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, 1999
[ ] 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.
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(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
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(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, 1999, the latest practicable date, 572,337 shares of the
registrant's common stock, without par value, were issued and outstanding.
2
OHIO STATE FINANCIAL SERVICES, INC.
INDEX
Page
Number
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Financial Condition (Unaudited) as of
June 30, 1999 and December 31, 1998 3
Consolidated Statement of Operations (Unaudited)
for the Six Months ended June 30, 1999 and 1998 4
Consolidated Statement of Operations (Unaudited)
for the Three Months ended June 30, 1999 and 1998 5
Consolidated Statement of Cash Flows (Unaudited)
for the Six Months ended June 30, 1999 and 1998 6
Notes to Unaudited Consolidated Financial Statements 7 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 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 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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OHIO STATE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (UNAUDITED)
June 30, December 31,
1999 1998
------------ ------------
ASSETS Cash and cash equivalents:
Cash and amounts due from banks $ 381,970 $ 907,682
Interest-bearing deposits with other institutions 2,077,852 4,792,090
------------ ------------
Total cash and cash equivalents 2,459,822 5,699,772
Interest bearing time deposits 2,800,000 3,100,000
Investment securities:
Available for sale (cost approximates fair value) 401,500 388,500
Held to maturity (market value of $3,938,855 at 6/30/99;
and $1,018,809 at 12/31/98) 4,040,866 967,117
Loans receivable, net 24,110,771 24,594,506
Office properties and equipment, net 467,795 466,335
Accrued interest receivable, loans and investments (net of reserve
for uncollected interest of $-0- at 6/30/99; and $-0- at 12/31/98) 218,851 157,227
Other assets 184,169 63,262
------------ ------------
TOTAL ASSETS $ 34,683,774 $ 35,436,719
============ ============
LIABILITIES
Deposit accounts $ 25,803,840 $ 25,450,404
Short-term notes payable -- 892,543
Advances by borrowers for taxes and insurance 180,473 182,061
Accrued interest payable and other liabilities 168,175 137,798
Deferred federal income taxes 72,264 72,264
------------ ------------
TOTAL LIABILITIES 26,224,752 26,735,070
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, 3,000,000 shares authorized, no par
or stated value; 634,168 shares issued -- --
Additional paid in capital 5,950,464 5,947,185
Treasury stock (61,831 shares at cost as of 6/30/99
and 35,708 shares at cost as of 12/31/98) (821,072) (494,283)
Unearned Employee Stock Ownership Plan shares (ESOP) (484,928) (536,735)
Unearned Recognition and Retention Plan shares (RRP) (342,139) (371,859)
Retained earnings - substantially restricted 4,156,697 4,157,341
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 8,459,022 8,701,649
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,683,774 $ 35,436,719
============ ============
See accompanying notes to the unaudited consolidated financial statements
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OHIO STATE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
For the Six Months Ended June 30,
1999 1998
---------- ----------
INTEREST AND DIVIDEND INCOME
Loans $ 921,246 $ 975,518
Mortgage-backed securities 28,439 37,595
Interest-bearing deposits and investment securities 229,289 283,837
Dividends on Federal Home Loan Bank stock 13,077 12,623
---------- ----------
Total interest and dividend income 1,192,051 1,309,573
---------- ----------
INTEREST EXPENSE
Savings deposits 497,590 515,218
Federal Home Loan Bank advances and notes payable 8,539 --
---------- ----------
Total interest expense 506,129 515,218
---------- ----------
NET INTEREST INCOME 685,922 794,355
PROVISION FOR LOAN LOSSES -- --
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 685,922 794,355
---------- ----------
NONINTEREST INCOME
Service charges 4,048 6,039
Other income and fees 8,148 7,478
---------- ----------
Total noninterest income 12,196 13,517
---------- ----------
NONINTEREST EXPENSE
Salaries and benefits 265,810 256,237
Occupancy expense 27,471 30,827
Furniture and equipment expense 16,176 12,351
Federal insurance premium 13,519 15,591
Legal and accounting fees 68,244 53,132
