<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, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission File No. 0-28648
OHIO STATE BANCSHARES, INC.
---------------------------
(Name of small business issuer in its charter)
OHIO 34-1816546
---- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 South Main Street, Marion, Ohio 43302
----------------------------------- -----
(Address of principal executive offices) (Zip code)
(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. [X]
Issuer's revenue for the year ended December 31, 1998 was: $4,481,279
The aggregate market value of the Issuer's voting stock held by nonaffiliates of
the Issuer as of March 5, 1999 based on the last trade price was $4,619,771.
At March 5, 1999, there were issued and outstanding 131,674 of the Issuer's
Common Shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Issuer's Proxy Statement to be dated approximately March 24,
1999, 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
<TABLE>
INDEX
FORM 10-KSB
<S> <C> <C>
PART I
- ------
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............... 3
PART II
- -------
ITEM 5. Market for Common Equity and Related Shareholder Matters.......... 3
ITEM 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 4
ITEM 7. Financial Statements.............................................. 21
ITEM 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................... 39
PART III
- --------
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................. 39
ITEM 10. Executive Compensation............................................ 39
ITEM 11. Security Ownership of Certain Beneficial Owners and Management.... 39
ITEM 12. Certain Relationships and Related Transactions.................... 39
ITEM 13. Exhibits and Reports on Form 8-K.................................. 40
SIGNATURES .................................................................. 41
</TABLE>
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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 (740) 387-2265.
Although wholly owned by the Corporation, the Bank functions as an independent
community bank. The Bank was chartered as an Ohio banking corporation on March
24, 1988 and commenced operations on August 23, 1988. The Bank offers a full
range of commercial banking services, including commercial loans, real estate
loans and various types of consumer loans; checking, savings and time deposits;
money market accounts; travelers checks; pre-approved overdraft protection; safe
deposit boxes and other customary nondeposit banking services. The Bank is an
agent for Mastercard and Visa credit cards and is a merchant depository for
cardholder sales drafts. At the present time, the Bank does not have a trust
department, but can provide access to this service through correspondent banks.
The Bank is a member of 24-hour automated teller networks. It also offers two
lanes of drive-up banking services at each banking location.
The nature of the Bank allows for full diversification of depositors and
borrowers so it is not dependent upon a single or a few customers. Most of the
Bank's deposits are attracted from individuals and 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.
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.
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(Continued)
2
<PAGE> 4
REGULATION OF THE BANK: The Bank is chartered in the State of Ohio and regulated
by the Ohio Department of Commerce, 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, 1998, the Bank employed 25 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.
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, 1998.
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).
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(Continued)
3
<PAGE> 5
For 1998 and 1997, 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>
1998 Low Bid High Bid Low Ask High Ask
---- ------- -------- ------- --------
<S> <C> <C> <C> <C>
1st Qtr. $37.00 $39.00 $39.00 $41.00
2nd Qtr. 39.00 39.00 41.00 41.00
3rd Qtr. 41.00 43.00 43.00 45.00
4th Qtr. 43.00 45.00 45.00 47.00
</TABLE>
<TABLE>
<CAPTION>
1997 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
</TABLE>
Management does not have knowledge of the prices paid in all transactions and
has not verified the accuracy of those prices that have been reported. Because
of the lack of an established market for the Corporation's stock, these prices
may not reflect the prices at which the stock would trade in an active market.
The Corporation has 500,000 authorized and 126,220 outstanding shares of common
stock held by approximately 468 shareholders as of December 31, 1998. The
Corporation paid cash dividends of $0.25 per share in June and December of 1998
and $0.20 per share in June and December of 1997, resulting in a total amount of
$0.50 and $0.40 per share in 1998 and 1997.
The Corporation has filed a Registration Statement with the Securities and
Exchange Commission to sell up to 24,800 shares of the Corporation's stock at
$47.00 per share, including underwriting commissions of $2.00 per share.
Shareholders with preemptive rights can purchase the stock at $45.00. The
Corporation expects to receive $1,078,000 in net proceeds after deducting
offering expenses from the sale of stock. As of December 31, 1998, the
Corporation had issued 5,020 shares related to the stock offering.
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, 1998 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.
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(Continued)
4
<PAGE> 6
When used in this Form 10-KSB or future filings by the Corporation with the
Securities and Exchange Commission, in the Corporation's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project," "believe," or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Corporation wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made, and to advise readers that various factors, including regional
and national economic conditions, changes in levels of market interest rates,
credit risks of lending activities and competitive and regulatory factors, could
affect the Corporation's financial performance and could cause the Corporation's
actual results for future periods to differ materially from those anticipated or
projected. The Corporation does not undertake, and specifically disclaims, any
obligation to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
The Corporation is not aware of any trends, events or uncertainties that will
have or are reasonably likely to have a material effect on the liquidity,
capital resources or operations except as discussed herein. In addition, the
Corporation is not aware of any current recommendations by regulatory
authorities that would have such effect if implemented.
RESULTS OF OPERATIONS
Net income for the Corporation was $425,000 in 1998, or $78,000 more than the
$347,000 earned in 1997. The reason for the increase in earnings for 1998 was
primarily due to total interest income increasing $538,000 from 1997 to 1998
while interest expense increased only $244,000 over the same period. This
$294,000 increase in net interest income was a result of the Corporation
increasing its interest-earning asset to interest-bearing liability ratio from
115.67% for 1997 to 117.31% for 1998. The yield earned on the average assets of
the Corporation decreased from 8.69% for the year ended December 31, 1997, to
8.48% for the year ended December 31, 1998. During the same period, the average
cost of interest-bearing liabilities decreased only from 4.50% to 4.45%.
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 $294,000 from 1997 to 1998. The net interest
margin, which is net interest income divided by average earning assets,
decreased 12 basis points from 4.81% for 1997 to 4.69% for 1998. The margin
decrease was the result of a declining net interest spread partially offset by
increasing the ratio of average interest-earning assets to average
interest-bearing liabilities from 115.67% for 1997 to 117.31% for 1998. The
increase in volume of average interest-earning assets more than compensated for
the decreased spread.
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(Continued)
5
<PAGE> 7
NET INTEREST INCOME (Continued)
Total interest income increased $538,000. However, the yield on earning assets
decreased from 8.69% in 1997 to 8.48% in 1998. Loan demand continued to be
strong for the first part of 1998 and then leveled off and was the primary
reason for the increase in total interest income. Interest and fees on loans
increased $501,000 from year-end 1997 to year-end 1998, due to an increase in
the average balances of loans of $6,326,000 during the period. This 20.47%
increase in average loan volumes more than offset the decrease in the average
loan yield from 9.68% in 1997 to 9.38% in 1998. Interest on taxable securities
declined $14,000. Interest on nontaxable securities increased $27,000 in 1998 as
the Corporation increased its investments in nontaxable securities.
Total interest expense increased $244,000 in 1998. Average interest-bearing
liabilities increased by $5,893,000. However, the rate paid on interest-bearing
liabilities decreased by 5 basis points for 1997 compared to 1998. The primary
reason for the decrease in the rate paid on interest-bearing liabilities was due
to time deposits. The average rate paid on time deposits decreased from 5.80% in
1997 to 5.69% in 1998. Average time deposit balances increased to 60.44% of
average interest-bearing liabilities in 1998, compared to 58.78% in 1997.
