SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission file number 0-20886.
OHSL FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)
Delaware 31-1362390
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5889 Bridgetown Road, Cincinnati, Ohio 45248
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (513) 574-3322
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such requirements
for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (Section 229.405 of this chapter)
is not contained herein, and will not 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]
As of February 28, 1997, the Registrant had issued and outstanding
1,256,091 shares of the Registrant's Common Stock.
The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of February 28, 1997, was $21.6
million.
(The exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the
Registrant that such person is an affiliate of the Registrant.)
The following documents are incorporated by reference: Parts II and
IV of Form 10-KSB - Annual Report to Stockholders
for the fiscal year ended December 31, 1996 and Part III of Form
10-KSB - Proxy Statement for Annual Meeting of Stockholders
to be held in 1997.
PART I
Item 1. Business
General
OHSL Financial Corp., (the "Corporation" or "OHSL") is a
Delaware corporation which was organized in 1992 by Oak Hills
Savings and Loan Company, F.A. ("Oak Hills" or the "Company") for
the purpose of becoming a savings and loan holding company. The
Corporation owns all of the outstanding stock of Oak Hills that was
issued on February 5, 1993, in connection with the completion of
its conversion from the mutual to the stock form of organization
(the "Conversion"). The Corporation issued 1,356,600 shares of
Common Stock at a price of $10.00 per share in the Conversion.
Oak Hills, the Corporation's sole subsidiary, was originally
chartered in 1907 as Lick Run Building and Loan Company ("Lick
Run"), an Ohio savings and loan association. Lick Run became Oak
Hills Savings and Loan Company in 1958 and merged with Rosemont
Savings Association in 1981. The Company converted to a federally
chartered thrift institution in 1990 and adopted its present name.
All references to the Corporation include Oak Hills, unless
otherwise indicated. The Corporation's common stock is quoted on
the National Association of Securities Dealers Automated Quotations
("NASDAQ") National Market System under the symbol "OHSL".
Both OHSL and Oak Hills are subject to comprehensive
regulation, examination and supervision by the Office of Thrift
Supervision, Department of the Treasury ("OTS") and by the Federal
Deposit Insurance Corporation ("FDIC"). Oak Hills is a member of
the Federal Home Loan Bank ("FHLB") System and its deposits are
backed by the full faith and credit of the United States Government
and are insured by the Savings Association Insurance Fund ("SAIF")
to the maximum extent permitted by the FDIC.
Oak Hills serves the financial needs of families and local
businesses in its primary market area, southwest Hamilton County,
Ohio through its main office located at 5889 Bridgetown Road,
Cincinnati, Ohio and four branch offices located on the west side
of Cincinnati. At December 31, 1996, OHSL had $215.7 million in
assets, deposits of $169.5 million and shareholders' equity of
$25.2 million.
As a community oriented financial institution, Oak Hills seeks
to serve the financial needs of the families and community
businesses in its market areas. The Company is principally engaged
in the business of attracting deposits from the general public and
using such deposits to originate residential loans in its primary
market area. To a lesser extent, the Company also originates
multi-family, commercial real estate, consumer, construction and
commercial business loans. In addition, the Company invests in
mortgage-backed investments, investment grade securities and short-
term liquid assets. The Company also offers a Visa/MasterCard
program to its customers in conjunction with another financial
institution. Finally, the Company offers, on an agency basis
through its subsidiary, mutual fund and annuity products to its
customers. See "-- Lending Activities" and "-- Subsidiary
Activities."
The Company's revenues are derived from interest on mortgage
loans, investments and consumer loans, income from service charges
and loan originations and loan servicing fee income. The Company's
operations are materially affected by general economic conditions,
the monetary and fiscal policies of the federal government and the
policies of the various regulatory authorities, including the OTS
and the Board of Governors of the Federal Reserve System ("Federal
Reserve Board"). Its results of operations are largely dependent
upon its net interest income, which is the difference between the
interest it receives on its loan portfolio and its mortgage-backed
investments and investment securities portfolios and the interest
it pays on its deposit accounts and borrowings.
OHSL's main office is located at 5889 Bridgetown Road,
Cincinnati, Ohio. The Company's telephone number is (513) 574-
3322.
Market Area
The Company's primary market area includes the western portion
of the city of Cincinnati containing the communities of Covedale,
Fairmount, Fernbank, Mt. Airy, Price Hill, Sayler Park,
Sedamsville, and Westwood; the cities of Addyston, Cheviot, Cleves,
and North Bend; and the nearby communities of Bridgetown, Delhi,
Dent, Elizabethtown, Hooven, Mack, and Monfort Heights. The
Company's main office is located in the Bridgetown/Mack area, and
its branch offices are located in Price Hill, Dent, and Delhi.
The Company's primary market area consists mostly of mature
residential communities, including densely populated urban areas in
western portions of the city of Cincinnati; less densely populated
suburban areas, much of which is subdivision-oriented, to the west
of Cincinnati; and moderately populated areas in rural settings
further to the west. The commercial segment of the primary market
area consists mostly of retail and service businesses supporting
the area's residential base and, to a lesser extent, light
manufacturing.
Cincinnati is the headquarters for a diverse group of
companies such as Procter & Gamble, The Kroger Co., American
Financial Corp., U.S. Shoe Corp., Mercantile Stores and Chiquita
Brands International, Inc. Additionally, major installations of
companies headquartered elsewhere include General Electric
(aircraft engine manufacturing), Ford Motor Company (automobile
manufacturing), and Monsanto Chemical (chemical manufacturing).
Other major employers include the University of Cincinnati and the
State of Ohio.
Lending Activities
General. The principal lending activity of the Company is
originating for its portfolio first mortgage loans secured by
owner-occupied one- to four-family residential properties located
in its primary market areas. In addition, in order to provide more
comprehensive financial services to families and community
businesses in the Company's primary market area, OHSL also
originates multi-family, commercial real estate, consumer,
construction and commercial business loans. See "-Originations,
Purchases and Sales of Loans."
Loan Portfolio Composition. The following table presents the
composition of the Company's loan portfolio (excluding loans held
for sale) in dollar amounts and in percentages (before deductions
for loans in process, deferred fees and discounts and the
allowances for loan losses) of total loans as of the dates
indicated.
December 31,
1994 1995 1996
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
Real Estate Loans:
One- to four-family......... $ 98,857 69.40% $ 99,782 68.20% $113,373 69.59%
Non-residential............. 17,108 12.01 16,945 11.58 17,091 10.49
Multi-family................ 9,441 6.63 9,630 6.58 11,598 7.12
Construction or development. 9,217 6.47 11,115 7.59 9,866 6.05
------- ----- ------- ----- ------- -----
Total real estate loans. 134,623 94.51 137,472 93.95 151,928 93.25
======= ===== ======= ===== ======= =====
Other Loans:
Consumer Loans:
Home equity................ 2,915 2.05 2,949 2.02 3,411 2.09
Student.................... 1,798 1.26 386 .26 285 .17
Automobile................. 1,167 .82 3,045 2.08 4,091 2.51
Deposit.................... 268 .19 248 .17 223 .14
Home improvement........... 404 .28 472 .32 478 .29
Other...................... 886 .62 1,397 .96 2,184 1.34
----- ---- ----- ---- ------ ----
Total consumer loans.... 7,438 5.22 8,497 5.81 10,672 6.54
Commercial business loans... 384 .27 350 .24 340 .21
----- ---- ----- ---- ------ ----
Total other loans....... 7,822 5.49 8,847 6.05 11,012 6.75
-------- ------ ------- ------ ------- ------
Total loans receivable.. 142,445 100.00% 146,319 100.00% 162,940 100.00%
====== ====== ======
Less:
Loans in process............ 3,957 3,116 4,065
Deferred fees and discounts. 753 537 355
Allowance for loan losses... 507 515 499
-------- ------- -------
Loans receivable, net....... $137,228 $142,151 $158,021
======== ======= ========
The following table shows the composition of the
Company's loan portfolio by fixed and adjustable
rate at the dates indicated.
December 31,
1994 1995 1996
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family.......... $ 51,037 35.83% $ 62,178 42.49% $ 73,523 45.12%
Multi-family and commercial.. 3,220 2.26 1,947 1.33 4,346 2.67
------- ----- ------- ----- ------- -----
Total real estate loans... 54,257 38.09 64,125 43.82 77,869 47.79
Consumer...................... 3,725 2.61 5,204 3.56 6,839 4.20
Commercial business........... 70 .05 57 .04 54 .03
------- ----- ------- ----- ------ -----
Total fixed-rate loans..... 58,052 40.75 69,386 47.42 84,762 52.02
Adjustable-Rate Loans:
Real estate:
One- to four-family.......... 47,820 33.57 37,604 25.70 39,850 24.46
Multi-family and commercial.. 23,329 16.38 24,628 16.83 24,343 14.94
Construction or development.. 9,217 6.47 11,115 7.60 9,866 6.05
------ ----- ------ ----- ------ -----
Total real estate loans... 80,366 56.42 73,347 50.13 74,059 45.45
Consumer...................... 3,713 2.61 3,293 2.25 3,833 2.35
Commercial business........... 314 0.22 293 0.20 286 .18
------ ----- ------ ----- ------ -----
Total adjustable-rate
loans..................... 84,393 59.25 76,933 52.58 78,178 47.98
------- ------ ------- ------ ------- -----
Total loans............... 142,445 100.00% 146,319 100.00% 162,940 100.00%
====== ====== ======
Less:
Loans in process.............. 3,957 3,116 4,065
Deferred fees and discounts... 753 537 355
Allowance for loan losses..... 507 515 499
------- ------- -------
Loans receivable, net...... $137,228 $142,151 $158,021
======= ======= =======
The following schedule sets forth the contractual maturity of
the Company's loan portfolio at December 31, 1996. Loans which have
adjustable interest rates are shown as maturing in the period during
which the contract is subject to repricing. The schedule does not
reflect the effects of possible prepayments or enforcement of
due-on-sale clauses.
Real Estate
-------------------------------------------------------
One- to Four-Family Multi-Family and Construction Commercial
Commercial or Development Consumer Business Total
------------------- ------------------ -------------- ------------ --------------- ----------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
-------- ---------- ------ ----------- ------ --------- ------ -------- ------ --------- ------ --------
(Dollars In Thousands)
Due During
Years Ending
December 31,
1997(1)......... $ 31,082 8.04% $ 8,480 9.40% $ 9,866 8.90% $ 4,972 8.97% $290 9.46% $ 54,690 8.50%
1998 and 1999. 16,789 7.60 17,066 9.53 -- -- 1,107 9.01 9 9.75 34,971 8.59
2000 and 2001. 6,523 8.70 1,003 8.75 -- -- 3,594 9.49 18 9.98 11,138 8.96
2002 to 2006.. 21,374 8.05 1,890 9.29 -- -- 967 9.73 14 10.20 24,245 8.21
2007 to 2016.. 19,452 7.90 250 9.75 -- -- 32 9.71 9 10.00 19,743 7.93
2017 and
following.... 18,153 8.01 -- -- -- -- -- -- -- -- 18,153 8.01
------- ---- ------ ---- ------- ----- ------- ---- ---- ----- ------- -----
TOTAL...... $113,373 7.99% $28,689 9.45% $ 9,866 8.90% $10,672 9.22% $340 9.54% $162,940 8.38%
======= ==== ====== ==== ======= ==== ======= ==== ==== ==== ======= =====
<FN>
(1) Includes demand loans and loans having no stated maturity.
