<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(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)
<TABLE>
<S> <C>
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)
</TABLE>
(740) 387-2265
- ---------------------------
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Shares, $10.00 par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
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]
<PAGE> 2
INDEX
FORM 10-KSB
<TABLE>
<CAPTION>
PART I
- ------
<S> <C> <C>
ITEM 1. Description of Business.................................................................. 2
ITEM 2. Description of Property.................................................................. 3
ITEM 3. Legal Proceedings........................................................................ 3
ITEM 4. Submission of Matters to a Vote of Security Holders...................................... 4
PART II
- -------
ITEM 5. Market for Common Equity and Related Shareholder Matters................................. 4
ITEM 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................ 5
ITEM 7. Financial Statements..................................................................... 20
ITEM 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................................................... 41
PART III
- --------
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act........................................ 41
ITEM 10. Executive Compensation................................................................... 41
ITEM 11. Security Ownership of Certain Beneficial Owners and Management........................... 41
ITEM 12. Certain Relationships and Related Transactions........................................... 41
ITEM 13. Exhibits and Reports on Form 8-K......................................................... 42
SIGNATURES ......................................................................................... 43
</TABLE>
1
<PAGE> 3
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
BUSINESS
At the annual shareholders' meeting held on April 13, 1995, the Marion Bank's
("Bank") shareholders approved a plan of reorganization whereby they would
exchange their shares of Bank stock for the common stock of Ohio State
Bancshares, Inc. ("Corporation"). The Corporation received approval from the
Board of Governors of the Federal Reserve System during early 1996 and the
reorganization was consummated on May 16, 1996. The principal business of the
Corporation is presently to operate the Bank, which is a wholly owned subsidiary
and its principal asset. The Corporation and the main office of the Bank are
located at 111 South Main Street, Marion, Ohio 43302. The Corporation's
telephone number is (614) 387-2265.
Although wholly owned by the Corporation, the Bank functions as an independent
community bank. The Bank was chartered as an Ohio banking corporation on March
24, 1988 and commenced operations on August 23, 1988. The Bank offers a full
range of commercial banking services, including commercial loans, real estate
loans and various types of consumer loans; checking, savings and time deposits;
money market accounts; travelers checks; pre-approved overdraft protection; safe
deposit boxes and other customary nondeposit banking services. The Bank is an
agent for Mastercard and Visa credit cards and is a merchant depository for
cardholder sales drafts. At the present time the Bank does not have a trust
department, but can provide access to this service through correspondent banks.
The Bank is a member of 24-hour automated teller networks. It also offers two
lanes of drive-up banking services at each banking location.
The nature of the Bank allows for full diversification of depositors and
borrowers so it is not dependent upon a single or a few customers. Most of the
Bank's deposits are attracted from individuals and moderate business related
sources. No material portion of the Bank's loans are concentrated within a
single industry or group of related industries. The business of the Bank is
somewhat seasonal in nature due to lending activities in the agricultural and
automobile markets.
The Corporation is not aware of any exposure to material costs associated with
environmental hazardous waste cleanup. Bank loan procedures require EPA studies
be obtained by Bank management prior to approving any commercial real estate
loan with such potential risk.
(Continued)
2
<PAGE> 4
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)
3
<PAGE> 5
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
1996 (1) Low Bid High Bid Low Ask High Ask
---- ------- -------- ------- --------
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.
(Continued)
4
<PAGE> 6
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.
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)
5
<PAGE> 7
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)
6
<PAGE> 8
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)
7
<PAGE> 9
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.
8
<PAGE> 10
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>
9
<PAGE> 11
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
============ ============
</TABLE>
Ratios:
<TABLE>
<S> <C> <C>
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>
10
<PAGE> 12
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.
11
<PAGE> 13
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>
12
<PAGE> 14
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>
13
<PAGE> 15
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.
14
<PAGE> 16
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.
15
<PAGE> 17
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.
16
<PAGE> 18
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.
17
<PAGE> 19
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 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.
18
<PAGE> 20
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.
19
<PAGE> 21
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
20
<PAGE> 22
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.
21
<PAGE> 23
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.
22
<PAGE> 24
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.
23
<PAGE> 25
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.
24
<PAGE> 26
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)
25
<PAGE> 27
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)
26
<PAGE> 28
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)
27
<PAGE> 29
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)
28
<PAGE> 30
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
============= ============ =========== =============
</TABLE>
Sales of available for sales securities were:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Proceeds $ 1,819,921 $ 2,714,626
Gross gains 946 15,956
Gross losses 795 8,642
</TABLE>
(Continued)
29
<PAGE> 31
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)
30
<PAGE> 32
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
============== ==============
</TABLE>
Impaired loans were as follows:
<TABLE>
<CAPTION>
1997
----
<S> <C>
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)
31
<PAGE> 33
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>
<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)
32
<PAGE> 34
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)
33
<PAGE> 35
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)
34
<PAGE> 36
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)
35
<PAGE> 37
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)
36
<PAGE> 38
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)
37
<PAGE> 39
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
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1997
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)
38
<PAGE> 40
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)
39
<PAGE> 41
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)
40
<PAGE> 42
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
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)
41
<PAGE> 43
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
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.
(Continued)
42
<PAGE> 44
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
OHIO STATE BANCSHARES, INC.
