<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, 1999
[ ] 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 Identification No.)
incorporation or organization)
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, 1999 was: $5,380,900
The aggregate market value of the Issuer's voting stock held by nonaffiliates of
the Issuer as of February 23, 2000 based on the last trade price of $53.00 was
$5,519,632.
At March 31, 2000, there were issued and outstanding 146,000 of the Issuer's
Common Shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Issuer's Proxy Statement to be dated approximately March 31,
2000, 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]
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<PAGE> 2
INDEX
FORM 10-KSB
<TABLE>
<S> <C> <C>
PART I
- ------
ITEM 1. Description of Business.................................................................. 3
ITEM 2. Description of Property.................................................................. 4
ITEM 3. Legal Proceedings........................................................................ 4
ITEM 4. Submission of Matters to a Vote of Security Holders...................................... 5
PART II
- -------
ITEM 5. Market for Common Equity and Related Shareholder Matters................................. 5
ITEM 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................ 6
ITEM 7. Financial Statements..................................................................... 19
ITEM 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................................................... 38
PART III
- --------
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act........................................ 38
ITEM 10. Executive Compensation................................................................... 38
ITEM 11. Security Ownership of Certain Beneficial Owners and Management........................... 38
ITEM 12. Certain Relationships and Related Transactions........................................... 38
ITEM 13. Exhibits and Reports on Form 8-K......................................................... 39
SIGNATURES ......................................................................................... 40
EXHIBITS
- --------
EXHIBIT 3.1 Amended Articles of Incorporation of Ohio State Bancshares, Inc.......................... 41
EXHIBIT 3.2 Code of Regulations of Ohio State Bancshares, Inc........................................ 50
EXHIBIT 27 Financial Data Schedule.................................................................. 58
EXHIBIT 99 Safe Harbor Under Private Securities Litigation Reform Act of 1995....................... 60
</TABLE>
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2
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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. ("OSB"), together referred to as the Corporation. OSB 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 OSB is presently to operate the Bank, which is a wholly owned
subsidiary and its principal asset. OSB 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 OSB, 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: OSB is a registered bank holding company
organized under the laws of the State of Ohio. As such, OSB 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 OSB and the Bank.
RECENT LEGISLATION: On November 12, 1999, President Clinton signed the
Graham-Leach-Bliley Act of 1999 (the "GLB Act"), which is intended to modernize
the financial services industry. The GLB Act refines large parts of a regulatory
framework that had its origins in the Depression Era of the 1930s. Effective
March 11, 2000, new opportunities will be available for banks, other depository
institutions, insurance companies and securities firms to enter into
combinations that permit a single financial services organization to offer
customers a more complete array of financial products and services.
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3
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The GLB Act introduces the concept of functional regulation. Functional
regulation mandates that the Board of Governors of the Federal Reserve System
give deference to the Securities and Exchange Commission and relevant state
securities and insurance authorities with respect to interpretations and
enforcement of activities within their respective jurisdictions.
The GLB Act amends the Bank Holding Company Act of 1956 to allow bank holding
companies to become certified as financial holding companies and participate in
the new financial activities contemplated in the GLB Act. The Federal Reserve
Board will serve as the umbrella regulator for financial holding companies while
the financial holding company's separately regulated subsidiaries will be
regulated by their primary functional regulators. In addition to meeting "well
capitalized" and "well managed" standards, the GLB Act makes satisfactory or
above Community Reinvestment Act compliance for insured depository institutions
necessary in order for them to engage in new financial activities. Financial
subsidiaries of banks may also be formed to engage in a new range of activities
under the GLB Act.
The GLB Act provides a federal right to privacy of non-public personal
information of individual customers. Federal regulatory agencies with primary
supervisory authority over numerous financial institutions have responsibility
for implementing this privacy provision and are currently in the process of
adopting regulations. OSB and the Bank are also subject to certain state laws
that deal with the use and distribution of non-public personal information.
Given the fact that the legislation is new, the regulatory process is only
beginning and numerous final regulations are still forthcoming, we cannot
predict the impact that the GLB Act will have on the Corporation at this time.
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, 1999, the Bank employed 26 full-time and 7 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-through
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 owns all premises related to its main office
and leases its 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 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.
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4
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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 December 31, 1999 fiscal year end.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The common stock of the Corporation trades infrequently and is not traded on any
established securities market. Parties interested in buying or selling the
Corporation's stock are generally referred to Community Banc Investments, New
Concord, Ohio (CBI).
For 1999 and 1998, 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>
1999 Low Bid High Bid Low Ask High Ask
---- ------- -------- ------- --------
<S> <C> <C> <C> <C>
1st Qtr. $ 45.00 $ 45.00 $ 47.00 $ 47.00
2nd Qtr. 45.00 47.00 47.00 49.00
3rd Qtr. 49.00 49.00 51.00 51.00
4th Qtr. 49.00 51.00 51.00 53.00
1998
----
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>
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 146,000 outstanding shares of common
stock held by approximately 506 shareholders as of December 31, 1999. The
Corporation paid cash dividends of $0.25 per share in June and December of 1999
and $0.25 per share in June and December of 1998, resulting in a total amount of
$0.50 per share in 1999 and 1998.
The Corporation filed a Registration Statement in 1998 with the Securities and
Exchange Commission to sell 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 could purchase the stock at $45.00. The Corporation
received approximately $1,069,000 in net proceeds after deducting the offering
expenses from the sale of stock. As of December 31, 1999, the Corporation had
sold and issued all 24,800 shares relating to the stock offering.
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5
<PAGE> 6
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the following pages, management presents an analysis of Ohio State
Bancshares, Inc.'s financial condition and results of operations as of and for
the year ended December 31, 1999 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.
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.
RESULTS OF OPERATIONS
Net income for the Corporation was $436,000 in 1999, or $11,000 more than the
$425,000 earned in 1998. The reason for the increase in earnings for 1999 was
primarily due to an increase in total net interest income of $534,000 partially
offset by an increase in noninterest expense of $319,000 and provision for loan
losses of $216,000. The increase in noninterest expense was primarily due to
increased personnel expenses, professional fees and loan collection expenses.
The increase in the provision for loan losses was due to loan growth combined
with higher net charge-offs. The yield earned on the average assets of the
Corporation decreased from 8.48% for the year ended December 31, 1998, to 8.26%
for the year ended December 31, 1999. During the same period, the average cost
of interest-bearing liabilities decreased by 19 basis points from 4.45% to
4.26%.
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.
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6
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Net interest income increased $534,000 from 1998 to 1999. The net interest
margin, which is net interest income divided by average earning assets,
decreased 5 basis points from 4.69% for 1998 to 4.64% for 1999. The margin
decrease was the result of a declining net interest spread of 4.03% for 1998
compared to 4.00% for 1999.
Total interest income increased $896,000 despite the yield on earning assets
decreasing from 8.48% in 1998 to 8.26% in 1999. Loan demand continued to be
strong for the first part of 1999 and then leveled off and was the primary
reason for the increase in total interest income. Interest and fees on loans
increased $537,000 for the year-end 1999 compared to the year-end 1998, due to
an increase in the average balances of loans of $6,811,000 during the period.
This 18.29% increase in average loan volume more than offset the decrease in the
average loan yield from 9.38% in 1998 to 9.15% in 1999. Interest on taxable
securities increased $258,000 and interest on nontaxable securities increased
$60,000 in 1999. Increases in both the average balances and yields of securities
contributed to the higher interest income levels.
Total interest expense increased $361,000 in 1999. Average interest-bearing
liabilities increased by $10,429,000. However, the rate paid on interest-bearing
liabilities decreased by 19 basis points for 1999 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 5.69% in
1998 to 5.33% in 1999. Average time deposit balances decreased to 55.99% of
average interest-bearing liabilities in 1999, compared to 60.44% in 1998.
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.
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7
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<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
(in thousands except percentages)
1999 1998
-------------------------------- --------------------------------
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
Federal funds sold 2,312 4.96 115 1,407 5.05 71
Taxable securities 12,021 6.08 744 8,549 5.70 486
Nontaxable securities 3,654 6.92 253 2,595 6.59 174
Loans 44,047 9.15 4,029 37,236 9.38 3,492
--------- -------- --------- ---------
TOTAL INTEREST-EARNING ASSETS 62,034 8.26 5,141 49,828 8.48 4,226
--------- -------- --------- ---------
NONINTEREST-EARNING ASSETS:
Cash and due from
financial institutions 2,172 2,300
Premises and equipment, net 984 835
Other real estate owned
and repossessions 23 42
Accrued interest and other assets 1,289 489
Less: Allowance for loan losses (377) (309)
--------- ---------
TOTAL NONINTEREST-EARNING ASSETS 4,091 3,357
--------- ---------
TOTAL ASSETS $ 66,125 $ 53,185
========= =========
LIABILITIES AND SHAREHOLDERS EQUITY:
INTEREST-BEARING LIABILITIES:
Demand deposits $ 12,691 2.79 354 $ 7,408 2.02 150
Savings deposits 10,223 2.97 303 9,346 2.95 276
Time deposits:
Under $100,000 20,929 5.36 1,121 17,802 5.69 1,013
$100,000 and over 8,692 5.25 457 7,872 5.69 448
Other borrowings 370 4.35 16 48 6.28 3
--------- -------- --------- ---------
TOTAL INTEREST-BEARING LIABILITIES 52,905 4.26 2,251 42,476 4.45 1,890
--------- -------- --------- ---------
NONINTEREST-BEARING LIABILITIES:
Demand deposits 7,939 6,453
Accrued interest payable
and other liabilities 533 448
--------- ---------
TOTAL NONINTEREST-BEARING LIABILITIES 8,472 6,901
--------- ---------
TOTAL LIABILITIES 61,377 49,377
TOTAL SHAREHOLDERS' EQUITY 4,748 3,808
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 66,125 $ 53,185
========= =========
NET INTEREST INCOME $ 2,890 $ 2,336
======== =========
NET INTEREST SPREAD 4.00% 4.03%
====== ====
NET YIELD ON INTEREST
EARNING ASSETS 4.64% 4.69%
====== ====
</TABLE>
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Yields and amounts earned on loans include loan costs, net of loan fees and late
charges of $21,548 for the year ended December 31, 1999, and $36,674 for the
year ended December 31, 1998. 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 $12,236,000 for 1999 and $8,537,000 for 1998
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>
1999 Compared to 1998 1998 Compared to 1997
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 $ (3) $ (3) $ -- $ (21) $ (24) $ 3
Federal funds sold 44 45 (1) 45 46 (1)
Taxable securities 258 223 35 (14) (1) (13)
Nontaxable securities (1) 79 73 6 32 38 (6)
Loans (2) 537 625 (88) 501 595 (94)
-------- -------- -------- ------ -------- --------
Total interest income 915 963 (48) 543 654 (111)
-------- -------- -------- ------ -------- --------
Demand deposits 204 133 71 40 32 8
Savings deposits 27 26 1 25 21 4
Time deposits <$100,000 108 170 (62) 93 122 (29)
Time deposits >$100,000 9 45 (36) 121 116 5
-
Other borrowings 13 14 (1) (35) (37) 2
-------- -------- -------- ------ -------- --------
Total interest expense 361 388 (27) 244 254 (10)
-------- -------- -------- ------ -------- --------
Net interest income $ 554 $ 575 $ (21) $ 299 $ 400 $ (101)
======== ======== ======== ====== ======== ========
</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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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 1999, the allowance had a balance of
$506,542, or 1.03% of total loans, compared to $360,093, or 0.96% of total
loans, at year-end 1998. The provision for loan losses was $446,000 for the year
ended December 31, 1999 compared to $230,000 for the year ended December 31,
1998. The increase was a result of growth of the loan portfolio which was 30.07%
for the year combined with an increase in net charge-offs to $300,000 from
$181,000 in 1998.
