<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the Fiscal Year December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ______________to___________________
Commission File Number: 000-23109
OHIO STATE FINANCIAL SERVICES, INC.
----------------------------------------------
(Name of small business issuer in its charter)
Ohio 31-1529204
- ------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
435 Main Street, Bridgeport, Ohio 43912
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (740) 635-0764
--------------
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
-------------------------
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Shares, without par value
--------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State the issuer's revenues for its most recent fiscal year: $2.6 million.
Based on the average of the bid and asked prices quoted by the OTC Bulletin
Board as of March 24, 1998, the aggregate market value of the voting stock held
by non-affiliates of the Registrant, on that date was $8.8 million.
At March 27 , 1998, there were 634,168 of the Registrant's Common Shares issued
and outstanding.
Part II of Form 10-KSB: Portions of the 1997 Annual Report to Shareholders in
Exhibit 13.
Part III of Form 10-KSB: Portions of the Proxy Statement for the 1998 Annual
Meeting of Shareholders in Exhibit 20.
Transitional Small Business Disclosure Format Yes No X
--- ---
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Ohio State Financial Services, Inc. ("OSFS") is a unitary savings and
loan holding company organized under Ohio law in March 1997. On September 26,
1997, OSFS acquired all of the common shares issued by Bridgeport Savings and
Loan Association, a savings and loan association organized under Ohio law (the
"Association"), upon the conversion of the Association from mutual to stock form
(the "Conversion").
As a savings and loan holding company, OSFS is subject to regulation,
supervision and examination by the Office of Thrift Supervision (the "OTS"). The
activities of OSFS have been limited primarily to holding the common stock of
the Association. Consequently, the following discussion focuses primarily on the
business of the Association.
As an Ohio savings and loan association, the Association is subject to
supervision and regulation by the OTS, the Ohio Department of Commerce, Division
of Financial Institutions (the "Division") and the Federal Deposit Insurance
Corporation (the "FDIC"). The Association is a member of the Federal Home Loan
Bank (the "FHLB") of Cincinnati, and the deposits of the Association are insured
up to applicable limits by the FDIC in the Savings Association Insurance Fund
(the "SAIF").
The Association conducts business from its main office located in
Bridgeport, Ohio, and one full-service branch located in Shadyside, Ohio. The
principal business of the Association is the origination of permanent mortgage
loans on one- to four-family residential real estate located in the
Association's primary market area, which consists of Belmont County, Ohio, and
Ohio and Marshall Counties, West Virginia. The Association also originates a
limited number of loans for the construction of one- to four-family residences
and permanent mortgage loans secured by nonresidential real estate in its market
area. In addition to real estate lending the Association originates secured and
unsecured consumer loans. For liquidity and interest rate risk management
purposes, the Association invests in interest-bearing deposits in other
financial institutions, U.S. Government and agency obligations and
mortgage-backed securities. Funds for lending and other investment activities
are obtained primarily from savings deposits, which are insured up to applicable
limits by the FDIC, principal repayments of loans and maturities of investment
securities.
Interest on loans and investments is the Association's primary source
of income. The Association's principal expense is interest paid on deposit
accounts. Operating results are dependent to a significant degree on the net
interest income of the Association, which is the difference between interest
income earned on loans, mortgage-backed securities and other investments and
interest paid on deposits. Like most thrift institutions, the Association's
interest income and interest expense are significantly affected by general
economic conditions and by the policies of various regulatory authorities.
LENDING ACTIVITIES
GENERAL. The Association's principal lending activity is the
origination of conventional fixed-rate real estate loans secured by one- to
four-family residences located in the Association's primary market area. Though
the Association currently originates loans for its portfolio and not with the
intention of selling such loans in the secondary market, fixed-rate loans are
generally underwritten according to secondary market guidelines. In addition to
real estate lending, the Association originates consumer loans, including loans
secured by deposit accounts, automobile loans, and unsecured loans.
<PAGE> 3
LOAN PORTFOLIO COMPOSITION. The following table presents certain
information in respect of the composition of the Association's loan portfolio at
the dates indicated:
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------------
Percent of Percent of Percent of
Amount total loans Amount total loans Amount total loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $19,754 80.33% $20,605 81.97% $21,086 79.54%
Multifamily - - 51 0.20 557 2.10
Nonresidential 572 2.33 460 1.83 1,064 4.01
Land 18 0.07 86 0.34 5 0.02
Construction 124 0.50 124 0.49 469 1.77
Consumer loans:
Automobiles 1,721 7.00 1,931 7.68 1,752 6.61
Savings accounts 370 1.51 265 1.06 244 0.92
Other 1,962 7.98 1,511 6.01 1,201 4.53
Commercial loans 69 0.28 105 0.42 132 0.50
--------- ------- --------- -------- -------- --------
Total loans 24,590 100.00% 25,138 100.00% 26,510 100.00%
====== ====== ======
Less:
Loans in process 36 51 328
Deferred loan fees 36 52 67
Allowance for loan losses 141 143 143
--------- --------- ---------
Total loans, net $24,377 $24,892 $25,972
======= ======= =======
</TABLE>
LOAN MATURITY. The following table sets forth certain information as of
December 31, 1997, regarding the dollar amount of loans maturing in the
Association's portfolio based on their contractual terms to maturity. Demand
loans and other loans having no stated schedule of repayments or no stated
maturity are reported as due in one year or less. Mortgage loans originated by
the Association in its portfolio generally include due-on-sale clauses that
provide the Association with the contractual right to deem the loan immediately
due and payable in the event the borrower transfers the ownership of the
property without the Association's consent. The table does not include the
effects of possible prepayments or scheduled repayments.
<TABLE>
<CAPTION>
During the year Due 1-3 Due 3-5 Due 5-10 Due 10-20 Due over
ending years years years years 20 years
December 31, after after after after after
1998 12/31/98 12/31/98 12/31/98 12/31/98 12/31/98 Total
-------------- ----------- ------------ ---------- --------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $ 2 $109 $297 $2,759 $14,146 $2,441 $19,754
Nonresidential - - 38 79 455 - 572
Land - 18 - - - - 18
Construction - - - - 124 - 124
Consumer loans 24 395 849 1,281 1,456 48 4,053
Commercial loans 29 35 5 - - - 69
---- ------ ---------- --------- ---------- ---------- ----------
Total $55 $557 $1,189 $4,119 $16,181 $2,489 $24,590
=== ==== ====== ====== ======= ====== =======
</TABLE>
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<PAGE> 4
The following table sets forth the dollar amounts of all loans
contractually due after December 31, 1998, and shows the amount of such loans
which have predetermined interest rates and which have floating or adjustable
interest rates:
<TABLE>
<CAPTION>
Fixed Adjustable
rates rates Total
----- ----- -----
(In thousands)
<S> <C> <C> <C>
Real estate loans:
One- to four-family $16,277 $3,475 $19,752
Nonresidential 572 - 572
Land 18 - 18
Construction 124 - 124
Consumer loans 4,029 - 4,029
Commercial loans 40 - 40
---------- ---------- ----------
Total $21,060 $3,475 $24,535
======= ====== =======
</TABLE>
LOANS SECURED BY ONE- TO FOUR-FAMILY REAL ESTATE. The principal lending
activity of the Association is the origination of conventional loans secured by
first mortgages on one- to four-family residences, primarily single-family
residences, located within the Association's primary market area. At December
31, 1997, the Association's one- to four-family residential real estate loans
totaled approximately $19.8 million, or 80.3% of total loans.
OTS regulations and Ohio law limit the amount which the Association may
lend in relationship to the appraised value of the real estate and improvements
which will secure the loan at the time of loan origination. In accordance with
such regulations, the Association makes loans on one- to four-family residences
of up to 80% of the value of the real estate and improvements thereon (the
"LTV").
The Association currently offers fixed-rate loans with terms of up to
25 years, though most loans are originated with terms of 15 years. The
Association does offer adjustable-rate mortgage loans ("ARMs") for terms of up
to 25 years, but has originated very few ARMs since 1990. The maximum interest
rate adjustment period on the ARMs is five years, but can be any number of years
less than five. The interest rate adjustments on ARMs presently offered by the
Association are indexed to the quarterly National Average Cost of Funds to
SAIF-Insured Institutions. Rate adjustments are computed by adding a stated
margin, typically 2%, to the index, with a maximum adjustment of 5% over the
term of the loan.
The Association has purchased interests in loans from other Ohio
financial institutions at times when there was low loan demand in the
Association's primary market area. Such purchases consist of fixed-rate loans
which meet the Association's underwriting standards. The Association's loan
portfolio includes two participation interests in several single-family loans
secured by properties located in Columbus, Ohio. At December 31, 1997, the
outstanding balance of participation loans purchased, which is included in the
one- to four-family loans, was $4.5 million, or 18.4% of the Association's total
loan portfolio.
LOANS SECURED BY MULTIFAMILY RESIDENCES. The Association originates a
limited number of loans secured by multifamily properties, which contain more
than four units. Multifamily loans are offered with fixed rates of interest for
terms of up to 25 years and have LTVs of up to 75%.
Multifamily lending is generally considered to involve a higher degree
of risk than one- to four-family residential lending because the borrower
typically depends upon income generated by the project to cover operating
expenses and debt service. The profitability of a project can be affected by
economic conditions, government policies and other factors beyond the control of
the borrower. The Association attempts to reduce the risk associated with
multifamily lending by evaluating the creditworthiness of the borrower and the
projected income from the project and by obtaining personal guarantees on loans
made to corporations and partnerships. The Association requires borrowers to
agree to submit financial statements annually to enable the Association to
monitor the loan and requires an assignment of rents.
NONRESIDENTIAL REAL ESTATE. The Association also originates a limited
number of loans for the purchase of nonresidential real estate. The
Association's nonresidential real estate loans have fixed rates, terms of up to
25 years and LTVs of up to 80%. Among the properties securing nonresidential
real estate loans are a church and a used car lot, which are located in the
Association's primary market area.
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<PAGE> 5
Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. The Association has endeavored to
reduce such risk by evaluating the credit history of the borrower, the location
of the real estate, the financial condition of the borrower, the quality and
characteristics of the income stream generated by the property and the
appraisals supporting the property's valuation.
At December 31, 1997, approximately $572,000, or 2.3% of the
Association's total loans, were secured by mortgages on nonresidential real
estate.
LAND LOANS. The Association also originates a limited number of loans
secured by single-family land lots. The Association's land loans are generally
three year amortizing loans and require an LTV of 75% or less. At December 31,
1997, approximately $18,000, or .07% of the Association's total loans, were
secured by land loans made to individuals intending to construct and occupy
single family residences on the properties.
CONSTRUCTION LOANS. The Association originates a limited number of
loans for the construction of single-family residential real estate.
Construction loans are structured as permanent loans with fixed rates of
interest and terms of up to 25 years. During the first six months, while the
residence is being constructed, the borrower is required to pay interest only.
Construction loans have LTVs of up to 80%, with the value of the land counting
as part of the owner's equity. At December 31, 1997, the Association had
approximately $124,000, or .50% of its total loans, invested in construction
loans, which represented one loan in process from 1995 due to the halt of
construction. During the year ended December 31, 1997, the Association did not
originate any construction loans.
CONSUMER LOANS. The Association originates various types of consumer
loans, including home improvement loans, loans secured by savings accounts and
motor vehicles and unsecured loans. Consumer loans are made at fixed rates of
interest. Consumer loans secured by a deposit or savings account are made at an
interest rate that is 2% above the rate paid on the underlying deposit account.
Automobile loans are originated with terms of up to six years for new
automobiles and up to three years for used automobiles. All automobile loans are
originated directly by the Association.
The Association also makes closed-end home equity loans in an amount
which, when added to the prior indebtedness secured by the real estate, does not
exceed 80% of the estimated value of the real estate. Home equity loans are
secured by real estate. The Association does not offer home equity loans with a
line of credit feature.
Consumer loans may entail greater credit risk than do residential
mortgage loans. The risk of default on consumer loans increases during periods
of recession, high unemployment, and other adverse economic conditions. Although
the Association has not had significant delinquencies on consumer loans, no
assurance can be provided that delinquencies will not increase.
At December 31, 1997, the Association had approximately $4.1 million,
or 16.5% of its total loans, invested in consumer loans.
COMMERCIAL LOANS. The Association has occasionally made commercial
loans to businesses in its primary market area. At December 31, 1997, the
Association had approximately $69,000, or .28% of total loans, invested in six
commercial loans. All of the loans were made to local businesses and are secured
by company vehicles. The Association does not currently originate commercial
loans.
LOAN SOLICITATION AND PROCESSING. Loan originations are generally
obtained from existing customers and members of the local community and from
referrals from real estate brokers, lawyers, accountants, and current and former
customers. The Association also advertises in the local print media and
periodically advertises on radio and television.
In underwriting real estate loans, the Association typically obtains a
credit report, verification of employment and other documentation concerning the
creditworthiness of the borrower. An appraisal of the fair market value of the
real estate that will be given as security for the loan is prepared by a
certified fee appraiser approved by the Board of Directors. Upon the completion
of the appraisal and the receipt of information on the credit history of the
borrower, the application for a loan is submitted for review in accordance with
the Association's underwriting guidelines which are established annually by the
Board of Directors. The President of the Association has authority to approve
loans of less than $100,000. Loans for
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<PAGE> 6
amounts greater than $100,000 must be approved by the full Board of Directors of
the Association, which meets twice a month.
Borrowers are required to carry satisfactory fire and casualty
insurance and flood insurance, if applicable, and to name the Association as an
insured mortgagee. The Association obtains an attorney's opinion of title.
The procedure for approval of construction loans is the same as for
permanent real estate loans, except that an appraiser evaluates the building
plans, construction specifications, and estimates of construction costs. The
Association also evaluates the feasibility of the proposed construction project
and the experience and record of the builder. Once approved, the construction
loan is disbursed in installments based upon periodic inspections of
construction progress.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan, and the value of the collateral, if any. The President of the
Association has authority to approve secured consumer loans of up to $50,000,
and unsecured consumer loans of up to $25,000. The Assistant Vice President and
the Loan Manager of the Association each have the authority to approve
applications for secured consumer loans up to $25,000 and for unsecured loans up
to $10,000 and $2,000, respectively
LOAN ORIGINATIONS AND PARTICIPATIONS. Currently, the Association is
originating fixed-rate loans for its portfolio and not with the intention of
selling such loans in the secondary market. The Association occasionally
purchases participation interests in fixed-rate loans originated by other
financial institutions which meet the Association's underwriting standards.
Typically the Association purchases a 90% interest in the loan, with the seller
retaining a 10% interest and the servicing of the loan. At December 31, 1997,
the outstanding balance of participation loans purchased, which is included in
the one- to four-family loans, was $4.5 million, or 18.4% of the Association's
total loan portfolio. See "Loans Secured by One- to Four-Family Real Estate."
The following table presents the Association's total loan origination,
participation and repayment activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Total gross loans receivable at
beginning of period $25,138 $26,510 $ 23,365
Loans originated:
Real estate:
One- to four-family 2,588 1,562 1,752
Multifamily - - -
Land - 90 -
Nonresidential 210 163 83
Construction - - 507
Consumer 2,454 2,136 2,355
Commercial - 8 121
------------ ---------- --------
Total loans originated 5,252 3,959 4,818
Loan participations:
One- to four-family - 431 1,543
Loan principal repayments (5,786) (5,762) (3,216)
Charge-offs - - -
Foreclosures (14) - -
----------- ----------- --------
Net loan activity (548) (1,372) 3,145
----------- -------- --------
Total gross loans receivable at
end of period $ 24,590 $25,138 $ 26,510
======== ======== ========
</TABLE>
The Association issues written commitments to prospective borrowers on
all approved mortgage loans which expire within 30 days of the date of issuance
and charges an application fee. In some instances, commitments may be renewed
or
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<PAGE> 7
extended. At December 31, 1997, the Association had $512,000 of outstanding
commitments to originate loans and $36,000 in undisbursed funds related to
construction loans. Management believes that less than 1% of loan commitments
expire without being funded.
LOANS TO ONE BORROWER LIMITS. OTS regulations generally limit the
aggregate amount that a savings association may lend to any one borrower to an
amount equal to 15% of the association's unimpaired capital and unimpaired
surplus (the "Lending Limit Capital"). A savings association may lend to one
borrower an additional amount not to exceed 10% of the association's Lending
Limit Capital if the additional amount is fully secured by certain forms of
"readily marketable collateral." Real estate is not considered "readily
marketable collateral." In applying this limit, the regulations require that
loans to certain related or affiliated borrowers be aggregated. An exception to
this limit permits loans of any type to one borrower of up to $500,000.
Based on such limits, the Association was able to lend approximately
$1.2 million to one borrower at December 31, 1997. The maximum amount that the
Association will lend to one borrower, however, is $500,000. The largest amount
the Association had outstanding to one borrower at December 31, 1997, was
$185,000, which consisted of two loans, each secured by a residential property
and an automobile. At December 31, 1997, the loans were performing in accordance
with their terms.
LOAN ORIGINATION AND OTHER FEES. The Association realizes loan
origination fees and other fee income from its lending activities. In addition,
the Association realizes income from late payment charges, application fees, and
fees for other miscellaneous services.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments, and general economic
conditions. All nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 91 as an adjustment to yield over
the life of the related loan.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. The
Association attempts to maintain a high level of asset quality through sound
underwriting policies and efficient collection practices.
To discourage late payments, the Association charges a late fee of 5%
of the payment amount after 15 days for loans originated since January 1, 1990.
When a loan is 30 days past due, the borrower is sent a delinquency notice. When
a loan is 31 to 60 days delinquent, the Association sends to the borrower
another delinquency notice and a personalized letter and one of the
Association's loan personnel will telephone the borrower. When a loan becomes 60
days delinquent, additional contacts are made and the loan is generally referred
to an attorney for foreclosure, unless a repayment schedule has been
established.
Loans are reviewed on a monthly basis and are placed on nonaccrual
status when collection in full is considered doubtful by management. Generally,
loans past due more than 90 days as to principal or interest are placed on
nonaccrual status. Interest accrued and unpaid at the time a loan is placed on
nonaccrual status is charged against interest income. Subsequent cash payments
are generally applied to interest income unless, in the opinion of management,
the collection of principal and interest is doubtful. In those cases, subsequent
cash payments would be applied to principal.
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The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------------------------------------
Percent Percent Percent
of total of total of total
Number Amount loans Number Amount loans Number Amount loans
------ ------ ----- ------ ------ ----- ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days 21 $331 1.35% 7 $174 0.69% 4 $135 0.51%
60 - 90 days 12 294 1.20 3 94 0.37 1 9 0.03
Over 90 days 6 98 0.40 2 69 0.27 1 6 0.02
--- ----- ---- --- ------ ---- - ------ ----
Total delinquent loans 39 $723 2.95% 12 $337 1.34% 6 $150 0.57%
== ==== ==== == ==== ==== = ==== ====
</TABLE>
Nonperforming assets include nonaccruing loans, accruing loans which
are delinquent more than 90 days, real estate acquired by foreclosure or by
deed-in-lieu thereof, in-substance foreclosures and repossessed assets.
The following table sets forth information with respect to the accrual
and nonaccrual status of the Association's loans and other nonperforming assets
at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate $ 64 $ 51 $ -
Consumer 34 18 6
------ ----- -----
Total nonaccrual loans 98 69 6
Total nonperforming loans 98 69 6
Real estate owned - - -
------- -------- -------
Total nonperforming assets $ 98 $ 69 $ 6
===== ===== ======
Allowance for loan losses $141 $143 $143
==== ==== ====
Nonperforming assets as a percent of total assets 0.26% 0.20% 0.02%
Nonperforming loans as a percent of total loans 0.40% 0.28% 0.02%
Allowance for loan losses as a percent of
nonperforming loans 143.86% 207.25% 2,383.33%
</TABLE>
For the year ended December 31, 1997, approximately $8,000 would have
been recorded had such nonaccruing loans been accruing pursuant to contractual
terms. During such period, interest collected on such loans and included in net
income was approximately $2,500.
Real estate acquired in settlement of loans is classified separately on
the balance sheet at the lower of the recorded investment in the property or its
fair value minus estimated costs of sale. Prior to foreclosure, the loan is
written down to the value of the underlying collateral by a charge to the
allowance for loan losses, if necessary. Any subsequent write-downs are charged
against operating expenses. Operating expenses of such properties, net of
related income or loss on disposition, are included in other expenses. At
December 31, 1997, the Association had no real estate acquired in settlement of
loans.
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<PAGE> 9
The Association classifies its assets on a regular basis in accordance
with federal regulations. Problem assets are classified as "substandard,"
"doubtful" or "loss." "Substandard" assets have one or more defined weaknesses
and are characterized by the distinct possibility that the Association will
sustain some loss if the deficiencies are not corrected. "Doubtful" assets have
the same weaknesses as "substandard" assets, with the additional characteristics
that (i) the weaknesses make collection or liquidation in full, on the basis of
currently existing facts, conditions and values, questionable and (ii) there is
a high possibility of loss. An asset classified "loss" is considered
uncollectible and of such little value that its continuance as an asset of the
Association is not warranted. In addition, federal regulations also contain a
"special mention" category, consisting of assets which do not currently expose
an institution to a different degree of risk to warrant classification but which
possess credit deficiencies or potential weaknesses deserving management's close
attention.
The aggregate amounts of the Association's classified assets at the
dates indicated were as follows:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------
1997 1996 1995
-------------------------------------
(In thousands)
<S> <C> <C> <C>
Classified assets:
Substandard $71 $ - $6
Doubtful - 132 -
Loss - - -
--- ---- --
Total classified assets $71 $132 $6
=== ==== ==
</TABLE>
The Association establishes a general allowance for loan losses for any
loan classified as substandard or doubtful. If an asset, or portion thereof, is
classified as loss, the Association establishes a specific allowance for loss in
the amount of 100% of the portion of the asset classified loss or charges off
the portion of any real estate loan deemed to be uncollectible. See "Allowance
for Loan Losses."
The Association analyzes each classified asset on a monthly basis to
determine whether changes in the classifications are appropriate under the
circumstances. Such analysis focuses on a variety of factors, including the
amount of any delinquency and the reasons for the delinquency, if any, the use
of the real estate securing the loan, the status of the borrower, and the
appraised value of the real estate. As such factors change, the classification
of the asset will change accordingly. At December 31, 1997, the Association had
classified $371,000 of assets as special mention, $71,000 as substandard and no
assets as doubtful or loss.
ALLOWANCE FOR LOAN LOSSES. Management reviews on a quarterly basis the
allowance for loan losses as it relates to a number of relevant factors,
including, but not limited to, growth and changes in the composition of the loan
portfolio, trends in the level of delinquent and problem loans, current and
anticipated economic conditions in the primary lending area, past loss
experience, and possible losses arising from specific problem assets.
While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustments and net income could be significantly affected if
circumstances differ substantially from the assumptions used in making the final
determination. In addition, the Association's determination as to the amount of
its allowance for loan losses in subject to review by the OTS, as part of its
examination process, which may result in the establishment of an additional
allowance based upon the judgment of the OTS after a review of the information
available at the time of the OTS examination.
