<PAGE> 1
As filed with the Securities and Exchange Commission on December 4, 1998
Registration No. 333-67933
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
OHIO STATE BANCSHARES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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<S> <C> <C>
OHIO 6710 34-1579601
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(State or Other Jurisdiction (Primary Standard Industrial (IRS Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
111 S. MAIN ST.
MARION, OHIO 43302
(740) 387-2265
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of small business issuer's Principal Executive Offices)
GARY E. PENDLETON COPIES OF COMMUNICATIONS TO:
PRESIDENT AND CHIEF EXECUTIVE OFFICER MARTIN D. WERNER, ESQ.
OHIO STATE BANCSHARES, INC. WERNER & BLANK CO., L.P.A.
111 SOUTH MAIN STREET 7205 W. CENTRAL AVENUE
MARION, OHIO 43302 TOLEDO, OH 43617
(740) 387-2265 (419) 841-8051
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
Approximate date of commencement of proposed sale of the securities to the
public: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES
EFFECTIVE.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum
Class of Securities Amount to Offering Price Aggregate Offering Amount of
to be Registered be Registered Per Share Price Registration Fee
- ------------------ ------------- -------------------- -------------------------- ----------------
<C> <C> <C> <C> <C>
Common Stock,
$10 par value 24,800 $47.00 $1,165,600 $343.86
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<PAGE> 2
THE SMALL BUSINESS ISSUER HEREBY AMENDS THIS REGISTRATION STATEMENT ON
SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
SMALL BUSINESS ISSUER SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES
THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT
TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE> 3
Prospectus
OHIO STATE BANCSHARES, INC.
24,800 COMMON SHARES
Rights Offering Subscription Price - $45 Per Share
Public Offering Subscription Price - $47 Per Share
Ohio State Bancshares, Inc., an Ohio chartered one-bank holding company
(the "Company") is offering to the holders of its $10 par value common shares
(the "Shares") the nontransferable right (the "Right") to subscribe for
additional Shares at the rate of one Share for every 4.8871 Shares held of
record at the close of business on December 1, 1998, plus additional
subscription privileges as set forth herein. After the offering of the Rights to
existing shareholders (the "Rights Offering"), the remaining Shares will be
offered to the public (the "Public Offering"). The Rights Offering will expire
on January 31, 1999 and the Public Offering will expire on March 31, 1999,
subject to the rights of the Company to extend such dates to no later than June
30, 1999, as provided for in the terms of the Offering (see "Plan of
Distribution"). The Shares of the Company are not listed on any exchange or the
NASDAQ stock market, but are traded on a limited basis in the over-the-counter
market. During the six month period commencing March 31, 1998 and ending
September 30, 1998, there were 73 trades in the Company's Shares representing
transactions in 31,496 Shares. For a discussion of the determination of the per
share offering price, see "Determination of the Offering Price". The market
price of the Shares may drop below the per share offering price during the
Offering and subscriptions for Shares may not be revoked. Therefore, subscribers
risk purchasing Shares, which at the time of purchase, have a market value below
the subscription price. No escrow will be utilized for funds paid to the Company
to purchase Shares in the Offering. Subscribers for Shares in the Rights
Offering will not receive interest on the funds submitted with their
subscriptions for Shares, and such funds may be held by the Company until the
Expiration Date of the Rights Offering, which shall be the latest date for stock
issuance for Shares purchased in the Rights Offering. Subscribers for Shares in
the Public Offering will not receive interest on the funds submitted upon the
call of their subscription for Shares, and such funds may be held by the Company
until the Expiration Date of the Public Offering including any extension
thereof, which shall be the latest date for stock issuance for Shares purchased
in the Public Offering. The Offering is not conditioned on the sale of a minimum
number of Shares.
The Company has an agreement with Community Banc Investments, Inc. for
it to act as underwriter in connection with the Public Offering of the Shares on
a best efforts basis. Community Banc Investments, Inc. is not required to sell
any specific number or dollar amount of the Shares but will use its best efforts
within the State of Ohio to sell the Shares remaining after the Rights Offering.
The following table shows the price for the Shares and the proceeds the
Company expects to receive. The amount of the total proceeds to be received by
the Company that is shown in the table assumes that all 24,800 Shares are sold.
This may not happen.
INVESTMENT IN THESE SECURITIES INVOLVES RISK. INVESTORS SHOULD BE ABLE
TO AFFORD THE LOSS OF THEIR INVESTMENT. SEE "RISK FACTORS" AT PAGE 10.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SHARES OFFERED HEREBY ARE NOT BANK DEPOSITS AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY OR COMPANY. THE
FEDERAL DEPOSIT INSURANCE CORPORATION HAS NOT PASSED, AND DOES NOT PASS, UPON
THE MERITS OF THESE OR ANY OTHER SECURITIES NOR DO THEY PASS UPON THE ACCURACY
OR COMPLETENESS OF ANY PROSPECTUS OR OTHER SELLING LITERATURE.
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Underwriting
Price To Discounts and
Public Commission Proceeds To Company(1)
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<S> <C> <C> <C>
Per Share $47 $2 $45
Total $1,165,600 $34,968 $1,130,632
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</TABLE>
Notes:
(1) These amounts reflect payment of the underwriter's commission for the
sale of all the Shares. The underwriter's commission is $2.00 per share
sold but limited to a maximum of 3% of the total offering price.
The date of this Prospectus is December 8, 1998.
NOTICE TO OHIO INVESTORS: A REGISTRATION STATEMENT CONCERNING THE
SHARES HAS BEEN FILED WITH THE OHIO DIVISION OF SECURITIES PURSUANT TO SECTION
1707.06(A)(1) OF THE OHIO REVISED CODE. THESE SHARES HAVE NOT BEEN APPROVED OR
DISAPPROVED AS AN INVESTMENT FOR ANY OHIO RESIDENT BY THE OHIO DIVISION OF
SECURITIES, NOR HAS THE DIVISION PASSED UPON THE ACCURACY OF THIS PROSPECTUS.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR
INCORPORATED BY REFERENCE. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU
INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION IN
WHICH IT WOULD BE UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
1
<PAGE> 4
TABLE OF CONTENTS
Prospectus Summary 6
Risk Factors 10
The Company 13
Use of Proceeds 13
Market for Common Equity and Dividends 13
Capitalization 14
Determination of Offering Price 15
Dilution 15
Plan of Distribution 16
Legal Proceedings 18
Description of the Common Shares 18
Information about Ohio State Bancshares, Inc. 23
Executive Compensation and Other Information 24
Certain Transactions 26
Directors, Executive Officers and Share Ownership 26
Management's Discussion and Analysis of Financial Condition
and Results of Operations 27
Comparative Summary of Selected Financial Data 28
Supervision and Regulation 29
Indemnification 33
Legal Opinions 35
Experts 35
Financial Statements Annex F-1
4
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FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS THROUGHOUT THIS PROSPECTUS REGARDING THE COMPANY'S
FINANCIAL POSITION, BUSINESS STRATEGY AND PLANS AND OBJECTIVES OF COMPANY
MANAGEMENT FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS RATHER THAN
HISTORICAL OR CURRENT FACTS. WHEN USED IN THIS PROSPECTUS, WORDS SUCH AS
"ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," "INTEND" AND SIMILAR EXPRESSIONS,
AS THEY RELATE TO THE COMPANY OR ITS MANAGEMENT, IDENTIFY FORWARD-LOOKING
STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON THE BELIEFS OF THE
COMPANY'S MANAGEMENT AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY
AVAILABLE TO THE COMPANY'S MANAGEMENT. SUCH STATEMENTS ARE INHERENTLY UNCERTAIN,
AND THERE CAN BE NO ASSURANCE THAT THE UNDERLYING ASSUMPTIONS WILL PROVE TO BE
VALID. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, SUCH AS THOSE
DISCLOSED UNDER "RISK FACTORS," INCLUDING BUT NOT LIMITED TO COMPETITIVE FACTORS
AND PRICING PRESSURES AFFECTING THE COMPANY, CHANGES IN LEGAL AND REGULATORY
REQUIREMENTS, TECHNOLOGICAL CHANGE, PRODUCT DEVELOPMENT RISKS AND GENERAL
ECONOMIC CONDITIONS. SUCH STATEMENTS REFLECT THE CURRENT VIEWS OF THE COMPANY
WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO THESE AND OTHER RISKS,
UNCERTAINTIES AND ASSUMPTIONS RELATING TO THE OPERATIONS, RESULTS OF OPERATIONS,
GROWTH STRATEGY AND LIQUIDITY OF THE COMPANY. ALL SUBSEQUENT WRITTEN AND ORAL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS
BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THIS PARAGRAPH. FURTHER
INFORMATION ON OTHER FACTORS WHICH COULD AFFECT THE COMPANY'S FINANCIAL
POSITION, BUSINESS STRATEGY, FUTURE OPERATIONS, AND THE VALUE OF THE SHARES ARE
INCLUDED IN THE COMMISSION FILINGS INCORPORATED BY REFERENCE HEREIN.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
financial statements and other information included elsewhere in this
Prospectus.
The Company
Ohio State Bancshares, Inc., an Ohio corporation, is a registered bank
holding company headquartered in Marion, Ohio. The principal business of
the Company is presently to operate The Marion Bank (the "Bank"), which is a
wholly owned subsidiary and the Company's principal asset. The Bank conducts a
general commercial banking business through its 2 full-service banking offices
located in Marion County. Marion County has long been an important industrial
center and is located 45 miles north of Columbus, Ohio. Among the Company's
strategic goals are the expansion of its operations, particularly by lending
into new markets in adjoining counties. The Company's mailing address is 111 S.
Main Street, Marion, Ohio 43302 and its telephone number is (740) 387-2265.
As of September 30, 1998, the Company had consolidated total assets of
approximately $55.9 million, deposits of approximately $51.6 million and
shareholders' equity of approximately $3.9 million. The Company and its
predecessor, Bank, have paid cash dividends on their Common Shares for five (5)
consecutive years.
Through its subsidiary Bank, the Company offers a broad range of
lending and deposit services to individual, governmental and commercial
customers. The Company's headquarters and the main office of the Bank are
located in downtown Marion, Ohio. The Bank's loan portfolio is diversified among
commercial, real estate, and installment lending. The Bank is not dependent upon
any single industry or business for its banking opportunities.
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The Offering
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Securities Offered............................................Subscriptions for 24,800 common shares $10 par value
(the "Shares") in the Company at a subscription price
of $45 per Share in the Rights Offering and $47 per
Share in the Public Offering.
Shares Outstanding/Authorized.................................The Company had 121,200 Shares issued and outstanding
as of December 1, 1998. Assuming full subscription of
the Offering, the Company will have 146,000 Shares
issued and outstanding subsequent to the offering,
assuming the Offering is fully subscribed. The
Company has 500,000 Shares authorized as of the date
hereof.
Preemptive Rights - Rights Offering...........................Pursuant to resolution of the Board of Directors,
each shareholder has the right to purchase their pro
rata portion of 24,800 shares offered by the Company
in the Offering ("Right"). Shareholders will be
entitled to purchase one Share at $45 per share
pursuant to such Right for every 4.8871 shares of
stock held by them as of December 1, 1998.
Fractional shares will not be issued. Rights will be
rounded downward to the nearest whole Share. Rights
are nontransferable. This preemptive right to
purchase shares offered in this Offering is referred
to throughout this Prospectus as the "Rights
Offering."
Public Offering...............................................The Company will offer any Shares not purchased in
the Rights Offering to the public at $47 per share.
The Public Offering will remain open until closed by
the Board of Directors of the Company (the "Closing")
which Closing may be at any time prior to the
Expiration Date of the Public Offering. In
connection with the Public Offering, the minimum
subscription which will be accepted is 100 shares.
Shares offered in the Public Offering outside of the
State of Ohio will only be offered to existing
shareholders of the Company. The Shares offered to
the public are referred to throughout this
Prospectus as the "Public Offering."
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Expiration Date of the Rights Offering........................The Rights Offering will expire on January 31, 1999.
Thereafter, current shareholders will have no further
preemptive rights to purchase Shares in this Offering,
but will have the option of subscribing, subject to
sale to others, in the Public Offering.
Expiration Date of the Public Offering........................The Public Offering will expire at the earlier of:
(i) a date determined at the direction of the Board
of Directors of the Company; or (ii) March 31, 1999,
unless extended by the Company which shall be not
later than June 30, 1999.
Manner of Subscribing.........................................CURRENT SHAREHOLDERS
Any current shareholder of the company interested in
purchasing additional shares pursuant to the rights
offering should execute and return to the company the
enclosed rights subscription agreement together with
a check in the full amount of the shares to be
purchased in the rights offering. Shareholders who
desire to purchase shares in excess of their
allowable pro rata amount in the rights offering
should follow the following instructions for
noncurrent shareholders as to the amounts to be
purchased in excess of the Rights Offering.
PERSON NOT CURRENTLY A SHAREHOLDER
A prospective investor interested in purchasing
Shares of the Company should complete and execute the
Subscription Agreement delivered with this Prospectus
and return it to the Company. The Subscription
Agreement obligates the Investor to deliver a check
in the full amount of the purchase price of the
subscribed for Shares upon call by the Company at any
time prior to and including the Closing. All checks
should be made payable directly to Ohio State
Bancshares, Inc.
</TABLE>
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<S> <C>
Use of Proceeds...............................................The estimated net proceeds of approximately
$1,130,632 to be realized by the Company will be used
for general corporate purposes including the further
capitalization of the Company and for potential
acquisitions.
Closing.......................................................The Offering will be closed at the direction of the
Board of Directors at any time after the Expiration
Date of the Rights Offering and on or prior to March
31, 1999, unless extended by the Company, which
extended date shall not be later than June 30, 1999.
</TABLE>
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RISK FACTORS
An investment in the Shares of the Company involves certain significant
risks, many of which are beyond the control of the Company and represent
contingencies that cannot be reliably estimated. Investment in the Shares is
suitable only for persons who have no need for liquidity in their investments.
Among other aspects of this Offering, potential investors should consider
carefully the following factors, which discussion is meant to be a summary of
the material but not all of the risk factors involved in a purchase of the
Shares.
MARKETABILITY OF THE SHARES
As of the date hereof, shares of the Common Stock of the Company trade
infrequently and there can be no assurance that a broader public market
subsequently will develop, notwithstanding the desire of the Company that the
same exist. While legally the Company will be in a position to purchase Shares
from time to time, the ability to do so will be limited by the available capital
of the Company and regulatory requirements. This will restrict the ability of an
investor to shift his investment in the Shares to an alternative investment in
the future. Given the lack of a ready market for the Shares, holders of the
Shares may need to find their own buyers of their Shares if they want to sell
such Shares.
SHARES ELIGIBLE FOR FUTURE SALE; DILUTION
Shares of Company common stock eligible for future sale could have a
dilutive effect on the market for the common stock of the Company and could
adversely affect the market price. The Articles of Incorporation of the Company
authorize the issuance of 500,000 shares of Common Stock, of which approximately
121,200 shares were outstanding at December 1, 1998. The issuance of additional
shares of Company common stock in the future could adversely affect the market
price of the Shares.
POTENTIAL FOR ASSESSMENT OF BANK SHARES
Under banking laws of the State of Ohio, shares of banks are subject to
assessment if the bank's capital becomes impaired from losses or other causes
and the Ohio Division of Financial Institutions orders such assessment. In the
event of failure to pay such assessment, the shares of the Bank may be subject
to auction by the Ohio Division of Financial Institutions to satisfy the
assessment. While the Company's Shares would not be directly assessable, in the
event that the Company is required to invest more funds in its subsidiary, the
Company may not have the funds available to do so and may need to acquire
additional funds for that purpose from its shareholders, equity markets or
through loans, which funds may not be available at that point in time.
EXISTING COMPETITION IN THE MARKET AREA
Bank holding companies and their subsidiary banks are subject to
vigorous and intense competition from various financial institutions and other
"nonbank" or non-regulated companies or firms that engage in similar activities.
The Bank competes for deposits with other commercial banks, savings banks,
savings and loan associations, insurance companies and credit unions, as
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<PAGE> 11
well as issuers of commercial paper and other securities, including shares in
mutual funds. In making loans, the Bank competes with other commercial banks,
savings banks, savings and loan associations, consumer finance companies, credit
unions, insurance companies, leasing companies and other nonbank lenders.
The Company and the Bank compete not only with financial institutions
in Ohio but also with a number of large out-of-state and foreign banks, bank
holding companies and other financial and nonbank institutions. Some of the
financial and other institutions operating in the same market are engaged in
national and international operations and have more assets and personnel than
the Company and the Bank. Some of the Bank's competitors are not subject to the
extensive bank regulatory structure and restrictive policies which apply to the
Company and the Bank.
The principal factors in successfully competing for deposits are
convenient office locations, flexible hours, competitive interest rates and
services, while those relating to loans are competitive interest rates, the
range of lending services offered and lending fees. The Company believes that
the local character of the Bank's business and its community bank management
philosophy enables it to compete successfully in its respective market area.
However, it is anticipated that competition will continue to increase in the
years ahead.
FINANCIAL CONDITION OF COMPANY DEPENDENT UPON BANK OPERATIONS
The financial health of the Company will be directly related to the
financial health of the Bank. The financial health of the Bank may be adversely
affected by detrimental changes in federal or state laws, the national monetary
and fiscal policies and international, national and/or local economic
conditions. Such laws, policies or conditions could have material and adverse
effects upon the Bank.
DEPENDENCE ON MANAGEMENT
The Company and the Bank are, and for the foreseeable future will be,
dependent primarily upon the services of Gary E. Pendleton, the President of the
Company and the Bank. If the services of Mr. Pendleton or other key officers to
be hired by the Bank were to become unavailable to the Company or the Bank for
any reason, or if the Company or the Bank were unable to hire highly qualified
and experienced personnel either to replace Mr. Pendleton or any other
experienced employee, or to adequately staff the anticipated growth of the Bank,
the operating results of the Company and the Bank could be aversely affected.
IMPACT OF INTEREST RATES
The results of operations for financial institutions, including the
Bank, may be materially and adversely affected by changes in prevailing economic
conditions, including declines in real estate market values, rapid changes in
interest rates and the monetary and fiscal policies of the federal government.
The Bank's profitability is in part a function of the spread between the
interest rates earned on investments and loans and the interest rates paid on
deposits and other interest-bearing liabilities. In the early 1990s, many
banking organizations experienced historically high interest rate spreads. More
recently, interest rate spreads have generally
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narrowed due to changing market conditions and competitive pricing pressure, and
there can be no assurance that such factors will not continue to narrow interest
rate spreads or that the higher interest rate spreads will return. Like most
banking institutions, the Bank's net interest spread and margin will be affected
by general economic conditions and other factors that influence market interest
rates and the Bank's ability to respond to changes to such rates. At any given
time, the Bank's assets and liabilities will be such that they are affected
differently by a given change in interest rates. As a result, an increase or
decrease in rates could have a material adverse effect on the Bank's net income,
capital and liquidity. While management takes measures to mitigate
interest rate risk, there can be no assurance that such measures will be
effective in minimizing the exposure to interest rate risk.
NEED FOR TECHNOLOGICAL CHANGE
The banking industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. The Company's
future success will depend in part on its ability to address the needs of its
customers by using technology to provide products and services that will satisfy
customer demands for convenience as well as to create additional efficiencies in
the Bank's operations. Many of the Bank's competitors have substantially greater
resources to invest in technological improvements. Such technology may permit
competitors to perform certain functions at a lower cost than the Bank. There
can be no assurance that the Bank will be able to effectively implement new
technology-driven products and services or be successful in marketing such
products and services to its customers.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation and provisions of the Ohio
Revised Code provide for the indemnification of its officers and directors and,
thereby, insulate its officers and directors from liability for certain breaches
of the duty of care. It is possible that the indemnification obligations imposed
under these provisions could result in a charge against the Company's earnings
and thereby affect the market value of the Company's stock and the availability
of funds for payment of dividends to the Company's shareholders.
ANTITAKEOVER PROVISIONS
The Articles of Incorporation and Code of Regulations of the Company
contain provisions which could discourage the acquisition of control of the
Company without the consent of the Board of Directors. The number of Shares
purchased now or in the future by the Company's management, may have a similar
effect. Such provisions also are designed to protect management and the Board of
Directors and may restrict shareholders from selling their shares to third
parties. These factors may have an adverse effect upon the value of the Shares
acquired hereunder.
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THE COMPANY
The Company commenced operations in May 1996 with the reorganization of
the Bank into a bank holding company. The Bank was organized in 1988 and is a
full-service bank offering a wide range of commercial and personal banking
services to customers in Marion County, Ohio, and adjoining counties. As a
locally owned and managed banking company in Marion County, the Bank seeks to
respond to its customers' banking needs by providing timely, local banking
decisions. Among the Company's strategic goals are the expansion of its
operations, particularly by lending into new markets in adjoining counties, and
through acquisition of other community banks.
Bank has 2 modern, full-service offices located in Marion County. The
Company's headquarters and the main office of Bank are located in downtown
Marion, Ohio, 111 S. Main Street, Marion, Ohio 43302, and its telephone number
is (740) 387-2265.
USE OF PROCEEDS
The net proceeds from the sale of the Shares offered hereby are
estimated to be $1,130,632. The net proceeds will be used to support the
anticipated growth of the Company, particularly for possible future
acquisitions. The Company has no present understanding or agreement with respect
to any particular acquisition.
MARKET FOR COMMON EQUITY AND DIVIDENDS
The common stock of the Company, and of the Bank preceding formation of
the Company, trades infrequently and is not traded on any established securities
market. Parties interested in buying or selling the Company's stock are
generally referred to Community Banc Investments, New Concord, Ohio (CBI).
For 1998 year-to-date, 1997 and 1996, bid and ask quotations were
obtained from CBI which makes a limited market in the Company'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
</TABLE>
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<TABLE>
<CAPTION>
1997(1) Low Bid High Bid Low Ask High Ask
---- ------- -------- ------- --------
<S> <C> <C> <C> <C>
1st Qtr. $ 34.50 $ 34.50 $ 36.50 $ 36.50
2nd Qtr. 34.50 35.50 36.50 37.50
3rd Qtr. 35.50 35.50 37.50 37.50
4th Qtr. 35.50 37.00 37.50 39.00
<CAPTION>
1998(1) Low Bid High Bid Low Ask High Ask
---- ------- -------- ------- --------
<S> <C> <C> <C> <C>
1st Qtr. $ 37.00 $ 39.00 $ 39.00 $ 41.00
2nd Qtr. 39.00 39.00 41.00 41.00
3rd Qtr. 41.00 43.00 43.00 45.00
</TABLE>
(1) All information presented above relates to the Company for the period
since its formation and to the Bank for the periods prior to formation
of the Company.
