1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
For the transition period from ____________ to ____________
Commission File Number 0-29649
Ohio State Financial Services, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1529204
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
435 Main Street, Bridgeport, OH 43912
----------------------------------------
(Address of principal executive offices)
(740) 635-0764
-----------------------
(Registrant's telephone
number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
As of August 3, 1998, the latest practicable date, 634,168 shares of the
registrant's common stock, without par value, were issued and outstanding.
2
OHIO STATE FINANCIAL SERVICES, INC.
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Financial Condition (Unaudited) as of
June 30, 1998 and December 31, 1997 3
Consolidated Statement of Operations (Unaudited)
for the Six Months ended June 30, 1998 and 1997 4
Consolidated Statement of Operations (Unaudited)
for the Three Months ended June 30, 1998 and 1997 5
Consolidated Statement of Cash Flows (Unaudited)
for the Six Months ended June 30, 1998 and 1997 6
Notes to Unaudited Consolidated Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Default Upon Senior Securities 14
Item 4. Submissions of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
3
OHIO STATE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (UNAUDITED)
June 30, December 31,
1998 1997
---- ----
ASSETS
Cash and cash equivalents:
Cash and amounts due from banks $ 476,801 $ 523,987
Interest-bearing deposits with other institutions 2,798,575 2,653,845
---------------- -----------------
Total cash and cash equivalents 3,275,376 3,177,832
Interest bearing time deposits 5,500,000 4,600,000
Investment securities:
Available for sale (cost of $375,600 at 6/30/98; and
$363,000 at 12/31/97) 375,600 363,000
Held to maturity (market value of $1,614,364 at 6/30/98;
and $4,224,064 at 12/31/97) 1,547,301 4,146,588
Loans receivable, net 25,171,911 24,377,054
Real estate owned 9,887 -
Office properties and equipment, net 474,398 482,950
Accrued interest receivable, loans and investments (net of reserve
for uncollected interest of $12,021 at 6/30/98; and $7,709 at 12/31/97) 192,805 173,639
Other assets 97,443 22,965
---------------- -----------------
TOTAL ASSETS $ 36,644,721 $ 37,344,028
================ =================
LIABILITIES
Deposit accounts $ 26,010,856 $ 26,333,439
Advances by borrowers for taxes and insurance 153,234 152,136
Accrued interest payable and other liabilities 112,448 221,978
Deferred federal income taxes 75,150 75,005
---------------- -----------------
TOTAL LIABILITIES 26,351,688 26,782,558
---------------- -----------------
STOCKHOLDERS' EQUITY
Common stock, 3,000,000 shares authorized, no par
or stated value; 634,168 shares issued and outstanding
at 6/30/98 and 12/31/97 - -
Additional paid in capital 5,939,165 5,922,360
Unearned Employee Stock Ownership Plan shares (ESOP) (468,540) (493,867)
Unearned Recognition and Retention Plan shares (RRP) (400,533) -
Retained earnings - substantially restricted 5,222,941 5,132,977
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 10,293,033 10,561,470
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 36,644,721 $ 37,344,028
================ =================
See accompanying notes to the unaudited consolidated financial statements
-3-
4
OHIO STATE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
For the Six Months Ended June 30,
1998 1997
---- ----
INTEREST AND DIVIDEND INCOME
Loans $ 975,518 $ 976,758
Mortgage-backed securities 37,595 44,355
Interest-bearing deposits and investment securities 283,837 197,269
Dividends on Federal Home Loan Bank stock 12,623 11,559
----------------- -----------------
Total interest and dividend income 1,309,573 1,229,941
----------------- -----------------
INTEREST EXPENSE
Savings deposits 515,218 577,799
Federal Home Loan Bank advances - 961
----------------- -----------------
Total interest expense 515,218 578,760
----------------- -----------------
NET INTEREST INCOME 794,355 651,181
PROVISION FOR LOAN LOSSES - -
----------------- -----------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 794,355 651,181
----------------- -----------------
NONINTEREST INCOME
Service charges 6,039 3,554
Gain on sale of other real estate - 2,245
Other income and fees 7,478 21,534
----------------- -----------------
Total noninterest income 13,517 27,333
----------------- -----------------
NONINTEREST EXPENSE
Salaries and benefits 256,237 180,108
Occupancy expense 30,827 29,969
Furniture and equipment expense 12,351 16,067
Federal insurance premium 15,591 11,575
Legal, accounting, and examination fees 53,132 12,985
Advertising and public relations 16,457 18,702
Franchise, payroll and other taxes 77,283 45,573
Stationery, printing and office expenses 25,174 19,394