</FN>
Under federal law, the aggregate amount of loans that the
Company is permitted to make to any one borrower is generally
limited to 15% of unimpaired capital and surplus (25% if the
security for such loan has a "readily ascertainable" value or 30%
for certain residential development loans). At December 31, 1996,
based on the above 15% limitation, the Company's regulatory loan-
to-one borrower limit was approximately $2.9 million. The Company
had no borrowers with aggregate loan balances in excess of the
regulatory limits at December 31, 1996. See "Regulation - Federal
Regulation of Savings Associations."
Loan applications are initially considered and approved at
various levels of authority, depending on the type and amount of
the loan. All loans greater than $1.0 million must be approved by
the Board of Directors. Generally, mortgage related loans greater
than $207,000 and less than $1.0 million are approved by the
Executive Committee of the Board of Directors. Mortgage related
loans less than $207,000 are approved by management.
All of the Company's lending is subject to its written
underwriting standards and to loan origination procedures. The
Company is an equal opportunity lender. Decisions on loan
applications are made on the basis of detailed applications and
property valuations (consistent with the Company's written
appraisal policy) by qualified appraisers. The loan applications
are designed primarily to determine the borrower's ability to repay
and the more significant items on the application are verified
through use of credit reports, financial statements, tax returns
and/or confirmations.
The Company requires evidence of marketable title and lien
position (generally consisting of a title survey and title
insurance) as well as fire and extended coverage casualty insurance
in amounts at least equal to the principal amount of the loan or
the value of improvements on the property, depending on the type of
loan. The Company also requires flood insurance to protect the
property securing its interest when the property is located in a
flood plain or otherwise deemed prudent by management. For loans
originated prior to 1993, the Company generally did not require
title insurance. Title insurance is now generally required on
current originations.
One- to Four-Family Residential Real Estate Lending
The cornerstone of the Company's lending program has long been
the origination of long term permanent loans secured by mortgages
on owner-occupied one- to four-family residences. At December 31,
1996, $113.3 million, or 69.6% of the Company's gross loan
portfolio consisted of permanent loans on one- to four-family
residences. Virtually all of the residential loans originated by
the Company are secured by properties located in the Company's
primary market area. See "- Originations and Purchases of Loans."
Historically, the Company originated for retention in its own
portfolio 30-year fixed-rate loans secured by one- to four-family
residential real estate. Beginning in 1982, in order to reduce its
exposure to changes in interest rates, Oak Hills began to emphasize
the origination of ARMs, subject to market conditions and consumer
preference. As a result of continued consumer demand, particularly
during periods of relatively low interest rates, for fixed-rate
loans, Oak Hills has continued to originate for retention in its
portfolio fixed-rate residential loans in amounts and at rates
which are monitored for compliance with the Company's
asset/liability management policy. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -
Asset/Liability Management" in the Annual Report to Stockholders,
attached hereto as Exhibit 13.
The Company's loans are underwritten and documented to permit
their sale, consistent with the Company's asset/liability
management objectives. The Company typically retains the servicing
of loans sold. The Company's fixed-rate loans are originated with
terms which conform to secondary market standards (i.e., Federal
Home Loan Mortgage Corporation ("FHLMC") standards). Most of the
Company's fixed-rate residential loans have original contractual
terms to maturity of 15 to 30 years. During 1996, the Company sold
$2.8 million of fixed-rate, one- to four-family loans in the
secondary market, representing approximately 18.7% of originations
of this type.
The Company has offered ARM loans at rates, terms and points
determined in accordance with market and competitive factors. The
programs currently offered generally meet the standards and
requirements of the secondary market for residential loans. The
Company's current one- to four-family residential ARMs are fully
amortizing loans with contractual maturities of up to 30 years.
The interest rates on the ARMs originated by the Company are
subject to adjustment at one or three-year intervals based on a
margin over an index based on the related U.S. Treasury Constant
Maturities Index for securities with terms to maturities of the
same length as the applicable adjustment period ("Treasury ARMs").
Decreases or increases in the interest rate of the Company's ARMs
are generally limited to 2% at any adjustment date and 6% over the
life of the loan. The Company's one- to four-family ARMs are not
convertible into fixed-rate loans, do not contain prepayment
penalties and do not produce negative amortization. ARM loans may
be assumed, provided home buyers meet the Company's underwriting
standards and the applicable fees are paid.
Multi-Family and Commercial Real Estate Lending
The Company has long made permanent multi-family and
commercial real estate loans in its primary market area. At
December 31, 1996, the Company had $28.7 million in multi-family
and commercial real estate loans, representing 17.6% of the
Company's gross loan portfolio.
The Company's multi-family portfolio includes loans secured by
residential buildings located primarily in the Company's primary
market area. The Company's commercial real estate portfolio
consists of loans on a variety of non-residential properties
including small shopping centers, office buildings and
manufacturing facilities and warehouses.
The Company has originated both adjustable-rate and fixed-rate
multi-family and commercial real estate loans. Rates on the
Company's adjustable-rate, multi-family and commercial real estate
loans generally adjust in a manner consistent with the Company's
ARMs except that the Company establishes a floor rate for
commercial real estate loans.
Multi-family and commercial real estate loans are generally
underwritten in amounts of up to 75% of the appraised value of the
underlying property.
Appraisals on properties securing multi-family and commercial
real estate loans originated by the Company are performed by a
qualified appraiser at the time the loan is made. In addition, the
Company's underwriting procedures generally require verification of
the borrower's credit history, income and financial statements,
banking relationships, references and income projections for the
property. Personal guarantees are generally obtained for the
Company's multi-family and commercial real estate loans.
The table below sets forth, by type of property, the number
and outstanding principal balance information concerning the
Company's multi-family and commercial real estate loans at
December 31, 1996.
Outstanding
Number of Principal
Loans Balance
(Dollars in Thousands)
Multi-family residential. 37 $11,598
Office/commercial........ 5 1,722
Retail................... 4 1,181
Auto service/repair...... 10 689
Motel/Lodging............ 9 6,043
Nursing homes............ 1 398
Other.................... 90 7,058
--- ------
Total................. 156 $28,689
=== ======
Multi-family residential and commercial real estate loans
generally present a higher level of risk than loans secured by one-
to four-family residences. This greater risk is due to several
factors, including the concentration of principal in a limited
number of loans and borrowers, the effects of general economic
conditions on income producing properties and the increased
difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family
residential and commercial real estate is typically dependent upon
the successful operation of the related real estate project. If
the cash flow from the project is reduced (for example, if leases
are not obtained or renewed), the borrower's ability to repay the
loan may be impaired. At December 31, 1996, no commercial real
estate loans were 90 or more days delinquent.
Construction and Development Lending
The Company makes construction loans to individuals for the
construction of their residences and, on occasion, loans to
builders or developers for the acquisition of land and the
construction or development of small- or medium-sized projects.
Loans to individuals for the construction of their residences
and the acquisition of land typically run for eight months with a
possible extension of up to an additional one year. The borrower
is not required to pay principal during the construction period,
but must pay interest. Residential construction loans are
generally underwritten pursuant to the same guidelines used for
originating permanent residential loans. At December 31, 1996, the
Company had committed to fund $9.9 million of one- to four-family
residential construction loans, with outstanding balances totaling
$5.8 million, which includes both loans to builders/developers and
loans directly to owner/occupants. Subject to future market
conditions, the Company intends to continue its construction
lending activities to persons intending to be owner-occupants.
As noted, the Company also originates construction loans to
builders and developers for the construction of one- to four-family
residences and commercial real estate and the acquisition and
development of one- to four-family lots in the Company's primary
market area. Construction loans to builders of one- to four-family
residences generally carry terms of up to eight months and
generally do not permit the payment of interest and loan fees from
loan proceeds. At December 31, 1996, the Company had approximately
$7.5 million in approved construction loans to builders and
developers, all of which will be utilized for the construction of
one- to four-family residences, including condominium projects.
Most of the Company's construction loans have been originated
with fixed rates of interest while lot loans carry adjustable rates
of interest on terms similar to the Company's one-year ARM loans.
Construction loans are generally made in amounts of up to a maximum
loan-to-value ratio of 80% (75% in the case of commercial real
estate). Prior to making a commitment to fund a construction loan,
the Company requires an appraisal of the property. The Company
obtains personal guarantees for substantially all of its
construction loans. Personal financial statements of guarantors
are also generally obtained as part of the Company's loan
underwriting. Virtually all of the Company's construction loans
are located in its primary market area.
The Company's construction or development loan agreements
provide that loan proceeds are disbursed in increments as
construction progresses. In the case of large construction loans,
the amount of each disbursement is based on the construction cost
estimate of an independent architect, engineer or qualified fee
inspector who inspects the project in connection with each
disbursement request. The Company periodically reviews the
progress of the underlying construction project.
Construction loans are obtained from a variety of sources,
including real estate brokers, developers and builders who have
previously borrowed from the Company, as well as referrals from
such borrowers. The application process includes a submission to
the Company of plans, specifications and costs of the project.
These items are used as a basis to determine the appraised value of
the subject property. Loans are based on the lesser of current
appraised value and the cost of construction (land plus building).
The Company's construction loans to persons other than owner-
occupants generally involve larger principal balances than do its
one- to four-family residential loans.
The table below sets forth, by type of property, the number
and amount of the Company's construction loans at December 31,
1996.
Total Outstanding
Number Loan Principal
of Loans Commitment Balance
(Dollars in Thousands)
One- to four-family
residential(1).............. 32 $ 9,866 $ 5,801
Multi-family residential..... -- -- --
Non-residential.............. -- -- --
---- ------ ------
Total construction or
development loans........ 32 $ 9,866 $ 5,801
==== ====== ======
(1) Includes loans for the development of condominium projects and
loans to develop land (clearing, grading, roads, sewers, etc.) in
support of one- to four-family construction.