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 Company's stock,
these prices may not reflect the prices at which the stock would trade in an
active market.
No shares of the Company's common stock are subject to outstanding
options or warrants to purchase, or securities convertible into, shares of the
Company's common stock. As of September 30, 1998, directors and executive
officers of the Company beneficially owned 55,784 shares of common stock of the
Company which could be sold by them in the manner provided for the sale of
securities by affiliates under Rule 144 of the Commission. No agreement exists
for the Company to register its common stock held by any shareholder.
The Company has 500,000 authorized and 121,200 outstanding shares of
common stock held by approximately 476 shareholders as of December 31, 1997. The
Company paid a $0.25 per share dividend in June and December 1998, resulting in
total dividends per share of $.50 in 1998. The Company paid cash dividends of
$0.20 per share in June and December of 1997 and 1996, resulting in a total
amount of $0.40 per share in each of 1997 and 1996. The Company's ability to pay
future dividends is dependent on the ability of the Bank to pay dividends to the
Company. The Bank's ability to pay dividends is subject to certain regulatory
limits and oversight. See "Supervision and Regulation."
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at September 30, 1998, and as adjusted for the issuance and sale of the
Shares offered hereby and the application of the net proceeds thereof (see "Use
of Proceeds"). The table below assumes the full subscription of the Rights
Offering. There is no minimum aggregate offering amount.
14
<PAGE> 15
<TABLE>
<CAPTION>
September 30, 1998
------------------
Actual Pro Forma Adjusted(l)
------ ---------------------
<S> <C> <C>
Shareholders' Equity:
Common shares, $10 par value, 500,000
shares authorized; 121,200 issued and outstanding $1,212,000
Common shares, $10 par value, 500,000 shares
authorized; 146,000 shares issued and outstanding $1,460,000
Additional paid-in capital 1,831,227 2,661,227
Retained earnings 806,307 806,307
Unrealized loss on securities 28,034 28,034
available for sale, net of tax ---------- ----------
Total shareholders' equity $3,877,568 $4,955,568
========== ==========
</TABLE>
(1) Net of underwriting commission and additional estimated expenses of
approximately $38,000 for offering, consulting, legal and accounting fees,
printing costs and filing fees with federal and state securities
authorities.
DETERMINATION OF OFFERING PRICE
The Board of Directors considered several factors in setting the per
share offering price of the Shares. The Shares of the Company are traded on a
limited basis in the over-the-counter market. In determining the per share
offering price, the Board of Directors took into account the prices at which
recent trades have taken place in the Company's Shares. Additionally the Board
considered the historical financial performance of the Company, including its
dividend payment history as well as management's perception that there is an
existing demand to purchase Shares of the Company by existing and prospective
shareholders. For additional information regarding the prices at which Shares
have traded and information regarding historical dividends, see "MARKET FOR
COMMON EQUITY AND DIVIDENDS."
DILUTION
Shareholders who do not participate on a pro rata basis, in the Rights
Offering, will experience dilution in ownership. Assuming the full subscription
of the Rights Offering had occurred on September 30, 1998, a purchaser of Shares
in the Rights Offering would have paid a premium of $11.06 per share on the
Shares purchased at a price of $45, or an approximately 32.59 percent premium
over the pro forma book value of such share of $33.94.
15
<PAGE> 16
PLAN OF DISTRIBUTION
The Company is offering to its shareholders of record (the
"Shareholders"), as of the close of business on December 1, 1998 (the "Record
Date"), the preemptive right to subscribe for 24,800 Shares at a price of $45.00
per Share, pursuant to the Rights Offering and, to the extent available, to
subscribe for additional Shares ("Additional Shares") in the Public Offering at
the subscription price of $47.00 per share (the "Subscription Price").
Shareholders will have the Right to purchase one Share, for each 4.8871 Shares
owned on the record date pursuant to the Rights Offering. Fractional shares will
not be issued. Rights will be rounded downward to the next whole Share.
Prospective investors will not have a right to a return of funds paid to the
Company.
The Shares not purchased pursuant to the Rights Offering are to be
offered to the public, subject to a minimum subscription of 100 shares. Shares
offered in the Public Offering outside of the State of Ohio will only be offered
to existing shareholders of the Company. Community Banc Investments, Inc.,
("CBI") will act as the underwriter in Ohio in connection with the Public
Offering on a best effort basis. CBI makes a limited market in the Company's
stock. The Company has agreed to indemnify CBI against certain liabilities that
may be incurred in connection with this Offering, including certain civil
liabilities under the Securities Act. A copy of the underwriting agreement
between CBI and the Company is on file with the Commission as an exhibit to the
Registration Statement of which this Prospectus forms a part.
Rights. Each Shareholder is entitled to subscribe for his pro rata
portion of the 24,800 Shares offered by the Company in the Rights Offering.
These preemptive rights to subscribe are evidenced by nontransferable Rights.
Each Right evidences the total number of Shares to which the Shareholder is
entitled to subscribe in the Rights Offering. A shareholder who does not
participate in the Rights Offering will experience ownership dilution (see
"Dilution"). Officers and Directors, in their capacity as shareholders, will
have the same right to purchase Shares in the Rights Offering as all other
Shareholders. While there can be no assurance of such, it is expected that the
executive officers and Directors of the Company will exercise their Rights to
purchase additional Shares of the Company.
Expiration Date. The Rights Offering expires on January 31, 1999 (the
"Expiration Date of the Rights Offering"). The Public Offering will expire (the
"Public Offering Expiration Date") at the earlier of: (i) the direction of the
Board of Directors of the Company; or (ii) March 31, 1999, unless extended by
the Company, which extended date shall not be later than June 30, 1999.
Subscribers for Shares would be informed of any such extension, in writing, by
the Company.
Method of Exercising Rights and Payment. Rights to subscribe may be
exercised by completing and signing the Rights Subscription Agreement and
mailing or delivering it, together with payment in full for all Shares
subscribed for under the Rights Offering in the manner indicated below, so as to
be received by the Company on or before the Expiration Date of the Rights
Offering. Full payment for Shares subscribed for in this Rights Offering is to
be made when a subscriber returns his Rights Subscription Agreement to the
Company in order to enable the Company to promptly process subscriptions for
Shares purchased in the Rights Offering. In the event that payment is less than
that required to purchase the number of Shares subscribed for under the Rights
Offering, the Company will issue only the number of Shares for which payment
16
<PAGE> 17
is received. There is no minimum subscription required to exercise a Right nor
is there any aggregate minimum Offering amount. The Company will accept Rights
Subscriptions as they are submitted.
By Hand Delivery By Mail
---------------- -------
Ohio State Bancshares, Inc. Ohio State Bancshares, Inc.
111 S. Main Street 111 S. Main Street
Marion, Ohio 43302 Marion, Ohio 43302
Attention: Gary E. Pendleton Attention: Gary E. Pendleton
Telephone inquiries should be directed to Gary E. Pendleton of the
Company at (740) 387-2265.
Public Offering. The Company will offer those Shares not purchased in
the Rights Offering, to the general public at a price of $47.00 per share (the
"Public Offering"). The Company reserves the right to accept or reject, in whole
or in part, for any reason, any subscription for Shares tendered to the Company
in the Public Offering. A minimum subscription of 100 shares is required in the
Public Offering.
The Company will close the Public Offering at the direction of the
Board of Directors (the "Closing") which may be at: (i) that time at which the
Offering is fully subscribed for; (ii) March 31, 1999, unless extended by the
Board of Directors of the Company, which extended date shall not be later than
June 30, 1999; or (iii) such other time as is deemed advisable by the Board of
Directors of the Company prior to full subscription of the Offering.
Method of Subscribing for Shares in Public Offering and Payment. To
subscribe for Shares in the Public Offering, complete the Subscription
Agreement, sign and return it in the manner indicated below so as to be received
by the Company on or before the Expiration Date of the Public Offering. Payment
for Shares subscribed for in the Public Offering will be due upon the call of
the Company. Because Shares offered in the Public Offering may be
oversubscribed, subscribers should not submit payment for such Shares until
notified by the Company as to the number of Shares for which the Company has
accepted their Subscription Agreement.
The Subscription Agreement may be executed and mailed or delivered to
the Company as follows:
By Hand Delivery By Mail
---------------- -------
Ohio State Bancshares, Inc. Ohio State Bancshares, Inc.
111 S. Main Street 111 S. Main Street
Marion, Ohio 43302 Marion, Ohio 43302
Attention: Gary E. Pendleton Attention: Gary E. Pendleton
Telephone inquiries should be directed to Gary E. Pendleton of the
Company at (740) 387-2265.
Oversubscription of Public Offering. In the event the Public Offering
portion of this Offering is oversubscribed at the Closing of the Offering, the
Company will determine on a case
17
<PAGE> 18
by case basis which subscriptions it will accept or reject among the subscribers
for Shares. In making its determination, the Company will take into account such
factors as the amount of the subscription, other business relationships between
the Company (or its subsidiary) and the subscriber, and whether such subscriber
is an existing shareholder of the Company. It is the intention of the Company to
encourage broad ownership of the Company among persons who live or work in the
primary market areas serviced by the Company, or its subsidiary Bank. The
Company reserves the right to accept or reject all or a portion of any
subscription for Shares.
Delivery of Share Certificates. As soon as practicable following
receipt of a Rights Subscription Agreement and full payment for Shares
subscribed for in the Rights Offering is received, certificates for Shares will
be mailed or delivered. After the Expiration Date of the Public Offering, and
after full payment is received from subscribers for Shares in the Public
Offering is received, certificates for Shares will be mailed or delivered as
soon as practicable.
Federal Income Taxes. The Company has received an opinion of Werner &
Blank Co., LLP, to the effect that, for federal income tax purposes: (i) neither
the receipt nor the exercise of the Rights will result in taxable income to the
shareholders; (ii) no deductible loss will be realized if Rights are allowed to
expire without exercise; (iii) the tax basis of Shares acquired upon the
exercise of Rights or in the Public Offering will be the Subscription Price; and
(iv) there is no allocation of an existing shareholders' tax basis in current
Shares held to such Shareholders Rights, whether or not such Rights are
exercised, because (based upon the limited time period in which shareholders
have the option to exercise their Rights and the fact that the purchase price
per share paid upon the exercise of a Right is substantially equal to the per
share price of the Shares sold in the Public Offering) the Company has
determined that such value is zero. No independent determination of the value of
the Rights distributed has been made.
LEGAL PROCEEDINGS
The Company is subject to various pending and threatened lawsuits in
which claims for monetary damages are asserted in the ordinary course of
business. While any litigation involves an element of uncertainty, in the
opinion of management, liabilities, if any, arising from such litigation or
threat thereof will not have a material effect on the Company.
DESCRIPTION OF COMMON SHARES
General
The Company is authorized to issue 500,000 Common Shares, $10 par
value. As of September 30, 1998, 121,200 Shares were issued and outstanding.
Holders of Shares are entitled to dividends when and if declared by
the Company's Board of Directors out of funds legally available therefore.
Voting rights are vested in holders of the Shares, each Share being entitled to
one vote. Holders of Shares have cumulative voting rights in electing directors.
Holders of Shares also have preemptive rights to subscribe to any additional
Shares that the Company may issue. Upon liquidation, holders of Shares are
entitled
18
<PAGE> 19
to receive pro rata any assets distributable to shareholders after
providing for the payment of creditors.
All of the Shares currently outstanding are, and the Shares to be
issued hereunder will be, validly issued, fully paid and nonassessable.
Antitakeover Provisions
The Company is an Ohio chartered corporation and as an "issuing public
corporation" under the laws of Ohio, is subject to the provisions of the Ohio
Control Share Acquisition Statute (the "Control Share Acquisition Statute").
Pursuant to this statute, the purchase of certain levels of voting power of the
Company (one-fifth or more, one-third or more, or a majority) can be made only
with the prior authorization of at least a majority of the total voting power of
the Company and a separate prior authorization of the holders of at least a
majority of the voting power held by shareholders other than the proposed
purchaser, Officers of the Company and Directors of the Company who are also
employees. This law has the effect of deterring certain potential acquisitions
of the Company which might be beneficial to shareholders. Further, federal law
requires approval of the Board of Governors of the Federal Reserve System before
any person or company acquires control of a bank holding company such as the
Company.
In addition, the Company's Amended Articles of Incorporation (the
"Articles") provide certain procedures which must be followed before the Company
may enter into a "Business Combination" with an "Interested Shareholder." The
Articles define the term "Business Combination" to include:
- - Any merger or consolidation of the Company or any of its subsidiaries with
an "Interested Shareholder";
- - Any sale, lease, exchange or other transfer from the Company or any of its
subsidiaries to an "Interested Shareholder" of assets with an aggregate
Fair Market Value of $2,500,000 or more;
- - Any sale or transfer of securities of the Company or any of its
subsidiaries to an "Interested Shareholder";
- - The acquisition by the Company or any of its subsidiaries of securities of
an "Interested Shareholder";
- - The adoption of a plan of liquidation or dissolution of the Company
proposed by an "Interested Shareholder";
- - Any reclassification or recapitalization of securities of the Company which
increases the voting power of an "Interested Shareholder. "
An "Interested Shareholder," as defined in the Articles, includes any
person or entity who owns or has beneficial ownership of more than 10 percent of
the outstanding Shares. Any "Business Combination" described above which is not
approved by a majority of the Directors of
19
<PAGE> 20
the Company, who are unaffiliated with the "Interested Shareholder" and were
members of the Board prior to the time that the "Interested Shareholder" became
an "Interested Shareholder" ("Continuing Directors"), must be approved by the
affirmative vote of the holders of 80 percent of the outstanding Shares. In
addition, unless a "Business Combination" is approved by a majority of the
"Continuing Directors" or by the affirmative vote of the holders of not less
than 66 2/3 percent of the outstanding Shares not held by an "Interested
Shareholder" (the "Independent Shareholders"), the Articles provide that the per
Share consideration payable to each "Independent Shareholder" in connection with
the "Business Combination" must not be less than the sum of: (1) the highest per
Share price paid, by the "Interested Shareholder" and (2) the difference between
the interest on the per share price calculated at the Treasury Bill rate, from
the time an "Interested Shareholder" first became a shareholder until the
"Business Combination" has been consummated and the per Share amount of cash
dividends paid to the "Independent Shareholder" during the same period. The
Articles limit the transactions which any "Interested Shareholder" may enter
into with the Company unless a majority of the "Continuing Directors" otherwise
approve. Any amendments to the Articles which alter the shareholder approval
requirements for the above defined "Business Combination" must also be approved
by the Continuing Directors or by the affirmative vote of the holders of at
least 66 2/3 percent of the outstanding Shares held by the Independent
Shareholders.
The availability of the authorized and unissued Shares of the Company
to be issued into friendly hands with the purpose of diluting a potential
acquiror's ownership of the Company may also be determined to have an
antitakeover effect. The Company's Articles of Incorporation and Code of
Regulations currently contain no other provisions that were intended to be or
could fairly be considered as antitakeover in nature or effect. The Board of
Directors has no present intention to amend the Articles of Incorporation to add
any antitakeover provisions, nor are the above described provisions the result
of Management's knowledge of any effort to obtain control of the Company by any
means.
Classification of Board of Directors
The Board of Directors of the Company has been classified by dividing
the Directors into three classes. One class of Directors is elected each year
for a term of three years, so that the term of office of one class of Directors
expires each year.
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Shares is the Bank, the
Company's wholly owned subsidiary.
Right of Redemption
The Company is specifically empowered by its Articles of Incorporation
to buy its shares of outstanding common stock from its shareholders.
20
<PAGE> 21
Liquidation Rights
In the event of liquidation, holders of common stock of the Company
are entitled to certain rights as to assets distributable to shareholders on a
pro rata basis, after satisfaction of debts of the Company.
Preemptive Rights
Holders of common stock of the Company will have the preemptive right
to subscribe for or to purchase any additional securities which may be issued by
the Company as provided by the Ohio General Business Corporation Law.
Preemptive rights permit a shareholder to subscribe to a sufficient
number of shares so as to maintain their relative pro rata ownership upon the
issuance of additional shares by a corporation, except in certain circumstances.
Dissenters Rights
Shareholders of the Company have dissenters' rights in certain
transactions pursuant to Ohio law, which includes certain mergers and
consolidations.
Cumulative Voting
Shareholders of the Company have cumulative voting rights pursuant to
Ohio law. The Company may, as permitted by Section 1701.69 of the Ohio Revised
Code, propose to shareholders that the Articles of Incorporation of the Company
be amended to delete the right to vote cumulatively in the election of
Directors. In the event the Company would propose such an amendment to
shareholders, all shareholders would be entitled to notice of the proposed
amendment as provided by law and such an amendment would be subject to other
requirements as to the number of shares which could be voted against the
proposed amendment. The adoption of such amendment would require the affirmative
vote of the holders of a majority of the stock entitled to vote in the election
of Directors.
A shareholder voting cumulatively may cast the number of shares he owns
times the number of Directors to be elected in favor of one nominee or allocate
such votes among the nominees as he determines.
Indemnification
The Company's Articles of Incorporation provide for mandatory
indemnification of officers, directors, employees and agents to the fullest
extent permitted by Ohio law. Ohio law provides for indemnification in both
derivative and nonderivative actions.
Ohio law generally provides for the payment of expenses, including
attorneys' fees, judgments, fines and amounts paid in settlement actually and
reasonable incurred by the indemnities provided such person acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and with respect to any criminal action or
proceeding if he had no reasonable cause to believe his conduct was unlawful.
21
<PAGE> 22
However, in derivative suits, if the suit is lost, no indemnification is
permitted in respect of any claim, issue or matter as to which the prospective
indemnitee is adjudged to be liable for negligence or misconduct in the
performance of his duty to the corporation and then only if, and only to the
extent that, a court of competent jurisdiction determines upon view of all the
circumstances of the case, the prospective indemnitee is fairly and reasonable
entitled to indemnity for such expenses as the court deems proper. Further, this
indemnity in derivative suits is limited to expenses incurred in defending the
suit, not the amount of any judgment, fine or other penalty levied against the
prospective indemnitee. Finally, no indemnification may be provided in any
action or suit in which the only liability asserted against a director is
pursuant to a statutory provision outlawing loans, dividends, and distribution
of assets under certain circumstances.
The Articles of Incorporation of the Company provide that the Company
shall indemnify its past and present directors for personal liability for
monetary damages resulting from breach of their fiduciary duty as directors,
except in certain instances involving a breach of a director's duty of loyalty
to the Company, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, liability based upon illegal
distribution of dividends and liability based upon a transaction from which the
Director derived an improper personal benefit.
The provisions regarding indemnification may not be applicable under
certain federal banking and securities laws and regulations.
Dividend Rights
Dividends may be paid on common stock of the Company as are declared by
the Board of Directors out of funds legally available therefor. Dividends may
not exceed the surplus of the Company, as defined by the Ohio Business
Corporation Act, and may not be declared if the Company is insolvent or would
thereby be made insolvent. (See "SUPERVISION, REGULATION AND LEGISLATION--The
Company.")
Assessability
When issued, common stock of the Company is fully paid and
nonassessable.
Reports
The Company's common stock is currently registered under Section 12g of
the Securities and Exchange Act of 1934 ("Exchange Act") and therefore the
Company files periodic reports as required by the Exchange Act with the SEC.
After the Offering, the Company's stock will continue to be registered under
Section 12g of the Exchange Act and the Company will continue to file periodic
reports with the Securities and Exchange Commission.
22
<PAGE> 23
INFORMATION ABOUT OHIO STATE BANCSHARES, INC.
Introduction
The Company commenced operations in May 1996 with the reorganization of
the Bank into a bank holding company. The Bank commenced operations in 1988 as
an Ohio banking corporation. The Bank is a full-service bank offering a wide
range of commercial and personal banking services primarily to customers in
Marion County, Ohio and surrounding counties, through its 2 offices. Bank's
services include commercial, mortgage and installment loans (particularly auto
loans), lease financing, checking accounts, savings accounts, certificates of
deposit, safe deposit boxes, traveler's checks, money orders, wire transfers,
computer services, MasterCard, VISA, IRAs, Keoghs, and money market investments.
Service Area
The Bank provides banking services throughout Marion County, Ohio,
which has long been an important industrial community in central Ohio. Major
companies with significant operations in Marion County, such as GTE and
Whirlpool Corporation, continue to provide a strong base for the skilled labor
force of Marion County. The Bank is not dependent upon any single industry or
business for its banking opportunities. The Company does not have foreign
operations.
Competition
Banking in central Ohio generally and Marion County specifically is
highly competitive. The Bank competes with various commercial banks in Marion
County, some of which are branches or affiliates of banks or bank holding
companies with significantly greater resources than the Company. The Bank also
competes with a large number of other financial institutions, such as savings
and loan associations, savings banks, insurance companies, consumer finance
companies, credit unions and commercial finance and leasing companies, for
deposits, loans and service business. Money market mutual funds, brokerage
houses and similar organizations provide many of the financial services offered
by Bank.
The Company competes on the basis of the rates of interest charged for
loans, the rates of interest paid for funds, the availability of services, the
fees charged for services and the local orientation and timeliness of lending
decisions.
Employees
As of September 30, 1998, the Company and the Bank had approximately 23
full-time employees and 5 part-time employees. The Company considers its and
the Bank's employee relations to be good. None of the employees are covered by a
collective bargaining agreement.
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<PAGE> 24
Properties
The Bank's main office is located at 111 S. Main Street, Marion, Ohio,
which houses the executive offices of the Company. In addition, the Bank
operates a branch facility at 220 Richland Road, Marion, Ohio. The Bank
owns real property used for its main office and leases its Richland Road
facility.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The Company is required to provide certain summary information
concerning compensation paid or accrued by the Company, to or on behalf of the
Company's Chief Executive Officer and the four highest paid executive officers
whose base salary and bonus exceeded $100,000, for the fiscal years ended
December 31, 1997, 1996, and 1995. As applied to the Company, the Company's
Chief Executive Officer's compensation is required to be disclosed as follows:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($)(1)(2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 77,500 26,825 13,238
GARY E. PENDLETON, President 1996 73,990 21,500 24,696
Ohio State Bancshares, Inc. 1995 65,283 21,200 18,767
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has provided and plans to continue to provide certain of its
executive officers with memberships in various clubs, which are also used
primarily for Company business, as well as certain specified life and medical
insurance benefits. Portions of the fees and premiums attributable to personal
use did not exceed 10 percent of the cash compensation of the Chief Executive
Officer.