- --------------------------------------------------------------------------------
(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>
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
(in thousands except percentages)
<CAPTION>
1998 1997
---------------------------- ----------------------------
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 $ 41 6.72% $ 3 $ 394 6.09% $ 24
Federal funds sold 1,407 5.05 71 492 5.30 26
Taxable securities 8,549 5.70 486 8,488 5.85 500
Nontaxable securities 2,595 6.59 174 2,032 7.01 142
Loans 37,236 9.38 3,492 30,910 9.68 2,991
------- ------ ------- ------
TOTAL INTEREST-EARNING ASSETS 49,828 8.48 4,226 42,316 8.69 3,683
------- ------ ------- ------
NONINTEREST-EARNING ASSETS:
Cash and due from banks 2,300 1,957
Premises and equipment, net 835 883
Other real estate owned
and repossessions 42 39
Accrued interest and other assets 489 685
Less: Allowance for loan losses (309) (282)
------- -------
TOTAL NONINTEREST-EARNING ASSETS 3,357 3,282
------- -------
TOTAL ASSETS $53,185 $45,598
======= =======
LIABILITIES AND SHAREHOLDERS EQUITY:
INTEREST-BEARING LIABILITIES:
Demand deposits $ 7,408 2.02 150 $ 5,815 1.90 110
Savings deposits 9,346 2.95 276 8,618 2.91 251
Time deposits:
Under $100,000 17,802 5.69 1,013 15,669 5.87 920
$100,000 and over 7,872 5.69 448 5,836 5.60 327
Other borrowings 48 6.28 3 645 5.95 38
------- ------ ------- ------
TOTAL INTEREST-BEARING LIABILITIES 42,476 4.45 1,890 36,583 4.50 1,646
------- ------ ------- ------
NONINTEREST-BEARING LIABILITIES:
Demand deposits 6,453 5,178
Accrued interest payable
and other liabilities 448 454
------- -------
TOTAL NONINTEREST-BEARING LIABILITIES 6,901 5,632
------- -------
TOTAL LIABILITIES 49,377 42,215
TOTAL SHAREHOLDERS' EQUITY 3,808 3,383
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $53,185 $45,598
======= =======
NET INTEREST INCOME $2,336 $2,037
====== ======
NET INTEREST SPREAD 4.03% 4.19%
==== ====
NET YIELD ON INTEREST
EARNING ASSETS 4.69% 4.81%
==== ====
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</TABLE>
(Continued)
7
<PAGE> 9
NET INTEREST INCOME (Continued)
Yields and amounts earned on loans include loan costs, net of loan fees and late
charges of $36,674 for the year ended December 31, 19998, and loans fees and
late charges, net of loan costs of $9,074 for the year ended December 31, 1997.
Nonaccruing loans are included in the daily average-loan amounts outstanding.
Yields on nontaxable securities have been computed on a fully tax equivalent
basis using a 34% tax rate. The historical amortized cost average balance of
$8,537,000 for 1998 and $8,547,000 for 1997 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.
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>
1998 Compared to 1997 1997 Compared to 1996
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 $(21) $(24) $ 3 $ (8) $ (9) $ 1
Federal funds sold 45 46 (1) -- 1 (1)
Taxable securities (14) (1) (13) (151) (144) (7)
Nontaxable securities (1) 32 38 (6) 24 23 1
Loans (2) 501 595 (94) 505 523 (18)
---- ---- ----- ----- ----- ----
Total interest income 543 654 (111) 370 394 (24)
---- ---- ----- ----- ----- ----
Deposits
Demand deposits 40 32 8 10 11 (1)
Savings deposits 25 21 4 3 4 (1)
Time deposits less than $100,000 93 122 (29) 92 87 5
Time deposits greater than
or equal to $100,000 121 116 5 (7) (8) 1
Other borrowings (35) (37) 2 8 6 2
---- ---- ----- ----- ----- ----
Total interest expense 244 254 (10) 106 100 6
---- ---- ----- ----- ----- ----
Net interest income $299 $400 $(101) $ 264 $ 294 $(30)
==== ==== ===== ===== ===== ====
</TABLE>
(1) Nontaxable income is adjusted to a fully tax equivalent basis using 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.
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(Continued)
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. 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 1998, the allowance had a balance of
$360,093, or 0.96% of total loans, compared to $311,095, or 0.90% of total
loans, at year-end 1997.
All loans charged-off during the year-ended December 31, 1998 were either
installment or credit cards, with the majority of the installment charge-offs
being related to indirect auto lending. Management is actively monitoring
problem loans and has increased collection efforts to reduce charge-offs in
future periods. In addition, management's goal is to increase other loan
categories and become less dependent on indirect auto loans to grow the loan
portfolio and diversify the risk of the portfolio. Management has also tightened
underwriting standards to improve the quality of indirect loans in the
portfolio. Should charge-offs continue, management will increase the provision
for loan losses in order to maintain the allowance for loan losses at a level
adequate to absorb probable losses in the loan portfolio.
The following table sets forth the amount of loans that 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,
---------------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Nonaccrual loans not included in impaired loans $176 $ 35
Loans past due 90 days or more,
excluding nonaccrual loan 73 184
Impaired loans (all also nonaccrual) 457 282
---- ----
Total $706 $501
==== ====
</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.
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9
<PAGE> 11
ALLOWANCE AND PROVISION FOR LOAN LOSSES (Continued)
The following chart presents only those watchlist loans at December 31, 1998,
which 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 24 $128,303
Commercial 1 49,994
-- --------
25 $178,297
== ========
</TABLE>
The following table shows activity in the allowance for loan losses and
pertinent ratios during the years indicated.
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Allowance for loan losses:
Balance at beginning of period $ 311 $ 281
Loans charged off:
Commercial -- (9)
Real estate -- --
Installment (241) (133)
----- -----
Total loans charged off: (241) (142)
Recoveries of loans previously charged off:
Commercial 1 1
Real estate -- --
Installment 59 32
----- -----
Total loan recoveries 60 33
----- -----
Net loans charged off (181) (109)
Provision charged to operating expense 230 139
----- -----
Balance at end of period $ 360 $ 311
===== =====
Ratios:
Net loans charged off to average loans 0.49% 0.35%
Net loans charged off to total loans at end of period 0.48 0.32
Allowance for loan losses to average loans 0.97 1.00
Allowance for loan losses to total loans at end of period 0.96 0.90
Net loans charged off to allowance for loan losses at end
of period 50.27 35.05
Net loans charged off to provision for loan losses 78.70 78.42
Allowance for loan losses to nonperforming loans (1) 51.01 62.11
</TABLE>
(1) Nonperforming loans consist of loans on nonaccrual, loans past due 90
days or more and still accruing interest, and impaired loans.
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10
<PAGE> 12
ALLOWANCE AND PROVISION FOR LOAN LOSSES (Continued)
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, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C> <C> <C>
Commercial $ 63,162 37.68% $ 42,503 37.91%
Real Estate 2,839 9.53 2,646 9.60
Installment 225,778 51.11 143,736 50.72
Credit Cards 11,639 1.60 11,462 1.73
Other -- 0.08 14 0.04
Unallocated 56,675 N/A 110,734 N/A
-------- ------ -------- ------
Total Allocation $360,093 100.00% $311,095 100.00%
======== ====== ======== ======
</TABLE>
NONINTEREST INCOME
Noninterest income increased from $239,000 in 1997 to $294,000 in 1998, a 23.01%
increase. Noninterest income consists of fees on deposits and checking accounts,
fees on other services and gains resulting from the sale of loans or securities.
The increase over prior year is primarily due to ATM surcharge fees for
noncustomers of the Bank and growth of the Corporation.