Service bureau expense 27,504 23,895
Other operating expenses 60,719 45,497
----------------- -----------------
Total noninterest expense 575,275 403,765
----------------- -----------------
INCOME BEFORE INCOME TAXES 232,597 274,749
PROVISION FOR INCOME TAXES 84,281 92,887
----------------- -----------------
NET INCOME $ 148,316 $ 181,862
================= =================
PER SHARE DATA
Earnings per share
Basic $ 26 $ -
================= =================
Diluted $ .25 $ -
================= =================
See accompanying notes to the unaudited consolidated financial statements
-4-
5
OHIO STATE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
For the Three Months Ended June 30,
1998 1997
---- ----
INTEREST AND DIVIDEND INCOME
Loans $ 488,726 $ 487,395
Mortgage-backed securities 18,043 21,832
Interest-bearing deposits and investment securities 134,424 100,738
Dividends on Federal Home Loan Bank stock 6,402 5,961
----------------- -----------------
Total interest and dividend income 647,595 615,926
----------------- -----------------
INTEREST EXPENSE
Savings deposits 257,734 291,079
Federal Home Loan Bank advances - 456
----------------- -----------------
Total interest expense 257,734 291,535
----------------- -----------------
NET INTEREST INCOME 389,861 324,391
PROVISION FOR LOAN LOSSES - -
----------------- -----------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 389,861 324,391
----------------- -----------------
NONINTEREST INCOME
Service charges 4,341 1,450
Gain on sale of other real estate - 2,245
Other income and fees 3,415 14,482
----------------- -----------------
Total noninterest income 7,756 18,177
----------------- -----------------
NONINTEREST EXPENSE
Salaries and benefits 137,857 89,290
Occupancy expense 15,021 15,322
Furniture and equipment expense 7,545 7,103
Federal insurance premium 7,576 6,954
Legal, accounting, and examination fees 32,206 7,698
Advertising and public relations 6,199 10,983
Franchise, payroll and other taxes 37,115 21,762
Stationery, printing and office expenses 12,686 9,269
Service bureau expense 13,559 11,431
Other operating expenses 30,826 23,212
----------------- -----------------
Total noninterest expense 300,590 203,024
----------------- -----------------
INCOME BEFORE INCOME TAXES 97,027 139,544
PROVISION FOR INCOME TAXES 36,111 47,184
----------------- -----------------
NET INCOME $ 60,916 $ 92,360
================= =================
PER SHARE DATA
Earnings per share
Basic $ .11 $ -
================= =================
Diluted $ .10 $ -
================= =================
See accompanying notes to the unaudited consolidated financial statements
-5-
6
OHIO STATE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
For the Six Months Ended June 30,
1998 1997
---- ----
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 148,316 $ 181,862
Adjustments:
Depreciation 18,434 22,310
Investment accretion and amortization, net (56) (1,537)
ESOP amortization 42,132 -
RRP amortization 15,467 -
Federal Home Loan Bank stock dividends (12,600) (11,400)
Deferred federal income taxes 145 7,497
Gain on sale of real estate owned - (2,245)
Accrued interest receivable and other assets (93,644) (57,812)
Accrued interest payable and other liabilities (109,530) (2,445)
----------------- ------------------
Net cash provided by operating activities 8,664 136,230
------------------ ------------------
CASH FLOW FROM INVESTING ACTIVITIES
Term deposits, net (900,000) (500,000)
Proceeds from maturities of held to maturity securities 2,500,000 -
Proceeds from redemptions of mortgage-backed certificates 99,343 63,021
Net increase (decrease) in loans (804,744) 214,415
Proceeds from sale of other real estate - 19,865
Acquisition of office properties and equipment (9,882) (24,480)
----------------- ------------------
Net cash provided by (used for) investing activities 884,717 (227,179)
----------------- ------------------
CASH FLOW FROM FINANCING ACTIVITIES
Payment of dividends (58,352) -
Change in deposits, net (322,583) 163,519
Change in mortgage escrow funds, net 1,098 (15,256)
Purchase of RRP (416,000) -
----------------- -----------------
Net cash provided by (used for) financing activities (795,837) 148,263
----------------- -----------------
Change in cash and cash equivalents 97,544 57,314
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,177,832 2,435,662
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,275,376 $ 2,492,976
================= =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits and borrowings $ 515,218 $ 578,105
Income taxes 164,578 1,769
Loans transferred to real estate acquired in settlement 9,887 17,620
See accompanying notes to the unaudited consolidated financial statements
-6-
7
OHIO STATE FINANCIAL SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of Ohio State Financial Services, Inc.
