee shall also insure all the contents of
the building at its sole expense.
ADDITIONAL INSUREDS
5.03. Lessor and Lessee agree that the other shall be named as an
additional insured on the aforementioned policies of insurance.
SUBROGATION WAIVER
5.04. Lessor and Lessee agree that, in the event of loss due to any of
the perils for which they have agreed to provide insurance, each party shall
look solely to its insurance for recovery. Lessor and Lessee hereby grant to
each other, on behalf of any insurer providing insurance to either of them with
respect to the demised premises, a waiver of any right of subrogation which any
insurer of one party may acquire against the other by virtue of payment of any
loss under such insurance.
PROOF OF COVERAGE
5.05. The original policies may be retained by the insured, but the
other party shall have the right to inspect any and all such policies, and the
insured, on demand, agrees to furnish the other party proof of payment of the
premium or premiums on any such policies.
PROTECTION AGAINST CANCELLATION
5.06. Proof must also be given by each party to the other that each of
the policies provided for in this article expressly provides that the policy
shall not be cancelled or altered without ten (10) days' prior written notice to
the other party.
FAILURE TO SECURE
5.07. If either party at any time during the term hereof should fail to
secure or maintain the foregoing insurance, the other party shall be permitted
to obtain such insurance in the defaulting party's name or as the agent of the
defaulting party and shall be compensated by the defaulting party for the cost
of the insurance premiums. The defaulting party shall pay the other interest on
paid
5
<PAGE> 6
insurance premiums at the rate of ten percent (10%) per annum computed from the
date written notice is received that the premiums have been paid.
PARTIAL OR TOTAL DESTRUCTION
5.08 If the building on the leased premises should be partially or
totally destroyed by fire, flood, or other casualty, Lessor shall rebuild and/or
make repairs so that the building is substantially the same as before such
destruction or damage. If the rebuilding or repairs cannot reasonably be
completed within one hundred and ninety-five (195) working days from the date of
written notification by Lessee to Lessor of the occurrence of the damage, this
lease shall terminate at the option of the Lessee and rent shall be abated for
the unexpired portion of this lease, effective as of the date of said written
notification.
ARTICLE 6. UTILITIES
6.01. Lessee shall during the term hereof pay all charges for all
utilities, including but not limited to telephone, gas, electricity, sewage, and
water used in or on the Leased Premises and for the removal of rubbish therefrom
immediately on becoming due and shall hold Lessor harmless from any liability
therefor.
ARTICLE 7. WASTE AND NUISANCE
7.01. Lessee shall not commit, or suffer to be committed, any waste on
the Leased Premises, nor shall maintain, commit, or permit the maintenance or
commission of any nuisance on the Leased Premises or use the Leased Premises for
any unlawful purpose.
ARTICLE 8. REPAIRS AND MAINTENANCE
LESSEE'S DUTIES TO REPAIR AND MAINTAIN
8.01. Except as otherwise provided herein, Lessee agrees to keep the
Leased Premises in good order and repair, reasonable wear and tear excepted.
More specifically Lessee agrees:
(a) To keep the Leased Premises clean and sanitary,
(b) To dispose from the Leased Premises all rubbish, garbage, and
other waste, in a clean and sanitary manner,
(c) To repair or replace all broken or damaged doors and windows
(both interior and exterior),
6
<PAGE> 7
(d) To repair and maintain the entire interior of the building,
(e) To repair, maintain and replace all wash basins, sinks,
toilets and all plumbing fixtures,
(f) To repair and maintain all electrical lighting outlets, light
fixtures, ballasts and all other electrical fixtures,
(g) To repair and maintain all interior walls, floors, ceilings
and carpeting.
(h) To repair and maintain all signs posted on the interior or
exterior of the Leased Premises,
(i) To repair and maintain the heating and cooling equipment
serving the Leased Premises.
(j) To maintain all grass and landscaping.
(k) To repair and maintain all other portions of the Leased
Premises not specifically enumerated as the Lessor's
responsibility under Paragraph 8.02 hereof.
LESSOR'S DUTIES TO REPAIR AND MAINTAIN
8.02. Except as otherwise provided herein, Lessor agrees to repair and
maintain the exterior of the Leased Premises in good order and repair,
reasonable wear and tear excepted. More specifically Lessor agrees:
(a) To keep the roof and exterior walls in a good state of repair.
(b) To replace the heating and cooling systems, unless replacement
is caused by Lessee's failure to perform routine maintenance.
Provided, however, that if replacement of the heating and
cooling system is required during the first fifteen (15) years
of the lease, the cost of replacement shall be shared equally
by Lessor and Lessee.
(c) To repair and maintain the common portion of the driveway from
Richland Road to a point in the driveway ending with the
easterly boundary of the Leased Premises, provided, however,
that Lessee shall provide snow removal for said driveway.
7
<PAGE> 8
ARTICLE 9. ALTERATIONS, IMPROVEMENTS AND FIXTURES
FIXTURES
9.01. Lessee shall have the right at any time and from time to time
during the term and any extended term hereof at his sole cost and expense, to
affix and install such property and equipment to, in, or on the Leased Premises
as it shall in its sole discretion deem advisable. Any such fixtures, equipment,
and other property installed in or affixed to or on the Leased Premises shall
remain the property of Lessee, and Lessor agrees that Lessee shall have the
right at any time, and from time to time, to remove any and all such fixtures,
equipment, and other property provided, however, that Lessee shall repair any
damages to the Leased Premises caused by such removal. Provided, further, that
any such fixtures, equipment, or property not removed from the premises within
thirty (30) days after expiration or sooner termination of the term or extended
term hereof shall be deemed to have been abandoned by Lessee and shall thereupon
become the absolute property of Lessor without compensation to Lessee.
IMPROVEMENTS
9.02. Upon written consent of Lessor, which consent shall not
unreasonably be withheld, Lessee shall have the right at his own cost and
expense from time to time during the initial term or any extended term hereof to
construct on the Leased Premises such buildings and other improvements and make
such alterations, additions, and changes therein as it deems necessary or
convenient for its purposes, and it shall be permitted from time to time during
and within thirty (30) days after expiration or sooner termination of the term
hereof to remove any such building or other improvements erected or made by it;
provided, however, that it shall repair any damages to the Leased Premises
caused by such removal and further provided that any such building or
improvement which shall not have been removed by Lessee on or within thirty (30)
days after expiration or sooner termination of the term or any extended term
hereof shall be deemed abandoned by Lessee and shall thereupon become the
absolute property of Lessor without compensation to Lessee, and Lessee shall not
be required on such abandonment to restore the premises to their present
condition. Lessee nevertheless covenants and agrees that any such improvements
shall be made in a careful, workmanlike manner and in compliance with all
applicable federal, state, and municipal laws and regulations.