NONINTEREST EXPENSE
These expenses are broken into three major categories that include personnel
expense, occupancy expense and other operating expenses. Noninterest expense to
total assets decreased from 3.27% in 1997 to 2.91% in 1998. Personnel expense
increased 12.03% from 1997 to 1998, as a result of normal salary increases and
the hiring of additional personnel. Occupancy expenses increased from $341,000
in 1997 to $360,000 in 1998, a 5.57% increase. This was due primarily to repairs
made at the Bank's main office. All other operating expenses increased 5.22%
from $575,000 in 1997 to $605,000 in 1998 largely due to increased losses
incurred on repossessed vehicles, increased franchise taxes due to higher
capital levels at the Bank and increased director fees.
FINANCIAL CONDITION
TOTAL ASSETS
Total assets grew from $49,794,000 on December 31, 1997 to $60,740,000 on
December 31, 1998, a 21.98% increase. The Corporation experienced strong growth
during 1998 primarily due to changes in the local market conditions resulting
from consolidation of financial institutions. The Corporation has obtained
several new loan and deposit customers despite spending less money on
advertising and, in certain circumstances, being less interest-rate competitive.
- --------------------------------------------------------------------------------
11
<PAGE> 13
LOANS
Total net loans increased 8.29% from $34,418,000 on December 31, 1997 to
$37,272,000 on December 31, 1998. Installment loans increased 8.98% from
$17,474,000 in 1997 to $19,043,000 in 1998. Commercial loans increased from
$13,059,000 on December 31, 1997 to $14,040,000 on December 31, 1998, a 7.51%
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. Commercial loan growth was primarily
due to local economic factors.
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, 1998, which is consistent with prior year. 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. However, management would like to rely less on indirect auto
loans in the future and increase the commercial and real estate portfolios as a
result of the charge-offs experienced in consumer lending.
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, 1998, the lending limit for the Bank was
approximately $618,000. 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, 1998.
<TABLE>
<CAPTION>
One One
Year Through After Five
or Less Five Years Years Total
------- ---------- ----- -----
<S> <C> <C> <C> <C>
REAL ESTATE
Fixed Rate $ -- $ 94 $ -- $ 94
Variable Rate 1 94 3,360 3,455
------ ------- ------- -------
Total Real Estate 1 188 3,360 3,549
COMMERCIAL
Fixed Rate 1,019 100 -- 1,119
Variable Rate 1,858 3,198 7,865 12,921
------ ------- ------- -------
Total Commercial 2,877 3,298 7,865 14,040
INSTALLMENT
Fixed Rate 336 17,136 1,212 18,684
Variable Rate 7 161 190 358
------ ------- ------- -------
Total Installment 343 17,297 1,402 19,042
CREDIT CARDS
Fixed Rate 331 -- -- 331
Variable Rate 267 -- -- 267
------ ------- ------- -------
Total Credit Card 598 -- -- 598
OTHER
Fixed Rate -- -- -- --
Variable Rate 28 -- -- 28
------ ------- ------- -------
Total Other 28 -- -- 28
TOTAL ALL LOANS $3,847 $20,783 $12,627 $37,257
====== ======= ======= =======
FIXED RATE $1,686 $17,330 $ 1,212 $20,228
VARIABLE $2,161 $ 3,453 $11,415 $17,029
</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 U.S. Treasury
securities, U.S. government and federal agency securities, mortgage-backed
securities, and state and municipal securities. 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 1998, deposits increased $7,355,063 more than total loan balances
increased. The deposit growth was steady throughout the year while most of the
loan growth in 1998 occurred during the first part of the year and then leveled
off. Securities were purchased primarily in the last half of 1998 with the funds
received from the deposit growth after the loan demand softened. 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 each year since. At year-end 1998, obligations of state
and political subdivisions totaled $3,198,000.
United States Government securities may be pledged to meet security requirements
imposed as a condition to receive the public funds. At December 31, 1998, the
Corporation had $4,835,000 pledged to secure public deposits compared to
$3,938,000 on December 31, 1997. 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, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
--------------------------------- ----------------------------------
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
---- ----- ----- ---- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. TREASURY
Over 3 months through
12 months $ 551 $ 555 5.93% $ -- $ -- --%
Over 1 year through 5 years 897 918 5.62 650 654 5.98
------- ------- ---- ------- ------- ----
TOTAL U.S. TREASURY 1,448 1,473 5.74 650 654 5.98
U.S. GOVERNMENT AND
FEDERAL AGENCIES:
3 months or less 500 500 4.95 -- -- --
Over 1 year through 5 years 2,005 2,018 6.04 502 504 6.20
------- ------- ---- ------- ------- ----
TOTAL U.S. GOVERNMENT AND
FEDERAL AGENCIES 2,505 2,518 5.82 502 504 6.20
MORTGAGE-BACKED SECURITIES 6,318 6,332 6.52 5,979 5,968 6.58
OTHER SECURITIES 236 236 6.64 223 223 6.19
------- ------- ---- ------- ------- ----
TOTAL SECURITIES
AVAILABLE FOR SALE $10,507 $10,559 6.25% $ 7,354 $ 7,349 6.49%
======= ======= ==== ======= ======= ====
</TABLE>
- --------------------------------------------------------------------------------
13
<PAGE> 15
SECURITIES (Continued)
<TABLE>
<CAPTION>
1998 1997
--------------------------------- ----------------------------------
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
---- ----- ----- ---- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY
U.S. GOVERNMENT AND
FEDERAL AGENCIES:
Over 3 months through
12 months $ -- $ -- --% $ 500 $ 492 6.05%
STATES AND MUNICIPALS
Over 5 year through 10 years 960 1,013 5.53 135 141 5.60
Over 10 years 2,238 2,315 5.39 2,024 2,098 5.67
------- ------- ---- ------- ------- ----
TOTAL STATES AND MUNICIPALS 3,198 3,328 5.43 2,159 2,239 5.66
------- ------- ---- ------- ------- ----
TOTAL SECURITIES
HELD TO MATURITY $ 3,198 $ 3,328 5.43% $ 2,659 $ 2,731 5.74%
======= ======= ==== ======= ======= ====
CERTIFICATES OF DEPOSIT:
3 months or less $ -- $ -- --% $ 99 $ 99 5.60%
Over 3 months through
12 months -- -- -- 100 100 6.80
------- ------- ---- ------- ------- ----
TOTAL CERTIFICATES OF
DEPOSIT $ -- $ -- --% $ 199 $ 199 6.20%
======= ======= ==== ======= ======= ====
</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 consist 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.
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, which is what
occurred during the later part of 1998. 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, 1998, the aggregate amount of time, savings and interest-bearing demand
deposits was 87.99% of total deposits. The Corporation does not have any foreign
deposits, nor does it have any material concentration of deposits.
- --------------------------------------------------------------------------------
14
<PAGE> 16
DEPOSITS (Continued)
Total deposits increased from $45,909,000 on December 31, 1997 to $56,079,000 on
December 31, 1998, a 22.13% increase. The major reason for this substantial
increase in deposits was due to consolidation of financial institutions in the
Corporation's market area which resulted in many new customers opening deposits
at the Bank. This occurred despite spending less money on advertising during
1998 and, in certain instances, being less interest-rate competitive on
products. Noninterest-bearing demand accounts declined from $7,012,000 on
December 31, 1997 to $6,732,000 on December 31, 1998. Interest-bearing demand
deposits increased $5,190,000, or 76.98%, from $6,742,000 at year-end 1997 to
$11,931,000 at year-end 1998. Savings account balances increased 4.08% from
$9,229,000 on December 31, 1997 to $9,606,000 on December 31, 1998. Certificates
of deposit increased from $22,926,000 at the end of 1997 to $27,800,000 at the
end of 1998, a 21.26% increase.