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<PAGE> 10
The following table sets forth an analysis of the Association's
allowance for loan losses for the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousand)
<S> <C> <C> <C>
Balance at beginning of year $143 $143 $143
Charge-offs (2) - -
Recoveries - - -
---- ---- ----
Net (charge-offs) recoveries 141 - -
Provision for losses on loans - - -
---- ---- ----
Balance at end of year $141 $143 $143
==== ==== ====
Ratio of net (charge-offs) recoveries to average
loans outstanding during the year 0.01% N/A N/A
Ratio of allowance for loan losses to total loans 0.57% 0.57% 0.55%
</TABLE>
The following table sets forth the allocation of the allowance for loan
losses by category. The allocations are based on management's assessment of the
risk characteristics of each of the components of the total loan portfolio and
is subject to changes as and when the risk factors of each such component
changes. The allocation is not indicative of either the specific amounts or the
loan categories in which future charge-offs may be taken, nor should it be taken
as an indicator of future loss trends. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- ---------------------------
Percent of loans Percent of loans Percent of loans
in each category in each category in each category
Amount to total loans Amount to total loans Amount to total loans
------ ---------------- ------ ------------------ ------ ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
One- to four-family $116 80.33% $115 81.97% $117 79.54%
Multifamily - - - 0.20 3 2.10
Nonresidential 2 2.33 3 1.83 6 4.01
Construction - 0.50 - 0.49 - 1.77
Land - 0.07 - 0.34 - 0.02
Consumer 23 16.49 25 14.75 17 12.06
Commercial - 0.28 - 0.42 - 0.50
---- ------ ---- ------ ---- ------
Total $141 100.00% $143 100.00% $143 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
INVESTMENT ACTIVITIES
GENERAL. Federal regulation and Ohio law permit the Association to
invest in various types of investment securities, including interest-bearing
deposits in other financial institutions, U.S. Treasury and agency obligations,
mortgage-backed securities, and certain other specified investments. The Board
of Directors of the Association has adopted an investment policy which
authorizes management to make investments in U.S. Treasury obligations, U.S.
Government and agency securities, municipal obligations, mortgage-backed
securities, deposits in the FHLB, certificates of deposit in federally-insured
financial institutions, and federal funds at commercial banks. The Association's
investment policy is designed primarily to provide and maintain liquidity within
regulatory guidelines, to maintain a balance of high quality investments to
minimize risk, and to maximize return without sacrificing liquidity and safety.
See "REGULATION."
-9-
<PAGE> 11
The Association's securities available for sale and investment
securities held to maturity at December 31, 1997, did not contain securities of
any issuer with an aggregate book value in excess of 10% of the Association's
equity, excluding those issued by the U. S. Government or its agencies. As of
December 31, 1997, the Association's investment portfolio was comprised of FHLB
stock, U.S. Government and agency securities, mortgage-backed securities, and
stock of a service provider, with an aggregate market value of $ 4.6 million.
At December 31, 1997, the Association held mortgage-backed securities
in its held to maturity investment portfolio with an amortized cost of $847,000.
The average yield on mortgage-backed securities at December 31, 1997, was 10.29%
The Association's mortgage-backed securities at December 31, 1997, were all
issued by the Government National Mortgage Association (the "GNMA") or the
Federal Home Loan Mortgage Corporation (the "FHLMC"), representing participation
interests in direct pass-through pools of long-term mortgage loans originated
and serviced by the issuers of the securities. Expected maturities will differ
from contractual maturities due to scheduled repayments and because borrowers
may have the right to call or prepay obligations with or without prepayment
penalties.
The following table sets forth the composition of the Association's
interest-bearing deposits and investment securities portfolio, including those
designated as available for sale, at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ------------------------
Carrying Fair Carrying Fair Carrying Fair
value value value value value value
----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits $ 2,654 $ 2,654 $1,985 $1,985 $ 625 $ 625
Interest-bearing time deposits 4,600 4,600 800 800 1,000 1,000
Investment securities:
Held to maturity:
U.S. Government and
federal agencies 3,299 3,310 3,797 3,811 4,187 4,237
Mortgage-backed securities
847 914 984 1,063 1,190 1,281
Available for sale:
FHLB stock 348 348 324 324 303 303
Intrieve Inc. stock 15 15 15 15 15 15
------- ------- ------ ------ ------ ------
Total $11,763 $11,841 $7,905 $7,998 $7,320 $7,461
======= ======= ====== ====== ====== ======
</TABLE>
The maturities of the Association's interest-bearing deposits and
investment securities (excluding mortgage-backed securities) at December 31,
1997, are indicated in the following table:
<TABLE>
<CAPTION>
At December 31, 1997
--------------------------------------------------------------------------------------------------------
After one through After five After ten
One year or less five years through ten years years Total
----------------- ---------------- ----------------- ----------------- ------------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Weighted Market
value yield value yield value yield value yield value average yield Value
----- ----- ----- ----- ----- ----- ----- ----- -------- ------------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing $2,654 5.70% - -% $- -% $- -% $ 2,654 5.70% $ 2,654
deposits
Interest-bearing 2,100 5.70 2,500 5.94 - - - - 4,600 5.83 4,600
time deposits
Investment
securities:
U.S. Government 2,999 5.70 300 8.60 - - - - 3,299 5.96 3,310
and federal
agencies
Intrieve Inc. 15 0.00 - - - - - - 15 0.00 15
stock
FHLB stock 348 7.31 - - - - - 348 7.31 348
------ ---- ------ ---- - - ------- ---- -------
Total $8,116 5.75% $2,800 6.24% $- -% $- -% $10,916 5.87% $10,927
====== ==== ====== ==== == = == = ======= ==== =======
</TABLE>
-10-
<PAGE> 12
The maturities of the Association's mortgage-backed securities
portfolio are indicated in the following tables:
<TABLE>
<CAPTION>
At December 31, 1997
- --------------------------------------------------------------------------------------------------------------------
After one After five
One year or less through five years through ten years After ten years Total
- ---------------- ------------------ ----------------- ------------------- -------------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market
value yield value yield value yield value yield value Yield value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- - $11 9.50% $19 12.04% $817 10.26% $847 10.29% $914
</TABLE>
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of the
Association's funds for use in lending and other investment activities. In
addition to deposits, the Association derives funds from interest payments and
principal repayments on loans and income on earning assets. Loan payments are a
relatively stable source of funds, while deposit inflows and outflows fluctuate
in response to general interest rates and money market conditions. The
Association may also borrow funds from the FHLB as a source of funds.
DEPOSITS. Deposits are attracted principally from within the
Association's market area through the offering of a selection of deposit
instruments, including regular passbook savings accounts, NOW accounts, money
market accounts, and certificates of deposit. Interest rates paid, maturity
terms, service fees, and withdrawal penalties for the various types of accounts
are monitored weekly by the President and reviewed monthly by the Board of
Directors of the Association. The Association does not use brokers to attract
deposits. The amount of deposits from outside the Association's market area is
not significant.
The following table sets forth the dollar amount of deposits in the
various types of accounts offered by the Association at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------
1997 1996 1995
------------------ -------------------- --------------------
Percent Percent Percent
of total of total of total
Amount deposits Amount deposits Amount deposits
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Regular savings
accounts (1) $ 9,947 37.77% $ 9,923 34.50% $ 9,565 32.30%
NOW and Super NOW accounts(2) 973 3.70 979 3.40 1,057 3.60
Money market accounts (3) 2,391 9.08 3,290 11.40 4,567 15.40
------- ------ ------- ------ ------- ------
Total transaction
accounts 13,311 50.55 14,192 49.30 15,189 51.30
Certificates of deposit
3.01 - 5.00% 6,303 23.94 6,837 23.75 7,978 26.94
5.01 - 7.00% 6,719 25.51 7,762 26.95 6,177 20.85
7.01 - 9.00% - - - - 271 0.91
------- ------ ------- ------ ------- ------
Total certificates of
deposit (4) 13,022 49.45 14,599 50.70 14,426 48.70
------- ------ ------- ------ ------- ------
Total deposits $26,333 100.00% $28,791 100.00% $29,615 100.00%
======= ====== ======= ====== ======= ======
- -----------------------------
</TABLE>
(Footnotes on next page).
-11-
<PAGE> 13
(1) The weighted average rate on passbook savings accounts was 3.0% at December
31, 1997, and December 31, 1996 and 1995, respectively.
(2) The weighted average rate on NOW and Super NOW accounts was 1.75%, at
December 31, 1997, and December 31, 1996 and 1995, respectively.
(3) The weighted average rate on money market accounts was 2.75%, 2.75% and
2.95% at December 31, 1997, and December 31, 1996 and 1995, respectively.
(4) The weighted average rate on all certificates of deposit was 5.03%, 5.09%
and 5.04% at December 31, 1997, and December 31, 1996 and 1995,
respectively.
The following table shows rate and maturity information for the
Association's certificates of deposit at December 31, 1997:
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------------------
Over Over
Up to 1 year to 2 years to Over
Rate one year 2 years 3 years 3 years Total
---- -------- ------- ------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
3.01% to 5.00% 5,013 889 207 194 6,303
5.01% to 7.00% 4,481 1,620 289 329 6,719
------ ------ ---- ---- -------
Total certificates of deposit $9,494 $2,509 $496 $523 $13,022
====== ====== ==== ==== =======
</TABLE>
At December 31, 1997, approximately $9.5 million of the Association's
certificates of deposit mature within one year. Based on past experience and the
Association's prevailing pricing strategies, management believes that a
substantial percentage of such certificates will be renewed with the Association
at maturity. If, however, the Association is unable to renew the maturing
certificates for any reason, borrowings of up to $7.0 million are available from
the FHLB of Cincinnati.
The following table presents the amount of the Association's
certificates of deposit of $100,000 or more by the time remaining until maturity
at December 31, 1997:
<TABLE>
<CAPTION>
Maturity Amount
-------- ------
(In thousands)
<S> <C>
Three months or less $1,404
Over 3 months to 6 months 827
Over 6 months to 12 months 1,340
Over 12 months 649
------
Total $4,220
======
</TABLE>
All of the above certificates of deposit are held by long-time
depositors at the Association and management believes that a substantial
percentage of such certificates will be renewed with the Association at
maturity.
-12-
<PAGE> 14
The following table sets forth the Association's deposit account
balance activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Beginning balance $ 28,791 $ 29,615 $ 29,198
Net increase(decrease) before
interest credited (3,597) (1,972) (686)
Interest credited 1,139 1,148 1,103
-------- ----- --- ---------
Ending balance 26,333 $28,791 $29,615
======== ========= =========
Net increase (decrease) $ (2,458) $ (824) $ 417
======== ========= =========
</TABLE>
BORROWINGS. The FHLB system functions as a central reserve bank
providing credit for its member institutions and certain other financial
institutions. See "REGULATION - Federal Home Loan Banks." As a member in good
standing of the FHLB of Cincinnati, the Association is authorized to apply for
advances from the FHLB of Cincinnati, provided certain standards of
creditworthiness have been met. Under current regulations, an association must
meet certain qualifications to be eligible for FHLB advances. The extent to
which an association is eligible for such advances will depend upon whether it
meets the Qualified Thrift Lender (the "QTL") test. See "REGULATION - Office of
Thrift Supervision -- Qualified Thrift Lender Test." If an association meets the
QTL test, the association will be eligible for 100% of the advances it would
otherwise be eligible to receive. If an association does not meet the QTL test,
the association will be eligible for such advances only to the extent it holds
specified QTL test assets. At December 31, 1997, the Association was in
compliance with the QTL test. At December 31, 1997, and during the year ended
December 31, 1996, the Association did not utilize FHLB advances. For the year
ended December 31, 1995, the average outstanding balance of FHLB advances was
$23,000. For the year ended December 31, 1997, the Association's average
outstanding balance of FHLB advances was $15,000.
COMPETITION
The Association faces competition for deposits and loans from branches
of two large independent commercial banks located in Bridgeport and branches of
two larger independent commercial banks and one branch of a super-regional
commercial bank in Shadyside. In addition, competing financial institutions
exist in surrounding communities located in the Association's market area. The
primary factors in competition for deposits are customer service and convenience
of office location. The Association competes for loan originations primarily
through the interest rates and loan fees it charges and through the efficiency
and quality of services it provides to borrowers. Competition is intense and is
affected by, among other things, the general availability of lendable funds,
general and local economic conditions, current interest rate levels and other
factors which are not readily predictable. The Association does not offer all of
the products and services offered by some of its competitors, particularly
commercial banks.
SUBSIDIARY ACTIVITY
On September 25, 1997, the Association dissolved its wholly-owned
subsidiary, Trailway Financial, Inc. ("Trailway"). Trailway was formed to
acquire stock in Intrieve, Inc., the Association's data processing servicing
company.
EMPLOYEES
At December 31, 1997, the Association had 14 full-time employees and no
part-time employees. The Association believes that relations with its employees
are excellent. The Association offers health, life and disability benefits to
all employees and has a defined benefit pension plan and a 401(k) plan for its
eligible full-time employees. None of the employees of the Association is
represented by a collective bargaining unit.
YEAR 2000
The Association's operations, like those of most financial
institutions, depend almost entirely on computer systems. The Association is
addressing the potential problems associated with the possibility that the
computers which control or operate the Association's operating systems,
facilities and infrastructure may not be programmed to read four-digit date
codes and, upon arrival of the year 2000, may recognize the two-digit code "00"
as the year 1900, causing systems to fail to
-13-
<PAGE> 15
function or to generate erroneous data. The Association is working with the
companies that supply or service its computer-operated or computer-dependent
systems to identify and remedy any year-2000 related problems.
At this time, no specific material expenses have been identified which
are reasonably likely to be incurred by the Association in connection with
year-2000 issues and the Association does not expect to incur significant
expense to implement corrective measures. No assurance can be given at this
time, however, that significant expense will not be incurred in future periods.
In the event that the Association is ultimately required to purchase replacement
computer systems, programs and equipment, or that substantial expense must be
incurred to make the Association's current systems, programs and equipment
year-2000 compliant, OSFS's net income and financial condition could be
adversely affected. While the Association is endeavoring to ensure that its
computer-dependent operations are year-2000 compliant, no assurance can be given
that some year-2000 problems will not occur.
In addition to possible expense related to its own systems, OSFS could
incur losses if year-2000 issues adversely affect the Association's depositors
or borrowers. Such problems could include delayed loan payments due to year-2000
problems affecting any of the Association's significant borrowers or impairing
the payroll systems of large employers in the Association's primary market area.
Because the Association's loan portfolio is highly diversified with regard to
individual borrowers and types of businesses and the Association's primary
market area is not significantly dependent upon one employer or industry, the
Association does not expect any significant or prolonged year-2000 related
difficulties that will affect net earnings or cash flow.
REGULATION
GENERAL
OSFS is a savings and loan holding company within the meaning of the
Home Owners Loan Act, as amended (the "HOLA"). Consequently, OSFS is subject to
regulation, examination and oversight by the OTS and must submit periodic
reports to the OTS concerning its activities and financial condition. In
addition, as a corporation organized under Ohio law, OSFS is subject to
provisions of the Ohio Revised Code applicable to corporations generally.
As a savings and loan association chartered under the laws of Ohio, the
Association is subject to regulation, examination and oversight by the
Superintendent of the Division (the "Ohio Superintendent"). Because the
Association's deposits are insured by the FDIC, the Association also is subject
to regulatory oversight by the FDIC. the Association must file periodic reports
with the OTS concerning its activities and financial condition. Examinations are
conducted periodically by federal and state regulators to determine whether the
Association is in compliance with various regulatory requirements and is
operating in a safe and sound manner. The Association is a member of the FHLB
and is subject to certain regulations promulgated by the Board of Governors of
the Federal Reserve System (the "FRB").
Congress is considering legislation to eliminate the federal savings
and loan charter and the separate federal regulation of savings and loan
associations. Pursuant to such legislation, Congress may eliminate the OTS and
the Association may be regulated under federal law as a bank or be required to
change its charter. Such change in regulation or charter would likely change the
range of activities in which the Association may engage and would probably
subject the Association to more regulation by the FDIC. In addition, OSFS might
become subject to a different set of holding company regulations limiting the
activities in which OSFS may engage and subjecting OSFS to additional regulatory
requirements, including separate capital requirements. At this time, OSFS cannot
predict when or whether Congress may actually pass legislation regarding OSFS's
and the Association's regulatory requirements or charter. Although such
legislation, if enacted, may change the activities in which OSFS or the
Association are authorized to engage, it is not anticipated that the current
activities of either OSFS or the Association will be materially affected by
those activity limits.
OHIO CORPORATION LAW
MERGER MORATORIUM STATUTE. Chapter 1704 of the Ohio Revised Code
regulates certain takeover bids affecting certain public corporations which have
significant ties to Ohio. This statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first
-14-
<PAGE> 16
becomes an Interested Shareholder, the Board of Directors of the issuing
corporation has approved the purchase of shares which resulted in such person
first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination
may not occur unless (1) one of the specified exceptions applies, (2) the
holders of at least two-thirds of the voting shares, and of at least a majority
of the voting shares not beneficially owned by the Interested Shareholder,
approve the business combination at a meeting called for such purpose, or (3)
the business combination meets certain statutory criteria designed to ensure
that the issuing public corporation's remaining shareholders receive fair
consideration for their shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. However,
the statute still prohibits for twelve months any business combination that
would have been prohibited but for the adoption of such an opt-out amendment.
The statute also provides that it will continue to apply to any business
combination between a person who became an Interested Shareholder prior to the
adoption of such an amendment as if the amendment had not been adopted. Neither
OSFS nor the Association has opted out of the protection afforded by Chapter
1704.
CONTROL SHARE ACQUISITION. Section 1701.831 of the Ohio Revised Code
(the "Control Share Acquisition Statute") requires that, with certain
exceptions, acquisitions of voting securities which would result in the
acquiring shareholder owning 20%, 33-1/3% or 50% of the outstanding voting
securities of an Ohio corporation (a "Control Share Acquisition") must be
approved in advance by the holders of at least a majority of the outstanding
voting shares of such corporation represented at a meeting at which a quorum is
present and a majority of the portion of the outstanding voting shares
represented at such a meeting excluding the voting shares owned by the acquiring
shareholder, by certain other persons who acquire or transfer voting shares
after public announcement of the acquisition or by certain officers of the
corporation or directors of the corporation who are employees of the
corporation. The Control Share Acquisition Statute was intended, in part, to
protect shareholders of Ohio corporations from coercive tender offers.
TAKEOVER BID STATUTE. Ohio law provides that an offeror may not make
not make a tender offer or request or invitation for tenders that would result
in the offeror beneficially owning more than ten percent of any class of the
target company's equity securities unless such offeror files certain information
with the Ohio Division of Securities (the "Securities Division") and provides
such information to the target company and the offerees within Ohio. The
Securities Division may suspend the continuation of the control bid if the
Securities Division determines that the offeror's filed information does not
provide full disclosure to the offerees of all material information concerning
the control bid. The statue also provides that an offeror may not acquire any
equity security of a target company within two years of the offeror's previous
acquisition of any equity security of the same target company pursuant to a
control bid unless the Ohio offerees may sell such security to the offeror on
substantially the same terms as provided by the previous control bid. The
statute does not apply to a transaction if either the offeror or the target
company is a savings and loan holding company and the proposed transaction
requires federal regulatory approval.
OHIO SAVINGS AND LOAN REGULATION
The Ohio Superintendent is responsible for the regulation and
supervision of Ohio savings and loan associations in accordance with the laws of
the State of Ohio and imposes assessments on Ohio associations based on their
asset size to cover the costs of supervision and examination. Ohio law
prescribes the permissible investments and activities of Ohio savings and loan
associations, including the types of lending that such associations may engage
in and the investments in real estate, subsidiaries and corporate or government
securities that such associations may make. The ability of Ohio associations to
engage in these state-authorized investments and activities is subject to
oversight and approval by the FDIC, if such investments or activities are not
permissible for a federally-chartered savings association. The Ohio
Superintendent also has approval authority over any mergers involving, or
acquisitions of control of, Ohio savings and loan associations. The Ohio
Superintendent may initiate certain supervisory measures or formal enforcement
actions against Ohio associations. Ultimately, if the grounds provided by law
exist, the Superintendent may place an Ohio association in conservatorship or
receivership.
In addition to being governed by the laws of Ohio specifically
governing savings and loan associations, the Association is also governed by
Ohio corporate law, to the extent such law does not conflict with the laws
specifically governing savings and loan associations.
-15-
<PAGE> 17
OFFICE OF THRIFT SUPERVISION
GENERAL. The OTS is an office of the Department of the Treasury and is
responsible for the regulation and supervision of all federally-chartered
savings associations and all other savings associations the deposits of which
are insured by the FDIC in the SAIF. The OTS issues regulations governing the
operation of savings associations, regularly examines such associations and
imposes assessments on savings associations based on their asset size to cover
the costs of general supervision and examination. The OTS also may initiate
enforcement actions against savings associations and certain persons affiliated
with them for violations of laws or regulations or for engaging in unsafe or
unsound practices. If the grounds provided by law exist, the OTS may appoint a
conservator or receiver for a savings association.
Savings associations are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosures, equal credit opportunity, fair credit
reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger. Community reinvestment
regulations evaluate how well and to what extent an institution lends and
invests in its designated service area, with particular emphasis on low- to
moderate-income communities and borrowers in that area.
REGULATORY CAPITAL REQUIREMENTS. The Association is required by OTS
regulations to meet certain minimum capital requirements. The tangible capital
requirement requires savings associations to maintain "tangible capital" of not
less than 1.5% of their adjusted total assets. Tangible capital is defined in
OTS regulations as core capital minus any intangible assets.
"Core capital" is comprised of common stockholders' equity (including
retained earnings), noncumulative preferred stock and related surplus, minority
interests in consolidated subsidiaries, certain nonwithdrawable accounts and
pledged deposits of mutual associations. OTS regulations require savings
associations to maintain core capital of at least 3% of their total assets. The
OTS has proposed to amend the core capital requirement so that those
associations that do not have the highest examination rating and exceed an
acceptable level of risk will be required to maintain core capital of from 4% to
5%, depending on the association's examination rating and overall risk. The
Association does not anticipate that it will be adversely affected if the core
capital requirement regulation is amended as proposed.
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of their risk-weighted assets. Risk-based
capital is defined as core capital plus certain additional items of capital,
which in the case of the Association includes allowances for loan and lease
losses at December 31, 1997.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to the interest rate risk component, a savings association
will have to measure the effect of an immediate 200 basis point change in
interest rates on the value of its portfolio as determined under the methodology
of the OTS. If the measured interest rate risk is above the level deemed normal
under the regulation, the association will be required to deduct one-half of
such excess exposure from its total capital when determining its risk-based
capital. In general, an association with less than $300 million in assets and a
risk-based capital ratio in excess of 12% will not be subject to the interest
rate risk component. Pending implementation of the interest rate risk component,
the OTS has the authority to impose a higher individualized capital requirement
on any savings association it deems to have excess interest rate risk. The OTS
also may adjust the risk-based capital requirement on an individualized basis to
take into account risks due to concentrations of credit and non-traditional
activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower defined capital category, an
association is subject to more restrictive and more numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. In addition, the OTS
generally can downgrade an association's capital category, notwithstanding its
capital level, if, after notice and opportunity for hearing, the association is
deemed to be engaging in an unsafe or unsound practice because it has not
corrected deficiencies that resulted in it receiving a less than satisfactory
examination rating on matters other than capital or it is deemed to be in an
unsafe or unsound condition. All undercapitalized associations must submit a
capital restoration plan to the OTS within 45 days after becoming
undercapitalized. Such associations will be subject to increased monitoring and
asset growth restrictions and will be required to obtain prior approval for
acquisitions, branching and engaging in new lines of business. Furthermore,
critically undercapitalized institutions must be placed in conservatorship or
receivership within 90 days of reaching that capitalization
-16-
<PAGE> 18
level, except under limited circumstances. The Association's capital at December
31, 1997, met the standards for the highest category, a "well-capitalized"
institution.
