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 September 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 November 6, 1998, the latest practicable date, 602,460 shares of the
registrant's common stock, without par value, were outstanding.
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OHIO STATE FINANCIAL SERVICES, INC.
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Financial Condition (Unaudited) as of
September 30, 1998 and December 31, 1997 3
Consolidated Statement of Operations (Unaudited)
for the Nine Months ended September 30, 1998 and 1997 4
Consolidated Statement of Operations (Unaudited)
for the Three Months ended September 30, 1998 and 1997 5
Consolidated Statement of Cash Flows (Unaudited)
for the Nine Months ended September 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 - 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Default Upon Senior Securities 16
Item 4. Submissions of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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OHIO STATE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (UNAUDITED)
September 30, December 31,
1998 1997
------------- ------------
ASSETS
Cash and cash equivalents:
Cash and amounts due from banks $ 567,565 $ 523,987
Interest-bearing deposits with other institutions 3,145,249 2,653,845
------------ ------------
Total cash and cash equivalents 3,712,814 3,177,832
Interest-bearing time deposits 5,300,000 4,600,000
Investment securities:
Available for sale (cost of $382,000 at 9/30/98; and
$363,000 at 12/31/97) 382,100 363,000
Held to maturity (market value of $1,039,518 at 9/30/98;
and $4,224,064 at 12/31/97) 979,541 4,146,588
Loans receivable, net 25,197,616 24,377,054
Real estate owned -- --
Office properties and equipment, net 472,281 482,950
Accrued interest receivable, loans and investments (net of reserve
for uncollected interest of $345 at 9/30/98; and $7,709 at 12/31/97) 182,180 173,639
Other assets 60,251 22,965
------------ ------------
TOTAL ASSETS $ 36,286,783 $ 37,344,028
============ ============
LIABILITIES
Deposit accounts $ 25,443,850 $ 26,333,439
Advances by borrowers for taxes and insurance 94,106 152,136
Other borrowed funds 192,543 --
Accrued interest payable and other liabilities 554,439 221,978
Deferred federal income taxes 71,550 75,005
------------ ------------
TOTAL LIABILITIES 26,356,488 26,782,558
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, 3,000,000 shares authorized, no par or
stated value; shares issued and outstanding:
602,460 at 9/30/98 and 634,168 at 12/31/97 -- --
Additional paid in capital 5,944,758 5,922,360
Unearned Employee Stock Ownership Plan shares (ESOP) (448,092)
Unearned Recognition and Retention Plan shares (RRP) (387,275) --
Treasury Stock, at cost: 31,708 shares at 09/30/98
and -0- at 12/31/97 (439,831) --
Retained earnings - substantially restricted 5,260,735 5,132,977
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 9,930,295 10,561,470
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 36,286,783 $ 37,344,028
============ ============
See accompanying notes to the unaudited consolidated financial statements
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OHIO STATE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
For the Nine Months Ended September 30,
1998 1997
---------- ----------
INTEREST AND DIVIDEND INCOME
Loans $1,471,221 $1,458,234
Mortgage-backed securities 53,709 65,521
Interest-bearing deposits and investment securities 415,871 308,590
Dividends on Federal Home Loan Bank stock 19,213 17,693
---------- ----------
Total interest and dividend income 1,960,014 1,850,038
---------- ----------
INTEREST EXPENSE
Savings deposits 772,273 872,957
Other borrowed funds 1,759 --
Federal Home Loan Bank advances -- 961
---------- ----------
Total interest expense 774,032 873,918
---------- ----------
NET INTEREST INCOME 1,185,982 976,120
PROVISION FOR LOAN LOSSES 11,191 --
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,174,791 976,120
---------- ----------
NONINTEREST INCOME
Service charges 9,874 7,862
Gain on sale of other real estate 12,108 2,245
Other income and fees 11,587 25,918
---------- ----------
Total noninterest income 33,569 36,025
---------- ----------
NONINTEREST EXPENSE
Salaries and benefits 388,291 275,215
Occupancy expense 46,341 46,535
Furniture and equipment expense 21,078 23,766
Federal insurance premium 22,601 19,171
Legal, accounting, and examination fees 80,047 20,229
Advertising and public relations 25,248 28,013
Franchise, payroll and other taxes 114,367 70,897
Stationery, printing and office expenses 37,285 28,019
Service bureau expense 45,739 37,410
Other operating expenses 90,237 66,974
---------- ----------