(2) Includes compensation for attendance at Board meetings while serving as a
Director and the Company's 401(k) plan matching amount.
CHANGE OF CONTROL AGREEMENT
Although the Company has no formal written employment contracts, Mr.
Pendleton, President and Chief Executive Officer has entered into a "Severance
Agreement Due to Change of Control of Ohio State Bancshares, Inc." (the "Change
of Control Agreement") with the Company dated August 7, 1991 and amended
February 5, 1993. The Change of Control Agreement provides for a payment to Mr.
Pendleton of an amount equal to two (2) times his average annual salary during
the last five years upon the occurrence of a "Change of Control of the Company.
In addition, like payments would be made in the case of an executive's voluntary
termination for "good cause" as defined in the Change of Control Agreements
including a change in the executive's status, title, position, salary,
relocation of the Company's principal executive offices outside a 35 mile radius
of Marion or failure to provide comparable benefits to those currently provided.
The Change of Control Agreement also provides for the payment of any legal fees
by the executive in order to enforce such Change of Control Agreement.
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<PAGE> 25
Notwithstanding other provisions of the Change of Control Agreement, a
termination of the employee "for cause" as defined in the Change of Control
Agreement, would not result in the triggering of the severance or termination
benefits under the Change of Control Agreement.
"Change of Control of the Company" is defined in the Change of Control
Agreement to mean: (i) the acquisition by a person or persons acting in concert
with the power to vote 33 percent or more of a class of the Company's voting
securities; or (ii) during any period of two (2) consecutive years during the
term of the Change of Control Agreements individuals who, at the beginning of
such period, constituted the Board of Directors of the Company cease for any
reason to constitute at least a majority of the Board, if in the instance
mentioned in subparagraphs (i) or (ii), the employment of the executive is
terminated involuntarily within one year of such change of control.
SUPPLEMENTAL RETIREMENT PLAN
The Corporation has entered into an Executive Indexed Salary
Continuation Plan (Supplemental Plan) with Mr. Pendleton. The purpose of the
Supplemental Plan is to supplement Mr. Pendleton's retirement income. Pursuant
to the terms of the Supplemental Plan, annually the Company will accrue a
nonqualified pension benefit for the benefit of Mr. Pendleton in an amount equal
to the excess return earned on a Company owned insurance product (the "Policy")
over the Bank's average after tax cost of funds expense as reported for the
third quarter of each year. At Mr. Pendleton's retirement he will be entitled to
receive the accrued deferred benefits in a lump sum cash payment or on an
annuity basis. It is impossible to predict the future value of such deferred
compensation due to the uncertainty of the future Policy yield. The Policy is
currently valued at $174,376 upon which a guaranteed rate of 4% is called for
under its terms. The benefits accrued under the Supplemental Plan are subject
to a vesting schedule except in the case of death, disability or a change of
control of the Company.
In addition, contemporaneously with the adoption of the Supplemental
Plan, the Corporation and Mr. Pendleton entered into a Split Dollar Life
Insurance Agreement which provides for the payment, to Mr. Pendleton's
beneficiaries, of 80% of the net-at-risk insurance portion of an insurance
policy purchased by the Corporation in connection with the establishment of the
Supplemental Plan. As of December 31, 1997, this Split Dollar Life Insurance
Agreement would have provided a death benefit of $174,376 to Mr. Pendleton's
beneficiaries. The Corporation purchased life insurance for the purpose of
funding its obligations under the Supplemental Plan in the event of Mr.
Pendleton's death and as an investment vehicle designed to fund the payments to
Mr. Pendleton at retirement.
DIRECTORS' COMPENSATION
Directors are paid $300 per month and $100 per month is retained and
paid at year end provided Board attendance is not less than 75%. The Chairman of
the Board receives $350 per month and $125 per month is retained and paid at
year end provided Board attendance is not less than 75%.
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<PAGE> 26
CERTAIN TRANSACTIONS
Some of the directors of the Company, as well as the companies with
which such directors are associated, are customers of, and have had transactions
with the Company (through The Marion Bank) in the ordinary course of the
Company's business in 1997. These transactions consisted of extensions of credit
in the ordinary course of business and were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with non-affiliated persons. In the opinion of
management of the company and its subsidiary, these transactions do not involve
more than normal risk of collectibility or present other unfavorable features.
The Company, through is subsidiary, expects to have in the future,
banking transactions, in the ordinary course of its business with directors,
officers, principal shareholders, and their associates, on substantially the
same terms, including interest rates and collateral on loans, as those
prevailing at the same time for comparable transactions with others and which do
not involve more than the normal risk of collectibility or present other
unfavorable features.
DIRECTORS, EXECUTIVE OFFICERS AND SHARE OWNERSHIP
The following table sets forth, as of September 30, 1998, for each
director and executive officer, name, age, principal occupations during the past
five years, the year they first became a director, year of expiration of the
current term as director, number of shares of the Company beneficially owned by
such person, and by all executive officers and Directors of the Company as a
group.
<TABLE>
<CAPTION>
Shares of
Company
Stock
Beneficially
Director Term Owned as of % of
Name Age Occupation Since Expires 9-30-98 Class
---- --- ---------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Samuel J. Birnbaum 81 Director of Real Estate Lodge 1988 2001 600 .50%
Keeper, Inc. (Hotel Management)
Lloyd L. Johnston 65 President, Johnston Supply Co. 1989 2001 4,350(2) 3.59%
(Wholesale Plumbing Supplies)
F. Winton Lackey 64 Owner, Mid Ohio Packaging Co. 1995 2001 800(1) .66%
John D. Owens 67 Retired Owner, Owens Electric 1994 2001 400(3) .33%
Theodore L. Graham 52 Managing Partner, Graham Investment 1991 2000 6,042(4) 4.99%
Co. (Warehousing and Real Estate
Development)
Lois J. Fisher 49 Owner, Harding Motor Lodge 1994 2000 550(5) .45%
Marion, Ohio
</TABLE>
26
<PAGE> 27
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Thurman R. Mathews 69 Owner, Mathews, Kennedy Ford Lincoln 1994 2000 8,735(6) 7.21%
Mercury, Marion
Fred K. White 64 Division Manager, Ohio Edison 1994 2000 218(7) .18%
(electric utility company)
Peter B. Miller 61 President, Pete Miller, 1997 1999 4,925(8) 4.06%
Inc.
William H. Harris 57 Banker, Ohio State Bancshares, Inc.* 1995 1999 522(9) .43%
Gary E. Pendelton 53 Banker, Ohio State Bancshares, Inc. 1990 1999 750 .62%
Principal Officers and Directors as a Group (11 Persons) 27,892 23.01%
</TABLE>
*Prior to joining Ohio State Bancshares, Inc. in December of 1994, Mr. Harris
was an Assistant Vice President for Star Bank from May of 1992 until he joined
Ohio State Bancshares, Inc. Prior to his position with Star Bank Mr. Harris was
a mortgage originator for Republic Bank.
(1) Includes 750 shares owned jointly with spouse.
(2) Includes 3,950 shares owned by a controlled company.
(3) Includes 200 shares owned by spouse.
(4) Includes 5,842 shares owned by partnership of which Mr. Graham is a general
partner.
(5) Includes 500 shares held in a trust of which Ms. Fisher is the Trustee.
(6) Includes 8,295 shares owned by spouse.
(7) Includes 218 held by a controlled trust.
(8) Includes 4,875 shares held jointly with spouse.
(9) Includes 20 shares jointly owned by spouse, and 452 IRA FBO William H.
Harris, DLJSC Custodian.
Except as described above, the Company has no knowledge that any
person, or any "group" as the term is used in Section 13(d)(3) of the Securities
Exchange Act of 1934, owns, as of September 30, 1998, of record or beneficially,
more than 5 percent of the outstanding Shares of the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Management's discussion and analysis of the Company's financial
condition and results of operation for its fiscal years ended December 31, 1997
and 1996 and the quarter ended September 30, 1998, is set forth in Item 6 of the
Company's 10-KSB for its fiscal year ended December 31, 1997, and Item 2 of the
Company's 10-QSB for the quarter ended September 30, 1998, which are attached as
Annex F-1 to this Prospectus and incorporated in this Prospectus.
Annex F-1 to this Prospectus includes copies of the Company's Form 10-KSB for
the Company's fiscal year ended December 31, 1997, and Form 10-QSB for the
quarter ended September 30, 1998, as filed with the Commission and which are
incorporated in this Prospectus.
27
<PAGE> 28
COMPARATIVE SUMMARY OF SELECTED FINANCIAL DATA
as of or for the years ending December 31, (000's except per share data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total interest income $ 3,657 $ 3,286 $ 3,084 $ 2,342 $ 2,199
Total interest expense 1,646 1,540 1,340 819 766
----------- ---------- ---------- ---------- ----------
Net interest income 2,011 1,746 1,744 1,523 1,433
Provision for loan losses 139 163 82 56 169
----------- ---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 1,872 1,583 1,662 1,467 1,264
Noninterest income 231 241 279 293 278
Noninterest expense 1,630 1,465 1,513 1,435 1,338
----------- ---------- ---------- ---------- ----------
Income before income taxes 473 359 428 325 204
Provision for income taxes 126 100 55 -- --
----------- ---------- ---------- ---------- ----------
Net income $ 347 $ 259 $ 373 $ 325 $ 204
=========== ========== ========== ========== ==========
PER SHARE DATA:
Basic and diluted earnings
per common share $ 2.86 $ 2.14 $ 3.08 $ 2.68 $ 1.69
Book value per share at year-end 29.40 26.62 25.22 19.69 19.97
Cash dividends per share 0.40 0.40 0.30 0.20 0.10
Number of shares used in net income
per share calculations 121,200 121,200 121,200 121,200 121,200
BALANCE SHEET DATA:
Total assets $ 49,794 $ 43,056 $ 41,744 $ 34,836 $ 31,465
Total securities 10,009 10,719 13,703 9,019 9,054
Total net loans 34,396 27,573 22,861 20,963 17,535
Allowance for loan losses 311 281 252 265 339
Total deposits 45,909 39,469 38,291 32,258 28,950
Shareholders' equity 3,563 3,226 3,057 2,387 2,420
OPERATING RATIOS:
Total net loans to total deposits 74.92% 69.86% 59.70% 64.99% 60.57%
Total shareholders' equity to total assets 7.16 7.49 7.32 6.85 7.69
Average shareholders' equity
to average assets 7.42 7.43 7.33 7.66 7.92
Return on average equity 10.26 8.32 13.38 13.22 8.71
Return on average assets 0.76 0.62 0.98 1.01 0.69
Dividend payout ratio 13.98 18.69 9.75 7.47 5.93
Total interest expense to interest income 45.02 46.86 43.45 34.97 34.83
Allowance for loan losses
to total loans 0.90 1.01 1.09 1.25 1.93
Average assets $ 45,598 $ 41,994 $ 37,992 $ 32,073 $ 29,604
Average shareholders' equity 3,383 3,119 2,786 2,458 2,346
</TABLE>
Averages used herein, unless indicated otherwise, are based on daily averages.
28
<PAGE> 29
SUPERVISION AND REGULATION
The following is a summary of certain statutes and regulations
affecting the Company. This summary is qualified in its entirety by such
statutes and regulations.
The Company
The Company is a registered bank holding company under the Bank Holding
Company Act of 1956 (the "Banking Act") as amended, and as such is subject to
regulation by the Federal Reserve Board ("FRS"). A bank holding company is
required to file with the FRS annual reports and other information regarding its
business operations and those of its subsidiaries. A bank holding company and
its subsidiary banks are also subject to examination by the FRS.
The Banking Act requires every bank holding company to obtain the prior
approval of the FRS before acquiring substantially all the assets of any bank or
bank holding company or ownership or control of any voting shares of any bank or
bank holding company, if, after such acquisition, it would own or control,
directly or indirectly, more than five percent (5%) of the voting shares of such
bank or bank holding company. The Banking Act currently permits bank holding
companies from any state to acquire banks and bank holding companies in any
other state, subject to certain conditions, including certain nationwide and
state-imposed concentration limits. Bank holding companies have the ability,
subject to certain restrictions, including state opt-out provisions, to
acquire by acquisition or merger branches outside their home state. The
establishment of new interstate branches also is possible in those states that
expressly permit it. Competition may increase further as banks branch across
state lines and enter new markets. (See "Recent Legislation.")
The Banking Act does not place territorial restrictions on the
activities of nonbank subsidiaries of a bank holding company.
In approving acquisitions by bank holding companies of companies
engaged in banking-related activities, the FRS considers whether the performance
of any such activity by a subsidiary of the holding company reasonably can be
expected to produce benefits to the public, such as greater convenience,
increased competition, or gains in efficiency, which outweigh possible adverse
effects, such as overconcentration of resources, decrease of competition,
conflicts of interest, or unsound banking practices.
Bank holding companies are restricted in, and subject to, limitations
regarding transactions with subsidiaries and other affiliates.
In addition, bank holding companies and their subsidiaries are
prohibited from engaging in certain "tie in" arrangements in connection with any
extensions of credit, leases, sales of property, or furnishing of services.
29
<PAGE> 30
Bank
The Bank is regulated by the Ohio Division of Financial Institutions
("ODFI") as an Ohio state chartered bank. Additionally, Bank is regulated by the
Federal Deposit Insurance Corporation ("FDIC") as a state non-member bank. The
deposits of Bank are insured by the FDIC.
Capital
The FRS, ODFI, and FDIC require banks and holding companies to maintain
minimum capital ratios.
The banking regulatory agencies have adopted risk-based capital
guidelines. These ratios involve a mathematical process of assigning various
risk weights to different classes of assets, then evaluating the sum of the
risk-weighted balance sheet structure against the Company's capital base. The
rules set the minimum guidelines for the ratio of capital to risk-weighted
assets (including certain off-balance sheet activities, such as standby letters
of credit) at 8%. At least half of the total capital is to be composed of common
equity, retained earnings, and a limited amount of perpetual preferred stock
less certain goodwill items ("Tier 1 Capital"). The remainder may consist of a
limited amount of subordinated debt, other preferred stock, or a limited amount
of loan loss reserves. At September 30, 1998, the Bank's risk-adjusted Tier 1
Capital and total capital, as defined by the regulatory agencies were 9.05% and
9.87% of risk-weighted assets, respectively.
In addition, banking regulatory agencies have adopted leverage capital
guidelines for banks and bank holding companies. Under these guidelines, banks
and bank holding companies must maintain a minimum ratio of three percent (3%)
Tier 1 to total assets. As of September 30, 1998, the Bank's core leverage ratio
was 7.02%, well above the regulatory minimum.
Regulatory authorities may increase such minimum requirements for all
banks and bank holding companies or for specified banks or bank holding
companies. Increases in the minimum required ratios could adversely affect the
Bank and the Company, including their ability to pay dividends.
Additional Regulation
The Bank is also subject to federal regulation as to such matters as
required reserves, limitation as to the nature and amount of its loans and
investments, regulatory approval of any merger or consolidation, issuance or
retirement by the Bank of its own securities, limitations upon the payment of
dividends and other aspects of banking operations. In addition, the activities
and operations of the Bank are subject to a number of additional detailed,
complex and sometimes overlapping laws and regulations. These include state
usury and consumer credit laws, state laws relating to fiduciaries, the Federal
Truth-in-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act
and Regulation B, the Fair Credit Reporting Act, the Truth in Savings Act, the
Community Reinvestment Act, antiredlining legislation and antitrust laws.
30
<PAGE> 31
Dividend Regulation
The ability of the Company to obtain funds for the payment of dividends
and for other cash requirements is largely dependent on the amount of dividends
which may be declared by its subsidiary. Generally, an Ohio state chartered bank
may not declare a dividend, without the approval of the ODFI, if the total of
dividends declared by such bank in a calendar year exceeds the total of its net
profits for that year combined with its retained profits of the preceding two
years.
Government Policies and Legislation
The policies of regulatory authorities, including the FRS, ODFI, FDIC
and the Depository Institutions Deregulation Committee, have had a significant
effect on the operating results of commercial banks in the past and are expected
to do so in the future. An important function of the FRS is to regulate
aggregate national credit and money supply through such means as open market
dealings in securities, establishment of the discount rate on member bank
borrowings, and changes in reserve requirements against member bank deposits.
Policies of these agencies may be influenced by many factors, including
inflation, unemployment, short-term and long-term changes in the international
trade balance and fiscal policies of the United States government.
The United States Congress has periodically considered and adopted
legislation which has resulted in further deregulation of both banks and other
financial institutions, including mutual funds, securities brokerage firms and
investment banking firms. No assurance can be given as to whether any additional
legislation will be adopted or as to the effect such legislation would have on
the business of Bank or the Company.
Recent Legislation
On September 29, 1994, the Reigle/Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") was signed into law. The
Interstate Act effectively permits nationwide banking. The Interstate Act
provides that one year after enactment, adequately capitalized and adequately
managed bank holding companies may acquire banks in any state, even in those
jurisdictions that currently bar acquisitions by out-of-state institutions,
subject to deposit concentration limits. The deposit concentration limits
provide that regulatory approval by the Federal Reserve Board may not be granted
for a proposed interstate acquisition if after the acquisition, the acquirer on
a consolidated basis would control more than 10% of the total deposits
nationwide or would control more than 30% of deposits in the state where the
acquiring institution is located. The deposit concentration state limit does not
apply for initial acquisitions in a state and in every case, may be waived by
the state regulatory authority. Interstate acquisitions are subject to
compliance with the Community Reinvestment Act ("CRA"). States are permitted to
impose age requirements not to exceed five years on target banks for interstate
acquisitions. States are not allowed to opt-out of interstate banking.
31
<PAGE> 32
Branching between states may be accomplished either by merging separate
banks located in different states into one legal entity, or by establishing de
novo branches in another state. Consolidation of banks was not permitted until
June 1, 1997, provided that the state had not passed legislation "opting-out" of
interstate branching. If a state opted-out prior to June 1, 1997, then banks
located in that state may not participate in interstate branching. A state could
have opted-in to interstate branching by bank consolidation or by de novo
branching by passing appropriate legislation earlier than June 1, 1997.
Interstate branching is also subject to a 30% statewide deposit concentration
limit on a consolidated basis, and a 10% nationwide deposit concentration limit.
The laws of the host state regarding community reinvestment, fair lending,
consumer protection (including usury limits) and establishment of branches shall
apply to the interstate branches. The State of Ohio opted-in to the legislation
in May of 1997.
De novo branching by an out-of-state bank is not permitted unless the
host state expressly permits de novo branching by banks from out-of-state. The
establishment of an initial de novo branch in a state is subject to the same
conditions as apply to initial acquisition of a bank in the host state other
than the deposit concentration limits.
The FDIC, together with the Federal Reserve, the ODFI and the Office of
Thrift Supervision (the "OTS"), have established rules implementing the
requirement that the federal banking agencies establish operational and
managerial standards to promote the safety and soundness of federally insured
depository institutions. The guidelines establish standards for internal
controls, information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, and compensation,
fees and benefits. In general, the guidelines prescribe the goals to be achieved
in each area, and each institution is responsible for establishing its own
procedures to achieve those goals. If an institution fails to comply with any of
the standards set forth in the guidelines, the institution's primary federal
regulator may require the institution to submit to a plan for achieving and
maintaining compliance. Failure to submit an acceptable plan, or failure to
comply with a plan that has been accepted by the appropriate regulator, would
constitute grounds for further enforcement action.
Federal and state regulatory agencies have adopted new regulations
under the Community Reinvestment Act ("CRA"). Under the new regulations, an
institution's performance in meeting the credit needs of its entire community,
including low and moderate income areas, as required by the CRA, is generally
evaluated under three tests: the "lending test," which considers the extent to
which the institution makes loans in the low and moderate income areas of its
market; the "service test," which considers the extent to which the institution
makes branches accessible to low and moderate income areas of its market and
provides other services that promote credit availability; and the "investment
test," which considers the extent to which the institution invests in community
and economic development activities. The Bank had a satisfactory CRA rating as
of its latest examination.
Proposed Legislation
In addition to the above, there have been proposed a number of
legislative and regulatory proposals designed to strengthen the federal deposit
insurance system and to improve the overall
32
<PAGE> 33
financial stability of the U.S. banking system. It is impossible to predict
whether or in what form these proposals may be adopted in the future, and if
adopted, what their effect would be on the Company. The United States Congress
has also periodically considered and adopted legislation which has resulted in
and could result in further deregulation of both banks and other financial
institutions. Such legislation could place the Company in more direct
competition with other financial institutions, including mutual funds, credit
unions, insurance companies and securities brokerage firms. No assurance can be
given as to whether any additional legislation will be enacted or as to the
effect of such legislation on the Company.
Year 2000
As a financial institution the Company is subject to the potential
risks to the financial services industry and the Company's business
specifically, of the "Y2K" issue. The Y2K issue is the acronym and terminology
currently utilized to describe a wide variety of application specific potential
technological problems inherent in computer software which is designed to read
only a 2 digit annual date position. Many software packages currently employed
by the financial services industry as well as by industries which provide
products and services which may effect the financial services industry, either
directly or indirectly through suppliers, customers, and other persons, are not
able to identify the advent of the year 2000 as "00." Therefore, there is wide
spread concern over the risks posed to the financial services industry which is
both highly automated and dependent upon information processing technology.
Concerns include but are not limited to possible erroneous checking account
transactions, interest calculations or payment schedules. Similarly Y2K issues
extend to possible problems with ATM systems or credit and debit cards. The
potential problems do not end at financial systems. Any machine or device
controlled by a computer is susceptible to the Y2K problem. The financial impact
to the industry as a whole to address Y2K could be substantial. The Securities
and Exchange Commission as well as all banking regulatory agencies have alerted
companies under their respective jurisdictions to consider and address the risks
posited by Y2K and to disclose where appropriate the specific impact of Y2K on
the Company.