March 19, 1998 By: /s/GARY E. PENDLETON
- -------------------------- --------------------------------
Date Gary E. Pendleton, President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of registrant and in the capacities indicated on
March 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
/s/WILLIAM H. HARRIS /s/F. WINTON LACKEY
- ----------------------------------- ------------------------------
William H. Harris F. Winton Lackey
Executive Vice President and Cashier 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>
43
<PAGE> 1
EXHIBIT 10.3
EXECUTIVE INDEXED SALARY CONTINUATION PLAN
AGREEMENT
This Agreement, made and entered into this 7th day of July, 1997, by
and between The Marion Bank, a Bank organized and existing under the laws of the
State of Ohio, hereinafter referred to as "the Bank", and William H. Harris, a
Key Employee and the Executive of the Bank, hereinafter referred to as "the
Executive".
The Executive has been in the employ of the Bank for several years and
has now and for years past faithfully served the Bank. It is the consensus of
the Board of Directors of the Bank (The Board) that the Executive's services
have been of exceptional merit, in excess of the compensation paid and an
invaluable contribution to the profits and position of the Bank in its field of
activity. The Board further believes that the Executive's experience, knowledge
of corporate affairs, reputation and industry contacts are of such value and his
continued services are so essential to the Bank's future growth and profits that
it would suffer severe financial loss should the Executive terminate his
services.
Accordingly, it is the desire of the Bank and the Executive to enter
into this Agreement under which the Bank will agree to make certain payments to
the Executive upon his retirement and, alternatively, to his beneficiary(ies) in
the event of his premature death while employed by the Bank.
It is the intent of the parties hereto that this Agreement be
considered an arrangement maintained primarily to provide supplemental
retirement benefits for the Executive, as a member of a select group of
management or highly-compensated employees of the Bank for purposes of the
Employee Retirement Security Act of 1974 (ERISA). The Executive is fully advised
of the Bank's financial status and has had substantial input in the design and
operation of this benefit plan.
Therefore, in consideration of the Executive's services performed in
the past and those to be performed in the future and based upon the mutual
promises and covenants herein contained, the Bank and the Executive, agree as
follows:
44
<PAGE> 2
I. DEFINITIONS
A. Effective Date:
The Effective Date of this Agreement shall be July 7, 1997.
B. Plan Year:
Any reference to "Plan Year" shall mean a calendar year from
January 1 to December 31. In the year of implementation, the
term "Plan Year" shall mean the period from the effective date
to December 31 of the year of the effective date.
C. Retirement Date:
Retirement Date shall mean retirement from service with the
Bank which becomes effective on the first day of the calendar
month following the month in which the Executive reaches his
sixtieth (60th) birthday or such later date as the Executive
may actually retire.
D. Termination of Service:
Termination of Service shall mean voluntary resignation of
service by the Executive or the Bank's discharge of the
Executive without cause ["cause" defined in subparagraph III
(D) hereinafter], prior to the Normal Retirement Age
[described in subparagraph I (J) hereinafter].
E. Pre-Retirement Account:
A Pre-Retirement Account shall be established as a liability
reserve account on the books of the Bank for the benefit of
the Executive. Prior to termination of service or Retirement
Date or the Executive's actual retirement from service with
the Bank, such liability reserve account shall be increased or
decreased each Plan Year (including the Plan Year in which the
Executive ceases to be employed by the Bank) by an amount
equal to the annual earnings or loss for that Plan Year
determined by the Index [described in subparagraph I (G)
hereinafter], less the Cost of Funds Expense for that Plan
Year [described in subparagraph I (H) hereinafter].
F. Index Retirement Benefit:
The Index Retirement Benefit for the Executive for any year
shall be equal to the excess of the annual earnings (if any)
determined by the Index [subparagraph I (G)] for that Plan
Year over the Cost of Funds Expense [subparagraph I (H)] for
that Plan Year.
45
<PAGE> 3
G. Index:
The Index for any Plan Year shall be the aggregate annual
after-tax income from the life insurance contracts described
hereinafter as defined by FASB Technical Bulletin 85-4. This
Index shall be applied as if such insurance contracts were
purchased on the effective date hereof.
<TABLE>
<S> <C>
Insurance Company: Alexander Hamilton Life Insurance Co.
Policy Form: Flexible Premium Adjustable Life
Policy Name: Executive Security Plan
Insured's Age and Sex: 57, Male
Riders: None
Ratings: None
Option: A
Face Amount: $250,000
Premiums Paid: $ 20,000
Number of Premium Payments: Nine
Assumed Purchase Date: July 7, 1997
</TABLE>
If such contracts of life insurance are actually purchased by
the Bank then the actual policies as of the dates they were
purchased shall be used in calculations under this Agreement.
If such contracts of life insurance are not purchased or are
subsequently surrendered or lapsed, then the Bank shall
receive annual policy illustrations that assume the above
described policies were purchased from the above named
insurance company(ies) on the Effective Date from which the
increase in policy value will be used to calculate the amount
of the Index.
In either case, references to the life insurance contract are
merely for purposes of calculating a benefit. The Bank has no
obligation to purchase such life insurance and, if purchased,
the Executive and his beneficiary(ies) shall have no ownership
interest in such policy and shall always have no greater
interest in the benefits under this Agreement than that of an
unsecured general creditor of the Bank.
H. Cost of Funds Expense:
The Cost of Funds Expense for any Plan Year shall be
calculated by taking the sum of the amount of premiums set
forth in the Indexed policies described above plus the amount
of any after-tax benefits paid to the Executive pursuant to
this Agreement (Paragraph III hereinafter) plus the amount of
all previous years after-tax Costs of Funds Expense, and
46
<PAGE> 4
multiplying that sum by the average after-tax Federal Reserve
discount rate for Plan Year.