ASSET/LIABILITY MANAGEMENT
Asset/liability management includes GAP measurement that determines, over
various time periods, interest-earning assets and interest-bearing liabilities
which are due to reprice at current market rates. A financial institution will
have a negative interest rate sensitivity GAP for a given period of time if the
amount of its interest-bearing liabilities maturing or repricing within that
period is greater than the total of the interest-earning assets maturing or
repricing within the same period. When interest rates increase, financial
institutions with a negative interest rate sensitivity GAP will be more likely
to experience increases in the cost of their liabilities faster than the
corresponding yields generated by their earning assets. Following the same
concept, as interest rates decrease, the cost of funds of financial institutions
with a negative interest-rate sensitivity GAP usually will decrease more rapidly
than the yields on the earning assets. As a general rule, the same changes in
interest rates will usually have the opposite effect on financial institutions
structured with a positive interest-rate sensitivity GAP.
Interest rate sensitivity varies with various types of interest-earning assets
and interest-bearing liabilities. Overnight federal funds on which the rates
change daily and loans, which are tied to variable indices, differ markedly from
long-term securities and fixed-rate loans. Time deposits over $100,000 and money
market certificates are more interest rate sensitive than passbook savings
accounts. The shorter-term interest rate sensitivities are critical to
reasonable measurement of interest rate sensitivity GAP.
The following table presents the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998, which are
scheduled to reprice or mature in each of the indicated time periods. Except as
noted, the amount of assets and liabilities that 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.
- --------------------------------------------------------------------------------
15
<PAGE> 17
ASSET/LIABILITY MANAGEMENT (Continued)
Interest Rate Sensitivity Gap as of December 31, 1998 (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) $14,071 $ 6,498 $16,528 $ 160 $37,257
Securities (1) 3,640 2,004 2,936 5,177 13,757
Federal funds sold 5,242 -- -- -- 5,242
------- ------- ------- ------- -------
Rate sensitive assets (RSA) 22,953 8,502 19,464 5,337 56,256
Liabilities
Interest-bearing demand (2) 11,931 -- -- -- 11,931
Savings (2) 9,606 -- -- -- 9,606
Time deposits 5,112 14,289 8,399 -- 27,800
------- ------- ------- ------- -------
Rate sensitive liabilities (RSL) 26,649 14,289 8,399 -- 49,337
------- ------- ------- ------- -------
Period GAP (3) $(3,696) $(5,787) $11,065 $ 5,337 $ 6,919
======= ======= ======= ======= =======
Cumulative GAP $(3,696) $(9,483) $ 1,582 $ 6,919
======= ======= ======= =======
Percentage of RSA (6.57)% (16.86)% 2.81% 12.30%
======= ======= ====== ======
</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.
CAPITAL RESOURCES
Shareholders' equity totaled $4,191,000 on December 31, 1998, compared to
$3,563,000 on December 31, 1997. At December 31, 1998 and December 31, 1997, the
ratio of shareholders' equity to assets was 6.90% and 7.16%.
The Corporation has filed a Registration Statement with the Securities and
Exchange Commission to sell up to 24,800 shares of the Corporation's stock at
$47.00 per share, including underwriting commissions of $2.00 per share.
Shareholders with preemptive rights can purchase the stock at $45.00. The
Corporation expects to receive $1,078,000 in net proceeds after deducting
offering expenses from the sale of stock. As of December 31, 1998, the
Corporation had issued 5,020 shares related to the stock offering.
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, 1998 and 1997.
- --------------------------------------------------------------------------------
16
<PAGE> 18
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 $8,015,000 at year-end 1998 and
$3,726,000 at year-end 1997. These assets provide the primary source of funds
for loan demand and deposit balance fluctuations. Additional sources of
liquidity are securities classified as available for sale, access to Federal
Home Loan Bank advances, as the Bank 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
$10,559,000 and $7,350,000 as of December 31, 1998 and December 31, 1997.
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, 1998
was 66.47%, down from 74.92% on December 31, 1997. For a detailed analysis of
Corporation's sources and uses of cash, refer to the Consolidated Statements of
Cash Flows.
IMPACT OF INFLATION
The Corporation's balance sheet is typical of financial institutions and
reflects a net positive monetary position whereby monetary assets exceed
monetary liabilities. Monetary assets and liabilities are those which can be
converted to a fixed number of dollars and include cash assets, securities,
loans, money market instruments, deposits and borrowed funds.
During periods of inflation, a net positive monetary position may result in an
overall decline in purchasing power of an entity. No clear evidence exists of a
relationship between the purchasing power of an entity's net positive monetary
position and its future earnings. Moreover, the Corporation's ability to
preserve the purchasing power of its net positive monetary position will be
partly influenced by the effectiveness of its asset/liability management
program. Management does not believe that the affect of inflation on its
nonmonetary assets (primarily bank premises and equipment) is material as such
assets are not held for resale and significant disposals are not anticipated.
YEAR 2000
The Bank's lending and deposit activities are almost entirely dependent on
computer systems which process and record transactions. In addition to its basic
operating activities, the Corporation's facilities and infrastructure, such as
security systems and communications equipment, are dependent to varying degrees
on computer systems. Management is aware of the potential Year 2000 (Y2K)
related problems that may affect the computers that control or operate the
Corporation's operating systems, facilities and infrastructure. 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 Y2K compliance.
Management began evaluating the potential impact of Y2K in the fall of 1997.
Every technology system utilized by the Bank was inventoried and graded as
either "mission critical" or "nonmission critical." Mission critical systems are
those critical to providing acceptable customer service, critical to maintaining
customer records and those which would have an impact on the Bank's liquidity
should they fail.
- --------------------------------------------------------------------------------
17
<PAGE> 19
YEAR 2000 (Continued)
The following systems were identified as "mission critical" by management. A
description on the current status of these systems is listed below.
1. IBM a/s 400 mainframe computer
2. Proof and Item Capture equipment
3. Jack Henry (JHA) 20/20 software
4. Fedline
5. Equifax Debit-Credit card processing system
6. EDS-MAC ATM processing system
7. Bank security system
IBM a/s 400 MAINFRAME COMPUTER
The Bank upgraded its mainframe computer in September 1998 for capacity reasons.
The upgrade also enables the computer to handle the additional memory
requirements of windows-based Y2K compliant JHA operating software that the Bank
is installing in April 1999.
PROOF AND ITEM CAPTURE EQUIPMENT
The Bank uses a Lundy MRS 90 reader-sorter which has been upgraded (memory
expansion) to operate in conjunction with JHA 20/20 software. NCR Proof Machines
are used to encode entry information. Y2K date chips have been installed in that
equipment. Identical Proof and Capture equipment has been tested and certified
as Y2K compliant by JHA and JHA user groups for use with JHA 20/20 software.
JHA 20/20 SOFTWARE
All JHA software has been vendor certified Y2K compliant since September 1998.
Test results for 20/20 software are being certified by the Bank at this time.
The Bank's decision to change to JHA 20/20 operating software was more to
increase operating efficiency and account capacity rather than a Y2K compliance
issue. JHA has been a leader in the industry and has designed its testing and
certification procedures for all its software products to conform to FDIC and
other industry regulatory standards.
FEDLINE
Fedline is the operating software utilized to process transactions and
communicate with the Federal Reserve Bank. These activities include wire
transfers, ACH transactions and Tax Payments. The Bank concluded Y2K testing
with the Federal Reserve in February 1999, and those results have been certified
as Y2K compliant.