The Company has developed a written Y2K Compliance Program which has
been adopted by the Company's Board of Directors. The Company and its subsidiary
bank have been subject to examination by the FDIC regarding Y2K and have not
been made aware of any material deficiency as a result of such examination. In
January 1998, a committee of the Company's corporate officers was formed to
identify all software systems, equipment and vendors that could possibly be
affected by the Year 2000 century change, devise a detailed testing and
confirmation system that will ensure that all affected systems are tested or
certified by the vendor and develop contingency plans including the possibility
of changing vendors for any application that the Company is unable to test or
certify to be Year 2000 complaint.
Management has evaluated the Company's computer hardware and software
and has contacted the companies that supply or service the Company's
computer-operated or -dependent systems to obtain confirmation that each such
system that is material to the operations of the Bank is either currently Year
2000 compliant or is expected to be Year 2000 compliant. The Bank uses software
of a nationally recognized software provider that specializes in financial
institutions which somewhat mitigates the risk associated with the Year 2000
issue. As of September 30, 1998, the Company has incurred costs of approximately
$60,000 related to Year 2000 compliance. The primary expenditures have been for
upgraded teller software and new personal computers. Management estimates
another $40,000 will be expended in 1999 for onsite and offsite software testing
and additional personal computers. With respect to systems that cannot presently
be confirmed as Year 2000 compliant, management will continue to work with the
appropriate supplier or servicer to ensure that all such systems will be
rendered compliant in a timely manner, with minimal expense to the Company or
disruption of the Bank's operations. Management anticipates Year 2000 compliance
testing will be completed by the first quarter of 1999 for its mission critical
systems. If the test results exhibit noncompliance with Year 2000 with respect
to any systems, the failure of which would have a material adverse effect on the
Bank's operations, financial condition or results, the Company would then
identify and contract with suppliers and services who are able to certify Year
2000 compliance.
In addition to possible expense related to its own systems, the Bank
could incur losses if loan payments are delayed due to Year 2000 problems
affecting any of the Bank's significant borrowers or impairing the payroll
systems of large employers in the Bank's primary market area. As a result, the
Year 2000 committee will review all commercial loans to determine if and to what
extent their ability to do business and to repay their loans will be affected by
the Year 2000 century change. Should the committee determine a business will be
affected by the Year 2000 issue, the committee will notify the customer of its
concerns and monitor the progress of that customer towards the goal of being
Year 2000 compliant. Because the Bank's loan portfolio is highly diversified
with regard to individual borrowers and types of businesses and the Bank's
primary market area is not significantly dependent upon one employer or
industry, the Bank does not expect any significant or prolonged Year 2000
related difficulties that will affect net earnings or cash flow.
INDEMNIFICATION
The Articles of Incorporation of the Company, in conjunction with
provisions of the Ohio Revised Code, contain certain indemnification provisions
which provide that directors, officers,
33
<PAGE> 34
employees or agents of the Company will be indemnified against expenses actually
and reasonably incurred by them if they are successful on the merits of a claim
or proceeding.
Even when a case or dispute is not ultimately determined on its merits
(i.e., settled), the indemnification provisions of the Articles of Incorporation
and Ohio law provide that the Company will indemnify directors when they meet
the applicable standard of conduct. The applicable standard of conduct is met if
the director acted in good faith and in a manner he or she reasonably believed
to be in or not opposed to the best interests of the Company or, with respect to
any criminal action or proceeding, if the director had no reasonable cause to
believe his or her conduct was unlawful. Whether the applicable standard of
conduct has been met is determined by the Board of Directors, a disinterested
committee of the Board, the shareholders or independent legal counsel in each
specific case.
The Articles of Incorporation of the Company, in conjunction with
provisions of the Ohio Revised Code, also provide that the indemnification
rights set forth therein are not exclusive of any other indemnification rights
to which a director may be entitled under any resolution or agreement, either
specifically or in general terms approved by the affirmative vote of the holders
of a majority of the shares entitled to vote thereon. The Company can also
provide for greater indemnification than that set forth in the Articles of
Incorporation if it chooses to do so. Additionally, and subject to the
limitations set forth below, the Articles of Incorporation require that the
Corporation indemnify its present and past directors for personal liability for
monetary damages resulting from breach of their fiduciary duty as directors.
Notwithstanding the above, no indemnification for personal liability shall be
provided for: (i) any breach of the directors' duty of loyalty to the
corporation or its stockholders; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii)
illegal distribution of dividends; and (iv) any transaction from which the
director derived an improper personal benefit.
The indemnification provisions of the Articles of Incorporation, in
conjunction with provisions of the Ohio Revised Code, provide that the Company
may purchase and maintain insurance on behalf of any director against any
liability asserted against such person and incurred by him or her in any such
capacity, whether or not the Company would have had the power to indemnify
against such liability. The Company is not aware of any pending or threatened
action, suit or proceeding involving any of its directors or officers for which
indemnification from the Company may be sought.
Insofar as indemnification for liabilities (primarily relating to
public distribution of securities) arising under the Securities Act of 1933, as
amended (the "1933 Act"), may be permitted to directors, officers and
controlling persons of the Company, or to an affiliate of the Company pursuant
to the Company's Articles of Incorporation or Code of Regulations or otherwise,
the Board of Directors has been advised that, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. Accordingly, it is
possible that the indemnification provisions may not apply to liabilities
arising under the 1933 Act unless the person to be indemnified is successful on
the merits of the claim or proceeding.
34
<PAGE> 35
LEGAL OPINIONS
The validity of the Shares offered hereby will be passed upon for the
Company by Werner & Blank Co., L.P.A., Toledo, Ohio, special counsel to the
Company in connection with the Offering.
EXPERTS
The consolidated financial statements of Ohio State Bancshares, Inc. as of
December 31, 1997 and 1996 and for the years then ended, appearing in this
Prospectus have been audited by Crowe, Chizek and Company LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
35
<PAGE> 36
ANNEX F-1
FINANCIAL STATEMENTS
1
<PAGE> 37
OHIO STATE BANCSHARES, INC.
ANNUAL REPORT
December 31, 1997
TABLE OF CONTENTS
<TABLE>
<S> <C>
President's Letter.......................................................................................... 1
Comparative Summary of Selected Financial Data.............................................................. 2
Form 10-KSB ............................................................................................. 3
INDEX ..................................................................................................... 4
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 Shareholder Matters..................................... 7
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................ 7
Item 7. Financial Statements......................................................................... 23
Report of Independent Auditors............................................................... 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>
F-1
<PAGE> 38
FROM THE PRESIDENT:
By the end of 1997, Ohio State Bancshares, Inc., the parent company of The
Marion Bank, reached assets totaling $49.8 million. Deposits climbed to a
recorded high of $45.9 million. The Corporation exceeded more than $34 million
in commercial, consumer, and personal loans. A major challenge faced by the
Corporation in 1997 was to increase profits over 1996 while at the same time
absorbing the overhead and start-up costs associated with our first branch
office located at 220 Richland Road. As evidenced by improvement in both return
on average assets and return on average equity, we were able to accomplish our
goal.
Our Richland Road office has been in operation for one year with total deposits
topping the $5 million mark. The continuation of this deposit growth will
greatly contribute to our success in 1998. It is reassuring to watch the steady
increase in customer traffic. I remain confident that the Richland Road office
will soon become a major contributor to our future success.
We continue to enjoy solid growth in both deposits (a 16.32% increase) and total
loans (a 24.31% increase) and, with input from the Board of Directors, fully
intend and have budgeted to continue efforts necessary for future growth.
It is with great regret that we report the death of our long-time supporter and
director John Baldauf. A director since 1993, John will be missed by our bank
and the entire Marion community. The Board of Directors has named local
businessman Pete B. Miller to replace John on our Board. John's legacy to our
bank was the construction of our beautiful new branch office on Richland Road.
Some of our shareholders may maintain their banking relationship with one of our
competitors. Wouldn't it make perfect sense to not only contribute to our
success with your personal banking relationship, but also to help achieve our
common goal by recommending The Marion Bank to your friends and relatives?
Sincerely,
Gary E. Pendleton
President/CEO
F-2
<PAGE> 39
COMPARATIVE SUMMARY OF SELECTED FINANCIAL DATA as
of or for the years ending December 31, (000's except per share data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total interest income $ 3,657 $ 3,286 $ 3,084 $ 2,342 $ 2,199
Total interest expense 1,646 1,540 1,340 819 766
----------- ---------- ---------- ---------- ----------
Net interest income 2,011 1,746 1,744 1,523 1,433
Provision for loan losses 139 163 82 56 169
----------- ---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 1,872 1,583 1,662 1,467 1,264
Noninterest income 231 241 279 293 278
Noninterest expense 1,630 1,465 1,513 1,435 1,338
----------- ---------- ---------- ---------- ----------
Income before income taxes 473 359 428 325 204
Provision for income taxes 126 100 55 -- --
----------- ---------- ---------- ---------- ----------
Net income $ 347 $ 259 $ 373 $ 325 $ 204
=========== ========== ========== ========== ==========
PER SHARE DATA:
Basic and diluted earnings
per common share $ 2.86 $ 2.14 $ 3.08 $ 2.68 $ 1.69
Book value per share at year-end 29.40 26.62 25.22 19.69 19.97
Cash dividends per share 0.40 0.40 0.30 0.20 0.10
Number of shares used in net income
per share calculations 121,200 121,200 121,200 121,200 121,200
BALANCE SHEET DATA:
Total assets $ 49,794 $ 43,056 $ 41,744 $ 34,836 $ 31,465
Total securities 10,009 10,719 13,703 9,019 9,054
Total net loans 34,396 27,573 22,861 20,963 17,535
Allowance for loan losses 311 281 252 265 339
Total deposits 45,909 39,469 38,291 32,258 28,950
Shareholders' equity 3,563 3,226 3,057 2,387 2,420
OPERATING RATIOS:
Total net loans to total deposits 74.92% 69.86% 59.70% 64.99% 60.57%
Total shareholders' equity to total assets 7.16 7.49 7.32 6.85 7.69
Average shareholders' equity
to average assets 7.42 7.43 7.33 7.66 7.92
Return on average equity 10.26 8.32 13.38 13.22 8.71
Return on average assets 0.76 0.62 0.98 1.01 0.69
Dividend payout ratio 13.98 18.69 9.75 7.47 5.93
Total interest expense to interest income 45.02 46.86 43.45 34.97 34.83
Allowance for loan losses
to total loans 0.90 1.01 1.09 1.25 1.93
Average assets $ 45,598 $ 41,994 $ 37,992 $ 32,073 $ 29,604
Average shareholders' equity 3,383 3,119 2,786 2,458 2,346
</TABLE>
Averages used herein, unless indicated otherwise, are based on daily averages.
- --------------------------------------------------------------------------------
F-3
<PAGE> 40
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
<TABLE>
<CAPTION>
<S><C>
(Mark one)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
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 of incorporation or organization) (I.R.S. Employer Identification No.)
111 South Main Street, Marion, Ohio 43302
- --------------------------------------- -----
(Address of principal executive offices) (Zip code)
(740) 387-2265
- --------------
(Issuer's telephone number)
</TABLE>
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.[ ]
Issuer's revenue for the year ended December 31, 1997 was: $3,887,791
At March 4, 1998, 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 4, 1998 was $3,745,547.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Issuer's Proxy Statement to be dated approximately March 15,
1998, 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]
- --------------------------------------------------------------------------------
F-4
<PAGE> 41
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 Shareholder Matters................................. 7
ITEM 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................ 7
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>
- --------------------------------------------------------------------------------
F-5
<PAGE> 42
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 (740) 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)
F-6
<PAGE> 43
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, 1997, the Bank employed 17 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 a
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)
F-7
<PAGE> 44
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, 1997.
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 1997 and 1996, 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>
1997(1) Low Bid High Bid Low Ask High Ask
------- ------- -------- ------- --------
<S> <C> <C> <C> <C>
1st Qtr. $ 34.50 $ 34.50 $ 36.50 $ 36.50
2nd Qtr. 34.50 35.50 36.50 37.50
3rd Qtr. 35.50 35.50 37.50 37.50
4th Qtr. 35.50 37.00 37.50 39.00
<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
</TABLE>
(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.
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 500,000 authorized and 121,200 outstanding shares of common
stock held by approximately 476 shareholders as of December 31, 1997. The
Corporation paid cash dividends of $0.20 per share in June and December of each
year, resulting in a total amount of $0.40 per share in each of 1997 and 1996.
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, 1997 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.
- --------------------------------------------------------------------------------
(Continued)
F-8
<PAGE> 45
RESULTS OF OPERATIONS
Net income for the Corporation was $347,000 in 1997, or $88,000 more than the
$259,000 earned in 1996. The reason for the increase in earnings for 1997 was
primarily due to total interest income increasing $372,000 from 1996 to 1997
while interest expense increased only $107,000 over the same period. This
$265,000 increase in net interest income was a result of the Corporation
increasing its loan to deposit ratio from 69.86% at year-end 1996 to 74.92% at
year-end 1997. The yield earned on the average assets of the Corporation
increased from 8.44% for the year ended December 31, 1996, to 8.70% for the year
ended December 31, 1997. During the same period, the average cost of
interest-bearing liabilities increased only from 4.47% to 4.50%. The increase in
earning assets and the resulting increase in net interest margin enabled the
Corporation to increase net income while absorbing the first year cost of its
new branch at 220 Richland Road, Marion, Ohio.
NET INTEREST INCOME
Net interest income is the amount of interest earned on loans, securities, and
other investments 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 $265,000 from 1996 to 1997. The net interest
margin, which is net interest income divided by average earning assets,
increased 30 basis points from 4.52% for 1996 to 4.82% for 1997. The margin
increase was the result of an improved net interest spread combined with
increasing the ratio of average interest-earning assets to average
interest-bearing liabilities from 113.64% for 1996 to 115.82% for 1997.
- --------------------------------------------------------------------------------
(Continued)
F-9
<PAGE> 46
NET INTEREST INCOME (Continued)
Total interest income increased $372,000 as the yield on earning assets
increased from 8.44% in 1996 to 8.70% in 1997. Strong loan demand was the
primary reason for the increase in total interest income. Interest and fees on
loans increased $512,000 from year-end 1996 to year-end 1997, due to an increase
in the average balances of loans of $5,456,000 during the period. This 21.39%
increase in average loan volumes more than offset the decrease in the average
loan yield from 9.75% in 1996 to 9.69% in 1997. Interest on taxable securities
declined $151,000 as management used funds from maturing securities to fund
seasonable loan demand. Interest on nontaxable securities increased $18,000 in
1997 as the Corporation increased its investments in nontaxable securities.
Total interest expense increased $107,000 in 1997. Average interest-bearing
liabilities increased by $2,143,000 and the rate paid on interest-bearing
liabilities increased by 3 basis points from year-end 1996 to year-end 1997. The
average rate paid on time deposits increased from 5.76% in 1996 to 5.80% in
1997. Average time deposit balances remained at 58.78% of average
interest-bearing liabilities in 1997, a similar percentage to the 58.56% in
1996.
- --------------------------------------------------------------------------------
(Continued)
F-10
<PAGE> 47
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)
1997 1996
-------------------------------- --------------------------------
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 $ 394 6.09% $ 24 $ 546 5.86% $ 32
Federal funds sold 492 5.28 26 468 5.56 26
Securities
Taxable 8,488 5.85 500 10,911 5.91 651
Nontaxable 2,032 6.99 142 1,707 6.91 118
Loans 30,963 9.69 2,999 25,507 9.75 2,486
--------- -------- --------- ---------
TOTAL INTEREST-EARNING ASSETS 42,369 8.70 3,691 39,139 8.44 3,313
--------- -------- --------- ---------
NONINTEREST-EARNING ASSETS:
Cash and due from banks 1,957 1,737
Premises and equipment, net 883 803
Other real estate owned
and repossessions 39 27
Accrued interest and other assets 632 552
Less: Allowance for loan losses (282) (264)
--------- ---------
TOTAL NONINTEREST-EARNING ASSETS 3,229 2,855
--------- ---------
TOTAL ASSETS $ 45,598 $ 41,994
========= =========
LIABILITIES AND SHAREHOLDERS EQUITY:
INTEREST-BEARING LIABILITIES:
NOW deposits $ 5,815 1.89 110 $ 5,238 1.91 100
Savings and money market deposits 8,618 2.91 251 8,485 2.92 248
Time deposits:
Under $100,000 15,669 5.87 920 14,182 5.84 828
$100,000 and over 5,836 5.60 327 5,987 5.58 334
Other borrowings 645 5.89 38 548 5.47 30
--------- -------- --------- ---------
TOTAL INTEREST-BEARING LIABILITIES 36,583 4.50 1,646 34,440 4.47 1,540
--------- -------- --------- ---------
NONINTEREST-BEARING LIABILITIES:
Demand deposits 5,178 4,036
Accrued interest payable
and other liabilities 454 399
--------- ---------
TOTAL NONINTEREST-BEARING LIABILITIES 5,632 4,435
--------- ---------
TOTAL LIABILITIES 42,215 38,875
TOTAL SHAREHOLDERS' EQUITY 3,383 3,119
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 45,598 $ 41,994
========= =========
NET INTEREST INCOME $ 2,045 $ 1,773
======== =========
NET INTEREST SPREAD 4.20% 3.97%
==== =======
NET YIELD ON INTEREST
EARNING ASSETS 4.82% 4.52%
==== =======
</TABLE>
Yields and amounts earned on loans include loan fees and late charges of $9,074
and $11,324 for the years ended December 31, 1997 and 1996. Nonaccruing loans
are included in the daily average loan amounts outstanding. Yields on nontaxable
securities have been computed on a fully tax equivalent basis utilizing a 34%
tax rate. The historical amortized cost average balance of $8,547,000 for 1997
and $11,006,000 for 1996 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)
F-11
<PAGE> 48
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>
1997 Compared to 1996 1996 Compared to 1995
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 $ (8) $ (9) $ 1 $ -- $ (1) $ 1
Federal funds sold -- 1 (1) (61) (58) (3)
Securities
Taxable (151) (144) (7) (47) 12 (59)
Nontaxable (1) 24 23 1 85 85 --
Loans (2) 513 529 (16) 245 330 (85)
-------- -------- -------- ------ -------- --------
Total interest income 378 400 (22) 222 368 (146)
-------- -------- -------- ------ -------- --------
Deposits
NOW accounts 10 11 (1) (2) (1) (1)
Savings deposits 3 4 (1) (11) (8) (3)
Time deposits <$100,000 92 87 5 113 86 27
Time deposits >$100,000 (7) (8) 1 73 83 (10)
-
Other borrowings 8 6 2 27 28 (1)
-------- -------- -------- ------ -------- --------
Total interest expense 106 100 6 200 188 12
-------- -------- -------- ------ -------- --------
Net interest income $ 272 $ 300 $ (28) $ 22 $ 180 $ (158)
======== ======== ======== ====== ======== ========
</TABLE>
(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.
- --------------------------------------------------------------------------------
F-12
<PAGE> 49
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The Corporation maintains an allowance for loan losses that management considers
adequate to provide for probable credit 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 60 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 1997, the allowance had a balance of $311,095 (0.90%
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)
1997 1996
---- ----
<S> <C> <C>
Nonaccrual loans $ 35 $ 29
Loans past due 90 days or more,
excluding nonaccrual loans 184 40
Impaired loans (all also nonaccrual) 282 --
------------ ------------
Total $ 501 $ 69
============ ============
</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, 1997,
that are not reported above as nonaccrual, delinquent or impaired. 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 7 $ 29,067
Commercial 2 36,324
---- ------------
9 $ 65,391
==== ============
</TABLE>
- --------------------------------------------------------------------------------
F-13
<PAGE> 50
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>
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Allowance for loan losses:
Balance at beginning of period $ 281 $ 252
Loans charged off:
Commercial (9) (7)
Real estate -- --
Installment (133) (159)
------------ ------------
Total loans charged off: (142) (166)
------------ ------------
Recoveries of loans previously charged off:
Commercial 1 --
Real estate -- --
Installment 32 32
------------ ------------
Total loan recoveries 33 32
------------ ------------
Net loans charged off (109) (134)
Provision charged to operating expense 139 163
------------ ------------
Balance at end of period $ 311 $ 281
============ ============
Ratios:
Net loans charged off to average loans 0.35% 0.53%
Net loans charged off to total loans at end of period 0.32% 0.48%
Allowance for loan losses to average loans 1.00% 1.10%
Allowance for loan losses to total loans at end of period 0.90% 1.01%
Net loans charged off to allowance for loan losses at end of period 35.05% 47.69%
Net loans charged off to provision for loan losses 78.42% 82.21%
</TABLE>
The following schedule is a breakdown of the allowance for loan losses allocated
by type of loan:
<TABLE>
<CAPTION>
Percentage of Percentage of
Loans in Each Loans in Each
Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C> <C> <C>
Commercial $ 42,503 37.91% $ 7,581 37.51%
Real Estate 2,646 9.60 2,288 9.96
Installment 143,736 50.72 114,156 50.40
Credit Cards 11,462 1.73 10,793 2.00
Other 14 .04 116 .13
Unallocated 110,734 N/A 146,208 N/A
------------- ------ -------------- ------
Total Allocation $ 311,095 100.00% $ 281,142 100.00%
============= ====== ============== ======
</TABLE>
- --------------------------------------------------------------------------------
F-14
<PAGE> 51
NONINTEREST INCOME
Noninterest income decreased from $241,000 in 1996 to $231,000 in 1997, a 4.24%
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 accounts were on plan in 1997 and similar to 1996
levels.
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 3.40% in 1996 to 3.27% in 1997. Personnel expense
increased 4.15% from 1996 to 1997, as a result of normal salary increases.
Occupancy expenses increased from $257,000 in 1996 to $341,000 in 1997, a 32.30%
increase. This was due primarily to expenses incurred at the Bank's Richland
Road branch which opened in late 1996. All other operating expenses increased
10.10% from $526,000 in 1996 to $579,000 in 1997 largely due to increased losses
incurred on repossessed vehicles and expenses associated with the new branch.
FINANCIAL CONDITION
TOTAL ASSETS
Total assets grew from $43,056,000 on December 31, 1996 to $49,794,000 on
December 31, 1997, a 15.65% increase. The major reason for the growth in assets
was a 24.75% increase in net loans which grew from $27,573,000 at year-end 1996,
to $34,396,000 at year-end 1997, a $6,823,000 increase. Cash and due from banks
increased $1,038,000, or 38.63% from $2,688,000 at December 31, 1996 to
$3,726,000 at December 31, 1997. Securities decreased 6.63%, or $710,000 from
$10,719,000 on December 31, 1996, to $10,009,000 on December 31, 1997.