I. Change of Control:
Change of control shall be deemed to be the cumulative
transfer of more than fifty percent (50%) of the voting stock
of the Bank Holding Company from the Effective Date of this
Agreement. For the purposes of this Agreement, transfers on
account of deaths or gifts, transfers between family members
or transfers to a qualified retirement plan maintained by the
Bank shall not be considered in determining whether there has
been a change in control.
J. Normal Retirement Age:
Normal Retirement Age shall mean the date on which the
Executive attains age sixty-five (65).
II. EMPLOYMENT
No provision of this Agreement shall be deemed to restrict or limit any
existing employment agreement by and between the Bank and the
Executive, nor shall any conditions herein create specific employment
rights to the Executive nor limit the right of the Employer to
discharge the Executive with or without cause. In a similar fashion, no
provision shall limit the Executive's rights to voluntarily sever his
employment at any time.
III. INDEX BENEFITS
The following benefits provided by the Bank to the Executive are in the
nature of a fringe benefit and shall in no event be construed to effect
nor limit the Executive's current or prospective salary increases, cash
bonuses or profit-sharing distributions or credits.
A. Retirement Benefits:
Should the Executive continue to be employed by the Bank until
his Retirement Date, defined in subparagraph I (C), he shall
be entitled to receive the balance in his Pre-Retirement
Account [as defined in subparagraph I (E)] in fifteen (15)
equal annual installments commencing thirty (30) days
following the Executive's Retirement. In addition to these
payments, commencing with the Plan Year in which the Executive
attains his Normal Retirement Age, defined in subparagraph I
(J), the Index Retirement Benefit [as defined in subparagraph
I (F) above] for each year shall be paid to the Executive
until his death.
47
<PAGE> 5
B. Termination of Service:
Subject to subparagraph III (D) hereinafter, should the
Executive suffer a termination of service [defined in
subparagraph I (D)], he shall be entitled to receive ten
percent (10%), times the number of full years (to a maximum of
100%) the Executive has served from the date of first
employment prior to attaining Normal Retirement Age with the
Bank, times the balance in the Pre-Retirement Account paid
over fifteen (15) years in equal installments commencing at
the Retirement Date [subparagraph I (C)]. In addition to these
payments, commencing upon the Executive's Normal Retirement
Age, ten percent (10%) times full years of service with the
Bank, times the Index Retirement Benefit for each year shall
be paid to the Executive until his death.
C. Death:
Should the Executive die prior to having received the full
balance of the Pre-Retirement Account, the unpaid balance of
the Pre-Retirement Account shall be paid in a lump sum to the
beneficiary selected by the Executive and filed with the Bank.
In the absence of or a failure to designate a beneficiary, the
unpaid balance shall be paid in a lump sum to the personal
representative of the Executive's estate.
D. Discharge for Cause:
Should the Executive be discharged for cause at any time prior
to his Retirement Date, all Index Benefits under this
Agreement [subparagraphs III (A), (B) or (C)] shall be
forfeited. The term "for cause" shall mean gross negligence or
gross neglect or the conviction of a felony or
gross-misdemeanor involving moral turpitude, fraud, dishonesty
or willful violation of any law that results in any adverse
effect on the Bank. If a dispute arises as to discharge "for
cause", such dispute shall be resolved by arbitration as set
forth in this Agreement.
E. Disability:
In the event the Executive shall become disabled, he shall be
considered to have reached his retirement date as of the date
of his disability for the purposes of receiving benefit
payments under this Agreement. The fact of disability shall be
in the sole discretion of the Board of Directors of the Bank
upon the application of the Executive.
48
<PAGE> 6
F. Death Benefit:
Except as set forth above, there is no death benefit provided
under this Agreement.
IV. RESTRICTIONS UPON FUNDING
The Bank shall have no obligation to set aside, earmark or entrust any
fund or money with which to pay its obligations under this Agreement.
The Executive, his beneficiary(ies) or any successor in interest to him
shall be and remain simply a general creditor of the Bank in the same
manner as any other creditor having a general claim for matured and
unpaid compensation.
The Bank reserves the absolute right at its sole discretion to either
fund the obligations undertaken by this Agreement or to refrain from
funding the same and to determine the exact nature and method of such
funding. Should the Bank elect to fund this Agreement, in whole or in
part, through the purchase of life insurance, mutual funds, disability
policies or annuities, the Bank reserves the absolute right, in its
sole discretion, to terminate such funding at any time, in whole or in
part. At no time shall the Executive be deemed to have any lien or
right, title or interest in or to any specific funding investment or to
any assets of the Bank.
If the Bank elects to invest in a life insurance, disability or annuity
policy upon the life of the Executive, then the Executive shall assist
the Bank by freely submitting to a physical exam and supplying such
additional information necessary to obtain such insurance or annuities.
V. CHANGE OF CONTROL
Upon a Change of Control [as defined in subparagraph I (I) herein], if
the Executive's employment is subsequently terminated then he shall
receive the benefits promised in this Agreement upon attaining Normal
Retirement Age, as if he had been continuously employed by the Bank
until his Normal Retirement Age. The Executive will also remain
eligible for all promised death benefits in this Agreement. In
addition, no sale, merger or consolidation of the Bank shall take place
unless the new or surviving entity expressly acknowledges the
obligations under this Agreement and agrees to abide by its terms.