Advertising and public relations 16,826 16,457
Franchise, payroll and other taxes 79,638 77,283
Stationery, printing and office expenses 27,961 25,174
Service bureau expense 28,963 27,504
Other operating expenses 49,408 60,719
---------- ----------
Total noninterest expense 594,016 575,275
---------- ----------
INCOME BEFORE INCOME TAXES 104,102 232,597
PROVISION FOR INCOME TAXES 38,400 84,281
---------- ----------
NET INCOME $ 65,702 $ 148,316
========== ==========
PER SHARE DATA
Earnings per share
Basic $ .13 $ .26
======= =======
Diluted $ .12 $ .25
======= =======
Average shares outstanding-basic 508,605 575,573
======= =======
Average shares outstanding-diluted 530,186 586,454
======= =======
See accompanying notes to the unaudited consolidated financial statements
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OHIO STATE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
For the Three Months Ended June 30,
1999 1998
-------- --------
INTEREST AND DIVIDEND INCOME
Loans $455,498 $488,726
Mortgage-backed securities 13,464 18,043
Interest-bearing deposits and investment securities 124,299 134,424
Dividends on Federal Home Loan Bank stock 6,630 6,402
-------- --------
Total interest and dividend income 599,891 647,595
-------- --------
INTEREST EXPENSE
Savings deposits 250,072 257,734
-------- --------
NET INTEREST INCOME 349,819 389,861
PROVISION FOR LOAN LOSSES -- --
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 349,819 389,861
-------- --------
NONINTEREST INCOME
Service charges 2,295 4,341
Other income and fees 3,767 3,415
-------- --------
Total noninterest income 6,062 7,756
-------- --------
NONINTEREST EXPENSE
Salaries and benefits 135,047 137,857
Occupancy expense 12,616 15,021
Furniture and equipment expense 9,276 7,545
Federal insurance premium 6,688 7,576
Legal and accounting fees 41,000 32,206
Advertising and public relations 7,657 6,199
Franchise, payroll and other taxes 40,182 37,115
Stationery, printing and office expenses 12,523 12,686
Service bureau expense 12,311 13,559
Other operating expenses 24,550 30,826
-------- --------
Total noninterest expense 301,850 300,590
-------- --------
INCOME BEFORE INCOME TAXES 54,031 97,027
PROVISION FOR INCOME TAXES 19,554 36,111
-------- --------
NET INCOME $ 34,477 $ 60,916
======== ========
PER SHARE DATA
Earnings per share
Basic $ .07 $ .11
======= =======
Diluted $ .07 $ .10
======= =======
Average shares outstanding-basic 503,362 568,349
======= =======
Average shares outstanding-diluted 520,994 590,111
======= =======
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 Six Months Ended June 30,
1999 1998
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 65,702 $ 148,316
Adjustments:
Depreciation 19,730 18,434
Investment accretion and amortization, net (129) (56)
ESOP and RRP amortization 84,806 57,599
Federal Home Loan Bank stock dividends (13,000) (12,600)
Deferred federal income taxes -- 145
Accrued interest receivable and other assets (182,531) (93,644)
Accrued interest payable and other liabilities 30,377 (109,530)
----------- -----------
Net cash provided by operating activities 4,955 8,664
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Term deposits, net 300,000 (900,000)
Proceeds from maturities of held to maturity securities -- 2,500,000
Proceeds from redemptions of mortgage-backed certificates 123,878 99,343
Purchase of held to maturity securities (3,197,498) --
Net change in loans 483,735 (804,744)
Acquisition of office properties and equipment (21,190) (9,882)
----------- -----------
Net cash provided by (used for) investing activities (2,311,075) 884,717
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Payment of dividends (66,346) (58,352)
Short-term borrowings, net (892,543) --
Purchase of treasury stock (326,789) --
Change in deposits, net 353,436 (322,583)
Change in mortgage escrow funds, net (1,588) 1,098
Purchase of RRP -- (416,000)
----------- -----------
Net cash used for financing activities (933,830) (795,837)
----------- -----------
Change in cash and cash equivalents (3,239,950) 97,544
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,699,772 3,177,832
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,459,822 $ 3,275,376
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits and borrowings $ 502,182 $ 515,218
Income taxes 73,418 164,578
Loans transferred to real estate acquired in settlement -- 9,887
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, 1998, and related notes which are
included on Form 10-KSB (file no. 0-23109).