Construction lending generally affords the Company an
opportunity to receive interest at rates higher than those
obtainable from residential lending and to receive higher
origination and other loan fees. In addition, such loans are
generally made for relatively short terms. Nevertheless,
construction lending to persons other than owner-occupants is
generally considered to involve a higher level of credit risk than
one- to four-family residential lending due to the concentration of
principal in a limited number of loans and borrowers and the
effects of general economic conditions on construction projects,
real estate developers and managers. In addition, the nature of
these loans is such that they are more difficult to evaluate and
monitor. The Company's risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of the
property's value upon completion of the project and the estimated
cost (including interest) of the project. If the estimate of value
proves to be inaccurate, the Company may be confronted, at or prior
to the maturity of the loan, with a project with a value which is
insufficient to assure full repayment and/or the possibility of
having to make substantial investments to complete and sell the
project. Because defaults in repayment may not occur during the
construction period, it may be difficult to identify problem loans
at an early stage. When loan payments become due, the cash flow
from the property may not be adequate to service the debt. In such
cases, the Company may be required to modify the terms of the loan.
Consumer Lending
Management believes that offering consumer loan products helps
to expand the Company's customer base and to create stronger ties
to its existing customer base. In addition, because consumer loans
generally have shorter terms to maturity and/or adjustable rates
and carry higher rates of interest than do residential mortgage
loans, they can be valuable asset/liability management tools. For
these reasons, the Company has increased its consumer lending in
recent periods. See "Management's Discussion and Analysis of
Financial Condition - Asset/Liability Management" in the Annual
Report to Stockholders, attached hereto as Exhibit 13.
The Company currently originates substantially all of its
consumer loans in its market area. At December 31, 1996, the
Company's consumer loans totalled $10.7 million or 6.6% of the
Company's loan portfolio.
Oak Hills offers a variety of secured consumer loans,
including second mortgage, home equity lines of credit and home
improvement loans, education loans (which carry a guaranty from a
State agency), loans secured by savings deposits and automobile
loans. Although the Company primarily originates consumer loans
secured by real estate, deposits or other collateral, the Company
also makes unsecured personal loans.
The Company's second mortgage and home equity loans are
generally limited to $50,000. The Company uses the same
underwriting standards for second mortgage loans and home equity
lines of credit as it uses for one- to four-family residential
mortgage loans. The Company's second mortgage loans and home
equity lines of credit are generally originated in amounts which,
together with the amount of the first mortgage, do not exceed 80%
of the appraised value of the property securing the loan. At
December 31, 1996, the Company had $3.1 million of home equity
lines of credit and an additional $3.8 million of additional funds
committed, but undrawn, under such lines. Second mortgage loans
are made for terms of up to twenty years with interest rates which
adjust at one-year intervals based on a margin over the one-year
U.S. Treasury constant maturities index. Decreases or increases in
the interest rate are generally limited to 2% at any adjustment
date and 6% over the life of the loan. At December 31, 1996, the
Company had $2.3 million of second mortgage loans, all of which are
classified in the Company's financial reports as one- to four-
family residential loans.
The terms of other types of consumer loans vary according to
the type of collateral, length of contract and creditworthiness of
the borrower. Lines of credit extended through the Company's
Visa/Mastercard credit card program are provided through a third
party lender.
The underwriting standards employed by the Company for
consumer loans include a determination of the applicant's payment
history on other debts and an assessment of the borrower's ability
to meet payments on the proposed loan along with his existing
obligations. In addition to the creditworthiness of the applicant,
the underwriting process also includes a comparison of the value of
the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater risk than residential
mortgage loans, particularly in the case of consumer loans which
are unsecured or secured by rapidly depreciable assets such as
automobiles. In such cases, any repossessed collateral for
defaulted consumer loans may not provide adequate sources of
repayment for the outstanding loan balances as a result of the
greater likelihood of damage, loss or depreciation. In addition,
consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be
affected by adverse personal circumstances. Furthermore, the
application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans. Although the level of
delinquencies in the Company's consumer loan portfolio has
generally been low ($44,000 was 90 days or more delinquent and on
non-accrual status at December 31, 1996), there can be no assurance
that delinquencies will not increase in the future.
Commercial Business Lending
Federally chartered savings institutions, such as Oak Hills,
are authorized to make secured or unsecured loans and issue letters
of credit for commercial, corporate, business and agricultural
purposes and to engage in commercial leasing activities, up to a
maximum of 10% of total assets.
The Company engages in a limited amount of commercial business
lending activities, generally with its existing customers. At
December 31, 1996, the Company had $340,000 in commercial business
loans outstanding, representing less than one percent of the
Company's gross loan portfolio.
Unlike residential mortgage loans, which
generally are made on
the basis of the borrower's ability to make repayment from his or
her employment and other income, and which are secured by real
property whose value tends to be more easily ascertainable,
commercial business loans are of higher risk and typically are made
on the basis of the borrower's ability to make repayment from the
cash flow of the borrower's business. The Company's commercial
business loans generally include personal guarantees and are
usually, but not always, secured by business assets, such as
accounts receivable, equipment and inventory as well as real
estate. However, the collateral securing the loans may depreciate
over time, may be difficult to appraise and may fluctuate in value
based on the success of the business.
Originations, Purchases and Sales of Loans
The Company originates real estate and other loans through
employees located at each of the Company's offices. Walk-in
customers and referrals from real estate brokers and builders are
also important sources of loan originations. The Company utilizes
the services of mortgage brokers with respect to the origination of
multi-family and/or commercial real estate loans. Such loans are
underwritten to the same standards as similar loans originated by
the Company. Additionally, such loans are normally located within
the Company's primary market area.
In order to supplement its loan production, the Company may
purchase loans from third parties, generally other savings
associations. The Company will continue to evaluate loan purchase
opportunities as they arise and may make purchases in the future
depending on market conditions.
The Company will periodically sell its residential real estate
loans consistent with its asset/liability objectives. When loans
are sold, the Company generally retains the responsibility for
servicing the loan. Loan servicing fees associated with sold loans
for which the Company has retained the servicing are at market
rates, generally between .25% and .375%, and are based upon the
loan balances outstanding. At December 31, 1996, approximately
$8.8 million of Oak Hills' loan portfolio was serviced by others
and the Company serviced $23.8 million of loans for others.
The following table shows the loan origination, purchase, sale
and repayment activities of the Company for the periods indicated.
Loans originated for sale are included in this table at their
current market value at December 31, 1996.
Year Ended December 31,
1994 1995 1996
(In Thousands)
Originations by type:
Adjustable-rate:
Real estate - one- to four-family... $10,361 $ 7,781 $17,025
- multi-family.......... 2,740 955 9,931
- commercial............ 1,073 2,397 6,544
Non-real estate - consumer.......... 84 115 156
- commercial
business......... 24 105 257
------ ------ ------
Total adjustable-rate........ 14,282 11,353 33,913
Fixed-rate:
Real estate - one- to four-family... 12,272 11,458 17,873
- multi-family.......... --- --- 1,285
- commercial............ 6,690 2,106 772
Non-real estate - consumer.......... 1,130 3,667 2,587
------ ------ ------
Total fixed-rate............. 20,092 17,231 22,517
------ ------ ------
Total loans originated....... 34,374 28,584 56,430
Purchases:
Real estate - one- to four-family... --- --- ---
- multi-family.......... --- --- ---
- commercial............ --- --- ---
------ ------ ------
Total purchases.............. --- --- 8,660
Sales:
Real estate - one- to four-family... 3,252 1,731 2,809
- multi-family.......... --- --- ---
- commercial............ --- --- ---
- consumer.............. --- 1,814 573
------- ------ -----
Total loan sales............. 3,252 3,545 3,382
------- ------ ------
Principal repayments................ 22,752 20,865 36,993
------- ------ ------
Total repayments............. 26,004 24,410 40,375
------- ------ ------
Increase in principal
balance.............................. 8,370 4,174 16,055
Increase (decrease) in other items,
net.................................. 2,192 1,049 (751)
------ ------ -------
Net increase................. $10,562 $ 5,223 $15,304
====== ====== ======
/TABLE
Delinquencies and Non-Performing Assets
Delinquency Procedures. When a borrower fails to make a
required payment on a loan, the Company attempts to cause the
delinquency to be cured by contacting the borrower. In the case of
residential loans, a late notice is sent and a call is made on all
loans under 30 days delinquent. Another late notice is sent 30
days after the due date. If the delinquency is not cured by the
60th day, a third notice and letter is mailed and, if appropriate,
the borrower is contacted by telephone. Additional written and
verbal contacts are made with the borrower between 45 and 90 days
after the due date.
In the event a real estate loan payment is past due for 90
days or more, the Company performs an in-depth review of the loan's
status, the condition of the property and circumstances of the
borrower. At 120 days, a final collection letter is sent. Based
upon the results of these actions, the Company may negotiate and
accept a repayment program with the borrower, accept a voluntary
deed in lieu of foreclosure or, when deemed necessary, initiate
foreclosure proceedings. In foreclosure, real property is sold at
a public sale and the Company may bid on the property to protect
its interest. A decision as to whether and when to initiate
foreclosure proceedings is made by the Board of Directors and is
based on such factors as the amount of the outstanding loan in
relation to the original indebtedness, the extent of delinquency
and the borrower's ability and willingness to cooperate in curing
the delinquencies.
The Company's procedures for repossession and sale of consumer
collateral are subject to various requirements under Ohio consumer
protection laws.
Real estate acquired by the Company as a result of foreclosure
or by deed in lieu of foreclosure is classified as real estate
owned until it is sold. When property is acquired, it is recorded
at the lower of cost or estimated fair value at the date of
acquisition, and any write-down resulting therefrom is charged to
the allowance for loan losses. Upon acquisition, all costs
incurred in maintaining the property are expensed. Costs relating
to the development and improvement of the property, however, are
capitalized to the extent of net realizable value. At December 31,
1996, no such real estate owned was held by the Company.
The following table sets forth the Company's loan delinquencies by
type, by amount and by percentage of type at December 31, 1996.
Past Due and Still Accruing:
--------------------------------------------------
Total
60-89 Days 90 Days and Over Non-accrual Loans Delinquent Loans
------------------------ ---------------------- ---------------------- --------------------
Percent Percent Percent Percent
of Loan of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
Real Estate:
One- to four-
family.......... 9 $ 449 .40% 11 $ 807 .71% -- $ --- -- 20 $1,256 1.11%
Multi-family...... -- --- -- 1 80 .69 -- --- -- 1 80 .69
Commercial........ -- --- -- -- --- -- -- --- -- -- --- --
Construction or
development..... -- --- -- -- --- -- -- --- -- -- --- --
Consumer........... 5 81 .76 -- --- -- 11 44 .41 16 125 1.17
Commercial Business -- --- -- -- --- -- 3 46 13.53 3 46 13.53
-- ----- --- ---- ---- ---- ---- ---- ----- --- ----- -----
Total......... 14 $ 530 .33 12 $ 887 .54 14 $ 90 .06 40 $1,507 .92%
== ===== === ==== ==== ==== ==== ==== ===== == ====== ======
Classification of Assets. Federal regulations require that
each savings institution classify its own assets on a regular
basis. In addition, in connection with examinations of savings
institutions, OTS and FDIC examiners have authority to identify
problem assets and, if appropriate, require them to be classified.