Federal law prohibits a savings association from making a capital
distribution to anyone or paying management fees to any person having control of
the association if, after such distribution or payment, the association would be
undercapitalized. In addition, each company controlling an undercapitalized
association must guarantee that the association will comply with its capital
plan until the association has been adequately capitalized on an average during
each of four preceding calendar quarters and must provide adequate assurances of
performance. The aggregate liability pursuant to such guarantee is limited to
the lesser of (a) an amount equal to 5% of the association's total assets at the
time the institution became undercapitalized and (b) the amount that is
necessary to bring the association into compliance with all capital standards
applicable to such association at the time the association fails to comply with
its capital restoration plan.
LIQUIDITY. OTS regulations require that a savings association maintain
an average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state or federal agency
obligations) equal to a monthly average of not less than 4% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Monetary penalties may be imposed upon associations failing to meet these
liquidity requirements. The eligible liquidity of the Association at December
31, 1997, was approximately $10.2 million, or 37%, and exceeded the applicable
4.0% liquidity requirement by approximately $9.1 million.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to meet
the QTL test. Prior to September 30, 1996, the QTL test required savings
associations to maintain a specified level of investments in assets that are
designated as qualifying thrift investments ("QTI"), which are generally related
to domestic residential real estate and manufactured housing and include credit
card, student and small business loans and stock issued by any FHLB, the FHLMC
or the FNMA. Under such test, 65% of an institution's "portfolio assets" (total
assets less goodwill and other intangibles, property used to conduct business
and 20% of liquid assets) must consist of QTI on a monthly average basis in nine
out of every 12 months. Effective September 30, 1996, a savings association may
also qualify as a QTL by meeting the definition of "domestic building and loan
association" under the Internal Revenue Code of 1986, as amended (the "Code").
In order for an institution to meet the definition of a "domestic building and
loan association" under the Code, at least 60% of such institution's assets must
consist of specified types of property, including cash loans secured by
residential real estate or deposits, educational loans and certain governmental
obligations. The OTS may grant exceptions to the QTL test under certain
circumstances. If a savings association fails to meet the QTL test, the
association and its holding company become subject to certain operating and
regulatory restrictions. A savings association that fails to meet the QTL test
will not be eligible for new FHLB advances. At December 31, 1997, the
Association met the QTL test.
LENDING LIMIT. OTS regulations generally limit the aggregate amount
that a savings association can lend to one borrower to an amount equal to 15% of
the association's Lending Limit Capital. A savings association may lend to one
borrower an additional amount not to exceed 10% of the association's Lending
Limit Capital, if the additional amount is fully secured by certain forms of
"readily marketable collateral." Real estate is not considered "readily
marketable collateral." Certain types of loans are not subject to the lending
limit. A general exception to the 15% limit provides that an association may
lend to one borrower up to $500,000, for any purpose. In applying the limit on
loans to one borrower, the regulations require that loans to certain related
borrowers be aggregated. At December 31, 1997, the Association was in compliance
with this lending limit.
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the lending limit on loans to one borrower, and the total of such loans to
executive officers, directors, principal shareholders and their related
interests cannot exceed the association's Lending Limit Capital (or 200% of
Lending Limit Capital for qualifying institutions with less than $100 million in
deposits). Most loans to directors, executive officers and principal
shareholders must be approved in advance by a majority of the "disinterested"
members of the board of directors of the association, with any "interested"
director not participating. All loans to directors, executive officers and
principal shareholders must be made on terms substantially the same as offered
in comparable transactions with the general public or as offered to all
employees in a company-wide benefit program. Loans to executive officers are
subject to additional limitations. The Association was in compliance with such
restrictions at December 31, 1997.
All transactions between savings associations and their affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. OSFS is
an affiliate of the Association . Generally, Sections 23A and 23B of the FRA (i)
limit the extent to which a savings association or its subsidiaries may engage
in "covered
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<PAGE> 19
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, (ii) limit the aggregate of all such
transactions with all affiliates to an amount equal to 20% of such capital stock
and surplus, and (iii) require that all such transactions be on terms
substantially the same, or at least as favorable to the association, as those
provided in transactions with a non-affiliate. The term "covered transaction"
includes the making of loans, purchasing of assets, issuance of a guarantee and
other similar types of transactions. In addition to the limits in Sections 23A
and 23B, a savings association may not make any loan or other extension of
credit to an affiliate unless the affiliate is engaged only in activities
permissible for a bank holding company and may not purchase or invest in
securities of any affiliate except shares of a subsidiary. The Association was
in compliance with these requirements and restrictions at December 31, 1997.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions, including dividend payments. An association which has converted
from mutual to stock form is prohibited from declaring or paying any dividends
or from repurchasing any of its stock if, as a result, the net worth of the
association would be reduced below the amount required to be maintained for the
liquidation account established in connection with its mutual to stock
conversion. OTS regulations also establish a three-tier system limiting capital
distributions according to ratings of associations based on their capital level
and supervisory condition.
Tier 1 consists of associations that, before and after the proposed
distribution, meet their fully phased-in capital requirements. Associations in
this category may make capital distributions during any calendar year up to the
greater of (i) 100% of net income, current year-to-date, plus 50% of the amount
by which the lesser of the association's tangible, core or risk-based capital
exceeds its fully phased-in capital requirement for such capital component, as
measured at the beginning of the calendar year, and (ii) the amount authorized
for a Tier 2 association. A Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association. The Association meets the requirements for a Tier 1 association and
has not been notified of any need for more than normal supervision.
Tier 2 consists of associations that, before and after the proposed
distribution, meet their current minimum, but not fully phased-in, capital
requirements. Associations in this category may make capital distributions of up
to 75% of net income over the most recent four quarters. Tier 3 associations do
not meet current minimum capital requirements and must obtain OTS approval of
any capital distribution. Tier 2 associations that propose to make a capital
distribution in excess of the noted safe harbor level must also obtain OTS
approval. Tier 2 associations proposing to make a capital distribution within
the safe harbor provisions and Tier 1 associations proposing to make any capital
distribution need only submit written notice to the OTS 30 days prior to such
distribution.
As a subsidiary of OSFS, the Association is required to give the OTS 30
days' notice prior to declaring any dividend on its stock. The OTS may object to
the distribution during such 30-day period based on safety and soundness
concerns.
HOLDING COMPANY REGULATION. OSFS is a savings and loan holding company
within the meaning of the HOLA. As such, OSFS has registered with the OTS and is
subject to OTS regulations, examination, supervision and reporting requirements.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association for
cash without such savings association being deemed to be controlled by OSFS.
Except with the prior approval of the OTS, no director or officer of a savings
and loan holding company or person owning or controlling by proxy or otherwise
more than 25% of such holding company's stock may also acquire control of any
savings institution, other than a subsidiary institution, or any other savings
and loan holding company.
As a unitary savings and loan holding company, OSFS generally has no
restrictions on its activities. Such companies are the only financial
institution holding companies which may engage in any commercial, securities and
insurance activities without restriction. Congress is considering legislation
which may limit OSFS's ability to engage in these activities. It cannot be
predicted whether and in what form these proposals might become law. However,
such limits would not impact OSFS's current activities, which consist solely of
holding stock of the Association . The broad latitude to engage in activities
under current law can be restricted. If the OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness or stability of its subsidiary savings association, the OTS may impose
such restrictions as deemed necessary to address such risk, including limiting
(i) payment of dividends by the savings association, (ii) transactions between
the savings association
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<PAGE> 20
and its affiliates, and (iii) any activities of the savings association that
might create a serious risk that the liabilities of OSFS and its affiliates may
be imposed on the savings association. Notwithstanding the foregoing rules as to
permissible business activities of a unitary savings and loan holding company,
if the savings association subsidiary of a holding company fails to meet the QTL
test, then such unitary holding company would become subject to the activities
restrictions applicable to multiple holding companies. At December 31, 1997, the
Association met both those tests.
If OSFS acquired control of another savings institution, other than
through a merger or other business combination with the Association, OSFS would
become a multiple savings and loan holding company. Unless the acquisition was
an emergency thrift acquisition and each subsidiary savings association met the
QTL test, the activities of OSFS and any of its subsidiaries (other than the
Association other subsidiary savings associations) would thereafter be subject
to activity restrictions. The HOLA provides that, among other things, no
multiple savings and loan holding company or subsidiary thereof that is not a
savings institution shall commence or continue for a limited period of time
after becoming a multiple savings and loan holding company or subsidiary
thereof, any business activity other than (i) furnishing or performing
management services for a subsidiary savings institution, (ii) conducting an
insurance agency or escrow business, (iii) holding, managing or liquidating
assets owned by or acquired from a subsidiary savings institution, (iv) holding
or managing properties used or occupied by a subsidiary savings institution, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by federal regulation as of March 5, 1987, to be engaged in
by multiple holding companies, or (vii) those activities authorized by the FRB
as permissible for bank holding companies, unless the OTS by regulation
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above must also be approved by the OTS prior
to being engaged in by a multiple holding company.
The OTS may approve acquisitions resulting in the formation of a
multiple savings and loan holding company that controls savings associations in
more than one state only if the multiple savings and loan holding company
involved controls a savings association that operated a home or branch office in
the state of the association to be acquired as of March 5, 1987, or if the laws
of the state in which the institution to be acquired is located specifically
permit institutions to be acquired by state-chartered institutions or savings
and loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
institutions). As under prior law, the OTS may approve an acquisition resulting
in a multiple savings and loan holding company controlling savings associations
in more than one state in the case of certain emergency thrift acquisitions.
Bank holding companies have had more expansive authority to make interstate
acquisitions than savings and loan holding companies since August 1995.
FEDERAL REGULATION OF ACQUISITIONS OF CONTROL OF OSFS AND THE
ASSOCIATION. In addition to the Ohio law limitations on the merger and
acquisition of the Association and OSFS, federal limitations generally require
regulatory approval of acquisitions at specified levels. Under pertinent federal
law and regulations, no person, directly or indirectly, or acting in concert
with others, may acquire control of the Association or OSFS without 60 days'
prior notice to the OTS. "Control" is generally defined as having more than 25%
ownership or voting power; however, ownership or voting power of more than 10%
may be deemed "control" if certain factors are in place. If the acquisition of
control is by a company, the acquiror must obtain approval, rather than give
notice, of the acquisition as a savings and loan holding company.
In addition, any merger of the Association must be approved by the OTS
as well as the Superintendent. Further, any merger of OSFS in which OSFS is not
the resulting company must also be approved by both the OTS and the
Superintendent.
FEDERAL DEPOSIT INSURANCE CORPORATION
DEPOSIT INSURANCE AND ASSESSMENTS. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
federally insured banks and savings and loan associations and safeguards the
safety and soundness of the banking and savings and loan industries. The FDIC
administers two separate insurance funds, the Bank Insurance Fund ("BIF") for
commercial banks and state savings banks and the SAIF for savings associations.
The Association is a member of the SAIF and its deposit accounts are insured by
the FDIC up to the prescribed limits. The FDIC has examination authority over
all insured depository institutions, including the Association , and has
authority to initiate enforcement actions against federally-insured savings
associations if the FDIC does not believe the OTS has taken appropriate action
to safeguard safety and soundness and the deposit insurance fund.
The FDIC is required to maintain designated levels of reserves in the
SAIF and in the BIF. The FDIC may increase assessment rates for either fund if
necessary to restore the fund's ratio of reserves to insured deposits to its
target level within a reasonable time and may decrease such rates if such target
level has been met. The FDIC has established a risk-based
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<PAGE> 21
assessment system for both SAIF and BIF members. Under this system, assessments
vary based on the risk the institution poses to its deposit insurance fund. The
risk level is determined based on the institution's capital level and the FDIC's
level of supervisory concern about the institution.
Prior to September 1996, the SAIF's ratio of reserves to insured
deposits was significantly below the level required by law, while the BIF's
ratio was above the required level. As a result, institutions with SAIF-insured
deposits were paying higher deposit insurance assessments than institutions with
BIF-insured deposits. Federal legislation providing for the recapitalization of
the SAIF became effective in September 1996 and included a special assessment of
$.657 per $100 of SAIF-insured deposits held at March 31, 1995. The Association
had approximately $29.1 million in deposits at March 31, 1995, and paid a
special assessment of $190,000.
STATE-CHARTERED ASSOCIATION ACTIVITIES. The ability of state-chartered
associations to engage in any state-authorized activities or make any
state-authorized investments is limited if such activity is conducted or
investment is made in a manner different than that permitted for, or subject to
different terms and conditions than those imposed on, federally chartered
savings associations. Engaging as a principal in any such activity or investment
not permissible for a federal association is subject to approval by the FDIC.
Such approval will not be granted unless certain capital requirements are met
and there is not a significant risk to the FDIC insurance fund. All of the
Association's activities and investments at December 31, 1997, were permissible
for a federal association.
FRB RESERVE REQUIREMENTS
FRB regulations currently require savings associations to maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $47.8
million (subject to an exemption of up to $4.7 million), and of 10% of net
transaction accounts in excess of $47.8 million. At December 31, 1997, the
Association was in compliance with the new reserve requirements.
FEDERAL HOME LOAN BANKS
The FHLBs provide credit to their members in the form of advances. The
Association is a member of the FHLB of Cincinnati and must maintain an
investment in the capital stock of the FHLB of Cincinnati in an amount equal to
the greater of 1.0% of the aggregate outstanding principal amount of the
Association's residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 5% of its advances from the FHLB
of Cincinnati. The Association was in compliance with this requirement with an
investment in stock of the FHLB of Cincinnati of $348,000 at December 31, 1997.
FHLB advances to member institutions who meet the QTL test are
generally limited to the lower of (i) 25% of the member's assets or (ii) 20
times the member's investment in FHLB stock. At December 31, 1997, the
Association's maximum limit on advances was approximately $7.0 million. The
granting of advances is also subject to the FHLB's collateral and credit
underwriting guidelines.
Upon the origination or renewal of a loan or advance, the FHLB is
required by law to obtain and maintain a security interest in collateral in one
or more of the following categories: fully-disbursed, whole first mortgage loans
on improved residential property or securities representing a whole interest in
such loans; securities issued, insured or guaranteed by the United States
Government or an agency thereof; deposits in any FHLB; or other real estate
related collateral (up to 30% of the member association's capital) acceptable to
the FHLB, if such collateral has a readily ascertainable value and the FHLB can
perfect its security interest in the collateral.
The FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
All long-term advances by the FHLB must be made only to provide funds for
residential housing finance.
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TAXATION
FEDERAL TAXATION
OSFS and the Association are each subject to the federal tax laws and
regulations which apply to corporations generally. In addition to the regular
income tax, OSFS and the Association may be subject to the alternative minimum
tax which is imposed at a minimum tax rate of 20% on "alternative minimum
taxable income" (which is the sum of a corporation's regular taxable income,
with certain adjustments, and tax preference items), less any available
exemption. Such tax preference items include interest on certain tax-exempt
bonds issued after August 7, 1986. In addition, 75% of the amount by which a
corporation's "adjusted current earnings" exceeds its alternative minimum
taxable income computed without regard to this preference item and prior to
reduction by net operating losses, is included in alternative minimum taxable
income. Net operating losses can offset no more than 90% of alternative minimum
taxable income. The alternative minimum tax is imposed to the extent it exceeds
the corporation's regular income tax. Payments of alternative minimum tax may be
used as credits against regular tax liabilities in future years. However, the
Taxpayer Relief Act of 1997 repealed the alternative minimum tax for certain
"small corporations" for tax years beginning after December 31, 1997. A
corporation initially qualifies as a small corporation if it had average gross
receipts of $5,000,000 or less for the three tax years ending with its first tax
year beginning after December 31, 1996. Once a corporation is recognized as a
small corporation, it will continue to be exempt from the alternative minimum
tax for as long as its average gross receipts for the prior three-year period
does not exceed $7,500,000. In determining if a corporation meets this
requirement, the first year that it achieved small corporation status is not
taken into consideration.
The Association's average gross receipts for the three tax years ending
on December 31, 1997, is $2.5 million and as a result, the Association does
qualify as a small corporation exempt from the alternative minimum tax.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Act"), which was signed into law on August 21, 1996, certain thrift
institutions, such as the Association , were allowed deductions for bad debts
under methods more favorable than those granted to other taxpayers. Qualified
thrift institutions could compute deductions for bad debts using either the
specific charge-off method of Section 166 of the Code or one of two reserve
methods of Section 593 of the Code. The reserve methods under Section 593 of the
Code permitted a thrift institution annually to elect to deduct bad debts under
either (i) the "percentage of taxable income" method applicable only to thrift
institutions, or (ii) the "experience" method that also was available to small
banks. Under the "percentage of taxable income" method, a thrift institution
generally was allowed a deduction for an addition to its bad debt reserve equal
to 8% of its taxable income (determined without regard to this deduction and
with additional adjustments). Under the "experience" method, a thrift
institution was generally allowed a deduction for an addition to its bad debt
reserve equal to the greater of (i) an amount based on its actual average
experience for losses in the current and five preceding taxable years, or (ii)
an amount necessary to restore the reserve to its balance as of the close of the
base year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the experience
method or the percentage of taxable income method. For tax years 1995, 1994, and
1993, the Association used the percentage of taxable income method.
The Act eliminated the percentage of taxable income method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize the experience method applicable to such institutions, while
thrift institutions that are treated as large banks are required to use only the
specific charge off method.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six-taxable year period, beginning with the
first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that is treated
as a large bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans (generally loans secured by improved real estate)
and its reserve for losses on nonqualifying loans (all other types of loans) as
of the close of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (I.E., the "pre-1988 reserves"). In the case
of a thrift institution that is treated as a small bank, like the
Association, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans and its reserve for losses on nonqualifying
loans as of the close of its last
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taxable year beginning before January 1, 1996, over (ii) the greater of the
balance of (a) its pre-1988 reserves or (b) what the thrift's reserves would
have been at the close of its last year beginning before January 1, 1996, had
the thrift always used the experience method.
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential or church property and certain mobile homes), but only to the extent
that the loan is made to the owner of the property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which require recapture in the case of
certain excessive distributions to shareholders. The pre-1988 reserves may not
be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the pre-1988 reserves; and third, out of such other accounts as may be proper.
To the extent a distribution by the Association to OSFS is deemed paid out of
its pre-1988 reserves under these rules, the pre-1988 reserves would be reduced
and the gross income of the Association for tax purposes would be increased by
the amount which, when reduced by the income tax, if any, attributable to the
inclusion of such amount in its gross income, equals the amount deemed paid out
of the pre-1988 reserves. As of December 31, 1997, the pre-1988 reserves of the
Association for tax purposes totaled approximately $832,000. The Association
believes it had approximately $4.3 million of accumulated earnings and profits
for tax purposes as of December 31, 1997, which would be available for dividend
distributions, provided regulatory restrictions applicable to the payment of
dividends are met. See Notes 6 and 15 to the financial statements. No
representation can be made as to whether the Association will have current or
accumulated earnings and profits in subsequent years.
The tax returns of the Association have been audited or closed without
audit through fiscal year 1992. In the opinion of management, any examination of
open returns would not result in a deficiency which could have a material
adverse effect on the financial condition of the Association .
OHIO TAXATION
OSFS is subject to the Ohio corporation franchise tax, which, as
applied to OSFS, is a tax measured by both net earnings and net worth. The rate
of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable
income and 8.9% of computed Ohio taxable income in excess of $50,000 or (ii)
0.582% times taxable net worth. For tax years beginning after December 31, 1998,
the rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.5% of computed Ohio taxable income in excess of $50,000 or
(ii) .400% times taxable net worth.
In computing its tax under the net worth method, OSFS may exclude 100%
of its investment in the capital stock of the Association , as reflected on the
balance sheet of OSFS in computing its taxable net worth as long as it owns at
least 25% of the issued and outstanding capital stock of the Association . The
calculation of the exclusion from net worth is based on the ratio of the
excludable investment (net of any appreciation or goodwill included in such
investment) to total assets multiplied by the net value of the stock. As a
holding company, OSFS may be entitled to various other deductions in computing
taxable net worth that are not generally available to operating companies.
A special litter tax is also applicable to all corporations, including
OSFS, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
The Association is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of the
book net worth of the Association determined in accordance with generally
accepted accounting principles. For tax year 1999, however, the franchise tax on
financial institutions will be 1.4% of the book net worth and for tax year 2000
and years thereafter the tax
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<PAGE> 24
will be 1.3% of the book net worth. As a "financial institution," the
Association is not subject to any tax based upon net income or net profits
imposed by the State of Ohio.
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth certain information at December 31,
1997, regarding the properties on which the main office and the branch office of
the Association are located:
<TABLE>
<CAPTION>
Owned or Date Square Net book
Location leased acquired footage value Deposits
- -------- ------ -------- ------- ----- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
435 Main Street Owned 1964 4,744 $143,630 $18,909
Bridgeport, Ohio 43912
4000 Central Avenue Owned 1979 2,197 285,238 7,424
Shadyside, Ohio 43943
</TABLE>
The Association owns all of its electronic data processing equipment.
Such equipment includes several personal computers which are fully depreciated.
ITEM 3. LEGAL PROCEEDINGS
Neither OSFS nor the Association is presently involved in any legal
proceedings of a material nature. From time to time, the Association is a party
to legal proceedings incidental to its business to enforce its security interest
in collateral pledged to secure loans made by the Association.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders of OSFS
during the last quarter of the fiscal year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained in those portions of the Annual Report to
Shareholders for the fiscal year ended December 31, 1997 (the "Annual Report"),
which are included in Exhibit 13 hereto under the caption "MARKET PRICE OF
COMMON SHARES AND RELATED SECURITY HOLDER MATTERS" is incorporated herein by
reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information contained in those portions of the Annual Report
included in Exhibit 13 hereto under the caption "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" is incorporated
herein by reference.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements contained in those portions of the
Annual Report included in Exhibit 13 hereto are incorporated herein by
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information contained in the definitive Proxy Statement for the 1998
Annual Meeting of Shareholders of OSFS (the "Proxy Statement"), which is
included in Exhibit 20 hereto, under the captions "BOARD OF DIRECTORS,"
"EXECUTIVE OFFICERS" and "VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT" is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement, which is included in
Exhibit 20 hereto, under the caption "COMPENSATION OF EXECUTIVE OFFICERS AND
DIRECTORS" is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Proxy Statement, which is included in
Exhibit 20 hereto, under the caption "VOTING SECURITIES AND OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT" is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Item 3 Amended Articles of Incorporation and Code
of Regulations
Item 10 Material Contracts
Item 13 Portions of the 1997 Annual Report to
Shareholders
Item 20 Proxy Statement for 1998 Meeting of
Shareholders
Item 21 Subsidiaries of the Registrant
Item 27 Financial Data Schedule
(b) No current report on Form 8-K was filed by OSFS during
the last quarter of the fiscal year covered by this
Report.