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 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
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beginning after December 15, 1997. The Company's equity securities classified as
available for sale consist of Federal Home Loan Bank ("FHLB") 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 June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 provides accounting and
reporting standards for derivatives instruments, including certain derivative
instruments embedded in other contracts, by requiring the recognition of those
items as assets or liabilities in the statement of financial position, recorded
at fair value. SFAS No. 133 precludes a held-to-maturity security from being
designated as a hedge item. However, at the date of initial application of SFAS
No. 133, an entity is permitted to transfer any held-to-maturity security into
the available-for-sale or trading categories. The unrealized holding gain or
loss on such transferred securities shall be reported consistent with the
requirements of SFAS No. 115, "Accounting for Certain Investment in Debt and
Equity Securities." Such transfers do not raise an issue regarding an entity's
intent to hold other debt securities to maturity in the future. SFAS No. 133
applies prospectively for all fiscal quarters of all years beginning after June
15, 1999. Earlier adoption is permitted for any fiscal quarter that begins after
the issue date of SFAS No. 133. Management does not believe the adoption of SFAS
No. 133 will have a material impact on the Company.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." SFAS No. 134 amends SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities" and SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. SFAS No. 134 is effective for the first fiscal quarter beginning
after December 15, 1998, and its adoption did not have a material impact on the
Company.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Comparison of Financial Condition at June 30, 1999 and December 31, 1998
At June 30, 1999, the Company's assets decreased by approximately $753,000, or
2.1%, to $34.7 million from $35.4 million at December 31, 1998. Total cash and
cash equivalents decreased by $3.2 million to $2.5 million at June 30, 1999,
from $5.7 million at December 31, 1998. This decrease represented the outflow of
cash associated with the payment of dividends, principal payments of short-term
borrowing and purchases of held to maturity securities and treasury stock.
Interest-bearing time deposits decreased by $300,000 to $2.8 million at June 30,
1999, from $3.1 million at December 31, 1998, as a net result of matured time
deposits. Investment securities increased by approximately $3.1 million to $4.4
million at June 30, 1999, from $1.4 million at December 31, 1998. The increase
reflected the purchase of held to maturity securities of $3.2 million in United
States Government and Agency obligations offset by the principal reduction of
$124,000 in mortgage-backed certificates.
Net loans receivable decreased $484,000 to $24.1 million at June 30, 1999, from
$24.6 at December 31, 1998. The decrease was primarily attributable to a
$405,000 decrease in consumer loans and a $213,000 decrease in one- to-four
family residential mortgage loans which were offset by a $121,000 increase in
construction loans.
Deposits increased $353,000, or 1.4%, from $25.4 million at December 31, 1998,
to $25.8 million at June 30, 1999, as a result of the stability of deposit
account interest rates at the Association, compared to a reduction in deposit
interest rates for alternative investment products available. Short-term notes
payable in the amount of $892,543 at December 31, 1998 were paid off as of June
30, 1999.
Shareholders' equity decreased $243,000, or 2.8%, to $8.5 million at June 30,
1999, compared to $8.7 million at December 31, 1998. The decrease was
attributable to the use of $327,000 to repurchase shares for treasury and the
issuance of dividends in the amount of $66,000. 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. The decrease in shareholders' equity was offset by net income of
$66,000, the recognition of shares in the Employee Stock Ownership Plan (the
"ESOP") amounting to $55,000 and the recognition of shares in the Recognition
and Retention Plan (the "RRP") in the amount of $30,000.
Comparison of Operating Results for the Six Months Ended June 30, 1999 and 1998
NET INCOME. Net income decreased $82,000, or 55.7%, from net income of $148,000
for the six months ended June 30, 1998, to net income of $66,000 for the same
period in 1999. The decrease in net income was primarily the result of a
decrease in net interest income of $108,000, or 13.7%, and an increase in
non-interest expenses of $19,000, or 3.3%, offset by a decrease in the provision
for income taxes of $46,000, or 54.4%.
NET INTEREST INCOME. Net interest income decreased $108,000, or 13.7%, from
$794,000 for the six months ended June 30, 1998, to $686,000 for the six months
ended June 30, 1999. The Company's net yield on interest-earning assets
decreased from 4.42% for the six months ended June 30, 1998, to 4.10% for the
same period in 1999. Interest and dividend income decreased $118,000, or 9.0%,
from $1.3 million for the six months ended June 30, 1998, to $1.2 million for
the six months ended June 30, 1999, while interest expense decreased $9,000, or
1.8%, from $515,000 for the 1998 period to $506,000 for the 1999 period.
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INTEREST AND DIVIDEND INCOME. Total interest and dividend income decreased
$118,000, or 9.0% for the six months ended June 30, 1999, compared to the same
period in 1998. Interest income on loans decreased $55,000, or 5.6%, from
$976,000 for the six months ended June 30, 1998, to $921,000 for the six months
ended June 30, 1999. The decrease in interest income on loans was primarily the
result of a decline in higher interest earning consumer loans combined with an
overall decrease in the average balance of loans in the amount of $619,000.