- --------------------------------------------------------------------------------
18
<PAGE> 20
YEAR 2000 (Continued)
EQUIFAX DEBIT-CREDIT CARD SYSTEM
The Bank uses Equifax Corporation to process debit and credit card transactions
through the Visa network. Equifax is testing the network with Visa and Master
Card to certify Y2K compliance. Direct testing with individual banks should be
completed by June 1999.
EDS-MAC ATM CARD PROCESSING
ATM card transactions and point of sale card purchases are performed through the
EDS-MAC network. EDS, like Equifax, is testing its network with Visa, Master
Card and other ATM processors. Individual bank testing is scheduled for the
first half of 1999. The Personal Computer System for ATM card maintenance has
been upgraded to EDS specifications and is scheduled for testing on March 13,
1999.
BANK SECURITY SYSTEMS
All security systems for the Bank has been certified Y2K compliant by the
vendors from which the products have been purchased.
OTHER NONMISSION CRITICAL SYSTEMS
The Bank has utilized the same due diligence which was used on mission critical
systems on all information technology systems used in the Bank. A new windows
based teller system was installed in August 1998 to upgrade that area to Y2K
compliance. All personal computers used by the Bank have been upgraded and
tested to ensure they are Y2K compliant. All software products utilized in the
Bank's daily operations have been certified Y2K compliant or replaced.
CUSTOMER EVALUATION AND NOTIFICATION
The Bank has reviewed all loans with balances of over $50,000 to assess whether
those customers have any significant risk because of Y2K failure that would
impact their ability to repay those loans. Two mailings have been sent to those
customers with follow-up planned in June 1999. At this time, the Bank does not
have any loan customers that they consider high risk for a Y2K related failure.
The Bank has also been sending mailers to all deposit customers informing them
of the Y2K risk and the steps that the Bank is taking to prepare us for Y2K. We
also have detailed information in our lobbies regarding the overall status of
the banking industry.
Y2K COSTS
The Bank incurred direct costs of approximately $80,000 in 1998 relating to Y2K
issues. These were primarily costs associated with upgrading personal computers
and the new teller system. In 1999, the Bank expects additional costs of about
$15,000 relating to Y2K expenses. The Bank has also incurred $125,000 in
indirect expenses upgrading the capacity of the computer mainframe and changing
to JHA 20/20 operating software.
- --------------------------------------------------------------------------------
19
<PAGE> 21
YEAR 2000 (Continued)
MANAGEMENT'S CURRENT FORECAST AND LIQUIDITY ISSUES
Management is confident that its internal systems will not be significantly
affected by Y2K. Management does anticipate that some problems may occur with
customer's systems and with their suppliers and customers. This could create
slower collection of receivables by the Bank's customers and result in an
increase of demand for line of credit loans or a decrease in checking and
savings account balances for the Bank. The Bank plans to maintain higher than
average levels of liquidity in the second half of 1999 and into the year 2000 to
offset that risk.
ANTICIPATED IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changers in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. The key criterion
for hedge accounting is that the hedging relationship must be highly effective
in achieving offsetting changes in fair value or cash flows. SFAS No. 133 does
not allow hedging of a security which is classified as held to maturity. Upon
adoption of SFAS No. 133, companies may reclassify any security from held to
maturity to available for sale if they wish to be able to hedge the security in
the future. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999, with early adoption encouraged for any fiscal quarter beginning July 1,
1998 or later, with no retroactive application. Management does not expect the
adoption of SFAS No. 133 to have a significant impact on the Corporation's
financial statements.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
changes the way companies involved in mortgage banking account for certain
securities and other interests they retain after securitizing mortgage loans
that were held for sale. SFAS No. 134 allows any retained mortgage-backed
securities after a securitization of mortgage loans held for sale to be
classified based on holding intent in accordance with SFAS No. 115, except in
cases where the retained mortgage-backed security is committed to be sold before
or during the securitization process in which case it must be classified as
trading. Previously, all retained mortgage-backed securities were required to be
classified as trading. SFAS No. 134 is effective as of January 1, 1999, and is
not expected to have a significant impact on the Corporation's financial
statements.
- --------------------------------------------------------------------------------
20
<PAGE> 22
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, 1998 and 1997, 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, 1998 and 1997, 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 29, 1999
- --------------------------------------------------------------------------------
21
<PAGE> 23
<TABLE>
OHIO STATE BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------------------
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,773,195 $ 2,669,486
Federal funds sold 5,242,000 1,057,000
----------- -----------
Cash and cash equivalents 8,015,195 3,726,486
Interest-earning deposits -- 199,000
Securities available for sale 10,559,019 7,349,595
Securities held to maturity (fair value 1998 -
$3,328,403, 1997 - $2,731,413) 3,198,042 2,659,045
Loans, net 37,271,773 34,417,950
Premises and equipment, net 896,769 837,187
Other real estate owned and repossessions 59,682 18,598
Accrued interest receivable 382,488 341,961
Other assets 356,638 244,048
----------- -----------
$60,739,606 $49,793,870
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 6,732,194 $ 7,012,228
Interest-bearing 49,336,879 38,896,495
----------- -----------
Total 56,069,073 45,908,723
Accrued interest payable 252,157 218,240
Other liabilities 227,167 104,092
----------- -----------
Total liabilities 56,548,397 46,231,055
Shareholders' equity
Common stock, $10.00 par value, 500,000 shares
authorized; 1998 -126,220 shares issued and
outstanding, 1997 - 121,200 shares issued and outstanding 1,262,200 1,212,000
Additional paid-in capital 2,006,927 1,831,227
Retained earnings 887,700 523,078
Accumulated other comprehensive income 34,382 (3,490)
----------- -----------
Total shareholders' equity 4,191,209 3,562,815
----------- -----------
$60,739,606 $49,793,870
=========== ===========
- -------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 24
<TABLE>
OHIO STATE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998 and 1997
- -------------------------------------------------------------------------------------
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including fees $3,492,030 $2,990,629
Taxable securities 486,372 500,162
Nontaxable securities 135,318 108,687
Federal funds sold 71,060 26,056
Certificates of deposit 2,762 23,629
---------- ----------
Total interest income 4,187,542 3,649,163
INTEREST EXPENSE
Deposits 1,887,304 1,607,988
Other borrowings 3,021 38,333
---------- ----------
Total interest expense 1,890,325 1,646,321
---------- ----------
NET INTEREST INCOME 2,297,217 2,002,842
Provision for loan losses 230,000 139,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,067,217 1,863,842
NONINTEREST INCOME
Fees for customer services 268,073 217,801
Net gains on sales of securities available for sale -- 151
Other 25,664 20,676
---------- ----------
Total noninterest income 293,737 238,628
NONINTEREST EXPENSE
Salaries and employee benefits 800,027 714,146
Occupancy 360,499 340,659
Office supplies 93,370 91,661
FDIC and state assessments 17,431 15,397
Professional fees 56,297 52,792
Advertising and public relations 46,161 54,790
Taxes, other than income 57,680 47,618
Loss on other real estate owned and repossessions 47,000 36,000
Credit card processing 51,115 54,174
Director fees 49,200 31,650
Insurance 26,718 26,472
Other 160,146 164,336
---------- ----------
Total noninterest expense 1,765,644 1,629,695
---------- ----------
INCOME BEFORE INCOME TAXES 595,310 472,775
Income tax expense 170,088 126,079
---------- ----------
NET INCOME $ 425,222 $ 346,696
========== ==========
BASIC AND DILUTED EARNINGS PER SHARE $ 3.51 $ 2.86
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED 121,242 121,200
========== ==========
- -------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 25
<TABLE>
OHIO STATE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------------------------------
<CAPTION>
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Shareholders'
Stock Capital Earnings Income Equity