ARTICLE 10. QUIET POSSESSION
COVENANT OF QUIET POSSESSION
10.01. Lessor shall, on the commencement date of the term of this lease
as hereinabove set forth, place Lessee in quiet possession of the Leased
Premises and shall secure him in the quiet possession thereof against all
persons lawfully claiming the same during the entire lease term and each
extension thereof.
8
<PAGE> 9
COVENANT REGARDING ENCUMBRANCES
10.02. Lessor warrants that this Lease is superior in priority to any
other encumbrances on the Leased Premises save and except any restrictions of
record in existence upon the execution hereof and except for any real estate
taxes not yet due and payable.
10.03. Lessor may from time to time execute a mortgage on the Leased
Premises and Lessee agrees to subordinate its leasehold interest to such
mortgagee provided the mortgagee executes a nondisturbance and attornment
agreement in a form acceptable to Lessee.
10.04. Lessor agrees within thirty (30) days after execution hereof to
provide Lessee with a certificate of title opinion showing the status of the
title at the commencement of this lease.
10.05 If at any time, Lessor seeks financing the security for which
shall be the Leased Premises, Lessor agrees to give the Lessee the right of
first refusal to match any bona fide financing terms offered by another
financial institution. Lessee shall have a period of ten (10) days after notice
to exercise or waive its right of first refusal.
ARTICLE 11. OPTION TO RENEW
11. 01. Lessee is hereby granted and shall, if not at the time in
default under this lease, have an option to renew this lease for two successive
periods of five (5) years each, but otherwise on the same terms, covenants, and
conditions herein contained.
HOW EXERCISED
11.02. This option shall be exercised only by Lessee's delivering to
Lessor in person or by United States registered or certified mail on or before
six (6) months before expiration of the initial or a renewable term written
notice of its election to renew or extend the term of this lease as herein
provided.
RENT UPON RENEWAL
11.03. The monthly rent during any renewal period shall be negotiated
during the ninety (90) days immediately prior to the expiration of the initial
term, which shall be subject to arbitration if the parties do not agree.
EFFECT OF HOLDING OVER
11.04. In the event Lessee does not renew this lease as herein
provided, and holds over
9
<PAGE> 10
beyond the expiration of the term hereof, such holding over shall be deemed a
month-to-month tenancy only at the monthly rent then being paid, payable on the
last day of each and every month thereafter until the tenancy is terminated in a
manner provided by law.
ARTICLE 12. SURRENDER OF PREMISES
NOTICE
12.01. Lessee shall, at least six (6) months prior to expiration of the
term or any renewal term hereof, give to Lessor a written notice of its
intention to surrender the Leased Premises on that date, but nothing contained
herein shall be construed as an extension of the term hereof or as a consent of
Lessor to any holding over by Lessee.
REMOVAL OF PROPERTY
12.02. Lessee shall, without demand therefor and at his own cost and
expense within thirty (30) days after expiration or sooner termination of the
term hereof or of any renewal term hereof remove all property belonging to it
and all alterations, additions, or improvements, and fixtures which by the terms
hereof it is permitted to remove, repair all damage to the Leased Premises
caused by such removal and restore the Leased Premises to the condition they
were in prior to the installation of the property so removed. Any property not
so removed shall be deemed to have been abandoned by Lessee and may be retained
or disposed of by Lessor.
SURRENDER
12.03. Lessee agrees to and shall, on expiration or sooner termination
of the term hereof or of any extended term hereof, promptly surrender and
deliver the Leased Premises to Lessor without demand therefor in good condition,
ordinary wear and tear and damage by the elements, fire, or act of God, or by
other cause beyond the reasonable control of Lessee excepted.
ARTICLE 13. CONDEMNATION
ALL OF PREMISES
13.01. If during the term of this lease or any extension or renewal
thereof, all of the Leased Premises should be taken for any public or
quasi-public use under any law, ordinance, or regulation or by right of eminent
domain, or should be sold to the condemning authority under threat of
condemnation, this lease shall terminate and the rent shall be abated during the
unexpired portion of this lease, effective as of the date of the taking of said
premises by the condemning authority.
10
<PAGE> 11
PARTIAL
13.02. If less than all of the leased premises shall be taken for any
public or quasi-public use under any law, ordinance, or regulation, or by right
of eminent domain, or should be sold to the condemning authority under threat of
condemnation, this lease shall not terminate but Lessor shall forthwith at his
sole expense, restore and reconstruct the building and other improvements,
situated on the leased premises, provided such restoration and reconstruction
shall make the same reasonable tenantable and suitable for the uses for which
the premises are leased. The rent payable hereunder during the unexpired portion
of this lease shall be adjusted equitably.
ALLOCATION OF AWARDS
13.03. Lessor and Lessee shall each be entitled to receive and retain
such separate awards and portions of lump sum awards as may be allocated to
their respective interests in any condemnation proceedings. The termination of
this lease shall not affect the rights of the respective parties to such awards.
ARTICLE 14. DEFAULTS AND REMEDIES
DEFAULT BY LESSEE
14.01. If Lessee shall allow the rent to be in arrears more than thirty
(30) days after written notice of such delinquency, or shall remain in default
under any other condition of this lease for a period of thirty (30) days after
written notice from Lessor, or should any other person other than Lessee secure
possession of the premises, or any part thereof, by reason of any receivership,
bankruptcy, proceedings, or other operation of law in any manner whatsoever,
Lessor may at its option, without notice to Lessee, terminate this lease or in
the alternative, Lessor may re-enter and take possession of said premises and
remove all persons and property therefrom, without being deemed guilty of any
manner of trespass, and relet the premises or any part thereof, for all or any
part of the remainder of said term, to a party satisfactory to Lessor, and at
such monthly rental as Lessor may with reasonable diligence be able to secure.
Should Lessor be unable to relet after reasonable efforts to do so, or should
such monthly rental be less than the rental Lessee was obligated to pay under
this lease, or any renewal thereof, plus the expense of reletting, then Lessee
shall pay the amount of such deficiency to Lessor.
