<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____ to _____.
Commission file number: 0-28648
-------
Ohio State Bancshares, Inc.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Ohio 34-1816546
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
111 South Main Street, Marion, Ohio 43302
-----------------------------------------
(Address of principal executive offices)
(740) 387-2265
---------------------------
(Issuer's telephone number)
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common stock, $10.00 par value 146,000 common shares
outstanding at May 8, 2000
Transitional Small Business Disclosure Format (check one):
Yes No X
------- ------
<PAGE> 2
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 2000
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets ................................... 3
Condensed Consolidated Statements of Income.............................. 4
Condensed Consolidated Statements of Changes in
Shareholders' Equity .................................................. 6
Condensed Consolidated Statements of Cash Flows ......................... 7
Notes to Condensed Consolidated Financial Statements .................... 8
Item 2. Management's Discussion and Analysis...................................... 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 19
Item 2. Changes in Securities and Use of Proceeds................................ 19
Item 3. Defaults Upon Senior Securities.......................................... 19
Item 4. Submission of Matters to a Vote of Security Holders...................... 19
Item 5. Other Information........................................................ 19
Item 6. Exhibits and Reports on Form 8-K......................................... 19
SIGNATURES ..................................................................... 20
</TABLE>
<PAGE> 3
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 1,580,027 $ 2,255,869
Federal funds sold 1,903,000 876,000
----------- -----------
Cash and cash equivalents 3,483,027 3,131,869
Securities available for sale 11,272,537 11,552,953
Securities held to maturity (fair value March 31, 2000 -
$3,693,461, December 31, 1999 - $3,654,914) 3,818,060 3,819,444
Loans, net 49,523,849 48,478,479
Premises and equipment, net 1,049,987 1,076,551
Other real estate owned and repossessions 4,656 10,756
Accrued interest receivable 494,823 450,021
Other assets 546,285 586,692
----------- -----------
$70,193,224 $69,106,765
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 7,771,890 $ 7,718,439
Interest-bearing 56,863,687 55,012,757
----------- -----------
Total 64,635,577 62,731,196
Federal Home Loan Bank borrowings -- 1,000,000
Accrued interest payable 256,030 255,532
Other liabilities 172,391 102,742
----------- -----------
Total liabilities 65,063,998 64,089,470
Shareholders' equity
Common stock, $10.00 par value; 500,000 shares authorized;
146,000 shares issued and outstanding 1,460,000 1,460,000
Additional paid-in capital 2,652,709 2,652,709
Retained earnings 1,351,828 1,250,970
Accumulated other comprehensive income (loss) (335,311) (346,384)
----------- -----------
Total shareholders' equity 5,129,226 5,017,295
----------- -----------
$70,193,224 $69,106,765
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to the condensed consolidated financial statements.
3.
<PAGE> 4
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including fees $1,097,210 $ 868,614
Taxable securities 182,851 151,526
Nontaxable securities 50,693 41,670
Federal funds sold and other 12,306 67,440
---------- ----------
Total interest income 1,343,060 1,129,250
INTEREST EXPENSE
Deposits 613,186 533,285
Other borrowings 8,345 24
---------- ----------
Total interest expense 621,531 533,309
---------- ----------
NET INTEREST INCOME 721,529 595,941
Provision for loan losses 75,000 32,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 646,529 563,941
NONINTEREST INCOME
Fees for customer services 64,591 57,095
Net gains on sales of securities available for sale -- 12,772
Other 15,338 6,436
---------- ----------
Total noninterest income 79,929 76,303
NONINTEREST EXPENSE
Salaries and employee benefits 283,236 241,259
Occupancy and equipment 109,200 90,831
Office supplies 25,453 20,160
FDIC and state assessments 6,583 4,722
Professional fees 22,602 17,611
Advertising and public relations 15,829 7,088
Taxes, other than income 14,450 15,800
Loss on other real estate owned and repossessions -- 19,000
Credit card processing 15,778 11,259
Director fees 13,334 14,100
Insurance 6,774 6,641
Other 70,756 57,081
---------- ----------
Total noninterest expense 583,995 505,552
---------- ----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING METHOD 142,463 134,692
Income tax expense 41,605 39,483
---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING METHOD 100,858 95,209
Cumulative effect on prior years of a change in
accounting for start-up costs -- (24,061)
---------- ----------
NET INCOME $ 100,858 $ 71,148
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
4.