----- ------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $1,212,000 $1,831,227 $224,862 $(42,109) $3,225,980
Comprehensive income:
Net income 346,696 346,696
Change in net unrealized
gain (loss) on securities
available for sale, net of
reclassification and tax
effects 38,619 38,619
----------
Total comprehensive
income 385,315
Cash dividends declared
($0.40 per share) (48,480) (48,480)
---------- ---------- -------- -------- ----------
Balance, December 31, 1997 1,212,000 1,831,227 523,078 (3,490) 3,562,815
Comprehensive income:
Net income 425,222 425,222
Change in net unrealized
gain (loss) on securities
available for sale, net of
reclassification and tax
effects 37,872 37,872
----------
Total comprehensive
income 463,094
Proceeds from sale of 5,020
shares of common stock 50,200 175,700 225,900
Cash dividends declared
($0.50 per share) (60,600) (60,600)
---------- ---------- -------- -------- ----------
Balance, December 31, 1998 $1,262,200 $2,006,927 $887,700 $ 34,382 $4,191,209
========== ========== ======== ======== ==========
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 26
<TABLE>
OHIO STATE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998 and 1997
- -------------------------------------------------------------------------------------------
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 425,222 $ 346,696
Adjustment to reconcile net income to net cash
from operating activities:
Depreciation and amortization 118,540 135,413
Net amortization of securities 32,710 23,129
Provision for loan losses 230,000 139,000
Deferred taxes 33,260 64,509
Net realized gains on sale of securities -- (151)
Loss on other real estate owned and repossessions 47,000 36,000
FHLB stock dividends (13,100) (11,300)
Net changes in:
Deferred loan costs (97,534) (137,210)
Interest receivable (40,527) 5,619
Interest payable 33,917 (18,558)
Other assets and liabilities (42,285) (108,380)
----------- -----------
Net cash from operating activities 727,203 474,767
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Sales -- 1,819,921
Maturities, prepayments and calls 2,337,212 1,489,820
Purchases (5,503,568) (2,517,733)
Securities held to maturity:
Maturities, prepayments and calls 725,000 100,000
Purchases (1,269,293) (135,000)
Net change in interest-earning deposits in other banks 199,000 300,000
Loan originations and payments, net (3,284,718) (6,952,804)
Additions to premises and equipment (178,122) (58,031)
Proceeds from sale of other real estate owned and
repossessions 210,345 126,235
----------- -----------
Net cash from investing activities (6,764,144) (5,827,592)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 10,160,350 6,439,753
Cash dividends paid (60,600) (48,480)
Net proceeds from sale of stock 225,900 --
----------- -----------
Net cash from financing activities 10,325,650 6,391,273
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 4,288,709 1,038,448
BEGINNING CASH AND CASH EQUIVALENTS 3,726,486 2,688,038
----------- -----------
ENDING CASH AND CASH EQUIVALENTS $ 8,015,195 $ 3,726,486
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,856,408 $ 1,664,879
Income taxes paid 72,000 5,000
SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers from loans to other real estate owned and
repossessions $ 298,429 $ 128,053
- -------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 27
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of Ohio State Bancshares, Inc. ("OSB") and its wholly-owned subsidiary,
The Marion Bank ("Bank"), together referred to as the Corporation. Intercompany
transactions and balances are eliminated in consolidation.
Nature of Operations: The Corporation provides financial services through its
main and branch office in Marion, Ohio. Its primary deposit products are
checking, savings, and term certificate accounts, and its primary lending
products are residential mortgage, commercial, and installment loans.
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. The Corporation is
primarily organized to operate in the banking industry. Substantially all
revenues and services are derived from banking products and services in Marion
County and contiguous counties.
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, deposits with other
financial institutions under 90 days and federal funds sold. Net cash flows are
reported for 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 in other comprehensive income.
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is not temporary.
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 the loan is
impaired or payments are past due over 60 days. Payments received on such loans
are reported as principal reductions.
- --------------------------------------------------------------------------------
(Continued)
26
<PAGE> 28
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 nature and volume of 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.
A loan is impaired 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 loan is 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.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is calculated generally on the
straight-line method over asset useful lives. Maintenance and repairs are
expensed and major improvements are capitalized.
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are
initially recorded at fair value when acquired, establishing a new cost basis.
If fair value declines, a valuation allowance is recorded through expense. Costs
after acquisition are expensed.
Long-term Assets: These assets are reviewed for impairment when events indicate
their carrying amount may not be recoverable from future undiscounted cash
flows. If impaired, the assets are recorded at discounted amounts.
Income Taxes: Income tax expense is the total 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 amounts for the 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 maintaining certain capital
levels and may limit the amount of dividends paid by the Bank to OSB or by OSB
to shareholders.
Earnings Per Common Share: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the period.
Diluted earnings per share is not currently applicable since the Corporation has
no common stock equivalents.
- --------------------------------------------------------------------------------
(Continued)
27
<PAGE> 29
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as a separate
component of equity. The accounting standard that requires reporting
comprehensive income first applies for 1998, with prior information restated to
be comparable.
Reclassifications: Certain reclassifications have been made to the 1997
financial statements to be comparable to the 1998 presentation.
NOTE 2 - SECURITIES
Year-end securities are as follows.
<TABLE>
<CAPTION>
1998
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury $ 1,447,568 $ 25,044 $ -- $ 1,472,612
U.S. government and federal
agencies 2,505,097 13,053 295 2,517,855
Mortgage-backed 6,318,020 43,127 28,835 6,332,312
----------- -------- ------- -----------
Total debt securities 10,270,685 81,224 29,130 10,322,779
Other securities 236,240 -- -- 236,240
----------- -------- ------- -----------
Total $10,506,925 $ 81,224 $29,130 $10,559,019
=========== ======== ======= ===========
HELD TO MATURITY
State and municipal $ 3,198,042 $130,361 $ -- $ 3,328,403
=========== ======== ======= ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
28
<PAGE> 30
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
1997
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury $ 650,291 $ 3,897 $ -- $ 654,188
U.S. government and federal
agencies 502,203 1,772 -- 503,975
Mortgage-backed 5,979,249 11,438 22,395 5,968,292
---------- ------- ------- ----------
Total debt securities 7,131,743 17,107 22,395 7,126,455
Other securities 223,140 -- -- 223,140
---------- ------- ------- ----------
Total $7,354,883 $17,107 $22,395 $7,349,595
========== ======= ======= ==========
HELD TO MATURITY
U.S. government and federal
agencies $ 500,000 $ -- $ 8,410 $ 491,590
State and municipal 2,159,045 80,778 -- 2,239,823
---------- ------- ------- ----------
Total $2,659,045 $80,778 $ 8,410 $2,731,413
========== ======= ======= ==========
</TABLE>
Sales of available for sales securities were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Proceeds $-- $1,819,921
Gross gains -- 946
Gross losses -- 795
</TABLE>
Contractual maturities of securities at year-end 1998 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 $ 1,049,964 $ 1,054,896 $ -- $ --
Due from one to five years 2,902,701 2,935,571 -- --
Due from five to ten years -- -- 959,662 1,013,519
Due after ten years -- -- 2,238,380 2,314,884
Mortgage-backed 6,318,020 6,332,312 -- --
Other securities 236,240 236,240 -- --
----------- ----------- ---------- ----------
$10,506,925 $10,559,019 $3,198,042 $3,328,403
=========== =========== ========== ==========
</TABLE>
Securities with carrying values of $4,835,000 and $3,938,000 at December 31,
1998 and 1997 were pledged to secure public deposits and for other purposes.