-24-
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 23, 1998.
OHIO STATE FINANCIAL SERVICES, INC.
By: /s/ Jon W. Letzkus
------------------------------
Jon W. Letzkus
President, Chief Executive
Officer and a Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been duly signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Michael P. Eddy By: /s/ John O. Costine
-------------------------------------- ---------------------------
Michael P. Eddy John O. Costine
Treasurer and Chief Financial Officer Director
Date: March 23, 1998 Date: March 23, 1998
By: /s/ Anton M. Godez By: /s/ William E. Reline
-------------------------------------- ---------------------------
Anton M. Godez William E. Reline
Director Director
Date: March 23, 1998 Date: March 23, 1998
By: /s/ Manuel C. Thomas
--------------------------------------
Manuel C. Thomas
Director
Date: March 23, 1998
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
<S> <C> <C>
3.1 Articles of Incorporation, as amended through July 1, Incorporated by reference to Pre-Effective
1997, of OSFS Amendment No. 1 to the Form S-1 dated
August 1,1997 (the "S-1 Amendment") and
filed by OSFS with the Securities and
Exchange Commission (the "SEC"), Exhibits
3.1 and 3.3
3.2 Regulations of the Ohio State Financial Services, Inc. Incorporated by reference to the
Registration Statement on Form S-1 dated
June 20, 1997 (the "Form S-1"), and filed
by OSFS with the SEC, Exhibit 3.2
10 Employment Agreement between the Association and Jon W.
Letzkus
13 Ohio State Financial Services, Inc. 1997 Annual Report to
Shareholders
20 Proxy Statement for the 1998 Annual Meeting of Shareholders
of Ohio State Financial Services, Inc.
21 Subsidiaries of the Registrant
27 Financial Data Schedule
</TABLE>
-2-
<PAGE> 1
EXHIBIT 10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (hereinafter referred to as this
"AGREEMENT"), is entered into effective the 1st day of January, 1998, by and
between the Bridgeport Savings and Loan Association, a savings and loan
association incorporated under Ohio law (hereinafter referred to as the
"EMPLOYER"), and Jon W. Letzkus, an individual (hereinafter referred to as the
"EMPLOYEE");
WITNESSETH:
WHEREAS, the EMPLOYEE is currently employed as the President and
Managing Officer of the EMPLOYER;
WHEREAS, as a result of the skill, knowledge and experience of the
EMPLOYEE, the Board of Directors of the EMPLOYER desires to retain the services
of the EMPLOYEE as the President and Managing Officer of the EMPLOYER;
WHEREAS, the EMPLOYEE desires to continue to serve as the President and
Managing Officer of the EMPLOYER; and
WHEREAS, the EMPLOYEE and the EMPLOYER desire to enter into this
AGREEMENT to set forth the terms and conditions of the employment relationship
between the EMPLOYER and the EMPLOYEE;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the EMPLOYER and the EMPLOYEE hereby agree as follows:
1. EMPLOYMENT AND TERM.
(a) TERM. Upon the terms and subject to the conditions of this
AGREEMENT, the EMPLOYER hereby employs the EMPLOYEE, and the EMPLOYEE hereby
accepts employment, as the President and Managing Officer of the EMPLOYER. The
term of this AGREEMENT shall commence on the date hereof and shall end on
December 31, 2000 unless extended by the EMPLOYER with the consent of the
EMPLOYEE as provided in subsection (b) of this Section 1 (hereinafter referred
to, together with such extensions, as the "TERM").
(b) EXTENSION. On or before each anniversary of the date of this
AGREEMENT, the Board of Directors of the EMPLOYER shall review this AGREEMENT,
document its justification and approval of this AGREEMENT in the board minutes,
and the TERM shall be extended for a one-year period beyond the then effective
expiration date, provided the Board of Directors determines that this AGREEMENT
should be extended. Any such extension shall be subject to the written consent
of the EMPLOYEE.
<PAGE> 2
2. DUTIES OF THE EMPLOYEE.
(a) GENERAL DUTIES AND RESPONSIBILITIES. The EMPLOYEE shall serve as
the President and Managing Officer of the EMPLOYER. Subject to the direction of
the Board of Directors of the EMPLOYER, the EMPLOYEE shall have responsibility
for the general management and control of the business and affairs of the
EMPLOYER and shall perform all duties and shall have all powers which are
commonly incident to the office of President and Managing Officer or which,
consistent therewith, are delegated to him by the Board of Directors. Such
duties shall include, but not be limited to, (i) managing the day-to-day
operations of the EMPLOYER, (ii) managing the efforts of the EMPLOYER to comply
with applicable laws and regulations, (iii) marketing of the EMPLOYER and its
services, (iv) supervising other employees of the EMPLOYER, (v) providing prompt
and accurate reports to the Board of Directors of the EMPLOYER regarding the
affairs and conditions of the EMPLOYER, and (vi) making recommendations to the
Board of Directors of the EMPLOYER concerning the strategies, capital structure,
tactics, and general operations of the EMPLOYER.
(b) DEVOTION OF ENTIRE TIME TO THE BUSINESS OF THE EMPLOYER. The
EMPLOYEE shall devote his entire productive time, ability and attention during
normal business hours throughout the TERM to the faithful performance of his
duties under this AGREEMENT. The EMPLOYEE shall not directly or indirectly
render any services of a business, commercial or professional nature to any
person or organization other than the EMPLOYER and its sole shareholder, Ohio
State Financial Services Corporation (hereinafter referred to as the "HOLDING
COMPANY") without the prior written consent of the Board of Directors of the
EMPLOYER; provided, however, that the EMPLOYEE shall not be precluded from (i)
vacations and other leave time in accordance with Section 3(d) hereof; (ii)
reasonable participation in community, civic, charitable or similar
organizations; or (iii) the pursuit of personal investments which do not
interfere or conflict with the performance of the EMPLOYEE's duties to the
EMPLOYER. Nothing in this section shall limit the EMPLOYEE's right to invest in
securities of any business that does not provide services or products of the
type or competing with those provided by the EMPLOYER or its subsidiaries or
affiliates.
3. COMPENSATION, BENEFITS AND REIMBURSEMENTS.
(a) SALARY. The EMPLOYEE shall receive during the TERM an annual salary
payable in equal installments not less often than monthly. The amount of such
annual salary shall be $78,500 until changed by the Board of Directors of the
EMPLOYER in accordance with Section 3(b) of this AGREEMENT.
(b) ANNUAL SALARY REVIEW. On or before each anniversary of the date of
this AGREEMENT, the annual salary of the EMPLOYEE shall be reviewed by the Board
of Directors of the EMPLOYER and shall be set at an amount not less than
$78,500, based upon the EMPLOYEE's individual performance and the overall
profitability and financial condition of the EMPLOYER (hereinafter referred to
as the "ANNUAL REVIEW"). The results of the ANNUAL REVIEW shall be reflected in
the minutes of the Board of Directors of the EMPLOYER.
2
<PAGE> 3
(c) EMPLOYEE BENEFIT PROGRAM. During the TERM, the EMPLOYEE shall be
entitled to participate in all formally established employee benefit, bonus,
pension and profit-sharing plans and similar programs that are maintained by the
EMPLOYER from time to time, and all employee benefit plans or programs hereafter
adopted in writing by the Board of Directors of the EMPLOYER, for which senior
management personnel are eligible, including any employee stock ownership plan,
stock option plan or other stock benefit plan (hereinafter collectively referred
to as the "BENEFIT PLANS") in accordance with the terms and conditions of such
BENEFIT PLANS, including but not limited to satisfaction of any participation or
vesting requirements. Notwithstanding any statement to the contrary contained
elsewhere in this AGREEMENT, the EMPLOYER may discontinue or terminate at any
time any such BENEFIT PLANS, now existing or hereafter adopted, to the extent
permitted by the terms of such plans and shall not be required to compensate the
EMPLOYEE for such discontinuance or termination.
(d) VACATION AND SICK LEAVE. The EMPLOYEE shall be entitled, without
loss of pay, to be absent voluntarily from the performance of his duties under
this AGREEMENT, in accordance with the policies periodically established by the
Board of Directors of the EMPLOYER for senior management officials of the
EMPLOYER. The EMPLOYEE shall not be entitled to receive any additional
compensation from the EMPLOYER in the event of his failure to take the full
allotment of vacation time in any calendar year. The EMPLOYEE shall be entitled
to annual sick leave as established by the Board of Directors of the EMPLOYER
for senior management officials of the EMPLOYER. In the event that any sick
leave time shall not have been used during any calendar year, such leave shall
accrue to subsequent calendar years, only to the extent authorized by the Board
of Directors of the EMPLOYER. Upon termination of employment, the EMPLOYEE shall
not be entitled to receive any additional compensation from the EMPLOYER for
unused sick leave.
4. TERMINATION OF EMPLOYMENT.
(a) GENERAL. In addition to the termination of the employment of the
EMPLOYEE upon the expiration of the TERM, the employment of the EMPLOYEE shall
terminate at any other time during the TERM (i) at the option of the EMPLOYER
upon the delivery of written notice by the EMPLOYER of employment termination to
the EMPLOYEE or (ii) at the option of the EMPLOYEE upon delivery by the EMPLOYEE
of written notice of termination to the EMPLOYER if, in connection with, or
within one year after a CHANGE IN CONTROL (hereinafter defined), the present
capacity or circumstances in which the EMPLOYEE is employed are materially
adversely changed (including, but not limited to, a material reduction in
responsibilities or authority, or the assignment of duties or responsibilities
substantially inconsistent with those normally associated with the EMPLOYEE's
position described in Section 2(a) of this AGREEMENT or the requirement that the
EMPLOYEE move his personal residence, or perform his principal executive
functions, more than thirty-five (35) miles from his primary office as of the
date of the commencement of the TERM of this AGREEMENT) before expiration of the
TERM, or the EMPLOYEE's compensation or other benefits provided under this
AGREEMENT are materially reduced. The following subparagraphs (A), (B) and (C)
of this
3
<PAGE> 4
Section 4(a) shall govern the obligations of the EMPLOYER to the EMPLOYEE upon
the occurrence of the events described in such subparagraphs:
(A) TERMINATION FOR JUST CAUSE. In the event that the EMPLOYER
terminates the employment of the EMPLOYEE during the TERM because of the
EMPLOYEE's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure or refusal to
perform the duties and responsibilities assigned in this AGREEMENT, willful
violation of any law, rule, regulation or final cease-and-desist order (other
than traffic violations or similar offenses), conviction of a felony or for
fraud or embezzlement, or material breach of any provision of this AGREEMENT
(hereinafter collectively referred to as "JUST CAUSE"), the EMPLOYEE shall not
receive, and shall have no right to receive, any compensation or other benefits
for any period after such termination.
(B) TERMINATION AFTER CHANGE OF CONTROL. In the event that,
the employment of the EMPLOYEE is terminated for any reason other than JUST
CAUSE or is terminated by the EMPLOYEE in accordance with Section 4(a)(ii) of
this Agreement, then the following shall occur:
(I) The EMPLOYER shall promptly pay to the EMPLOYEE
or to his beneficiaries, dependents or estate an amount equal to the product of
2.99 multiplied by the greater of the annual salary set forth in Section 3(a) of
this AGREEMENT or the annual salary payable to the EMPLOYEE as a result of any
ANNUAL REVIEW;
(II) The EMPLOYEE, his dependents, beneficiaries
and estate shall continue to be covered at the EMPLOYER's expense under all
health, life, disability and other welfare benefit plans of the EMPLOYER in
which the EMPLOYEE was a participant prior to the effective date of the
termination of his employment as if the EMPLOYEE were still employed under this
AGREEMENT until the earliest of the expiration of two years from the effective
date of the termination of employment or the date on which the EMPLOYEE is
included in another employer's benefit plans as a full-time employee; and
(III) The EMPLOYEE shall not be required to
mitigate the amount of any payment provided for in this AGREEMENT by seeking
other employment or otherwise, nor shall any amounts received from other
employment or otherwise by the EMPLOYEE offset in any manner the obligations of
the EMPLOYER hereunder, except as specifically stated in subparagraph (II).
In the event that payments pursuant to this subsection (ii)
would result in the imposition of a penalty tax pursuant to Section 280G(b)(3)
of the Internal Revenue Code of 1986, as amended, and the regulations
promulgated thereunder (hereinafter collectively referred to as "SECTION 280G"),
such payments shall be reduced to the maximum amount which may be paid under
SECTION 280G without exceeding such limits. Payments pursuant to this subsection
also may not exceed the limit set forth in Regulatory Bulletin 27a of the Office
of Thrift Supervision (hereinafter referred to as the "OTS").
4
<PAGE> 5
(C) TERMINATION WITHOUT CHANGE OF CONTROL. In the event that
the employment of the EMPLOYEE is terminated before the expiration of the TERM
other than (A) for JUST CAUSE or (B) in connection with or within one year after
a CHANGE OF CONTROL, then the following shall occur:
(I) The EMPLOYER shall be obligated to continue to
pay on a monthly basis to the EMPLOYEE, his designated beneficiaries or his
estate, his annual salary provided pursuant to Section 3(a) or (b) of this
AGREEMENT until the expiration of the TERM;
(II) The EMPLOYER shall continue to provide to the
EMPLOYEE, at the EMPLOYER's expense, health, life, disability, and other welfare
benefits substantially equal to those being provided to the EMPLOYEE at the date
of termination of his employment until the earliest to occur of the expiration
of the TERM or the date on which the EMPLOYEE is included in another employer's
benefit plans as a full-time employee; and
(III) The EMPLOYEE shall not be required to
mitigate the amount of any payment provided for in this AGREEMENT by seeking
other employment or otherwise, nor shall any amounts received from other
employment or otherwise by the EMPLOYEE offset in any manner the obligations of
the EMPLOYER hereunder, except as specifically stated in subparagraph (II).
In the event that payments pursuant to this subsection (iii) would
result in the imposition of a penalty tax pursuant to SECTION 280G, such
payments shall be reduced to the maximum amount which may be paid under SECTION
280G without exceeding those limits. Payments pursuant to this subsection also
may not exceed the limit set forth in Regulatory Bulletin 27a of the OTS.
(b) DEATH OF THE EMPLOYEE. The TERM automatically terminates upon the
death of the EMPLOYEE. In the event of such death, the EMPLOYEE's estate shall
be entitled to receive the compensation due the EMPLOYEE through the last day of
the calendar month in which the death occurred, except as otherwise specified
herein.
(c) "GOLDEN PARACHUTE" PROVISION. Any payments made to the EMPLOYEE
pursuant to this AGREEMENT or otherwise are subject to and conditioned upon
their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated
thereunder.
(d) DEFINITION OF "CHANGE OF CONTROL". A "CHANGE OF CONTROL" shall mean
any one of the following events; (i) the acquisition of ownership or power to
vote more than 25% of the voting stock of the EMPLOYER or the HOLDING COMPANY;
(ii) the acquisition of the ability to control the election of a majority of the
directors of the EMPLOYER or the HOLDING COMPANY; (iii) during any period of up
to two consecutive years, individuals who at the beginning of such period
constitute the Board of Directors of the EMPLOYER or the HOLDING COMPANY cease
for any reason to constitute at least two-thirds thereof; provided, however,
that any individual whose election or nomination for election as a member of the
Board of Directors of the EMPLOYER or the HOLDING COMPANY was
5
<PAGE> 6
approved by a vote of at least two-thirds of the directors then in office shall
be considered to have continued to be a member of the Board of Directors of the
EMPLOYER or the HOLDING COMPANY; or (iv) the acquisition by any person or entity
of "conclusive control" of the EMPLOYER within the meaning of 12 C.F.R. Section
574.4(a), or the acquisition by any person or entity of "rebuttable control"
within the meaning of 12 C.F.R. Section 574.4(b) that has not been rebutted in
accordance with 12 C.F.R. Section 574.4(c). For purposes of this paragraph, the
term "person" refers to an individual or corporation, partnership, trust,
association, or other organization, but does not include the EMPLOYEE and any
person or persons with whom the EMPLOYEE is "acting in concert" within the
meaning of 12 C.F.R. Part 574.
5. SPECIAL REGULATORY EVENTS. Notwithstanding Section 4 of this AGREEMENT, the
obligations of the EMPLOYER to the EMPLOYEE shall be as follows in the event of
the following circumstances:
(a) If the EMPLOYEE is suspended and/or temporarily prohibited from
participating in the conduct of the EMPLOYER's affairs by a notice served under
section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (hereinafter
referred to as the "FDIA"), the EMPLOYER's obligations under this AGREEMENT
shall be suspended as of the date of service of such notice, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
EMPLOYER shall pay the EMPLOYEE all or part of the compensation withheld while
the obligations in this AGREEMENT were suspended and reinstate, in whole or in
part, any of the obligations that were suspended;
(b) If the EMPLOYEE is removed and/or permanently prohibited from
participating in the conduct of the EMPLOYER's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA, all obligations of the EMPLOYER under
this AGREEMENT shall terminate as of the effective date of such order; provided,
however, that vested rights of the EMPLOYEE shall not be affected by such
termination;
(c) If the EMPLOYER is in default, as defined in section 3(x)(1) of the
FDIA, all obligations under this AGREEMENT shall terminate as of the date of
default; provided, however, that vested rights of the EMPLOYEE shall not be
affected;
(d) All obligations under this AGREEMENT shall be terminated, except to
the extent of a determination that the continuation of this AGREEMENT is
necessary for the continued operation of the EMPLOYER, (i) by the Director of
the OTS, or his or her designee at the time that the Federal Deposit Insurance
Corporation enters into an agreement to provide assistance to or on behalf of
the EMPLOYER under the authority contained in Section 13(c) of the FDIA or (ii)
by the Director of the OTS, or his or her designee, at any time the Director of
the OTS approves a supervisory merger to resolve problems related to the
operation of the EMPLOYER or when the EMPLOYER is determined by the Director of
the OTS to be in an unsafe or unsound condition; provided, however that no
vested rights of the EMPLOYEE shall not be affected by any such termination; and
6
<PAGE> 7
(e) The provisions of this Section 5 are governed by the requirements
of 12 C.F.R. Section 563b.39(b) and in the event that any statements in this
Section 5 are inconsistent with 12 C.F.R. Section 563b.39(b), the provisions of
12 C.F.R. Section 563b.39(b) shall be controlling.
6. CONSOLIDATION, MERGER OR SALE OF ASSETS. Nothing in this AGREEMENT shall
preclude the EMPLOYER or the HOLDING COMPANY from consolidating with, merging
into, or transferring all, or substantially all, of their assets to another
corporation that assumes all of their obligations and undertakings hereunder.
Upon such a consolidation, merger or transfer of assets, the term "EMPLOYER" as
used herein, shall mean such other corporation or entity, and this AGREEMENT
shall continue in full force and effect.
7. CONFIDENTIAL INFORMATION. The EMPLOYEE acknowledges that during his
employment he will learn and have access to confidential information regarding
the EMPLOYER and its customers and businesses. The EMPLOYEE agrees and covenants
not to disclose or use for his own benefit, or the benefit of any other person
or entity, any confidential information, unless or until the EMPLOYER consents
to such disclosure or use or such information is otherwise legally in the public
domain. The EMPLOYEE shall not knowingly disclose or reveal to any unauthorized
person any confidential information relating to the EMPLOYER, its subsidiaries,
or affiliates, or to any of the businesses operated by them, and the EMPLOYEE
confirms that such information constitutes the exclusive property of the
EMPLOYER. The EMPLOYEE shall not otherwise knowingly act or conduct himself (a)
to the material detriment of the EMPLOYER, its subsidiaries, or affiliates, or
(b) in a manner which is inimical or contrary to the interests of the EMPLOYER.
8. NON-ASSIGNABILITY. Neither this AGREEMENT nor any right or interest hereunder
shall be assignable by the EMPLOYEE, his beneficiaries or legal representatives
without the EMPLOYER's prior written consent; provided, however, that nothing in
this Section 8 shall preclude (a) the EMPLOYEE from designating a beneficiary to
receive any benefits payable hereunder upon his death, or (b) the executors,
administrators, or other legal representatives of the EMPLOYEE or his estate
from assigning any rights hereunder to the person or persons entitled thereto.
9. NO ATTACHMENT. Except as required by law, no right to receive payment under
this AGREEMENT shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge or hypothecation or to execution,
attachment, levy, or similar process of assignment by operation of law, and any
attempt, voluntary or involuntary, to effect any such action shall be null, void
and of no effect.
10. BINDING AGREEMENT. This AGREEMENT shall be binding upon, and inure to the
benefit of, the EMPLOYEE and the EMPLOYER and their respective permitted
successors and assigns.
11. AMENDMENT OF AGREEMENT. This AGREEMENT may not be modified or amended,
except by an instrument in writing signed by the parties hereto.
7
<PAGE> 8
12. WAIVER. No term or condition of this AGREEMENT shall be deemed to have been
waived, nor shall there be an estoppel against the enforcement of any provision
of this AGREEMENT, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver,
unless specifically stated therein, and each waiver shall operate only as to the
specific term or condition waived and shall not constitute a waiver of such term
or condition for the future or as to any act other than the act specifically
waived.
13. SEVERABILITY. If, for any reason, any provision of this AGREEMENT is held
invalid, such invalidity shall not affect the other provisions of this AGREEMENT
not held so invalid, and each such other provision shall, to the full extent
consistent with applicable law, continue in full force and effect. If this
AGREEMENT is held invalid or cannot be enforced, then any prior AGREEMENT
between the EMPLOYER (or any predecessor thereof) and the EMPLOYEE shall be
deemed reinstated to the full extent permitted by law, as if this AGREEMENT had
not been executed.
14. HEADINGS. The headings of the paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this AGREEMENT.
15. GOVERNING LAW. This AGREEMENT has been executed and delivered in the State
of Ohio and its validity, interpretation, performance, and enforcement shall be
governed by the laws of the State of Ohio, except to the extent that federal law
is governing.
16. EFFECT OF PRIOR AGREEMENTS. This AGREEMENT contains the entire understanding
between the parties hereto and supersedes any prior employment agreement between
the EMPLOYER or any predecessor of the EMPLOYER and the EMPLOYEE, including but
not limited to the Employment Agreement dated September 1, 1997.
17. NOTICES. Any notice or other communication required or permitted pursuant to
this AGREEMENT shall be deemed delivered if such notice or communication is in
writing and is delivered personally or by facsimile transmission or is deposited
in the United States mail, postage prepaid, addressed as follows:
If to the EMPLOYER:
Bridgeport Savings and Loan Association
435 Main Street
Bridgeport, Ohio 43912
8
<PAGE> 9
with copies to:
Terri Reyering Abare, Esq.
Vorys, Sater, Seymour and Pease
Atrium Two, Suite 2100
221 East Fourth Street
Cincinnati, Ohio 45202
If to the EMPLOYEE:
Mr. Jon W. Letzkus
117 Euclid Avenue
Wheeling, WV 26003
IN WITNESS WHEREOF, the EMPLOYER has caused this AGREEMENT to be
executed by its duly authorized officer, and the EMPLOYEE has signed this
AGREEMENT, each as of the day and year first above written.