Interest income on investments, including interest-bearing deposits, decreased
$54,000 to $242,000, for the six months ended June 30, 1999, compared to
$296,000 for the 1998 period. The decrease in interest income on investments was
directly attributable to the $1.6 million decrease in the average balance of
investments for the six months ended June 30, 1999, compared to the 1998 period.
Interest income on mortgage-backed securities decreased $10,000 to $28,000 for
the six months ended June 30, 1999, compared to $38,000 for the 1998 period. The
decrease was the direct result of the $188,000 decrease in the average balance
of mortgage-backed securities for the six months ended June 30, 1999, compared
to the 1998 period.
INTEREST EXPENSE. Total interest expense decreased by $9,000, or 1.8%, from the
1998 period to the 1999 period. Interest expense on deposit accounts decreased
$18,000, or 3.4%, from $515,000 for the six months ended June 30, 1998 to
$497,000 for the six months ended June 30, 1999. The Association's cost of
deposit funds decreased from 3.93% for the six months ended June 30, 1998, to
3.86% for the 1999 period, while average outstanding deposits declined $440,000,
or 1.7%, from $26.2 million for the period ended June 30, 1998 to $25.8 million
for the same period ended June 30, 1999. 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. This decrease was offset by an increase
in interest expense on notes payable in the amount of $9,000. The interest was
paid during the six months ended June 30, 1999 on the outstanding note payable
balance existing at December 31, 1998. Interest expense on notes payable was not
incurred during the six months ended June 30, 1998 since there were no borrowed
funds during the period.
PROVISION FOR LOAN LOSSES. No provisions for losses on loans were made for the
six months ended June 30, 1999 and 1998. Management judges the adequacy of the
allowance for loan losses and any additions to it based on maintaining 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, 1999, 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 $12,000 for the six months ended
June 30, 1999 compared to $14,000 for the same period in 1998. The decline was
due to a $2,000 decrease in service charges which was partially offset by a $670
increase in other income and fees.
NONINTEREST EXPENSE. Noninterest expenses increased $19,000, or 3.3%, from
$575,000 for the six months ended June 30, 1998, to $594,000 for the 1999
period. The increase in noninterest expense was partly attributable to a $10,000
increase in salaries and benefits from the 1998 to the 1999 period resulting
from the $15,000 increase in costs associated with RRP which was offset by a
$3,000 decrease in costs associated with the ESOP. Legal and accounting fees
increased $15,000, or 28.4%, from $53,000 for June 30, 1998 to $68,000 for June
30, 1999, due to expenses related to public filings.
INCOME TAXES. The provision for income taxes totaled $38,000 for the six months
ended June 30, 1999, a decrease of $46,000, or 54.4%, from the $84,000 in the
same 1998 period due to a decrease in pretax income.
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Comparison of Operating Results for the Three Months Ended June 30, 1999 and
1998
NET INCOME. Net income decreased $27,000, or 43.4%, from net income of $61,000
for the three months ended June 30, 1998, to net income of $34,000 for the same
period in 1999. The decrease in net income was primarily the result of a
decrease in net interest income of $40,000, or 10.3%, which was partially offset
by a decrease in the provision for income taxes of $17,000, or 45.9%.
NET INTEREST INCOME. Net interest income decreased $40,000, or 10.3%, from
$390,000 for the three months ended June 30, 1998, to $350,000 for the three
months ended June 30, 1999. The Company's net yield on interest-earning assets
decreased from 4.36% for the three months ended June 30, 1998, to 4.18% for the
same period in 1999. Interest and dividend income decreased $48,000, or 7.4%,
from $648,000 for the three months ended June 30, 1998, to $600,000 for the
three months ended June 30, 1999, while interest expense decreased $8,000, or
3.0%, from $258,000 for the 1998 period to $250,000 for the 1999 period.
INTEREST AND DIVIDEND INCOME. Total interest and dividend income decreased
$48,000, or 7.4%, for the three months ended June 30, 1999, compared to the same
period in 1998. Interest income on loans decreased $33,000, or 6.8%, from
$489,000 for the three months ended June 30, 1998, to $456,000 for the three
months ended June 30, 1999. The decrease in interest income on loans was
primarily the result of a decline in higher interest earning consumer loans
combined with an overall decrease in the average balance of loans in the amount
of $1.0 million. Interest income on investments, including interest-bearing
deposits, decreased $10,000 to $131,000, for the three months ended June 30,
1999, compared to $141,000 for the 1998 period. The decrease in interest income
on investments was directly attributable to the $1.0 million decrease in the
average balance of investments for the three months ended June 30, 1999,
compared to the 1998 period. Interest income on mortgage-backed securities
decreased $5,000 to $13,000 for the three months ended June 30, 1999, compared
to $18,000 for the 1998 period. The decrease was the direct result of the
$190,000 decrease in the average balance of mortgage-backed securities for the
three months ended June 30, 1999, compared to the 1998 period.