Total noninterest expense 871,234 616,229
---------- ----------
INCOME BEFORE INCOME TAXES 337,126 395,916
PROVISION FOR INCOME TAXES 121,840 133,949
---------- ----------
NET INCOME $ 215,286 $ 261,967
========== ==========
PER SHARE DATA
Earnings per share
Basic $ .38 $ --
======= =======
Diluted $ .37 $ --
======= =======
See accompanying notes to the unaudited consolidated financial statements
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OHIO STATE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
For the
Three Months Ended September 30,
1998 1997
-------- --------
INTEREST AND DIVIDEND INCOME
Loans $495,704 $481,476
Mortgage-backed securities 16,114 21,166
Interest-bearing deposits and investment securities 132,032 111,321
Dividends on Federal Home Loan Bank stock 6,590 6,135
-------- --------
Total interest and dividend income 650,440 620,098
-------- --------
INTEREST EXPENSE
Savings deposits 257,055 295,159
Other borrowed funds 1,759 --
Federal Home Loan Bank advances -- --
-------- --------
Total interest expense 258,814 295,159
-------- --------
NET INTEREST INCOME 391,626 324,939
PROVISION FOR LOAN LOSSES 11,191 --
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 380,435 324,939
-------- --------
NONINTEREST INCOME
Service charges 3,835 2,840
Gain on sale of other real estate 12,108 --
Other income and fees 4,109 5,450
-------- --------
Total noninterest income 20,052 8,290
-------- --------
NONINTEREST EXPENSE
Salaries and benefits 132,054 95,107
Occupancy expense 15,514 16,565
Furniture and equipment expense 8,727 7,699
Federal insurance premium 7,010 7,596
Legal, accounting, and examination fees 26,915 7,244
Advertising and public relations 8,791 9,311
Franchise, payroll and other taxes 37,084 25,325
Stationery, printing and office expenses 12,111 8,624
Service bureau expense 18,235 13,515
Other operating expenses 29,517 21,072
-------- --------
Total noninterest expense 295,958 212,058
-------- --------
INCOME BEFORE INCOME TAXES 104,529 121,171
PROVISION FOR INCOME TAXES 37,560 41,062
-------- --------
NET INCOME $ 66,969 $ 80,109
======== ========
PER SHARE DATA
Earnings per share
Basic $ .12 $ --
======= ======
Diluted $ .11 $ --
======= ======
See accompanying notes to the unaudited consolidated financial statements
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OHIO STATE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30,
1998 1997
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 215,286 $ 261,971
Adjustments:
Depreciation 27,950 32,071
Investment accretion and amortization, net (271) (2,566)
ESOP amortization 68,173 --
RRP amortization 28,725 --
Federal Home Loan Bank stock dividends (19,100) (17,500)
Deferred federal income taxes (3,455) 7,497
Gain on sale of real estate owned (12,108) (2,245)
Provision for loan losses (11,191) --
Accrued federal income taxes (77,513) --
Accrued interest receivable and other assets (45,827) 21,459
Accrued interest payable and other liabilities (23,037) 268,988
----------- -----------
Net cash provided by operating activities 147,632 569,675
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Term deposits, net (700,000) (500,000)
Proceeds from maturities of held to maturity securities 3,000,000 --
Proceeds from redemptions of mortgage-backed certificates 167,318 106,861
Loans, net (860,258) 357,926
Proceeds from sale of other real estate 62,995 19,865
Acquisition of office properties and equipment (17,281) (50,387)
----------- -----------
Net cash provided by (used for) investing activities 1,652,774 (65,735)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Payment of dividends (87,528) --
Other borrowed funds, net 192,543 --
Proceeds from sale of stock -- 5,409,551
Change in deposits, net (889,589) (1,238,314)
Change in mortgage escrow funds, net (58,030) (79,098)
Purchase of Treasury Stock (6,820) --
Purchase of RRP (416,000) --
----------- -----------
Net cash provided by (used for) financing activities (1,265,424) 4,092,139
----------- -----------
Change in cash and cash equivalents 534,982 4,596,079
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,177,832 2,435,662
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,712,814 $ 7,031,741
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits and borrowings $ 772,092 $ 872,319
Income taxes 208,178 25,569
Loans transferred to real estate acquired in settlement 50,887 17,620
Treasury Stock pending settlement 433,011 --
See accompanying notes to the unaudited consolidated financial statements
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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"), include 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 (file no. 0-29649).