There are three classifications for problem assets: Substandard,
Doubtful and Loss. Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that
the association will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of Substandard
assets, with the additional characteristics that the weaknesses
make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a
high possibility of loss. An asset classified Loss is considered
uncollectible and of such little value that continuance as an asset
of the institution is not warranted. The regulations have also
created a Special Mention category, consisting of assets which do
not currently expose a savings institution to a sufficient degree
of risk to warrant classification, but do possess credit
deficiencies or potential weaknesses deserving management's close
attention. Assets classified as Substandard or Doubtful require
the institution to establish prudent general allowances for loan
losses. If an asset or portion thereof is classified as Loss, the
institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified
Loss, or charge off such amount.
On the basis of management's review of its assets, at December
31, 1996, the Company had classified a total of $1,509,000 of its
loans, as follows:
Multi-Family
One- to Four and Commercial
Family Real Estate Consumer Total
(In thousands)
Special Mention... $ 496 $ --- $ --- $ 496
Substandard....... 770 125 94 989
Doubtful.......... 5 10 9 24
Loss.............. --- --- --- ---
----- ---- ----- -----
$1,271 $ 135 $ 103 $1,509
===== ==== ===== =====
The Company's classified assets consist of the non-performing
loans and other assets of concern discussed herein. As of the date
hereof, management believes that these asset classifications are
consistent with those of the OTS and FDIC.
Non-Performing Assets. The following table sets forth the
amounts and categories of non-performing assets in the Company's
loan portfolio. Loans are reviewed quarterly and delinquent loans
may be placed on non-accrual status, consistent with the Company's
classification policies. Real estate loans are placed on
nonaccrual status when either principal or interest is 90 days or
more past due, respectively, unless, in the judgement of
management, the loan is owner-occupied, well collateralized and in
the process of collection. Consumer loans are placed on non-
accrual status if they remain delinquent after 90 days. If a loan
is deemed uncollectible by management, it is charged off. For all
years presented, the Company has had no troubled debt
restructurings (which involved forgiving a portion of interest or
principal on any loans or making loans at a rate materially less
than that of market rates).
At December 31,
1994 1995 1996
(Dollars in Thousands)
Non-accruing loans:
Commercial real estate....... $ 224 $ 44 $ --
Consumer..................... 34 47 44
Commercial business.......... --- --- 46
----- ----- ----
Total..................... 258 91 90
----- ----- ----
Accruing loans delinquent 90 days
or more:
One- to four-family.......... 668 572 807
Multi-family................. --- --- 80
Commercial Real Estate....... 67 --- ---
----- ----- ----
Total..................... 735 572 887
----- ----- ----
Foreclosed assets:
One- to four-family.......... --- --- ---
----- ----- ----
Total..................... --- --- ---
----- ----- ----
Total non-performing assets.... $ 993 $ 663 $ 977
===== ===== ====
Total as a percentage of total
assets........................ .56% .32% .45%
===== ===== ====
Management has considered the Company's non-performing and "of
concern" assets in establishing its allowance for loan losses.
The allowance for loan losses is established through a
provision for loan losses charged to earnings based on management's
evaluation of the risk inherent in its loan portfolio and changes
in the nature and volume of its loan activity. Such evaluation,
which includes a review of all loans of which full collectibility
may not be reasonably assured, considers the estimated net
realizable value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant
recognition in providing for an adequate allowance for loan losses.
In determining the general valuation allowance under these
policies, historical charge-offs and recoveries, changes in the mix
and levels of the various types of loans, the current loan
portfolio and current economic conditions are considered. The
Company also requires additional valuation allowances for all
delinquent and classified loans.
While management believes that it uses the best information
available to determine the allowance for loan losses, unforeseen
market conditions could result in adjustments to the allowance for
loan losses, and net earnings could be significantly affected, if
circumstances differ substantially from the assumptions used in
making the final determination.
As of December 31, 1996, there were $496,000 of one- to four-
family residential loans which are being monitored by management
because they are delinquent between 30 and 89 days. There were no
other loans not included on the table or discussed above where
known information about the possible credit problems of borrowers
caused management to have serious doubts as to the ability of the
borrower to comply with present loan repayment terms and which may
result in disclosure of such loans in the future.
Loan Loss Reserve Analysis. The following table sets forth
the activity in the Company's allowance for loan losses for the
periods indicated.
Year Ended December 31,
1994 1995 1996
(Dollars in Thousands)
Balance at beginning of period. $ 501 $ 507 $ 515
Charge-offs:
One- to four-family.......... --- --- ---
Commercial business.......... --- --- 22
Consumer..................... 7 --- 3
Recoveries:
Consumer..................... 3 --- ---
---- ---- ----
Net charge-offs................ 4 --- 25
Provision charged to
operations.................... 10 8 9
---- ---- ----
Balance at end of period....... $ 507 $ 515 $ 499
==== ==== ====
Ratio of net charge-offs during
the period to average loans
outstanding during the period. .01% ---% .02%
==== ==== ====
Ratio of the allowance for loan
losses to non-performing loans
at the end of the period...... 51.1% 77.7% 51.1%
==== ==== ====
Ratio of the allowance for loan
losses to net loans (including
loans held for sale) at the
end of the period............. .37% .36% .32%
==== ==== ====
The distribution of the Company's allowance for losses on loans at
the dates indicated is summarized as follows:
December 31,
1994 1995 1996
----------------- -------------- ------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------- -------- ------ -------- ------ ----------
(Dollars in Thousands)
One- to four-family...... $ 228 69.4% $ 222 68.2% $ 214 69.6%
Multi-family............. 10 6.6 13 6.6 11 7.1
Commercial real estate... 62 12.0 46 11.6 61 10.5
Construction or develop-
ment.................... 8 6.5 10 7.6 5 6.1
Consumer................. 25 5.2 31 5.8 33 6.5
Commercial business...... -- .3 -- .2 -- .2
Unallocated.............. 174 -- 193 -- 175 ---
----- ----- ----- ----- ------ -----
Total............... $ 507 100.0% $ 515 100.0% $ 499 100.0%
===== ===== ===== ======= ====== =====
Investment Activities
As part of its asset/liability management strategy, the
Company regularly invests in U.S. government and agency
obligations, mortgage-backed securities, collateralized mortgage
obligations, investment grade corporate obligations and mutual
funds registered with the U.S. Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, and interest-
bearing deposits. At December 31, 1996, the Company did not own
any securities of a single issuer which exceeded 10% of the
Company's retained earnings, other than federal agency obligations.
The Company is required by federal regulations to maintain a
minimum amount of liquid assets which may be available to meet cash
flow or other financial needs. Federal regulations govern the types
and amounts which may be invested in certain financial instruments.
In other cases, federal regulations specify certain procedural
requirements which must be followed prior to investing in certain
financial instruments or which must be maintained during the period
of ownership of the financial instrument.
The Company regularly reviews cash flow projections in order
to assure that adequate liquidity is available. As of December 31,
1996, the Company's liquidity ratio, defined as the qualifying
liquid assets as a percentage of withdrawable deposits and current
borrowings, was 5.6% as compared to the OTS requirement of 5.0%.
The Company classifies securities as held-to-maturity or
available-for-sale. Securities are held to maturity and carried at
amortized cost only if OHSL has a positive intent and ability to
hold the securities to maturity. All other securities are
designated as available-for-sale and carried at fair value.
At December 31, 1996, OHSL's securities portfolio had a total
book value of $43.1 million. Of that total, $17.3 million are
Federal Agency obligations, $11.0 million are collateralized
mortgage obligations (which are securities derived by reallocating
cash flows from other mortgage instruments), $10.8 million are
mortgage-backed securities and $4.1 million are other obligations
(consisting primarily of tax-free obligations and corporate bonds).
At December 31, 1996, all of OHSL's mortgage-backed securities
are held in its available-for-sale portfolio and accordingly are
included in its financial statements at fair value. OHSL's CMOs
are held in its held-to-maturity portfolio and accordingly are
included in its financial statements at amortized cost. See Note
2 of the Notes to the Consolidated Financial Statements.
All of OHSL's mortgage-backed securities and collateralized
mortgage obligations are issued and backed by federal agencies or
carried a AAA rating from Standard & Poor as of December 31, 1996.
Accordingly, management believes that these securities are
generally resistant to credit problems.
OHSL purchases mortgage-backed securities in the regular
course of business. The type of security purchased is based upon
OHSL's asset/liability management strategy, balance sheet
objectives, yield potential, and other factors. For instance, most
of the mortgage-backed securities purchased over the last several
years have had adjustable interest rates or short to intermediate
effective terms to maturity.
See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Asset/Liability Management"
in the Annual Report to Stockholders, attached hereto as Exhibit
13.
The following table sets forth the composition of OHSL's investment
portfolio at the dates indicated.
December 31,
1994 1995 1996
------------- --------------- -------------------------
Book % of Book % of Book % of Weighted
Value Total Value Total Value Total Avg. Yield
(Dollars in Thousands)
Available for Sale Securities:
Federal agency obligations... $ 4,732 34.4% $ --- --% $ --- --% --%
Mortgage-backed securities... 5,812 42.2 10,401 75.9 10,731 76.8 6.35
Mutual funds................. 2,460 17.9 2,810 20.5 2,770 19.8 6.08
Other obligations............ 757 5.5 492 3.6 468 3.4 6.00
------- ----- ------ ----- ------ ----- ----
$ 13,761 100.0% $13,703 100.0% $13,969 100.0% 6.28%
======= ===== ====== ===== ====== ===== ====
Held-to-Maturity Securities:
Federal agency obligations... $ 5,987 47.9% $19,410 69.7% $17,330 59.4% 7.08%
Mortgage-backed securities... --- -- --- -- --- -- --
Collateralized mortgage
obligations................. 6,504 52.1 7,625 27.4 11,022 37.8 6.20
Mutual funds................. --- -- --- -- --- -- --
Other obligations............ --- -- 808 2.9 810 2.8 8.03
------- ----- ------ ----- ------ ----- ----
$ 12,491 100.0% $27,843 100.0% $29,162 100.0% 6.77%
======= ===== ====== ===== ====== ===== ====
The following table presents the contractual maturities of the
Corporation's securities portfolio at December 31, 1996.
Obligations which are callable by the issuer are shown as maturing
in the year which corresponds to the final stated maturity.
Mortgage-backed securities are shown as maturing in the year(s) in
which the Corporation expects to receive the payment of
principal, based upon the recent payment history of the investment.