- --------------------------------------------------------------------------------
(Continued)
29
<PAGE> 31
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 3 - LOANS
Year-end loans were as follows.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commercial $14,039,906 $13,059,019
Installment 19,042,541 17,474,294
Real estate 3,548,885 3,307,311
Credit card 597,650 595,324
Other 27,583 15,330
----------- -----------
37,256,565 34,451,278
Net deferred loan costs 375,301 277,767
Allowance for loan losses (360,093) (311,095)
----------- -----------
$37,271,773 $34,417,950
=========== ===========
</TABLE>
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Beginning balance $ 311,095 $ 281,142
Loans charged off (240,942) (141,854)
Recoveries of previous charge-offs 59,940 32,807
Provision for loan losses 230,000 139,000
--------- ---------
Ending balance $ 360,093 $ 311,095
========= =========
</TABLE>
Impaired loans were as follows.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Year-end loans with no allocated allowance
for loan losses $ -- $ --
Year-end loans with allocated allowance
for loan losses 457,464 282,000
-------- --------
Total $457,464 $282,000
======== ========
Amount of the allowance allocated $ 45,746 $ 32,000
Loans past due over 90 days still on accrual $ 72,810 $183,983
Loans on nonaccrual 633,094 316,880
Average of impaired loans during the year 409,540 87,916
Interest income recognized during impairment 36,728 1,700
Cash-basis interest income recognized 36,728 1,700
</TABLE>
All impaired loans are also included in nonaccrual loans.
- --------------------------------------------------------------------------------
(Continued)
30
<PAGE> 32
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 4 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 115,875 $ 115,875
Premises 442,064 416,479
Equipment 1,462,981 1,317,423
Building and leasehold improvements 130,455 123,476
----------- -----------
Total cost 2,151,375 1,973,253
Less accumulated depreciation (1,254,606) (1,136,066)
----------- -----------
$ 896,769 $ 837,187
=========== ===========
</TABLE>
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
leased space for one of its automated teller machines under an operating lease.
The lease expired November 1, 1998, and was not renewed. Total rental expense
was $52,748 in 1998 and $40,148 in 1997.
Rental commitments under noncancelable operating leases were:
<TABLE>
<S> <C>
1999 $ 38,748
2000 38,748
2001 38,883
2002 40,685
2003 40,685
Thereafter 557,091
--------
$754,840
========
</TABLE>
NOTE 5 - DEPOSITS
Year-end interest-bearing deposits were as follows.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Demand $11,931,417 $ 6,741,609
Savings 9,605,660 9,229,034
Time:
In denominations under $100,000 18,730,867 16,065,307
In denominations of $100,000 or more 9,068,935 6,860,545
----------- -----------
Total interest-bearing deposits $49,336,879 $38,896,495
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
31
<PAGE> 33
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 5 - DEPOSITS (Continued)
Scheduled maturities of time deposits were as follows.
<TABLE>
<S> <C>
1999 $19,400,341
2000 7,413,654
2001 814,113
2002 171,694
-----------
$27,799,802
===========
</TABLE>
Year-end stated maturities of certificates of deposit of $100,000 or more were
as follows.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Three months or less $1,306,557 $1,250,714
Three through six months 3,689,750 2,299,909
Six through twelve months 2,326,759 2,230,282
Over twelve months 1,745,869 1,079,640
---------- ----------
$9,068,935 $6,860,545
========== ==========
</TABLE>
NOTE 6 - BORROWINGS
Federal funds purchased and a line of credit from the Federal Home Loan Bank of
Cincinnati are financing arrangements used by the Corporation. Information
concerning borrowings was as follows.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Maximum month-end balance during the year $809,000 $1,981,000
Average balance during the year 48,121 644,561
Average interest rate during the year 6.28% 5.95%
</TABLE>
The Corporation's maximum line of credit with the Federal Home Loan Bank was
$3,916,000 and $3,652,000 at December 31, 1998 and 1997. No borrowings were
outstanding on this line of credit at December 31, 1998 or 1997. Advances under
the agreement are collateralized by a blanket pledge of the Bank's real estate
mortgage loan portfolio and Federal Home Loan Bank stock.
NOTE 7 - EMPLOYEE BENEFITS
The Corporation provides a profit sharing plan that 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 8% of the participant's base compensation.
In addition, the Corporation may make an additional discretionary contribution
allocated to all eligible participants based on compensation. Contributions by
the Corporation were $15,800 and $9,900 for the years ended December 31, 1998
and 1997.
- --------------------------------------------------------------------------------
(Continued)
32
<PAGE> 34
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES
Income tax expense was as follows.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current $ 136,828 $ 61,570
Deferred 33,260 64,509
--------- ---------
$ 170,088 $ 126,079
========= =========
</TABLE>
Year-end deferred tax assets and liabilities were due to the following.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 78,934 $ 68,190
Alternative minimum tax credit -- 6,761
Leases 813 2,412
Unrealized loss on securities available for
sale -- 1,798
--------- ---------
Total deferred tax assets 79,747 79,161
Deferred tax liabilities
Depreciation (32,906) (32,338)
Accrual to cash conversion (165,460) (135,197)
Unrealized gain on securities available for
sale (17,712) --
FHLB stock dividend (17,170) (12,716)
Other (1,697) (1,338)
--------- ---------
Total deferred tax liabilities (234,945) (181,589)
--------- ---------
Net deferred tax liability $(155,198) $(102,428)
========= =========
</TABLE>
Effective tax rates differ from federal statutory rates applied to financial
statement income due to the following.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Federal statutory rate times financial statement
income $ 202,405 $ 160,744
Effect of:
Tax exempt interest (38,289) (31,932)
Other, net 5,972 (2,733)
--------- ---------
Total $ 170,088 $ 126,079
========= =========
Effective tax rate % 28.6% 26.7%
========= =========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
33
<PAGE> 35
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 9 - RELATED PARTIES
Loans to principal officers, directors, and their affiliates in 1998 were as
follows.
<TABLE>
<S> <C>
Beginning balance $1,004,793
New loans 145,973
Effect of changes in related parties (9,465)
Repayments (504,126)
----------
Ending balance $ 637,175
==========
</TABLE>
Deposits from principal officers, directors, and their affiliates at year-end
1998 were $ 8,112,184.
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.
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.
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 7.25% to 10.50% at year-end 1998
and 6.2% to 11.5% at year-end 1997. Outstanding commitments for credit cards had
rates ranging from 12.0% to 17.9% at year-end 1998 and 1997. Of the total
outstanding balances on credit cards year-end 1998, 55% were fixed rate and 45%
were variable rate and at year-end 1997, 59% were fixed rate and 41% were
variable rate.
- --------------------------------------------------------------------------------
(Continued)
34
<PAGE> 36
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (Continued)
Year-end contractual amounts of financial instruments with off-balance-sheet
risk were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commitments to extend credit $2,156,000 $3,272,000
Credit card arrangements 1,256,000 1,203,000
Letters of credit 20,000 --
</TABLE>
At year-end 1998 and 1997, reserves of $425,000 and $370,000 were required as
deposits with the Federal Reserve or as cash on hand. These reserves do not earn
interest.