(the "Company"), includes its wholly-owned subsidiary, Bridgeport Savings and
Loan Association (the "Association"). All significant inter-company balances and
transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB and, therefore, do not
necessarily include all information that would be included in audited financial
statements. The information furnished reflects all adjustments which are, in the
opinion of management, necessary for a fair statement of the results of
operations. All such adjustments are of a normal recurring nature. The results
of operations for the interim periods are not necessarily indicative of the
results to be expected for the full year.
These statements should be read in conjunction with the consolidated statements
as of and for the year ended December 31, 1997, and related notes which are
included on Form 10-KSB.
NOTE 2 - CONVERSION TO STOCK FORM OF OWNERSHIP AND FORMATION OF HOLDING COMPANY
On March 24, 1997, the Board of Directors of the Association approved a plan of
conversion (the "Plan") providing for the conversion of the Association from a
mutual savings and loan association to a capital stock savings and loan
association incorporated under Ohio law (the "Conversion") and the simultaneous
issuance of all of its outstanding stock to a newly-formed holding company, Ohio
State Financial Services, Inc. After approval by the regulatory authorities and
the Association's members, the Conversion was completed on September 26, 1997.
As a result of this transaction, the Company was formed and the Association
became a wholly-owned subsidiary of the Company.
In connection with the conversion on September 26, 1997, the Company completed
the sale of 634,168 shares of common stock at $10.00 per share. From the
proceeds, $5,916,081 was allocated to additional paid in capital, which is net
of conversion costs of $425,599. The common shares of the Company have no par or
stated value per share. Included in the 634,168 shares were 50,653 shares
acquired by the ESOP.
NOTE 3 - RECENT ACCOUNTING STANDARDS
In June, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. It does not
require a specific format for the financial statement but requires an enterprise
display an amount representing total comprehensive income for the period in that
financial statement. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of the
Statement of Financial Position. Under existing accounting standards, other
comprehensive income shall be classified separately into foreign currency items,
minimum pension liability adjustments, and unrealized gains and losses on
certain investments in debt and equity securities. The provisions of SFAS No.
130 became effective for fiscal years beginning after December 15, 1997. The
Company's equity securities classified as available for sale consist of Federal
Home Loan Bank stock and stock in the Company's data processing servicer and
reflect no unrealized gain or loss due to their restricted nature. The adoption
of SFAS No. 130 did not have a material impact on the disclosure requirements of
the Company due to the absence of any items of comprehensive income.
In February, 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
establishes standards for computing and presenting earnings per share ("EPS") by
entities with publicly-held common stock or potential common stock. SFAS No. 128
simplifies the standards for computing earnings per share previously found in
Accounting Principles Board ("APB") Opinion No. 15, "Earnings Per Share." Basic
EPS excludes dilution and is computed by dividing income available to
-7-
8
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15. SFAS No. 128 supersedes APB Opinion
No. 15 and is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. Earlier or retroactive application
is not permitted. The Company adopted SFAS No. 128 on December 31, 1997.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." The
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings
based on a control-oriented "financial-components" approach. Under this
approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and liabilities it has incurred,
derecognizes financial assets when control has been surrendered and
derecognizes liabilities when extinguished. The provisions of Statement No. 125
are effective for transactions occurring after December 31, 1996, except those
provisions relating to repurchase agreements, securities lending, and other
similar transactions and pledged collateral, which were delayed until after
December 31, 1997 by SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of SFAS No. 125, an amendment of SFAS No. 125." The adoption of
these statements did not have a material impact on the Company's consolidated
financial position or results of operations.