LOANS
Total gross loans increased 24.31% from $27,713,000 on December 31, 1996 to
$34,451,000 on December 31, 1997. Installment loans increased 25.10% from
$13,968,000 in 1996 to $17,474,000 in 1997. Commercial loans increased from
$10,396,000 on December 31, 1996 to $13,059,000 on December 31, 1997, a 25.62%
increase during the period. The installment loan growth was due to obtaining an
increased market share of the indirect automobile loan business in Marion, as
well as strong demand in the local market. 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.
- --------------------------------------------------------------------------------
F-15
<PAGE> 52
LOANS (Continued)
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% of the Corporation's total loan portfolio on
December 31, 1997. The Corporation's present policy regarding diversity in the
loan portfolio is based on local economic conditions, competitive forces, supply
of funds and indicators in order to optimize income.
With certain exceptions, the Bank is permitted under applicable law to make
loans to individual borrowers in aggregate amounts of up to 15% of the Bank's
total capital. As of December 31, 1997, the lending limit for the Bank was
approximately $528,000. The Bank sells participations in its loans where
necessary to stay within legal lending limits.
The following is a schedule of contractual maturities of fixed and variable rate
loans, rounded to the nearest thousand, as of December 31, 1997.
<TABLE>
<CAPTION>
One One
Year Through After Five
or Less Five Years Years Total
------- ---------- ----- -----
<S> <C> <C> <C> <C>
REAL ESTATE
Fixed Rate $ 81 $ 81
Variable Rate 76 $ 3,150 3,226
------------ ----------- ------------
Total Real Estate 157 3,150 3,307
COMMERCIAL
Fixed Rate $ 842 228 25 1,095
Variable Rate 2,639 2,607 6,718 11,964
------------ ------------ ------------ ------------
Total Commercial 3,481 2,835 6,743 13,059
INSTALLMENT
Fixed Rate 233 15,444 1,243 16,920
Variable Rate 20 184 350 554
------------ ------------ ------------ ------------
Total Installment 253 15,628 1,593 17,474
CREDIT CARDS
Fixed Rate 351 351
Variable Rate 244 244
------------ ------------
Total Credit Card 595 595
OTHER
Fixed Rate 2 2
Variable Rate 14 14
------------ ------------ ------------ ------------
Total Other 16 16
TOTAL ALL LOANS $ 4,345 $ 18,620 $ 11,486 $ 34,451
============ ============ ============ ============
FIXED RATE $ 1,428 $ 15,753 $ 1,268 $ 18,449
VARIABLE $ 2,917 $ 2,867 $ 10,218 $ 16,002
</TABLE>
- --------------------------------------------------------------------------------
F-16
<PAGE> 53
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, obligations of federal agencies, mortgage-backed
securities, and obligations of state and political subdivisions. 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 1997, net loan balances increased only $383,000 more than deposit
balances increased. The loan growth was steady throughout the year while most of
the deposit growth in 1997 occurred during the last four months of the year.
Maturing securities, principal paydowns of government-insured mortgage
securities and short-term borrowings were used to fund the loan demand during
peak periods. Because the Corporation's net operating loss carryforwards were
fully utilized during 1995, management began purchasing municipal bonds and has
increased this portion of the securities portfolio during the past two years. At
year-end 1997, obligations of state and political subdivisions totaled
$2,159,000.
United States Government securities may be pledged to meet security requirements
imposed as a condition to receive the public funds. At December 31, 1997, the
Corporation had $3,938,000 pledged to secure public deposits compared to
$4,946,000 on December 31, 1996. 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 and the weighted average yields as of December 31, 1997 and
December 31, 1996:
<TABLE>
<CAPTION>
1997 1996
----------------------------------- ----------------------------------
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:
Over 1 year through 5 years $ 650 $ 654 5.98%
U.S. GOVERNMENT AGENCIES:
3 months or less $ 210 $ 211 6.82%
Over 1 year through 5 years 502 504 6.20 1,503 1,497 6.02
---------- ---------- ---- --------- ---------- ----
TOTAL U.S. GOVERNMENT
AGENCIES 502 504 6.20 1,713 1,708 6.12
MORTGAGE-BACKED SECURITIES 5,979 5,968 6.58 6,258 6,200 6.46
OTHER SECURITIES 223 223 6.19 182 182 6.21
---------- ---------- ---- --------- ---------- ----
TOTAL SECURITIES
AVAILABLE FOR SALE $ 7,354 $ 7,349 6.49% $ 8,153 $ 8,090 6.38%
========== ========== ==== ========= ========== ====
</TABLE>
- --------------------------------------------------------------------------------
F-17
<PAGE> 54
SECURITIES (Continued)
<TABLE>
<CAPTION>
1997 1996
----------------------------------- ----------------------------------
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%
U.S. GOVERNMENT AGENCIES:
Over 3 months through
12 months $ 500 $ 492 6.05%
Over 1 year through 5 years 500 467 6.05
OBLIGATIONS OF STATES AND
POLITICAL SUBDIVISIONS
Over 5 year through 10 years 135 141 5.60
Over 10 years 2,024 2,098 5.67 2,029 2,042 5.73
---------- ---------- ---- --------- ---------- ----
TOTAL OBLIGATIONS OF STATES
AND POLITICAL SUBDIVISIONS 2,159 2,239 5.66 2,029 2,042 5.73
---------- ---------- ---- --------- ---------- ----
TOTAL SECURITIES
HELD TO MATURITY $ 2,659 $ 2,731 5.74% $ 2,629 $ 2,609 5.81%
========== ========== ==== ========= ========== ====
CERTIFICATES OF DEPOSIT:
3 months or less $ 99 $ 99 5.60%
Over 3 months through
12 months 100 100 6.80 $ 300 $ 301 5.88%
Over 1 year through
5 years 199 201 6.20
---------- ---------- ---- --------- ---------- ----
TOTAL CERTIFICATES OF
DEPOSIT $ 199 $ 199 6.20% $ 499 $ 502 6.01%
========== ========== ==== ========= ========== ====
</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.
- --------------------------------------------------------------------------------
F-18
<PAGE> 55
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, 1997, the aggregate amount of time, savings and
interest-bearing demand deposits was 84.73% of total deposits. The Corporation
does not have any foreign deposits, nor does it have any material concentration
of deposits.
Total deposits increased from $39,469,000 on December 31, 1996 to $45,909,000 on
December 31, 1997, a 16.32% increase. The major reason for this substantial
increase in deposits was the 61.99% increase in noninterest-bearing demand
accounts which grew from $4,329,000 on December 31, 1996 to $7,012,000 on
December 31, 1997. Almost 50% of the deposit growth for 1997 occurred in the
last quarter of the year. Interest-bearing demand deposits increased $785,000,
or 13.17%, from $5,957,000 at year-end 1996 to $6,742,000 at year-end 1997.
Savings account balances increased 10.53% from $8,350,000 on December 31, 1996
to $9,229,000 on December 31, 1997. Certificates of deposit increased from
$20,834,000 at the end of 1996, to $22,926,000 at the end of 1997, a 10.04%
increase. The Corporation was able to attract sufficient dollars to fund its
growing loan portfolio without paying rates higher than the market.
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.
- --------------------------------------------------------------------------------
F-19
<PAGE> 56
ASSET/LIABILITY MANAGEMENT (Continued)
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.
The following table presents the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1997, 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, 1997 (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) $ 13,495 $ 5,100 $ 15,605 $ 251 $ 34,451
Securities (1) 500 1,654 7,855 10,009
Federal funds sold 1,057 1,057
Interest-earning deposits 99 100 199
----------- ----------- ----------- ----------- -----------
Rate sensitive assets (RSA) 14,651 5,700 17,259 8,106 45,716
Liabilities
Interest-bearing demand (2) 6,742 6,742
Savings (2) 9,229 9,229
Time deposits 4,254 9,879 8,793 22,926
----------- ----------- ----------- ----------- -----------
Rate sensitive liabilities (RSL) 20,225 9,879 8,793 38,897
----------- ----------- ----------- ----------- -----------
Period GAP (3) $ (5,574) $ (4,179) $ 8,466 $ 8,106 $ 6,819
=========== =========== =========== =========== ===========
Cumulative GAP $ (5,574) $ (9,753) $ (1,287) $ 6,819
=========== =========== =========== ===========
Percentage of RSA (12.19)% (21.33)% (2.82)% 14.92%
=========== =========== =========== ===========
</TABLE>
(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.
- --------------------------------------------------------------------------------
F-20
<PAGE> 57
CAPITAL RESOURCES
Shareholders' equity totaled $3,563,000 on December 31, 1997, compared to
$3,226,000 on December 31, 1996. At December 31, 1997 and December 31, 1996, the
ratio of shareholders' equity to assets was 7.16% and 7.49%.
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. The Bank was
categorized as "well-capitalized" at December 31, 1997 and 1996.
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 $3,726,000 at year-end 1997 and
$2,688,000 at year-end 1996. 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, access to Federal
Home Loan Bank advances, as the Corporation is a member of the Federal Home Loan
Bank of Cincinnati, and agreements with correspondent banks for buying and
selling Federal Funds. The fair value of securities classified as available for
sale was $7,350,000 and $8,090,000 as of December 31, 1997 and December 31,
1996.
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, 1997
was 74.92%, up from 69.86% on December 31, 1996.
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.
YEAR 2000
The Corporation's strategy and operating plan is to achieve operating readiness
to ensure that its customers are provided uninterrupted services and the
Corporation is able to comply with all applicable consumer protection statutes
as they relate to Year 2000 Compliance.
In January 1998, a committee of its corporate officers was formed to identify
all software systems, equipment and vendors that could possibly be affected by
the Year 2000 century change, devise a detailed testing and confirmation system
that will ensure that all affected systems are tested or certified by the vendor
as of December 31, 1998 and develop contingency plans including the possibility
of changing vendors for any application that the Corporation is
- --------------------------------------------------------------------------------
F-21
<PAGE> 58
unable to test or certify to be Year 2000 compliant. The committee will also
review all commercial loans to determine if and to what extent their ability to
do business and to repay their loans will be affected by the Year 2000 century
change. Should the committee determine a business will be affect by the Year
2000 issue, the committee will notify that customer of its concerns and monitor
the progress of that customer towards the goal of being Year 2000 compliant.
Management does not believe that the associated costs relating to the Year 2000
effort will materially affect the Corporation's results of operations, liquidity
and capital resources.
ANTICIPATED IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") 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. SFAS
No. 125 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" which was issued in December 1996, 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
continued to be effective January 1, 1997. SFAS No. 125 did not have a material
impact on the Corporation's financial statements.
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which is
effective for periods ending after December 15, 1997, including interim periods.
SFAS No. 128 simplifies the calculation of earnings per share ("EPS") by
replacing primary EPS with basic EPS. It also requires dual presentation of
basic EPS and diluted EPS for entities with complex capital structures. Basic
EPS includes no dilution and is computed by dividing income available to common
shareholders by the weighted-average common shares outstanding for the period.
Diluted EPS reflects the potential dilution of securities that could share in
earnings such as stock options, warrants or other common stock equivalents. All
prior period EPS data must be restated to conform with the new presentation. The
Corporation currently has no common stock equivalents.
- --------------------------------------------------------------------------------
F-22
<PAGE> 59
In February 1997, the FASB issued SFAS No. 129, "Disclosures of Information
about Capital Structure." SFAS No. 129 consolidates existing accounting guidance
relating to disclosure about a company's capital structure. Public companies
generally have always been required to make disclosures now required by SFAS No.
129 and, therefore, SFAS No. 129 had no impact on the Corporation. SFAS No. 129
is effective for financial statements for periods ending after December 15,
1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement.
SFAS No. 130 requires that an enterprise (1) classify items of other
comprehensive income by their nature in a financial statement and (2) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purpose is required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 significantly changes the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 uses a
"management approach" to disclose financial and descriptive information about an
enterprise's reportable operating segments which is based on reporting
information the way that management organizes the segments within the enterprise
for making operating decisions and assessing performance. For many enterprises,
the management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements and requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. Because the Corporation has no
non-banking subsidiaries or other significant segments, SFAS No. 131 will not
affect the Corporation.
- --------------------------------------------------------------------------------
F-23
<PAGE> 60
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, 1997 and 1996, 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, 1997 and 1996, 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 30, 1998
- --------------------------------------------------------------------------------
F-24
<PAGE> 61
OHIO STATE BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,669,486 $ 1,972,038
Federal funds sold 1,057,000 716,000
--------------- ----------------
Total cash and cash equivalents 3,726,486 2,688,038
Interest-earning deposits 199,000 499,000
Securities available for sale, at fair value 7,349,595 8,089,532
Securities held to maturity (Fair value of
$2,731,413 in 1997 and $2,609,268 in 1996) 2,659,045 2,629,280
Loans, net of allowance for loan losses 34,395,874 27,572,913
Premises and equipment, net 837,187 914,569
Other real estate owned and repossessions 18,598 52,780
Accrued interest receivable 341,961 347,580
Other assets 266,124 262,194
--------------- ----------------
Total assets $ 49,793,870 $ 43,055,886
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 7,012,228 $ 4,328,870
Interest-bearing 38,896,495 35,140,100
--------------- ----------------
Total 45,908,723 39,468,970
Accrued interest payable 218,240 236,798
Other liabilities 104,092 124,138
--------------- ----------------
Total liabilities 46,231,055 39,829,906
Shareholders' equity
Common stock, $10.00 par value,
500,000 shares authorized; 121,200 shares
issued and outstanding 1,212,000 1,212,000
Additional paid-in capital 1,831,227 1,831,227
Retained earnings 523,078 224,862
Unrealized loss on securities
available for sale, net of tax (3,490) (42,109)
--------------- ----------------
Total shareholders' equity 3,562,815 3,225,980
--------------- ----------------
Total liabilities and
shareholders' equity $ 49,793,870 $ 43,055,886
=============== ================
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-25
<PAGE> 62
OHIO STATE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 2,998,530 $ 2,486,077
Taxable securities 500,162 651,024
Nontaxable securities 108,687 90,778
Federal funds sold 26,056 25,522
Certificates of deposit 23,629 32,098
-------------- ---------------
Total interest income 3,657,064 3,285,499
INTEREST EXPENSE
Deposits 1,607,988 1,509,093
Other borrowings 38,333 30,427
-------------- ---------------
Total interest expense 1,646,321 1,539,520
-------------- ---------------
NET INTEREST INCOME 2,010,743 1,745,979
Provision for loan losses 139,000 163,000
-------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,871,743 1,582,979
NONINTEREST INCOME
Fees for customer services 217,801 208,353
Net realized gain on sales of securities available for sale 151 7,314
Other income 12,775 25,268
-------------- ---------------
Total noninterest income 230,727 240,935
NONINTEREST EXPENSE
Salaries and employee benefits 709,712 681,441
Occupancy 340,659 257,493
Office supplies 91,661 92,634
FDIC and state assessments 15,397 7,724
Professional fees 52,792 47,471
Advertising and public relations 54,790 46,747
Taxes, other than income 47,618 48,874
Loss on other real estate owned and repossessions 36,000 18,000
Credit card processing expense 54,174 56,385
Insurance 30,906 30,699
Other expenses 195,986 177,655
-------------- ---------------
Total noninterest expense 1,629,695 1,465,123
-------------- ---------------
INCOME BEFORE INCOME TAXES 472,775 358,791
Income tax expense 126,079 99,385
-------------- ---------------
NET INCOME $ 346,696 $ 259,406
============== ===============
Basic and diluted earnings per share $ 2.86 $ 2.14
============== ===============
Average shares outstanding 121,200 121,200
============== ===============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-26
<PAGE> 63
OHIO STATE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<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,
1996 $ 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
Net income 346,696 346,696
Cash dividends declared
($0.40 per share) (48,480) (48,480)
Change in unrealized
loss on securities
available for sale 38,619 38,619
-------------- -------------- ------------- ------------ ---------------
Balance, December 31,
1997 $ 1,212,000 $ 1,831,227 $ 523,078 $ (3,490) $ 3,562,815
============== ============== ============= ============ ===============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-27
<PAGE> 64
OHIO STATE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 346,696 $ 259,406
Adjustment to reconcile net income to net cash
from operating activities:
Depreciation and amortization 135,413 100,529
Net amortization of security premiums 23,129 33,209
Provision for loan losses 139,000 163,000
Deferred taxes 64,509 53,876
Net realized gains on securities available for sale (151) (7,314)
Loss on other real estate owned and repossessions 36,000 18,000
FHLB stock dividends (11,300) (9,000)
Net changes in:
Interest receivable 5,619 (43,196)
Interest payable (18,558) 124
Other assets and liabilities (108,380) (241,725)
-------------- ----------------
Net cash from operating activities 611,977 326,909
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales 1,819,921 2,714,626
Proceeds from maturities and principal paydowns 1,489,820 2,527,337
Purchases (2,517,733) (1,519,203)
Securities held to maturity:
Proceeds from maturities and principal paydowns 100,000
Purchases (135,000) (818,798)
Net change in interest-earning deposits in other banks 300,000 1,000
Net change in loans (7,090,014) (5,029,413)
Purchases of premises and equipment (58,031) (247,480)
Proceeds from sale of other real estate owned and repossessions 126,235 152,829
-------------- ---------------
Net cash from investing activities (5,964,802) (2,219,102)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 6,439,753 1,178,281
Cash dividends paid (48,480) (48,480)
-------------- ---------------
Net cash from financing activities 6,391,273 1,129,801
-------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,038,448 (762,392)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,688,038 3,450,430
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,726,486 $ 2,688,038
============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 1,664,879 $ 1,539,396
Income taxes paid 5,000 105,527
Loans transferred to other real estate owned and repossessions 128,053 154,899
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-28
<PAGE> 65
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
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 Marion Bank's shareholders
approved a plan of reorganization whereby they would exchange their shares of
The Marion 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: Commercial, real estate, and installment loans are made to
customers primarily in Marion County, Ohio. Substantially all loans are secured
by specific items of collateral including business assets, consumer assets and
real estate. Commercial loans are expected to be repaid from cash flow from
operations of businesses. Real estate loans are secured by both residential and
commercial real estate. All operations are in the banking industry.
Use of Estimates: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions based
on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future
results could differ. The allowance for loan losses, fair values of financial
instruments and the status of contingencies are particularly subject to change.
Cash Flow Reporting: Cash and cash equivalents include cash on hand, demand
deposits with other financial institutions and federal funds sold. Cash flows
are reported net for customer loan and deposit transactions, interest-bearing
time deposits with other financial institutions and short-term borrowings with
maturities of 90 days or less.
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. Realized gains are based on the amortized cost of the
specific security sold. Securities are written down to fair value when a decline
in fair value is not temporary. Interest and dividend income includes
amortization of purchase premium or discount.
- --------------------------------------------------------------------------------
(Continued)
F-29
<PAGE> 66
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
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 for probable credit losses, 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 or at the fair
value of collateral if repayment is expected solely from the collateral. Loans
are evaluated for impairment when payments are delayed, typically 60 days or
more, or when it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
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 when events
indicate the carrying amount may not be recoverable. Maintenance and repairs are
expensed and major improvements are capitalized.
Other Real Estate Owned and Repossessions: Real estate properties and
repossessions acquired in collection of a loan are recorded at fair value at
acquisition. Any reduction to fair value from the carrying value of the related
loan is accounted for as a loan loss. 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)
F-30
<PAGE> 67
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
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 in a separate note. 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
Dividend Restriction: Banking regulations require the maintenance of certain
capital levels and may limit the amount of dividends which may be paid by the
Bank to the Corporation. For regulatory capital requirements, see a separate
note.
Earnings Per Share: Basic earnings per share is based on weighted-average common
shares outstanding. Diluted earnings per share is not currently applicable since
the Corporation has no common stock equivalents.
Reclassifications: Certain reclassifications have been made to the 1996
financial statements to be comparable to the 1997 presentation.
- --------------------------------------------------------------------------------
(Continued)
F-31
<PAGE> 68
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
Year-end securities were as follows:
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury securities $ 650,291 $ 3,897 $ 654,188
Obligations of U.S. government
agencies 502,203 1,772 503,975
Mortgage-backed securities 5,979,249 11,438 $ 22,395 5,968,292
------------- ------------ ---------- -------------
Total debt securities available
for sale 7,131,743 17,107 22,395 7,126,455
Other securities 223,140 223,140
------------- ------------ ----------- -------------
Total securities
available for sale $ 7,354,883 $ 17,107 $ 22,395 $ 7,349,595
============= ============ =========== =============
HELD TO MATURITY
Obligations of U.S.
government agencies $ 500,000 $ 8,410 $ 491,590
Obligations of state and political
subdivisions 2,159,045 $ 80,778 2,239,823
------------- ----------- ----------- -------------
Total securities held to
maturity $ 2,659,045 $ 80,778 $ 8,410 $ 2,731,413
============= ============ =========== =============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-32
<PAGE> 69
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<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
============= ============ =========== =============
Sales of available for sales securities were:
1997 1996
---- ----
Proceeds $ 1,819,921 $ 2,714,626
Gross gains 946 15,956
Gross losses 795 8,642
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-33
<PAGE> 70
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Contractual maturities of securities at year-end were as follows. Securities not
due at a single maturity date, primarily mortgage-backed securities, are shown
separately.
<TABLE>
<CAPTION>
Available-for-sale securities Held to maturity securities
----------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 500,000 $ 491,590
Due from one to five years $ 1,152,494 $ 1,158,163
Due from five to ten years 134,770 142,215
Due after ten years 2,024,275 2,097,608
Mortgage-backed 5,979,249 5,968,292
Other securities 223,140 223,140
------------- ------------- ------------- -------------
$ 7,354,883 $ 7,349,595 $ 2,659,045 $ 2,731,413
============= ============= ============= =============
</TABLE>
Securities with carrying values of $3,938,000 and $4,946,000 at December 31,
1997 and 1996 were pledged to secure public deposits and for other purposes.