All rights and remedies of Lessor under this lease shall be cumulative,
and none shall exclude any other right or remedy at law. Such rights and
remedies may be exercised and enforced concurrently and whenever and as often as
occasion therefor arises.
DEFAULT BY LESSOR
14.02. If Lessor defaults in the performance of any term, covenant, or
condition required to be performed by him under this agreement, Lessee may elect
either one of the following:
11
<PAGE> 12
(a) After not less than thirty (30) days' notice to
Lessor, Lessee may remedy such default by any
necessary action, and in connection with such remedy
may pay expenses and employ counsel; all reasonable
sums expended or obligations incurred by Lessee in
connection therewith shall be paid by Lessor to
Lessee on demand, and on failure of such
reimbursement, Lessee may, in addition to any other
right or remedy that Lessee may have, deduct the
costs and expenses thereof from rent subsequently
becoming due hereunder; or
(b) Elect to terminate this agreement on giving at least
thirty (30) days' notice to Lessor of such intention,
thereby terminating this agreement on the date
designated in such notice, unless Lessor shall have
cured such default prior to expiration of the thirty
(30)-day period.
ARTICLE 15. INSPECTION BY LESSOR
15.01. Lessee shall permit Lessor and his agents to enter into and upon
the leased premises at all reasonable times for the purpose of inspecting the
same or for the purpose of maintaining or making repairs or alterations to the
building.
ARTICLE 16. ASSIGNMENT, SUBLEASE AND LESSOR'S COVENANT
16.01. Lessee shall have the right with the prior written consent of
Lessor, which consent will not be unreasonably withheld, to assign this lease,
and any interest therein, and to sublet the Leased Premises, or any part
thereof, or any right or privilege pertinent thereto, provided each assignee
assumes in writing all of Lessee's obligations under this lease, and Lessee
shall remain liable for each and every obligation under this lease, and provided
further Lessee shall not sublease to any person or entity which is in the same
business as any of Lessor's other tenants on Richland Road or Mt. Vernon Avenue
in Marion, Ohio.
ASSIGNMENT BY LESSOR
16.02. Lessor is expressly given the right to assign any or all of its
interest under the terms of this lease.
16.03. Lessor or any of its affiliates agrees that during the initial
and any renewal terms hereof not to lease any real estate currently owned by it,
located on Richland Road or Mt. Vernon Avenue, to any other financial
institution of any kind doing business in Marion County, save and except for any
tenants of Lessor already under lease at the time of execution of this lease or
their successors and assigns.
16.04. For purposes of this paragraph "affiliate" shall mean Lessor or
any of its shareholders, officers, directors or successors in interest thereto.
12
<PAGE> 13
ARTICLE 17. RIGHT OF FIRST REFUSAL
17.01. If at any time during the initial term or any renewal term of
this lease Lessor shall receive a bona fide offer to purchase the Leased
Premises which Lessor desires to accept, Lessee is hereby granted a right of
first refusal to purchase the Leased Premises on the same terms and conditions
of the bona fide offer. Lessee shall have a period of thirty (30) days after
written notice in which to exercise or waive its right of first refusal.
Provided, however, the right of first refusal granted to Lessee pertains only to
the Leased Premises and not to other contiguous property owned by Lessor, nor to
any offer received by Lessor which includes such contiguous property in addition
to the Leased Premises.
17.02. Lessor is currently the owner of contiguous property being Tract
"E" and part of Tract "D" in Reidenbaugh Addition to the City of Marion, Ohio.
If Lessor receives an offer for the sale of said contiguous property (whether or
not including the leased premises) Lessor will obtain an affidavit from said
prospective purchaser that restricts the use of said premises as a bank for a
period of five years from the date of purchase, except for the current use by
City Loan & Savings and The Marion Bank, their successors and assigns.
If a prospective purchaser refuses to provide such affidavit, then and
in that event, Lessor shall give Lessee thirty (30) days notice of such proposed
sale and the terms thereof. Lessee shall have the first option to purchase said
property within the thirty (30) day period at the same price and on the same
terms of any such proposal.
ARTICLE 18. LICENSE FOR INGRESS AND EGRESS
18.01. The parties agree that ingress and egress to the Leased Premises
is through and across a driveway owned by Lessor located immediately along the
northern boundary of the Leased Premises and over which Lessee is granted a
license for unrestricted access to the Leased Premises. Lessor agrees to improve
that portion of the driveway serving the Leased Premises to a standard
consistent with commercial vehicular traffic to and from the Leased Premises.
The driveway shall have curb cuts to the Leased Premises as shown in the
Drawings. The driveway is more particularly described in the attached Exhibit B.
18.02. Lessor agrees to repair and maintain the driveway area serving
the Leased Premises to a standard consistent with commercial vehicular traffic
to and from the Leased Premises.
18.03. Lessee agrees to provide snow removal for the driveway from
Richland Road to a point in the driveway ending with the easterly boundary of
the Leased Premises.
18.04. If Lessee's right to use the driveway is terminated for any
reason, Lessee shall have the option to immediately terminate this lease.
13
<PAGE> 14
18.05. Although Lessee's right to use the driveway shall be
nonexclusive, Lessor agrees not to grant any right to any third party which
unreasonably interferes with Lessee's use of the driveway.
ARTICLE 19. SIGNS
19.01. Lessee shall have the right to erect signs on any portion of the
Leased Premises including, but not limited to, the exterior walls of the
building, windows, doors and grounds, subject to applicable laws and deed
restrictions. Lessee shall remove all signs at the termination of this lease and
shall repair any damage and close any holes caused by such removal.
19.02. Lessor agrees as part of the initial construction cost to erect
one (1) sign as shown in the Drawings. Thereafter the lettering shall be deemed
the property of Lessee but the sign structure shall remain the property of
Lessor.
19.03. Lessee shall be responsible for the repair and maintenance of
all signage.
ARTICLE 20. ARBITRATION
20.01. Lessor and Lessee agree to submit to arbitration any dispute
that may arise out of the construction or implementation of the terms of this
lease. In the event arbitration is requested by either party, each party shall
select one arbitrator and the two arbitrators shall select a third. The
arbitrators shall then meet and hear the arguments of the parties and decide the
matter by majority vote. The decision of the arbitrators shall be final and
binding. Each party shall pay the cost of the arbitrator selected by it and the
cost of the third arbitrator shall be paid by the party most adversely affected
by the award.