NOTE 2-CONVERSION TO A 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
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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.
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 September 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 September 30, 1998,
approximately 5,844 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:
Nine Months Ended
September 30,
1998
--------
Denominator
Denominator for basic earnings per share-weighted-average shares 572,378
Employee stock options (antidilutive) --
Unvested RRP shares 14,136
-------
Denominator for diluted earnings per share-adjusted weighted-average
assumed conversions 586,514
=======
Three Months Ended
September 30,
1998
---------
Denominator
Denominator for basic earnings per share-weighted-average shares 564,505
Employee stock options (antidilutive) --
Unvested RRP shares 20,646
-------
Denominator for diluted earnings per share-adjusted weighted-average
assumed conversions 585,151
=======
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NOTE 5 - EMPLOYEE BENEFITS
Recognition and Retention Plan (RRP)
The Board of Directors adopted the RRP for directors and certain officers and
employees which was approved by shareholders 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 these entities. 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, and have the responsibility to invest all funds
contributed by the Association to the Trust created for the RRP.
In June, 1998, the Trust purchased, with funds contributed by the Association,
shares of the Company and 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 initially will be excluded from shareholders' 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 shareholders' equity.
Stock Option Plan
The Board of Directors adopted a Stock Option Plan for the directors, officers,
and employees which was approved by shareholders at the annual meeting held on
April 15, 1998. An aggregate of 63,417 authorized but unissued common shares of
the Company were reserved for future issuance under the Stock Option Plan. The
Company granted options to purchase 55,808 common shares. The options are
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 common share
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 55,808 --
Canceled during the period -- --
Exercised during the period -- --
------ ------
Outstanding at end of period, 55,808 --
(Option price of $17.375 per share) ====== ======
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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 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 September 30, 1998 and December 31, 1997
At September 30, 1998, the Company's assets decreased by approximately
$1,057,000 to $36,287,000 from $37,344,000 at December 31, 1997. Total cash and
cash equivalents increased by $535,000 to $3,713,000 at September 30, 1998, from
$3,178,000 at December 31, 1997. This increase represented the inflow of cash
associated with borrowed funds, maturity of held to maturity securities, and
principal collected on mortgage-backed securities. The increase in cash and cash
equivalents was offset by the purchase of term deposits, increased loan
production, depositors' withdrawals of funds, and the purchase of RRP shares.
Interest-bearing time deposits increased by $700,000 to $5,300,000 at September
30, 1998, from $4,600,000 at December 31, 1997. Held to maturity securities
decreased by approximately $3,167,000 to $980,000 at September 30, 1998, from
$4,147,000 at December 31, 1997. The decrease reflected the maturity of
$3,000,000 in United States Government and agency obligations and the principal
reduction of $167,000 in mortgage-backed certificates. Net loans receivable
increased $821,000 to $25,198,000 at September 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 Association's loan product.
Deposits decreased $889,000, or 3.38%, from $26,333,000 at December 31, 1997, to
$25,444,000 at September 30, 1998. The decrease was due to funds withdrawn by
depositors because of the competitive nature of alternative investment products
available to depositors. Other borrowed funds increased to $193,000 at September
30, 1998 in order to fund short-term liquidity needs of the Holding Company.
Accrued interest payable and other liabilities increased $332,000 from $222,000
at December 31, 1997 to $554,000 at September 30, 1998. The increase was the
direct result of the pending settlement of $433,000 for Treasury Stock purchased
September 30, 1998, offset by a decrease in accrued federal income taxes of
$78,000.
Shareholders' Equity decreased $631,000 to $9,930,000 at September 30, 1998,
compared to $10,561,000 at December 31, 1997. The decrease was attributable to
the purchase of RRP shares in the amount of $416,000 and the purchase of
treasury shares in the amount of $440,000 offset by net income of $215,000,
allocation of shares in the ESOP amounting to $68,000 and recognition of shares
in the RRP in the amount of $29,000. Shareholders' equity was also reduced by
dividends of $88,000. Future dividend policies will be determined by the Board
of Directors in light of earnings and the financial condition of the Company,
including applicable governmental regulations and policies.