On April 1, 1998, the Company adopted SFAS No. 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits". The new standard revises employers'
disclosures about pension and other postretirement benefits plans. SFAS No. 132
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligation and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosure requirements that are no
longer useful. SFAS No. 132 suggests combined formats for presentation of
pension and other postretirement benefit disclosures. The adoption of SFAS No.
132 did not have a material impact on presentation and disclosure of pension and
other postretirement benefits.
NOTE 4 - EARNINGS PER SHARE
The provisions of SFAS No. 128, "Earnings Per Share," are not applicable to the
three month and six month periods ended June 30, 1997, as the conversion from
mutual to stock form was not completed until September 26, 1997.
The company accounts for the 50,653 shares acquired by the ESOP in accordance
with Statement of Position 93-6; shares controlled by the ESOP are not
considered in the weighted average shares outstanding until the shares are
committed for allocation to employee accounts. At June 30, 1998, approximately
3,799 shares had been committed for allocation.
The following table sets forth the computation of basic and diluted earnings per
share. There were no convertible securities which would affect the numerator in
calculating basic and diluted earnings per share; therefore, net income as
presented on the Consolidated Statement of Operations (Unaudited) will be used
as the numerator. The following tables set forth a reconciliation of the
denominator of the basic and diluted earnings per share computation:
Six Months Ended
June 30, 1998
-------------
Denominator
Denominator for basic earnings per share-weighted-average shares 575,573
Employee stock options (antidilutive) -
Unvested RRP shares 10,881
------
Denominator for diluted earnings per share-adjusted 586,454
=======
-8-
9
Three Months Ended
June 30, 1998
-------------
Denominator
Denominator for basic earnings per share-weighted-average shares 568,349
Employee stock options (antidilutive) -
Unvested RRP shares 21,762
------
Denominator for diluted earnings per share-adjusted 590,111
=======
NOTE 5 - EMPLOYEE BENEFITS
Recognition and Retention Plan (RRP)
The Board of Directors adopted a RRP for directors and certain officers and
employees which was approved by stockholders at the annual meeting held on April
15, 1998. The objective of the RRP is to enable the Association to retain its
corporate officers, key employees, and directors who have the experience and the
ability necessary to manage the Company and the Association. Directors,
officers, and key employees who are selected by members of the Board-appointed
committee are eligible to receive benefits under the RRP. Directors of the
Association serve as trustees for the RRP.
In June, 1998, the RRP purchased, with funds contributed by the Association,
shares of the common stock of which 22,320 shares were awarded to directors and
employees, and 2,680 shares remained unawarded. Directors, officers, and
employees who terminate their employment with the Association shall forfeit the
right to any shares which were awarded but not earned, except in the event of
death or disability.
The Association granted a total of 22,320 shares of common stock on April 15,
1998. These shares become earned and non-forfeitable over a five-year period on
each anniversary date of the award beginning April 15, 1999. The RRP shares
purchased in the conversion initially will be excluded from stockholders'
equity. The Company recognizes compensation expense in the amount of fair value
of the common stock at the grant date, over the years during which the shares
are earned and recorded as an addition to stockholders' equity.
Stock Option Plan
- -----------------
The Board of Directors adopted a Stock Option Plan for the directors, officers,
and employees which was approved by stockholders at the annual meeting held on
April 15, 1998. The Company granted options to purchase 58,979 shares of common
stock. The options are first exercisable over a five-year period beginning April
15, 1999. The stock options typically have expiration terms of ten years. The
per share exercise price of a stock option shall be, at a minimum, equal to the
fair value of a share of common stock on the date the option is granted.
Proceeds from the exercise of the stock options are credited to additional
paid-in capital.
The following table presents share data related to the stock option plan:
Shares Under Option
-------------------
1998 1997
---- ----
Outstanding, beginning of the year -- --
Granted during the period 58,979 --
Canceled during the period -- --
Exercised during the period -- --
------ --
Outstanding at end of period, 58,979 --
(Option price of $17.375 per share) ====== ==
-9-
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
On March 24, 1997, the Board of Directors of the Association approved the Plan
and the Conversion. After approval by the regulatory authorities and the
Association's members, the Conversion was completed on September 26, 1997, and
as a result, the holding company was formed (the "Company") and the Association
became a wholly-owned subsidiary of the Company. In connection with the
Conversion on September 26, 1997, the Company completed the sale of 634,168
shares (the "Offering") and received net proceeds of approximately $5,916,081.