<PAGE> 5
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
BASIC AND DILUTED EARNINGS PER SHARE:
Before cumulative effect of a change in accounting
method $ .69 $ .73
Cumulative effect on prior years of a change in
accounting for start-up costs -- (.18)
-------- --------
BASIC AND DILUTED EARNINGS PER SHARE $ .69 $ .55
======== ========
Weighted average shares outstanding 146,000 129,987
======== ========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to the condensed consolidated financial statements.
5.
<PAGE> 6
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
Balance at beginning of period $5,017,295 $4,191,209
Proceeds from sale of 7,838 shares of common stock,
net of offering costs -- 310,392
Comprehensive income:
Net income 100,858 71,148
Change in net unrealized gain (loss) on securities
available for sale, net of reclassification and tax effects 11,073 (77,388)
---------- ----------
Total comprehensive income (loss) 111,931 (6,240)
---------- ----------
Balance at end of period $5,129,226 $4,495,361
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to the condensed consolidated financial statements.
6.
<PAGE> 7
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 100,858 $ 71,148
Adjustments to reconcile net income to net cash from
operating activities
Net amortization of securities 5,683 9,250
Provision for loan losses 75,000 32,000
Depreciation and amortization 42,544 29,597
Net realized gains on sales of securities -- (12,772)
Federal Home Loan Bank stock dividends (3,600) (3,300)
Loss on other real estate owned and repossessions -- 19,000
Loss on sale of premises and equipment -- 785
Change in deferred loan costs 14,445 (62,672)
Change in accrued interest receivable (44,802) (55,720)
Change in accrued interest payable 498 17,829
Change in other assets and other liabilities 104,352 (75,472)
----------- -----------
Net cash from operating activities 294,978 (30,327)
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases -- (3,435,126)
Maturities, prepayments and calls 296,494 1,155,465
Sales -- 487,188
Securities held to maturity:
Purchases -- (501,250)
Loan originations and payments, net (1,177,515) (2,876,704)
Proceeds from sale of other real estate owned and repossessions 48,800 85,675
Proceeds from sale of premises and equipment -- 4,000
Purchases of premises and equipment (15,980) (53,197)
----------- -----------
Net cash from investing activities (848,201) (5,133,949)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 1,904,381 3,183,479
Net changes in short-term FHLB advances (1,000,000) --
Net proceeds from sale of stock -- 310,392
----------- -----------
Net cash from financing activities 904,381 3,493,871
----------- -----------
Net change in cash and cash equivalents 351,158 (1,670,405)
Cash and cash equivalents at beginning of period 3,131,869 8,015,195
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,483,027 $ 6,344,790
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 621,033 $ 515,480
Income taxes paid -- 70,000
SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers from loans to other real estate owned and repossessions $ 42,700 $ 60,600
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to the condensed consolidated financial statements.
7.
<PAGE> 8
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the consolidated financial position of Ohio State Bancshares, Inc. at March 31,
2000, and its results of operations and cash flows for the periods presented.
All such adjustments are normal and recurring in nature. The accompanying
consolidated financial statements have been prepared in accordance with the
instructions of Form 10-QSB and, therefore, do not purport to contain all
necessary financial disclosures required by generally accepted accounting
principles that might otherwise be necessary in the circumstances, and should be
read in conjunction with the consolidated financial statements and notes thereto
of Ohio State Bancshares, Inc. for the year ended December 31, 1999, included in
its 1999 Annual Report. Reference is made to the accounting policies of Ohio
State Bancshares, Inc. described in the notes to consolidated financial
statements contained in its 1999 Annual Report. Ohio State Bancshares, Inc. has
consistently followed these policies in preparing this Form 10-QSB.
The accompanying 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 have been eliminated.
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.
To prepare financial statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions based on available
information. These estimates and assumptions affect amounts reported in the
financial statements and the disclosures provided, and future results could
differ. The allowance for loan losses, fair values of financial instruments and
the status of contingencies are particularly subject to change.
Basic earnings per share is net income divided by the weighted average number of
common shares outstanding during the period. Diluted earnings per share is not
currently applicable since the Corporation has no potentially dilutive common
shares.
Income tax expense is based on the effective tax rate expected to be applicable
for the entire year. 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.
- --------------------------------------------------------------------------------
(Continued)
8.