Comparison of Operating Results for the Nine Months Ended September 30, 1998 and
1997
NET INCOME. Net income decreased $47,000, or 17.8%, from net income of $262,000
for the nine months ended September 30, 1997, compared to net income of $215,000
for the same period in 1998. The decrease in net income was primarily the result
of an increase in noninterest expenses of $255,000, or 41.4%, and an increase in
the provision for loan losses of $11,000, offset by an increase in net interest
income of $210,000 or, 21.5%, and a decrease in income taxes of $12,000.
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NET INTEREST INCOME. Net interest income increased $210,000, or 21.5%, from
$976,000 for the nine months ended September 30, 1997, to $1,186,000 for the
nine months ended September 30, 1998. The Company's net yield on
interest-earning assets increased from 3.92% for the nine months ended September
30, 1997, to 4.51% for the same period in 1998. Interest and dividend income
increased $110,000, or 5.9%, from $1,850,000 for the nine months ended September
30, 1997, to $1,960,000 for the nine months ended September 30, 1998. Interest
expense decreased $100,000, or 11.4%, from $874,000 for the 1997 period to
$774,000 for the 1998 period.
INTEREST AND DIVIDEND INCOME. Total interest and dividend income increased
$110,000 for the nine months ended September 30, 1998, compared to the same
period in 1997. Interest income on investments, including interest-bearing
deposits and mortgage-backed securities, increased $96,000 to $470,000, for the
nine months ended September 30, 1998, compared to $374,000 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 $1.6 million for the nine months ended September 30, 1998,
compared to the 1997 period. Interest income on loans increased $13,000 from
$1,458,000 for the nine months ended September 30, 1998, as a result of the
average balance of loans increasing $279,000.
INTEREST EXPENSE. Total interest expense decreased by $100,000 from the 1997
period to the 1998 period. The Association's cost of funds decreased from 4.00%
for the nine months ended September 30, 1997, to 3.98% for the 1998 period,
while average outstanding deposits declined $3.2 million from $29.1 million for
the period ended September 30, 1997, to $25.9 million for the same period ended
September 30, 1998. The decrease in the average balance of deposits was the
result of funds withdrawn by depositors because of the competitive nature of
alternative investment products available to depositors.
PROVISION FOR LOAN LOSSES. The provision for losses on loans for the nine months
ended September 30, 1998 increased by $11,000 in order to replenish the reserve
for loan losses to a level management believes adequate after charge-offs.
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, an additional provision to the allowance was deemed necessary.
Although management believes that its loan loss allowance at September 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 $34,000 for the nine months ended
September 30, 1998, a decrease of $2,000, from $36,000 for the 1997 period,
which was attributable to nonrecurring income items in the 1997 period. These
nonrecurring items were offset by an increase in the gain on the sale of other
real estate in the amount of $10,000 from $2,000 in the 1997 period compared to
$12,000 for the nine months ended September 30, 1998.
NONINTEREST EXPENSE. Noninterest expenses increased $255,000, or 41.4%, from
$616,000 for the nine months ended September 30, 1997, to $871,000 for the 1998
period. The increase in noninterest expenses was partly attributable to a
$113,000, or 41.1%, increase in salaries and benefits from the 1997 to the 1998
period resulting from costs associated with the ESOP of $68,000, and costs
associated with the RRP of $29,000, and merit base pay increases. Franchise,
payroll and other taxes increased by $43,000, or 61.3%, from the nine months
ended September 30, 1997, to the 1998 period. This increase was primarily the
result of an increase in franchise taxes assessed on net worth which increased
as a result of the Offering. Legal and accounting fees increased $60,000, from
$20,000 for September 30, 1997, to $80,000 for September 30, 1998. The increase
in legal and accounting fees was due to expenses related to meeting regulatory
requirements. Other operating expenses increased by $23,000 to $90,000 for the
nine months ended September 30, 1998, from $67,000 for the same period in 1997.
The increase was attributable to administrative expenses associated with the
Company, the ESOP, and the RRP.
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INCOME TAXES. The provision for income taxes totaled $122,000 for the nine
months ended September 30, 1998, a decrease of $12,000, or 9.0%, from the
$134,000 in the comparable 1997 period due to a decrease in pretax income.