The Company transferred approximately $2,958,041 of the net proceeds to the
Association for the purchase of all of the capital stock of the Association. In
addition, $506,530 was loaned to the Association's Employee Stock Ownership Plan
("ESOP") for the purchase of shares in the Offering.
Comparison of Financial Condition at June 30, 1998 and December 31, 1997
At June 30, 1998, the Company's assets decreased by approximately $699,000 to
$36,645,000 from $37,344,000 at December 31, 1997. Total cash and cash
equivalents increased by $97,000 to $3,275,000 at June 30, 1998, from $3,178,000
at December 31, 1997. This increase represented the inflow of cash associated
with the maturity of held to maturity securities offset by the purchase of term
deposits, increased loan production, depositors withdrawal of funds, and the
purchase of RRP shares. Interest bearing time deposits increased by $900,000 to
$5,500,000 at June 30, 1998, from $4,600,000 at December 31, 1997. Held to
maturity securities decreased by approximately $2,600,000 to $1,547,000 at June
30, 1998, from $4,147,000 at December 31, 1997. The decrease reflected the
maturity of $2,500,000 in United States Government and Agency obligations and
the principal reduction of $99,000 in mortgage-backed certificates. Net loans
receivable increased $795,000 to $25,172,000 at June 30, 1998 from $24,377,000
at December 31, 1997. The increase was primarily in non-residential mortgages
and reflects the competitive pricing of the Associations loan product.
Deposits decreased $322,000, or 1.2% from $26,333,000 at December 31, 1997, to
$26,011,000 at June 30, 1998. Stockholders' Equity decreased $268,000 to
$10,293,000 at June 30, 1998, compared to $10,561,000 at December 31, 1997. The
decrease was attributable the purchase of RRP shares in the amount of $416,000
offset by net income of $148,400, allocation of shares in the Employee Stock
Ownership Plan amounting to $42,000 and vesting of shares in the RRP in the
amount of $15,000. Stockholders' equity was also reduced by dividends of
$58,352. Future dividend policies will be determined by the Board of Directors
in light of earnings and financial condition of the Company, including
applicable governmental regulations and policies.
Comparison of Operating Results for the Six Months Ended June 30, 1998 and 1997
NET INCOME. Net income decreased $34,000, or 18.9%, from net income of $182,000
for the six months ended June 30, 1997, compared to net income of $148,000 for
the same period in 1998. The decrease in net income was primarily the result of
an increase in noninterest expenses of $171,000, or 42.3% and a decrease in
noninterest income of $14,000 offset somewhat by an increase in net interest
income of $143,000 or, 22.0%.
NET INTEREST INCOME. Net interest income increased $143,000, or 22.0%, from
$651,000 for the six months ended June 30, 1997, to $794,000 for the six months
ended June 30, 1998. The Company's net yield on interest-earning assets
increased from 3.94% for the six months ended June 30, 1997, to 4.42% for the
same period in 1998. Interest and dividend income increased $80,000, or 6.5%,
from $1,230,000 for the six months ended June 30, 1997, to $1,310,000 for the
six months ended June 30, 1998. Interest expense decreased $64,000, or 11.0%,
from $579,000 for the 1997 period to $515,000 for the 1998 period.
INTEREST AND DIVIDEND INCOME. Total interest and dividend income increased
$80,000 for the six months ended June 30, 1998, compared to the same period in
1997. Interest income on investments, including interest-bearing deposits and
mortgage-backed securities, increased $80,000 to $321,000 for the six months
ended June 30, 1998, compared to $241,000 for the 1997 period. The increase in
interest income on investments was directly attributable to the investment of
funds received in the Offering as the average balance of investments increased
$2.9 million for the six months ended June 30, 1998, compared to the 1997
period. Interest income on loans remained unchanged for the comparable periods.