ARTICLE 21. MISCELLANEOUS
NOTICES AND ADDRESSES
21.01. All notices provided to be given under this agreement shall be
given by certified mail or registered mail, addressed to the property party, at
the following address:
Lessor: Lessee:
Stephen L. Jenkins Gary E. Pendleton, President
P.O. Box 513 111 South Main Street
Marion, Ohio 43301-0513 P.O. Box 1818
Marion, Ohio 43301-1818
14
<PAGE> 15
PARTIES BOUND
21.02. This agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective heirs, executors, administrators, legal
representatives, successors, and assigns when permitted by this agreement.
OHIO LAW TO APPLY
21.03. This agreement shall be construed under and in accordance with
the laws of the State of Ohio, and all obligations of the parties created
hereunder are performable in Marion County, Ohio.
LEGAL CONSTRUCTION
21.04. In case any one or more of the provisions contained in this
lease shall for any reason be held to be invalid, illegal, or unenforceable in
any respect, such invalidity, illegality, or unenforceability shall not affect
any other provision thereof and this lease shall be construed as if such
invalid, illegal, or unenforceable provision had never been contained herein.
SOLE AGREEMENT OF THE PARTIES
21.05. This lease constitutes the sole and only agreement of the
parties hereto and supersedes any prior understandings or written or oral
agreements between the parties respecting the within subject matter.
AMENDMENT
21.06. No amendment, modification, or alteration of the terms hereof
shall be binding unless the same be in writing, dated subsequent to the date
hereof, and duly executed by the parties hereto.
15
<PAGE> 16
RIGHTS AND REMEDIES CUMULATIVE
21.07. The rights and remedies provided by this lease are cumulative
and the use of any one right or remedy by either party shall not preclude or
waive its right to use any or all other remedies. Said rights and remedies are
given in addition to any other rights the parties may have by law, statute,
ordinance, or otherwise.
WAIVER OF DEFAULT
21.08. No waiver by the parties hereto of any default or breach of any
term, condition, or covenant of this lease shall be deemed to be a waiver of any
other breach of the same or any other term, condition, or covenant contained
herein.
ATTORNEYS' FEES
21.09. In the event Lessor or Lessee breaches any of the terms of this
agreement whereby the party not in default employs attorneys to protect or
enforce its rights hereunder and prevails, then the defaulting party agrees to
pay the other party reasonable attorneys' fees so incurred by such other party.
EXCUSE
21.10. Neither Lessor nor Lessee shall be required to perform any term,
condition, or covenant in this lease so long as such performance is delayed or
prevented by any acts of God, strikes, lockouts, material or labor restrictions
by any governmental authority, civil riot, floods, and any other cause not
reasonably within the control of the Lessor or Lessee and which by the exercise
of due diligence Lessor or Lessee in unable, wholly or in part, to prevent or
overcome.
TIME OF THE ESSENCE
21. 11. Time is of the essence of this agreement.
16
<PAGE> 17
MEMORANDUM OF LEASE
21.12. A short form of this Lease, as furnished by LESSOR, shall be
executed for recording at the same time this Lease is executed, and shall be the
only instrument pertaining to this Lease that shall be publicly recorded.
IN WITNESS WHEREOF. the undersigned Lessor and Lessee hereto execute
this agreement as of the day and year first above written.
Signed and acknowledged LESSOR
in presence of:
HENNEY AND COOPER, INC.
- -----------------------------
By
----------------------------
Stephen L. Jenkins, President
- -----------------------------
LESSEE
THE MARION BANK
- -----------------------------
By
-----------------------------
Gary E. Pendleton, President
- -----------------------------
STATE OF OHIO )
)
COUNTY OF MARION) SS:
Before me, a Notary Public in and for said county, personally appeared
the above-named Stephen L. Jenkins, President of HENNEY AND COOPER,
INC., who acknowledged the signing thereof to be his voluntary act and
deed.
IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal
this 20th day of June, 1996.
-------------------------------------
Notary Public
17
<PAGE> 18
STATE OF OHIO )
)
COUNTY OF MARION) SS:
Before me, a Notary Public in and for said county, personally appeared
the above-named Gary E. Pendleton, President of THE MARION BANK, who
acknowledged the signing thereof to be his voluntary act and deed.
IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal
this 20th day of June, 1996.
----------------------------------
Notary Public
This instrument was prepared by:
Ted M. McKinniss, Esq.
EMENS, KEGLER, BROWN, HILL & RITTER
250 Executive Drive, Suite B
Marion, Ohio 43302
18
<PAGE> 19
ADDENDUM
This Addendum to Lease Agreement dated June 20, 1996 between Henney &
Cooper, Inc. ("Lessor"), and The Marion Bank ("Lessee") is made and entered into
as of December 5, 1996:
WITNESSETH:
WHEREAS, Lessor and Lessee entered into a Lease Agreement dated June
20, 1996 whereby Lessor agreed to cause to be constructed on the leased premises
a building for use by Lessee as a branch bank; and
WHEREAS, Section 3.01 of said Lease Agreement sets forth a formula for
determination of the lease payments based upon the cost of construction of said
building; and
WHEREAS, Section 3.01 further provides that an Addendum shall be signed
by Lessor and Lessee which states the fixed minimum rent to be paid using the
final cost of construction. -------
NOW, THEREFORE, In consideration of the Lease Agreement and the mutual
promises of the parties, the parties agree as follows:
1. The final cost of construction of the building constructed on
the leased premises was $386,236.00.
2. The date of the commencement of said lease shall be December
5, 1996.
3. The amount of the fixed minimum rent calculated at the rate of
$8.36 per thousand per month shall be $3,229.00 per month.
4. The amount of rent for the month of December 1996 shall be
prorated and it is agreed that the rent for the period from
December 5,1996 through December 31, 1996 shall be $2,708.00.
5. Commencing January 1, 1997 through November 30, 2001 the fixed
minimum rent shall be $3,229.00 per month.
6. On December 1, 2001 the fixed minimum rent shall be adjusted
in accordance with the provisions of Section 3.02 of the Lease
Agreement.
7. Except as specifically amended hereby, the Lease Agreement
dated June 20, 1996 shall remain in full force and effect.
<PAGE> 20
IN WITNESS WHEREOF, the parties have hereunto subscribed their names in
duplicate on the day and year first above written.