NOTE 3 - LOANS
Year-end loans were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commercial $ 13,059,019 $ 10,395,804
Installment 17,474,294 13,967,939
Real estate 3,307,311 2,761,119
Credit card 595,324 554,928
Other 15,330 33,708
--------------- ----------------
34,451,278 27,713,498
Net deferred loan costs 255,691 140,557
Allowance for loan losses (311,095) (281,142)
--------------- ----------------
$ 34,395,874 $ 27,572,913
=============== ================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-34
<PAGE> 71
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Beginning balance $ 281,142 $ 252,174
Loans charged off (141,854) (165,534)
Recoveries of previous charge-offs 32,807 31,502
Provision for loan losses 139,000 163,000
-------------- --------------
Ending balance $ 311,095 $ 281,142
============== ==============
Impaired loans were as follows:
1997
----
Year-end impaired loans with allowance for
loan losses allocated $ 282,000
Amount of the allowance allocated 32,000
Average of impaired loans during the year 87,916
Total interest income recognized during impairment 1,700
Cash-basis interest income recognized 1,700
</TABLE>
As of and for the year ended December 31, 1996, 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 $316,880 and $29,147 at
December 31, 1997 and 1996. All impaired loans are also included in nonaccrual
loans.
NOTE 4 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 115,875 $ 115,875
Premises 416,479 415,079
Equipment 1,317,423 1,279,995
Building and leasehold improvements 123,476 104,273
-------------- --------------
Total cost 1,973,253 1,915,222
Less accumulated depreciation (1,136,066) (1,000,653)
-------------- --------------
$ 837,187 $ 914,569
============== ==============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-35
<PAGE> 72
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 4 - PREMISES AND EQUIPMENT (Continued)
The Bank's branch facility 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. The Corporation also
leases space for one of its automated teller machines under an operating lease.
The lease term is for one year expiring in November 1998. Upon expiration, the
lease will be continued, rewritten, or terminated. Total rental expense was
$40,148 in 1997.
Rental commitments under noncancelable operating leases are:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 54,148
1999 38,748
2000 38,748
2001 38,883
2002 40,685
Thereafter 597,775
------------
$ 808,987
============
</TABLE>
NOTE 5 - DEPOSITS
At year-end, total interest-bearing deposits were comprised of the following
classifications:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Demand $ 6,741,609 $ 5,956,981
Savings 9,229,034 8,349,565
Time:
In denominations under $100,000 16,065,307 14,665,983
In denominations of $100,000 or more 6,860,545 6,167,571
--------------- ----------------
Total interest-bearing deposits $ 38,896,495 $ 35,140,100
=============== ================
</TABLE>
At year-end, stated maturities of time deposits were as follows:
<TABLE>
<S> <C>
1998 $ 14,132,451
1999 6,206,093
2000 2,495,457
2001 91,851
----------------
$ 22,925,852
================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-36
<PAGE> 73
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 5 - DEPOSITS (Continued)
At year-end, stated maturities of certificates of deposit of $100,000 or more
were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Three months or less $ 1,250,714 $ 1,615,757
Three through six months 2,299,909 2,317,897
Six through twelve months 2,230,282 1,933,917
Over twelve months 1,079,640 300,000
-------------- --------------
$ 6,860,545 $ 6,167,571
============== ==============
</TABLE>
NOTE 6 - BORROWINGS
Federal funds purchased and a line of credit from the Federal Home Loan Bank of
Cincinnati are financing arrangements. Information concerning borrowings is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Maximum month-end balance during the year $ 1,981,000 $ 1,000,000
Average month-end balance during the year 644,561 548,376
Average interest rate during the year 5.89% 5.47%
</TABLE>
The Bank's maximum line of credit with the Federal Home Loan Bank was $3,588,000
and $2,100,000, at December 31, 1997 and 1996. No borrowings were outstanding on
this line of credit as of December 31, 1997 or 1996. Advances under the
agreement are collateralized by a blanket pledge of the Bank's real estate
mortgage loan portfolio and Federal Home Loan Bank stock.
NOTE 7 - EMPLOYEE BENEFITS
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 $9,900 and $15,100 for the years ended
December 31, 1997 and 1996.
- --------------------------------------------------------------------------------
(Continued)
F-37
<PAGE> 74
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current $ 61,570 $ 45,509
Deferred 64,509 53,876
------------ ------------
$ 126,079 $ 99,385
============ ============
</TABLE>
The sources of gross deferred tax assets and gross deferred tax liabilities at
year-end were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 68,190 $ 61,486
Alternative minimum tax credit 6,761 9,894
Leases 2,412
Unrealized loss on securities
available for sale 1,798 21,692
Other 1,587
------------ ------------
Total deferred tax assets 79,161 94,659
Deferred tax liabilities
Depreciation (32,338) (24,879)
Leases (27)
Accrual to cash conversion (135,197) (76,928)
Other (14,054) (10,850)
------------ ------------
Total deferred tax liabilities (181,589) (112,684)
------------ ------------
Net deferred tax liability $ (102,428) $ (18,025)
============ ============
</TABLE>
The difference between the financial statement tax provision and amounts
computed by applying the statutory federal income tax to income before taxes was
as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Income tax expense at the statutory
federal tax rate $ 160,744 $ 121,989
Tax exempt interest (31,932) (26,548)
Other items (2,733) 3,944
------------- ------------
Total provision for income taxes $ 126,079 $ 99,385
============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-38
<PAGE> 75
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 9 - RELATED PARTIES
Certain directors, executive officers and companies with which they are
affiliated were loan customers during 1997. Following is an analysis of such
loans:
<TABLE>
<S> <C>
Total loans at January 1, 1997 $ 546,015
New loans 637,438
Repayments (178,660)
---------------
Total loans at December 31, 1997 $ 1,004,793
===============
</TABLE>
NOTE 10 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
Various contingent liabilities are not reflected in the financial statements,
including claims and legal actions arising in the ordinary course of business.
In the opinion of management, after consultation with legal counsel, the
ultimate disposition of these matters is not expected to have a material affect
on the financial condition or results of operations.
At year-end 1997 and 1996, reserves of $370,000 and $313,000 were required as
deposits with the Federal Reserve or as cash on hand. These reserves do not earn
interest.
Included in cash and cash equivalents at year-end 1997 and 1996 was
approximately $2,952,000 and $1,547,000, on deposit with the Independent State
Bank of Ohio.
Some financial instruments are used in the normal course of business to meet 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 amounts reported in the financial
statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit, standby letters of
credit and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many 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)
F-39
<PAGE> 76
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
(Continued)
Commitments to extend credit, primarily in the form of undisbursed portions of
approved lines of credit, are principally variable rate commitments. The
interest rates on these commitments ranged from 6.2% to 11.5% at year-end 1997
and 5.9% to 10.9% at year-end 1996. Outstanding commitments for credit cards had
rates ranging from 12.0% to 17.9% at year-end 1997 and 14.3% to 16.8% at
year-end 1996. Of the total outstanding balances on credit cards year-end 1997,
59% were fixed rate and 41% were variable rate and at year-end 1996, 62% were
fixed rate and 38% were variable rate.
A summary of the contractual amounts of financial instruments with
off-balance-sheet risk at year-end were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commitments to extend credit $ 3,272,000 $ 3,770,000
Credit card arrangements 1,203,000 1,010,000
</TABLE>
NOTE 11 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial instruments at year-end were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 3,726,486 $ 3,726,486 $ 2,688,038 $ 2,688,038
Interest-earning deposits 199,000 199,445 499,000 501,860
Securities available for sale 7,349,595 7,349,595 8,089,532 8,089,532
Securities held to maturity 2,659,045 2,731,413 2,629,280 2,609,268
Loans receivable, net 34,395,874 34,302,991 27,572,913 27,511,265
Accrued interest receivable 341,961 341,961 347,580 347,580
Financial liabilities
Demand and savings
deposits (22,982,871) (22,982,871) (18,635,416) (18,635,416)
Time deposits (22,925,852) (23,035,701) (20,833,554) (20,963,699)
Accrued interest payable (218,240) (218,240) (236,798) (236,798)
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-40
<PAGE> 77
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 11 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair value approximates carrying amount for all items except those
described below. Estimated fair value for securities is based on quoted market
values for the individual securities or for equivalent securities. Estimated
fair value for loans is based on the rates charged at year end for new loans
with similar maturities, applied until the loan is assumed to reprice or be
paid. Estimated fair value for time deposits is based on the rates paid at year
end for new deposits applied until maturity. Estimated fair value for other
financial instruments and off-balance-sheet loan commitments are considered
nominal.
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.
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 only 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.
<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>
- --------------------------------------------------------------------------------
(Continued)
F-41
<PAGE> 78
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 12 - REGULATORY MATTERS (Continued)
At year-end 1997 and 1996, the Bank was categorized as well capitalized. No
conditions or events have occurred subsequent to year-end 1997 that management
believes have changed the Bank's category. Actual capital levels for the Bank
and minimum required levels (in thousands) 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
------ ----- ------ ----- ------ -----
1997
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted
assets) $ 3,822 10.2% $ 2,998 8.0% $ 3,747 10.0%
Tier 1 capital (to risk weighted
assets) $ 3,541 9.5% $ 1,499 4.0% $ 2,248 6.0%
Tier 1 capital (to average assets) $ 3,541 7.3% $ 1,933 4.0% $ 2,416 5.0%
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%
</TABLE>
The Corporation's primary source of funds with which to pay dividends is
dividends received from the Bank. The payment of dividends by the Bank to the
Corporation is subject to restrictions by its regulatory agency. These
restrictions generally limit dividends to current and prior two years retained
earnings as defined by the regulations. In addition, dividends may not reduce
capital levels below the minimum regulatory requirements disclosed above. Under
the most restrictive of these requirements, the Corporation estimates retained
earnings available for payment of dividends by the Bank to the Corporation
approximates $75,000 in order to maintain the well capitalized status at
year-end 1997.
- --------------------------------------------------------------------------------
(Continued)
F-42
<PAGE> 79
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 13 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
The following are condensed parent company only financial statements for Ohio
State Bancshares, Inc. Earnings for the Corporation, 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.
CONDENSED BALANCE SHEET
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Assets:
Cash and cash equivalents $ 4,061 $ 469
Investment in bank subsidiary 3,518,402 3,176,164
Organizational costs, net 34,016 43,972
Other assets 6,336 5,375
--------------- -------------
Total assets $ 3,562,815 $ 3,225,980
=============== =============
Shareholders' equity $ 3,562,815 $ 3,225,980
=============== =============
</TABLE>
CONDENSED STATEMENTS OF INCOME
Year ended December 31, 1997 and Period of May 16, 1996 - December 31, 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Dividends from bank subsidiary $ 52,240 $ 107,240
--------------- -------------
Total expense 13,884 10,559
--------------- -------------
Income before income tax and equity in
undistributed net income 38,356 96,681
Income tax benefit 4,721 1,615
Equity in undistributed net income of subsidiary 303,619 102,378
--------------- -------------
Net income $ 346,696 $ 200,674
=============== =============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-43
<PAGE> 80
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 13 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENT OF CASH FLOWS
Year ended December 31, 1997 and Period of May 16, 1996 - December 31, 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 346,696 $ 200,674
Adjustments:
Equity in undistributed net income
of subsidiary (303,619) (102,378)
Change in other assets (961) (55,155)
Amortization 9,956 5,808
--------------- -------------
Net cash from operating activities 52,072 48,949
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends (48,480) (48,480)
--------------- -------------
Net cash from financing activities (48,480) (48,480)
--------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,592 469
CASH AT BEGINNING OF PERIOD 469 --
--------------- -------------
CASH AT END OF PERIOD $ 4,061 $ 469
=============== =============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-44
<PAGE> 81
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 years.
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 15, 1998 for the Annual
Meeting of Shareholders to be held on April 9, 1998 and is incorporated herein
by reference.
ITEM 10 - EXECUTIVE COMPENSATION
Information concerning executive compensation appears on pages 6 and 7 under the
captions Executive Compensation and Other Information in the Corporation's
Definitive Proxy Statement dated March 15, 1998 for the Annual Meeting of
Shareholders to be held on April 9, 1998 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 15,
1998 for the Annual Meeting of Shareholders to be held on April 9, 1998 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 15, 1998 for the Annual Meeting of
Shareholders to be held on April 9, 1998 and is incorporated herein by
reference.
- --------------------------------------------------------------------------------
(Continued)
F-45
<PAGE> 82
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
Branch on Richland Road in Marion, Ohio ** 4
10.2 Executive Indexed Salary Continuation
Plan Agreement for President ** 5
10.3 Executive Indexed Salary Continuation
Plan Agreement for Executive Officers *** 6
20 Proxy Statement for the 1997 Annual **** 7
Meeting of the Shareholders
21 Subsidiaries of the Registrant ** 8
27 Financial Data Schedule *** 9
99 Safe Harbor under the Private Securities
Litigation Reform Act of 1996 *** 10
</TABLE>
* 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, 1996. 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.
** Indicates documents which have been previously filed as part of the
Corporation's Annual Report on Form 10-KSB for the year ended December 31,
1996. All of such previously filed documents are hereby incorporated by
reference. Such documents are available to shareholders without charge upon
request.
*** The indicated exhibit has been filed as separate pages of the 1997 Form
10-KSB and is available to shareholders upon request.
**** The indicated exhibit was separately filed by the Corporation and such
document is incorporated herein by reference.
(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.
- --------------------------------------------------------------------------------
F-46
<PAGE> 83
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.
<TABLE>
<CAPTION>
<S> <C>
OHIO STATE BANCSHARES, INC.
March 19, 1998 By: /s/GARY E. PENDLETON
------------------ ------------------------------------
Date Gary E. Pendleton, President
</TABLE>
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 19, 1998.
<TABLE>
<CAPTION>
Signatures Signatures
---------- ----------
<S> <C>
/s/GARY E. PENDLETON /s/LLOYD L. JOHNSTON
- ----------------------------------------------- ----------------------------------------------
Gary E. Pendleton Lloyd L. Johnston
President and Chief Executive Officer, Director Director
/s/WILLIAM H. HARRIS /s/F. WINTON LACKEY
- ----------------------------------------------- ----------------------------------------------
William H. Harris F. Winton Lackey
Executive Vice President and Cashier, Director Director
/s/FRED K. WHITE /s/THURMAN R. MATHEWS
- ----------------------------------------------- ----------------------------------------------
Fred K. White Thurman R. Mathews
Director, Chairman of the Board Director
/s/SAMUEL J. BIRNBAUM /s/PETER B. MILLER
- ----------------------------------------------- ----------------------------------------------
Samuel J. Birnbaum Peter B. Miller
Director Director
/s/LOIS J. FISHER /s/JOHN OWENS
- ----------------------------------------------- ----------------------------------------------
Lois J. Fisher John Owens
Director Director
/s/THEODORE L. GRAHAM
- -----------------------------------------------
Theodore L. Graham
Director
</TABLE>
- --------------------------------------------------------------------------------
F-47
<PAGE> 84
BOARD OF DIRECTORS (1)
<TABLE>
<CAPTION>
<S> <C>
Fred K. White - Chairman.............................................. Retired, Division Manager,
Ohio Edison
Marion, Ohio
Gary E. Pendleton..................................................... President and CEO,
The Marion Bank
Marion, Ohio
Samuel J. Birnbaum.................................................... Director of Real Estate,
Lodgekeeper, Inc.
Prospect, 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. Mathews.................................................... Owner, Mathews-Kennedy Ford/
Lincoln Mercury
Marion, Ohio
Peter B. Miller....................................................... Owner, Pete Miller, Inc.
Marion, Ohio
John Owens ....................................................... Retired Owner, Owens Electric
Marion, Ohio
</TABLE>
(1) All are Directors of Ohio State Bancshares, Inc. and The Marion Bank
- --------------------------------------------------------------------------------
F-48
<PAGE> 85
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
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
(740) 387-2265
ANNUAL MEETING
The annual shareholders' meeting will be held April 9, 1998, at 5 p.m. in the
main office of The Marion Bank, 111 South Main Street, Marion, Ohio.
- --------------------------------------------------------------------------------
F-49
<PAGE> 86
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
For the transaction period from to .
----- -----
Commission file number: 0-28648
-------
Ohio State Bancshares, Inc.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Ohio 34-1816546
- -------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
111 South Main Street, Marion, Ohio 43302
-----------------------------------------
(Address of principal executive offices)
(740) 387-2265
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common stock, $10.00 par value 121,200 common shares
outstanding at November 9, 1998
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
F-51
<PAGE> 87
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1998
- -------------------------------------------------------------------------------
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets ........................... 3
Condensed Consolidated Statements of Income ..................... 4
Condensed Consolidated Statements of Comprehensive Income ....... 5
Condensed Consolidated Statements of Changes in
Shareholders' Equity .......................................... 6
Condensed Consolidated Statements of Cash Flows ................. 7
Notes to the Consolidated Financial Statements .................. 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................. 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 22
Item 2. Changes in Securities and Use of Proceeds ..................... 22
Item 3. Defaults Upon Senior Securities ............................... 22
Item 4. Submission of Matters to a Vote of Security Holders ........... 22
Item 5. Other Information ............................................. 22
Item 6. Exhibits and Reports on Form 8-K .............................. 22
SIGNATURES ............................................................. 23
F-52
<PAGE> 88
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,602,037 $ 2,669,486
Federal funds sold 919,000 1,057,000
----------- -----------
Total cash and cash equivalents 3,521,037 3,726,486
Interest-earning deposits in other banks -- 199,000
Securities available for sale 8,800,900 7,349,595
Securities held to maturity (Fair value of $3,241,311
at September 30, 1998 and $2,731,413 at December 31, 1997) 3,099,227 2,659,045
Loans, net of allowance for loan losses 38,837,455 34,395,874
Premises and equipment, net 821,340 837,187
Other real estate owned and repossessions 51,206 18,598
Accrued interest receivable 419,716 341,961
Other assets 354,083 266,124
----------- -----------
Total assets $55,904,954 $49,793,870
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 6,942,862 $ 7,012,228
Interest-bearing 44,610,643 38,896,495
----------- -----------
Total 51,553,505 45,908,723
Accrued interest payable 233,434 218,240
Other liabilities 240,457 104,092
----------- -----------
Total liabilities 52,027,396 46,231,055
Shareholders' equity
Common stock, $10.00 par value; 500,000 shares authorized;
121,200 shares issued and outstanding 1,212,000 1,212,000
Additional paid-in capital 1,831,227 1,831,227
Retained earnings 806,307 523,078
Unrealized gain (loss) on securities available
for sale, net of tax 28,034 (3,490)
----------- -----------
Total shareholders' equity 3,877,568 3,562,815
----------- -----------
Total liabilities and shareholders' equity $55,904,964 $49,793,870
=========== ===========
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
F-53
<PAGE> 89
<TABLE>
<CAPTION>
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 888,617 $786,422 $2,580,457 $2,169,956
Taxable securities 120,258 119,156 344,279 388,785
Nontaxable securities 37,464 26,922 97,859 81,522
Other 13,012 11,661 36,137 32,273
---------- -------- ---------- ----------
Total interest income 1,059,351 944,161 3,058,732 2,672,536
INTEREST EXPENSE
Deposits 487,143 420,098 1,377,102 1,182,329
Other borrowings 253 13,785 3,021 37,701
---------- -------- ---------- ----------
Total interest expense 487,396 433,883 1,380,123 1,220,030
---------- -------- ---------- ----------
NET INTEREST INCOME 571,955 510,278 1,678,609 1,452,506
Provision for loan losses 40,000 24,000 157,000 77,000
---------- -------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 531,955 486,278 1,521,609 1,375,506
NONINTEREST INCOME
Fees for other customer services 67,203 54,765 195,908 156,149
Net realized gain on sales of securities
available for sale -- (296) -- 494
Other income 538 3,381 21,683 18,382
---------- -------- ---------- ----------
Total noninterest income 67,741 57,850 217,591 175,025
NONINTEREST EXPENSE
Salaries and employee benefits 200,378 168,601 589,211 520,062
Occupancy expense 90,168 82,775 270,496 251,791
Office supplies 26,442 20,428 69,221 65,577
FDIC and state assessments 4,559 3,750 12,862 11,348
Taxes other than income 14,100 8,396 43,580 32,101
Legal and accounting 14,220 14,744 43,053 42,194
Advertising and public relations 10,186 13,513 33,443 45,942
Loss on other real estate owned
and repossessions 5,000 8,000 22,000 21,000
Insurance 6,681 6,629 20,151 19,886
Credit card processing expense 13,666 12,529 39,821 36,867
Directors' fees 14,100 9,825 35,100 23,325
Other expenses 38,578 45,247 113,682 118,326
---------- -------- ---------- ----------
Total noninterest expense 438,078 394,437 1,292,620 1,188,419
---------- -------- ---------- ----------
Income before federal income taxes 161,618 149,691 446,580 362,112
Income taxes 48,862 38,032 133,051 95,232
---------- -------- ---------- ----------
NET INCOME $ 112,756 $111,659 $ 313,529 $ 266,880
========== ======== ========== ==========
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ .93 $ .92 $ 2.59 $ 2.20
========== ======== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
F-54
<PAGE> 90
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME $112,756 $111,659 $313,529 $266,880
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain (loss) on available for
sale securities arising during the period 29,679 23,975 31,524 31,032
Reclassification for realized amount -- 193 -- (326)
-------- -------- -------- --------
COMPREHENSIVE INCOME $142,435 $135,827 $345,053 $297,586
======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
F-55
<PAGE> 91
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
-------------
1998 1997
---- ----
<S> <C> <C>
Balance at beginning of period $3,562,815 $3,225,980
Net income 313,529 266,880
Cash dividends ($.25 per share in 1998 and $.20 per share in 1997) (30,300) (24,240)
Change in fair value of securities available for sale 31,524 30,706
---------- ----------
Balance at end of period $3,877,568 $3,499,326
========== ==========
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
F-56
<PAGE> 92
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
-------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 313,529 $ 266,880
Adjustments to reconcile net income to net cash from
operating activities
Net amortization of premiums 27,880 16,102
Provision for loan losses 157,000 77,000
Depreciation and amortization 86,944 104,830
Net realized gains on securities available for sale -- (494)
Federal Home Loan Bank stock dividend (9,700) (8,100)
Loss on sale of other real estate owned and repossessions 22,000 21,000
Change in accrued interest receivable (77,755) 13,752
Change in accrued interest payable 15,194 (19,814)
Change in other assets and other liabilities 32,166 (51,137)
----------- -----------
Net cash from operating activities 567,258 420,019
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (3,121,323) (1,694,598)
Proceeds from maturities and principal paydowns 1,703,713 1,142,488
Proceeds from sales -- 1,319,603
Securities held to maturity
Purchases (944,293) --
Proceeds from maturities and principal paydowns 500,000 100,000
Net change in interest-earning deposits in other banks 199,000 200,000
Net change in loans (4,806,659) (5,305,690)
Proceeds from sale of other real estate owned and repossessions 153,470 105,280
Purchases of premises and equipment (71,097) (49,419)
----------- -----------
Net cash from investing activities (6,387,189) (4,182,336)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 5,644,782 3,917,445
Cash dividends paid (30,300) (24,240)
----------- -----------
Net cash from financing activities 5,614,482 3,893,205
----------- -----------
Net change in cash and cash equivalents (205,449) 130,888
Cash and cash equivalents at beginning of period 3,726,486 2,688,038
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,521,037 $ 2,818,926
=========== ===========
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
F-57
<PAGE> 93
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the consolidated financial position of Ohio State Bancshares, Inc. ("OSB") at
September 30, 1998, and its results of operations and cash flows for the periods
presented. All such adjustments are normal and recurring in nature. The
accompanying consolidated financial statements have been prepared in accordance
with the instructions of Form 10-QSB and, therefore, do not purport to contain
all necessary financial disclosures required by generally accepted accounting
principles that might otherwise be necessary in the circumstances, and should be
read in conjunction with the consolidated financial statements and notes thereto
of OSB for the year ended December 31, 1997, included in its 1997 Annual Report.