All loans charged-off during the year-ended December 31, 1999 were either
installment, commercial 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. To assist in reducing charge-offs, the
Corporation has hired a loan collection officer. However, it may take several
months before improvement is noted. 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. 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,
-------------------------------------------------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Nonaccrual loans not included in impaired loans $ 228 $ 176
Loans past due 90 days or more,
excluding nonaccrual loan 172 73
Impaired loans (all also on nonaccrual) -- 457
------------ ------------
Total $ 400 $ 706
============ ============
</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 90 days, unless
collection is assured.
The following chart presents only those watchlist loans at December 31, 1999,
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
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10
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officers may request a loan be added to the watchlist if they suspect repayment
problems may arise and feel the need for frequent reviews.
<TABLE>
<CAPTION>
Type of Loan: Number of Loans Watchlist Amount
------------- --------------- ----------------
<S> <C> <C>
Installment 15 $ 97,534
Commercial 5 163,849
---- ------------
20 $ 261,383
==== ============
</TABLE>
The following table shows activity in the allowance for loan losses and
pertinent ratios during the years indicated.
<TABLE>
<CAPTION>
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Allowance for loan losses:
Balance at beginning of period $ 360 $ 311
Loans charged-off:
Commercial (23) --
Real estate -- --
Installment (345) (241)
----------- ------------
Total loans charged-off: (368) (241)
----------- ------------
Recoveries of loans previously charged-off:
Commercial -- 1
Real estate -- --
Installment 68 59
----------- ------------
Total loan recoveries 68 60
----------- ------------
Net loans charged-off (300) (181)
Provision for loan losses 447 230
----------- ------------
Balance at end of period $ 507 $ 360
=========== ============
Ratios:
Net loans charged-off to average loans 0.68% 0.49%
Net loans charged-off to total loans at end of period 0.61 0.48
Allowance for loan losses to average loans 1.15 0.97
Allowance for loan losses to total loans at end of period 1.03 0.96
Net loans charged-off to allowance for loan losses at end of period 59.24 50.27
Net loans charged-off to provision for loan losses 67.20 78.70
Allowance for loan losses to nonperforming loans (1) 126.67 51.01
</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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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, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C> <C> <C>
Commercial $ 27,786 30.73% $ 63,162 37.68%
Real Estate 6,035 15.58 2,839 9.53
Installment 323,157 52.23 225,778 51.11
Credit Cards 14,152 1.41 11,639 1.60
Other -- 0.05 -- 0.08
Unallocated 135,412 N/A 56,675 N/A
------------- --------- -------------- ---------
Total Allocation $ 506,542 100.00% $ 360,093 100.00%
============= ======== ============== =========
</TABLE>
NONINTEREST INCOME
Noninterest income increased from $294,000 in 1998 to $298,000 in 1999, a 1.36%
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 gains from the sales of
securities available for sale.
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 increased from 2.91% in 1998 to 3.02% in 1999. Personnel expense
increased $196,000, or 24.48% from 1998 to 1999, as a result of normal salary
increases and the hiring of additional personnel. Occupancy expenses increased
from $360,000 in 1998 to $371,000 in 1999, a 3.04% increase. This was due
primarily to repairs made at the Bank's main office. All other operating
expenses increased 18.50% from $605,000 in 1998 to $717,000 in 1999 largely due
to increased loan collection expenses and professional fees.
FINANCIAL CONDITION
TOTAL ASSETS
Total assets grew from $60,740,000 on December 31, 1998 to $69,107,000 on
December 31, 1999, a 13.78% increase. The Corporation experienced strong growth
during 1999 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.
LOANS
Total net loans increased 30.07% from $37,272,000 on December 31, 1998 to
$48,478,000 on December 31, 1999. Installment loans increased 32.83% from
$19,043,000 in 1998 to $25,294,000 in 1999. Commercial loans increased from
$14,040,000 on December 31, 1998 to $14,881,000 on December 31, 1999, a 5.99%
increase during the period. Real estate loans increased 112.57% from $3,549,000
at December 31, 1998 to
- --------------------------------------------------------------------------------
12
<PAGE> 13
$7,544,000 at December 31, 1999. 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 and the hiring of a new senior loan
officer in the last quarter of 1998. The real estate loan growth was primarily
due to the hiring of a new loan officer that focused on the real estate
portfolio.
The Corporation's loan portfolio consists primarily of commercial, consumer
loans (loans to individuals for household, family and other personal expenses)
and real estate loans. These categories accounted for approximately 31%, 52%,
and 16% of the Corporation's total loan portfolio on December 31, 1999. 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 intends 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, 1999, the lending limit for the Bank was
approximately $702,000. 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, 1999.
<TABLE>
<CAPTION>
One One
Year Through After Five
or Less Five Years Years Total
------- ---------- ----- -----
<S> <C> <C> <C> <C>
REAL ESTATE
Fixed Rate $ 45 $ 430 $ 42 $ 517
Variable Rate 25 472 6,530 7,027
------------ ------------ ------------ ------------
Total Real Estate 70 902 6,572 7,544
COMMERCIAL
Fixed Rate 3,177 2,360 1,285 6,822
Variable Rate 180 495 7,384 8,059
------------ ------------ ------------ ------------
Total Commercial 3,357 2,855 8,669 14,881
INSTALLMENT
Fixed Rate 460 21,686 2,600 24,746
Variable Rate 2 421 124 547
------------ ------------ ------------ ------------
Total Installment 462 22,107 2,724 25,293
CREDIT CARDS
Fixed Rate -- -- -- --
Variable Rate 684 -- -- 684
------------ ------------ ------------ ------------
Total Credit Card 684 -- -- 684
OTHER
Fixed Rate -- -- -- --
Variable Rate 28 -- -- 28
------------ ------------ ------------ ------------
Total Other 28 -- -- 28
------------ ------------ ------------ ------------
TOTAL ALL LOANS $ 4,601 $ 25,864 $ 17,965 $ 48,430
============ ============ ============ ============
FIXED RATE $ 3,682 $ 24,476 $ 3,927 $ 32,085
VARIABLE 919 1,388 14,038 16,345
</TABLE>
- --------------------------------------------------------------------------------
13
<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 or deposit
withdrawals.
Securities available for sale and securities held to maturity increased from
$13,757,000 at December 31, 1998 to $15,372,000 at December 31, 1999, an
increase of $1,615,000, or 11.74%. The increase resulted primarily from using
some excess liquidity that existed at December 31, 1998, and investing of funds
received from the $1.1 million stock sale, which concluded in the second quarter
of 1999.
United States Government securities may be pledged to meet security requirements
imposed as a condition to receive public funds. At December 31, 1999, the
Corporation had $6,496,000 pledged to secure public deposits compared to
$4,835,000 on December 31, 1998. 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, 1999 and
1998.
<TABLE>
<CAPTION>
1999 1998
----------------------------------- ----------------------------------
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
---- ----- ----- ---- ----- -----
AVAILABLE FOR SALE (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. TREASURY
Less than one year $ 300 $ 298 5.60% $ 551 $ 555 5.93%
Over 1 year through 5 years 598 596 5.85 897 918 5.62
---------- ---------- --------- ----------
TOTAL U.S. TREASURY 898 894 5.77 1,448 1,473 5.74
U.S. GOVERNMENT AND
FEDERAL AGENCIES:
Less than one year 500 500 6.00 500 500 4.95
Over 1 year through 5 years 2,781 2,662 5.17 2,005 2,018 6.04
Over 10 years 1,999 1,873 7.14 -- -- --
---------- ---------- --------- ----------
TOTAL U.S. GOVERNMENT AND
FEDERAL AGENCIES 5,280 5,035 5.99 2,505 2,518 5.82
MORTGAGE-BACKED SECURITIES 5,650 5,374 6.56 6,318 6,332 6.52
OTHER SECURITIES 250 250 5.72 236 236 6.64
---------- ---------- --------- ----------
TOTAL SECURITIES
AVAILABLE FOR SALE $ 12,078 $ 11,553 6.23% $ 10,507 $ 10,559 6.25%
========== ========== ========= ==========
HELD TO MATURITY
STATES AND MUNICIPALS
Over 5 year through 10 years $ 1,094 $ 1,097 5.23% $ 960 $ 1,013 5.53%
Over 10 years 2,725 2,558 5.54 2,238 2,315 5.39
---------- ---------- --------- ----------
TOTAL HELD TO MATURITY $ 3,819 $ 3,655 5.45% $ 3,198 $ 3,328 5.43%
========== ========== ========= ==========
</TABLE>
- --------------------------------------------------------------------------------
14
<PAGE> 15
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.
FUNDING
Deposits are the Corporation's primary source of funds. The Corporation can
obtain additional funds when needed through the overnight purchase of federal
funds or obtaining advances from the Federal Home Loan Bank to meet occasional
declines in deposits, to satisfy cash reserve requirements, or for other
short-term liquidity needs. At times, when the Corporation has more funds than
it needs for its reserve requirements or short-term liquidity needs, it
increases its investment in securities, sells federal funds to other financial
institutions or places funds in short-term certificates of deposit with other
financial institutions. The distribution of the Corporation's deposits in terms
of maturity and applicable interest rates is a primary determinant of the
Corporation's cost of funds and the relative stability of its supply of funds.
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, 1999, the aggregate amount of time, savings and
interest-bearing demand deposits was 87.70% of total deposits. The Corporation
does not have any foreign deposits, nor does it have any material concentration
of deposits.
Total deposits increased from $56,069,000 on December 31, 1998 to $62,731,000 on
December 31, 1999, a 11.88% increase. The major reason for this substantial
increase in deposits was due to the consolidation of financial institutions in
the Corporation's market area that resulted in many new customers opening
deposits at the Bank. This occurred despite spending less money on advertising
during 1999 and, in certain instances, being less interest-rate competitive on
products. Noninterest-bearing demand accounts increased from $6,732,000 on
December 31, 1998 to $7,718,000 on December 31, 1999. Interest-bearing demand
deposits increased $1,796,000, or 15.05%, from $11,931,000 at year-end 1998 to
$13,727,000 at year-end 1999. Savings account balances increased 4.69% from
$9,606,000 on December 31, 1998 to $10,056,000 on December 31, 1999.
Certificates of deposit increased from $27,800,000 at the end of 1998 to
$31,229,000 at the end of 1999, a 12.34% 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.
- --------------------------------------------------------------------------------
15
<PAGE> 16
The following table presents the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999, 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.
Interest Rate Sensitivity Gap as of December 31, 1999 (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) (4) $ 900 $ 3,701 $ 25,864 $ 17,965 $ 48,430
Securities (1) -- 798 3,258 11,316 15,372
Federal funds sold 876 -- -- -- 876
----------- ----------- ----------- ----------- -----------
Rate sensitive assets (RSA) 1,776 4,499 29,122 29,281 64,678
Liabilities
Interest-bearing demand (2) 13,727 -- -- -- 13,727
Savings (2) 10,056 -- -- -- 10,056
Time deposits 6,761 17,326 7,034 108 31,229
FHLB borrowings 1,000 -- -- -- 1,000
----------- ----------- ----------- ----------- -----------
Rate sensitive liabilities (RSL) 31,544 17,326 7,034 108 56,012
----------- ----------- ----------- ----------- -----------
Period GAP (3) $ (29,768) $ (12,827) $ 22,088 $ 29,173 $ 8,666
=========== =========== =========== =========== ===========
Cumulative GAP $ (29,768) $ (42,595) $ (20,507) $ 8,666
=========== =========== =========== ===========
Percentage of RSA (46.02)% (65.86)% (31.71)% 13.40%
=========== =========== =========== ===========
</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.