Signed in the presence of: HENNEY & COOPER, INC.
BY
- --------------------------------- --------------------------------
Stephen L. Jenkins, President
- --------------------------------
THE MARION BANK
- --------------------------------
BY
- --------------------------------- ---------------------------------
Gary E. Pendleton, President
STATE OF OHIO
MARION COUNTY ss:
Before me, a Notary Public in and for said County and State, personally
appeared the above-named Stephen L. Jenkins, President of Henney and Cooper,
Inc., who acknowledged that he did sign the foregoing instrument and that the
same is his free act and deed for the uses and purposes therein set forth.
IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at
Marion, Ohio this 7th day of February, 1997.
---------------------------------
Notary Public
STATE OF OHIO
MARION COUNTY ss:
Before me, a Notary Public in and for said County and State, personally
appeared the above-named Gary Pendleton, President of The Marion Bank Lessee,
who acknowledged that he did sign the foregoing instrument and that the same is
his free act and deed for the uses and purposes therein set forth.
IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at
Marion, Ohio this ______ day of February, 1997.
---------------------------------
Notary Public
This instrument prepared by BARTRAM BARTRAM, Attorneys at Law
146 E. Center Street, P.O. Box 3
Marion, Ohio 43301-0003
<PAGE> 1
EXHIBIT 10.2
EXECUTIVE INDEXED SALARY CONTINUATION PLAN
AGREEMENT
This Agreement, made and entered into this 30th day of December, 1996,
by and between The Marion Bank, a Bank organized and existing under the laws of
the State of Ohio, hereinafter referred to as "the Bank", and Gary E. Pendleton,
a Key Employee and the Executive of the Bank, hereinafter referred to as "the
Executive".
The Executive has been in the employ of the Bank for several years and
has now and for years past faithfully served the Bank. It is the consensus of
the Board of Directors of the Bank (The Board) that the Executive's services
have been of exceptional merit, in excess of the compensation paid and an
invaluable contribution to the profits and position of the Bank in its field of
activity. The Board further believes that the Executive's experience, knowledge
of corporate affairs, reputation and industry contacts are of such value and his
continued services are so essential to the Bank's future growth and profits that
it would suffer severe financial loss should the Executive terminate his
services.
Accordingly, it is the desire of the Bank and the Executive to enter
into this Agreement under which the Bank will agree to make certain payments to
the Executive upon his retirement and, alternatively, to his beneficiary(ies) in
the event of his premature death while employed by the Bank.
It is the intent of the parties hereto that this Agreement be
considered an arrangement maintained primarily to provide supplemental
retirement benefits for the Executive, as a member of a select group of
management or highly-compensated employees of the Bank for purposes of the
Employee Retirement Security Act of 1974 (ERISA). The Executive is fully advised
of the Bank's financial status and has had substantial input in the design and
operation of this benefit plan.
Therefore, in consideration of the Executive's services performed in
the past and those to be performed in the future and based upon the mutual
promises and covenants herein contained, the Bank and the Executive, agree as
follows:
<PAGE> 2
I. DEFINITIONS
A. Effective Date:
--------------
The Effective Date of this Agreement shall be December 30,
1996.
B. Plan Year:
---------
Any reference to "Plan Year" shall mean a calendar year from
January 1 to December 31. In the year of implementation, the
term "Plan Year" shall mean the period from the effective date
to December 31 of the year of the effective date.
C. Retirement Date:
---------------
Retirement Date shall mean retirement from service with the
Bank which becomes effective on the first day of the calendar
month following the month in which the Executive reaches his
sixtieth (60th) birthday or such later date as the Executive
may actually retire.
D. Termination of Service:
----------------------
Termination of Service shall mean voluntary resignation of
service by the Executive or the Bank's discharge of the
Executive without cause ["cause" defined in subparagraph III
(D) hereinafter], prior to the Normal Retirement Age
[described in subparagraph I (J) hereinafter].
E. Pre-Retirement Account:
----------------------
A Pre-Retirement Account shall be established as a liability
reserve account on the books of the Bank for the benefit of
the Executive. Prior to termination of service or Retirement
Date or the Executive's actual retirement from service with
the Bank, such liability reserve account shall be increased or
decreased each Plan Year (including the Plan Year in which the
Executive ceases to be employed by the Bank) by an amount
equal to the annual earnings or loss for that Plan Year
determined by the Index [described in subparagraph I (G)
hereinafter], less the Cost of Funds Expense for that Plan
Year [described in subparagraph I (H) hereinafter].
F. Index Retirement Benefit:
------------------------
The Index Retirement Benefit for the Executive for any year
shall be equal to the excess of the annual earnings (if any)
determined by the Index [subparagraph I (G)] for that Plan
Year over the Cost of Funds Expense [subparagraph I (H)] for
that Plan Year.
2
<PAGE> 3
G. Index:
-----
The Index for any Plan Year shall be the aggregate annual
after-tax income from the life insurance contracts described
hereinafter as defined by FASB Technical Bulletin 85-4. This
Index shall be applied as if such insurance contracts were
purchased on the effective date hereof.
Insurance Company: Alexander Hamilton Life Insurance Co.
Policy Form: Flexible Premium Adjustable Life
Policy Name: Executive Security Plan
Insured's Age and Sex: 52, Male
Riders: None
Ratings: None
Option: A
Face Amount: $1,239,860
Premiums Paid: $88,000
Number of Premium Payments: Thirteen
Assumed Purchase Date: December 31, 1996
If such contracts of life insurance are actually purchased by
the Bank then the actual policies as of the dates they were
purchased shall be used in calculations under this Agreement.
If such contracts of life insurance are not purchased or are
subsequently surrendered or lapsed, then the Bank shall
receive annual policy illustrations that assume the above
described policies were purchased from the above named
insurance company(ies) on the Effective Date from which the
increase in policy value will be used to calculate the amount
of the Index.
In either case, references to the life insurance contract are
merely for purposes of calculating a benefit. The Bank has no
obligation to purchase such life insurance and, if purchased,
the Executive and his beneficiary(ies) shall have no ownership
interest in such policy and shall always have no greater
interest in the benefits under this Agreement than that of an
unsecured general creditor of the Bank.