<PAGE> 9
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
NOTE 2 - SECURITIES
Securities at March 31, 2000 and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
March 31, 2000
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury $ 898,751 $ -- $ (5,532) $ 893,219
U.S. government and federal agencies 5,276,114 -- (250,421) 5,025,693
Mortgage-backed 5,352,179 -- (252,094) 5,100,085
----------- ------- --------- -----------
Total debt securities 11,527,044 -- (508,047) 11,018,997
Other securities 253,540 -- -- 253,540
----------- ------- --------- -----------
Total $11,780,584 $ -- $(508,047) $11,272,537
=========== ======= ========= ===========
HELD TO MATURITY
State and municipal $ 3,818,060 $20,606 $(145,205) $ 3,693,461
=========== ======= ========= ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
9.
<PAGE> 10
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
December 31, 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>
Proceeds from sales of securities classified as available for sale were $487,188
during the three month period ended March 31, 1999. Gross gains of $12,772 were
realized on the sales during the three month period ending March 31, 1999. There
were no security sales during the three month period ended March 31, 2000.
The amortized cost and estimated fair values of securities at March 31, 2000, by
contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because certain borrowers may have the right to call or
repay obligations with or without penalties.
<TABLE>
<CAPTION>
Available-for-Sale Securities Held-to-Maturity Securities
----------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 1,299,056 $ 1,293,544 $ -- $ --
Due in one to five years 2,877,345 2,742,458 -- --
Due in five to ten years -- -- 1,093,639 1,096,641
Due after ten years 1,998,464 1,882,910 2,724,421 2,596,820
Mortgage-backed securities 5,352,179 5,100,085 -- --
Other securities 253,540 253,540 -- --
----------- ----------- ---------- ----------
$11,780,584 $11,272,537 $3,818,060 $3,693,461
=========== =========== ========== ==========
</TABLE>
Securities with a carrying value of approximately $6,703,000 at March 31, 2000
and $6,496,000 at December 31, 1999 were pledged to secure deposits and for
other purposes.
- --------------------------------------------------------------------------------
(Continued)
10.
<PAGE> 11
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS
Loans at March 31, 2000 and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Commercial $14,627,658 $14,880,924
Installment 25,175,750 25,293,544
Real estate 9,052,639 7,543,953
Credit card 606,230 683,629
Other 18,269 27,841
----------- -----------
49,480,546 48,429,891
Net deferred loan costs 540,685 555,130
Allowance for loan losses (497,382) (506,542)
----------- -----------
$49,523,849 $48,478,479
=========== ===========
</TABLE>
Activity in the allowance for loan losses for the three months ended March 31,
2000 and 1999 was as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Balance - January 1 $ 506,542 $360,093
Loans charged-off (119,597) (77,760)
Recoveries 35,437 27,078
Provision for loan losses 75,000 32,000
--------- --------
Balance - March 31 $ 497,382 $341,411
========= ========
</TABLE>
Impaired loans during the three months ended March 31, 2000 and 1999 were as
follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Average of impaired loans during the period $ -- $457,464
Interest income recognized during impairment -- --
Cash-basis interest income recognized -- --
</TABLE>
The balance of impaired loans at March 31, 2000 and December 31, 1999 was not
material.
Nonperforming loans were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Loans past due over 90 days still on accrual $ 50,344 $172,052
Loans on nonaccrual 183,032 227,851
- --------------------------------------------------------------------------------
(Continued)
</TABLE>
11.
<PAGE> 12
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
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 - COMMITMENTS, OFF-BALANCE SHEET RISK, CONTINGENCIES AND
CONCENTRATIONS OF CREDIT RISK
Various contingent liabilities are not reflected in the financial statements,
including claims and legal actions arising in the ordinary course of business.
In the opinion of management, after consultation with legal counsel, the
ultimate disposition of these matters is not expected to have a material affect
on the financial condition or results of operations.
Some financial instruments, 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.
Commitments to extend credit, primarily in the form of undisbursed portions of
approved lines of credit, consist primarily of variable rate commitments. The
interest rates on these commitments ranged from 8.25% to 14.50% at March 31,
2000 and 8.00% to 14.25% at December 31, 1999. Outstanding commitments for
credit cards had interest rates ranging from 12.00% to 16.50% as of March 31,
2000 and from 12.00% to 16.25% as of December 31, 1999.
A summary of the contractual amounts of financial instruments with
off-balance-sheet risk at March 31, 2000 and December 31, 1999 follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Commitments to extend credit $3,081,000 $4,400,000
Credit card arrangements 2,548,000 2,394,000
Letters of credit 30,000 30,000
</TABLE>
Included in cash and cash equivalents at March 31, 2000 and December 31, 1999
was approximately $2,891,000 and $1,680,000 on deposit with the Independent
State Bank of Ohio.