As the mutual funds owned by the Corporation have no stated
maturity, they are shown as maturing in 1997.
2002 and Amortized Fair
1997 1998-99 2000-2001 After Cost Value
(Dollars in Thousands)
Available for Sale Securities:
Mortgage-backed securities... $ 2,150 $ 4,300 $ 1,610 $ 2,714 $10,774 $10,731
Mutual funds................. 2,798 --- --- --- 2,798 2,770
Other obligations............ --- --- --- 500 500 468
-------- ------- ------- ------- ------- -------
4,948 4,300 1,610 3,214 14,072 13,969
Held-to-Maturity Securities:
Federal agency obligations... --- 1,481 2,000 13,849 17,330 17,278
Collateralized mortgage
obligations................. 1,320 2,200 4,960 2,542 11,022 10,857
Tax-free obligations(1)........ --- --- --- 810 810 818
-------- ------ ------- ------- ------- -------
1,320 3,681 6,960 17,201 29,162 28,953
-------- ------ ------- ------- ------- -------
Total Investments $ 6,268 $ 7,981 $ 8,570 $20,415 $43,234 $42,922
======== ======= ======== ======== ======== ========
Weighted Average Yield 6.29% 6.29% 6.44% 7.24% 6.77%
======= ====== ======= ======= =======
<FN>
(1) Shown at tax-equivalent yield
</FN>
Sources of Funds
General. Deposit accounts have traditionally been the primary
source of the Company's funds for use in lending and for other
general business purposes. In addition to deposits, the Company
derives funds from loan repayments and cash flows generated from
operations. Scheduled loan payments are a relatively stable source
of funds, while deposit inflows and outflows and the related cost
of such funds have varied. Other potential sources of funds
available to the Company include borrowings from the FHLB of
Cincinnati and other borrowings.
Deposits. The Company attracts both short-term and long-term
deposits by offering a wide assortment of accounts and rates. The
Company offers regular passbook accounts, NOW accounts, money
market accounts and fixed interest rate certificates of deposits
with varying maturities and individual retirement accounts. The
Company also offers non-interest bearing personal and business
checking accounts. Deposit account terms vary, according to the
minimum balance required, the time period the funds must remain on
deposit and the interest rate, among other factors. The Company
has not actively sought deposits outside of its primary market
area.
In setting rates, the Company regularly evaluates (i) its
internal cost of funds, (ii) the rates offered by competing
institutions, (iii) its investment and lending opportunities and
(iv) its liquidity position. In order to decrease the volatility
of its deposits, the Company imposes penalties on early withdrawal
on its certificates of deposit. The Company does not have any
brokered deposits and has no present intention to accept or solicit
such deposits.
The following table sets forth the savings flows at the
Company during the periods indicated.
Year Ended December 31,
1994 1995 1996
(Dollars in Thousands)
Opening balance.... $ 135,842 $ 135,587 $ 159,314
Deposits........... 285,589 310,787 327,811
Withdrawals........ (291,493) (294,485) (325,782)
--------- --------- ---------
Balance before
interest credited. 129,938 151,889 161,343
Interest credited.. 5,649 7,425 8,143
--------- --------- ---------
Ending balance..... $ 135,587 $ 159,314 $ 169,486
========= ========= =========
Net increase
(decrease)........ $ (255)$ 23,727 $ 10,172
========= ========= =========
Percent increase
(decrease)........ (0.19)% 17.50% 6.38%
==== ===== ====
The following table sets forth the dollar amount of
deposits in the various types of programs offered by
the Company for the periods indicated.
Year Ended December 31,
1994 1995 1996
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
(Dollars in Thousands)
Transaction Accounts:
Non-interest bearing deposits....... $ 4,013 3.0% $ 4,042 2.5% $ 2,669 1.6%
Savings accounts.................... 16,533 12.2 22,165 13.9 24,322 14.4
NOW accounts........................ 17,183 12.6 15,180 9.5 16,487 9.7
Money market accounts............... 17,646 13.0 12,939 8.2 11,545 6.8
------- ---- ------ ---- ------ ----
Total Transaction Accounts.......... 55,375 40.8 54,326 34.1 55,023 32.5
------- ---- ------ ---- ------ ----
Certificates:
2.00 - 3.99%........................ 6,684 4.9 912 .6 906 .5
4.00 - 5.99%........................ 51,516 38.0 39,554 24.8 57,360 33.9
6.00 - 7.99%....................... 15,227 11.2 60,225 37.8 52,274 30.8
8.00 - 9.99%........................ 6,785 5.1 4,297 2.7 3,923 2.3
------- ----- ------- ----- ------- -----
Total Certificates................... 80,212 59.2 104,988 65.9 114,463 67.5
------- ----- ------- ----- ------- -----
Total Deposits....................... 135,587 100.0% 159,314 100.0% 169,486 100.0%
===== ===== =====
Accrued Interest on deposit accounts. 5 8 119
------- ------- -------
Total Deposits and accrued interest
on deposit accounts............... $135,592 $159,322 $ 169,605
======= ======= ========
The following table shows rate and maturity information for
the Company's certificates of deposit as of December 31, 1996.
2.00- 4.00- 6.00- 8.00- Percent
3.99% 5.99% 7.99% 9.99% Total of Total
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending:
March 31, 1997................. $ 906 $16,894 $ 2,181 $ 36 $ 20,017 17.49%
June 30, 1997.................. -- 10,257 7,519 4 17,780 15.53
September 30, 1997............. -- 7,417 5,009 -- 12,426 10.86
December 31, 1997.............. -- 7,079 5,779 2,079 14,937 13.05
March 31, 1998................. -- 2,446 6,049 487 8,982 7.85
June 30, 1998.................. -- 1,006 6,046 162 7,214 6.30
September 30, 1998............. -- 1,879 3,250 10 5,140 4.49
December 31, 1998.............. -- 2,354 271 194 2,819 2.46
March 31, 1999................. -- 3,091 -- 357 3,448 3.01
June 30, 1999.................. -- 949 -- 381 1,330 1.16
September 30, 1999............. -- 619 37 113 769 .67
December 31, 1999.............. -- 194 -- -- 194 .17
Thereafter..................... -- 3,175 16,133 99 19,408 16.96
------ ------ ------ ------ ------- ------
Total...................... $ 906 $57,360 $52,274 $ 3,923 $114,463 100.00%
Percent of total............ 0.79% 50.11% 45.67% 3.43%
====== ====== ====== ======
The following table indicates the amount of the Company's certificates
of deposit by time remaining until maturity as of December 31, 1996.
Maturity
------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
(In Thousands)
Certificates of deposit less
than $100,000............... $17,308 $16,116 $23,024 $43,928 $100,376
Certificates of deposit of
$100,000 or more............ 2,709 1,664 4,048 5,375 13,796
Public funds(1).............. -- -- 291 -- 291
------- ------ ------ ------ -------
Total certificates of
deposit..................... $20,017 17,780 $27,363 $49,303 $114,463
====== ====== ====== ====== =======
<FN>
(1) Deposits from governmental and other public entities.
</FN>
For additional information regarding the composition of the
Company's deposits, see Note 6 of the Notes to the Consolidated
Financial Statements.
Borrowings. The Company's other available sources of funds
include advances from the FHLB of Cincinnati and other borrowings.
As a member of the FHLB of Cincinnati, the Company is required to
own capital stock in the FHLB of Cincinnati and is authorized to
apply for advances from the FHLB of Cincinnati. Each FHLB credit
program has its own interest rate, which may be fixed or variable,
and range of maturities. The FHLB of Cincinnati may prescribe the
acceptable uses for these advances, as well as limitations on the
size of the advances and repayment provisions.
The following table sets forth the maximum month-end balance
and average balance of FHLB advances and other borrowings for the
periods indicated.
Year Ended December 31,
1994 1995 1996
(In Thousands)
Maximum Balance:
FHLB advances................ $15,150 $17,400 $20,627
Other borrowings............. 3,000 --- ---
Average Balance:
FHLB advances................ 9,785 15,865 17,961
Other borrowings............. 582 --- ---
The following table sets forth certain information as to the
Company's FHLB advances and other borrowings at the dates
indicated.
Year Ended December 31,
1994 1995 1996
(In Thousands)
FHLB advances.................. $15,150 $17,400 $19,116
Other borrowings............... --- --- ---
------ ------ ------
Total borrowings............. $15,150 $17,400 $19,116
====== ====== ======
Weighted average interest
rate of borrowings........... 6.38% 5.92% 5.96%
====== ====== ======
Service Corporation
Federal associations generally may invest up to 2% of their
assets in service corporations, plus an additional 1% of assets if
for community purposes. In addition, federal associations may
invest up to 50% of their regulatory capital in conforming loans to
their service corporations.
The Company has one service corporation, CFSC, Inc. ("CFSC"),
which is engaged in the sale on an agency basis of tax-deferred
annuities and mutual fund products. At December 31, 1996, the
Company had an equity investment in CFSC of $35,000. For the year
ended December 31, 1996, CFSC received commission income of $10,000
from its mutual fund and annuity sales activities.
Competition
The Company faces strong competition both in originating real
estate loans and in attracting deposits. Competition in
originating loans comes primarily from other savings institutions,
commercial banks and mortgage bankers who also make loans secured
by real estate located in the Company's primary market area. The
Company competes for loans principally on the basis of the interest
rates and loan fees it charges, the types of loans it originates
and the quality of services it provides to borrowers.
The Company faces substantial competition in attracting
deposits from other savings institutions, commercial banks,
securities firms, money market and mutual funds, credit unions and
other investment vehicles. The Company competes with numerous
savings institutions, commercial banks and credit unions which
operate through extensive branch offices in its primary market
area. The ability of the Company to attract and retain deposits
depends on its ability to provide an investment opportunity that
satisfies the requirements of investors as to rate of return,
liquidity, risk, convenient locations and other factors. The
Company competes for these deposits by offering a variety of
deposit accounts at competitive rates, convenient business hours
and a customer oriented staff. The Company estimates its market
share of savings deposits in the Hamilton County market area to be
less than 5%.
REGULATION
General
The Company is a federally chartered savings association, the
deposits of which are federally insured and backed by the full
faith and credit of the United States Government. Accordingly, the
Company is subject to broad federal regulation and oversight
extending to all its operations. The Company is a member of the
FHLB of Cincinnati and is subject to certain limited regulation by
the Board of Governors of the Federal Reserve System ("Federal
Reserve Board"). As the savings and loan holding company for Oak
Hills, OHSL also is subject to federal regulation and oversight.
The purpose of the regulation of OHSL and other holding companies
is to protect subsidiary savings associations. The Company is a
member of the SAIF and the deposits of the Company are insured by
the FDIC. As a result, the FDIC has certain regulatory and
examination authority over the Company.