Reference is made to the accounting policies of OSB described in the notes to
consolidated financial statements contained in its 1997 Annual Report. OSB has
consistently followed these policies in preparing this Form 10-QSB.
The accompanying consolidated financial statements include the accounts of OSB
and its wholly-owned subsidiary, The Marion Bank ("Bank"). All significant
intercompany transactions and balances have been eliminated.
Commercial, real estate, and installment loans are made to customers primarily
in Marion County, Ohio. Substantially all loans are secured by specific items of
collateral including business assets, consumer assets and real estate.
Commercial loans are expected to be repaid from cash flow from operations of
businesses. Real estate loans are secured by both residential and commercial
real estate. All operations are in the banking industry.
To prepare financial statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions based on available
information. These estimates and assumptions affect amounts reported in the
financial statements and the disclosures provided, and future results could
differ. The allowance for loan losses, fair values of financial instruments and
the status of contingencies are particularly subject to change.
For the nine months ended September 30, 1998 and 1997, cash paid for interest
was $1,364,929 and $1,239,844, and cash paid for income taxes was $60,000 and
$5,000. Noncash transfers from loans to other real estate owned and
repossessions totaled $208,078 and $115,288 for the nine months ended September
30, 1998 and 1997.
Basic earnings per share is based on weighted-average common shares outstanding.
Diluted earnings per share is not currently applicable since OSB has no common
stock equivalents. The weighted average number of shares outstanding for all
periods presented is 121,200.
- -------------------------------------------------------------------------------
(Continued)
F-58
<PAGE> 94
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The provision for income taxes is based on the effective tax rate expected to be
applicable for the entire year. Income tax expense is the sum of the current
year income tax due or refundable and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are expected future tax
consequences of temporary differences between the carrying amounts and tax basis
of assets and liabilities, computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be
realized.
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," in 1996. It revises the
accounting for transfers of financial assets, such as loans and securities, and
for distinguishing between sales and secured borrowings. It was originally
effective for transactions in 1997. SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125," was issued in December
1996. SFAS 127 deferred, for one year, the effective date of provisions related
to securities lending, repurchase agreements and other similar transactions. The
remaining portions of SFAS No. 125 continued to be effective January 1, 1997.
SFAS No. 125 did not have a material impact on OSB's financial statements for
transactions subject to the Statement beginning January 1, 1998.
OSB adopted on January 1, 1998, SFAS No. 130, "Reporting Comprehensive Income,"
issued by the FASB in June 1997. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. It does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.
- -------------------------------------------------------------------------------
(Continued)
F-59
<PAGE> 95
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This Statement significantly changes the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about reportable segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
uses a "management approach" to disclose financial and descriptive information
about an enterprise's reportable operating segments which is based on reporting
information the way that management organizes the segments within the enterprise
for making operating decisions and assessing performance. For many enterprises,
the management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements. The Statement also requires that selected information be reported in
interim financial statements. SFAS No. 131 is effective for financial statements
for periods beginning after December 15, 1997. No additional disclosure under
SFAS No. 131 was required for OSB.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". SFAS No. 132 amends the disclosure
requirements of previous pension and other postretirement benefit accounting
standards by requiring additional disclosures about such plans as well as
eliminating some disclosures no longer considered useful. SFAS No. 132 also
allows greater aggregation of disclosures for employers with multiple defined
benefit plans. Non-public companies are subject to reduced disclosure
requirements, however, such entities may elect to follow the full disclosure
requirements of SFAS No. 132. SFAS No. 132 will be effective for 1998 and is not
expected to have a significant impact on the OSB's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The key criterion for hedge accounting is that
the hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. SFAS No. 133 does not allow hedging of a
security which is classified as held to maturity, accordingly, upon adoption of
SFAS No. 133, companies may reclassify any security from held to maturity to
available for sale if they wish to be able to hedge the security in the future.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999 with
early adoption encouraged for any fiscal quarter beginning July 1, 1998 or
later, with no retroactive application.
- -------------------------------------------------------------------------------
(Continued)
F-60
<PAGE> 96
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 2 - SECURITIES
Securities at September 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury securities $1,447,345 $ 25,330 $ -- $1,472,675
Obligations of U.S. government agencies 1,001,523 11,932 -- 1,013,455
Mortgage-backed securities 6,076,716 20,672 15,458 6,081,930
---------- -------- ------- ----------
Total debt securities available for sale 8,525,584 57,934 15,458 8,568,060
Other securities 232,840 -- -- 232,840
---------- -------- ------- ----------
Total securities available for sale $8,758,424 $ 57,934 $15,458 $8,800,900
========== ======== ======= ==========
HELD TO MATURITY
Obligations of states and political
subdivisions $3,099,227 $142,084 $ -- $3,241,311
========== ======== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury securities $ 650,291 $ 3,897 $ -- $ 654,188
Obligations of U.S. government agencies 502,203 1,772 -- 503,975
Mortgage-backed securities 5,979,249 11,438 22,395 5,968,292
---------- ------- ------- ----------
Total debt securities available for sale 7,131,743 17,107 22,395 7,126,455
Other securities 223,140 -- -- 223,140
---------- ------- ------- ----------
Total securities available for sale $7,354,883 $17,107 $22,395 $7,349,595
========== ======= ======= ==========
HELD TO MATURITY
Obligation of U.S. government agencies $ 500,000 $ -- $ 8,410 $ 491,590
Obligations of states and political
subdivisions 2,159,045 80,778 -- 2,239,823
---------- ------- ------- ----------
Total securities held to maturity $2,659,045 $80,778 $ 8,410 $2,731,413
========== ======= ======= ==========
</TABLE>
No securities classified as available for sale were sold during the three or
nine months ended September 30, 1998. Proceeds from sales of securities
classified as available for sale were $999,688 and $1,319,603 during the three
and nine months ended September 30, 1997. Gross gains of $156 and gross losses
of $452 were realized on sales during the three month period ending September
30, 1997. Gross gains of $946 and gross losses of $452 were realized on sales
during the nine month period ending September 30, 1997.
- -------------------------------------------------------------------------------
(Continued)
F-61
<PAGE> 97
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
The amortized cost and estimated fair values of securities at September 30,
1998, by contractual maturity, are shown below. Actual maturities may differ
from contractual maturities because certain borrowers may have the right to call
or repay obligations with or without penalties.
<TABLE>
<CAPTION>
Available-for-Sale Securities Held-to-Maturity Securities
----------------------------- ----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 249,968 $ 252,265 $ -- $ --
Due in one to five years 2,198,900 2,233,865 -- --
Due in five to ten years -- -- 960,012 1,017,829
Due after ten years -- -- 2,139,215 2,223,482
Mortgage-backed securities 6,076,716 6,081,930 -- --
Other securities 232,840 232,840 -- --
---------- ---------- ---------- ----------
$8,758,424 $8,800,900 $3,099,227 $3,241,311
========== ========== ========== ==========
</TABLE>
Securities with a carrying value of approximately $2,436,000 at September 30,
1998 and $3,938,000 at December 31, 1997 were pledged to secure deposits and for
other purposes.
NOTE 3 - LOANS
Loans at September 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Commercial $15,057,162 $13,059,019
Installment 19,674,480 17,474,294
Real estate 3,457,838 3,307,311
Credit card 586,779 595,324
Other 27,210 15,330
----------- -----------
38,803,469 34,451,278
Net deferred loan costs 380,394 255,691
Allowance for loan losses (346,408) (311,095)
----------- -----------
$38,837,455 $34,395,874
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-62
<PAGE> 98
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
Activity in the allowance for loan losses for the nine months ended September
30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance - January 1 $ 311,095 $ 281,142
Loan charged-off (148,207) (118,953)
Recoveries 26,520 29,118
Provision for loan losses 157,000 77,000
--------- ---------
Balance - June 30 $ 346,408 $ 268,307
========= =========
</TABLE>
Impaired loans at September 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Period-end impaired loans with allowance
for loan losses allocated $662,000 $282,000
Amount of allowance allocated 66,000 32,000
</TABLE>
Impaired loans for the nine months ended September 30, 1998 were as follows:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Average of impaired loans during the period $362,000
Total interest income recognized during impairment --
Cash-basis interest income recognized --
</TABLE>
During the nine months ended September 30, 1997, OSB had no loans for which
impairment was required to be evaluated on an individual basis. Loans on which
the accrual of interest has been discontinued because circumstances indicate
that collection is questionable amounted to $913,075 and $316,880 at September
30, 1998 and December 31, 1997. All impaired loans are also included in
nonaccrual loans.
NOTE 4 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
Various contingent liabilities are not reflected in the financial statements,
including claims and legal actions arising in the ordinary course of business.
In the opinion of management, after consultation with legal counsel, the
ultimate disposition of these matters is not expected to have a material affect
on the financial condition or results of operations.
- -------------------------------------------------------------------------------
(Continued)
F-63
<PAGE> 99
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 4 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (Continued)
At September 30, 1998 and December 31, 1997, reserves of $425,000 and $370,000
were required as deposits with the Federal Reserve or as cash on hand. These
reserves do not earn interest.
Included in cash and cash equivalents at September 30, 1998 and December 31,
1997 was approximately $2,409,000 and $2,952,000 on deposit with the Independent
State Bank of Ohio.
Some financial instruments are used in the normal course of business to meet
financing needs of customers and to reduce exposure to interest rate changes.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. These involve, to varying degrees,
credit and interest rate risk in excess of the amounts reported in the financial
statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit, standby letters of
credit and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many commitments are expected to expire
without being used, total commitments do not necessarily represent future cash
requirements. Standby letters of credit and financial guarantees written are
commitments to guarantee a customer's performance to a third party.
Commitments to extend credit, primarily in the form of undisbursed portions of
approved lines of credit, consist primarily of variable rate commitments. The
interest rates on these commitments ranged from 5.73% to 15.50% at September 30,
1998 and 6.20% to 11.50% at December 31, 1997. Outstanding commitments for
credit card rates ranged from 12.00% to 17.90% as of September 30, 1998 and
December 31, 1997. Of the total outstanding balances on these credit cards at
September 30, 1998, 56% were fixed and 44% were variable rate and at December
31, 1997, 59% were fixed rate and 41% were variable rate.
A summary of the contractual amounts of financial instruments with
off-balance-sheet risk at September 30, 1998 and December 31, 1997 follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Commitments to extend credit $2,083,000 $3,272,000
Credit card arrangements 999,000 1,203,000
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-64
<PAGE> 100
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 4 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (Continued)
At September 30, 1998 and December 31, 1997, the Bank had a line of credit
enabling it to borrow up to $3,782,000 and $3,588,000 with the Federal Home Loan
Bank of Cincinnati. No borrowings were outstanding on this line of credit as of
September 30, 1998 or December 31, 1997. Advances under the agreement are
collateralized by a blanket pledge of the Bank's real estate mortgage loan
portfolio and Federal Home Loan Bank stock.
The Bank's branch facility, which opened in December 1996, is leased under an
operating lease. The lease term is for twenty years. At the conclusion of the
fifth, tenth and fifteenth years, the rent shall be adjusted by 50% of the
cumulative increase in the Consumer Price Index over the previous five years
with a minimum of 5% increase and a maximum of 10% increase for any one
five-year period. The Corporation also leases space for one of its automated
teller machines under an operating lease. The lease term is for one year
expiring in November 1998. Upon expiration, the lease will be continued,
rewritten, or terminated. Total rental expense was $13,887 and $41,661 for the
three and nine months ended September 30, 1998 and $9,687 and $29,061 for the
three and nine months ended September 30, 1997.
Rental commitments under these noncancelable operating leases are:
<TABLE>
<CAPTION>
Year ending September 30,
<S> <C>
1999 $ 41,548
2000 38,748
2001 38,748
2002 40,336
2003 40,685
Thereafter 567,261
--------
$767,326
========
</TABLE>
- -------------------------------------------------------------------------------
F-65
<PAGE> 101
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
INTRODUCTION
The following discussion focuses on the consolidated financial condition of Ohio
State Bancshares, Inc. ("OSB") at September 30, 1998, compared to December 31,
1997, and the consolidated results of operations for the three and nine months
ended September 30, 1998, compared to the same periods in 1997. The purpose of
this discussion is to provide the reader with a more thorough understanding of
the consolidated financial statements. This discussion should be read in
conjunction with the interim consolidated financial statements and related
footnotes.
When used in this Form 10-QSB or future filings by OSB with the Securities and
Exchange Commission, in OSB's press releases or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project," "believe," or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. OSB wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made, and to advise readers that
various factors, including regional and national economic conditions, changes in
levels of market interest rates, credit risks of lending activities and
competitive and regulatory factors, could affect OSB's financial performance and
could cause OSB's actual results for future periods to differ materially from
those anticipated or projected. OSB does not undertake, and specifically
disclaims, any obligation to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
See Exhibit 99, which is incorporated herein by reference.
OSB is not aware of any trends, events or uncertainties that will have or are
reasonably likely to have a material effect on the liquidity, capital resources
or operations except as discussed herein. In addition, OSB is not aware of any
current recommendations by regulatory authorities that would have such effect if
implemented.
FINANCIAL CONDITION
OSB has experienced 12.27% asset growth since December 31, 1997, as total assets
increased $6,111,000 from $49,794,000 at December 31, 1997 to $55,905,000 at
September 30, 1998. Maintaining a moderate growth rate while increasing the loan
to deposit ratio continues to be OSB's primary operating strategy.
- --------------------------------------------------------------------------------
F-66
<PAGE> 102
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Interest-earning deposits in other banks, securities available for sale and
securities held to maturity increased from $10,208,000 at December 31, 1997 to
$11,900,000 at September 30, 1998, an increase of $1,692,000, or 16.58%. It is
management's strategy to maintain securities and other liquid assets at about
their current level as a percentage of total assets.
Net loans increased $4,442,000, or 12.91% during the period from December 31,
1997 to September 30, 1998. This growth was funded primarily by increases in
deposit accounts and when necessary, short-term advances from the Federal Home
Loan Bank. Commercial loans increased 15.30% from $13,059,000 on December 31,
1997 to $15,057,000 on September 30, 1998. Installment loans grew from
$17,474,000 on December 31, 1997 to $19,674,000 on September 30, 1998, a 12.59%
increase.
The allowance for loan losses remained almost unchanged at 0.89% of loans as of
September 30, 1998 compared to 0.90% at December 31, 1997. The slight decline
occurred despite increasing the provision for loan losses by $80,000 over the
prior year nine-month period due to net charge-offs increasing $32,000 over the
prior year nine-month period and loan growth. All loans charged-off during the
nine months ended September 30, 1998 were either installment or credit cards.
$21,000 of the allowance at September 30, 1998 remains unallocated to any
specific loan or loan category. Management is actively monitoring problem loans
and has increased collection efforts to reduce charge-offs in future periods.
Should charge-offs continue, management will increase the provision for loan
losses in order to maintain the allowance for loan losses at a level adequate to
absorb reasonably foreseeable losses in the loan portfolio.
Total deposits increased $5,645,000, or 12.30% from December 31, 1997 to
September 30, 1998. The increase in deposits was primarily due to the 14.69%
increase in interest-bearing deposits from $38,896,000 on December 31, 1997 to
$44,611,000 on September 30, 1998. Noninterest-bearing deposits declined
$69,000, or 0.99% from December 31, 1997 to September 30, 1998. This decrease
was due to cyclical cash needs by the OSB's large commercial customers.
The loan and deposit growth that OSB has experienced during 1998 is primarily
due to changes in the local market conditions resulting from financial
institution consolidation. Due to the local market conditions, OSB has obtained
several new loan and deposit customers despite spending less money on
advertising and, in certain circumstances, being less interest rate competitive.
- -------------------------------------------------------------------------------
F-67
<PAGE> 103
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The operating results of OSB are affected by general economic conditions, the
monetary and fiscal policies of federal agencies and the regulatory policies of
agencies that regulate financial institutions. OSB's cost of funds is influenced
by interest rates on competing investments and general market rates of interest.
Lending activities are influenced by consumer and business demand, which, in
turn, is affected by the interest rates at which such loans are made, general
economic conditions and the availability of funds for lending activities.
OSB's net income is primarily dependent upon its net interest income, which is
the difference between interest income generated on interest-earning assets and
interest expense incurred on interest-bearing liabilities. Provisions for loan
losses, service charges, gains on the sale of assets and other income,
noninterest expense and income taxes also affect net income.
Net income for the three and nine months ended September 30, 1998 was $113,000
and $314,000, or $1,000 and $47,000 more than the same periods in 1997. The
reason for the increase in earnings was primarily due to improved net interest
income partially offset by increases in the provision for loan losses and
noninterest expense.
Net interest income is the largest component of OSB's income and is affected by
the interest rate environment and the volume and composition of interest-earning
assets and interest-bearing liabilities. Net interest income increased by
$62,000 and $226,000 for the three and nine months ended September 30, 1998
compared to the same periods in 1997. The increase in net interest income is
attributable to OSB's earning assets increasing from $43,798,000 at September
30, 1997 to $52,003,000 at September 30, 1998. OSB increased its net loan to
deposit ratio from 74.92% on December 31, 1997 to 75.33% as of September 30,
1998 which also contributed to the increase in net interest income. Increasing
the loan to deposit ratio usually improves the net interest margin as loans
typically earn a higher yield than other investing alternatives.
Noninterest income increased $10,000, or 17.10% for the three months ended
September 30, 1998, and $43,000, or 24.32% for the nine months ended September
30, 1998, over the same periods in the prior year. The increase over the prior
periods is primarily due to ATM surcharge fees for noncustomers of the Bank and
commissions from credit life insurance.
Noninterest expense was up $44,000, or 11.06% for the three months ended
September 30, 1998 versus the three months ended September 30, 1997. Noninterest
expense increased $104,000, or 8.77% for the nine months ended September 30,
1998, compared to the same period in the prior year. Normal salary increases and
the hiring of additional personnel plus higher occupancy costs were the major
reasons for the increase in noninterest expense.
- --------------------------------------------------------------------------------
F-68
<PAGE> 104
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
CAPITAL RESOURCES
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings and other factors, and regulators
can lower classifications in certain ceases. Failure to meet various capital
requirements can initiate regulatory action having a direct material affect on
the operations of the Bank.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
<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 September 30, 1998 and December 31, 1997, the actual capital ratios for the
Bank were:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Total capital to risk-weighted assets 9.87% 10.20%
Tier 1 capital to risk-weighted assets 9.05 9.45
Tier 1 capital to average assets 7.02 7.33
</TABLE>
At September 30, 1998, the Bank was categorized as adequately capitalized rather
than well capitalized due to the growth of the Bank exceeding capital retention.
OSB is in the process of filing the required Registration Statements to sell
approximately $1,166,000 of its stock. The proceeds from the stock offering will
be infused into the Bank. As a result, management anticipates the Bank will
regain its well capitalized classification at December 31, 1998. Federal deposit
insurance premiums are assessed based upon regulatory capital ratios at June 30
and December 31 of each year. Thus, the Bank's status as adequately capitalized
at September 30, 1998 will not result in increased deposit insurance premiums.
At December 31, 1997, the Bank was categorized as well capitalized.
- ------------------------------------------------------------------------------
F-69
<PAGE> 105
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
LIQUIDITY
Liquidity management focuses on the ability to have funds available to meet the
loan and depository transaction needs of the Bank's customers and OSB's other
financial commitments. Cash and cash equivalent assets (which include deposits
this Bank maintains at other banks, federal funds sold and other short-term
investments) totaled $3,521,000 at September 30, 1998 and $3,726,000 at December
31, 1997. These assets provide the primary source of funds for loan demand and
deposit balance fluctuations. Additional sources of liquidity are securities
classified as available for sale and access to Federal Home Loan Bank advances,
as the Bank is a member of the Federal Home Loan Bank of Cincinnati.
Taking into account the capital adequacy, profitability and reputation
maintained by OSB, available liquidity sources are considered adequate to meet
current and projected needs.
YEAR 2000
OSB's subsidiary Bank's lending and deposit activities are almost entirely
dependent on computer systems which process and record transactions. In addition
to its basic operating activities, OSB's facilities and infrastructure, such as
security systems and communications equipment, are dependent to varying degrees
on computer systems. Management is aware of the potential Year 2000 related
problems that may affect the computers that control or operate OSB's operating
systems, facilities and infrastructure. OSB's strategy and operating plan is to
achieve operating readiness to ensure that its customers are provided
uninterrupted services and OSB is able to comply with all applicable consumer
protection statutes as they relate to Year 2000 compliance.
In January 1998, a committee of its corporate officers was formed to identify
all software systems, equipment and vendors that could possibly be affected by
the Year 2000 century change, devise a detailed testing and confirmation system
that will ensure that all affected systems are tested or certified by the vendor
and develop contingency plans including the possibility of changing vendors for
any application that OSB is unable to test or certify to be Year 2000 compliant.