INTEREST EXPENSE. Total interest expense decreased by $64,000 from the 1997
period to the 1998 period. The Association's cost of funds decreased from 3.98%
for the six months ended June 30, 1997, to 3.93% for the 1998 period, while
average
-10-
11
outstanding deposits declined $2,802,000 from $29,015,000 for the period ended
June 30, 1997 to $26,213,000 for the same period ended June 30, 1998. The
decrease in the average balance of deposits was the result of customers electing
not to renew maturing certificates of deposit at prevailing interest rates, and
the withdrawal of deposits for the purchase of the Company's common shares in
connection with the Conversion.
PROVISION FOR LOAN LOSSES. There were no provisions for losses on loans for the
six months ended June 30, 1998 and 1997. Management judges the adequacy of the
allowance for loan losses and any additions to it based on a level which is
deemed adequate to absorb credit losses inherent in the loan portfolio. The
amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and current
economic conditions. Based on management's evaluation, the amount of the
allowance was deemed adequate with no additional provision necessary. Although
management believes that its loan loss allowance at June 30, 1998, is adequate
based upon the available facts and circumstances, there can be no assurance that
additions to such allowance will not be necessary in future periods, which could
adversely affect the Company's results of operations.
NONINTEREST INCOME. Noninterest income totaled $14,000 for the six months ended
June 30, 1998, a decrease of $13,000 from $27,000 for the 1997 period, as a
result of nonrecurring income items in the 1997 period.
NONINTEREST EXPENSE. Noninterest expenses increased $171,000, or 42.5%, from
$404,000 for the six months ended June 30, 1997, to $575,000 for the 1998
period. The increase in noninterest expenses was partly attributable to an
increase in salaries and benefits of $76,000 from the 1997 period to the 1998
period resulting from costs associated with the ESOP of $42,000, costs
associated with the RRP of $16,000, and base pay merit increases. Franchise,
payroll and other taxes increased by $32,000 from the six months ended June 30,
1997 to the 1998 period. This increase is primarily the result of an increase in
franchise taxes assessed on net worth which increased as a result of the
Conversion. Legal and accounting fees increased $40,000, from $13,000 for June
30, 1997 to $53,000 for June 30, 1998. The increase in legal and accounting fees
is due to expenses related to the holding company.
INCOME TAXES. The provision for income taxes totaled $84,000 for the six months
ended June 30, 1998, a decrease of $9,000, or 9.3%, from the $93,000 in the
comparable 1997 period due to a decrease in pretax income.
Comparison of Operating Results for the Three Months Ended June 30, 1998 and
1997
NET INCOME. Net income was $61,000 for the three months ended June 30, 1998, a
decrease of $31,000, or 34.0%, compared to net income of $92,000 for the three
months ended June 30, 1997. The decrease in net income was primarily the result
of an increase in noninterest expenses of $98,000, or 48.3% and a decrease in
noninterest income of $10,000 offset by an increase in net interest income of
$65,000, or 20.1%.
NET INTEREST INCOME. Net interest income increased $65,000, or 20.2%, from
$325,000 for the three months ended June 30, 1997, to $390,000 for the three
months ended June 30, 1998. The company's net yield on interest-earning assets
increased from 3.93% for the three months ended June 30, 1997, to 4.36% for the
same period in 1998. Interest and dividend income increased $32,000, or 5.2%,
from $616,000 for the three months ended June 30, 1997, to $648,000 for the
three months ended June 30, 1998, while interest expense decreased $34,000, or
11.6%, from $292,000 for the 1997 period to $258,000 for the 1998 period.
INTEREST AND DIVIDEND INCOME. Total interest and dividend income increased
$32,000 for the three months ended June 30, 1998, compared to the same period in
1997. Interest income on investments, including interest-bearing deposits and
mortgaged-backed securities, increased $29,000 to $152,000 for the three months
ended June 30, 1998, compared to $123,000 for the 1997 period. The increase in
interest income on investments was directly attributable to the investment of
funds received in the Offering as the average balance of investments increased
$2.4 million for the three months ended June 30, 1998, compared to the 1997
period. Interest income on loans remained relatively unchanged for the
comparable periods as a $356,000 increase in the average balance of loans was
offset by a decline in the yield from 7.85% to 7.77%.