49
<PAGE> 7
VI. MISCELLANEOUS
A. Alienability and Assignment Prohibition:
Neither the Executive, his/her surviving spouse nor any other
beneficiary under this Agreement shall have any power or right
to transfer, assign, anticipate, hypothecate, mortgage,
commute, modify or otherwise encumber in advance any of the
benefits payable hereunder nor shall any of said benefits be
subject to seizure for the payment of any debts, judgments,
alimony or separate maintenance owed by the Executive or his
beneficiary, nor be transferable by operation of law in the
event of bankruptcy, insolvency or otherwise. In the event the
Executive or any beneficiary attempts assignment, commutation,
hypothecation, transfer or disposal of the benefits hereunder,
the Bank's liabilities shall forthwith cease and terminate.
B. Binding Obligation of Bank and any Successor in Interest:
The Bank expressly agrees that it shall not merge or
consolidate into or with another bank or sell substantially
all of its assets to another bank, firm or person until such
bank, firm or person expressly agrees, in writing, to assume
and discharge the duties and obligations of the Bank under
this Agreement. This Agreement shall be binding upon the
parties hereto, their successors, beneficiary(ies), heirs and
personal representatives.
C. Revocation:
It is agreed by and between the parties hereto that, during
the lifetime of the Executive, this Agreement may be amended
or revoked at any time or times, in whole or in part, by the
mutual written assent of the Executive and the Bank.
D. Gender:
Whenever in this Agreement words are used in the masculine or
neuter gender, they shall be read and construed as in the
masculine, feminine or neuter gender, whenever they should so
apply.
E. Effect on Other Bank Benefit Plans:
Nothing contained in this Agreement shall affect the right of
the Executive to participate in or be covered by any qualified
or non-qualified pension, profit-sharing, group, bonus or
other supplemental compensation or fringe benefit plan
constituting a part of the Bank's existing or future
compensation structure.
50
<PAGE> 8
F. Headings:
Headings and subheadings in this Agreement are inserted for
reference and convenience only and shall not be deemed a part
of this Agreement.
G. Applicable Law:
The validity and interpretation of this Agreement shall be
governed by the laws of the State of Ohio.
VII. ERISA PROVISION
A. Named Fiduciary and Plan Administrator:
The "Named Fiduciary and Plan Administrator" of this plan
shall be The Marion Bank until its removal by the Board. As
Named Fiduciary and Administrator, the Bank shall be
responsible for the management, control and administration of
the Salary Continuation Agreement as established herein. The
Named Fiduciary may delegate to others certain aspects of the
management and operation responsibilities of the plan
including the employment of advisors and the delegation of
ministerial duties to qualified individuals.
B. Claims Procedure and Arbitration:
In the event a dispute arises over benefits under this
Agreement and benefits are not paid to the Executive (or to
his beneficiary in the case of the Executive's death) and such
claimants feel they are entitled to receive such benefits,
then a written claim must be made to the Plan Administrator
named above within ninety (90) days from the date payments are
refused. The Plan Administrator shall review the written claim
and if the claim is denied, in whole or in part, they shall
provide in writing within ninety (90) days of receipt of such
claim their specific reasons for such denial, reference to the
provisions of this Agreement upon which the denial is based
and any additional material or information necessary to
perfect the claim. Such written notice shall further indicate
the additional steps to be taken by claimants if a further
review of the claim denial is desired. A claim shall be deemed
denied if the Plan Administrator fails to take any action
within the aforesaid ninety-day period.
51
<PAGE> 9
If claimants desire a second review they shall notify the Plan
Administrator in writing within ninety (90) days of the first
claim denial. Claimants may review this Agreement or any
documents relating thereto and submit any written issues and
comments they may feel appropriate. In its sole discretion,
the Plan Administrator shall then review the second claim and
provide a written decision within ninety (90) days of receipt
of such claim. This decision shall likewise state the specific
reasons for the decision and shall include reference to
specific provisions of this Agreement upon which the decision
is based.
If claimants continue to dispute the benefit denial based upon
completed performance of this Agreement or the meaning and
effect of the terms and conditions thereof, then claimants may
submit the dispute to a Board of Arbitration for final
arbitration. Said Board shall consist of one member selected
by the claimant, one member selected by the Bank, and the
third member selected by the first two members. The Board
shall operate under any generally recognized set of
arbitration rules. The parties hereto agree that they and
their heirs, personal representatives, successors and assigns
shall be bound by the decision of such Board with respect to
any controversy properly submitted to it for determination.
Where a dispute arises as to the Bank's discharge of the
Executive "for cause," such dispute shall likewise be
submitted to arbitration as above described and the parties
hereto agree to be bound by the decision thereunder.
IN WITNESS WHEREOF, the parties hereto acknowledge that each has
carefully read this Agreement and executed the original thereof on the 7th day
of July, 1997 and that, upon execution, each has received a conforming copy.
THE MARION BANK
By:
- ----------------------- -----------------------
Witness Title
By:
- ----------------------- -----------------------
Witness William H. Harris
52
<PAGE> 10
EXECUTIVE INDEXED SALARY CONTINUATION PLAN
AGREEMENT
This Agreement, made and entered into this 7th day of July, 1997, by
and between The Marion Bank, a Bank organized and existing under the laws of the
State of Ohio, hereinafter referred to as "the Bank", and Kevin C. Smith, a Key
Employee and the Executive of the Bank, hereinafter referred to as "the
Executive".