- --------------------------------------------------------------------------------
(Continued)
12.
<PAGE> 13
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - COMMITMENTS, OFF-BALANCE SHEET RISK, CONTINGENCIES AND
CONCENTRATIONS OF CREDIT RISK (Continued)
At March 31, 2000 and December 31, 1999 the Bank had a line of credit enabling
it to borrow up to $4,268,000 and $4,196,000 with the Federal Home Loan Bank of
Cincinnati. There were no borrowings outstanding on this line of credit as of
March 31, 2000. Borrowings of $1,000,000 were outstanding as of December 31,
1999. Advances under the agreement are collateralized by a blanket pledge of the
Bank's real estate mortgage loan portfolio and Federal Home Loan Bank stock.
The Bank's branch facility is leased under an operating lease. The lease term is
for twenty years. At the conclusion of the fifth, tenth and fifteenth years, the
rent shall be adjusted by 50% of the cumulative increase in the Consumer Price
Index over the previous five years with a minimum of 5% increase and a maximum
of 10% increase for any one five-year period. Total rental expense was $9,687
for the three months ended March 31, 2000 and March 31, 1999.
Rental commitments under these noncancelable operating leases are:
<TABLE>
<CAPTION>
Year ending March 31,
<S> <C>
2001 $ 38,748
2002 39,368
2003 40,685
2004 40,685
2005 40,685
Thereafter 506,234
--------
$706,405
========
</TABLE>
NOTE 5 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows for the
three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Unrealized holding gains and losses on available for sale
securities $16,777 $(104,659)
Reclassification adjustments for (gains) and losses later
recognized as income -- (12,772)
------- ---------
Net unrealized gains and losses 16,777 (117,431)
Tax effect (5,704) 40,043
------- ---------
Other comprehensive income (loss) $11,073 $ (77,388)
======= =========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
13.
<PAGE> 14
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 6 - REGULATORY MATTERS
On February 10, 2000, the Corporation entered into a Memorandum of Understanding
("MOU") by and among The Marion Bank, Ohio Division of Financial Institutions
and the Federal Deposit Insurance Corporation ("FDIC"), whereby the Bank has
agreed to comply with certain directives which are intended to correct
operational deficiencies and improve overall financial condition.
Under the terms of the MOU, the Bank may not pay dividends to OSB without the
prior written approval of the Ohio Division of Financial Institutions and the
FDIC. However, this restriction does not prevent OSB from paying dividends to
its shareholders from its available assets. Additionally, 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. Finally, 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.
- --------------------------------------------------------------------------------
(Continued)
14.
<PAGE> 15
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
INTRODUCTION
The following discussion focuses on the consolidated financial condition of Ohio
State Bancshares, Inc. at March 31, 2000, compared to December 31, 1999, and the
consolidated results of operations for the three months ended March 31, 2000,
compared to the same period in 1999. The purpose of this discussion is to
provide the reader with a more thorough understanding of the consolidated
financial statements than what could be obtained from an examination of the
financial statements alone. This discussion should be read in conjunction with
the interim consolidated financial statements and related footnotes.
When used in this Form 10-QSB or future filings by the Corporation with the
Securities and Exchange Commission, in 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.
See Exhibit 99, which is incorporated herein by reference.
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.
FINANCIAL CONDITION
The Corporation experienced 1.57% asset growth since December 31, 1999, as total
assets increased $1,086,000 from $69,107,000 at December 31, 1999 to $70,193,000
at March 31, 2000. Most of this growth is attributable to the $1,045,000 growth
in net loans for the same period.
Securities available for sale and securities held to maturity decreased from
$15,372,000 at December 31, 1999 to $15,091,000 at March 31, 2000. The only
significant activity during the quarter was from principal repayments on
mortgage-backed securities. Cash and cash equivalents increased by slightly more
than the decrease in securities.
Net loans increased $1,045,000, or 2.16%, during the period from December 31,
1999 to March 31, 2000. This growth was funded by increases in deposit accounts.
The loan growth was in the real estate loan portfolio. Real estate loans
increased $1,509,000, or 20.00%, from December 31, 1999. The continued growth in
the real estate loan portfolio was primarily due to the hiring of a new loan
officer in the first quarter of 1999 who focuses exclusively on the real estate
portfolio. The other loan portfolio categories declined from December 31, 2000.