(4) Loans are presented gross and do not include net deferred loan costs and
the allowance for loan losses.
CAPITAL RESOURCES
Shareholders' equity totaled $5,017,000 on December 31, 1999 compared to
$4,191,000 on December 31, 1998. At December 31, 1999 and December 31, 1998, the
ratio of shareholders' equity to assets was 7.26% and 6.90%.
- --------------------------------------------------------------------------------
16
<PAGE> 17
The Corporation filed a Registration Statement with the Securities and Exchange
Commission to sell 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 could purchase the stock at $45.00. The Corporation received
approximately $1,069,000 in net proceeds after deducting the offering expenses
from the sale of stock. As of December 31, 1999, the Corporation had sold and
issued all 24,800 shares relating 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%. However, the Bank entered into a
Memorandum of Understanding ("MOU") with the Ohio Division of Financial
Institutions and Federal Deposit Insurance Corporation on February 10, 2000. The
MOU imposes certain restrictions which are more fully discussed in Note 12 to
the Consolidated Financial Statements.
Management recognizes the importance of complying with the provisions of the
above mentioned MOU. As management's focus turns towards internal matters, such
as internal controls and asset quality, growth may slow down as compared to the
past few years. Additionally, it is probable that operating expenses will
increase in 2000 due to professional fees and the addition of full-time staff to
assist with this matter.
LIQUIDITY
Liquidity management focuses on the Corporation's ability to have funds
available to meet the loan and depository transaction needs of its customers and
the Corporation's other financial commitments. Cash and cash equivalent assets
(which include deposits the Corporation maintains at other banks, federal funds
sold and other short-term investments) totaled $3,132,000 at year-end 1999 and
$8,015,000 at year-end 1998. 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
$11,553,000 and $10,559,000 as of December 31, 1999 and December 31, 1998.
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, 1999
was 77.28%, up from 66.47% on December 31, 1998. 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
- --------------------------------------------------------------------------------
17
<PAGE> 18
inflation on its nonmonetary assets (primarily bank premises and equipment) is
material as such assets are not held for resale and significant disposals are
not anticipated.
YEAR 2000
The Corporation experienced no problems in their computer application systems,
nor has management been made aware of any system problems of the Corporation's
major customers and vendors, related to Year 2000 issues. In addition, the
Corporation did not experience unusual deposit withdrawals related to the Year
2000. In 1999, the Corporation's expenditures for the Year 2000 issues totaled
$10,200. The Corporation does not anticipate any additional significant expenses
in regards to Year 2000 issues.
ANTICIPATED IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Standards ("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 changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. SFAS No. 133 does not allow hedging of a security which is
classified as held to maturity. 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, as amended by SFAS
No. 137, is effective for fiscal years beginning after June 15, 2000, 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.
- --------------------------------------------------------------------------------
18
<PAGE> 19
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, 1999 and 1998, 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, 1999 and 1998, 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 28, 2000, except for
Note 12, as to which the date is February 10, 2000
- --------------------------------------------------------------------------------
19
<PAGE> 20
OHIO STATE BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 2,255,869 $ 2,773,195
Federal funds sold 876,000 5,242,000
--------------- ----------------
Cash and cash equivalents 3,131,869 8,015,195
Securities available for sale 11,552,953 10,559,019
Securities held to maturity (fair value 1999 - $3,654,914;
1998 - $3,328,403) 3,819,444 3,198,042
Loans, net 48,478,479 37,271,773
Premises and equipment, net 1,076,551 896,769
Other real estate owned and repossessions 10,756 59,682
Accrued interest receivable 450,021 382,488
Other assets 586,692 356,638
--------------- ----------------
$ 69,106,765 $ 60,739,606
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 7,718,439 $ 6,732,194
Interest-bearing 55,012,757 49,336,879
--------------- ----------------
Total 62,731,196 56,069,073
Federal Home Loan Bank borrowings 1,000,000 --
Accrued interest payable 255,532 252,157
Other liabilities 102,742 227,167
--------------- ----------------
Total liabilities 64,089,470 56,548,397
Shareholders' equity
Common stock, $10.00 par value, 500,000 shares authorized;
1999 - 146,000 shares issued and outstanding,
1998 - 126,220 shares issued and outstanding 1,460,000 1,262,200
Additional paid-in capital 2,652,709 2,006,927
Retained earnings 1,250,970 887,700
Accumulated other comprehensive income (loss) (346,384) 34,382
--------------- ----------------
Total shareholders' equity 5,017,295 4,191,209
--------------- ----------------
$ 69,106,765 $ 60,739,606
=============== ================
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
20
<PAGE> 21
OHIO STATE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 4,029,344 $ 3,492,030
Taxable securities 743,818 486,372
Nontaxable securities 195,300 135,318
Federal funds sold 114,585 71,060
Certificates of deposit -- 2,762
-------------- ---------------
Total interest income 5,083,047 4,187,542
INTEREST EXPENSE
Deposits 2,235,507 1,887,304
Other borrowings 16,078 3,021
-------------- ---------------
Total interest expense 2,251,585 1,890,325
-------------- ---------------
NET INTEREST INCOME 2,831,462 2,297,217
Provision for loan losses 446,500 230,000
-------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,384,962 2,067,217
NONINTEREST INCOME
Fees for customer services 247,353 268,073
Net gains on sales of securities available for sale 13,044 --
Other 37,456 25,664
-------------- ---------------
Total noninterest income 297,853 293,737
NONINTEREST EXPENSE
Salaries and employee benefits 995,856 800,027
Occupancy 371,446 360,499
Office supplies 101,964 93,370
FDIC and state assessments 20,149 17,431
Professional fees 76,213 56,297
Advertising and public relations 33,858 46,161
Taxes, other than income 63,069 57,680
Loss on other real estate owned and repossessions 27,000 47,000
Credit card processing 56,822 51,115
Director fees 56,400 49,200
Insurance 26,903 26,718
Other 254,704 160,146
-------------- ---------------
Total noninterest expense 2,084,384 1,765,644
-------------- ---------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING METHOD 598,431 595,310
Income tax expense 138,100 170,088
-------------- ---------------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING METHOD 460,331 425,222
Cumulative effect on prior years of a change in accounting for start-up costs (24,061) --
-------------- ---------------
NET INCOME $ 436,270 $ 425,222
============== ===============
BASIC AND DILUTED EARNINGS PER SHARE:
Before cumulative effect of a change in accounting method $ 3.27 $ 3.51
Cumulative effect on prior years of a change in accounting for
start-up costs (.17) --
-------------- ---------------
BASIC AND DILUTED EARNINGS PER SHARE $ 3.10 $ 3.51
============== ===============
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED 140,799 121,242
============== ===============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
21
<PAGE> 22
OHIO STATE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Shareholders'
Stock Capital Earnings Income (Loss) Equity
----- ------- -------- ------------- ------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $ 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
Comprehensive income:
Net income 436,270 436,270
Change in net unrealized
gain (loss) on securities
available for sale, net of
reclassification and tax
effects (380,766) (380,766)
---------------
Total comprehensive
income 55,504
Proceeds from sale of 19,780
shares of common stock,
net of offering costs 197,800 645,782 843,582
Cash dividends declared
($0.50 per share) (73,000) (73,000)
-------------- -------------- ------------- ------------ ---------------
Balance, December 31,
1999 $ 1,460,000 $ 2,652,709 $ 1,250,970 $ (346,384) $ 5,017,295
============== ============== ============= ============ ===============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
22
<PAGE> 23
OHIO STATE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 436,270 $ 425,222
Adjustment to reconcile net income to net cash from
operating activities:
Depreciation and amortization 142,310 118,540
Net amortization of securities 24,197 32,710
Provision for loan losses 446,500 230,000
Deferred taxes 71,053 33,260
Net gains on sales of securities available for sale (13,044) --
Loss on sale of premises and equipment 785 --
Loss on other real estate owned and repossessions 27,000 47,000
FHLB stock dividends (13,700) (13,100)
Net changes in
Deferred loan costs (179,829) (97,534)
Interest receivable (67,533) (40,527)
Interest payable 3,375 33,917
Other assets and liabilities (229,380) (42,285)
-------------- ---------------
Net cash from operating activities 648,004 727,203
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Sales 787,563 --
Maturities, prepayments and calls 2,749,473 2,337,212
Purchases (5,100,493) (5,503,568)
Securities held to maturity
Maturities, prepayments and calls -- 725,000
Purchases (626,250) (1,269,293)
Net change in interest-earning deposits in other banks -- 199,000
Loan originations and payments, net (11,637,747) (3,284,718)
Additions to premises and equipment (326,877) (178,122)
Proceeds from sale of premises and equipment 4,000 --
Proceeds from sale of other real estate owned and repossessions 186,296 210,345
-------------- ---------------
Net cash from investing activities (13,964,035) (6,764,144)
CASH FLOWS FROM FINANCING ACTIVITIES
Net changes in deposits 6,662,123 10,160,350
Net changes in short-term FHLB advances 1,000,000 --
Cash dividends paid (73,000) (60,600)
Proceeds from sale of stock, net of offering costs 843,582 225,900
-------------- ---------------
Net cash from financing activities 8,432,705 10,325,650
-------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (4,883,326) 4,288,709
BEGINNING CASH AND CASH EQUIVALENTS 8,015,195 3,726,486
-------------- ---------------
ENDING CASH AND CASH EQUIVALENTS $ 3,131,869 $ 8,015,195
============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 2,248,210 $ 1,856,408
Income taxes paid 175,000 72,000
SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers from loans to other real estate owned and repossessions $ 164,370 $ 298,429
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
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. Accordingly, the Corporation's operations are
considered by management to be aggregated in one reportable operating segment.
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.
Other securities such as FHLB stock are carried at cost.
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 that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of net deferred loan costs and the allowance for loan
losses.
Interest income is reported on the interest method and includes amortization of
net deferred loan 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)
24
<PAGE> 25
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
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 using past loan loss experience, 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.
Financial Instruments: Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and standby letters of credit,
issued to meet customer financing needs. The face amounts for these items
represents the exposure to loss, before considering customer collateral or
ability to repay. Such financial instruments are recorded when they are funded.
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 OSB has no common
stock equivalents.
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.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
- --------------------------------------------------------------------------------
(Continued)
25
<PAGE> 26
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Restrictions on Cash: The Corporation was required to have $432,000 and $425,000
of cash on hand or on deposit with the Federal Reserve Bank to meet regulatory
reserve and clearing requirements at year-end 1999 and 1998. These balances do
not earn interest.
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 shareholders' equity.
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.
New Accounting Pronouncements: The Corporation adopted Statement of Position
("SOP") 98-5, "Reporting on the Costs of Start-Up Activities" effective January
1, 1999. It requires costs of start-up activities and organizational costs be
expensed as incurred. As a result, the Corporation expensed, at January 1, 1999,
the remaining unamortized organizational costs associated with the formation of
the holding company in 1996. The amount is shown on the Statement of Income as a
cumulative effect of a change in accounting method.
Reclassifications: Certain reclassifications have been made to the 1998
financial statements to be comparable to the 1999 presentation.
NOTE 2 - SECURITIES
Year-end securities are as follows.