INTEREST EXPENSE. Total interest expense decreased by $34,000 from the 1997
period to the 1998 period. The Association's cost of funds decreased from 4.01%
for the three months ended June 30, 1997, to 3.95% for the 1998 period, while
average outstanding deposits declined $2,926,000 from $29,034,000 for the period
ended June 30, 1997 to $26,108,000 for the same
-11-
12
period ended June 30, 1998. The decrease in the average balance of deposits was
the result of customers electing not to renew maturing certificates of deposit
at prevailing interest rates, and the withdrawal of deposits for the purchase of
the Company's common shares in connection with the Conversion.
PROVISION FOR LOAN LOSSES. There were no provisions for losses on loans for the
three months ended June 30, 1998 and 1997.
NONINTEREST INCOME. Noninterest income totaled $8,000 for the six months ended
June 30, 1998, a decrease of $10,000, from $18,000 for the 1997 period, as a
result of nonrecurring income items in the 1997 period.
NONINTEREST EXPENSE. Noninterest expense increased $98,000, or 48.1%, from
$203,000 for the six months ended June 30, 1997, to $301,000 for the 1998
period. The increase in noninterest expense was partly attributable to an
increase in salaries and benefits of $49,000 from the 1997 to the 1998 period
resulting from costs associated with the ESOP of $21,000, costs associated with
the RRP of $16,000, and base pay merit increases. Franchise, payroll and other
taxes increased by $15,000 from the six months ended June 30, 1997 to the 1998
period. This increase is primarily the result of an increase in franchise taxes
assessed on net worth which increased as a result of the Conversion. Legal and
accounting fees increased $24,000, from $8,000 for the three months ended June
30, 1997 to $32,000 for the three months ended June 30, 1998. The increase in
legal and accounting fees is due to expenses related to the holding company.
INCOME TAXES. The provision for income taxes totaled $36,000 for the three
months ended June 30, 1998, a decrease of $11,000, or 23.4%, from the $47,000
provision in the comparable 1997 period due to a decrease in pre-tax income.
Year 2000
Many computer programs that can only distinguish the final two digits of the
year entered (a common programming practice in earlier years) are expected to
read entries for the year 2000 as the year 1900 and compute payment, interest
and delinquency based on the wrong date or are expected to be unable to compute
payment, interest or delinquency. Rapid and accurate data processing is
essential to the operation of the Association. Data Processing is also essential
to most other financial institutions and many other companies. All of the
material data processing of the Association that could be affected by this
problem is provided by a third party service bureau. The service bureau of the
Association has advised the Association that it expects to resolve this
potential problem before the year 2000. However, if the service bureau is unable
to resolve this potential problem in time, the Association would likely
experience significant data processing delays, mistakes or failures. These
delays, mistakes or failures could have a significant adverse impact on the
financial condition and results of operations of the Association.
Liquidity and Cash Flows
The Association's primary sources of funds are deposits, amortization and
prepayment of loans, maturities of investment securities, and funds provided
from operations. While scheduled loan repayments are a relatively predictable
source of funds, deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions, and competition. In addition, the
Association invests excess funds in overnight deposits which provide liquidity
to meet lending requirements.
The Association has other sources of liquidity if a need for additional funds
arises. Additional sources of funds include Federal Home Loan Bank ("FHLB") of
Cincinnati advances. At June 30, 1998, the Association's total borrowing
capacity from the FHLB totaled approximately $7.1 million, and there were no
advances outstanding.
As of June 30, 1998, the Association has $458,000 in outstanding mortgage and
construction loan commitments. Management believes that it has adequate sources
to meet the actual funding requirements.
Management monitors the Association's tangible, core, and risk-based capital
ratios in order to assess compliance with OTS regulations. At June 30, 1998, the
Association exceeded the minimum capital ratio requirements imposed by the OTS.
-12-
13
At June 30, 1998, the Association's capital ratios were as follows:
Requirement Actual
----------- ------
Tangible capital 1.50% 23.76%
Core capital 4.00% 23.76%
Risk-based capital 8.00% 48.26%
Risk Elements
The table below presents information concerning nonperforming assets, which
include nonaccrual loans, renegotiated loans, accruing loans 90 days or more
past due, other real estate owned, and repossessed assets. A loan is classified
as nonaccrual when, in the opinion of management, there are serious doubts about
collectibility of interest and principal. Once the accrual of interest is
discontinued, future income is recognized only when cash is received.