Attest: Bridgeport Savings and Loan Association
ANTON M. GODEZ By: MANUEL C. THOMAS
- --------------------------- ------------------------------------
its Chairman
-----------------------------
Attest:
WILLIAM E. RELINE JON W. LETZKUS
- --------------------------- ------------------------------------
Jon W. Letzkus
<PAGE> 1
OHIO STATE FINANCIAL SERVICES, INC.
[LOGO OF MAP OF OHIO WITH STAR SHOWN IN LOCATION OF BRIDGEPORT, OHIO]
1997 ANNUAL REPORT
<PAGE> 2
[OHIO STATE FINANCIAL SERVICES, INC. LETTERHEAD]
Dear Shareholder:
Throughout our recent stock conversion and the formation of Ohio State Financial
Services, Inc. as the holding company for The Bridgeport Savings and Loan
Association, we have stayed focused on the important goal of providing for the
financial needs of our local community. Bridgeport Savings is the only financial
institution headquartered in Bridgeport, and the stock of OSFS which was sold in
connection with the conversion is owned by many of the people who live and work
in Bridgeport, Ohio.
The Directors will not lose sight of our polar star, which is to serve our
customers. Quality service to our customers is a key to producing a good return
on your investment in OSFS.
With the recent payment of a dividend, the Board has indicated that we intend to
provide a competitive return for our shareholders while fostering the growth of
Bridgeport Savings through a strategy that is conservative and sound.
Thank you for the confidence which you have shown in our company, and I trust
that your relationship with us will be fruitful in the years to come. If there
is anything that we can do to be at your service, you only need to give us a
call.
Sincerely,
Jon W. Letzkus,
Chairman of the Board and President
<PAGE> 3
BUSINESS OF OHIO STATE FINANCIAL SERVICES, INC.
================================================================================
Ohio State Financial Services, Inc. ("OSFS"), a unitary savings and loan holding
company incorporated under the laws of the State of Ohio, owns all of the issued
and outstanding common stock of Bridgeport Savings and Loan Association
("Bridgeport"), a savings and loan association incorporated under Ohio law. In
September 1997, OSFS acquired all of the common stock issued by Bridgeport upon
its conversion from a mutual savings and loan association to a stock savings and
loan association (the "Conversion"). The activities of OSFS have been limited
primarily to holding the common shares of Bridgeport.
Bridgeport conducts business from its main office located in Bridgeport, Ohio,
and one full-service branch office located in Shadyside, Ohio. The principal
business of Bridgeport is the origination of permanent mortgage loans secured by
first mortgages on one- to four-family residential real estate located in
Bridgeport's primary market area which consists of Belmont County, Ohio, and
Ohio and Marshall Counties, West Virginia. Bridgeport also originates a limited
number of loans for the construction of one- to four-family residences and
permanent mortgage loans secured by multi-family and nonresidential real estate
in its market area. In addition to real estate lending, Bridgeport originates
secured and unsecured consumer loans. For liquidity and interest rate risk
management purposes, Bridgeport invests in interest-bearing deposits in other
financial institutions, U.S. Government and agency obligations and
mortgage-backed securities. Funds for lending and other investment activities
are obtained primarily from savings deposits, which are insured up to applicable
limits by the Federal Deposit Insurance Corporation (the "FDIC"), principal
repayments on loans and maturities of investment securities.
As a savings and loan holding company, OSFS is subject to regulation,
supervision and examination by the Office of Thrift Supervision of the United
States Department of the Treasury (the "OTS"). As a savings and loan association
incorporated under Ohio law, Bridgeport is subject to regulation, supervision
and examination by the OTS and the Ohio Department of Commerce, Division of
Financial Institutions (the "Division"). Bridgeport is also a member of the
Federal Home Loan Bank (the "FHLB") of Cincinnati.
MARKET PRICE OF COMMON SHARES OF OSFS
AND RELATED SHAREHOLDER MATTERS
================================================================================
There were 634,168 common shares of OSFS outstanding on March 2, 1998, held of
record by approximately 500 shareholders. Price information with respect to the
common shares of OSFS is quoted on the OTC Bulletin Board under the symbol
"OSFS."
The table below sets forth the high and low bid prices for the common shares of
OSFS for each quarter of the 1997 year ending after September 26, 1997, the date
of completion of the Conversion. Price quotations reflect interdealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.
1
<PAGE> 4
<TABLE>
<CAPTION>
High Bid Low Bid
-------- -------
FISCAL 1997
<S> <C> <C>
Quarter Ended:
September 30, 1997(1) $15.50 $14.50
December 31, 1997 15.50 14.75
<FN>
- -------------------
(1) Reflects the period from September 26, 1997 through September 30, 1997.
</TABLE>
OSFS did not declare a dividend during 1997. Dividends are subject to
determination and declaration by the Board of Directors of OSFS, which takes
into account the financial condition and results of operation of OSFS, tax
considerations, industry standards, economic conditions, regulatory restrictions
and other factors which affect the payment of dividends.
2
<PAGE> 5
SELECTED CONSOLIDATED
FINANCIAL INFORMATION AND OTHER DATA
================================================================================
The following table sets forth certain information concerning the consolidated
financial condition, earnings and other data regarding OSFS at the dates and for
the periods indicated.
<TABLE>
<CAPTION>
SELECTED FINANCIAL CONDITION At December 31,
AND OTHER DATA: -------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $37,344 $33,929 $34,553 $33,699 $35,319
Cash and cash
equivalents 3,178 2,436 1,177 1,624 6,539
Investment securities 8,263 4,936 5,505 7,062 4,078
Mortgage-backed
securities 847 984 1,191 1,522 2,263
Loans receivable, net 24,377 24,892 25,972 22,783 21,645
Deposits 26,333 28,791 29,615 29,198 31,158
Shareholders' equity 10,561 4,770 4,558 4,197 3,841
Number of full-service
offices 2 2 2 2 2
<CAPTION>
SUMMARY OF EARNINGS: Year ended December 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest and dividend
income $2,534 $2,515 $2,478 $2,298 $2,486
Interest expense 1,146 1,158 1,108 982 1,184
------ ------- ------ ------- -------
Net interest income 1,388 1,357 1,370 1,316 1,302
Provision for losses on
loans - - - 17 54
------ ------- ------ ------- -------
Net interest income after
provision for losses on
loans 1,388 1,357 1,370 1,299 1,248
Noninterest income 34 45 42 78 30
Noninterest expense(1) 866 1,083 865 848 765
------ ------- ------ ------- -------
Net income before
provision for income
taxes 557 319 547 529 513
Provision for income taxes 194 107 186 174 150
Cumulative effect of
change in accounting
principle - - - - 43
------ ------- ------ ------- -------
Net income $ 363 $ 212 $ 361 $ 355 $ 320
====== ======= ====== ======= =======
<FN>
- ------------------------------
(1) Includes a non-recurring pre-tax expense of $190,000 for the year ended
December 31, 1996, for a special one-time assessment to recapitalize
the Savings Association Insurance Fund (the "SAIF") administered by the
FDIC.
</TABLE>
3
<PAGE> 6
<TABLE>
<CAPTION>
SELECTED FINANCIAL RATIOS: At or for the year ended December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Performance ratios:
Return on average assets(1) 1.02% 0.62% 1.06% 1.04% 0.88%
Return on average equity(1) 5.48 4.53 8.25 8.87 8.71
Interest rate spread 3.41 3.62 3.76 3.66 3.42
Net interest margin 4.07 4.08 4.17 3.97 3.71
Non-interest expense to average assets(1) 2.44 3.15 2.54 2.47 2.11
Efficiency ratio(2) 60.88 77.27 61.28 60.83 57.42
Net interest income to operating
expenses(1) 160.31 125.27 158.36 155.09 170.23
Average interest-earning assets to
average interest-bearing liabilities 119.52 113.28 112.04 110.59 108.55
Capital ratios:
Average equity to average assets 18.60 13.64 12.87 11.69 10.12
Equity to assets, end of period 28.28 14.06 13.19 12.45 10.88
Asset quality ratios:
Nonperforming assets to average assets(3) 0.28 0.20 0.02 0.02 0.48
Nonperforming assets to total assets(3) 0.26 0.50 0.02 0.02 0.50
Nonperforming loans to total loans 0.40 0.28 0.02 0.03 0.76
Allowance for loans losses to gross loans 0.57 0.57 0.55 0.62 0.67
Allowance for loans losses to
nonperforming loans 143.86 207.25 2383.33 2042.86 87.88
Net (charge-offs) recoveries to average
loans 0.01 - - (0.08) (0.02)
<FN>
- ------------------------------
(1) Includes a nonrecurring pre-tax expense of $190,000 for the year ended
December 31, 1996, for a special one-time assessment to recapitalize the
SAIF.
(2) Non-interest expense as a percentage of net interest income plus
non-interest income.
(3) Nonperforming assets include non-accrual loans, accruing loans more than 90
days past due and real estate acquired in settlement of loans.
</TABLE>
4
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
GENERAL
- --------------------------------------------------------------------------------
OSFS was incorporated for the purpose of owning all of Bridgeport's outstanding
stock. As a result, the discussion that follows focuses on Bridgeport's
financial condition and results of operations. The following discussion and
analysis of the financial condition and results of operations of OSFS and
Bridgeport should be read in conjunction with and with reference to the
consolidated financial statements, and the notes thereto, included in this
Annual Report.
CHANGES IN FINANCIAL CONDITION
- --------------------------------------------------------------------------------
OSFS' total assets increased by approximately $3.4 million to $37.3 million at
December 31, 1997, from $33.9 million at December 31, 1996. The increase in
total assets was funded primarily by net proceeds of $5.9 million from the
issuance of 634,168 common shares of OSFS in September of 1997 (the "Offering")
and undistributed net earnings of $363,000, which were partially offset by a
decrease in deposits of $2.5 million from $28.8 million at December 31, 1996 to
$26.3 million at December 31, 1997.
Total cash and cash equivalents totaled $3.2 million at December 31, 1997, an
increase of $742,000, or 30.5%, from $2.4 million at December 31, 1996. The
increase includes a portion of the inflow of cash from the Offering. Management
maintains a level of cash equivalents which is desirable for meeting
Bridgeport's normal cash flow requirements for the funding of loans and
repayment of deposits.
Net loans receivable decreased approximately $515,000 to $24.4 million at
December 31, 1997, from $24.9 million at December 31, 1996. The decrease was
primarily attributable to the decrease of $1.0 million in mortgage
participations in one- to four-family mortgages which was partially offset by an
increase in consumer loans of $346,000. All other loan categories increased
nominally from 1996 to 1997.
Interest-bearing time deposits increased $3.8 million from $800,000 at December
31, 1996, to $4.6 million at December 31, 1997, which represented the temporary
investment of part of the proceeds received in the Offering.
Total deposits decreased $2.5 million, or 8.5%, from $28.8 million at December
31, 1996, to $26.3 million at December 31, 1997. Certificates of deposit
decreased by $1.6 million from $14.6 million at December 31, 1996, to $13.0
million at December 31, 1997. The decline was primarily attributable to higher
rate certificates maturing in 1997 which depositors elected not to renew. The
weighted average rate on all certificates of deposit declined from 5.09% at
December 31, 1996, to 5.03% at December 31, 1997. Approximately $900,000 of the
decline in deposits primarily consists of funds withdrawn by depositors to
purchase OSFS common shares in connection with the Conversion.
5
<PAGE> 8
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
GENERAL. Net income increased $150,000, or 70.8%, from $213,000 for the year
ended December 31, 1996, to $363,000 for the year ended December 31, 1997. The
increase in net income was primarily the result of a decrease in non-interest
expense of $217,000 and a $31,000 increase in net interest income.
NET INTEREST INCOME. Net interest income increased $31,000, or 2.3%, from
$1,357,000 for the year ended December 31, 1996, to $1,388,000 for the year
ended December 31, 1997. The increase was attributable to an increase in
interest and dividend income of $19,000 for 1996, compared to 1997, and a
decrease in interest expense of $12,000, or 1.1%, from $1,158,000 for the year
ended December 31, 1996, compared to $1,146,000 for the year ended December 31,
1997.
The increase in interest income resulted primarily from an increase in interest
on investments of $80,000, or 20.5%, year to year which was partially offset by
a decrease in interest on loans of $46,000, or 2.3%, and by a decrease in
interest on mortgage-backed securities of $17,000, or 16.5%. The increase in
interest on investments was due to an increase in the average balance of
interest-bearing deposits of $1.9 million representing the investment of $5.8
million of the net proceeds from the Offering which was completed in September
1997. The decrease in interest on loans resulted from a $599,000 decrease in the
average balance of loans outstanding. The decline in interest income on
mortgage-backed securities was attributable to a lower balance as a result of
prepayments of principal.
Total interest expense decreased $12,000, or 1.1%, from $1,158,000 for 1996, to
$1,146,000 for 1997. The decrease year to year was primarily due to a decrease
in the average volume of interest-bearing liabilities of $791,000, from $29.3
million for 1996 to $28.5 million for 1997. The decrease in interest-bearing
liabilities 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 OSFS common shares in connection with the
Conversion.
PROVISION FOR LOSSES ON LOANS. There were no provisions for losses on loans
during the years ended December 31, 1997 and 1996. Management strives to
maintain the allowance for loan losses at a level which management believes is
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 ability of borrowers to repay their
loans, the estimated value of any underlying collateral, and current economic
conditions. Based on management's evaluation, the amount of the allowance was
deemed adequate in 1997 with no additional provision necessary. There can be no
assurances, however, that future losses will not exceed estimated amounts or
that additional provisions for loan losses will not be required in future
periods.
NONINTEREST INCOME. Noninterest income decreased $11,000 from $45,000 for the
year ended December 31, 1996, to $34,000 for the year ended December 31, 1997.
The decline was due to the absence of a non-recurring income item in 1996
involving an adjustment to the principal balance of mortgage-backed securities.
6
<PAGE> 9
NONINTEREST EXPENSES. Noninterest expense decreased $217,000, or 20.1%, from
$1.1 million for the year ended December 31, 1996, to $866,000 for the year
ended December 31, 1997. The decrease in non-interest expenses was primarily
attributable to the absence of the one-time SAIF-recapitalization assessment of
$190,000. In addition, Bridgeport benefited from a lower base deposit insurance
premium, as a result of the SAIF recapitalization, from $.23 per $100 of
deposits to $.065 per $100 of deposits.
Furniture and equipment expense decreased $30,000, from $65,000 in 1996 to
$35,000 in 1997. The decrease is due to lower depreciation expense as a result
of certain fixed assets that were fully depreciated as of December 31, 1996.
Nonrecurring maintenance costs incurred in 1996 also contributed to the lower
expense for 1997. In 1997, salaries and employee benefits increased $45,000, or
13%, due to the hiring of an additional employee and merit increases for
existing employees.
PROVISION FOR INCOME TAXES. The provision for income taxes for the year ended
December 31, 1997, was $194,000,. an increase of $88,000, or 82.3%, from
$106,000 for the year ended December 31, 1996. The increase resulted from an
increase in net income before income taxes. The effective rate on taxes for the
year ended December 31, 1997, was 34.8% compared to 33.4% for the year ended
December 31, 1996.
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
GENERAL. Net income for the year ended December 31, 1996, decreased $149,000, or
41.2%, to $212,000 from $361,000 for the year ended December 31, 1995. The
decrease resulted primarily from a decrease of $13,000 in net interest income
and an increase of $218,000, or 25.2%, in non-interest expenses due largely to a
$190,000 non-recurring special assessment for the recapitalization of the SAIF,
which were partially offset by an increase of $3,000 in noninterest income and a
decrease in the provision for income taxes of $79,000. Excluding the one-time
SAIF special assessment, pre-tax income decreased $38,000, or 6.9%, to $509,000
in 1996.
NET INTEREST INCOME. Total interest and dividend income for the year ended
December 31, 1996, was $2.5 million, an increase of $36,000, or 1.5%, from the
year ended December 31, 1995. The increase was primarily due to an increase in
interest on loans of $91,000, or 4.7%, due to a $987,000 increase in the average
balance of loans outstanding year to year and a six basis point increase in the
yield on loans, which more than offset declines in income from all other asset
categories. Interest income on mortgage-backed securities for the year ended
December 31, 1996, decreased $17,000, or 14.4%, due to a $205,000 decline in the
average outstanding balance which offset a nine basis point increase in the
yield. Interest earned on interest-bearing deposits decreased $6,000 or 4.0%,
due primarily to a decrease of $196,000 in the average balance outstanding,
which was offset somewhat by an 18 basis point increase in yield. Income on
investment securities decreased by $30,000 due to a 38 basis point decline in
yield and a $209,000 decline in the average balance outstanding.
Total interest expense increased $50,000, or 4.5%, to $1.2 million in 1996. The
increase was primarily attributable to a 17 basis point increase in the cost of
funds from 3.78% to 3.95%, as the average balance of deposits outstanding
increased only $33,000 to $29.3 million in 1996. The increase in the cost of
7
<PAGE> 10
funds was the result of higher rates offered by Bridgeport in response to rates
offered by competing institutions in Bridgeport's market area.
PROVISION FOR LOSSES ON LOANS. There were no provisions for losses on loans for
the years ended December 31, 1996 and 1995. Based on management's evaluation,
the amount of the allowance was deemed adequate with no additional provision
necessary for 1996.
NONINTEREST INCOME. Noninterest income for the year ended December 31, 1996,
increased $3,000, or 7.7%, to $45,000. The increase resulted from a $6,000
increase in other income and fees, which was partially offset by a $3,000
decrease in income from service charges.
NONINTEREST EXPENSES. Noninterest expenses totaled $1.1 million for the year
ended December 31, 1996, an increase of $218,000, or 25.2%, compared to the year
ended December 31, 1995. The increase resulted primarily from a $191,000
increase in federal deposit insurance premiums due to a $190,000 non-recurring
special assessment recorded at September 30, 1996, to recapitalize the SAIF, and
a $13,000 increase in depreciation expense due to equipment purchases in late
1995 and 1996.
PROVISION FOR INCOME TAXES. The provision for income taxes for the year ended
December 31, 1996, decreased $79,000, or 42.7%, to $106,000, as a result of a
decrease in net income before income taxes compared to 1995.
8
<PAGE> 11
AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA
- --------------------------------------------------------------------------------
The following table sets forth certain information relating to the average
balance sheet information of OSFS and reflects the average yield on
interest-earning assets and the average cost of interest-bearing liabilities for
the years indicated. Such yields and costs are derived by dividing income or
expense by the average balance of interest-earning assets or interest-bearing
liabilities, respectively, for the years presented. Average balances are derived
from month-end balances.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ---------------------------- -----------------------------
Average Interest Average Average Interest Average Average Interest Average
outstanding earned/ yield/ outstanding earned/ yield/ outstanding earned/ yield/
balance paid rate balance paid rate balance paid rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 4,455 $ 237 5.32% $ 2,592 $ 144 5.56% $ 2,788 $ 150 5.38%
Investment securities(1) 4,032 258 6.40 4,274 269 6.29 4,483 299 6.67
Mortgage-backed securities 913 85 9.31 1,091 102 9.35 1,296 120 9.26
Loans receivable(2) 24,708 1,954 7.91 25,267 2,000 7.92 24,280 1,909 7.86
-------- ------ ---- ------- ----- ---- ------- ------ ----
Total interest-earning
assets 34,108 2,534 7.43 33,224 2,515 7.57 32,847 2,478 7.54
Non-interest-earning assets 1,447 1,186 1,161
------- ------- -------
Total assets $35,555 $34,410 $34,008
======= ======= =======
Interest-bearing liabilities:
NOW and money market
accounts $ 3,837 95 2.48 $ 4,910 127 2.59 $ 6,226 176 2.83
Regular savings accounts 10,295 314 3.05 9,807 297 3.00 9,687 291 3.00
Certificates of deposit 14,390 736 5.11 14,611 734 5.03 13,382 640 4.78
-------- ------- ---- ------- ------ ---- ------ ------- ----
Total deposits 28,522 1,145 4.01 29,328 1,158 3.95 29,295 1,107 3.78
------ ------ ----
FHLB advances 15 1 6.67 - - - 23 1 4.35
-------- ------- ---- ------- ------ ---- ------ ------- ----
Total interest-bearing
liabilities 28,537 1,146 4.02 29,328 1,158 3.95 29,318 1,108 3.78
---- ------ ---- ------- ----
Non-interest-bearing
liabilities 404 389 313
-------- --------- --------
Total liabilities 28,941 29,717 29,631
Shareholders' equity 6,614 4,693 4,377
-------- --------- --------
Total liabilities and
shareholders' equity $35,555 $34,410 $34,008
======== ======== ========
Net interest income $1,388 $1,357 $1,370
====== ====== ======
Interest rate spread 3.41% 3.62% 3.76%
==== ==== ====
Net interest margin 4.07% 4.08% 4.17%
==== ==== ====
Average interest-earning
assets to average
interest-bearing
liabilities 119.52% 113.28% 112.04%
====== ====== ======
<FN>
- -------------------
(1) Includes dividends on FHLB stock.
(2) Includes nonperforming loans
</TABLE>
9
<PAGE> 12
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected Bridgeport's interest income and interest expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior period rate), (ii)
changes in rate (change in rate multiplied by prior period volume) and (iii)
total changes in rate and volume. The combined effects of changes in both volume
and rate, which cannot be separately identified, have been attributed to the
mix.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
--------------------------------------- -------------------------------------
Increase Increase
(decrease) due to Total (decrease) due to Total
-------------------------- increase ------------------------ increase
Volume Rate Mix (decrease) Volume Rate Mix (decrease)
------ ---- --- --------- ------ ---- --- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-bearing deposits $103 $ (6) $(4) $93 $(11) $ 5 $ - $ (6)
Investment securities (15) 4 - (11) (14) (17) 1 (30)
Mortgage-backed securities (17) - - (17) (19) 1 - (18)
Loans receivable (44) - (2) (46) 78 15 (1) 91
---- ---- --- ---- --- --- --- ----
Total interest income 27 (2) (6) 19 34 4 - 38
Interest-bearing liabilities
Deposits (32) 18 1 (13) 1 50 - 51
FHLB advances 1 - - 1 (1) - - (1)
---- ---- --- ---- -- ---- ---- ----
Total interest expense (31) 18 1 (12) - 50 - 50
---- -- --- ---- ----- ---- ---- ----
Increase (decrease) in net
interest income $ 58 $(20) $(7) $31 $ 34 $(46) $ - $(12)
==== ===== ==== === ==== ==== ==== ====
</TABLE>
ASSET AND LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------
Bridgeport, like other financial institutions, is subject to interest rate risk
to the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. Interest rate risk is defined as the sensitivity
of an institution's earnings and net asset values to changes in interest rates.
As part of its effort to monitor and manage the interest rate risk of
Bridgeport, the Board of Directors has adopted an interest rate risk policy
which sets exposure limits for Bridgeport, specifies certain transactions that
Bridgeport may not engage in without prior Board authorization and provides for
quarterly review by the Board of Directors of various interest rate risk
reports.