Included in cash and cash equivalents at year-end 1998 and 1997 was
approximately $6,999,000 and $2,952,000 on deposit with the Independent State
Bank of Ohio.
NOTE 11 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial instruments at year-end were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 8,015,195 $ 8,015,195 $ 3,726,486 $ 3,726,486
Interest-earning deposits -- -- 199,000 199,445
Securities available for sale 10,559,019 10,559,019 7,349,595 7,349,595
Securities held to maturity 3,198,042 3,328,403 2,659,045 2,731,413
Loans, net 37,271,773 37,833,567 34,417,950 34,325,067
Accrued interest receivable 382,488 382,488 341,961 341,961
Financial liabilities
Demand and savings
deposits (28,269,271) (28,269,271) (22,982,871) (22,982,871)
Time deposits (27,799,802) (28,018,308) (22,925,852) (23,035,701)
Accrued interest payable (252,157) (252,157) (218,240) (218,240)
</TABLE>
The estimated fair value approximates the 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 fixed-rate 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.
- --------------------------------------------------------------------------------
(Continued)
35
<PAGE> 37
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 12 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
Banks and bank holding companies are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and,
additionally for banks, prompt corrective action regulations involve
quantitative measures of assets, liabilities and certain off-balance-sheet items
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgements by regulators.
Failure to meet capital requirements can initiate regulatory action.
The prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required.
At year-end 1998 and 1997, the Bank was categorized as well capitalized. No
conditions or events have occurred subsequent to the latest notification by
regulators that management believes would have changed the Bank's category.
Actual capital levels for the Bank and minimum required 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
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
1998
Total capital (to risk weighted assets) $4,480 10.7% $3,361 8.0% $4,201 10.0%
Tier 1 capital (to risk weighted assets) 4,120 9.8 1,680 4.0 2,520 6.0
Tier 1 capital (to average assets) 4,120 7.1 2,316 4.0 2,895 5.0
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
</TABLE>
OSB's primary source of funds with which to pay dividends is dividends received
from the Bank. The payment of dividends by the Bank to OSB 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
dividend limitations described, approximately $279,000 is available to pay
dividends to OSB to maintain the well-capitalized status at year-end.
- --------------------------------------------------------------------------------
(Continued)
36
<PAGE> 38
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 12 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED
EARNINGS (Continued)
The Corporation has filed a Registration Statement with the Securities and
Exchange Commission to sell up to 24,800 shares of the Corporation's stock at
$47.00 per share, including underwriting commissions of $2.00 per share.
Shareholders with preemptive rights can purchase the stock at $45.00. The
Corporation expects to receive $1,078,000 in net proceeds after deducting
offering expenses from the sale of stock. As of December 31, 1998, the
Corporation had sold and issued 5,020 shares related to the stock offering.
NOTE 13 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Unrealized holding gains and losses on
available-for-sale securities $57,382 $58,664
Reclassification adjustments for (gains)
and losses later recognized in income -- (151)
------- -------
Net unrealized gains and losses 57,382 58,513
Tax effect 19,510 19,894
------- -------
Other comprehensive income $37,872 $38,619
======= =======
</TABLE>
NOTE 14 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
Condensed parent company only financial statements for OSB follows.
<TABLE>
CONDENSED BALANCE SHEETS
December 31, 1998 and 1997
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Assets:
Cash and cash equivalents $ 2,164 $ 4,061
Investment in bank subsidiary 4,154,155 3,518,402
Organizational costs, net 24,060 34,016
Other assets 10,830 6,336
---------- ----------
Total assets $4,191,209 $3,562,815
========== ==========
Shareholders' equity $4,191,209 $3,562,815
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
37
<PAGE> 39
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 14 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (Continued)
<TABLE>
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1998 and 1997
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Dividends from bank subsidiary $ 62,000 $ 52,240
Total expense 13,271 13,884
-------- --------
Income before income tax and undistributed
subsidiary income 48,729 38,356
Income tax benefit 4,512 4,721
Equity in undistributed subsidiary income 371,981 303,619
-------- --------
Net income $425,222 $346,696
======== ========
</TABLE>
<TABLE>
CONDENSED STATEMENT OF CASH FLOWS
Years ended December 31, 1998 and 1997
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 425,222 $ 346,696
Adjustments:
Equity in undistributed subsidiary
income (371,981) (303,619)
Change in other assets (4,494) (961)
Amortization 9,956 9,956
--------- ---------
Net cash from operating activities 58,703 52,072
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (60,600) (48,480)
--------- ---------
Net cash from financing activities (60,600) (48,480)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,897) 3,592
BEGINNING CASH AND CASH EQUIVALENTS 4,061 469
--------- ---------
ENDING CASH AND CASH EQUIVALENTS $ 2,164 $ 4,061
========= =========
</TABLE>
- --------------------------------------------------------------------------------
38
<PAGE> 40
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 24, 1999 for the Annual
Meeting of Shareholders to be held on April 15, 1999, 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 24, 1999 for the Annual Meeting of
Shareholders to be held on April 15, 1999, 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 24,
1999 for the Annual Meeting of Shareholders to be held on April 15, 1999, 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 24, 1999 for the Annual Meeting of
Shareholders to be held on April 15, 1999 and is incorporated herein by
reference.
- --------------------------------------------------------------------------------
(Continued)
39
<PAGE> 41
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 1998 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 1995 *** 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 in prior years. 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 1998 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.
- --------------------------------------------------------------------------------
40
<PAGE> 42
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 18, 1999 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 8, 1999.
Signatures Signatures
---------- ----------
/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
- --------------------------------------------------------------------------------
41
<PAGE> 1
OHIO STATE BANCSHARES, INC.
EXHIBIT NO. 99
- --------------------------------------------------------------------------------
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
----------------------------------------------------------------------
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. Ohio State Bancshares,
Inc. ("Corporation") desires to take advantage of the "safe harbor" provisions
of the Act. Certain information, particularly information regarding future
economic performance and finances and plans and objectives of management,
contained or incorporated by reference in the Corporation's Annual Report on
Form 10-KSB for the year ended December 31, 1998 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.
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
<PAGE> 2
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.
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,773
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,242
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,559
<INVESTMENTS-CARRYING> 3,198
<INVESTMENTS-MARKET> 3,328
<LOANS> 37,272
<ALLOWANCE> 360
<TOTAL-ASSETS> 60,740
<DEPOSITS> 56,069
<SHORT-TERM> 0
<LIABILITIES-OTHER> 480
<LONG-TERM> 0
0
0
<COMMON> 1,262
<OTHER-SE> 2,929
<TOTAL-LIABILITIES-AND-EQUITY> 60,740
<INTEREST-LOAN> 3,492
<INTEREST-INVEST> 621
<INTEREST-OTHER> 74
<INTEREST-TOTAL> 4,187
<INTEREST-DEPOSIT> 1,887
<INTEREST-EXPENSE> 1,890
<INTEREST-INCOME-NET> 2,297
<LOAN-LOSSES> 230
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,766
<INCOME-PRETAX> 595
<INCOME-PRE-EXTRAORDINARY> 425
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 425
<EPS-PRIMARY> 3.51
<EPS-DILUTED> 3.51
<YIELD-ACTUAL> 4.69
<LOANS-NON> 633
<LOANS-PAST> 73
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 178
<ALLOWANCE-OPEN> 311
<CHARGE-OFFS> 241
<RECOVERIES> 60
<ALLOWANCE-CLOSE> 360
<ALLOWANCE-DOMESTIC> 360
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 57
</TABLE>