Certain of these regulatory requirements and restrictions are
discussed below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, the Company is required
to file periodic reports with the OTS and is subject to periodic
examinations by the OTS and the FDIC. The last regular OTS and
FDIC examinations of the Company were as of April 1996 and October
1990, respectively. Under agency scheduling guidelines, it is
likely that another examination will be initiated in the near
future.
The OTS has established a schedule for the assessment of fees
upon all savings associations to fund the operations of the OTS.
The general assessment is computed upon the savings association's
total assets, as reported in the association's latest quarterly
thrift financial report. Savings associations (unlike the Company)
that are classified as "troubled" (i.e., having a supervisory
rating of "4" or "5" or subject to a conservatorship) are required
to pay a 50% premium over the standard assessment. The Company's
OTS assessment for the year ended December 31, 1996, was $58,000.
The OTS also has extensive enforcement authority over all
savings institutions and their holding companies, including the
Corporation and the Company. This enforcement authority includes,
among other things, the ability to assess civil money penalties, to
issue cease-and-desist or removal orders and to initiate injunctive
actions. In general, these enforcement actions may be initiated
for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed
with the OTS. Except under certain circumstances, public
disclosure of final enforcement actions by the OTS is required.
In addition, the investment, lending, and branching authority
of the Company is prescribed by federal laws and regulations, and
it is prohibited from engaging in any activities not permitted by
such laws and regulations. For instance, no savings institution
may invest in non-investment grade corporate debt securities. In
addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may
not exceed 400% of regulatory capital, except with approval of the
OTS. The Company is in compliance with each of these restrictions.
The Company's permissible lending limit for loans-to-one-
borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain
readily marketable collateral, in which case this limit is
increased to 25% of unimpaired capital and surplus). At
December 31, 1996, the Company's lending limit under the 15%
restriction was $2.9 million. The Company is in compliance with
the loans-to-one-borrower limitation.
In December 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted into law. FDICIA
provides for, among other things, the recapitalization of the Bank
Insurance Fund; adoption of safety and soundness standards,
including enhanced federal supervision of depository institutions,
including greater authority for the appointment of a conservator or
receiver for undercapitalized institutions; the establishment of
risk-based deposit insurance premiums; liberalization of the
qualified thrift lender test; greater restrictions on transactions
with affiliates; and mandated consumer protection disclosures with
respect to deposit accounts. See "- Insurance of Accounts and
Regulation by the FDIC," "- Regulatory Capital Requirements" and
"- Qualified Thrift Lender Test."
The OTS, as well as the other federal banking agencies, have
issued proposed safety and soundness standards on matters such as
loan underwriting and documentation, internal controls and audit
systems, interest rate risk exposure and compensation and other
employee benefits. The proposal also establishes the maximum ratio
of classified assets to total capital (which for this purpose
includes loss allowances exceeding the amount includable for
regulatory capital purposes) at 100% and the minimum level of
earnings sufficient to absorb losses without impairing capital.
Insurance of Accounts and Regulation by the FDIC
The Company is a member of the SAIF, which is administered by
the FDIC. Savings deposits are insured up to applicable limits by
the FDIC and such insurance is backed by the full faith and credit
of the United States government. As insurer, the FDIC imposes
deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such
action, and may terminate the deposit insurance if it determines
that the institution has engaged or is engaging in unsafe or
unsound practices, or is in an unsafe or unsound condition.
FDICIA also requires the FDIC to implement a risk-based
deposit insurance assessment system. Pursuant to this requirement,
the FDIC has adopted a transitional risk-based assessment system,
under which all insured depository institutions will be placed into
one of nine categories and assessed insurance premiums, ranging
from .23% to .31% of deposits, based upon their level of capital
and supervisory evaluation. The FDIC will review the
implementation of the transitional system in adopting the permanent
system. No assurance can be given that the permanent system will
be identical to the transitional system. Final regulations have
not yet been issued. Under the transitional system, institutions
classified as well capitalized (i.e., a core capital ratio of at
least 5%, a ratio of Tier 1 or core capital to risk-weighted assets
("Tier 1 risk-based capital") of at least 6% and a risk-based
capital ratio of at least 10%) and considered healthy would pay the
lowest premium while institutions that are less than adequately
capitalized (i.e., core and Tier 1 risk-based capital ratios of
less than 4% or a risk-based capital ratio of less than 8%) and
considered of substantial supervisory concern would pay the highest
premium. Risk classification of all insured institutions will be
made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a
semiannual basis, if it determines that the reserve ratio of the
SAIF will be less than the designated reserve ratio of 1.25% of
SAIF insured deposits. In setting these increased assessments, the
FDIC must seek to restore the reserve ratio to that designated
reserve level, or such higher reserve ratio as established by the
FDIC. In addition, under FDICIA, the FDIC may impose special
assessments on SAIF members to repay amounts borrowed from the
United States Treasury or for any other reason deemed necessary by
the FDIC.
The financing corporations created by FIRREA and the
Competitive Equality Banking Act of 1987 are also empowered to
assess premiums on savings associations to help fund the
liquidation or sale of troubled associations. Such premiums
cannot, however, exceed the amount of SAIF assessments and are paid
in lieu thereof.
Regulatory Capital Requirements
Federally insured savings associations, such as the Company,
are required to maintain a minimum level of regulatory capital.
The OTS has established capital standards, including a tangible
capital requirement, a leverage ratio (or core capital) requirement
and a risk-based capital requirement applicable to such savings
associations. These capital requirements must be generally as
stringent as the comparable capital requirements for national
banks. The OTS is also authorized to impose capital requirements
in excess of these standards on individual associations on a case-
by-case basis.
The capital regulations require tangible capital of at least
1.5% of adjusted total assets (as defined by regulation). Tangible
capital generally includes stockholders' equity. In addition, all
intangible assets, other than a limited amount of purchased
mortgage servicing rights, must be deducted from tangible capital.
At December 31, 1996, the Company did not have any intangible
assets.
At December 31, 1996, the Company had tangible capital of
$19.5 million, or 9.2% of adjusted total assets, which is
approximately $16.3 million above the minimum requirement of 1.5%
of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at
least 3% of adjusted total assets (as defined by regulation). Core
capital generally consists of tangible capital plus certain
intangible assets, including supervisory goodwill (which is phased-
out over a five-year period). A savings association must maintain
a core capital ratio of at least 4% to be considered adequately
capitalized unless its supervisory condition is such to allow it to
maintain a 3% ratio.
As required by federal law, the OTS has proposed a rule
revising its minimum core capital requirement to be no less
stringent than that imposed on national banks. The OTS has
proposed that only those savings associations rated a composite one
(the highest rating) under the MACRO rating system for savings
associations will be permitted to operate at or near the regulatory
minimum leverage ratio of 3%. All other savings associations will
be required to maintain a minimum leverage ratio of 4% to 5%. The
OTS will assess each individual savings association through the
supervisory process on a case-by-case basis to determine the
applicable requirement. No assurance can be given as to the final
form of any such regulation, the date of its effectiveness or the
requirement applicable to the Company.
At December 31, 1996, the Company had core capital equal to
$19.5 million, or 9.2% of adjusted total assets, which is $11.0
million above the minimum leverage ratio requirement of 4% as in
effect on that date.
The OTS risk-based requirement requires savings associations
to have total capital of at least 8% of risk-weighted assets.
Total capital consists of core capital, as defined above, and
supplementary capital. Supplementary capital consists of certain
permanent and maturing capital instruments that do not qualify as
core capital and general valuation loan and lease loss allowances
up to a maximum of 1.25% of risk-weighted assets. Supplementary
capital may be used to satisfy the risk-based requirement only to
the extent of core capital. At December 31, 1996, the Company had
no capital instruments that qualify as supplementary capital and
$487,000 of general loss reserves, which was less than 1.25% of
risk-weighted assets.
On December 31, 1996, the Company had total risk-based capital
of $20.0 million (including $19.5 million in core capital and $0.5
million in qualifying supplementary capital) and risk-weighted
assets of $108.5 million, or total capital of 18.4% of risk-
weighted assets. This amount was $11.3 million above the 8.0%
requirement in effect on that date.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions or requirements on
associations with respect to their ability to pay dividends or make
other distributions of capital. OTS regulations prohibit an
association from declaring or paying any dividends or from
repurchasing any of its stock if, as a result, the net worth of the
association would be reduced below the amount required to be
maintained for the liquidation account established in connection
with its mutual to stock conversion.
The OTS utilizes a three-tiered approach to permit
associations, based on their capital level and supervisory
condition, to make capital distributions which include dividends,
stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account (see "--Regulatory
Capital Requirements").
Generally, Tier 1 associations, which are associations that
before and after the proposed distribution meet their fully phased-
in capital requirements, may make capital distributions during any
calendar year equal to the greater of 100% of net income for the
year-to-date plus 50% of the amount by which the lesser of the
association's tangible, core or risk-based capital exceeds its
fully phased-in capital requirement for such capital component, as
measured at the beginning of the calendar year, or the amount
authorized for a Tier 2 association. However, a Tier 1 association
deemed to be in need of more than normal supervision by the OTS may
be downgraded to a Tier 2 or Tier 3 association as a result of such
a determination. The Company meets the requirements for a Tier 1
association and has not been notified of a need for more than
normal supervision. Tier 2 associations, which are associations
that before and after the proposed distribution meet their current
minimum capital requirements, may make capital distributions of up
to 75% of net income over the most recent four quarter period.
Tier 3 associations (which are associations that do not meet
current minimum capital requirements) that propose to make any
capital distribution and Tier 2 associations that propose to make
a capital distribution in excess of the noted safe harbor level
must obtain OTS approval prior to making such distribution. Tier
2 associations proposing to make a capital distribution within the
safe harbor provisions and Tier 1 associations proposing to make
any capital distribution need only submit written notice to the OTS
30 days prior to such distribution. As a subsidiary of the
Corporation, the Company is required to give the OTS 30 days'
notice prior to declaring any dividend on its stock. The OTS may
object to the distribution during that 30-day period based on
safety and soundness concerns. See "-Regulatory Capital
Requirements."
Liquidity
All savings associations, including Oak Hills, are required to
maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or
less. This liquidity ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the
minimum liquidity ratio is 5.0%.
In addition, short-term liquid assets (e.g., cash, certain
time deposits, certain bankers acceptances and short-term United
States Treasury obligations) currently must constitute at least 1%
of the association's average daily balance of net withdrawable
deposit accounts and short-term borrowings. Penalties may be
imposed upon associations for violations of either liquidity ratio
requirement. At December 31, 1996, Oak Hills was in compliance
with both requirements, with an overall liquid asset ratio of 5.60%
and a short-term liquid assets ratio of 3.6%.