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury $ 898,475 $ 261 $ (4,579) $ 894,157
U.S. government and federal
agencies 5,279,823 -- (244,788) 5,035,035
Mortgage-backed 5,649,539 -- (275,718) 5,373,821
-------------- ------------ ----------- -------------
Total debt securities 11,827,837 261 (525,085) 11,303,013
Other securities 249,940 -- -- 249,940
-------------- ------------ ----------- -------------
Total $ 12,077,777 $ 261 $ (525,085) $ 11,552,953
============== ============ =========== =============
HELD TO MATURITY
State and municipal $ 3,819,444 $ 19,882 $ (184,412) $ 3,654,914
============== ============ =========== =============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
26
<PAGE> 27
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<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>
Proceeds from the sales of securities available for sale during 1999 were
$787,563. Gross gains of $13,044 were realized on the sales. No sales of
securities occurred in 1998.
Contractual maturities of securities at year-end 1999 were as follows.
Securities not due at a single maturity date, primarily mortgage-backed
securities, are shown separately.
<TABLE>
<CAPTION>
Available for sale Held to Maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 800,141 $ 798,299 $ -- $ --
Due from one to five years 3,379,693 3,257,763 -- --
Due from five to ten years -- -- 1,093,983 1,097,374
Due after ten years 1,998,464 1,873,130 2,725,461 2,557,540
Mortgage-backed 5,649,539 5,373,821 -- --
Other securities 249,940 249,940 -- --
------------- ------------- ------------- -------------
$ 12,077,777 $ 11,552,953 $ 3,819,444 $ 3,654,914
============== ============== ============= =============
</TABLE>
Securities with carrying values of $6,496,000 and $4,835,000 at December 31,
1999 and 1998 were pledged to secure public deposits and for other purposes.
- --------------------------------------------------------------------------------
(Continued)
27
<PAGE> 28
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 3 - LOANS
Year-end loans were as follows.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Commercial $ 14,880,924 $ 14,039,906
Installment 25,293,544 19,042,541
Real estate 7,543,953 3,548,885
Credit card 683,629 597,650
Other 27,841 27,583
--------------- ----------------
48,429,891 37,256,565
Net deferred loan costs 555,130 375,301
Allowance for loan losses (506,542) (360,093)
--------------- ----------------
$ 48,478,479 $ 37,271,773
=============== ================
</TABLE>
Activity in the allowance for loan losses was as follows.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Beginning balance $ 360,093 $ 311,095
Loans charged-off (367,631) (240,942)
Recoveries of previous charge-offs 67,580 59,940
Provision for loan losses 446,500 230,000
--------------- ----------------
Ending balance $ 506,542 $ 360,093
=============== ================
</TABLE>
Impaired loans were as follows.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Year-end loans with no allocated allowance
for loan losses $ -- $ --
Year-end loans with allocated allowance
for loan losses -- 457,464
--------------- ----------------
Total $ -- $ 457,464
=============== ================
Amount of the allowance allocated $ -- $ 45,746
Average of impaired loans during the year $ 229,095 $ 409,540
Interest income recognized during impairment 54,251 36,728
Cash-basis interest income recognized 54,251 36,728
</TABLE>
Nonperforming loans were as follows.
<TABLE>
<S> <C> <C>
Loans past due over 90 days still on accrual $ 172,052 $ 72,810
Loans on nonaccrual 227,851 633,094
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
28
<PAGE> 29
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
All impaired loans were also included in nonaccrual loans at December 31, 1998.
Nonperforming loans include smaller balance homogeneous loans such as
residential real estate, installment and credit card loans, that are
collectively evaluated for impairment.
NOTE 4 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land $ 115,875 $ 115,875
Premises 445,384 442,064
Equipment 1,049,552 1,462,981
Building and leasehold improvements 169,485 130,455
--------------- ----------------
Total cost 1,780,296 2,151,375
Less accumulated depreciation (703,745) (1,254,606)
--------------- ----------------
$ 1,076,551 $ 896,769
=============== ================
</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.
This lease expired November 1, 1998, and was not renewed. Total rental expense
was $38,748 in 1999 and $52,748 in 1998.
Rental commitments for the Bank's branch facility noncancelable operating lease
were as follows.
<TABLE>
<S> <C>
2000 $ 38,748
2001 38,883
2002 40,685
2003 40,685
2004 40,685
Thereafter 516,406
---------------
$ 716,092
===============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
29
<PAGE> 30
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 5 - DEPOSITS
Year-end interest-bearing deposits were as follows.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Demand $ 13,727,482 $ 11,931,417
Savings 10,056,178 9,605,660
Time:
In denominations under $100,000 20,847,132 18,730,867
In denominations of $100,000 or more 10,381,965 9,068,935
--------------- ----------------
Total interest-bearing deposits $ 55,012,757 $ 49,336,879
=============== ================
</TABLE>
Scheduled maturities of time deposits were as follows.
<TABLE>
<S> <C>
2000 $ 24,086,614
2001 5,003,843
2002 1,953,042
2003 72,320
2004 5,351
Thereafter 107,927
--------------
$ 31,229,097
==============
</TABLE>
Year-end stated maturities of certificates of deposit of $100,000 or more were
as follows.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Three months or less $ 2,430,717 $ 1,306,557
Three through six months 3,774,116 3,689,750
Six through twelve months 3,705,572 2,326,759
Over twelve months 471,560 1,745,869
-------------- --------------
$ 10,381,965 $ 9,068,935
============== ==============
</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>
1999 1998
---- ----
<S> <C> <C>
Maximum month-end balance during the year $ 1,500,000 $ 809,000
Average balance during the year 370,019 48,121
Average interest rate during the year 4.35% 6.28%
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
30
<PAGE> 31
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 6 - BORROWINGS (Continued)
The Corporation's maximum line of credit with the Federal Home Loan Bank was
$4,196,000 and $3,916,000 at December 31, 1999 and 1998. Borrowings of
$1,000,000 with an interest rate of 6.03%, which matures on January 14, 2000,
were outstanding at December 31, 1999. No borrowings were outstanding at
December 31, 1998. 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 $16,900 and $15,800 for the years ended December 31, 1999
and 1998.
NOTE 8 - INCOME TAXES
Income tax expense was as follows.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current $ 67,047 $ 136,828
Deferred 71,053 33,260
------------ ------------
$ 138,100 $ 170,088
============ ============
</TABLE>
Effective tax rates differ from federal statutory rates applied to financial
statement income due to the following.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Federal statutory rate times financial statement income $ 203,467 $ 202,405
Effect of:
Tax exempt interest (57,501) (38,289)
Other, net 7,866 5,972
------------ ------------
Total $ 138,100 $ 170,088
============ ============
Effective tax rate % 23.1% 28.6%
============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
31
<PAGE> 32
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES (Continued)
Year-end deferred tax assets and liabilities were due to the following.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 103,913 $ 78,934
Unrealized loss on securities available for sale 178,440 --
Deferred compensation 5,100 --
Organizational costs 3,652 --
Leases -- 813
------------ ------------
Total deferred tax assets 291,105 79,747
Deferred tax liabilities
Depreciation (40,972) (32,906)
Accrual to cash conversion (256,164) (165,460)
Unrealized gain on securities available for sale -- (17,712)
FHLB stock dividend (21,828) (17,170)
Other (2,240) (1,697)
------------ ------------
Total deferred tax liabilities (321,204) (234,945)
------------ ------------
Net deferred tax liability $ (30,099) $ (155,198)
============ ============
</TABLE>
NOTE 9 - RELATED PARTIES
Loans to principal officers, directors, and their affiliates in 1999 were as
follows.
<TABLE>
<S> <C>
Beginning balance $ 637,175
New loans 770,110
Repayments (544,189)
--------------
Ending balance $ 863,096
==============
</TABLE>
Deposits from principal officers, directors, and their affiliates at year-end
1999 were $6,651,179.
NOTE 10 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
Some financial instrument, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used. Off-balance-sheet
risk to credit loss exists up to the face amount of these instruments, although
material losses are not anticipated. The same credit policies are used to make
such commitments as are used for loans, including obtaining collateral at
exercise of the commitment.
- --------------------------------------------------------------------------------
(Continued)
32
<PAGE> 33
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES (Continued)
Commitments to extend credit, primarily in the form of undisbursed portions of
approved lines of credit, are principally variable rate commitments. The
interest rates on these commitments ranged from 8.00% to 14.25% at year-end 1999
and 7.25% to 10.50% at year-end 1998. Outstanding commitments for credit cards
had interest rates ranging from 12.00% to 16.25% at year-end 1999 and 12.00% to
17.90% at year-end 1998.
Year-end contractual amounts of financial instruments with off-balance-sheet
risk were as follows.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Commitments to extend credit $ 4,400,000 $ 2,156,000
Credit card arrangements 2,394,000 1,256,000
Letters of credit 30,000 20,000
</TABLE>
Included in cash and cash equivalents at year-end 1999 and 1998 was
approximately $1,680,000 and $6,999,000 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>
1999 1998
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 3,131,869 $ 3,131,869 $ 8,015,195 $ 8,015,195
Securities available for sale 11,552,953 11,552,953 10,559,019 10,559,019
Securities held to maturity 3,819,444 3,654,914 3,198,042 3,328,403
Loans, net 48,478,479 48,723,918 37,271,773 37,833,567
Accrued interest receivable 450,021 450,021 382,488 382,488
Financial liabilities
Demand and savings
deposits (31,502,099) (31,502,099) (28,269,271) (28,269,271)
Time deposits (31,229,097) (31,346,953) (27,799,802) (28,018,308)
Federal Home Loan Bank
borrowings (1,000,000) (1,000,000) -- --
Accrued interest payable (255,532) (255,532) (252,157) (252,157)
</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. For
fixed rate loans or deposits and for variable rate loans or deposits with
infrequent repricing or repricing limits, fair value is based on discounted cash
flows using current market rates applied to the estimated life and credit risk.
Fair values for impaired loans are estimated using discounted cash flow analysis
or underlying collateral values. The fair value of off-balance-sheet items is
based on the current fees or cost that would be charged to enter into or
terminate such arrangements and are considered nominal.
- --------------------------------------------------------------------------------
(Continued)
33
<PAGE> 34
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 12 - CAPITAL REQUIREMENTS, RESTRICTIONS ON RETAINED EARNINGS
AND REGULATORY MATTERS
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.
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 1999 and 1998, 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 as follows.
<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
------ ----- ------ ----- ------ -----
1999 (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted
assets) $ 5,185 10.4% $ 3,991 8.0% $ 4,989 10.0%
Tier 1 capital (to risk weighted
assets) 4,678 9.4 1,996 4.0 2,994 6.0
Tier 1 capital (to average assets) 4,678 6.8 2,750 4.0 3,437 5.0
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
</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 $196,000 is available to pay
dividends to OSB and still maintain the well-capitalized status. Under the terms
of the Memorandum of Understanding ("MOU"), which is more fully described below,
the Bank may not pay dividends to OSB without the prior written approval of the
Ohio Division of Financial Institutions and Federal Deposit Insurance
Corporation. However, this restriction does not prevent OSB from paying
dividends to its shareholders from its available assets.
- --------------------------------------------------------------------------------
(Continued)
34
<PAGE> 35
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 12 - CAPITAL REQUIREMENTS, RESTRICTIONS ON RETAINED EARNINGS
AND REGULATORY MATTERS (Continued)
On February 10, 2000, the Corporation entered into a MOU by and among The Marion
Bank, Ohio Division of Financial Institutions and the FDIC, whereby the Bank has
agreed to comply with certain directives which are intended to correct
operational deficiencies and improve overall financial condition.