H. Cost of Funds Expense:
---------------------
The Cost of Funds Expense for any Plan Year shall be
calculated by taking the sum of the amount of premiums set
forth in the Indexed policies described above plus the amount
of any after-tax benefits paid to the Executive pursuant to
this Agreement (Paragraph III hereinafter) plus the amount of
all previous years after-tax Costs of Funds Expense, and
multiplying that sum by the average after-tax cost of funds of
the Bank's third quarter Call Report for the Plan Year as
filed with the Federal Reserve.
3
<PAGE> 4
I. Change of Control:
-----------------
Change of control shall be deemed to be the cumulative
transfer of more than fifty percent (50%) of the voting stock
of the Bank Holding Company from the Effective Date of this
Agreement. For the purposes of this Agreement, transfers on
account of deaths or gifts, transfers between family members
or transfers to a qualified retirement plan maintained by the
Bank shall not be considered in determining whether there has
been a change in control.
J. Normal Retirement Age:
---------------------
Normal Retirement Age shall mean the date on which the
Executive attains age sixty-five (65).
II. EMPLOYMENT
No provision of this Agreement shall be deemed to restrict or limit any
existing employment agreement by and between the Bank and the
Executive, nor shall any conditions herein create specific employment
rights to the Executive nor limit the right of the Employer to
discharge the Executive with or without cause. In a similar fashion, no
provision shall limit the Executive's rights to voluntarily sever his
employment at any time.
III. INDEX BENEFITS
The following benefits provided by the Bank to the Executive are in the
nature of a fringe benefit and shall in no event be construed to effect
nor limit the Executive's current or prospective salary increases, cash
bonuses or profit-sharing distributions or credits.
A. Retirement Benefits:
-------------------
Should the Executive continue to be employed by the Bank until
his Retirement Date, defined in subparagraph I (C), he shall
be entitled to receive the balance in his Pre-Retirement
Account [as defined in subparagraph I (E)] in fifteen (15)
equal annual installments commencing thirty (30) days
following the Executive's Retirement. In addition to these
payments, commencing with the Plan Year in which the Executive
attains his Normal Retirement Age, defined in subparagraph I
(J), the Index Retirement Benefit [as defined in subparagraph
I (F) above] for each year shall be paid to the Executive
until his death.
4
<PAGE> 5
B. Termination of Service:
----------------------
Subject to subparagraph III (D) hereinafter, should the
Executive suffer a termination of service [defined in
subparagraph I (D)], he shall be entitled to receive ten
percent (10%), times the number of full years (to a maximum of
100%) the Executive has served from the date of first
employment prior to attaining Normal Retirement Age with the
Bank, times the balance in the Pre-Retirement Account paid
over fifteen (15) years in equal installments commencing at
the Retirement Date [subparagraph I (C)]. In addition to these
payments, commencing upon the Executive's Normal Retirement
Age, ten percent (10%) times full years of service with the
Bank, times the Index Retirement Benefit for each year shall
be paid to the Executive until his death.
C. Death:
-----
Should the Executive die prior to having received the full
balance of the Pre-Retirement Account, the unpaid balance of
the Pre-Retirement Account shall be paid in a lump sum to the
beneficiary selected by the Executive and filed with the Bank.
In the absence of or a failure to designate a beneficiary, the
unpaid balance shall be paid in a lump sum to the personal
representative of the Executive's estate.
D. Discharge for Cause:
-------------------
Should the Executive be discharged for cause at any time prior
to his Retirement Date, all Index Benefits under this
Agreement [subparagraphs III (A), (B) or (C)] shall be
forfeited. The term "for cause" shall mean gross negligence or
gross neglect or the conviction of a felony or gross-
misdemeanor involving moral turpitude, fraud, dishonesty
or willful violation of any law that results in any adverse
effect on the Bank. If a dispute arises as to discharge "for
cause", such dispute shall be resolved by arbitration as set
forth in this Agreement.
E. Disability:
----------
In the event the Executive shall become disabled, he shall be
considered to have reached his retirement date as of the date
of his disability for the purposes of receiving benefit
payments under this Agreement. The fact of disability shall be
in the sole discretion of the Board of Directors of the Bank
upon the application of the Executive.
5
<PAGE> 6
F. Death Benefit:
-------------
Except as set forth above, there is no death benefit provided
under this Agreement.
IV. RESTRICTIONS UPON FUNDING
The Bank shall have no obligation to set aside, earmark or entrust any
fund or money with which to pay its obligations under this Agreement.
The Executive, his beneficiary(ies) or any successor in interest to him
shall be and remain simply a general creditor of the Bank in the same
manner as any other creditor having a general claim for matured and
unpaid compensation.
The Bank reserves the absolute right at its sole discretion to either
fund the obligations undertaken by this Agreement or to refrain from
funding the same and to determine the exact nature and method of such
funding. Should the Bank elect to fund this Agreement, in whole or in
part, through the purchase of life insurance, mutual funds, disability
policies or annuities, the Bank reserves the absolute right, in its
sole discretion, to terminate such funding at any time, in whole or in
part. At no time shall the Executive be deemed to have any lien or
right, title or interest in or to any specific funding investment or to
any assets of the Bank.
If the Bank elects to invest in a life insurance, disability or annuity
policy upon the life of the Executive, then the Executive shall assist
the Bank by freely submitting to a physical exam and supplying such
additional information necessary to obtain such insurance or annuities.
V. CHANGE OF CONTROL
Upon a Change of Control [as defined in subparagraph I (I) herein], if
the Executive's employment is subsequently terminated then he shall
receive the benefits promised in this Agreement upon attaining Normal
Retirement Age, as if he had been continuously employed by the Bank
until his Normal Retirement Age. The Executive will also remain
eligible for all promised death benefits in this Agreement. In
addition, no sale, merger or consolidation of the Bank shall take place
unless the new or surviving entity expressly acknowledges the
obligations under this Agreement and agrees to abide by its terms.
6
<PAGE> 7
VI. MISCELLANEOUS
A. Alienability and Assignment Prohibition:
---------------------------------------
Neither the Executive, his/her surviving spouse nor any other
beneficiary under this Agreement shall have any power or right
to transfer, assign, anticipate, hypothecate, mortgage,
commute, modify or otherwise encumber in advance any of the
benefits payable hereunder nor shall any of said benefits be
subject to seizure for the payment of any debts, judgments,
alimony or separate maintenance owed by the Executive or his
beneficiary, nor be transferable by operation of law in the
event of bankruptcy, insolvency or otherwise. In the event the
Executive or any beneficiary attempts assignment, commutation,
hypothecation, transfer or disposal of the benefits hereunder,
the Bank's liabilities shall forthwith cease and terminate.