Commercial loans decreased 1.70% from $14,881,000 on December 31, 1999 to
$14,628,000 on March 31, 2000. Installment loans decreased .47% from $25,294,000
on December 31, 1999 to $25,176,000 on March 31, 2000.
- --------------------------------------------------------------------------------
(Continued)
15.
<PAGE> 16
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The allowance for loan losses decreased to .99% of loans as of March 31, 2000
compared to 1.03% at December 31, 1999. The decline occurred due to net
charge-offs exceeding the provision for loan losses for the three months ended
March 31, 2000 and loan growth. All loans charged-off during the three months
ended March 31, 2000 were either installment or credit cards. $26,000 of the
allowance at March 31, 2000 remains unallocated to any specific loan or loan
category. Management's collection efforts have started to show results through
improved delinquency totals which should reduce charge-offs in future periods.
However, 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.
Total deposits increased $1,904,000, or 3.04%, from December 31, 1999 to March
31, 2000. The increase in deposits was primarily due to the 3.36% increase in
interest-bearing deposits from $55,013,000 on December 31, 1999 to $56,864,000
on March 31, 2000. This increase was due to cyclical lower cash needs of
customers.
RESULTS OF OPERATIONS
The operating results of the Corporation are affected by general economic
conditions, the monetary and fiscal policies of federal agencies and the
regulatory policies of agencies that regulate financial institutions. The
Corporation's cost of funds is influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
influenced by consumer and business demand, which, in turn, is affected by the
interest rates at which such loans are made, general economic conditions and the
availability of funds for lending activities.
The Corporation's net income is primarily dependent upon its net interest
income, which is the difference between interest income generated on
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Provisions for loan losses, service charges, gains on the sale of
assets and other income, noninterest expense and income taxes also affect net
income.
Net income for the three months ended March 31, 2000 was $101,000, or $30,000
more than the same period in 1999. The reason for the increase in earnings was
primarily due to an increase in net interest income of $126,000 and the
write-off of remaining organization costs of $24,000 taken during the first
quarter of 1999 partially offset by increases in the provision for loan losses
of $43,000 and noninterest expense of $78,000.
Net interest income is the largest component of Corporation's income and is
affected by the interest rate environment and the volume and composition of
interest-earning assets and interest-bearing liabilities. Net interest income
increased by $126,000 for the three months ended March 31, 2000 compared to the
same period in 1999. The increase in net interest income is attributable to the
Corporation's average earning assets increasing from $58,119,000 for the three
months ended March 31, 1999 to $65,617,000 for the three months ended March 31,
2000.
The provision for loan losses increased due to charge-offs experienced in the
first quarter of 2000. Management has increased collection efforts and continued
to charge-off problem loans to clean up the loan portfolio.
- --------------------------------------------------------------------------------
(Continued)
16.
<PAGE> 17
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Noninterest expense was up $78,000, or 15.52%, for the three months ended March
31, 2000 versus the three months ended March 31, 1999. Normal salary increases
and the addition of personnel compared to the prior year, increased occupancy
and equipment expense due to the amortization of the Jack Henry Associates 20/20
software which the Bank converted to in April 1999, increased advertising
expenses and added professional fees were the major reasons for the increase in
noninterest expense.
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 6 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 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.
CAPITAL RESOURCES
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings and other factors, and regulators
can lower classifications in certain cases. Failure to meet various capital
requirements can initiate regulatory action having a direct material affect on
the operations of the Bank.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
<TABLE>
<CAPTION>
Capital to risk-
weighted assets
---------------- Tier 1 capital
Total Tier 1 to average assets
----- ------ -----------------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
</TABLE>
At March 31, 2000 and December 31, 1999, the actual capital ratios for the Bank
were:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Total capital to risk-weighted assets 10.5% 10.4%
Tier 1 capital to risk-weighted assets 9.5 9.4
Tier 1 capital to average assets 6.9 6.8
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
17.
<PAGE> 18
OHIO STATE BANCSHARES, INC.
PART I - FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
At March 31, 2000 and December 31 1999, the Bank was categorized as well
capitalized. However, the MOU requires the Bank to, among other things, obtain
prior written approval from the Ohio Division of Financial Institutions and
Federal Deposit Insurance Corporation before paying dividends from the Bank to
OSB. The provisions of the MOU are more fully discussed in Note 6 to the
Condensed Consolidated Financial Statements.