The Executive has been in the employ of the Bank for several years and
has now and for years past faithfully served the Bank. It is the consensus of
the Board of Directors of the Bank (The Board) that the Executive's services
have been of exceptional merit, in excess of the compensation paid and an
invaluable contribution to the profits and position of the Bank in its field of
activity. The Board further believes that the Executive's experience, knowledge
of corporate affairs, reputation and industry contacts are of such value and his
continued services are so essential to the Bank's future growth and profits that
it would suffer severe financial loss should the Executive terminate his
services.
Accordingly, it is the desire of the Bank and the Executive to enter
into this Agreement under which the Bank will agree to make certain payments to
the Executive upon his retirement and, alternatively, to his beneficiary(ies) in
the event of his premature death while employed by the Bank.
It is the intent of the parties hereto that this Agreement be
considered an arrangement maintained primarily to provide supplemental
retirement benefits for the Executive, as a member of a select group of
management or highly-compensated employees of the Bank for purposes of the
Employee Retirement Security Act of 1974 (ERISA). The Executive is fully advised
of the Bank's financial status and has had substantial input in the design and
operation of this benefit plan.
Therefore, in consideration of the Executive's services performed in
the past and those to be performed in the future and based upon the mutual
promises and covenants herein contained, the Bank and the Executive, agree as
follows:
53
<PAGE> 11
I. DEFINITIONS
A. Effective Date:
The Effective Date of this Agreement shall be July 7, 1997.
B. Plan Year:
Any reference to "Plan Year" shall mean a calendar year from
January 1 to December 31. In the year of implementation, the
term "Plan Year" shall mean the period from the effective date
to December 31 of the year of the effective date.
C. Retirement Date:
Retirement Date shall mean retirement from service with the
Bank which becomes effective on the first day of the calendar
month following the month in which the Executive reaches his
sixtieth (60th) birthday or such later date as the Executive
may actually retire.
D. Termination of Service:
Termination of Service shall mean voluntary resignation of
service by the Executive or the Bank's discharge of the
Executive without cause ["cause" defined in subparagraph III
(D) hereinafter], prior to the Normal Retirement Age
[described in subparagraph I (J) hereinafter].
E. Pre-Retirement Account:
A Pre-Retirement Account shall be established as a liability
reserve account on the books of the Bank for the benefit of
the Executive. Prior to termination of service or Retirement
Date or the Executive's actual retirement from service with
the Bank, such liability reserve account shall be increased or
decreased each Plan Year (including the Plan Year in which the
Executive ceases to be employed by the Bank) by an amount
equal to the annual earnings or loss for that Plan Year
determined by the Index [described in subparagraph I (G)
hereinafter], less the Cost of Funds Expense for that Plan
Year [described in subparagraph I (H) hereinafter].
F. Index Retirement Benefit:
The Index Retirement Benefit for the Executive for any year
shall be equal to the excess of the annual earnings (if any)
determined by the Index [subparagraph I (G)] for that Plan
Year over the Cost of Funds Expense [subparagraph I (H)] for
that Plan Year.
54
<PAGE> 12
G. Index:
The Index for any Plan Year shall be the aggregate annual
after-tax income from the life insurance contracts described
hereinafter as defined by FASB Technical Bulletin 85-4. This
Index shall be applied as if such insurance contracts were
purchased on the effective date hereof.
<TABLE>
<S> <C>
Insurance Company: Alexander Hamilton Life Insurance Co.
Policy Form: Flexible Premium Adjustable Life
Policy Name: Executive Security Plan
Insured's Age and Sex: 45, Male
Riders: None
Ratings: None
Option: A
Face Amount: $176,000
Premiums Paid: $ 10,000
Number of Premium Payments: Nineteen
Assumed Purchase Date: July 7, 1997
</TABLE>
If such contracts of life insurance are actually purchased by
the Bank then the actual policies as of the dates they were
purchased shall be used in calculations under this Agreement.
If such contracts of life insurance are not purchased or are
subsequently surrendered or lapsed, then the Bank shall
receive annual policy illustrations that assume the above
described policies were purchased from the above named
insurance company(ies) on the Effective Date from which the
increase in policy value will be used to calculate the amount
of the Index.
In either case, references to the life insurance contract are
merely for purposes of calculating a benefit. The Bank has no
obligation to purchase such life insurance and, if purchased,
the Executive and his beneficiary(ies) shall have no ownership
interest in such policy and shall always have no greater
interest in the benefits under this Agreement than that of an
unsecured general creditor of the Bank.
H. Cost of Funds Expense:
The Cost of Funds Expense for any Plan Year shall be
calculated by taking the sum of the amount of premiums set
forth in the Indexed policies described above plus the amount
of any after-tax benefits paid to the Executive pursuant to
this Agreement (Paragraph III hereinafter) plus the amount of
all previous years after-tax Costs of Funds Expense, and
55
<PAGE> 13
multiplying that sum by the average after-tax Federal Reserve
discount rate for Plan Year.
I. Change of Control:
Change of control shall be deemed to be the cumulative
transfer of more than fifty percent (50%) of the voting stock
of the Bank Holding Company from the Effective Date of this
Agreement. For the purposes of this Agreement, transfers on
account of deaths or gifts, transfers between family members
or transfers to a qualified retirement plan maintained by the
Bank shall not be considered in determining whether there has
been a change in control.