Comparison of Operating Results for the Three Months Ended September 30, 1998
and 1997
NET INCOME. Net income decreased $13,000, or 16.4%, from net income of $80,000
for the three months ended September 30, 1997, to net income of $67,000 for the
same period in 1998. The decrease in net income was primarily the result of an
increase in noninterest expenses of $84,000, or 39.6% and an increase in the
provision for loan losses of $11,191, offset by an increase in noninterest
income of $12,000 and an increase in net interest income of $67,000, or 20.5%,
and a decrease in income taxes of $3,000.
NET INTEREST INCOME. Net interest income increased $67,000, or 20.5%, from
$325,000 for the three months ended September 30, 1997, to $392,000 for the
three months ended September 30, 1998. The net yield on interest-earning assets
increased from 3.82% for the three months ended September 30, 1997, to 4.48% for
the same period in 1998. Interest and dividend income increased $30,000, or
4.9%, from $620,000 for the three months ended September 30, 1997, to $650,000
for the three months ended September 30, 1998, while interest expense decreased
$36,000, or 12.3%, from $295,000 for the 1997 period to $259,000 for the 1998
period.
INTEREST AND DIVIDEND INCOME. Total interest and dividend income increased
$30,000 for the three months ended September 30, 1998, compared to the same
period in 1997. Interest income on investments, including interest-bearing
deposits and mortgaged-backed securities, increased $16,000 to $148,000, for the
three months ended September 30, 1998, compared to $132,000 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 $976,000 for the three months ended September 30, 1998,
compared to the 1997 period. Interest income on loans increased $15,000 from
$481,000 for the three months ended September 30, 1997, to $496,000 for the same
period in 1998. The increase was the result of an increase in the average
balance of loans of $471,000.
INTEREST EXPENSE. Total interest expense decreased by $36,000 from the 1997
period to the 1998 period. The cost of funds decreased from 4.03% for the three
months ended September 30, 1997, to 4.00% for the 1998 period, while average
outstanding deposits declined $3.6 million, or 12.3%, from $29.3 million for the
period ended September 30, 1997, to $25.7 million for the same period ended
September 30, 1998. The decrease in the average balance of deposits was the
result of funds withdrawn by depositors because of the competitive nature of
alternative investment products available to depositors.
PROVISION FOR LOAN LOSSES. The provision for losses on loans for the three
months ended September 30, 1998, increased by $11,000 in order to replenish the
reserve for loan losses to a level management believes adequate after charge
offs. Based on management's evaluation, an additional provision to the allowance
was deemed necessary. Although management believes that its loan loss allowance
at September 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 $20,000 for the three months
ended September 30, 1998, an increase of $12,000, from $8,000 for the 1997
period as a result of a gain on the sale of other real estate in the 1998
period.
NONINTEREST EXPENSE. Noninterest expenses increased $84,000, or 39.6%, from
$212,000 for the three months ended September 30, 1997, to $296,000 for the 1998
period. The increase in noninterest expenses was partly attributable to an
increase in salaries and benefits of $37,000 from the 1997 to the 1998 period
resulting from
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costs associated with the ESOP of $20,000, costs associated with the RRP of
$13,000, and merit base pay increases. Franchise, payroll and other taxes
increased by $12,000 from the three months ended September 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 Offering. Legal and
accounting fees increased $20,000, from $7,000 for September 30, 1997, to
$27,000 for September 30, 1998. The increase in legal and accounting fees is due
to expenses related to meeting regulatory requirements of the Company. Other
operating expenses increased by $9,000 to $30,000 for the three months ended
September 30, 1998, from $21,000 for the same period in 1997. The increase was
attributable to administrative expenses associated with the Company, the ESOP,
and the RRP.
INCOME TAXES. The provision for income taxes totaled $38,000 for the three
months ended September 30, 1998, a decrease of $3,000, or 8.5%, from $41,000 in
the comparable 1997 period due to a decrease in pre-tax income.
YEAR 2000
Rapid and accurate data processing is essential to the Association's operations.
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 or as zero and incorrectly
attempt to compute payment, interest, delinquency, and other data. The
Association has been evaluating both information technology (computer systems)
and non-information technology systems (e.g., vault timers and electronic door
lock). Based upon such evaluations, management has determined that the
Association has Year 2000 risk in three areas: (1) the Association's own
computers (2) the computers of others used by the Association's borrowers, and
(3) the computers of others who provide the Association with data processing.