One of the methods utilized by Bridgeport to monitor interest rate risk is the
rate shock risk estimates contained in the quarterly rate shock risk reports
prepared by an outside consulting firm that specializes in interest rate risk
assessments. The reports assess Bridgeport's interest rate risk based on the
percent and dollar changes in Bridgeport's net portfolio value ("NPV") projected
over permanent and instantaneous parallel shifts in interest rates. The rate
shock methodology attempts to quantify interest
10
<PAGE> 13
rate risk as the change in Bridgeport's NPV which would result from a
theoretical change in current interest rates. The management and the Board of
Directors of Bridgeport attempt to maintain the projected change in NPV within
limits established by the Board of Directors.
Presented below, as of December 31, 1997, is an analysis of Bridgeport's
interest rate risk as measured by changes in NPV for instantaneous and parallel
shifts of 100 basis points in market interest rates, assuming rates would stay
constant over a twelve-month period. The table also contains the policy limits
set by the Board of Directors of Bridgeport as the maximum change in NPV that
the Board of Directors deems advisable in the event of various changes in
interest rates. Such limits have been established with consideration of the
dollar impact of various rate changes and Bridgeport's strong capital position.
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------- Board limit
Change in interest rate $ Change in NPV % Change in NPV % Change in NPV
(basis points) --------------- -------------- ---------------
- ----------------------- (Dollars in thousands)
<S> <C> <C> <C>
+400 $(1,824) (22)% (50)%
+300 (1,404) (17) (38)
+200 (928) (11) (25)
+100 (437) (5) (15)
0 0 0 0
-100 184 2 15
-200 280 3 25
-300 232 3 38
-400 755 9 50
</TABLE>
The Board of Directors and management of Bridgeport believe that certain factors
afford Bridgeport the ability to operate successfully despite its exposure to
interest rate risk. Although Bridgeport originates predominantly fixed-rate
loans, such loans are typically secured by residential real estate and for terms
of 15 years or less. Bridgeport also manages its interest rate risk by
maintaining capital well in excess of regulatory requirements and by maintaining
a high level of investments in short-term instruments with maturities of five
years or less. For the year ended December 31, 1997, Bridgeport's tangible
capital was 22.5% of total assets and its liquidity ratio was 37.3%.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate from
those assumed in making the risk calculations.
11
<PAGE> 14
LIQUIDITY AND CAPITAL MANAGEMENT
- --------------------------------------------------------------------------------
The liquidity of OSFS and Bridgeport, which is primarily represented by cash and
cash equivalents, is a result of the funds used in or provided by Bridgeport's
operating, investing and financing activities. These activities are summarized
below for the years ended December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net income $ 363 $ 212 $ 361
Adjustments to reconcile net income
to net cash from operating activities 123 5 53
------ ------- -------
Net cash from operating activities 486 217 414
Net cash provided by (used in)
investment activities (2,694) 1,860 (1,272)
Net cash provided by (used in)
financing activities 2,950 (818) 411
------ ------- -------
Net change in cash and cash
equivalents 742 1,259 (447)
Cash and cash equivalents at
beginning of period 2,436 1,177 1,624
------ ------- -------
Cash and cash equivalents at
end of period $3,178 $2,436 $1,177
====== ====== ======
</TABLE>
Bridgeport's principal sources of funds are deposits, loan and mortgage-backed
securities repayments, maturities of securities and other funds provided by
operations. Bridgeport also has the ability to borrow from the FHLB of
Cincinnati. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan and mortgage-backed
security prepayments are influenced to a greater degree by interest rates,
general economic conditions and competition. Bridgeport maintains investments in
liquid assets based upon management's assessment of (i) the need for funds, (ii)
expected deposit flows, (iii) the yields available on short-term liquid assets
and (iv) the objectives of Bridgeport's asset and liability management program.
OTS regulations presently require Bridgeport to maintain an average daily
balance of liquid assets, which may include, but are not limited to, investments
in U.S. Treasury and federal agency obligations in an amount equal to 4% of the
sum of Bridgeport's average daily balance of net withdrawable deposit accounts
and borrowings payable in one year or less. The liquidity requirement, which may
be changed from time to time by the OTS to reflect changing economic conditions,
is intended to provide a source of relatively liquid funds upon which Bridgeport
may rely if necessary to fund loan originations, deposit withdrawals or other
short-term funding needs. At December 31, 1997, Bridgeport's regulatory
liquidity ratio was 37.3%. At such date, Bridgeport had commitments to originate
loans and loans in process totaling $548,000 and no commitments to purchase or
sell loans. Bridgeport considers its liquidity and capital resources sufficient
to meet its outstanding short-term and long-term needs. See Note 6 to the
Consolidated Financial Statements.
12
<PAGE> 15
Bridgeport is required by applicable law and regulations to meet certain minimum
capital standards, which include a tangible capital requirement, a core capital
requirement or leverage ratio and a risk-based capital requirement. Bridgeport
exceeded all of its regulatory capital requirements at December 31, 1997.
OTS regulations require a savings and loan association to maintain core capital
of at least 3% of Bridgeport's total assets. "Core capital" is comprised of
common shareholders' equity (including retained earnings), noncumulative
preferred stock and related surplus, minority interests in consolidated
subsidiaries, certain nonwithdrawable accounts, pledged deposits of mutual
associations and intangible assets, primarily certain purchased mortgage
servicing rights. The OTS has proposed to increase the core capital requirement
to 4% and 5%, except for those associations with the highest examination rating
and acceptable levels of risk.
The tangible capital requirement requires a savings and loan association to
maintain "tangible capital" of not less than 1.5% of Bridgeport's adjusted total
assets. Tangible capital is defined in OTS regulations as core capital minus any
intangible assets.
OTS regulations require that a savings and loan association maintain "risk-based
capital" in an amount not less than 8% of its risk-weighted assets. Risk-based
capital is defined as core capital plus certain additional items of capital,
which in the case of Bridgeport included $134,000 of Bridgeport's allowance for
loan losses at December 31, 1997.
The following table summarizes Bridgeport's regulatory capital requirements and
actual capital at December 31, 1997:
<TABLE>
<CAPTION>
Excess of actual
capital over current
Actual capital Current requirement requirement Applicable asset total
------------------- ------------------ ------------------ ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible capital $8,087 22.5% $ 539 1.5% $7,548 21.0% $35,915
Core capital 8,087 22.5 1,077 3.0 7,010 19.5 35,915
Risk-based capital 8,221 48.7 1,351 8.0 6,870 40.7 16,890
</TABLE>
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
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 and 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
13
<PAGE> 16
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 is 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 are effective for fiscal years beginning after December 15, 1997.
Management does not believe the adoption of SFAS No. 130 will have a material
impact on the disclosure requirements of OSFS.
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 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. The adoption of SFAS No. 128 at
December 31, 1997, did not have a material impact on the disclosure requirements
of OSFS.
In February 1997, the FASB issued SFAS No. 129, which incorporates the
disclosure requirements of APB Opinion No. 15, and makes them applicable to all
public and nonpublic entities that have issued securities addressed by SFAS No.
129. APB Opinion No. 15 requires disclosure of descriptive information about
securities that is not necessarily related to the computation of EPS. SFAS No.
129 continues the previous requirements to disclose certain information about an
entity's capital structure found in APB Opinions No. 19, "Omnibus Opinion -
1966," and No. 15, and SFAS No. 47, "Disclosure of Long-Term Obligations," for
entities that were subject to the requirements of those standards. SFAS No. 129
eliminates the exemption of nonpublic entities from certain disclosure
requirements of APB Opinion No. 15 as provided by SFAS No. 21, "Suspension of
the Reporting of Earnings per Share, and Segment Information by Nonpublic
Enterprises." SFAS No. 129 supersedes specific disclosure requirements of APB
Opinions Nos. 10 and 15 and SFAS No. 47 and consolidates them in SFAS No. 129
for ease of retrieval and for greater visibility to nonpublic entities. SFAS No.
129 is effective for financial statements for periods ending after December 15,
1997. The adoption of SFAS No. 129 did not have a material impact on the
disclosure requirements of OSFS.
In June 1996, the FASB issued SFAS No. 125, effective, on a prospective basis,
for fiscal years beginning after December 31, 1996. SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities based on consistent application of a
financial-components approach that focuses on control. SFAS No. 125 extends the
"available for sale" and "trading" approach of SFAS No. 115 to non-security
financial assets that can be contractually prepaid or otherwise settled in such
a way that the holder of the asset would not recover substantially all of its
recorded investment. In addition, SFAS No. 125 amends SFAS No. 115 to prevent a
security from being classified as held-to-maturity if the security can be
prepaid or settled in such a manner that the holder of the security would not
recover substantially all of its recorded investment. The extension of the SFAS
No. 115 approach to certain non-security financial assets and the amendment to
SFAS No. 115 are effective for financial assets held on or acquired after
January 1, 1997. Effective
14
<PAGE> 17
January 1,1997, SFAS No. 125 superseded SFAS No. 122. Management has not yet
determined the effect, if any, SFAS No. 125 will have on the financial
statements of OSFS.
15
<PAGE> 18
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS AND
CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
PAGE
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 17
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 18
CONSOLIDATED STATEMENTS OF OPERATIONS 20
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 21
CONSOLIDATED STATEMENTS OF CASH FLOWS 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23
16
<PAGE> 19
SNODGRASS
Certified Public Accountants and Consultants
INDEPENDENT AUDITOR'S REPORT
----------------------------
Board of Directors
Ohio State Financial Services, Inc.
We have audited the accompanying consolidated statements of financial condition
of Ohio State Financial Services, Inc. and subsidiary as of December 31, 1997
and 1996, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ohio State Financial
Services, Inc. and subsidiary as of December 31, 1997 and 1996, and the results
of their operations and cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
S.R. Snodgrass, A.C.
Wheeling, West Virginia
January 9, 1998
S.R. Snodgrass, A.C.
980 National Road Wheeling, WV 26003~6400 Phone: 304~233~5030 Facsimile:
304~233~3062
17
<PAGE> 20
OHIO STATE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
Cash and cash equivalents:
Cash and amounts due from banks $ 523,987 $ 450,252
Interest-bearing deposits with other institutions 2,653,845 1,985,410
----------- -----------
Total cash and cash equivalents 3,177,832 2,435,662
Interest bearing time deposits 4,600,000 800,000
Investment securities:
Available for sale (at market value) 363,000 339,300
Held to maturity (market value of $4,224,064 at 12/31/97; and $4,873,596
at 12/31/96) 4,146,588 4,781,206
Loans receivable, net 24,377,054 24,892,321
Office properties and equipment, net 482,950 471,672
Accrued interest receivable, loans and investments (net of reserve for
uncollected interest of $7,709 at 12/31/97; and $1,802 at 12/31/96) 173,639 134,340
Other assets 22,965 74,153
----------- -----------
TOTAL ASSETS $37,344,028 $33,928,654
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
18
<PAGE> 21
OHIO STATE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (CONTINUED)
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
---- ----
<S> <C> <C>
LIABILITIES
Deposit accounts $ 26,333,439 $ 28,791,121
Advances by borrowers for taxes and insurance 152,136 154,245
Accrued interest payable and other liabilities 221,978 157,437
Deferred federal income taxes 75,005 55,508
------------ ------------
TOTAL LIABILITIES 26,782,558 29,158,311
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, no par or stated value, 3,000,000 shares authorized; 634,168 shares
issued and outstanding at December 31, 1997 - -
Additional paid in capital 5,922,360 -
Unallocated shares - employee stock ownership plan (493,867) -
Retained earnings-substantially restricted 5,132,977 4,770,343
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 10,561,470 4,770,343
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 37,344,028 $ 33,928,654
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE> 22
OHIO STAGE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31.
----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans-taxable $1,953,696 $2,000,015 $1,909,388
Mortgage-backed certificates - taxable 85,485 102,351 119,631
Interest-bearing deposits and investment securities - taxable 470,891 390,802 429,689
Dividends on Federal Home Loan Bank stock 23,939 21,746 19,785
---------- ---------- ----------
Total interest and dividend income 2,534,011 2,514,914 2,478,493
---------- ---------- ----------
INTEREST EXPENSE
Savings deposits 1,144,619 1,157,860 1,107,184
Federal Home Loan Bank advances 961 - 1,172
---------- ---------- ----------
Total interest expense 1,145,580 1,157,860 1,108,356
---------- ---------- ----------
Net interest income 1,388,431 1,357,054 1,370,137
PROVISION FOR LOSSES ON LOANS: - - -
---------- ---------- ----------
Net interest income after provision for loan losses 1,388,431 1,357,054 1,370,137
---------- ---------- ----------
NONINTEREST INCOME
Service charges 15,433 16,313 18,973
Gains on sale of other real estate 2,245 - -
Other income and fees 16502 28,658 22,765
---------- ---------- ----------
Total noninterest income 34,180 44,971 41,738
---------- ---------- ----------
NONINTEREST EXPENSES
Salaries and benefits 394,955 349,554 351,608
Occupancy expense 61,419 59,245 56,750
Furniture and equipment expense 35,191 65,632 54,729
Machine rental and service bureau expense 50,814 55,489 49,211
Stationery printing and office expenses 39,856 29,022 23,832
Advertising and public relations 39,978 32,204 37,686
Franchise, payroll and other taxes 90,128 91,559 90,991
Federal insurance premium 26,717 270,218 78,913
Legal and accounting fees 39,077 29,217 24,272
Other operating expenses 87,959 101,180 97,212
---------- ---------- ----------
Total noninterest expense 866,094 1,083,320 865,204
---------- ---------- ----------
Income before income taxes 556,517 318,705 546,671
PROVISION FOR INCOME TAXES 193,883 106,343 185,438
---------- ---------- ----------
Net income $ 362,634 $ 212,362 $ 361,233
========== ========== ==========
PER SHARE DATA (from October 1, 1997)
Net earnings per share $ .17 $ - $ -
========== ========== ==========
AVERAGE SHARES OUTSTANDING $ 584,148 - -
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE> 23
OHIO STATE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Additional Earnings Unallocated Total
Common Paid in Substantially Shares in Shareholders'
Stock Capital Restricted ESOP Equity
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ - $ - $ 4,196,748 $ $ 4,196,748
-----------
Net income - - 361,233 - 361,233
------------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 - - 4,557,981 - 4,557,981
Net income - - 212,362 - 212,362
------------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 - - 4,770,343 - 4,770,343
Net income - - 362,634 - 362,634
Sale of common stock - 5,916,081 - (506,530) 5,409,551
Accrued compensation expense-ESOP - 6,279 - 12,663 18,942
------------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 $ - $ 5,922,360 $ 5,132,977 $ (493,867) $10,561,470
============= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
21
<PAGE> 24
OHIO STATE FINANCIAL SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 362,634 $ 212,362 $ 361,233
Adjustments:
Depreciation 38,437 70,225 57,139
Gain on real estate owned (2,245) - -
Deferred federal income tax 19,497 11,695 (6,001)
Accretion of investment security discounts (3,743) (10,714) (23,942)
ESOP amortization 18,942
Federal Home Loan Bank stock dividend (23,700) (21,600) (19,600)
Accrued interest receivable and other assets 11,889 (14,347) (43,425)
Accrued interest payable and other liabilities 64,541 (30,490) 88,263
----------- ----------- -----------
Net cash provided by operating activities 486,252 217,131 413,667
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Term deposits, net (3,800,000) 200,000 1,600,000
Proceeds from maturities of held to maturity securities 500,000 400,000 -
Proceeds from redemptions of mortgage-backed certificates 138,361 207,075 332,936
Net change in loans (excluding participations purchased) 497,647 1,510,892 (1,646,330)
Participation loans purchased - (431,000) (1,543,000)
Acquisition of office properties and equipment (49,715) (27,295) (14,999)
Disposition of real estate owned 19,865 - -
----------- ----------- -----------
Net cash provided by (used in) investing activities (2,693,842) 1,859,672 (1,271,393)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock 5,409,551 - -
Change in deposits, net (2,457,682) (823,674) 416,756
Change in mortgage escrow funds, net (2,109) 5,510 (6,086)
----------- ----------- -----------
Net cash provided by (used in) financing activities 2,949,760 (818,164) 410,670
----------- ----------- -----------
Change in cash and cash equivalents 742,170 1,258,639 (447,056)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,435,662 1,177,023 1,624,079
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,177,832 $ 2,435,662 $ 1,177,023
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE> 25
OHIO STATE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997,1996, AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the consolidated financial statements of
Ohio State Financial Services, Inc. and Subsidiary. The accounting and reporting
policies of the Company conform to generally accepted accounting principles and
to general practice within the savings and loan industry. The following is a
description of the more significant of those policies.
NATURE OF OPERATIONS - Ohio State Financial Services, Inc. (the "Company") was
organized under Ohio law in March 1997. The Company acquired 100% of the common
stock of Bridgeport Savings and Loan Association (the "Association"), a savings
and loan association organized under Ohio law, on September 26,1997, upon its
conversion from mutual to stock form. The operating results of the Company
depend primarily upon the operating results of the Association. The Association
provides banking services to customers through its Bridgeport and Shadyside Ohio
offices. The principal business of the Association is the origination of
permanent mortgage loans on one-to-four family residential real estate located
in the Association's primary market area, which consists of Belmont County in
Ohio and Ohio and Marshall Counties in West Virginia.
USE OF ESTIMATES - The financial statements have been prepared in conformity
with generally accepted accounting principles and, as such, include amounts
based on informed estimates and judgments of management with consideration given
to materiality. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, Bridgeport Savings and
Loan Association. All significant intercompany accounts and transactions have
been eliminated in consolidation.
RECLASSIFICATION - Certain amounts for the years ended December 31,1996 and
1995, have been reclassified to conform with the current period's presentation.
OFFICE PROPERTIES AND EQUIPMENT - Land is carried at cost; buildings and
equipment are stated at cost, less accumulated depreciation. Maintenance,
repairs, and minor improvements are charged to operating expenses as incurred.
Major improvements and betterments are capitalized.
Depreciation is computed on the straight-line method for financial reporting
purposes over the following estimated useful lives:
Building and improvements 10-50 years
Furniture, fixtures and equipment 3-50 years
Automobiles 5 years
23
<PAGE> 26
OHIO STATE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REAL ESTATE - Real estate acquired in the settlement of loans is carried at the
lower of the recorded investment in the property or its fair value minus
estimated costs of sale.
LOAN FEES. DISCOUNTS. AND PREMIUMS - Loan fees are accounted for in conformity
with requirements of the Statement of Financial Accounting Standards No. 91.
Accordingly, loan origination and commitment fees and certain direct loan
origination costs are deferred, and the net amount amortized over the
contractual lives of the related loans or commitments as an adjustment of the
related loan's yield using the interest method.
LOANS RECEIVABLE - Loans receivable are stated at their unpaid principal
balance, net of the allowance for loan losses. Interest on loans is credited to
income as earned and is accrued only if it is considered collectible. An
allowance for uncollected interest on mortgage loans is provided for all accrued
interest on loans which are delinquent more than 90 days, resulting in interest
previously accrued on those loans being reversed from income, and thereafter,
interest is recognized only to the extent of payments received. Loans are
returned to accrual status when less than 90 days delinquent and when, in
management's judgment, collection is probable.
Effective January 1,1995, the Company adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" and
Statement of Financial Accounting Standards No. 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures" (FAS 114 and 118).
Impaired loans as defined by FAS 114 and 118 exclude certain consumer loans and
residential real estate loans. Loan impairment is measured based on the present
value of expected cash flows discounted at the loan's effective interest rate or
at the fair value of the collateral if the loan is collateral dependent. Since
the adoption of FAS 114 and 118, the Company had no loans which management has
determined to be impaired.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is maintained at a
level which, in management's judgment, is 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, specific impaired loans, and economic conditions. Allowances for
impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is increased by a provision
for loan losses, which is charged to expense and reduced by chargeoffs, net of
recoveries. Changes in the allowance relating to impaired loans are charged or
credited to the provision for loan losses. Because of uncertainties inherent in
the estimation process, management's estimate of credit losses inherent in the
loan portfolio and the related allowance may change in the near term.
24
<PAGE> 27
OHIO STATE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT SECURITIES - Debt securities, including mortgage-backed securities
acquired with the intent and ability to hold to maturity are stated at cost and
adjusted for amortization of premium and accretion of discount, which are
computed using a level yield method and are recognized as adjustments of
interest income. Under FAS No. 115, investment securities in the portfolio are
classified as either available for sale or held to maturity. The Company does
not currently conduct short term purchase and sale transactions of investment
securities which would be classified as trading securities.
The initial determination of investments classified as available for sale was
based principally on the Company's asset/liability position and potential
liquidity needs. These securities are available for sale at any time based upon
management's assessment of changes in economic or financial market conditions,
interest rate or prepayment risk, liquidity considerations, and other factors.
Securities classified as available for sale are carried at market value.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of equity until
realized. No unrealized gain or loss is applicable to the Company's equity
securities due to the restricted nature of the securities.
INCOME TAXES - Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under FAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
EARNINGS PER SHARE - On September 26,1997, the Company issued 634,168 shares of
common stock. Earnings per share data has been determined by dividing net income
since October 1, 1997, of $100,667 by the weighted average number of shares
issued and outstanding since the original issue date. Earnings from September
26, 1997 through September 30,1997, were determined not to be meaningful. As
discussed in Note 9, 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. The pro forma net
income per share for the 1997 period is $.16, assuming the shares had been
outstanding for the entire year.