J. Normal Retirement Age:
Normal Retirement Age shall mean the date on which the
Executive attains age sixty-five (65).
II. EMPLOYMENT
No provision of this Agreement shall be deemed to restrict or limit any
existing employment agreement by and between the Bank and the
Executive, nor shall any conditions herein create specific employment
rights to the Executive nor limit the right of the Employer to
discharge the Executive with or without cause. In a similar fashion, no
provision shall limit the Executive's rights to voluntarily sever his
employment at any time.
III. INDEX BENEFITS
The following benefits provided by the Bank to the Executive are in the
nature of a fringe benefit and shall in no event be construed to effect
nor limit the Executive's current or prospective salary increases, cash
bonuses or profit-sharing distributions or credits.
A. Retirement Benefits:
Should the Executive continue to be employed by the Bank until
his Retirement Date, defined in subparagraph I (C), he shall
be entitled to receive the balance in his Pre-Retirement
Account [as defined in subparagraph I (E)] in fifteen (15)
equal annual installments commencing thirty (30) days
following the Executive's Retirement. In addition to these
payments, commencing with the Plan Year in which the Executive
attains his Normal Retirement Age, defined in subparagraph I
(J), the Index Retirement Benefit [as defined in subparagraph
I (F) above] for each year shall be paid to the Executive
until his death.
56
<PAGE> 14
B. Termination of Service:
Subject to subparagraph III (D) hereinafter, should the
Executive suffer a termination of service [defined in
subparagraph I (D)], he shall be entitled to receive ten
percent (10%), times the number of full years (to a maximum of
100%) the Executive has served from the date of first
employment prior to attaining Normal Retirement Age with the
Bank, times the balance in the Pre-Retirement Account paid
over fifteen (15) years in equal installments commencing at
the Retirement Date [subparagraph I (C)]. In addition to these
payments, commencing upon the Executive's Normal Retirement
Age, ten percent (10%) times full years of service with the
Bank, times the Index Retirement Benefit for each year shall
be paid to the Executive until his death.
C. Death:
Should the Executive die prior to having received the full
balance of the Pre-Retirement Account, the unpaid balance of
the Pre-Retirement Account shall be paid in a lump sum to the
beneficiary selected by the Executive and filed with the Bank.
In the absence of or a failure to designate a beneficiary, the
unpaid balance shall be paid in a lump sum to the personal
representative of the Executive's estate.
D. Discharge for Cause:
Should the Executive be discharged for cause at any time prior
to his Retirement Date, all Index Benefits under this
Agreement [subparagraphs III (A), (B) or (C)] shall be
forfeited. The term "for cause" shall mean gross negligence or
gross neglect or the conviction of a felony or
gross-misdemeanor involving moral turpitude, fraud, dishonesty
or willful violation of any law that results in any adverse
effect on the Bank. If a dispute arises as to discharge "for
cause", such dispute shall be resolved by arbitration as set
forth in this Agreement.
E. Disability:
In the event the Executive shall become disabled, he shall be
considered to have reached his retirement date as of the date
of his disability for the purposes of receiving benefit
payments under this Agreement. The fact of disability shall be
in the sole discretion of the Board of Directors of the Bank
upon the application of the Executive.
57
<PAGE> 15
F. Death Benefit:
Except as set forth above, there is no death benefit provided
under this Agreement.
IV. RESTRICTIONS UPON FUNDING
The Bank shall have no obligation to set aside, earmark or entrust any
fund or money with which to pay its obligations under this Agreement.
The Executive, his beneficiary(ies) or any successor in interest to him
shall be and remain simply a general creditor of the Bank in the same
manner as any other creditor having a general claim for matured and
unpaid compensation.
The Bank reserves the absolute right at its sole discretion to either
fund the obligations undertaken by this Agreement or to refrain from
funding the same and to determine the exact nature and method of such
funding. Should the Bank elect to fund this Agreement, in whole or in
part, through the purchase of life insurance, mutual funds, disability
policies or annuities, the Bank reserves the absolute right, in its
sole discretion, to terminate such funding at any time, in whole or in
part. At no time shall the Executive be deemed to have any lien or
right, title or interest in or to any specific funding investment or to
any assets of the Bank.
If the Bank elects to invest in a life insurance, disability or annuity
policy upon the life of the Executive, then the Executive shall assist
the Bank by freely submitting to a physical exam and supplying such
additional information necessary to obtain such insurance or annuities.
V. CHANGE OF CONTROL
Upon a Change of Control [as defined in subparagraph I (I) herein], if
the Executive's employment is subsequently terminated then he shall
receive the benefits promised in this Agreement upon attaining Normal
Retirement Age, as if he had been continuously employed by the Bank
until his Normal Retirement Age. The Executive will also remain
eligible for all promised death benefits in this Agreement. In
addition, no sale, merger or consolidation of the Bank shall take place
unless the new or surviving entity expressly acknowledges the
obligations under this Agreement and agrees to abide by its terms.
58
<PAGE> 16
VI. MISCELLANEOUS
A. Alienability and Assignment Prohibition:
Neither the Executive, his/her surviving spouse nor any other
beneficiary under this Agreement shall have any power or right
to transfer, assign, anticipate, hypothecate, mortgage,
commute, modify or otherwise encumber in advance any of the
benefits payable hereunder nor shall any of said benefits be
subject to seizure for the payment of any debts, judgments,
alimony or separate maintenance owed by the Executive or his
beneficiary, nor be transferable by operation of law in the
event of bankruptcy, insolvency or otherwise. In the event the
Executive or any beneficiary attempts assignment, commutation,
hypothecation, transfer or disposal of the benefits hereunder,
the Bank's liabilities shall forthwith cease and terminate.