LIQUIDITY
Liquidity management focuses on the ability to have funds available to meet the
loan and depository transaction needs of the Bank's customers and the
Corporation's other financial commitments. Cash and cash equivalent assets
(which include deposits this Bank maintains at other banks, federal funds sold
and other short-term investments) totaled $3,483,000 at March 31, 2000 and
$3,132,000 at December 31, 1999. These assets provide the primary source of
funds for loan demand and deposit balance fluctuations. Additional sources of
liquidity are securities classified as available for sale and access to Federal
Home Loan Bank advances, as the Bank is a member of the Federal Home Loan Bank
of Cincinnati.
Taking into account the capital adequacy, profitability and reputation
maintained by the Corporation, available liquidity sources are considered
adequate to meet current and projected needs. See the Condensed Consolidated
Statements of Cash Flows for a more detailed review of the Corporation's sources
and uses of cash.
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. The Corporation does not anticipate any additional significant expenses in
regards to Year 2000 issues.
- --------------------------------------------------------------------------------
18.
<PAGE> 19
OHIO STATE BANCSHARES, INC.
FORM 10-QSB
Quarter ended March 31, 2000
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Legal Proceedings:
-----------------
There are no matters required to be reported under this item.
Item 2 - Changes in Securities and Use of Proceeds:
-----------------------------------------
There are no matters required to be reported under this item.
Item 3 - Defaults Upon Senior Securities:
-------------------------------
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders:
---------------------------------------------------
There are no matters required to be reported under this item.
Item 5 - Other Information:
-----------------
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K:
--------------------------------
(a) Exhibit 11 - Statement Regarding Computation of Earnings
Per Share
(b) Exhibit 27 - Financial Data Schedule.
(c) Exhibit 99 - Safe Harbor Under Private Securities
Litigation Reform Act of 1995.
(d) No current reports on Form 8-K were filed by the small
business issuer during the quarter ended March 31, 2000.
- --------------------------------------------------------------------------------
19.
<PAGE> 20
OHIO STATE BANCSHARES, INC.
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OHIO STATE BANCSHARES, INC.
---------------------------
(Registrant)
Date: May 11, 2000 /s/ Gary E. Pendleton
------------ ---------------------
(Signature)
Gary E. Pendleton
President and Chief Executive
Officer
Date: May 11, 2000 /s/ Cynthia L. Sparling
------------ -----------------------
(Signature)
Cynthia L. Sparling
Vice President
- --------------------------------------------------------------------------------
20.
<PAGE> 21
OHIO STATE BANCSHARES, INC.
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
- -------------- ----------- -----------
<S> <C> <C>
11 Statement Regarding Computation Refer to weighted average shares
of Earnings Per Share on the Condensed Consolidated
Statements of Income and Note 1 to
Condensed Consolidated Financial
Statements.
27 Financial Data Schedule 22
99 Safe Harbor Under Private Incorporated by reference to
Securities Litigation Reform Act Exhibit 99 to Annual Report
of 1995 on Form 10-KSB for the year ended
December 31, 1999 filed by the
Small Business Issuer on March
29, 2000.
</TABLE>
- --------------------------------------------------------------------------------
21.
<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 QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,580
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,903
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,273
<INVESTMENTS-CARRYING> 3,818
<INVESTMENTS-MARKET> 3,693
<LOANS> 49,524
<ALLOWANCE> 497
<TOTAL-ASSETS> 70,193
<DEPOSITS> 64,636
<SHORT-TERM> 0
<LIABILITIES-OTHER> 428
<LONG-TERM> 0
0
0
<COMMON> 1,460
<OTHER-SE> 3,669
<TOTAL-LIABILITIES-AND-EQUITY> 70,193
<INTEREST-LOAN> 1,097
<INTEREST-INVEST> 234
<INTEREST-OTHER> 12
<INTEREST-TOTAL> 1,343
<INTEREST-DEPOSIT> 613
<INTEREST-EXPENSE> 622
<INTEREST-INCOME-NET> 722
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 584
<INCOME-PRETAX> 142
<INCOME-PRE-EXTRAORDINARY> 101
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 101
<EPS-BASIC> 0.69
<EPS-DILUTED> 0.69
<YIELD-ACTUAL> 4.58
<LOANS-NON> 183
<LOANS-PAST> 50
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 666
<ALLOWANCE-OPEN> 507
<CHARGE-OFFS> 120
<RECOVERIES> 35
<ALLOWANCE-CLOSE> 497
<ALLOWANCE-DOMESTIC> 471
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 26
</TABLE>