The MOU requires the Bank to, among other things, retain an independent
consulting firm to prepare a findings and recommendations report on the
effectiveness of Bank's management and Board of Directors and engage an
independent public accounting firm to perform an attestation engagement on the
Bank's assessment of the internal control structure for 2000 and 2001 and to
review certain general ledger accounts and internal checking accounts.
Additionally, the Bank must implement a risk monitoring system related to
certain types of loans and maintain adequate allowance for loan losses, correct
weaknesses in internal control as identified by examiners from the Ohio Division
of Financial Institutions and establish written policies and procedures to
ensure that transactions with Bank insiders, and their related interests, are
handled in a proper manner. The Bank is implementing corrective actions to
comply with the provisions discussed above.
The Corporation filed a Registration Statement with the Securities and Exchange
Commission to sell 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 could purchase the stock at $45.00. The Corporation received
approximately $1,069,000 in net proceeds after deducting the offering expenses
from the sale of stock. As of December 31, 1999, the Corporation had sold and
issued all 24,800 shares relating to the stock offering.
NOTE 13 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Unrealized holding gains (losses) on available-for-sale
securities $ (563,874) $ 57,382
Reclassification adjustments for (gains) and losses later
recognized in income (13,044) --
--------------- --------------
Net unrealized gains and losses (576,918) 57,382
Tax (expense) benefit 196,152 (19,510)
--------------- --------------
Other comprehensive income (loss) $ (380,766) $ 37,872
=============== ==============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
35
<PAGE> 36
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 14 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
Condensed parent company only financial statements for OSB follows.
CONDENSED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Assets
Cash and cash equivalents $ 667,158 $ 2,164
Investment in bank subsidiary 4,330,734 4,154,155
Organizational costs, net -- 24,061
Other assets 19,403 10,829
--------------- -------------
Total assets $ 5,017,295 $ 4,191,209
=============== =============
Shareholders' equity $ 5,017,295 $ 4,191,209
=============== =============
</TABLE>
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Dividends from bank subsidiary $ -- $ 62,000
Total expense, including cumulative effect of a change
in accounting method 29,649 13,271
--------------- -------------
Income before income tax and undistributed
subsidiary income (29,649) 48,729
Income tax benefit 8,574 4,512
Equity in undistributed subsidiary income 457,345 371,981
--------------- -------------
Net income $ 436,270 $ 425,222
=============== =============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
36
<PAGE> 37
OHIO STATE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 14 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENT OF CASH FLOWS
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 436,270 $ 425,222
Adjustments:
Equity in undistributed subsidiary income (457,345) (371,981)
Change in other assets (8,574) (4,494)
Amortization 24,061 9,956
--------------- -------------
Net cash from operating activities (5,588) 58,703
CASH FLOWS FROM INVESTING ACTIVITIES
Capital contribution to subsidiary (100,000) (225,900)
--------------- -------------
Net cash from investing activities (100,000) (225,900)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of stock 843,582 225,900
Dividends paid (73,000) (60,600)
--------------- -------------
Net cash from financing activities 770,582 165,300
--------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 664,994 (1,897)
BEGINNING CASH AND CASH EQUIVALENTS 2,164 4,061
--------------- -------------
ENDING CASH AND CASH EQUIVALENTS $ 667,158 $ 2,164
=============== =============
</TABLE>
- --------------------------------------------------------------------------------
37
<PAGE> 38
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 4 and 5 under the captions Continuing Directors and Nominees in
the Corporation's Definitive Proxy Statement dated March 31, 2000 for the Annual
Meeting of Shareholders to be held on April 20, 2000, 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 31, 2000 for the Annual Meeting of
Shareholders to be held on April 20, 2000, 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 page 3 under the captions Continuing Directors and
Nominees in the Corporation's Definitive Proxy Statement dated March 31, 2000
for the Annual Meeting of Shareholders to be held on April 20, 2000, and is
incorporated herein by reference.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
contained on pages 8 and 9 under the caption Certain Transactions in the
Corporation's Definitive Proxy Statement dated March 31, 2000 for the Annual
Meeting of Shareholders to be held on April 20, 2000 and is incorporated herein
by reference.
- --------------------------------------------------------------------------------
38
<PAGE> 39
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 Instruments Defining the Rights of
Security Holders *** 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 2000 Annual
Meeting of the Shareholders **** 7
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
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 1999 Form
10-KSB and is available to shareholders upon request.
*** See amended Articles of Incorporation of the Corporation for provisions
defining the rights of the holders of common shares.
**** The indicated exhibit will be 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.
- --------------------------------------------------------------------------------
39
<PAGE> 40
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 16, 2000 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.
<TABLE>
<CAPTION>
Signatures Signatures
---------- ----------
<S> <C>
/s/GARY E. PENDLETON /s/LLOYD L. JOHNSTON
- -------------------------------------------- --------------------------------------------
Gary E. Pendleton Lloyd L. Johnston
President and Chief Executive Officer, Director
/s/WILLIAM H. HARRIS /s/F. WINTON LACKEY
- -------------------------------------------- --------------------------------------------
William H. Harris F. Winton Lackey
Executive Vice President and Cashier, Director
/s/FRED K. WHITE /s/THURMAN R. MATHEWS
- -------------------------------------------- --------------------------------------------
Fred K. White Thurman R. Mathews
Director, Chairman of the Board Director
/s/SAMUEL J. BIRNBAUM /s/PETER B. MILLER
- -------------------------------------------- --------------------------------------------
Samuel J. Birnbaum Peter B. Miller
Director Director
/s/LOIS J. FISHER /s/JOHN D. OWENS
- -------------------------------------------- --------------------------------------------
Lois J. Fisher John D. Owens
Director Director
/s/THEODORE L. GRAHAM
- --------------------------------------------
Theodore L. Graham
Director
</TABLE>
- --------------------------------------------------------------------------------
40
<PAGE> 1
EXHIBIT 3.1
AMENDED
ARTICLES OF INCORPORATION
OF
OHIO STATE BANCSHARES, INC.
*****
THE UNDERSIGNED, under Sections 1701.01 et seq. of the Revised Code of
Ohio, do hereby certify:
FIRST: The name of said Corporation shall be:
Ohio State Bancshares, Inc.
SECOND: The place in the State of Ohio where its principal office is to
be located is Marion, in Marion County.
THIRD: The purposes for which it is formed are:
To engage in any lawful act or activity for which corporations may be
formed under Sections 1701.01 to 1701.98 inclusive of the Ohio Revised Code.
FOURTH: The authorized number of shares of the Corporation is five
hundred thousand (500,000), all of which shall be with a par value of Ten
Dollars ($10.00) each.
FIFTH: The following provisions are hereby agreed to for the purpose of
defining, limiting and regulating the exercise of the authority of the
Corporation, or of the Directors, or of all of the shareholders:
The Board of Directors is expressly authorized to set apart, out of any
of the funds of the Corporation available for dividends, a reserve or reserves
for any proper purpose or to abolish any such reserve in the manner in which it
was created, and to purchase on behalf of the Corporation any shares issued by
it to the extent permitted under Sections 1701.01 et seq. of the Revised Code of
Ohio.
The Corporation may in its regulations confer powers upon its Board of
Directors in addition to the powers and authorities conferred upon it expressly
by Sections 1701.01 et seq. of the Revised Code of Ohio.
Any meeting of the shareholders or the Board of Directors may be held
at any place within or without the State of Ohio in the manner provided for in
the regulations of the Corporation.
Subject to Article SIXTH, any amendments to the Articles of
Incorporation may be made from time to time, and any proposal or proposition
requiring the action of shareholders may be
- --------------------------------------------------------------------------------
<PAGE> 2
authorized from time to time by the affirmative vote of the holders of shares
entitling them to exercise a majority of the voting power of the Corporation.
SIXTH: FAIR PRICE AND SUPER VOTE REQUIREMENT
A. Definitions as used in this Article Sixth
(1) "Affiliate" or "Associate" shall have the respective meanings
given to such terms in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as in effect on March 1, 1994.
(2) A person shall be a "beneficial owner" of any Voting Stock:
(i) which such person or any of its Affiliates or Associates
beneficially owns, directly or indirectly; or
(ii) which such person or any of its Affiliates or Associates
has by itself or with others (a) the right to acquire (whether such right is
exercisable immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise, or (b) the right to
vote pursuant to any agreement, arrangement or understanding; or
(iii) which is beneficially owned, directly or indirectly, by
any other person with which such person or any of its Affiliates or Associates
has any agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of Voting Stock.
(3) "Business Combination" shall include:
(i) any merger or consolidation of the Corporation or any of its
subsidiaries with or into an Interested Shareholder, regardless of which person
is the surviving entity;
(ii) any sale, lease, exchange, mortgage, pledge, or other
disposition (in one transaction or a series of transactions) from the
Corporation or any of its subsidiaries to an Interested Shareholder, or from an
Interested Shareholder to the Corporation or any of its subsidiaries, of assets
having an aggregate Fair Market Value of twenty percent (20%) or more of the
Corporation's total stockholders' equity;
(iii) the issuance, sale or other transfer by the Corporation or
any subsidiary thereof of any securities of the Corporation or any subsidiary
thereof to an Interested Shareholder (other than an issuance or transfer of
securities which is effected on a pro rata basis to all shareholders of the
Corporation);
(iv) the acquisition by the Corporation or any of its
subsidiaries of any securities of an Interested Shareholder;
- --------------------------------------------------------------------------------
<PAGE> 3
(v) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an Interested
Shareholder;
(vi) any reclassification or recapitalization of securities of
the Corporation if the effect, directly or indirectly, of such transaction is to
increase the relative voting power of an Interested Shareholder; or
(vii) any agreement, contract or other arrangement providing for
or resulting in any of the transactions described in this definition of Business
Combination.
(4) "Continuing Director" shall mean any member of the Board of
Directors of the Corporation who is unaffiliated with the Interested Shareholder
and was a member of the Board of Directors prior to the time that the Interested
Shareholder became an Interested Shareholder; any successor of a Continuing
Director who is unaffiliated with the Interested Shareholder and is approved to
succeed a Continuing Director by the Continuing Directors; any member of the
Board of Directors who is appointed to fill a vacancy on the Board of Directors
who is unaffiliated with the Interested Shareholder and is approved by the
Continuing Directors.
(5) "Fair Market Value" shall mean:
(i) in the case of securities listed on a national securities
exchange or quoted in the National Association of Securities Dealers Automated
Quotations System (or any successor thereof), the highest sales price or bid
quotation, as the case may be, reported for securities of the same class or
series traded on a national securities exchange or in the over-the-counter
market during the 30-day period immediately prior to the date in question, or if
no such report or quotation is available, the fair market value as determined by
the Continuing Directors; and
(ii) in the case of other securities and of other property or
consideration (other than cash), the Fair Market Value as determined by the
Continuing Directors; provided, however, in the event the power and authority of
the Continuing Directors ceases and terminates pursuant to Subdivision F of this
Article SIXTH as a result of there being less than five Continuing Directors at
any time, then (a) for purposes of clause (ii) of the definition of "Business
Combination," any sale, lease, exchange, mortgage, pledge, or other disposition
of assets from the Corporation or any of its subsidiaries to an Interested
Shareholder or from an Interested Shareholder to the Corporation or any of its
subsidiaries, regardless of the Fair Market Value thereof, shall constitute a
Business Combination, and (b) for purposes of paragraph 1 of Subdivision D of
this Article SIXTH, in determining the amount of consideration received or to be
received per share by the Independent Shareholders in a Business
- --------------------------------------------------------------------------------
<PAGE> 4
Combination, there shall be excluded all consideration other than cash and the
Fair Market Value of securities listed on a national securities exchange or
quoted in the National Association of Securities Dealers Automated Quotations
System (or any successor thereof) for which there is a reported sales price or
bid quotation, as the case may be, during the 30-day period immediately prior to
the date in question.