25
<PAGE> 28
OHIO STATE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - INVESTMENTS
The carrying amounts and fair values of the Company's investment securities at
December 31, 1997 and 1996, are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities Available for Sale:
Federal Home Loan Bank stock (restricted) $ 348,000 $ -- $ -- $ 348,000
Intrieve Incorporated 15,000 -- -- 15,000
---------- ---------- ---------- ----------
Total available for sale 363,000 -- -- 363,300
---------- ---------- ---------- ----------
Securities to be Held to Maturity:
U.S. Government and federal agencies 3,299,577 15,685 5,160 3,310,102
Mortgage-backed securities 847,011 66,951 -- 913,962
---------- ---------- ---------- ----------
Total held to maturity 4,146,588 82,636 5,160 4,224,064
---------- ---------- ---------- ----------
Total $4,509,588 $ 82,636 $ 5,160 $4,587,064
========== ========== ========== ==========
December 31, 1996
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Securities Available for Sale:
Federal Home Loan Bank stock (restricted) $ 324,300 $ -- $ -- $ 324,300
Intrieve Incorporated 15,000 -- -- 15,000
---------- ---------- ---------- ----------
Total available for sale 339,300 -- -- 339,300
---------- ---------- ---------- ----------
Securities to be Held to Maturity:
U.S. Government and federal agencies 3,797,043 31,468 17,883 3,810,628
Mortgage-backed securities 984,163 78,805 -- 1,062,968
---------- ---------- ---------- ----------
Total held to maturity 4,781,206 110,273 17,883 4,873,596
---------- ---------- ---------- ----------
Total $5,120,506 $ 110,273 $ 17,883 $5,212,896
========== ========== ========== ==========
</TABLE>
26
<PAGE> 29
OHIO STATE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - INVESTMENTS (CONTINUED)
The book value and fair value of investment securities at December 31, 1997 and
1996, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------
Securities to Be Securities
Held To Maturity Available For Sale
----------------------- -----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $2,999,577 $2,997,025 $ - $ -
Due from one year through five years 300,000 313,077
Equity securities - - 363,000 363,000
Mortgage-backed securities 847,011 913,962 - -
---------- ---------- ---------- ----------
Total $4,146,588 $4,224,064 $ 363,000 $ 363,000
========== ========== ========== ==========
December 31, 1997
-------------------------------------------------
Securities to Be Securities
Held To Maturity Available For Sale
--------------------- -----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
Due in one year or less $ 500,000 $ 498,905 $ - $ -
Due from one year through five years 3,297,043 3,311,723 - -
Equity securities - - 339,300 339,300
Mortgage-backed securities 984,163 1,062,968 - -
---------- ---------- ---------- ----------
Total $4,781,206 $4,876,596 $ 339,300 $ 339,300
========== ========== ========== ==========
</TABLE>
27
<PAGE> 30
OHIO STATE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - LOANS RECEIVABLE
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
---- ----
<S> <C> <C>
Mortgage loans:
Construction $ 123,700 $ 123,700
1-4 family 19,753,899 20,605,236
Multi-family - 51,162
Commercial 572,315 459,924
Land 18,224 86,225
------------- -------------
20,468,138 21,326,247
------------- ------------
Consumer loans:
Passbook loans 370,408 264,620
Other consumer loans 3,682,412 3,441,738
----------- -----------
4,052,820 3,706,358
----------- -----------
Commercial loans: 69,529 105,264
------------- ------------
Total 24,590,487 25,137,869
---------- ----------
Less:
Loans in process 36,457 50,649
Allowance for loan losses 140,978 143,000
Deferred loan fees 35,998 51,889
-------------- --------------
213,433 245,548
------------- -------------
Loans receivable, net $24,377,054 $24,892,321
=========== ===========
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1997 1996 1995
----------- ------------- ---------------
<S> <C> <C> <C>
Balance, beginning of period $143,000 $143,000 $143,000
Provision charged to income - - -
Charge-offs (2,022) - -
----------- ------------- ---------------
-
Balance, end of period $140,978 $143,000 $143,000
======== ======== ========
</TABLE>
28
<PAGE> 31
OHIO STATE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Land $ 137,638 $ 137,638
Office buildings and improvements 631,486 603,462
Furniture, fixtures and equipment 437,920 437,920
Automobile 23,403 15,563
------------ -----------
Total 1,230,447 1,194,583
Less accumulated depreciation 747,497 722,911
----------- -----------
Net office properties and equipment $ 482,950 $ 471,672
========== ==========
</TABLE>
Depreciation charged to operations was $38,437, $70,225, and $57,139 for the
years ended December 31, 1997, 1996, and 1995.
NOTE 5 - DEPOSIT ANALYSIS
The Association's deposits by type are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1997 1996
----------------------------- --------------------------
Amount Percent Amount Percent
----------- ------- -------- -------
<S> <C> <C> <C> <C>
NOW and Super NOW accounts $ 973,059 3.70% $18,791,121 3.40%
Money Market 2,391,372 9.10 3,289,819 11.40
Regular Savings 9,946,727 37.80 9,922,705 34.50
Certificates of Deposit 13,022,281 49.40 14,599,486 50.70
---------- ----- ---------- -----
Total $26,333,439 100.00% $28,791,121 100.00%
=========== ====== =========== ======
</TABLE>
Scheduled maturities of certificates of deposit are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
----------- -------------
<S> <C> <C>
Within three months $ 3,511,563 $ 3,211,395
Three to six months 2,736,685 2,979,206
Six to twelve months 3,246,343 4,327,338
One to two years 2,508,791 2,524,351
Two to three years 507,676 914,494
Three to four years 383,377 260,688
Four to six years 127,846 382,014
-------------- --------------
Total $13,022,281 $14,599,486
=========== ===========
</TABLE>
29
<PAGE> 32
OHIO STATE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - DEPOSIT ANALYSIS (CONTINUED)
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $4,220,000 at December 31, 1997, and $3,922,000 at December
31,1996. Deposits in excess of $100,000 are not federally insured.
Interest expense by deposit category is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
NOW and Super NOW Accounts $ 19,092 $ 17,552 $ 17,970
Money Market 76,042 108,629 157,789
Regular Savings 313,974 296,929 291,351
Certificates of Deposit 735,511 734,750 640,074
------------ ----------- ----------
Total $1,144,619 $1,157,860 $1,107,184
=========== ========== ==========
</TABLE>
NOTE 6 - REGULATORY MATTERS
The Association is subject to various regulatory capital requirements
administered by its primary federal regulator, the Office of Thrift Supervision.
Failure to meet the minimum regulatory capital requirements can initiate certain
mandatory, and possible additional discretionary actions by regulators, that if
undertaken, could have a direct material affect on the Association's financial
statements. Under the regulatory capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Association must meet specific
capital guidelines involving quantitative measures of the Association's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Association's capital amounts and classification under
the prompt corrective action guidelines are also subject to qualitative judgment
by the regulators about components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios of tangible
capital, core capital (Tier 1), and risk-based capital.
The most recent notification from the OTS categorized the Association as "well
capitalized" under the regulatory framework for prompt corrective action. To be
categorized as "well capitalized", the Association must maintain minimum total
risk-based, core (Tier 1), and tangible ratios set forth in the table below.
There are no conditions or events since that notification that management
believes have changed the institution's category.
30
<PAGE> 33
OHIO STATE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - REGULATORY MATTERS (CONTINUED)
The Association's actual capital amounts and ratios are also presented in the
table. Risk-based capital includes tangible capital plus $134,000 of the
Association's allowance for loan losses.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ----
As of December 31, 1997: (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital
(To risk weighted assets) $8,221 48.7% $1,351 8.0% $1,689 10.0%
Core (Tier 1) capital
(To risk weighted assets) 8,087 47.9% 676 4.0% 1,013 6.0%
Core (Tier 1) capital
(To total assets) 8,087 22.5% 1,077 3.0% 1,796 5.0%
Tangible capital
(To total assets) 8,087 22.5% 539 1.5% Not Defined
As of December 31, 1996:
Total risk-based capital
(To risk weighted assets) $4,908 29.5% $1,331 8.0% $1,664 10.0%
Core (Tier 1) capital
(To risk weighted assets) 4,770 28.7% 666 4.0% 998 6.0%
Core (Tier 1) capital
(To total assets) 4,770 14.1% 1,018 3.0% 1,696 5.0%
Tangible capital
(To total assets) 4,770 14.1% 509 1.5% Not Defined
</TABLE>
NOTE 7 - FEDERAL INCOME TAX
The Association was permitted until 1996 a special bad debts deduction limited
generally to eight percent of otherwise taxable income and subject to certain
limitations based on aggregate loans and savings account balances at the end of
the year. In 1996, the Small Business Job Protection Act (the "Act") was signed
into law. The Act eliminated the percentage of taxable income bad debt deduction
for thrift institutions and requires that bad debts for federal income taxes be
determined based primarily on the experience method. The Act provides that bad
debt reserves accumulated after 1987 are subject to recapture over a six year
period which began in 1996. The Act provides that bad debt reserves accumulated
prior to 1988 be exempt from recapture. If the amounts that qualify as
deductions for federal income tax purposes are later used for purposes other
than for bad debt losses, they will be subject to federal income tax at the then
corporate rate. Retained income at December 31, 1997 and 1996, included
approximately $832,000 (pre 1988 reserves) for which federal income tax has not
been provided.
31
<PAGE> 34
OHIO STATE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - FEDERAL INCOME TAX (CONTINUED)
The provisions for Federal income taxes consist of:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current $ 174,386 $ 94,648 $ 191,439
Deferred 19,497 11,695 (6,001)
--------- --------- ---------
Total $ 193,883 $ 106,343 $ 185,438
========= ========= =========
</TABLE>
The following temporary differences gave rise to the deferred tax (asset)
liability:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------- --------
<S> <C> <C>
Income and expense recognized in the financial
statements on the accrual basis, but on the
cash basis for tax purposes $ 20,411 $4,956
Depreciation 1,350 1,520
FHLB stock dividends (incl. redemptions) 90,418 82,360
Difference in bad debt deduction (23,748) (26,365)
Other (13,426) (6,963)
-------- -------
Total $ 75,005 $ 55,508
======== ========
</TABLE>
A reconciliation between the amount of reported income tax expense and the
amount computed by applying the Federal income tax rate to income before income
taxes is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Tax at statutory rate (34%) $ 189,216 $ 108,360 $ 185,868
Increase (decrease) in taxes resulting from:
Nontaxable income (1,103) (2,017) (430)
Other 5,770 - -
--------- --------- ---------
Total $ 193,883 $ 106,343 $ 185,438
========= ========= =========
Effective rate 34.8% 33.4% 33.9%
</TABLE>
32
<PAGE> 35
OHIO STATE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - RETIREMENT PLAN AND 401(K) THRIFT PLAN
The Association has a defined benefit plan for all eligible employees through
the Financial Institutions Retirement Fund. The plan covers and enrolls as
active members all employees who are expected to complete 1,000 hours of service
in twelve consecutive months and have attained age twenty-one. Because the plan
is a multi-employer plan, plan information for the Association separately is not
determinable. Pension expense for the years ended December 31, 1997, 1996, and
1995, was $6,836, $10,899, and $21,561, respectively.
The Association participates in the Financial Institutions Thrift Plan, which
qualifies under Section 401(k) of the Internal Revenue Code. The plan is for all
eligible employees and allows the Association to match employee contributions to
a maximum of 6% of their compensation. The employer's matching funds are based
upon the following schedule: 50% of the members' contributions during their
second and third years of employment, 75% during the fourth and fifth years of
employment, and 100% upon completion of their fifth year of service. The
Association suspended matching contributions effective April, 1995. The
Association's plan expenses for the years ended December 31, 1997, 1996, and
1995, amounted to $1,632, $940, and $3,542, respectively. Plan expense amounts
include any employer's matching contributions.
NOTE 9 - EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
During the year ended December 31, 1997, the Association adopted an ESOP for the
benefit of officers and employees who have met certain eligibility requirements
related to age and length of service. An ESOP trust was created, and acquired
50,653 shares of common stock in the Company's initial public offering, using
proceeds of a loan obtained from the Company, which bears interest at an annual
rate of 6.55%. The loan, which is secured by the shares of stock purchased,
calls for annual interest over a ten year period and annual principal payments
of $50,653 with the initial installment due September 26, 1998.
The Association is scheduled to make annual contributions to the trust to allow
the trust to make the required loan payments to the Company. Shares are released
from collateral based upon the proportion of annual principal payments made on
the loan each year and allocated to qualified employees. As shares are committed
to be released from collateral based on the terms of the loan, the Association
reports compensation expense based upon the fair value of the shares. Dividends,
when paid on allocated ESOP shares, are charged to retained earnings. Dividends
paid on unallocated shares are reported as compensation cost. Compensation
expense for the ESOP was $ 18,942 for the year ended December 31, 1997.
33
<PAGE> 36
OHIO STATE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP") (CONTINUED)
The following table represents the components of the ESOP shares at December 31,
1997:
<TABLE>
<CAPTION>
<S> <C>
Allocated shares -
Shares committed for allocation 1,266
Shares distributed -
Unallocated shares 49,387
--------
Total ESOP shares 50,653
========
Fair value of ESOP shares $772,458
========
</TABLE>
NOTE 10 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Ohio State Financial Services, Inc. is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These instruments involve, to varying degrees, elements
of credit risk in excess of the amount recognized in the statement of financial
condition. The contract amounts of these instruments reflect the extent of
involvement the institution has in particular classes of financial instruments.
The institution uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
The following represents financial instruments whose contract amounts represent
credit risk:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
-------- -------
<S> <C> <C>
Loans in process $ 36,457 $50,649
Commitments to originate loans - fixed rates 512,000 -
</TABLE>
The interest rate on fixed rate residential mortgage loan commitments was 7.0%
at December 31, 1997.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The institution evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the institution upon extension of credit, is based on management's
credit evaluation of the borrower. Collateral held consists primarily of single-
family residences.
34
<PAGE> 37
OHIO STATE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
CONCENTRATION OF CREDIT RISK
The mortgage-backed securities held by Ohio State Financial Services, Inc.
consist of FHLMC and GNMA pass-through securities which are directly or
inherently backed by the full faith and credit of the United States Government.
The Company's real estate loans and loan commitments are primarily for
properties located throughout Eastern Ohio and Northern West Virginia. Repayment
of these loans is in part dependent upon the economic conditions in this region.
The Company evaluates each customer's creditworthiness on a case-by-case basis
and requires collateral on all real estate loans which consists primarily of
residential properties.
The Company also has concentration of credit risk exposure in cash. The Company
places its cash with high credit quality financial institutions. At times, such
investments may be in excess of the FDIC insurance limit. The Company had total
deposits with financial institutions of $110,072, and $279,117 in excess of FDIC
limits as of December 31, 1997 and 1996, respectively.
NOTE 11 - RELATED PARTY TRANSACTIONS
Directors and officers of the Company and its wholly-owned subsidiary were
customers of, and had other transactions with the Company in the ordinary course
of business during the years ended December 31, 1997, 1996, and 1995.
Loans and commitments included in such transactions were made with substantially
the same terms and collateral as those prevailing at the time for comparable
transactions with other persons. Loans to directors and officers did not involve
more than the normal risk of collectibility, or present other unfavorable
features. The loans to directors and officers at December 31, 1997 and 1996,
were not material in the aggregate amount.
NOTE 12 - CASH FLOWS INFORMATION
Cash equivalents include amounts due from banks and Federal Home Loan Bank
overnight accounts and term deposits with original maturities of ninety days or
less.
In addition, the Company made federal income tax payments during the years ended
December 31, 1997, 1996, and 1995, of $49,369; $125,888; and $200,000,
respectively. Cash payments for interest for the years ended December 31, 1997,
1996 and 1995 were $1,146,763; $1,177,830; and $1,102,239, respectively.
35
<PAGE> 38
OHIO STATE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - DEPOSIT INSURANCE
Saving Association Insurance Fund member institutions were assessed a one-time
deposit insurance premium to recapitalize the Fund on September 30, 1996. The
assessment totaled approximately $190,300 and was recorded in the year ended
December 31, 1996. The premium was based on deposits as of March 31, 1995. As a
result of the assessment, the Association's deposit premium insurance rate was
reduced from $.23 to $.065 per $100 of deposit for periods subsequent to
September 30, 1996.
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlements of the instruments.
Statement 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. In addition, the value of
long-term relationships with depositors and other customers are not reflected.
The value of these items is significant. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the corporation.
The following methods and assumptions were used in estimating fair value of
financial instruments as disclosed herein:
CASH AND CASH EQUIVALENTS: For those short-term instruments, the carrying amount
is a reasonable estimate of fair value.
TIME DEPOSITS: For those short-term instruments, the carrying amount is a
reasonable estimate of fair value.
INVESTMENT SECURITIES AND SECURITIES HELD FOR SALE: For debt securities and
marketable equity securities held for investment purposes and for sale, fair
values are based on quoted market prices or dealer quotes. If a quoted market
price is not available, fair value is estimated using quoted market prices for
similar securities.
LOANS: For certain homogeneous categories of loans, such as some residential
mortgages, fair value is estimated using the quoted market prices for securities
backed by similar loans. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities.
36
<PAGE> 39
OHIO STATE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
DEPOSIT LIABILITIES: The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining maturities.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------
Estimated
Carrying Amount Fair Value
--------------- -----------
<S> <C> <C>
Financial Assets:
Cash and cash equivalents $ 3,177,832 $ 3,177,832
Interest bearing time deposits 4,600,000 4,600,000
Securities available for sale 363,000 363,000
Securities held to maturity 4,146,588 4,224,064
Loans, net 24,377,054 24,578,310
Financial Liabilities:
Deposits 26,333,439 26,441,633
Advance payments by borrowers for taxes and insurance 152,136 152,136
December 31, 1996
--------------------------------------
Estimated
Carrying Amount Fair Value
--------------- ----------
Financial Assets:
Cash and cash equivalents $ 2,435,662 $ 2,435,662
Interest bearing time deposits 800,000 800,000
Securities available for sale 339,000 339,000
Securities held to maturity 4,781,000 4,874,000
Loans, net 24,892,000 24,442,543
Financial Liabilities:
Deposit 28,791,000 28,880,000
Advance payments by borrowers for taxes and insurance 154,245 154,245
</TABLE>
37
<PAGE> 40
OHIO STATE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - CONVERSION AND REORGANIZATION
On March 24, 1997, the Board of Directors of the Association approved a plan of
conversion (the "Plan") pursuant to which the Association converted from a
mutual savings and loan association to a capital stock savings and loan
association incorporated under Ohio law and simultaneously issue 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. The
Company became a unitary savings and loan holding company with its principal
assets being the capital stock of the Association, the investments made with the
net proceeds retained from the sale of common shares in the Offering and a loan
made to the ESOP to facilitate the ESOP's purchase of common shares in the
Conversion.
In connection with the conversion, 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 carry no par or stated value per
share.
In accordance with regulations, at the time that the Association converted from
a mutual savings and loan association to a permanent capital stock savings and
loan association, a portion of retained earnings was restricted by establishing
a liquidation account. The liquidation account will be maintained for the
benefit of eligible account holders who continue to maintain their accounts at
the Association after the Conversion. The liquidation account will be reduced
annually to the extent that eligible account holders have reduced their
qualifying deposits. Subsequent increases will not restore an eligible account
holder's interest in the liquidation account. In the event of a complete
liquidation of the Association each account holder will be entitled to receive a
distribution from the liquidation account in an amount proportionate to the
current adjusted qualifying balances for accounts then held.
38
<PAGE> 41
OHIO STATE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - PARENT COMPANY
Effective September 26, 1997 active operations of Ohio State Financial Services,
Inc. were initiated with the approval of the stock conversion of the Association
and correspondent purchase of all the stock of the wholly-owned subsidiary
savings and loan by the Company which coincided with the initial public offering
of the Company stock. The condensed financial statements of Ohio State Financial
Services, Inc. are as follows:
CONDENSED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1997
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Cash deposits with subsidiary bank $ 1,046,244
Interest bearing time deposits 1,400,000
Investment in subsidiary bank 7,580,092
Loan receivable from ESOP 506,530
Other assets 41,346
---------------
Total assets $10,574,212
===============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C>
Other liabilities $ 12,742
Stockholders' equity 10,561,470
------------
Total liabilities and stockholders' equity $10,574,212
===============
</TABLE>
39
<PAGE> 42
OHIO STATE FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - PARENT COMPANY (CONTINUED)
CONDENSED STATEMENT OF OPERATIONS
FOR THE PERIOD SEPTEMBER 26, 1997 TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
INCOME
Interest $ 23,153
EXPENSES
Operating expenses 16,492
--------
Income before equity in undistributed earnings of subsidiary 6,661
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 96,271
--------
Income before income taxes 102,932
PROVISION FOR INCOME TAXES 2,265
--------
Net income $100,667
========
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
FOR THE PERIOD SEPTEMBER 26, 1997 TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
OPERATING ACTIVITIES
Net income $100,667
Adjustments to reconcile net income to cash provided by operating
activities:
Undistributed net income of subsidiary (96,271)
Increase in other assets (41,346)
Increase in other liabilities 12,742
-----------
Net cash used in operating activities (24,208)
-----------
INVESTING ACTIVITIES
Purchases of time deposits (1,400,000)
FINANCIAL ACTIVITIES
Net proceeds from sales of common stock 2,470,452
-----------
Changes in cash and cash equivalents 1,046,244
-----------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD -
-----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,046,244
===========
</TABLE>
40
<PAGE> 43
OHIO STATE FINANCIAL SERVICES, INC.
AND
BRIDGEPORT SAVINGS AND LOAN ASSOCIATION
DIRECTORS AND EXECUTIVE OFFICERS
================================================================================
BOARD OF DIRECTORS OF
OHIO STATE FINANCIAL SERVICES, INC. AND
BRIDGEPORT SAVINGS AND LOAN ASSOCIATION
John O. Costine
Partner
Costine Law Firm
Anton M. Godez
President
General Welding Supply Company
Jon W. Letzkus
President
Ohio State Financial Services, Inc. and
Bridgeport Savings and Loan Association
William E. Reline
Consultant
Wheeling Machine Products
Manuel C. Thomas
Officer
M.C. Thomas Insurance Agency, Inc.
EXECUTIVE OFFICERS OF
OHIO STATE FINANCIAL SERVICES, INC.
Jon W. Letzkus
President
Marianne Doyle
Vice President
Michael P. Eddy
Treasurer and Chief Financial Officer
Sherri Yarbrough
Secretary
EXECUTIVE OFFICERS OF
BRIDGEPORT SAVINGS AND LOAN ASSOCIATION
Jon W. Letzkus
President
Marianne Doyle
Assistant Vice President
Darlene V. Bennington
Treasurer and Secretary
Michael P. Eddy
Comptroller
Sherri Yarbrough
Loan Manager
41
<PAGE> 44
SHAREHOLDER SERVICES
================================================================================
The Fifth Third Bank serves as transfer agent and dividend distributing agent
for the shares of OSFS. Communications regarding change of address, transfer of
shares, lost certificates and dividends should be sent to:
The Fifth Third Bank
Stock Transfer Department
Mail Drop 1090F 5-3212
38 Fountain Square Plaza
Cincinnati, Ohio 45263
(513) 579-5320
(800) 837-2755
ANNUAL MEETING
================================================================================
The Annual Meeting of Shareholders of OSFS will be held on April 15, 1997, at
1:00 p.m., Eastern Time, at the McClure Hotel, 1200 Market Street, Wheeling,
West Virginia 26003. Shareholders are cordially invited to attend.
ANNUAL REPORT ON FORM 10-KSB
================================================================================
A copy of the Annual Report on Form 10-KSB of OSFS, as filed with the Securities
and Exchange Commission, will be available at no charge to shareholders upon
request to:
Ohio State Financial Services, Inc.
435 Main Street
Bridgeport, Ohio 43912
Attention: Secretary
42
<PAGE> 1
Exhibit 20
OHIO STATE FINANCIAL SERVICES, INC.
435 MAIN STREET
BRIDGEPORT, OHIO 43912
(614) 635-0764
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Notice is hereby given that the 1998 Annual Meeting of Shareholders of
Ohio State Financial Services, Inc. ("OSFS") will be held at the McClure Hotel,
1200 Market Street, Wheeling, West Virginia 26003, on April 15, 1998, at 1:00
p.m., local time (the "Annual Meeting"), for the following purposes, all of
which are more completely set forth in the accompanying Proxy Statement:
1. To elect five directors of OSFS for terms
expiring in 1999;
2. To approve the Ohio State Financial Services,
Inc. 1998 Stock Option and Incentive Plan, a copy
of which is attached hereto as Exhibit A;
3. To approve the Bridgeport Savings and Loan
Association Recognition and Retention Plan and
Trust Agreement, a copy of which is attached
hereto as Exhibit B;
4. To ratify the selection of S. R. Snodgrass, A.C.
as the auditors of OSFS for the current fiscal
year; and
5. To transact such other business as may properly
come before the Annual Meeting or any
adjournments thereof.