B. Binding Obligation of Bank and any Successor in Interest:
The Bank expressly agrees that it shall not merge or
consolidate into or with another bank or sell substantially
all of its assets to another bank, firm or person until such
bank, firm or person expressly agrees, in writing, to assume
and discharge the duties and obligations of the Bank under
this Agreement. This Agreement shall be binding upon the
parties hereto, their successors, beneficiary(ies), heirs and
personal representatives.
C. Revocation:
It is agreed by and between the parties hereto that, during
the lifetime of the Executive, this Agreement may be amended
or revoked at any time or times, in whole or in part, by the
mutual written assent of the Executive and the Bank.
D. Gender:
Whenever in this Agreement words are used in the masculine or
neuter gender, they shall be read and construed as in the
masculine, feminine or neuter gender, whenever they should so
apply.
E. Effect on Other Bank Benefit Plans:
Nothing contained in this Agreement shall affect the right of
the Executive to participate in or be covered by any qualified
or non-qualified pension, profit-sharing, group, bonus or
other supplemental compensation or fringe benefit plan
constituting a part of the Bank's existing or future
compensation structure.
59
<PAGE> 17
F. Headings:
Headings and subheadings in this Agreement are inserted for
reference and convenience only and shall not be deemed a part
of this Agreement.
G. Applicable Law:
The validity and interpretation of this Agreement shall be
governed by the laws of the State of Ohio.
VII. ERISA PROVISION
A. Named Fiduciary and Plan Administrator:
The "Named Fiduciary and Plan Administrator" of this plan
shall be The Marion Bank until its removal by the Board. As
Named Fiduciary and Administrator, the Bank shall be
responsible for the management, control and administration of
the Salary Continuation Agreement as established herein. The
Named Fiduciary may delegate to others certain aspects of the
management and operation responsibilities of the plan
including the employment of advisors and the delegation of
ministerial duties to qualified individuals.
B. Claims Procedure and Arbitration:
In the event a dispute arises over benefits under this
Agreement and benefits are not paid to the Executive (or to
his beneficiary in the case of the Executive's death) and such
claimants feel they are entitled to receive such benefits,
then a written claim must be made to the Plan Administrator
named above within ninety (90) days from the date payments are
refused. The Plan Administrator shall review the written claim
and if the claim is denied, in whole or in part, they shall
provide in writing within ninety (90) days of receipt of such
claim their specific reasons for such denial, reference to the
provisions of this Agreement upon which the denial is based
and any additional material or information necessary to
perfect the claim. Such written notice shall further indicate
the additional steps to be taken by claimants if a further
review of the claim denial is desired. A claim shall be deemed
denied if the Plan Administrator fails to take any action
within the aforesaid ninety-day period.
60
<PAGE> 18
If claimants desire a second review they shall notify the Plan
Administrator in writing within ninety (90) days of the first
claim denial. Claimants may review this Agreement or any
documents relating thereto and submit any written issues and
comments they may feel appropriate. In its sole discretion,
the Plan Administrator shall then review the second claim and
provide a written decision within ninety (90) days of receipt
of such claim. This decision shall likewise state the specific
reasons for the decision and shall include reference to
specific provisions of this Agreement upon which the decision
is based.
If claimants continue to dispute the benefit denial based upon
completed performance of this Agreement or the meaning and
effect of the terms and conditions thereof, then claimants may
submit the dispute to a Board of Arbitration for final
arbitration. Said Board shall consist of one member selected
by the claimant, one member selected by the Bank, and the
third member selected by the first two members. The Board
shall operate under any generally recognized set of
arbitration rules. The parties hereto agree that they and
their heirs, personal representatives, successors and assigns
shall be bound by the decision of such Board with respect to
any controversy properly submitted to it for determination.
Where a dispute arises as to the Bank's discharge of the
Executive "for cause," such dispute shall likewise be
submitted to arbitration as above described and the parties
hereto agree to be bound by the decision thereunder.
IN WITNESS WHEREOF, the parties hereto acknowledge that each has
carefully read this Agreement and executed the original thereof on the 7th day
of July, 1997 and that, upon execution, each has received a conforming copy.
THE MARION BANK
By:
- ----------------------- -----------------------
Witness Title
By:
- ----------------------- -----------------------
Witness Kevin C. Smith
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,669
<INT-BEARING-DEPOSITS> 199
<FED-FUNDS-SOLD> 1,057
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,350
<INVESTMENTS-CARRYING> 2,659
<INVESTMENTS-MARKET> 2,731
<LOANS> 34,396
<ALLOWANCE> 311
<TOTAL-ASSETS> 49,794
<DEPOSITS> 45,909
<SHORT-TERM> 0
<LIABILITIES-OTHER> 322
<LONG-TERM> 0
0
0
<COMMON> 1,212
<OTHER-SE> 2,351
<TOTAL-LIABILITIES-AND-EQUITY> 49,794
<INTEREST-LOAN> 2,999
<INTEREST-INVEST> 609
<INTEREST-OTHER> 49
<INTEREST-TOTAL> 3,657
<INTEREST-DEPOSIT> 1,608
<INTEREST-EXPENSE> 1,646
<INTEREST-INCOME-NET> 2,010
<LOAN-LOSSES> 139
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,630
<INCOME-PRETAX> 473
<INCOME-PRE-EXTRAORDINARY> 347
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 347
<EPS-PRIMARY> 2.86
<EPS-DILUTED> 2.86
<YIELD-ACTUAL> 4.82
<LOANS-NON> 317
<LOANS-PAST> 184
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 29
<ALLOWANCE-OPEN> 281
<CHARGE-OFFS> 142
<RECOVERIES> 33
<ALLOWANCE-CLOSE> 311
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<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 111
</TABLE>
<PAGE> 1
EXHIBIT NO. 99
OHIO STATE BANCSHARES, INC.