Accounting
An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and
documented investment policies and strategies, and must be
accounted for in accordance with GAAP. Under the policy statement,
management must support its classification of and accounting for
loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. Management believes that
the Company is in compliance with this OTS policy statement.
Qualified Thrift Lender Test
All savings associations, including the Company, are required
to meet a qualified thrift lender ("QTL") test to avoid certain
restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (which
consists of total assets less intangibles, properties used to
conduct the savings association's business and liquid assets not
exceeding 20% of total assets) in qualified thrift investments on
a monthly average for nine out of every 12 months on a rolling
basis. At December 31, 1996, the Company met the test and has
always met the test since it went into effect.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as
favorable to the association as transactions with non-affiliates.
In addition, certain of these transactions are restricted to a
percentage of the association's capital. Affiliates of Oak Hills
include OHSL and any company which is under common control with the
Company. In addition, a savings association may not lend to any
affiliate engaged in activities not permissible for a bank holding
company or acquire the securities of most affiliates. Oak Hills'
subsidiaries are generally not deemed affiliates.
Certain transactions with affiliated persons are also subject
to conflict of interest regulations enforced by the OTS.
Affiliated persons include officers, directors and controlling
stockholders.
Holding Company Regulation
OHSL is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, OHSL is required to
register and file reports with the OTS and is subject to regulation
and examination by the OTS. In addition, the OTS has enforcement
authority over OHSL and its non-savings association subsidiaries
which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings
association.
As a unitary savings and loan holding company, OHSL generally
is not subject to activity restrictions. If OHSL acquires control
of another savings association as a separate subsidiary, it would
become a multiple savings and loan holding company, and the
activities of OHSL and any of its subsidiaries (other than Oak
Hills or any other SAIF-insured savings association) could become
subject to such restrictions.
If the Company fails the QTL test, the Company must obtain the
approval of the OTS prior to continuing after such failure,
directly or through its other subsidiaries, any business activity
other than those approved for multiple savings and loan holding
companies or their subsidiaries. In addition, within one year of
such failure, the Company must register as (and will become subject
to the restrictions applicable to) a bank holding company. The
activities authorized for a bank holding company are more limited
than are the activities authorized for a unitary or multiple
savings and loan holding company. See "--Qualified Thrift Lender
Test."
OHSL must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisitions
are generally prohibited if they result in a multiple savings and
loan holding company controlling savings associations in more than
one state. However, such interstate acquisitions are permitted
based on specific state authorization or in a supervisory
acquisition of a failing savings association.
Federal Securities Law
The stock of the Corporation is registered with the SEC under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Corporation is subject to the information, proxy
solicitation, insider trading restrictions and other requirements
of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Corporation
may not be resold without registration or unless sold in accordance
with certain resale restrictions. If the Corporation meets
specified current public information requirements, each affiliate
of the Corporation is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions
to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily NOW checking
accounts) and non-personal time deposits. At December 31, 1996,
the Company was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy liquidity requirements
that may be imposed by the OTS. See "--Liquidity."
Savings associations are authorized to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve Board
regulations require associations to exhaust other reasonable
alternative sources of funds, including FHLB borrowings, before
borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
The Company is a member of the FHLB of Cincinnati, which is
one of 12 regional FHLBs that administers the home financing credit
function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is
funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures
established by the board of directors of the FHLB. These policies
and procedures are subject to the regulation and oversight of the
Federal Housing Finance Board. All advances from the FHLB are
required to be fully secured by sufficient collateral as determined
by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Company is required to purchase and maintain
stock in the FHLB of Cincinnati. At December 31, 1996, the Company
had $1.5 million in FHLB stock, which was in compliance with this
requirement. In past years, the Company has received dividends
on its FHLB stock which have generally been in the form of
additional shares of FHLB stock. Dividends on FHLB stock averaged
7.00% for calendar year 1996.
Under federal law, the FHLBs are required to provide funds for
the resolution of troubled savings associations and to contribute
to low and moderately priced housing programs through direct loans
or interest subsidies on advances targeted for community investment
and low and moderate income housing projects. These contributions
have adversely affected the level of FHLB dividends paid and could
continue to do so in the future. These contributions could also
have an adverse effect on the value of FHLB stock in the future.
A reduction in value of the Company's FHLB stock may result in a
corresponding reduction in the Company's capital.
For the year ended December 31, 1996, dividends paid by the
FHLB of Cincinnati to the Company totaled $102,000, which
constitute a $9,000 increase over the amount of dividends received
in calendar year 1995. The $26,000 dividend received for the
quarter ended December 31, 1996 reflects an annualized rate of
7.00%. As virtually all dividends for 1996 were paid in the form
of additional shares of FHLB stock, the effect of these dividends
was to increase the Company's investment in FHLB stock from $1.4
million at December 31, 1995 to $1.5 million at December 31, 1996.
Federal and State Taxation
OHSL Financial Corp.and Oak Hills are both subject to the federal
taxlaws and regulations which apply to corporations generally.
Prior to the enactment of the Small Business Jobs Protection Act
(the"Act"), which was signed into law on August 21, 1996, certain
thrift institutions, such as Oak Hills, were allowed deductions for
bad debts under methods more favorable than those granted to other
taxpayers. Qualified thrift institutions could compute deductions
for bad debts using either the specific charge off method of
Section 166 of the Code or the reserve method of Section 593 of the
Code.
Under Section 593, a thrift institution annually could elect
to deduct bad debts under either (i) the "percentage of taxable
income" method applicable only to thrift institutions, or (ii) the
"experience" method that also was available to small banks. Under
the "percentage of taxable income" method, a thrift institution
generally was allowed a deduction for an addition to its bad debt
reserve equal to 8% of its taxable income (determined without
regard to this deduction and with additional adjustments). Under
the "experience" method, a thrift institution was generally allowed
a deduction for an addition to its bad debt reserve equal to the
greater of (i) an amount based on its actual average experience for
losses in the current and five preceding taxable years, or (ii) an
amount necessary to restore the reserve to its balance as of the
close of the base year. A thrift institution could elect annually
to compute its allowable addition to bad debt reserves for
qualifying loans either under the experience method or the
percentage of taxable income method. For tax years 1995 and 1994,
Oak Hills used the percentage of taxable income method because such
method provided a higher bad debt deduction than the experience
method.
Section 1616 of the Act repealed the Section 593 reserve
method of accounting for bad debts by thrift institutions,
effective for taxable years beginning after 1995. Thrift
institutions that are treated as small banks are allowed to utilize
the experience method applicable to such institutions, while thrift
institutions that are treated as large banks are required to use
only the specific charge off method. The percentage of taxable
income method of accounting for bad debts is no longer available
for any financial institution.
A thrift institution required to change its method of
computing reserves for bad debt will treat such change as a change
in the method of accounting, initiated by the taxpayer and having
been made with the consent of the Secretary of the Treasury.
Section 481(a) of the Code requires certain amounts to be
recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely with respect to the
"applicable excess reserves" of the taxpayer. The amount of the
applicable excess reserves will be taken into account ratably over
a six-taxable year period, beginning with the first taxable year
beginning after 1995, subject to the residential loan requirement
described below. In the case of a thrift institution that is
treated as a large bank, the amount of the institution's applicable
excess reserves generally is the excess of (i) the balances of its
reserve for losses on qualifying real property loans (generally
loans secured by improved real estate) and its reserve for losses
on nonqualifying loans (all other types of loans) as of the close
of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last
taxable year beginning before January 1, 1988 (i.e., the "pre-1988
reserves"). In the case of a thrift institution that is treated as
a small bank, like Oak Hills, the amount of the institution's
applicable excess reserves generally is the excess of (i) the
balances of its reserve for losses on qualifying real property
loans and its reserve for losses on nonqualifying loans as of the
close of its last taxable year beginning before January 1, 1996,
over (ii) the greater of the balance of (a) its pre-1988 reserves
or (b) what the thrift's reserves would have been at the close of
its last year beginning before January 1, 1996, had the thrift
always used the experience method.
For taxable years that begin after December 31, 1995, and
before January 1, 1998, if a thrift meets the residential loan
requirement for a tax year, the recapture of the applicable excess
reserves otherwise required to be taken into account as a Code
Section 481(a) adjustment for the year will suspended. A thrift
meets the residential loan requirement if, for the tax year, the
principal amount of residential loans made by the thrift during the
year is not less than its base amount. The "base amount" generally
is the average of the principal amounts of the residential loans
made by the thrift during the six most recent tax years beginning
before January 1, 1996.
A residential loan is a loan as described in Section
7701(a)(19)(C)(v) (generally a loan secured by residential or
church property and certain mobile homes), but only to the extent
that the loan is made to the owner of the property.
The balance of the pre-1988 reserves is subject to the
provisions of Section 593(e), as modified by the Act, which
requires recapture in the case of certain excessive distributions
to shareholders. The pre-1988 reserve may not be utilized for
payment of cash dividends or other distributions to a shareholder
(including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of
a cash dividend by a thrift institution to a shareholder is treated
as made: first, out of the institution's post-1951 accumulated
earnings and profits; second, out of the pre-1988 reserves; and
third, out of such other accounts as may be proper. To the extent
a distribution by Oak Hills to the Corporation is deemed paid out of
its pre-1988 reserves under these rules, the pre-1988 reserves
would be reduced and Oak Hills' gross income for tax purposes would
be increased by the amount which, when reduced by the income tax,
if any, attributable to the inclusion of such amount in its gross
income, equals the amount deemed paid out of the pre-1988 reserves.
As of December 31, 1996, Oak Hills' pre-1988 reserves for tax
purposes totaled approximately $2.7 million. Oak Hills believes it
had approximately $19.4 million of accumulated earnings and profits
for tax purposes as of December 31, 1996, which would be available
for dividend distributions, provided regulatory restrictions
applicable to the payment of dividends are met. No representation
can be made as to whether Oak Hills will have current or
accumulated earnings and profits in subsequent years.
In addition to the regular income tax, OHSL and Oak
Hills are subject to a minimum tax. An alternative minimum tax is
imposed at a minimum tax rate of 20% on "alternative minimum
taxable income" (which is the sum of a corporation's regular
taxable income, with certain adjustments, and tax preference
items), less any available exemption. Such tax preference items
include interest on certain tax-exempt bonds issued after August 7,
1988. In addition, 75% of the amount by which a corporation's
"adjusted current earnings" exceeds its alternative minimum taxable
income computed without regard to this preference item and prior to
reduction by net operating losses is included in alternative
minimum taxable income. Net operating losses can offset no more
than 90% of alternative minimum taxable income. The alternative
minimum tax is imposed to the extent it exceeds the corporation's
regular income tax. Payments of alternative minimum tax may be
used as credits against regular tax liabilities in future years.