(6) "Independent Shareholder" shall mean shareholders of the
Corporation other than the Interested Shareholder engaged in or proposing the
Business Combination.
(7) "Interested Shareholder" shall mean: (a) any person (other than
the Corporation or any of its subsidiaries), and (b) the Affiliates and
Associates of such person, who, or which together, are:
(i) the beneficial owner, directly or indirectly, of 10% or more
of the outstanding Voting Stock or were within the two-year period immediately
prior to the date in question the beneficial owner, directly or indirectly, of
10% or more of the then outstanding Voting Stock; or
(ii) an assignee of or other person who has succeeded to any
shares of the Voting Stock which were at any time within the two-year period
immediately prior to the date in question beneficially owned by an Interested
Shareholder, if such assignment or succession shall have occurred in the course
of a transaction or series of transactions not involving a public offering
within the meaning of the Securities Act of 1933.
Notwithstanding the foregoing, no Trust Department, or designated
fiduciary or other trustee of such Trust Department of the Corporation or a
subsidiary of the Corporation, or other similar fiduciary capacity of the
Corporation with direct voting control of the outstanding Voting Stock shall be
included or considered as an Interested Shareholder. Further, no profit-sharing,
employee stock ownership, employee stock purchase and savings, employee pension,
or other employee benefit plan of the Corporation or any of it subsidiaries, and
no trustee of any such plan in its capacity as such trustee, shall be included
or considered as an Interested Shareholder.
(8) A "Person" shall mean an individual, partnership, trust,
corporation, or other entity and includes any two or more of the foregoing
acting in concert.
(9) "Voting Stock" shall mean all outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of directors
of the Corporation.
B. Supermajority Vote to Effect Business Combination. No Business
Combination shall be effected or consummated unless:
- --------------------------------------------------------------------------------
<PAGE> 5
(1) Authorized and approved by the Continuing Directors and, if
otherwise required by law to authorize or approve the transaction, the approval
or authorization of shareholders of the Corporation, by the affirmative vote of
the holders of such number of shares as is mandated by the Ohio Revised Code; or
(2) Authorized and approved by the affirmative vote of holders of
not less than 80% of the outstanding Voting Stock voting together as a single
class.
The authorization and approval required by this Subdivision B is in
addition to any authorization and approval required by Subdivision C of this
Article SIXTH.
C. Fair Price Required to Effect Business Combination. No Business
Combination shall be effected or consummated unless:
(1) All the conditions and requirements set forth in Subdivision D
of this Article SIXTH have been satisfied; or
(2) Authorized and approved by the Continuing Directors; or
(3) Authorized and approved by the affirmative vote of holders of
not less than 66 2/3% of the outstanding Voting Stock held by all Independent
Shareholders voting together as a single class.
Any authorization and approval required by this Subdivision C is in
addition to any authorization and approval required by Subdivision B of this
Article SIXTH.
D. Conditions and Requirements to Fair Price. All the following
conditions and requirements must be satisfied in order for clause (1) of
Subdivision C of this Article SIXTH to be applicable.
(1) The cash and Fair Market Value of the property, securities or
other consideration to be received by the Independent Shareholders in the
Business Combination per share for each class or series of capital stock of the
Corporation must not be less than the sum of:
(i) the highest per share price (including brokerage
commissions, transfer taxes, soliciting dealer's fees and similar payments) paid
by the Interested Shareholder in acquiring any shares of such class or series,
respectively, and, in the case of Preferred Stock, if greater, the amount of the
per share redemption price; and
(ii) the amount, if any, by which interest on the per share
price, calculated at the Treasury Bill Rate from time to time in effect, from
the date the Interested Shareholder first became an Interested Shareholder until
the Business Combination has been consummated, exceeds the per share amount of
cash dividends received by the Independent Shareholders during such period. The
"Treasury Bill Rate" means for each calendar quarter, or part thereof,
- --------------------------------------------------------------------------------
<PAGE> 6
the interest rate of the last auction in the preceding calendar of 91-day United
States Treasury Bills expressed as a bond equivalent yield.
For purposes of this paragraph (1) per share amounts shall be
appropriately adjusted for any recapitalization, reclassification, stock
dividend, stock split, reserve split, or other similar transaction. Any Business
Combination which does not result in the Independent Shareholders receiving
consideration for or in respect of their shares of capital stock of the
Corporation shall not be treated as complying with the requirements of this
paragraph (1).
(2) The form of the consideration to be received by the Independent
Shareholders owning the Corporation's shares must be the same as was previously
paid by the Interested Shareholder(s) for shares of the same class or series;
provided, however, if the Interested Shareholder previously paid for shares of
such class or series with different forms of consideration, the form of the
consideration to be received by the Independent Shareholders owning shares of
such class or series must be in the form as was previously paid by the
Interested Shareholder in acquiring the largest number of shares of such class
or series previously acquired by the Interested Shareholder, provided, further,
in the event no shares of the same class or series had been previously acquired
by the Interested Shareholder, the form of consideration must be cash. The
provisions of this paragraph (2) are not intended to diminish the aggregate
amount of cash and Fair Market Value of any other consideration that any holder
of the Corporation's shares is otherwise entitled to receive upon the
liquidation or dissolution of the Corporation, under the terms of any contract
with the Corporation or an Interested Shareholder, or otherwise.
(3) From the date the Interested Shareholder first became an
Interested Shareholder until the Business Combination has been consummated, the
following requirements must be complied with unless the Continuing Directors
otherwise approve:
(i) the Interested Shareholder has not received, directly or
indirectly, the benefit (except proportionately as a shareholder) of any loan,
advance, guaranty, pledge, or other financial assistance, tax credit or
deduction, or other benefit from the Corporation or any of its subsidiaries;
(ii) there shall have been no failure to declare and pay in
full, when and as due or scheduled, any dividends required to be paid on any
class or series of the Corporation's shares;
(iii) there shall have been (a) no reduction in the annual rate
of dividends paid on Common Shares of the Corporation (except as necessary to
reflect any split of such shares), and (b) an increase in the annual rate of
dividends as necessary to reflect reclassification (including
- --------------------------------------------------------------------------------
<PAGE> 7
a reverse split), recapitalization or any similar transaction which has the
effect of reducing the number of outstanding Common Shares; and
(iv) there shall have been no amendment or other modification to
any profit-sharing, employee stock ownership; employee stock purchase and
savings, employee pension or other employee benefit plan of the Corporation or
any of its subsidiaries, the effect of which is to change in any manner the
provisions governing the voting of any shares of capital stock of the
Corporation in or covered by such plan.
(4) A proxy or information statement describing the Business
Combination and complying with the requirements of the Securities Exchange Act
of 1934, as amended, and the rules and regulations under it (or any subsequent
provisions replacing that Act and the rules and regulations under it) has been
mailed at least 30 days prior to the completion of the Business Combination to
the holders of all outstanding Voting Stock. If deemed advisable by the
Continuing Directors, the proxy or information statement shall contain a
recommendation by the Continuing Directors as to the advisability (or
inadvisability) of the Business Combination and/or an opinion by an investment
banking firm, selected by the Continuing Directors and retained at the expense
of the Corporation, as to the fairness (or unfairness) of the Business
Combination to the Independent Shareholders.
E. Other Applicable Voting Requirement. The affirmative votes or
approvals required to be received from shareholders of the Corporation under
Subdivisions B, C and H of this Article SIXTH are in addition to the vote of the
holders of any class of shares of capital stock of the Corporation otherwise
required by law, or by other provisions of these Articles of Incorporation, or
by the express terms of the shares of such class. The affirmative votes or
approvals required to be received from shareholders of the Corporation under
Subdivisions B, C and H of this Article SIXTH shall apply even though no vote or
a lesser percentage vote, may be required by law, or by other provisions of
these Articles of Incorporation, or otherwise. Any authorization, approval or
other action of the Continuing Directors under this Article SIXTH is in addition
to any required authorization, approval or other action of the Board of
Directors.
F. Continuing Directors. All actions required or permitted to be taken
by the Continuing Directors shall be taken with or without a meeting by the vote
or written consent of two-thirds of the Continuing Directors, regardless of
whether the Continuing Directors constitute a quorum of the members of the Board
of Directors then in office. In the event that the number of Continuing
Directors is at any time less than five, all power and authority of the
Continuing Directors under this Article SIXTH shall thereupon cease and
terminate, including, without
- --------------------------------------------------------------------------------
<PAGE> 8
limitation, the authority of the Continuing Directors to authorize and approve a
Business Combination under Subdivisions B and C of this Article SIXTH and to
approve a successor Continuing Director. Two-thirds of the Continuing Directors
shall have the power and duty, consistent with their fiduciary obligations, to
determine for the purpose of this Article SIXTH, on the basis of information
known to them:
(1) Whether any person is an Interested Shareholder;
(2) Whether any person is an Affiliate or Associate of another;
(3) Whether any person has an agreement, arrangement, or
understanding with another or is acting in concert with another; and
(4) The Fair Market Value of property, securities or other
consideration (other than cash).
The good faith determination of the Continuing Directors on such
matters shall be binding and conclusive for purposes of this Article SIXTH.
G. Effect on Fiduciary Obligations of Interested Shareholders. Nothing
contained in this Article SIXTH shall be construed to relieve any Interested
Shareholder from any fiduciary obligations imposed by law.
H. Repeal. Notwithstanding any other provisions of these Articles of
Incorporation (and notwithstanding the fact that a lesser percentage vote may be
required by law or other provision of these Articles of Incorporation), the
provisions of this Article SIXTH may not be repealed, amended, supplemented or
otherwise modified, unless:
(1) The Continuing Directors (or, if there is no Interested
Shareholder, a majority vote of the whole Board of Directors of the Corporation)
recommend such repeal, amendment, supplement or modification and such repeal,
amendment or modification is approved by the affirmative vote of the holders of
not less than a simple majority of the outstanding Voting Stock; or
(2) Such repeal, amendment, supplement or modification is approved
by the affirmative vote of holders of (a) not less than 80% of the outstanding
Voting Stock voting together as a single class, and (b) not less than 66 2/3% of
the outstanding Voting Stock held by all shareholders other than Interested
Shareholders voting together as a single class.
I. Further Considerations to Effect Business Combination. No Business
Combination shall be effected or consummated unless, in addition to the
consideration set forth in Subdivisions B, C, D and E of this Article SIXTH, the
Board of Directors of the Corporation, including the
- --------------------------------------------------------------------------------
<PAGE> 9
Continuing Directors shall consider all of the following factors and any other
factors which it (they) deem relevant:
(1) The Social and economic effects of the transaction on the
Corporation and its subsidiaries, employees, depositors, loan and other
customers, creditors and other elements of the communities in which the
Corporation and its subsidiaries operate or are located;
(2) The business and financial conditions and earnings prospects of
the Interested Shareholder, including, but not limited to, debt service and
other existing or likely financial obligations of the Interested Shareholder,
and the possible effect on other elements of the communities in which the
Corporation and its subsidiaries operate or are located, and
(3) The competence, experience and integrity of the Interested
Shareholder and his (its) or their management.
SEVENTH: Shareholders of the Corporation shall have the preemptive
right to purchase shares when issued by the Corporation as provided by and
subject to the limitations of the Ohio General Corporation Law as the same may
be in effect from time to time.