Renegotiated loans are those loans which terms have been renegotiated to provide
a reduction or deferral of principal or interest as a result of the
deterioration of the financial condition of the borrower.
June 30, December 31,
1998 1997
---- ----
(Dollars in thousands)
Loans on nonaccrual basis $129 $98
Accruing loans past due 90 days 0 0
Renegotiated loans 0 0
---- ---
Total nonperforming loans 129 98
Other real estate owned 0 0
Repossessed assets 10 0
---- ---
Total nonperforming assets $139 $98
==== ===
Nonperforming loans as a percent of total loans 0.51% 0.40%
==== ====
Nonperforming assets as a percent of total assets 0.38% 0.26%
==== ====
Allowance for loan losses to nonperforming loans 109.29% 143.86%
====== ======
Nonperforming loans are primarily made up of one- to four-family residential
mortgages. The collateral requirements on such loans reduce the risk of
potential losses to an acceptable level, in management's opinion.
Management believes the level of the allowance for loan losses at June 30, 1998,
is sufficient; however, there can be no assurance that the current allowance for
loan losses will be adequate to absorb all future loan losses. The relationship
between the allowance for loan losses and outstanding loans is a function of the
credit quality and known risk attributed to the loan portfolio. The on-going
loan review program is used to determine the adequacy of the allowance for loan
losses.
-13-
14
PART II - OTHER INFORMATION
Item 1 - Legal proceedings
NONE
Item 2 - Changes in securities
NONE
Item 3 - Defaults upon senior securities
NONE
Item 4 - Submission of matters to a vote of security holders
The Annual Meeting of Shareholders of Ohio State Financial Services,
Inc., was held on April 15, 1998. The following are the votes cast on each
matter presented to the shareholders:
1. The election of directors for terms expiring in 1999:
FOR WITHHELD
--- --------
John O. Costine 470,524 34,125
Anton M. Godez 470,849 33,800
Jon W. Letzkus 470,849 33,800
William E. Reline 470,849 33,800
Manuel C. Thomas 470,524 34,125
2. The approval of the Ohio State Financial Services, Inc., 1998 Stock
Option and Incentive Plan:
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
327,435 79,541 100 227,092
3. The approval of the Ohio State Financial Services Recognition and
Retention Plan and Trust Agreement:
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
383,260 87,765 1,000 162,143
4. The ratification of the selection of S. R. Snodgrass, A.C., as the
auditors of Ohio State Financial Services, Inc., for the current fiscal year:
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
485,649 19,000 -0- 129,519
Item 5 - Other information
Any proposals of shareholders intended to be included in the Company's
proxy statement and proxy card for the 1999 Annual Meeting of
Shareholders should be sent to the Company by certified mail and must
be received by the Company not later than November 13, 1998. In
addition, if a shareholder intends to present a proposal at the 1999
Annual Meeting without including the proposal in the proxy materials
related to that meeting, and if the proposal is not received by
January 27, 1999, then the
-14-
15
proxies designated by the Board of Directors of the Company for the
1999 Annual Meeting of Shareholders of the Company may vote in their
discretion on any such proposal any shares for which they have been
appointed proxies without mention of such matter in the proxy statement
or on the proxy card for such meeting.
Item 6 - Exhibits and reports on Form 8-K
Exhibit 10.1: Ohio State Financial Services, Inc. 1998 Stock
Option and Incentive Plan (Incorporated by reference
to the Definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders).
Exhibit 10.2: Ohio State Financial Services, Inc. Recognition
and Retention Plan and Trust Agreement (Incorporated
by reference to the Definitive Proxy Statement for
the 1998 Annual Meeting of Shareholders).
Exhibit 27: Financial Data Schedule
-15-
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OHIO STATE FINANCIAL SERVICES, INC.
Date: August 13, 1998 By: /s/ JON W. LETZKUS
------------------
Jon W. Letzkus
President and Chief Executive Officer
(Principal Executive Officer)
Signature Title Date
--------- ----- ----
/s/ JON W. LETZKUS
- ---------------------
Jon W. Letzkus President and CEO August 13, 1998
/s/ MICHAEL P. EDDY
- --------------------- Treasurer and
Michael P. Eddy Chief Financial Officer August 13, 1998
-16-