In addition, for taxable years after 1986 and before 1996, both OHSL
and Oak Hills are also subject to an environmental tax
equal to 0.12% of the excess of alternative minimum taxable income
for the taxable year (determined without regard to net operating
losses and the deduction for the environmental tax) over $2.0
million.
Oak Hills has been audited by the IRS with respect to federal
income tax returns through 1984. An audit of the Corporation's
consolidated federal income tax returns for the calendar years 1994
and 1995 is presently in progress. With respect to years examined
by the IRS, all deficiencies have been satisfied. In the opinion
of management, any examination of these and other still open
returns (including returns of subsidiaries) would not result in a
deficiency which could have a material adverse effect on the
financial condition of OHSL.
Delaware Taxation. As a Delaware holding company, OHSL is
exempted from Delaware corporate income tax but is required to file
an annual report with and pay an annual fee to the State of
Delaware. OHSL is also subject to an annual franchise tax imposed
by the State of Delaware.
Ohio Taxation. The State of Ohio imposes a franchise tax of
1.5 percent of the Company's regulatory capital determined under
GAAP, as adjusted for goodwill and with allocations pursuant to
prescribed formulas for property held outside the State of Ohio.
The State of Ohio also imposes a fee based upon the shares issued
by OHSL as a foreign corporation.
Employees
At December 31, 1996, the Company had a total of 46 full-time
employees and 32 part-time employees. None of the Company's
employees are represented by any collective bargaining group.
Management considers its employee relations to be excellent.
Item 2. Properties
The following table sets forth information concerning the main
office and each branch office of the Company at December 31, 1996.
At December 31, 1996, the Company's premises had an aggregate net
book value of approximately $2.4 million.
Lease (In Thousands)
Year Owned or Expiration Net Book
Location Opened Leased Date Value
Main Office
5889 Bridgetown Road
Cincinnati, Ohio 45248 1953 owned NA $ 389
Full Service
Branches
4024 Glenway Avenue
Cincinnati, Ohio 45205 1982 owned NA 72
6581 Harrison Avenue
Cincinnati, Ohio 45247 1982 owned NA 1,585
5329 Foley Road
Cincinnati, Ohio 45238 1990 leased 2000 109
6105 Cleves-Warsaw Pike
Cincinnati, Ohio 45233 1996 leased 2001 242
The Company conducts the majority of its administrative
activities at its Harrison Avenue branch. The Company believes
that its current facilities are adequate to meet present and
immediately foreseeable needs.
Item 3. Legal Proceedings
The Corporation and the Company are involved from time to time
as plaintiff or defendant in various legal actions arising in the
normal course of its business. While the ultimate outcome of any
such legal proceedings cannot be predicted with certainty, it is
the opinion of management, after consultation with counsel
representing the Corporation and Oak Hills, that the resolution of
such legal proceedings should not have a material effect on the
Corporation's consolidated financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through
the solicitation of proxies or otherwise, during the quarter ended
December 31, 1996.
Item 5. Additional Information - Executive Officers
The following information as to the business experience during
the past five years is supplied with respect to executive officers
of OHSL and Oak Hills who do not serve on either entity's Board of
Directors. There are no arrangements or understandings between the
persons named and any other person pursuant to which such officers
were selected.
Patrick J. Condren, C.P.A., age 45, is Treasurer, a position
he has held since 1988. In 1993, Mr. Condren was appointed Chief
Financial and Accounting Officer. As Treasurer and Chief Financial
and Accounting Officer, Mr. Condren is responsible for the
accounting, investment and other financial matters of OHSL and Oak
Hills. Mr. Condren joined Oak Hills in 1986 as Controller.
Terry E. Todd, age 46, has served as Vice President and
Director of Lending of Oak Hills since May of 1991. As Director of
Lending, Mr. Todd is responsible for overseeing the origination,
processing and servicing of loans for Oak Hills. Prior to joining
Oak Hills in 1991, Mr. Todd was a loan officer in the Cincinnati
office of National City Mortgage, a mortgage lending firm located
in Cleveland, Ohio, from 1986 to 1991. As a Loan Officer, Mr. Todd
was responsible for residential mortgage loan originations.
Marilyn R. Wieland, age 46, is Senior Vice President and
Secretary of Oak Hills, a position she has held since 1989. Ms.
Wieland is responsible for oversight of the savings department and
is the director of human resources. Ms. Wieland served as Vice
President and Secretary of Oak Hills from 1985 to 1989. Ms.
Wieland is the daughter of Norbert Brinker, the Chairman of the
Board of OHSL and Oak Hills.
PART II
Item 6. Market for Registrant's Common Equity and Related
Stockholder Matters
Page 34 of the attached 1996 Annual Report to Stockholders is
herein incorporated by reference.
OHSL common stock has approximately 800 stockholders at
December 31, 1996.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Pages 6 through 14 of the attached 1996 Annual Report to
Stockholders are herein incorporated by reference.
The following schedule
should be reviewed in conjunction with
Management's Discussion and Analysis of Financial Condition and
Results of Operation, which are herein incorporated by reference.
The following schedule presents the dollar amount of changes in
interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It
distinguishes between the increases related to changes in
outstanding balances and those due to changes in interest rates.
For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i)
changes in volume (i.e., changes in volume multiplied by old rate)
and (ii) changes in rate (i.e., changes in rate multiplied by old
volume). For purposes of this table, changes attributable to both
rate and volume, which cannot be segregated, have been allocated
proportionately.
Year Ended December 31,
1995 vs. 1994 1996 vs. 1995
--------------------------------- -----------------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
-------------------- -------------------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
----------- ------ ---------- ------ -------- ----------
Interest-earning assets:
Loans receivable........... $ 887 $ 676 $ 1,563 $ 703 $ 19 $ 722
Available-for-sale securities......... 163 (39) 124 (151) 85 (66)
Held-to-maturity securities and
other investments................... 563 152 715 878 (17) 861
FHLB stock............................ 4 16 20 7 2 9
------ ------- -------- ------ ------- --------
Total interest-earning assets....... $1,617 $ 805 2,422 $1,437 $ 89 $ 1,526
====== ======= -------- ====== ======= --------
Interest-bearing liabilities:
Demand and NOW deposits............... $ (38) $ (14) (52) $ (14) $ (40) $ (54)
Savings accounts...................... (232) 240 8 (32) (264) (296)
Time deposits......................... 1,283 523 1,806 1,075 216 1,291
Borrowings............................ 310 165 475 124 (38) 86
------ ------- ------- ------ ------- --------
Total interest-bearing
liabilities........................ $1,323 $ 914 2,237 $1,153 $ (126) 1,027
====== ======= ------- ====== ======= --------
Net interest income.................... $ 185 $ 499
======== ========
Item 8. Financial Statements
The following information appearing in the Company's Annual
Report to Stockholders for the year ended December 31, 1996, is
incorporated by reference in this Annual Report on Form 10-KSB as
Exhibit 13.
Annual Report Section Pages in Annual Report
Report of Independent Auditors 15
Consolidated Balance Sheets as of
December 31, 1996 and 1995 16
Consolidated Statements of Income
for the Years Ended December 31, 1996,
1995 and 1994 17
Consolidated Statements of Changes
in Shareholders' Equity for Years
Ended December 31, 1996, 1995 and 1994 18
Consolidated Statements of Cash Flows
for Years Ended December 31, 1996,
1995 and 1994 19-20
Notes to Consolidated Financial
Statements 21-33
With the exception of the aforementioned information, the
Corporation's Annual Report to Stockholders for the year ended
December 31, 1996, is not deemed filed as part of this Annual
Report on Form 10-KSB.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
There has been no Current Report on Form 8-K filed within 24
months prior to the date of the most recent financial statements
reporting a change of accountants and/or reporting disagreements on
any matter of accounting principle or financial statement
disclosure.
PART III
Item 10. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act
Directors
Information concerning directors of the Corporation is
incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in
1997, a copy of which will be filed not later than 120 days after
the close of the fiscal year.
Executive Officers
Information regarding the business experience of the executive
officers of the Corporation and the Company contained in Part I of
this Form 10-KSB is incorporated herein by reference.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated
herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1997, a copy of which
will be filed not later than 120 days after the close of the fiscal
year.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information concerning security ownership of certain
beneficial owners and management is incorporated herein by
reference from the definitive Proxy Statement for the Annual
Meeting Stockholders to be held in 1997, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related
transactions is incorporated herein by reference from the
definitive Proxy Statement for the Annual Meeting of Stockholders
to be held in 1997, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Item 14. Exhibits and Reports on Form 8-K
(a) Exhibits
Sequential
Reference to Page Number
Prior Filing Where Attached
or Exhibit Exhibits Are
Regulation Number Located in This
S-K Exhibit Attached Annual Report
Number Document Hereto on Form 10-K
3 Articles of
Incorporation and
Bylaws.... * Not applicable
4 Instruments defining the
rights of security
holders, including
indentures:
Common Stock
Certificate............. * Not applicable
10 Material contracts:
Stock Option and
Incentive Plan........ * Not applicable
Employment Agreement of
Kenneth L. Hanauer...... * Not applicable
Bank Incentive Plan..... * Not applicable
11 Statement re computation
of per share earnings... 11 Page 55
13 Annual Report to
Shareholders........... 13
21 Subsidiaries of
Registrant.............. 21 Page 56
23 Consent of Accountants.. 23
*Filed as exhibits to the Registrant's Registration Statement No.
33-53398 on Form S-1 filed on October 16, 1992. All of such
previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three-month period
ended December 31, 1996, except for a Form 8-K filed October 29,
1996 to report the approval of a stock repurchase plan, a Form 8-K
filed November 18, 1996 to report earnings of the Company for the
quarter ended September 30, 1996, and a Form 8-K filed on December
3, 1996 to report the payment of a cash dividend.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
OHSL FINANCIAL CORP.
Date: March 24, 1997 By:/s/ Kenneth L. Hanauer
Kenneth L. Hanauer, President
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
/s/Kenneth L. Hanauer /s/Norbert G. Brinker
Kenneth L. Hanauer, President Norbert G. Brinker, Chairman
and Director of the Board
(Principal Executive Officer)
Date: March 24, 1997 Date: March 24, 1997
/s/William R. Hillebrand /s/Thomas M. Herron
William R. Hillebrand, Director Thomas M. Herron, Director
Date: March 24, 1997 Date: March 24, 1997
/s/Alvin E. Hucke /s/Thomas E. McKiernan
Alvin E. Hucke, Director Thomas E. McKiernan, Director
Date: March 24, 1997 Date: March 24, 1997
/s/Joseph J. Tenoever /s/Howard H. Zoellner
Joseph J. Tenoever, Director Howard H. Zoellner, Director
Date: March 24, 1997 Date: March 24, 1997
/s/Patrick J. Condren
Patrick J. Condren, Treasurer
(Principal Financial and
Accounting Officer)
Date: March 24, 1997