INTEREST EXPENSE. Total interest expense decreased by $8,000, or 3.0%, from the
1998 period to the 1999 period. The Association's cost of deposit funds
decreased from 3.95% for the three months ended June 30, 1998, to 3.85% for the
1999 period, while average outstanding deposits declined $136,000, or .5%, from
$26.1 million for the period ended June 30, 1998 to $26.0 million for the same
period ended June 30, 1999. 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.
PROVISION FOR LOAN LOSSES. Based on management's evaluation of the adequacy of
the loan loss allowance, no provisions for losses on loans were made for the
three months ended June 30, 1999 and 1998.
NONINTEREST INCOME. Noninterest income totaled $6,000 for the three months ended
June 30, 1999 compared to $8,000 for the same period in 1998.
NONINTEREST EXPENSE. Noninterest expenses increased $1,000, or .4%, from
$301,000 for the three months ended June 30, 1998, to $302,000 for the 1999
period. The increase in noninterest expense was partly attributable to a $9,000
increase in legal and accounting fees from $32,000 for June 30, 1998 to $41,000
for June 30, 1999, due to expenses related to public filings. This increase was
partially offset by a $6,000 decrease in other operating expenses from the 1998
to 1999 period.
INCOME TAXES. The provision for income taxes totaled $20,000 for the three
months ended June 30, 1999, a decrease of $16,000, or 45.9%, from the $36,000 in
the same 1998 period due to a decrease in pretax income.
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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
locks). 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 were approximately
$17,000.
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 customer's 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.
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 has advised the
Association that it has completed the upgrades necessary for Year 2000
readiness. The service bureau has tested these upgrades and Year 2000 compliance
has been successfully completed.
CONTINGENCY PLAN. The Association is monitoring its service bureau and is being
provided with periodic updates on its status. If the Association's service
bureau fails at any time, 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 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 FHLB of Cincinnati advances. At June
30, 1999, the Association's total borrowing capacity from the FHLB totaled
approximately $7.7 million, of which there were no advances outstanding.
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As of June 30, 1999, the Association has $1.2 million 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 (the
"OTS") relations. At June 30, 1999, the Association exceeded the minimum capital
ratio requirements imposed by the OTS.
At June 30, 1999, the Association's capital ratios were as follows:
Association
Requirement Actual
----------- -----------
Tangible capital 1.50% 18.24%
Core capital 4.00% 18.24%
Risk-based capital 8.00% 36.87%
Risk Elements
Nonperforming assets include 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. 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. There were no
nonperforming assets outstanding as of June 30, 1999 and December 31, 1998.
Management believes the level of the allowance for loan losses at June 30, 1999,
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
The Annual Meeting of Shareholders of Ohio State Financial Services,
Inc., was held on April 21, 1999. The following are the votes cast on each
matter presented to the shareholders:
1. The election of directors for terms expiring in 2000:
FOR WITHHELD
--- --------
John O. Costine 509,693 15,100
Anton M. Godez 509,993 14,800
Jon W. Letzkus 509,993 14,800
William E. Reline 509,993 14,800
Manuel C. Thomas 506,793 18,000
2. The approval of the amendments to the Ohio State Financial Services,
Inc., 1998 Stock Option and Incentive Plan, to provide for the acceleration of
the vesting of options following a change of control of OSFS or Bridgeport
Savings and Loan Association and to reduce the vesting period of options from
five years to three years:
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
461,233 60,275 2,435 48,394
3. The approval of the amendment to the Bridgeport Savings and Loan
Association Recognition and Retention Plan and Trust Agreement to provide for
the acceleration of the vesting of awards following a change of control of OSFS
or Bridgeport Savings and Loan Association:
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
460,133 60,875 3,785 47,544
4. The ratification of the selection of S.R. Snodgrass, A.C., as the
auditors of Ohio State Financial Services, Inc.:
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
493,443 28,000 2,500 48,394
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Item 5 - Other information
NONE
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.
By: /s/ Jon W. Letzkus
Date: August 3 , 1999 -------------------------------------
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 3, 1999
/s/ Michael P. Eddy
- ------------------- Treasurer and
Michael P. Eddy Chief Financial Officer August 3, 1999
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