ASSOCIATION'S OWN COMPUTERS. The Association has upgraded its computer system to
eliminate the Year 2000 risk. The Association does not expect to have material
additional costs to address this risk. The upgrade costs did not have a material
impact on the Company's consolidated financial position or results of
operations.
COMPUTERS OF OTHERS USED BY THE ASSOCIATION'S BORROWERS. The Association has
evaluated most of their borrowers and does not believe the Year 2000 problem
should, on an aggregate basis, impact their ability to make payments to the
Association. The Association believes that most of its residential borrowers are
not dependent on their home computers for income and that none of its commercial
borrowers are so large that a Year 2000 problem would render them unable to
collect revenue or rent and, in turn, continue to make loan payments to the
Association. The Association does not expect any material costs to address this
risk area and believes it is Year 2000 compliant in this risk area.
COMPUTERS OF OTHERS WHO PROVIDE THE ASSOCIATION WITH DATA PROCESSING. This risk
is primarily focused on one third-party service bureau that provides virtually
all of the Association's data processing. This service bureau is not Year 2000
compliant but has advised the Association that it expects to be compliant before
the Year 2000. If this problem is not solved before the Year 2000, the
Association would likely experience significant delays, mistakes, or failures.
These delays, mistakes, or failures could have a significant impact on the
Association's financial condition and results of operations.
CONTINGENCY PLAN. The Association is monitoring its service bureau to evaluate
whether its data processing system will fail and is being provided with periodic
updates on the status of testing and upgrades being made by the service bureau.
If the Association's service bureau fails, the Association will attempt to
locate an alternative service bureau that is Year 2000 compliant. If the
Association is unsuccessful, the Association will enter deposit balances and
interest with its existing computer system. If this labor intensive approach is
necessary, management and employees will become much less efficient. However,
the Association believes that it would be able to operate in this manner
indefinitely, until its existing service bureau, or its replacement, is able to
again provide data processing services. If very few financial institution
service bureaus were operating in the Year
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2000, the Association's replacement costs, assuming the Association could
negotiate an agreement, could be material.
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 a line of credit with the Federal
Home Loan Bank ("FHLB") of Cincinnati for advances. At September 30, 1998, the
Association's total borrowing capacity from the FHLB totaled approximately $7.1
million, of which there were no advances outstanding.
As of September 30, 1998, the Association had $791,000 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 the Office of Thrift Supervision
("OTS") regulations. At September 30, 1998, the Association exceeded the minimum
capital ratio requirements imposed by the OTS as follows:
Association
Requirement Actual
----------- ------
Tangible capital 1.50% 24.33%
Core capital 4.00% 24.33%
Risk-based capital 8.00% 48.99%
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RISK ELEMENTS
The table below presents information concerning nonperforming assets including
nonaccrual loans, renegotiated loans, loans 90 days or more past due, other real
estate loans, 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. At the time the accrual of interest is discontinued,
future income is recognized only when cash is received. Renegotiated loans are
those loans in which terms have been renegotiated to provide a reduction or
deferral of principal or interest as a result of the deterioration of the
borrower.
September 30, December 31,
1998 1997
------ ------
(dollars in thousands)
Loans on nonaccrual basis $ 2 $ 98
Loans past due 90 days still accruing -- --
Renegotiated loans -- --
---------- -------
Total nonperforming loans 2 98
Other real estate -- --
Repossessed assets -- --
---------- -------
Total nonperforming assets $ 2 $ 98
========== =======
Nonperforming loans as a percent of total loans 0.01% 0.40%
========== =======
Nonperforming assets as a percent of total assets 0.01% 0.26%
========== =======
Allowance for loan losses to nonperforming loans 5,558.50% 143.86%
========== =======
Nonperforming loans are primarily made up of one- to four-family residential
mortgages. The collateral requirements on 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 September 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 and the credit approval process is used to
determine the adequacy of the allowance for loan losses.
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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
NONE
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 January 27, 1999. 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 November 13, 1998, then
the 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
Financial Data Schedule
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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: November 6 , 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 November 6, 1998
/s/ Michael P. Eddy Treasurer and
- ---------------------- Chief Financial Officer
Michael P. Eddy November 6, 1998
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