Management has evaluated its computer hardware and software and has contacted
the companies that supply or service OSB's computer-operated or -dependent
systems to obtain confirmation that each such system that is material to the
operations of the Bank is either currently Year 2000 compliant or is expected to
be Year 2000 compliant. The Bank uses software of a nationally recognized
software provider that specializes in financial institutions which somewhat
mitigates the risk associated with the Year 2000 issue. As of September 30,
1998, OSB has incurred costs of approximately $60,000 related to Year 2000
compliance. The primary expenditures have been for upgraded teller software and
new personal computers. Management estimates another $40,000 will be expended in
1999 for onsite and offsite software testing and additional personal computers.
With respect to systems that cannot presently be
- -----------------------------------------------------------------------------
F-70
<PAGE> 106
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
confirmed as Year 2000 compliant, management will continue to work with the
appropriate supplier or servicer to ensure that all such systems will be
rendered compliant in a timely manner, with minimal expense to OSB or disruption
of the Bank's operations. Management anticipates Year 2000 compliance testing
will be completed by the first quarter of 1999 for its mission critical systems.
If the test results exhibit noncompliance with Year 2000 with respect to any
systems, the failure of which would have a material adverse effect on the Bank's
operations, financial condition or results, OSB would then identify and contract
with suppliers and servicers who are able to certify Year 2000 compliance.
In addition to possible expense related to its own systems, the Bank could incur
losses if loan payments are delayed due to Year 2000 problems affecting any of
the Bank's significant borrowers or impairing the payroll systems of large
employers in the Bank's primary market area. As a result, the Year 2000
committee will review all commercial loans to determine if and to what extent
their ability to do business and to repay their loans will be affected by the
Year 2000 century change. Should the committee determine a business will be
affected by the Year 2000 issue, the committee will notify that customer of its
concerns and monitor the progress of that customer towards the goal of being
Year 2000 compliant. Because the Bank's loan portfolio is highly diversified
with regard to individual borrowers and types of businesses and the Bank's
primary market area is not significantly dependent upon one employer or
industry, the Bank does not expect any significant or prolonged Year 2000
related difficulties that will affect net earnings or cash flow.
- -------------------------------------------------------------------------------
F-71
<PAGE> 107
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
Quarter ended September 30, 1998
PART II - OTHER INFORMATION
- -------------------------------------------------------------------------------
Item 1 - Legal Proceedings:
------------------
There are no matters required to be reported under this item.
Item 2 - Changes in Securities and Use of Proceeds:
-----------------------------------------
There are no matters required to be reported under this item.
Item 3 - Defaults Upon Senior Securities:
--------------------------------
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders:
----------------------------------------------------
There are no matters required to be reported under this item.
Item 5 - Other Information:
------------------
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K:
---------------------------------
(a) Exhibit 27 - Financial Data Schedule.
(b) Exhibit 99 - Safe Harbor Under Private Securities
Litigation Reform Act of 1995.
(c) No current reports on Form 8-K were filed by the small
business issuer during the quarter ended September 30,
1998.
- -------------------------------------------------------------------------------
F-72
<PAGE> 108
OHIO STATE BANCSHARES, INC.
SIGNATURES
- -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OHIO STATE BANCSHARES, INC.
--------------------------------
(Registrant)
Date: November 12, 1998 /s/ Gary E. Pendleton
---------------------- --------------------------------
(Signature)
Gary E. Pendleton
President and Chief Executive
Officer
Date: November 12, 1998 /s/ William H. Harris
---------------------- --------------------------------
(Signature)
William H. Harris
Executive Vice President and Cashier
- -------------------------------------------------------------------------------
F-73
<PAGE> 109
OHIO STATE BANCSHARES, INC.
Index to Exhibits
- -------------------------------------------------------------------------------
EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
- --------------- ----------- -----------
27 Financial Data Schedule 25
99 Safe Harbor Under the Private Incorporated by reference
Securities Litigation Reform Act to Exhibit 99 to Annual
of 1995 Report on Form 10-KSB for
the year ended December 31,
1997 filed by the Small
Business Issuer on March
27, 1998.
- --------------------------------------------------------------------------------
F-74
<PAGE> 110
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Ohio General Corporation Law ("OGCL") provides that Ohio corporations
may indemnify an individual made a party to any threatened, pending, or
completed action, suit or proceeding whether civil, criminal, administrative or
investigative, because the individual is or was a director, officer, employee or
agent of the corporation, against liability incurred in the proceeding if the
person: (i) acted in good faith and (ii) the individual believes his conduct was
in the corporation's best interest or was not opposed to the corporation's best
interest.
The OGCL further provides that a corporation shall indemnify an
individual who was fully successful on the merits or otherwise in any proceeding
to which the director, officer, employee or agent was a party because the
individual was or is a director, officer, employee or agent of the corporation,
for reasonable expenses incurred by the director in connection with the
proceeding. The OGCL also provides that a corporation may purchase and maintain
insurance on behalf of the individual who is or was a director, officer,
employee or agent of the corporation or who, while a director, officer, employee
or agent of the corporation is or was serving at the request of the corporation
as a director, officer, partner, trustee, employer or agent of another foreign
or domestic corporation, partnership, joint venture, trust, employee benefit
plan or other enterprises, against liability asserted against or incurred by the
individual in that capacity or arising from the individual's status as a
director, officer, employee, or agent.
The Articles of Incorporation confirm the general provisions of the
OGCL and also provide for indemnification of the directors of the small business
issuer for personal liability for monetary damages resulting from breach of
their fiduciary duty as directors except for: (i) any breach of the directors'
duty of loyalty to the small business issuer or its stockholder; (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) illegal distribution of dividends; and (iv) any
transaction from which the director derived an improper personal benefit.
Small business issuer will maintain a directors' and officers'
liability insurance policy, including bank reimbursement, for the purpose of
providing indemnification to its directors and officers in the event of such a
threatened, pending or completed action.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the sale
and distribution of the Common Stock being registered. All amounts shown are
estimates except the SEC registration fee, and assume the sale of 24,800 Shares,
the maximum number of Shares offered.
<TABLE>
<CAPTION>
<S> <C>
--------------------------------------------------------------
SEC registration fee $344
--------------------------------------------------------------
EDGAR, printing and mailing costs 2,000
--------------------------------------------------------------
Fees and expenses of counsel 25,000
--------------------------------------------------------------
Accounting and related expenses 5,000
--------------------------------------------------------------
</TABLE>
<PAGE> 111
<TABLE>
<S> <C>
--------------------------------------------------------------
Blue Sky fees and expenses 1,000
--------------------------------------------------------------
Miscellaneous 5,000
-----
--------------------------------------------------------------
Total $38,344
--------------------------------------------------------------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The Small Business Issuer has not sold any securities within the past
three years without registering them under the Securities Act.
ITEM 27. EXHIBITS
The exhibits filed pursuant to this Item 27 immediately follow the
Exhibit Index. The following is a description of the applicable exhibits
required for Form SB-2 provided by Item 601 of Regulation S-B.
<TABLE>
<CAPTION>
Exhibit Number Description Reference to Prior
- -------------- ----------- ------------------
Filing
------
<S> <C> <C>
(1) Underwriting Agreement with Community ***
Banc Investments, Inc.
(3.1) Amended Articles of Incorporation of the Company. *
(3.2) Code of Regulations of the Company. *
(4) Instruments defining the rights of shareholders,
including indentures.
A. Instruments defining the rights of Company's
shareholders are included in the Articles of
Incorporation and Code of Regulations.
(5) Opinion of Werner & Blank Co., L.P.A., regarding
Ohio State Bancshares, Inc. Common Stock, and
Consent
(8) Opinion of Werner & Blank Co., L.P.A. regarding
tax matters
(10.1) Lease Agreement Between Henney and Cooper, Inc.
and The Marion Bank for Branch on Richland Road
in Marion, Ohio **
(10.2) Executive Indexed Salary Continuation Plan
Agreement for President **
</TABLE>
<PAGE> 112
<TABLE>
<CAPTION>
Exhibit Number Description Reference to Prior
- -------------- ----------- ------------------
Filing
------
<S> <C> <C>
(10.3) Executive Indexed Salary Continuation Plan
Agreement for Executive Officers **
(21) Description of Subsidiary of the Company, ***
filed herewith.
(23.1) Consent of Crowe, Chizek and Company LLP
(23.2) Consent of Werner & Blank Co., L.P.A. (the
consent is contained in that firm's opinions filed
as Exhibit (5)).
(23.3) Consent of Werner & Blank Co., L.P.A.
(the consent is contained in that firm's opinion
filed Exhibit (8)).
(24) Power of Attorney. ***
(99.1) Form of Subscription Agreement for Rights Offering. ***
(99.2) Form of Subscription Agreement for Public Offering. ***
(99.3) Cover letter to accompany prospectus delivery to
shareholders.
</TABLE>
* 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, 1996. 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.
** Indicates documents which have been previously filed as part of the
Corporation's Annual Report on Form 10-KSB for the year ended December
31, 1996 or December 31, 1997. All of such documents are hereby
incorporated by reference. Such documents are available to shareholders
without charge upon request.
*** Indicates documents previously filed as part of Issuer's Registration
statement on Form SB-2 (File No. 333-67933)
<PAGE> 113
ITEM 28. UNDERTAKINGS.
(a) The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or
events which, individually or together,
represent a fundamental change in the
information set forth in the Registration
Statement; and
(iii) To include any additional or changed
material information on the plan of
distribution.
(2) For determining any liability under the Securities
Act of 1933, each post-effective amendment shall be
deemed to be a new registration statement of the
securities offered, and the offering of the
securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold
at the end of the offering.
(b) The small business issuer undertakes to supplement the
Prospectus, after the end of the initial subscription period
for existing shareholders of the small business issuer, to
include the results of the subscription offer, the
transactions by the underwriter during the subscription
period, the amount of unsubscribed securities that the
underwriter will purchase and the terms of any later
reoffering. If the underwriter makes any public offering of
the securities on terms different from those on the cover page
of the Prospectus, the small business issuer will file a
post-effective amendment to state the terms of such offering.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to officers,
directors, and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer, or controlling
person of the small business issuer in the successful defense
<PAGE> 114
of any action, suit, or proceeding) is asserted by such director,
officer, or controlling person in connection with the securities
being registered, the small business issuer will, unless in the
opinion of its counsel that matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE> 115
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the small
business issuer certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and has authorized this
Amendment No. 1 to Registration Statement to be signed on its behalf by the
undersigned, in the City of Marion, State of Ohio, this 4th day of December,
1998.
Ohio State Bancshares, Inc.
By:/s/ G. E. PENDLETON
-----------------------------------
Gary E. Pendleton
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed below by the following
persons in the capacities indicated below on the 4th day of December, 1998.
<TABLE>
<CAPTION>
<S> <C>
/s/ G. E. PENDLETON /s/ W. H. HARRIS
- ------------------------------------ -------------------------------------------
Gary E. Pendleton, President, William H. Harris, Executive Vice President
Chief Executive Officer and Director and Cashier, Chief Financial and Chief
Accounting Officer and Director
</TABLE>
*Samuel J. Birnbaum, Director
*John D. Owens, Director
*Lois J. Fisher, Director
*Thurman R. Mathews, Director
*Peter B. Miller, Director
* Gary E. Pendleton hereby signs this Amendment No. 1 to Registration Statement
on December 4, 1998, on behalf of each of the persons so indicated for whom he
is attorney-in-fact pursuant to a power of attorney filed herewith, which
persons, together with Messrs. Pendleton and Harris, constituted a majority of
the members of the registrant's Board of Directors.
/s/ G. E. PENDLETON
--------------------------------
Gary E. Pendleton
<PAGE> 116
<TABLE>
<CAPTION>
Exhibit Index
<S> <C>
Exhibit (1) Underwriting Agreement with Community Banc Investments, Inc.*
Exhibit (3.1) Amended Articles of Incorporation of the Company. *
Exhibit (3.2) Code of Regulations of the Company.*
Exhibit (4) Instruments defining the rights of shareholders, including
indentures.
A. Instruments defining the rights of Company's shareholders are included in the
Articles of Incorporation and Code of Regulations.
Exhibit (5) Opinion of Werner & Blank Co., L.P.A., regarding Ohio State Bancshares, Inc. Common
Stock, and Consent.
Exhibit (8) Opinion of Werner & Blank Co., L.P.A. regarding tax matters.
Exhibit (10.1) Lease Agreement Between Henney and Cooper, Inc. and The Marion Bank for Branch on
Richland Road in Marion, Ohio*
Exhibit (10.2) Executive Indexed Salary Continuation Plan Agreement for President*
Exhibit (10.3) Executive Indexed Salary Continuation Plan Agreement for Executive Officers*
Exhibit (21) Description of Subsidiary of the Company, filed herewith.*
Exhibit (23.1) Consent of Crowe, Chizek and Company LLP
Exhibit (23.2) Consent of Werner & Blank Co., L.P.A. (the consent is contained in that firm's
opinions filed as Exhibit (5)).
Exhibit (23.3) Consent of Werner & Blank Co., L.P.A. (the
consent is contained in that firm's opinion filed as
Exhibit (8)).
Exhibit (24) Power of Attorney.*
Exhibit (99.1) Form of Subscription Agreement for Rights Offering.*
Exhibit (99.2) Form of Subscription Agreement for Public Offering.*
Exhibit (99.3) Cover letter to accompany prospectus delivery to
shareholders.
</TABLE>
* Previously Filed
<PAGE> 1
EXHIBIT 5. OPINION OF WERNER & BLANK CO., L.P.A.
December 4, 1998
Ohio State Bancshares, Inc.
111 S. Main Street
Marion, Ohio 43302
RE: Issuance of Shares of Common Stock
Gentlemen:
This letter is written in connection with the Registration Statement on Form
SB-2 (the "Registration Statement") to be filed with the Securities and Exchange
Commission (the "Commission"), pursuant to the Securities Act of 1933, as
amended (the "Securities Act"), for the purpose of registering 24,800 shares
(the "Shares") of common stock, $10 par value (the "Common Stock"), of Ohio
State Bancshares, Inc. (the "Company").
For purposes of rendering the opinion expressed below, we have examined and
relied upon originals, or copies certified to our satisfaction, of such records,
documents, certificates of public officials and officers of the Company, and
other documents and instruments as we have deemed appropriate.
In conducting our examination, we have assumed, without investigation, the
genuineness of all signatures, the correctness of all certificates, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as certified or photostatic
copies and the authenticity of the originals of such copies, and the accuracy
and completeness of all records made available to us by the Company. In
rendering our opinion below, we have assumed, without investigation, that any
certificate or other document on which we have relied that was given or dated
earlier than the date of this letter continued to remain accurate insofar as
relevant to such opinion, from such earlier date through and including the date
of this letter. In addition, we have assumed, without investigation, the
accuracy of the representations and statements as to factual matters made in the
Registration Statement and in the prospectus to be delivered to each shareholder
(the "Prospectus"), and the accuracy of representations and statements as to
factual matters made by the officers and employees of the Company and public
officials.
The opinion expressed below is subject, without investigation, to the following
assumptions:
A. The Registration Statement, as finally amended, will become and remain
effective throughout all periods relevant to the opinion expressed below.
<PAGE> 2
B. The Prospectus will fulfill, and, together with any subsequent amendments or
supplements thereto, will continue to fulfill all of the requirements of the
Securities Act, throughout all periods relevant to the opinion expressed below.
C. The resolutions of the board of directors authorizing the offer, sale and
issuance of the Shares (the "Authorizing Resolutions"), will not be revoked or
rescinded, and no amendment, modification, or other alteration of the
Authorizing Resolutions will cause such resolutions, as amended, to deviate
materially in substance from the provisions of the Authorizing Resolutions as in
effect on the date hereof.
D. All offers, sales and issuances of the Shares will be made in a manner (i)
which complies with the terms, provisions and conditions described in the
Prospectus and any amendments or supplements to the Prospectus, and (ii) which
is within the scope of the Authorizing Resolutions.
E. All offers, sales and issuances of the Shares will comply with the applicable
securities laws of the states having jurisdiction.
F. At all times relevant to the opinion set forth below, the Company has been
and will remain in good standing in Ohio and in each foreign jurisdiction where
qualification is required.
G. No subsequent amendment, modification or other alternation of the Prospectus
or the Registration Statement will cause the terms, provisions and conditions
relating to the offer, sale and issuance of the Shares pursuant thereto to
deviate materially in substance from said terms, provisions and conditions as
described therein on the date hereof.
H. The Shares will be issued for consideration having a value of not less than
the par value of the Common Stock.
The opinion expressed below is subject to the following qualifications:
(a) The opinion expressed below is limited to the matters expressly set forth in
this opinion letter, and no opinion is to be implied or may be inferred beyond
the matters expressly so stated.
(b) We disclaim any obligation to update this opinion letter for events
occurring after the date of this opinion letter.
(c) The opinion expressed below is limited to the effect of the General
Corporation Law of the State of Ohio; accordingly, no opinion is expressed with
respect to the laws of any other jurisdiction, or the effect thereof, on the
offer, sale or issuance of the Shares.
Based upon and subject to the foregoing, we are of the opinion that the Shares,
when issued, will be validly issued, fully paid and nonassessable.
<PAGE> 3
We hereby consent to the filing of this opinion letter as an exhibit to
Amendment No. 1 to the Registration Statement. This opinion letter is rendered
solely for your benefit in connection with the Registration Statement. Except as
provided in this opinion letter, without our prior written consent, this opinion
letter may not be: (i) relied upon by any other person or for any other purpose;
(ii) quoted in whole or in part or otherwise referred to in any report or
document; or (iii) furnished (the original or copies thereof) to any other
person.
Sincerely,
/s/ Werner & Blank Co., L.P.A.
WERNER & BLANK CO., L.P.A.
<PAGE> 1
EXHIBIT 8. OPINION OF WERNER & BLANK CO., L.P.A. REGARDING TAX MATTERS.
December 4, 1998
Board of Directors
Ohio State Bancshares, Inc.
111 S. Main Street
Marion, Ohio 43302
Gentlemen:
You have asked that we furnish Ohio State Bancshares, Inc. (the "Company") an
opinion of our firm with respect to certain tax issues in connection with the
Company's proposed offering of 24,800 Shares of its common stock as
specifically set forth in its Registration Statement on Form SB-2 and related
Prospectus to be filed with the Securities and Exchange Commission. We have
reviewed the Registration Statement and have made such investigation of laws
and regulations that we have deemed necessary under the circumstances. All
capitalized terms used herein shall have the same meaning as given to them in
the Registration Statement on Form SB-2 of the Company, utilized in connection
with the offering. Based upon our review and investigation, we are of the
following opinion.
1. Neither the receipt nor the exercise of the Rights will result in taxable
income to the shareholders of the Company who receive such Rights in
connection with the offering.
2. No deductible loss will be realized if Rights are allowed to expire without
exercise;
3. The tax basis of Shares acquired upon the exercise of Rights or in the
Public Offering will be the Subscription Price; and
4. There is no allocation of an existing shareholders' tax basis in current
Shares held to such shareholders' Rights, whether or not such Rights are
exercised, because (based on the limited time period in which the
shareholders have the option to exercise their Rights and the fact that the
purchase price per share on the exercise of a Right is substantially equal
to the per share price of the Shares sold in the Public Offering) the
Company has determined that such value is zero. We understand that no
independent determination of value of the Rights distributed has been made.
Board of Directors
November 3, 1998
We hereby consent to the filing of this opinion as an Exhibit to said
Registration Statement as amended, and its reference under the caption, "PLAN OF
DISTRIBUTION" - Federal Income Taxes.
Very truly yours,
/s/ Werner & Blank Co., L.P.A.
Werner & Blank Co., L.P.A.
<PAGE> 1
EXHIBIT 23.1 CONSENT OF CROWE, CHIZEK & COMPANY LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation in this registration statement of Ohio State
Bancshares, Inc. on Form SB-2, and all amendments thereto, of our report dated
January 30, 1998 appearing in the Annual Report of Ohio State Bancshares, Inc.,
for the year ended December 31, 1997. We also consent to the reference to our
firm under the heading "Experts" in the prospectus, which is part of this
Registration Statement.
/s/ Crowe, Chizek & Company LLP
Crowe, Chizek & Company LLP
Columbus, Ohio
December 4, 1998
<PAGE> 1
EXHIBIT 99.3
[OHIO STATE BANCSHARES, INC. LETTERHEAD]
December 8, 1998
Dear Shareholder:
Ohio State Bancshares is making an offer to its shareholders of 24,800 shares
of its common stock at a price of $45.00 per share. You are entitled to
purchase a maximum of 1 share for every 4.8871 shares of common stock that you
owned as of the close of business on December 1, 1998. The offering of stock
to existing shareholders only will expire on January 31, 1999.
If our current shareholders do not purchase all of the 24,800 shares, the
balance remaining after January 31, 1999, will be offered to the public at a
price of $47.00 per share. You may also subscribe to purchase shares in this
public offering. If the public offering is oversubscribed, the Company will
decide on a case by case basis which of the public offering subscriptions to
accept.
I have enclosed the prospectus for this stock offering, along with the
subscription agreements that you may sign and return to me to purchase shares
and a stamped and addressed envelope for the subscription agreements. One of
the subscription agreements is titled "Rights Subscription Agreement." The
other is titled "Subscription Agreement." Complete, sign and return the Rights
Subscription Agreement, along with a check for the total purchase price, to
purchase shares at $45 per share to which you are entitled as a current
shareholder. In making out your check, remember that you are entitled to buy a
maximum of 1 share for every 4.8871 shares you owned at December 1, 1998.
Complete, sign and return the Subscription Agreement for any additional shares
you want to buy, but do not send a check for the amount in the Subscription
Agreement. We will contact you later if you get to purchase additional shares
and you can send the check at that time.
Please read the prospectus carefully. It describes the terms of the stock
offering and contains important information about Ohio State Bancshares.
Your Board of Directors plans to use the proceeds from this common stock
offering to continue the growth of your Company. From December 31, 1994 to
September 30, 1998, your Company has grown from $34,836,000 in assets to
$55,904,954 in assets. For this period, the bid and ask quotations for the
Company's common stock have increased from $26.50 per share bid and $28.50 per
share asked during the fourth quarter of 1994, to a high bid of $43.00 per
share and a high asked of $45.00 per share, during the quarter ended September
30, 1998. I believe that this common stock offering presents the opportunity
for you to increase your participation in what I believe will be the continued
successful growth of the Company. Again, please read the enclosed prospectus
carefully and I hope that you will choose to invest.
Sincerely,
Gary E. Pendleton
President and CEO