EIGHTH: The Corporation shall indemnify its present and past Directors,
officers, employees and agents, and such other persons as it shall have powers
to indemnify, to the full extent permitted under, and subject to the limitations
of, Title 17 of the Ohio Revised Code. Additionally, and subject to the
limitations set forth below, the Corporation shall indemnify its present and
past Directors for personal liability for monetary damages resulting from breach
of their fiduciary duty as Directors. Notwithstanding the above, no
indemnification for personal liability shall be provided for: (i) any breach of
the Directors' duty of loyalty to the Corporation or its stockholder; (ii) acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) illegal distribution of dividends; and (iv) any
transaction from which the Director derived an improper personal benefit.
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<PAGE> 1
EXHIBIT 3.2
CODE OF REGULATIONS
OF
OHIO STATE BANCSHARES, INC.
ARTICLE 1
Offices
Section 1. Principal Office. The principal office of the Company shall
be at such place in the County of Marion, Ohio, as may be designated from time
to time by the Board of Directors.
Section 2. Other Offices. The Corporation shall also have offices at
such other places without, as well as within, the State of Ohio, as the Board of
Directors may from time to time determine.
ARTICLE II
Meetings of Shareholders
Section 1. Annual Meeting. The annual meeting of the shareholders of
this Corporation for the purpose of fixing or changing the number of directors
of the Corporation, electing directors and transacting such other business as
may come before the meeting, shall be held at such time as may be fixed by the
Board of Directors by resolution from time to time.
Section 2. Special Meetings. Special meetings of the shareholders may
be called at any time by the Chairman of the Board of Directors, President, or a
majority of the Board of Directors acting with or without a meeting, or by
shareholders owning, in the aggregate, not less than twenty-five percent (25%)
of the stock of the Corporation.
Section 3. Place of Meetings. Meetings of shareholders shall be held at
the main office of the Corporation unless the Board of Directors decides that a
meeting shall be held at some other place within or without the State of Ohio
and causes the notices thereof to so state.
Section 4. Notice of Meetings. Unless waived, a written, printed, or
typewritten notice of each annual or special meeting stating the day, hour, and
place and the purpose or purposes thereof shall be served upon or mailed to each
shareholder of record (a) as of the day next preceding the day on which notice
is given or (b) if a record date therefor is duly fixed, of record as of said
date. Notice of such meeting shall be mailed, postage prepaid, at least ten (10)
days prior to the date thereof. If mailed, it shall be directed to a shareholder
at his address as the name appears upon the records of the Corporation.
Section 5. Waiver of Notice. Any shareholder, either before or after
any meeting, may waive any notice required to be given by law or under these
Regulations; and whenever all of the shareholders entitled to vote shall meet in
person or by proxy and consent to holding a meeting, it shall be valid for all
purposes without call or notice, and at such meeting any action may be taken.
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<PAGE> 2
Section 6. Quorum. A majority of the outstanding capital stock,
represented in person or by proxy, shall constitute a quorum at any meeting of
the shareholders, unless otherwise provided by law; but less than a quorum may
adjourn any meeting, from time to time, and a meeting may be held, as adjourned,
without further notice. A majority of the votes cast shall decide every question
or matter submitted to the shareholders at any meeting, unless otherwise
provided by law or by the Articles of Incorporation.
Section 7. Proxies. Any shareholder of record who is entitled to attend
a shareholders' meeting, or to vote thereat or to assent or give consents in
writing, shall be entitled to be represented at such meetings or to vote thereat
or to assent or give consent in writing, as the case may be, or to exercise any
other of his rights, by proxy or proxies appointed by a writing signed by such
shareholder, which need not be sealed, witnessed or acknowledged.
A telegram, cablegram, wireless message or photogram appearing to have
been transmitted by a shareholder, or a photograph, photostatic facsimile or
equivalent reproduction of a writing appointing a proxy or proxies shall be a
sufficient writing.
No appointment of a proxy shall be valid after the expiration eleven
(11) months after it is made, unless the writing specifies the date on which it
is to expire or the length of time it is to continue in force.
Section 8. Voting. At any meeting of the shareholders, each shareholder
of the Corporation shall, except as otherwise provided by law or by the Articles
of Incorporation or by these Regulations, be entitled to one (1) vote in person
or by proxy for each share of the corporation registered in his name on the
books of the Corporation: (a) on the record date for the determination of
shareholders entitled to vote at such meeting, notwithstanding the prior or
subsequent sale, or other disposal of such share or shares or transfer of the
same on the books of the Corporation on or after the record date; or (b) if no
such record date shall have been fixed, then at the time of such meeting.
Section 9. Action Without Meeting. Any action which may be authorized
or taken at any meeting of shareholders may be authorized or taken without a
meeting in a writing or writings signed by all of the holders of shares who
would be entitled to notice of a meeting of the shareholders held for such
purpose. Such writing or writings shall be filed with or entered upon the
records of the Corporation.
ARTICLE III
Directors
Section 1. Number of Directors. The number of Directors constituting
the entire Board shall not be less than three (3) nor more than twenty-five
(25), the exact number of Directors to be determined from time to time by a
majority vote of the whole Board of Directors of the Corporation, or by a
majority vote of stockholders at an annual meeting or special meeting called for
such purpose, and such exact number shall be thirteen (13) until otherwise so
determined; provided, however, that any increase or decrease in the number of
Directors resulting from an action by a majority of the whole Board as herein
provided for, shall be subject to a limitation of two persons in any one
calendar year.
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<PAGE> 3
Section 2. Election and Term of Directors. The Board of Directors shall
be divided into three classes, as nearly equal in number as the then total
number of Directors constituting the whole Board permits, with the term of
office of one class expiring each year. Any vacancies in the Board of Directors
for any reason, and any newly created directorships resulting from any increase
in the number of Directors, may be filled by the Board of Directors, acting by a
majority of the Directors then in office, although less than a quorum, and any
Director so chosen shall hold office until the next election of the class for
which such Directors shall have been chosen and until their successor shall be
elected and qualified. No decrease in the number of Directors shall shorten the
term of any incumbent Director. At each annual meeting of stockholders, the
successors to the class of Directors whose term shall then expire shall be
elected to hold office for a term expiring at the third succeeding annual
meeting.
Section 3. Nominations. Nominations of persons for election to the
Board of the Corporation at a meeting of the Shareholders may be made by or at
the direction of the Board of Directors or may be made at a meeting of
Shareholders by any Shareholder of the Corporation entitled to vote for the
election of Directors at the meeting who complies with the notice procedures set
forth in this Section 3 of Article III. Such nominations, other than those made
by or at the direction of the Board, shall be made pursuant to timely notice in
writing to the Secretary of the Corporation. To be timely, a Shareholder's
notice shall be delivered to or mailed and received at the principal office of
the Corporation not less than fourteen (14) days nor more than fifty (50) days
prior to the meeting; provided, however, that in the event that less than
twenty-one (21) days notice or prior public disclosure of the date of the
meeting is given or made to Shareholders, notice by the Shareholder to be timely
must be so delivered or mailed no later than the close of business on the
seventh (7th) day following the day on which day notice of the date of the
meeting was mailed or such public disclosure was made, whichever first occurs,
but in no event shall such timely notice of Shareholder nomination be received
by the Secretary of the Corporation less than seven (7) days prior to the
Shareholder meeting. Such Shareholder's notice to the Secretary shall set forth
(a) as to each person whom the Shareholder proposes to nominate for election or
reelection as a Director, (i) the name, age, business address and residence
address of the persons, (ii) the principal occupation or employment of the
person, and (iii) the class and number of shares of capital stock of the
Corporation which are beneficially owned by the person and (b) as to the
Shareholder giving the notice (i) the name and record address of the Shareholder
and (ii) the class and number of shares of capital stock of the Corporation
which are beneficially owned by the Shareholder. The Corporation may require any
proposed nominee to furnish such other information as may reasonably be required
by the Corporation to determine the eligibility of such proposed nominee to
serve as Director of the Corporation. No person shall be eligible for election
as a Director of the Corporation at a meeting of the Shareholders unless
nominated in accordance with the procedures set forth herein. The Chairman of
the meeting shall, if the facts warrant, determine and declare to the meeting
that a nomination was not made in accordance with the foregoing procedure and
the defective nomination shall be disregarded.
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<PAGE> 4
Section 4. Vacancies. In case of any vacancy in the Board of Directors,
through death, resignation, disqualification, or other cause, the remaining
Directors, by an affirmative vote of a majority thereof, may elect a successor
to hold office for the unexpired portion of the term of the Director whose place
is vacant until the election and qualification of his successor.
Section 5. Removal. Any or all of the directors may be removed by the
affirmative vote of a majority of the outstanding shares of the corporation,
present in person or by proxy, at a duly called and held meeting for such
purpose.
ARTICLE IV
Powers, Meeting, and Compensation of Directors
Section 1. Meetings of the Board. A meeting of the Board of Directors
shall be held immediately following the adjournment of each shareholders'
meeting at which directors are elected, or within sixty (60) days thereafter,
and notice of such meeting need not be given.
The Board of Directors may, by bylaws or resolution, provide for other
meetings of the Board. Special meetings of the Board of Directors may be held at
any time upon call of the Chairman of the Board of Directors, President,
Executive Vice President (if one is appointed and serving at such time), Senior
Vice President (if one is appointed and serving at such time), or any two (2)
members of the Board.
Notice of any special meeting of the Board of Directors shall be mailed
to each director, addressed to him at his residence or usual place of business,
at least two (2) days before the day on which the meeting is to be held, or
shall be sent to him at such place by telegraph, cable, radio or wireless, or be
given personally or by telephone, not later than the day before the day on which
the meeting is to be held. Every such notice shall state the time and place of
the meeting but need not state the purposes thereof. Notice of any meeting of
the Board need not be given to any director, however, if waived by him in
writing or by telegraph, cable, radio, wireless, or telephonic communication
whether before or after such meeting is held, or if he shall be present at such
meeting; and any meeting of the Board shall be a legal meeting without any
notice thereof having been given, if all the directors shall be present thereat.
Meetings of the Board shall be held at the office of the Corporation,
or at such other place, within or without the State of Ohio, as the Board may
determine from time to time and as may be specified in the notice thereof.
Meetings of the Board of Directors may also be held by the utilization of
simultaneous telephonic communications linking all directors present at such
meetings, and all such business conducted via such telephonic communication
shall be considered legally enforceable by the Corporation.
Section 2. Quorum. A majority of the Board of Directors serving in such
capacity shall constitute a quorum for the transaction of business, provided
that whenever less than a quorum is present at the time and place appointed for
any meeting of the Board, a majority of those present may adjourn the meeting
from time to time, without notice other than by announcement at the meeting,
until a quorum shall be present.
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<PAGE> 5
Section 3. Action without Meeting. Any action may be authorized or
taken without a meeting in a writing or writings signed by all the directors,
which writing or writings shall be filed with or entered upon the records of the
Corporation.
Section 4. Compensation. The directors shall receive compensation for
their services in an amount fixed by resolution of the Board of Directors.
Section 5. Bylaws. For the government of its actions, the Board of
Directors may adopt bylaws consistent with the Articles of Incorporation and
these Regulations.
ARTICLE V
Committees
Section 1. Committees. The Board of Directors may by resolution provide
such standing or special committees as it deems desirable, and discontinue the
same at its pleasure. Each such committee shall have such powers and perform
such duties, not inconsistent with law, as may be delegated to it by the Board
of Directors. Vacancies in such committees may be filled by the Board of
Directors.