B. Binding Obligation of Bank and any Successor in Interest:
--------------------------------------------------------
The Bank expressly agrees that it shall not merge or
consolidate into or with another bank or sell substantially
all of its assets to another bank, firm or person until such
bank, firm or person expressly agrees, in writing, to assume
and discharge the duties and obligations of the Bank under
this Agreement. This Agreement shall be binding upon the
parties hereto, their successors, beneficiary(ies), heirs and
personal representatives.
C. Revocation:
----------
It is agreed by and between the parties hereto that, during
the lifetime of the Executive, this Agreement may be amended
or revoked at any time or times, in whole or in part, by the
mutual written assent of the Executive and the Bank.
D. Gender:
------
Whenever in this Agreement words are used in the masculine or
neuter gender, they shall be read and construed as in the
masculine, feminine or neuter gender, whenever they should so
apply.
E. Effect on Other Bank Benefit Plans:
----------------------------------
Nothing contained in this Agreement shall affect the right of
the Executive to participate in or be covered by any qualified
or non-qualified pension, profit-sharing, group, bonus or
other supplemental compensation or fringe benefit plan
constituting a part of the Bank's existing or future
compensation structure.
7
<PAGE> 8
F. Headings:
--------
Headings and subheadings in this Agreement are inserted for
reference and convenience only and shall not be deemed a part
of this Agreement.
G. Applicable Law:
--------------
The validity and interpretation of this Agreement shall be
governed by the laws of the State of Ohio.
VII. ERISA PROVISION
A. Named Fiduciary and Plan Administrator:
--------------------------------------
The "Named Fiduciary and Plan Administrator" of this plan
shall be The Marion Bank until its removal by the Board. As
Named Fiduciary and Administrator, the Bank shall be
responsible for the management, control and administration of
the Salary Continuation Agreement as established herein. The
Named Fiduciary may delegate to others certain aspects of the
management and operation responsibilities of the plan
including the employment of advisors and the delegation of
ministerial duties to qualified individuals.
B. Claims Procedure and Arbitration:
--------------------------------
In the event a dispute arises over benefits under this
Agreement and benefits are not paid to the Executive (or to
his beneficiary in the case of the Executive's death) and such
claimants feel they are entitled to receive such benefits,
then a written claim must be made to the Plan Administrator
named above within ninety (90) days from the date payments are
refused. The Plan Administrator shall review the written claim
and if the claim is denied, in whole or in part, they shall
provide in writing within ninety (90) days of receipt of such
claim their specific reasons for such denial, reference to the
provisions of this Agreement upon which the denial is based
and any additional material or information necessary to
perfect the claim. Such written notice shall further indicate
the additional steps to be taken by claimants if a further
review of the claim denial is desired. A claim shall be deemed
denied if the Plan Administrator fails to take any action
within the aforesaid ninety-day period.
If claimants desire a second review they shall notify the Plan
Administrator in writing within ninety (90) days of the first
claim denial. Claimants may review this Agreement or any
documents relating thereto and submit any written issues and
8
<PAGE> 9
comments they may feel appropriate. In its sole discretion,
the Plan Administrator shall then review the second claim and
provide a written decision within ninety (90) days of receipt
of such claim. This decision shall likewise state the specific
reasons for the decision and shall include reference to
specific provisions of this Agreement upon which the decision
is based.
If claimants continue to dispute the benefit denial based upon
completed performance of this Agreement or the meaning and
effect of the terms and conditions thereof, then claimants may
submit the dispute to a Board of Arbitration for final
arbitration. Said Board shall consist of one member selected
by the claimant, one member selected by the Bank, and the
third member selected by the first two members. The Board
shall operate under any generally recognized set of
arbitration rules. The parties hereto agree that they and
their heirs, personal representatives, successors and assigns
shall be bound by the decision of such Board with respect to
any controversy properly submitted to it for determination.
Where a dispute arises as to the Bank's discharge of the
Executive "for cause", such dispute shall likewise be
submitted to arbitration as above described and the parties
hereto agree to be bound by the decision thereunder.
IN WITNESS WHEREOF, the parties hereto acknowledge that each has
carefully read this Agreement and executed the original thereof on the 30th day
of December, 1996 and that, upon execution, each has received a conforming copy.
THE MARION BANK
By:
- --------------------------- --------------------------------------
Witness Title
By:
- --------------------------- --------------------------------------
Witness Gary E. Pendleton
9
<PAGE> 1
EXHIBIT 21
- ----------
OHIO STATE BANCSHARES, INC.
---------------------------
State of Percentage of
Subsidiary Incorporation securities owned
- ---------- ------------- ----------------
The Marion Bank (1) Ohio 100%
(1) The subsidiary's principal office is located in Marion, Ohio.
- --------------------------------------------------------------------------------
49
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,972,038
<INT-BEARING-DEPOSITS> 499,000
<FED-FUNDS-SOLD> 716,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,089,532
<INVESTMENTS-CARRYING> 2,629,280
<INVESTMENTS-MARKET> 2,609,268
<LOANS> 27,572,913
<ALLOWANCE> 281,142
<TOTAL-ASSETS> 43,055,886
<DEPOSITS> 39,468,970
<SHORT-TERM> 0
<LIABILITIES-OTHER> 360,936
<LONG-TERM> 0
0
0
<COMMON> 1,212,000
<OTHER-SE> 2,013,980
<TOTAL-LIABILITIES-AND-EQUITY> 43,055,886
<INTEREST-LOAN> 2,486,077
<INTEREST-INVEST> 741,802
<INTEREST-OTHER> 57,620
<INTEREST-TOTAL> 3,285,499
<INTEREST-DEPOSIT> 1,509,093
<INTEREST-EXPENSE> 1,539,520
<INTEREST-INCOME-NET> 1,745,979
<LOAN-LOSSES> 163,000
<SECURITIES-GAINS> 7,314
<EXPENSE-OTHER> 1,465,123
<INCOME-PRETAX> 358,791
<INCOME-PRE-EXTRAORDINARY> 259,406
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 259,406
<EPS-PRIMARY> 2.14
<EPS-DILUTED> 2.14
<YIELD-ACTUAL> 4.52
<LOANS-NON> 29,147
<LOANS-PAST> 40,222
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 20,625
<ALLOWANCE-OPEN> 252,174
<CHARGE-OFFS> 165,534
<RECOVERIES> 31,502
<ALLOWANCE-CLOSE> 281,142
<ALLOWANCE-DOMESTIC> 281,142
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 146,208
</TABLE>
<PAGE> 1
OHIO STATE BANCSHARES, INC.