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. Ohio State Bancshares,
Inc. ("Corporation") desires to take advantage of the "safe harbor" provisions
of the Act. Certain information, particularly information regarding future
economic performance and finances and plans and objectives of management,
contained or incorporated by reference in the Corporation's Annual Report on
Form 10-KSB for the year ended December 31, 1997 is forward-looking. In some
cases, information regarding certain important factors that could cause actual
results of operations or outcomes of other events to differ materially from any
such forward-looking statement appear together with such statement. In addition,
forward-looking statements are subject to other risks and uncertainties
affecting the financial institutions industry, including, but not limited to,
the following:
INTEREST RATE RISK
The Corporation's operating results are dependent to a significant degree on its
net interest income, which is the difference between interest income from loans,
securities and other interest-earning assets and interest expense on deposits,
borrowings and other interest-bearing liabilities. The interest income and
interest expense of the Corporation change as the interest rates on
interest-earning assets and interest-bearing liabilities change. Interest rates
may change because of general economic conditions, the policies of various
regulatory authorities and other factors beyond the Corporation's control. In a
rising interest rate environment, loans tend to prepay slowly and new loans at
higher rates increase slowly, while interest paid on deposits increases rapidly
because the terms to maturity of deposits tend to be shorter than the terms to
maturity or prepayment of loans. Such differences in the adjustment of interest
rates on assets and liabilities may negatively affect the Corporation's income.
ADEQUACY OF THE ALLOWANCE FOR LOAN LOSSES
The Corporation maintains an allowance for loan losses based upon a number of
relevant factors, including, but not limited to, trends in the level of
nonperforming and classified loans, current and anticipated economic conditions
in the primary lending area, past loss experience, possible losses arising from
specific problem loans and changes in the composition of the loan portfolio.
While the Board of Directors of the Corporation believes that it uses the best
information available to determine the allowance for loan losses, unforeseen
market conditions could result in material adjustments, and net earnings could
be significantly adversely affected if circumstances differ substantially from
the assumptions used in making the final determination.
63
<PAGE> 2
Loans secured by one- to four-family residential real estate are generally
considered to involve less risk of loss than other loans in the portfolio due,
in part, to the effects of general economic conditions. The repayment of
commercial loans generally depends upon the cash flow from the operation of the
business or property, which may be negatively affected by national and local
economic conditions. The risk of default on installment and credit card loans
increases during periods of recession, high unemployment and other adverse
economic conditions. When consumers have trouble paying their bills, they are
more likely to pay mortgage loans than consumer loans. In addition, the
collateral securing such loans, if any, may decrease in value more rapidly than
the outstanding balance of the loan.
COMPETITION
The Marion Bank ("Bank") competes for deposits with other commercial banks,
savings associations and credit unions and issuers of commercial paper and other
securities, such as shares in money market mutual funds. The primary factors in
competing for deposits are interest rates and convenience of office location. In
making loans, The Bank competes with other, commercial banks, savings
associations, consumer finance companies, credit unions, leasing companies,
mortgage companies and other lenders. Competition is affected by, among other
things, the general availability of lendable funds, general and local economic
conditions, current interest rate levels and other factors which are not readily
predictable. The size of financial institutions competing with the Bank is
likely to increase as a result of changes in statutes and regulations
eliminating various restrictions on interstate and inter-industry branching and
acquisitions. Such increased competition may have an adverse effect upon the
Corporation.
LEGISLATION AND REGULATION THAT MAY ADVERSELY AFFECT THE CORPORATION EARNINGS
As a state-chartered financial institution, the Bank is subject to extensive
regulation by the Ohio Division of Financial Institutions and the Federal
Deposit Insurance Corporation (the "FDIC") and is periodically examined by such
regulatory agencies to test compliance with various regulatory requirements. As
a bank holding company, the Corporation is also subject to regulation and
examination by the Board of Governors of the Federal Reserve System. Such
supervision and regulation of the Bank and the Corporation are intended
primarily for the protection of depositors and not for the maximization of
shareholder value and may affect the ability of the Corporation to engage in
various business activities. The assessments, filing fees and other costs
associated with reports, examinations and other regulatory matters are
significant and may have an adverse effect on the Corporation's net earnings.
The FDIC is authorized to establish separate annual assessment rates for deposit
insurance of members of the Bank Insurance fund (the "BIF") and the Savings
Association Insurance Fund (the "SAIF"). The FDIC has established a risk-based
assessment system for both SAIF and BIF members. Under such system, assessments
may vary depending on the risk the institution poses to its deposit insurance
fund. Such risk level is determined by reference to the institution's capital
level and the FDIC's level of supervisory concern about the institution.
64