ARTICLE VI
Officers
Section 1. General Provisions. The Board of Directors shall elect a
President, such number of Vice Presidents as the Board may from time to time
determine, a Secretary and Treasurer, and, in its discretion, a Chairman of the
Board of Directors and a Vice Chairman of the Board of Directors. If no such
Chairman of the Board is elected by the Board of Directors, the President of the
Corporation shall act as presiding officer of the Corporation. The Board of
Directors may from time to time create such offices and appoint such other
officers, subordinate officers and assistant officers as it may determine. The
President and the Chairman of the Board shall be, but the other officers need
not be, chosen from among the members of the Board of Directors.
Section 2. Terms of Office. The officers of the Corporation shall hold
office at the pleasure of the Board of Directors and, unless sooner removed by
the Board of Directors, until the reorganization meeting of the Board of
Directors following the date of their election and until their successors are
chosen and qualified.
A vacancy in any office, however created, may be filled by the Board of
Directors.
ARTICLE VII
Duties of Officers
Section 1. Chairman of the Board. The Chairman of the Board, if one be
elected, shall preside at all meetings of the shareholders and Board of
Directors and shall have such other powers and duties as may be prescribed by
the Board of Directors or by law.
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<PAGE> 6
Section 2. Vice Chairman of the Board. The Vice Chairman of the Board,
if one be elected, shall preside at all meetings of the shareholders and the
Board of Directors, in the absence of the Chairman of the Board. The Vice
Chairman shall have such powers and duties as may be prescribed by the Board of
Directors, or prescribed by the Chairman of the Board, or by law.
Section 3. President. The President shall be the chief executive
officer of the Corporation and shall exercise supervision over the business of
the Corporation and over its several officers, subject, however, to the control
of the Board of Directors. In the absence of or if a Chairman of the Board shall
not have been elected or a Vice Chairman shall not have been elected, the
President shall preside at meetings of the shareholders and Board of Directors.
He shall have authority to sign all certificates for shares and all deeds,
mortgages, bonds, contracts, notes and other instruments requiring his
signature; and shall have all the powers and duties prescribed by law and such
others as the Board of Directors may from time to time assign to him.
Section 4. Vice Presidents. The Vice Presidents shall perform such
duties as are conferred upon them by these regulations or as may from time to
time be assigned to them by the Board of Directors, the Chairman of the Board or
the President. At the request of the President, or in his absence or disability,
the Vice President, designated by the President (or in the absence of such
designation, the Vice President designated by the Board), shall perform all the
duties of the President, and when so acting, shall have all the powers of the
President. The authority of Vice Presidents to sign in the name of the
Corporation all certificates for shares and authorized deeds, mortgages, bonds,
contracts, notes and other instruments, shall be coordinated with like authority
of the President. Any one or more of the Vice Presidents may be designated as an
"Executive Vice President" or a "Senior Vice President."
Section 5. The Secretary. The Secretary shall issue notices of all
meetings for which notice shall be required to be given, shall keep the minutes
of all meetings, shall have charge of the corporate seal, if any, and corporate
record books, shall cause to be prepared for each meeting of shareholders the
list of shareholders entitled to vote thereat, and shall have such other duties
and powers as may be assigned to or vested in him by the Board of Directors, the
Executive Committee or the President.
Section 6. The Treasurer. The Treasurer shall have the custody of all
moneys and securities of the Corporation and shall keep adequate and correct
accounts of the Corporation's business transactions, including accounts of its
assets, liabilities, receipts, disbursements, gains, losses, stated capital and
shares. The funds of the Corporation shall be deposited in the name of the
Corporation by the Treasurer in such depositories as the Board of Directors may
from time to time designate. The Treasurer shall have such other duties and
powers as may be assigned to or vested in him by the Board of Directors, the
Executive Committee or the President.
Section 7. Assistant and Subordinate Officers. The Board of Directors
may appoint such assistant and subordinate officers as it may deem desirable.
Each such officer shall hold office during the pleasure of the Board of
Directors and perform such duties as the Board of Directors may prescribe.
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<PAGE> 7
The Board of Directors may, from time to time, authorize any officers
to appoint and remove assistant and subordinate officers, to prescribe their
authority and duties, and to fix their compensation.
Section 8. Duties of Officers May Be Delegated. In the absence of any
officer of the Corporation, or for any other reason the Board of Directors may
deem sufficient, the Board of Directors may delegate, for the time being, the
powers or duties, or any of them, of such officer to any other officer, or to
any director.
ARTICLE VIII
Certificates for Shares
Section 1. Form and Execution. Certificates for shares shall be issued
to each shareholder in such form as shall be approved by the Board of Directors.
Such certificates shall be signed by the Chairman of the Board of Directors or
the President or a Vice President and by the Secretary of the Corporation, which
certificates shall certify the number and class of shares held by the
shareholder in the Corporation, but no certificates for shares shall be
delivered until such shares are fully paid. When such a certificate is
countersigned by an incorporated transfer agent or registrar, the signature of
any of said officers of the Corporation may be a facsimile, or engraved, stamped
or printed. Although any officer of the Corporation whose manual or facsimile
signature is affixed to a share certificate shall cease to be such officer
before the certificate is delivered, such certificate, nevertheless, shall be
effective in all respects when delivered.
Such certificate for shares shall be transferable in person or by
attorney, but, except as hereinafter provided in the case of lost, mutilated or
destroyed certificates, no transfers of shares shall be entered upon the records
of the Corporation until the previous certificates, if any, given for the same
shall have been surrendered and canceled.
Section 2. Lost, Mutilated or Destroyed Certificates. If any
certificate for shares is lost, mutilated or destroyed, the Board of Directors
may authorize the issuance of a new certificate in place thereof, upon such
terms and conditions as it may deem advisable. The Board of Directors in its
discretion may refuse to issue such new certificates until the Corporation has
been indemnified by a final order or decree of a court of competent jurisdiction
.
ARTICLE IX
Fiscal Year
The fiscal year of the Corporation shall end on the 31st day of
December in each year, or on such other day as may be fixed from time to time by
the Board of Directors.
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<PAGE> 8
ARTICLE X
Amendments
These Regulations may be amended or repealed at any meeting of
shareholders called for that purpose by the affirmative vote of the holders of
record of shares entitling them to exercise a majority of the voting power on
such proposal or, without a meeting, by the written consent of the holders of
record of shares entitling them to exercise two-thirds (2/3) of the voting power
on such proposal.
Ohio State Bancshares, Inc.
-------------------------------------------
William Harris, Secretary
Dated:
-------------------------------------
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,256
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 876
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,553
<INVESTMENTS-CARRYING> 3,819
<INVESTMENTS-MARKET> 3,655
<LOANS> 48,478
<ALLOWANCE> 507
<TOTAL-ASSETS> 69,107
<DEPOSITS> 62,731
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 358
<LONG-TERM> 0
0
0
<COMMON> 1,460
<OTHER-SE> 3,557
<TOTAL-LIABILITIES-AND-EQUITY> 69,107
<INTEREST-LOAN> 4,029
<INTEREST-INVEST> 939
<INTEREST-OTHER> 115
<INTEREST-TOTAL> 5,083
<INTEREST-DEPOSIT> 2,236
<INTEREST-EXPENSE> 2,252
<INTEREST-INCOME-NET> 2,831
<LOAN-LOSSES> 447
<SECURITIES-GAINS> 13
<EXPENSE-OTHER> 2,084
<INCOME-PRETAX> 598
<INCOME-PRE-EXTRAORDINARY> 460
<EXTRAORDINARY> 0
<CHANGES> 24
<NET-INCOME> 436
<EPS-BASIC> 3.10
<EPS-DILUTED> 3.10
<YIELD-ACTUAL> 4.64
<LOANS-NON> 228
<LOANS-PAST> 172
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 261
<ALLOWANCE-OPEN> 360
<CHARGE-OFFS> 368
<RECOVERIES> 68
<ALLOWANCE-CLOSE> 507
<ALLOWANCE-DOMESTIC> 507
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 135
</TABLE>
<PAGE> 1
EXHIBIT NO. 99
OHIO STATE BANCSHARES, INC.
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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, 1999 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 for probable credit
losses based upon a number of relevant factors, including, but not limited to,
past loan loss experience, the nature and volume of the portfolio, information
about specific borrower situations and estimated collateral values, economic
conditions and other factors. 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 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.
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<PAGE> 2
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 Department of Commerce, 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.
On November 12, 1999, President Clinton signed the Graham-Leach-Bliley Act of
1999 (the "GLB Act"), which is intended to modernize the financial services
industry. The GLB Act refines large parts of a regulatory framework that had its
origins in the Depression Era of the 1930s. Effective March 11, 2000, new
opportunities will be available for banks, other depository institutions,
insurance companies and securities firms to enter into combinations that permit
a single financial services organization to offer customers a more complete
array of financial products and services.
The GLB Act introduces the concept of functional regulation. Functional
regulation mandates that the Board of Governors of the Federal Reserve System
give deference to the Securities and Exchange Commission and relevant state
securities and insurance authorities with respect to interpretations and
enforcement of activities within their respective jurisdictions.
The GLB Act amends the Bank Holding Company Act of 1956 to allow bank holding
companies to become certified as financial holding companies and participate in
the new financial activities contemplated in the GLB Act. The Federal Reserve
Board will serve as the umbrella regulator for financial holding companies while
the financial holding company's separately regulated subsidiaries will be
regulated by their primary functional regulators. In addition to meeting "well
capitalized" and "well managed" standards, the GLB Act makes satisfactory or
above Community Reinvestment Act compliance for insured depository institutions
necessary in order for them to engage in new financial activities. Financial
subsidiaries of banks may also be formed to engage in a new range of activities
under the GLB Act.
The GLB Act provides a federal right to privacy of non-public personal
information of individual customers. Federal regulatory agencies with primary
supervisory authority over numerous financial institutions have responsibility
for implementing this privacy provision and are currently in the process of
adopting regulations. OSB and the Bank are also subject to certain state laws
that deal with the use and distribution of non-public personal information.
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<PAGE> 3
Given the fact that the legislation is new, the regulatory process is only
beginning and numerous final regulations are still forthcoming, we cannot
predict the impact that the GLB Act will have on the Corporation at this time.
Compliance with Memorandum of Understanding
The Bank entered into a Memorandum of Understanding ("MOU") with the Ohio
Division of Financial Institutions and Federal Deposit Insurance Corporation on
February 10, 2000, whereby the Bank has agreed to comply with certain directives
which are intended to correct operational deficiencies and improve overall
financial condition.
The MOU requires the Bank to, among other things, retain an independent
consulting firm to prepare a findings and recommendations report on the
effectiveness of Bank's management and Board of Directors and engage an
independent public accounting firm to perform an attestation engagement on the
Bank's assessment of the internal control structure for 2000 and 2001 and to
review certain general ledger accounts and internal checking accounts.
Additionally, the Bank must implement a risk monitoring system related to
certain types of loans and maintain adequate allowance for loan losses, correct
weaknesses in internal control as identified by examiners from the Ohio Division
of Financial Institutions and establish written policies and procedures to
ensure that transactions with Bank insiders, and their related interests, are
handled in a proper manner. The Bank may not pay dividends to OSB without the
prior written approval of the Ohio Division of Financial Institutions and
Federal Deposit Insurance Corporation. However, this restriction does not
prevent OSB from paying dividends to its shareholders from its available assets.
Management recognizes the importance of complying with the provisions of the
above mentioned MOU and is implementing corrective actions. As management's
focus turns towards internal matters, such as internal controls and asset
quality, growth may slow down as compared to the past few years. Additionally,
it is probable that operating expenses will increase in 2000 due to professional
fees and the addition of full-time staff to assist with this matter.
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