EXHIBIT NO. 99
- --------------------------------------------------------------------------------
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
----------------------------------------------------------------------
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about their companies, so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those discussed in the statement. Ohio State
Bancshares, Inc. ("Corporation") desires to take advantage of the "safe harbor"
provisions of the Act. Certain information, particularly information regarding
future economic performance and finances and plans and objectives of management,
contained or incorporated by reference in the Corporation's Annual Report on
Form 10-KSB for the year ended December 31, 1996 is forward-looking. In some
cases, information regarding certain important factors that could cause actual
results of operations or outcomes of other events to differ materially from any
such forward-looking statement appear together with such statement. In addition,
forward-looking statements are subject to other risks and uncertainties
affecting the financial institutions industry, including, but not limited to,
the following:
Interest Rate Risk
- ------------------
The Corporation's operating results are dependent to a significant
degree on its net interest income, which is the difference between interest
income from loans, securities and other interest-earning assets and interest
expense on deposits, borrowings and other interest-bearing liabilities. The
interest income and interest expense of the Corporation change as the interest
rates on interest-earning assets and interest-bearing liabilities change.
Interest rates may change because of general economic conditions, the policies
of various regulatory authorities and other factors beyond the Corporation's
control. In a rising interest rate environment, loans tend to prepay slowly and
new loans at higher rates increase slowly, while interest paid on deposits
increases rapidly because the terms to maturity of deposits tend to be shorter
than the terms to maturity or prepayment of loans. Such differences in the
adjustment of interest rates on assets and liabilities may negatively affect the
Corporation's income.
Adequacy of the Allowance for Loan Losses
- -----------------------------------------
The Corporation maintains an allowance for loan losses based upon a
number of relevant factors, including, but not limited to, trends in the level
of nonperforming assets and classified loans, current and anticipated economic
conditions in the primary lending area, past loss experience, possible losses
arising from specific problem loans and changes in the composition of the loan
portfolio. While the Board of Directors of the Corporation believes that it uses
the best information available to determine the allowance for loan losses,
unforeseen market conditions could result in material adjustments, and net
earnings could be significantly adversely affected if circumstances differ
substantially from the assumptions used in making the final determination.
<PAGE> 2
Loans secured by one- to four-family residential real estate are
generally considered to involve less risk of loss than other loans in the
portfolio due, in part, to the effects of general economic conditions. The
repayment of commercial loans generally depends upon the cash flow from the
operation of the business or property, which may be negatively affected by
national and local economic conditions. The risk of default on installment and
credit card loans increases during periods of recession, high unemployment and
other adverse economic conditions. When consumers have trouble paying their
bills, they are more likely to pay mortgage loans than consumer loans. In
addition, the collateral securing such loans, if any, may decrease in value more
rapidly than the outstanding balance of the loan.
Competition
- -----------
The Marion Bank ("Bank") competes for deposits with other commercial banks,
savings associations and credit unions and issuers of commercial paper and other
securities, such as shares in money market mutual funds. The primary factors in
competing for deposits are interest rates and convenience of office location. In
making loans, The Bank competes with other, commercial banks, savings
associations, consumer finance companies, credit unions, leasing companies,
mortgage companies and other lenders. Competition is affected by, among other
things, the general availability of lendable funds, general and local economic
conditions, current interest rate levels and other factors which are not readily
predictable. The size of financial institutions competing with the Bank is
likely to increase as a result of changes in statutes and regulations
eliminating various restrictions on interstate and inter-industry branching and
acquisitions. Such increased competition may have an adverse effect upon the
Corporation.
Legislation and Regulation that may Adversely Affect the Corporation Earnings
- -----------------------------------------------------------------------------
As a state-chartered financial institution, the Bank is subject to
extensive regulation by the Ohio Division of Financial Institutions and the
Federal Deposit Insurance Corporation (the "FDIC") and is periodically examined
by such regulatory agencies to test compliance with various regulatory
requirements. As a bank holding company, the Corporation is also subject to
regulation and examination by the Board of Governors of the Federal Reserve
System. Such supervision and regulation of the Bank and the Corporation are
intended primarily for the protection of depositors and not for the maximization
of shareholder value and may affect the ability of the Corporation to engage in
various business activities. The assessments, filing fees and other costs
associated with reports, examinations and other regulatory matters are
significant and may have an adverse effect on the Corporation's net earnings.
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance of members of the Bank Insurance fund (the "BIF") and the
Savings Association Insurance Fund (the "SAIF"). The FDIC has established a
risk-based assessment system for both SAIF and BIF members. Under such system,
assessments may vary depending on the risk the institution poses to its deposit
insurance fund. Such risk level is determined by reference to the institution's
capital level and the FDIC's level of supervisory concern about the institution.
Because the reserves of the BIF exceeded the statutorily set minimum,
assessments for healthy BIF institutions were significantly decreased in the
last half of 1995 and were reduced to $ 2,000 per year for well-capitalized,
well-managed banks, like the Bank, in 1996. Assessments paid by healthy
institutions on deposits in the SAIF exceed that paid by healthy banks by
approximately $ .23 per $ 100 in deposits in 1996.
<PAGE> 3
Federal legislation that was effective September 30, 1996, provided for
the recapitalization of the SAIF by means of a special assessment of $ .657 per
$ 100 in deposits held at March 31, 1995, in order to increase SAIF reserves to
the level required by law. That legislation also required that BIF members begin
to share the cost of prior thrift failures. As a result of the recapitalization
of the SAIF and this cost sharing between BIF and SAIF members, FDIC assessments
for well-capitalized, well-managed institutions during 1997 have been set at $
.013 per $ 100 in BIF deposits and $ .064 per $ 100 in SAIF deposits. The
recapitalization plan also provides for the merger of the SAIF and BIF effective
January 1, 1999, assuming there are no savings associations under federal law.
Under separate proposed legislation, Congress is considering the elimination of
the federal thrift charter. The Corporation cannot predict the impact of the
such legislation and the merger of the BIF and SAIF on the Corporation or the
Bank until the legislation is enacted and the funds are merged.