Only shareholders of OSFS of record at the close of business on
February 20, 1998, will be entitled to receive notice of and to vote at the
Annual Meeting and at any adjournments thereof. Whether or not you expect to
attend the Annual Meeting, we urge you to consider the accompanying Proxy
Statement carefully and to SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY SO
THAT YOUR SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES AND THE PRESENCE OF
A QUORUM MAY BE ASSURED. The giving of a proxy does not affect your right to
vote in person in the event you attend the Annual Meeting.
Bridgeport, Ohio By Order of the Board of Directors
March 9, 1998
Jon W. Letzkus
<PAGE> 2
OHIO STATE FINANCIAL SERVICES, INC.
435 MAIN STREET
BRIDGEPORT, OHIO 43912
(614) 635-0764
PROXY STATEMENT
PROXIES
The enclosed proxy (the "Proxy") is solicited by the Board of Directors
of Ohio State Financial Services, Inc. ("OSFS") for use at the 1998 Annual
Meeting of Shareholders of OSFS to be held at the McClure Hotel, 1200 Market
Street, Wheeling, West Virginia 26003, on April 15, 1998, at 1:00 p.m., local
time, and at any adjournments thereof (the "Annual Meeting"). Without affecting
any vote previously taken, the Proxy may be revoked by executing a later dated
proxy which is received by OSFS before the Proxy is exercised or by giving
notice of revocation to OSFS in writing or in open meeting before the Proxy is
exercised. Attendance at the Annual Meeting will not, of itself, revoke the
Proxy.
Each properly executed Proxy received prior to the Annual Meeting and
not revoked will be voted as specified thereon or, in the absence of specific
instructions to the contrary, will be voted:
FOR the reelection of John O. Costine, Anton M. Godez, Jon
W. Letzkus, William E. Reline and Manuel C. Thomas as
directors of OSFS for terms expiring in 1999;
FOR the approval of the Ohio State Financial Services, Inc.
1998 Stock Option and Incentive Plan (the "Stock Option
Plan"), a copy of which is attached hereto as Exhibit A;
FOR the approval of the Bridgeport Savings and Loan
Association Recognition and Retention Plan and Trust Agreement
(the "RRP"), a copy of which is attached hereto as Exhibit B;
and
FOR the ratification of the selection of S. R. Snodgrass,
A.C. ("S.R. Snodgrass") as the auditors of OSFS for the
current fiscal year.
The Proxies may be solicited by the directors, officers and other
employees of OSFS and Bridgeport Savings and Loan Association ("Bridgeport"), in
person or by telephone, telegraph or mail only for use at the Annual Meeting.
The Proxy will not be used for any other meeting. The cost of soliciting the
Proxies will be borne by OSFS.
Only shareholders of record as of the close of business on February 20,
1998 (the "Voting Record Date"), are entitled to vote at the Annual Meeting.
Each such shareholder will be entitled to cast one vote for each share owned.
The records of OSFS disclose that, as of the Voting Record Date, there were
634,168 votes entitled to be cast at the Annual Meeting.
This Proxy Statement is first being mailed to shareholders of OSFS on
or about March 13, 1998.
VOTE REQUIRED
ELECTION OF DIRECTORS
Under Ohio law and the Code of Regulations of OSFS (the "Regulations"),
the five nominees receiving the greatest number of votes will be elected as
directors. Shares held by a nominee for a beneficial owner which are represented
in person or by proxy but not voted with respect to the election of directors
and shares as to which the authority to vote is withheld are not counted toward
the election of directors or toward the election of the individual nominees
specified on the Proxy.
<PAGE> 3
APPROVAL OF THE STOCK OPTION PLAN AND THE RRP
The affirmative vote of a majority of the outstanding common shares of
OSFS is necessary to approve the Stock Option Plan and the RRP. Under Ohio law,
shares held by a nominee for a beneficial owner which are represented in person
or by proxy but not voted with respect to such proposals ("non-votes") are
counted as present. The effect of an abstention or a non-vote is the same as a
vote against the approval of the Stock Option Plan and the RRP. If the
accompanying Proxy is signed and dated by the shareholder but no vote or
instruction to abstain is specified thereon, however, the shares held by such
shareholder will be voted FOR the adoption of the Stock Option Plan and the RRP.
RATIFICATION OF SELECTION OF AUDITORS
The affirmative vote of a majority of the shares represented in person
or by proxy at the Annual Meeting is necessary to ratify the selection of S.R.
Snodgrass as the auditors of OSFS for the current fiscal year. The effect of an
abstention or a non-vote is, therefore, the same as a "no" vote. If the
accompanying Proxy is signed and dated by the shareholder but no vote or
instruction to abstain is specified thereon, however, the shares held by such
shareholder will be voted FOR the ratification of the selection of S.R.
Snodgrass as the auditors of OSFS for the current fiscal year.
VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
only person known to OSFS to own beneficially more than five percent of the
outstanding common shares of OSFS as of February 28, 1998:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name And Address Beneficial Ownership Shares Outstanding
- ---------------- -------------------- -------------------
<S> <C> <C>
Ohio State Financial Services, Inc.
Employee Stock Ownership Plan
435 Main Street 50,653 (1) 7.99%
Bridgeport, Ohio 43912
Jeffrey L. Gendell
200 Park Avenue
Suite 3900 39,300 (2) 6.20%
New York, New York 10166
- ---------------------------
</TABLE>
(1) Consists of the shares held by First Bankers Trust Company, N.A., as
the Trustee for the Ohio State Financial Services, Inc. Employee Stock
Ownership Plan (the "ESOP"). The Trustee has voting power over shares
that have not been allocated to an ESOP participant and shares that
have been allocated to an ESOP participant but as to which no voting
instructions are given by the recipient. The Trustee has limited shared
investment power over all ESOP shares.
(2) Based on a Schedule 13D filed with the Securities and Exchange
Commission by Jeffrey L. Gendell ("Gendell"), Tontine Financial
Partners, L.P., a Delaware limited partnership ("Tontine"), and Tontine
Management L.L.C., a Delaware limited liability company ("TM").
Gendell, TM and Tontine report shared voting and dispositive power over
the reported shares.
-2-
<PAGE> 4
The following table sets forth information regarding the number of
common shares of OSFS beneficially owned by each director and by all directors
and executive officers of OSFS as a group as of February 28, 1998:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name And Address (1) Beneficial Ownership (2) Shares Outstanding
- -------------------- --------------------- ------------------
<S> <C> <C>
John O. Costine 2,000 0.32%
Anton M. Godez 14,000 2.21
Jon W. Letzkus 14,000 (3) 2.21
William E. Reline 5,000 0.79
Manuel C. Thomas 14,000 (4) 2.21
All directors and executive officers
of OSFS as a group (8 people) 61,233 9.66%
- ----------------------------
</TABLE>
(1) Each of the persons listed in this table may be contacted at the address of
OSFS.
(2) All persons listed have sole voting or investment power unless
otherwise indicated by footnote.
PROPOSAL ONE - ELECTION OF DIRECTORS
ELECTION OF DIRECTORS
The Regulations provide for a Board of Directors consisting of five
persons. In accordance with Section 2.03 of the Regulations, nominees for
election as directors may be proposed only by the directors or by a shareholder
entitled to vote for directors. A nomination by a shareholder must be submitted
in writing to the Secretary of OSFS and received by the Secretary not later than
the sixtieth day before the first anniversary of the most recent annual meeting
of shareholders held for the election of directors. Each written nomination must
state the name, age, business or residence address of the nominee, the principal
occupation or employment of the nominee, the number of common shares of OSFS
owned either beneficially or of record by each such nominee and the length of
time such shares have been so owned.
The Board of Directors proposes the reelection at the Annual Meeting of
the following persons to terms which will expire in 1999:
<TABLE>
<CAPTION>
Director of Director of
OSFS Bridgeport
Name Age (1) Position(s) held since (2) since
- ---- ------- ---------------- --------- ----- -----
<S> <C> <C> <C>
John O. Costine 73 Director 1997 1975
Anton M. Godez 72 Director 1997 1990
Jon W. Letzkus 54 Director, President and 1997 1989
Chairman
William E. Reline 68 Director 1997 1992
Manuel C. Thomas 74 Director 1997 1985
- -----------------------------
</TABLE>
(1) As of February 28, 1998.
(2) Each director of OSFS is also a director of Bridgeport and became a
director of OSFS in connection with the conversion of Bridgeport from
mutual to stock form (the "Conversion") and the formation of OSFS as
the holding company for Bridgeport.
-3-
<PAGE> 5
If any nominee is unable to stand for election, any Proxies granting
authority to vote for such nominee will be voted for such substitute as the
Board of Directors recommends.
JOHN O. COSTINE is a partner in the Costine Law Firm, a general
partnership, located in St. Clairsville, Ohio and has practiced law since 1950.
ANTON M. GODEZ has served as the President of the General Welding
Supply Company located in Martins Ferry, Ohio, since 1950.
JON W. LETZKUS is the President of both OSFS and Bridgeport and is the
designated Managing Officer of Bridgeport. Mr. Letzkus joined Bridgeport in
September 1980 as a vice president. Mr. Letzkus has served as the President of
Bridgeport since 1989.
WILLIAM E. RELINE retired from Cooper Industries, a mining equipment
manufacturing company, in 1989 and has been a consultant to Wheeling Machine
Products since 1996.
MANUEL C. THOMAS has been employed by M. C. Thomas Insurance Agency,
Inc. since 1954.
MEETINGS OF DIRECTORS
The Board of Directors of OSFS met three times for regularly scheduled
and special meetings during 1997. Each director of OSFS is also a director of
Bridgeport. The Board of Directors of Bridgeport met 28 times for regularly
scheduled and special meetings during 1997.
COMMITTEES OF DIRECTORS
The Board of Directors of OSFS does not currently have any committees,
but intends to establish an audit committee and a committee to administer the
Stock Option Plan. The full Board of Directors of Bridgeport serves as the
Compensation Committee. The function of the Compensation Committee is to
determine compensation for Bridgeport's employees and to make decisions
regarding employee benefits and related matters. Mr. Letzkus does not
participate in discussions regarding his salary. The Compensation Committee met
three times during the year ended December 31, 1997.
EXECUTIVE OFFICERS
In addition to Mr. Letzkus, the President of OSFS and Bridgeport, the
following persons are executive officers of OSFS:
<TABLE>
<CAPTION>
NAME AGE (1) POSITION(S) HELD
----- ------ ----------------
<S> <C> <C>
Marianne Doyle 38 Vice President of OSFS and Assistant Vice
President of Bridgeport
Michael P. Eddy 38 Treasurer and Chief Financial Officer of
OSFS and Comptroller of Bridgeport
Sherri Yarbrough 30 Secretary of OSFS
---------------------------------
(1) As of February 28, 1998.
</TABLE>
MARIANNE DOYLE has served Bridgeport as the Assistant Vice President
since 1994 and as a loan officer since 1985.
MICHAEL P. EDDY has served since 1985 as the Comptroller of Bridgeport
and from 1985 to 1994 he also served as the Secretary of Bridgeport.
SHERRI YARBROUGH has served Bridgeport as a loan officer and as the
Office Manager since 1990.
-4-
<PAGE> 6
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by Bridgeport to
Jon W. Letzkus, the President and Chief Executive Officer of OSFS and
Bridgeport, for the fiscal years ended December 31, 1997 and 1996. No executive
officer of OSFS earned salary and bonus in excess of $100,000 during 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
----------------------------------------
Annual Compensation
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Name and Principal Year Salary ($) (1) Bonus ($)
Position
-------------------------------------------------------------------------------
Jon W. Letzkus 1997 $73,500 $10,075
President and Chief 1996 70,000 6,024
Executive Officer
-------------------------------------------------------------------------------
</TABLE>
(1) Does not include amounts attributable to other miscellaneous
benefits received by Mr. Letzkus. The cost to OSFS or Bridgeport
of providing such benefits to Mr. Letzkus was less than 10% of his
cash compensation.
DIRECTOR COMPENSATION
Each director of OSFS receives a fee of $250 per quarterly meeting of
the Board of Directors. Each director of Bridgeport who is not a full-time
employee of Bridgeport receives a fee of $225 per meeting of the Board of
Directors attended with three paid absences. OSFS and Bridgeport do not pay
committee fees.
EMPLOYMENT AGREEMENT
In September 1997, Bridgeport entered into an employment agreement with
Jon W. Letzkus (the "Employment Agreement"), which was amended effective January
1, 1998. The Employment Agreement provides for a term of three years and a
salary of not less than $78,500 and performance reviews by the Board of
Directors not less often than annually, at which time the Employment Agreement
may be extended for a period of one year. The Employment Agreement also provides
for the inclusion of Mr. Letzkus in any formally established employee benefit,
bonus, pension, and profit-sharing plans for which senior management personnel
are eligible and for vacation and sick leave in accordance with Bridgeport's
prevailing policies.
The Employment Agreement is terminable by Bridgeport at any time. In
the event of termination by Bridgeport for "just cause," as defined in the
Employment Agreement, Mr. Letzkus has no right to receive any compensation or
other benefits for any period after such termination. In the event of
termination by Bridgeport other than for just cause, at the end of the term of
the Employment Agreement or in connection with a "change of control," as defined
in the Employment Agreement, Mr. Letzkus is entitled to a continuation of salary
payments for a period of time equal to the term of the Employment Agreement and
a continuation of benefits substantially equal to those being provided at the
date of termination of employment until the earliest to occur of the end of the
term of the Employment Agreement or the date on which Mr. Letzkus becomes
employed full-time by another employer.
The Employment Agreement also contains provisions with respect to the
occurrence within one year of a "change of control" of (1) the termination of
employment of Mr. Letzkus for any reason other than just cause, retirement, or
termination at the end of the term of the agreement, or (2) a constructive
termination resulting from change, without Mr. Letzkus' written consent, in the
capacity or circumstances in which Mr. Letzkus is employed or a material
reduction in his responsibilities, authority, compensation, or other benefits
provided under the Employment Agreement. In the event of any such occurrence,
Mr. Letzkus is entitled to payment of an amount equal to two times Mr. Letzkus'
annual compensation immediately preceding the termination of his employment. In
addition, Mr. Letzkus is entitled to continued coverage under all benefit plans
until the earliest of the end of the term of the Employment Agreement or the
date on which he is included in another employer's benefit plans as a full-time
employee. The maximum which Mr. Letzkus may receive, however, is limited to an
amount which will
-5-
<PAGE> 7
not result in the imposition of a penalty tax pursuant to Section 280G(b)(3) of
the Code. "Control," as defined in the Employment Agreement, generally refers to
the acquisition by any person or entity of the ownership or power to vote 10% or
more of the voting stock of Bridgeport or OSFS, the control of the election of a
majority of the directors of Bridgeport or OSFS, or the exercise of a
controlling influence over the management or policies of Bridgeport or OSFS.
PROPOSAL TWO - APPROVAL OF THE OHIO STATE FINANCIAL SERVICES, INC.
1998 STOCK OPTION AND INCENTIVE PLAN
STOCK OPTION PLAN
The following is a summary of the terms of the Stock Option Plan and is
qualified in its entirety by reference to the full text of the Stock Option
Plan, a copy of which is attached hereto as Exhibit A.
PURPOSE. The purposes of the Stock Option Plan include retaining and
providing incentives to the directors, managerial and other employees of OSFS
and any subsidiary by facilitating their purchase of a stock interest in OSFS.
Pursuant to the Stock Option Plan, 63,417 common shares have been reserved for
issuance by OSFS upon the exercise of options to be granted to certain
directors, officers and employees of OSFS and its subsidiaries from time to time
under the Stock Option Plan.
ADMINISTRATION AND ELIGIBILITY. The Stock Option Plan will be
administered by a committee composed of at least three directors of OSFS who are
not employees of OSFS or any subsidiary of OSFS (the "Stock Option Committee").
The Stock Option Committee may grant options under the Stock Option Plan at such
times as it deems most beneficial to OSFS and its subsidiaries on the basis of
the individual participant's position, duties and responsibilities, the value of
their services to OSFS and any subsidiary and any other factors the Stock Option
Committee may deem relevant. Pursuant to the terms of the Stock Option Plan, no
employee may receive options to purchase more than 25% of the shares which may
be subject to options pursuant to the Stock Option Plan, and directors who are
not employees of OSFS or any subsidiary may not receive options to purchase more
than 5% of such shares individually or 30% in the aggregate.
Without further approval of the shareholders, the Board of Directors
may at any time terminate the Stock Option Plan or may amend it from time to
time in such respects as the Board of Directors may deem advisable, except that
the Board of Directors may not, without the approval of the shareholders, make
any amendment which would (a) increase the aggregate number of common shares
which may be issued under the Stock Option Plan (except for adjustments to
reflect certain changes in the capitalization of OSFS), (b) materially modify
the requirements as to eligibility for participation in the Stock Option Plan,
or (c) materially increase the benefits accruing to participants under the Stock
Option Plan. Notwithstanding the foregoing, the Board of Directors may amend the
Stock Option Plan to take into account changes in applicable securities, federal
income tax and other applicable laws.
OPTION TERMS. Options granted to the officers and employees under the
Stock Option Plan may be "incentive stock options" ("ISOs") within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
may be options which do not qualify under Section 422 of the Code
("Non-Qualified Stock Options"). Options granted under the Stock Option Plan to
directors who are not employees of OSFS or Bridgeport will be Non-Qualified
Stock Options.
The exercise price of each option granted under the Stock Option Plan
will be determined by the Stock Option Committee at the time the option is
granted; provided, however, that the exercise price of an option may not be less
than 100% of the fair market value of the shares on the date of the grant. In
addition, the exercise price of an ISO may not be less than 110% of the fair
market value of the shares on the date of the grant if the recipient owns more
than 10% of the outstanding common shares of OSFS. The Stock Option Committee
will fix the term of each option, except that an ISO will not be exercisable
after the expiration of ten years from the date it is granted; provided,
however, that if a recipient of an ISO owns a number of shares representing more
than 10% of OSFS shares outstanding at the time the ISO is granted, the term of
the ISO will not exceed five years. If the fair market value of shares awarded
pursuant to ISOs that are exercisable for the first time during any calendar
year by a participant under the Stock Option Plan exceeds $100,000, the ISOs
will be considered Non-Qualified Stock Options to the extent of such excess.
-6-
<PAGE> 8
An option recipient cannot transfer or assign an option other than by
will or in accordance with the laws of descent and distribution. Termination of
an option recipient's employment for cause, as defined in the Stock Option Plan,
will result in the termination of any outstanding exercisable options. Any
options which have not yet become exercisable will terminate upon the
resignation, removal or retirement of a director of OSFS or Bridgeport, or upon
the termination of employment of an officer or employee of OSFS or Bridgeport,
except in the case of death or disability.
OSFS will receive no monetary consideration for the granting of options
under the Stock Option Plan. Upon the exercise of options, OSFS will receive
payment of cash or, if acceptable to the Stock Option Committee, common shares
of OSFS or outstanding awarded stock options. The market value of the common
shares underlying the options reserved for the Stock Option Plan is $1.1
million, based upon the number of shares reserved, multiplied by the $17.50 per
share closing sales price of shares of OSFS on March 3, 1998, as quoted on the
OTC Bulletin Board.
TAX TREATMENT OF INCENTIVE STOCK OPTIONS. An optionee who is granted an
ISO will not recognize taxable income either on the date of grant or on the date
of exercise, although the difference between the fair market value of the shares
at the time of exercise and the exercise price is a tax preference item
potentially subject to the alternative minimum tax.
Upon disposition of shares acquired from the exercise of an ISO,
capital gain or loss is generally recognized in an amount equal to the
difference between the amount realized on the sale or disposition and the
exercise price. However, if the optionee disposes of the shares within two years
of the date of grant or within one year from the date of the issuance of the
shares to the optionee (a "Disqualifying Disposition"), then the optionee will
recognize ordinary income, as opposed to capital gain, at the time of
disposition. In general, the amount of ordinary income recognized will be equal
to the lesser of (i) the amount of gain realized on the disposition, or (ii) the
difference between the fair market value of the shares received on the date of
exercise and the exercise price. Any remaining gain or loss is treated as a
short-term, mid-term or long-term capital gain or loss, depending upon the
period of time the shares have been held.
OSFS will not be entitled to a tax deduction upon either the exercise
of an ISO or the disposition of shares acquired pursuant to such exercise,
except to the extent that the optionee recognizes ordinary income in a
Disqualifying Disposition. Ordinary income from a Disqualifying Disposition will
constitute compensation but will not be subject to tax withholding, nor will it
be considered wages for payroll tax purposes.
If the holder of an ISO pays the exercise price, in whole or in part,
with previously acquired shares, the exchange should not affect the ISO tax
treatment of the exercise. Upon such exchange, and except for Disqualifying
Dispositions, no gain or loss is recognized by the optionee upon delivering
previously acquired shares to OSFS, and shares received by the optionee equal in
number to the previously acquired common shares exchanged therefor will have the
same basis and holding period for long-term or mid-term capital gain purposes as
the previously acquired shares. (The optionee, however, will not be able to
utilize the prior holding period for the purpose of satisfying the ISO statutory
holding period requirements for avoidance of a Disqualifying Disposition.)
Shares received by the optionee in excess of the number of shares previously
acquired will have a basis of zero and a holding period which commences as of
the date the shares are transferred to the optionee upon exercise of the ISO. If
an ISO is exercised using shares previously acquired through the exercise of an
ISO, the exchange of such previously acquired shares will be considered a
disposition of such shares for the purpose of determining whether a
Disqualifying Disposition has occurred.
TAX TREATMENT OF NON-QUALIFIED STOCK OPTIONS. A recipient of a
Non-Qualified Stock Option does not recognize taxable income on the date of
grant of the option, provided that the option does not have a readily
ascertainable fair market value at the time it is granted. In general, the
optionee must recognize ordinary income at the time of exercise of a
Non-Qualified Stock Option in the amount of the difference between the fair
market value of the shares on the date of exercise and the option exercise
price. The ordinary income recognized will constitute compensation for which tax
withholding by OSFS generally will be required. The amount of ordinary income
recognized by an optionee will be deductible by OSFS in the year that the
optionee recognizes the income if OSFS complies with any applicable withholding
requirement.
If the sale of the shares could subject the optionee to liability under
Section 16(b) of the Securities Exchange Act of 1934, the optionee generally
will recognize ordinary income only on the date that the optionee is no longer
subject to such liability in an amount equal to the fair market value of the
shares on such date less the option exercise price. Nevertheless, the optionee
may elect under Section 83(b) of the Code, within 30 days of the date of
exercise, to recognize ordinary income as of the date of exercise, without
regard to the restriction of Section 16(b).
-7-
<PAGE> 9
Shares acquired upon the exercise of a Non-Qualified Stock Option will
have a tax basis equal to their fair market value on the exercise date or other
relevant date on which ordinary income is recognized, and the holding period for
the shares generally will begin on the date of exercise or such other relevant
date. Upon subsequent disposition of the shares, the optionee will recognize
long-term capital gain or loss if the optionee has held the shares for more than
eighteen months prior to disposition, mid-term capital gain or loss if the
optionee has held the shares for at least one year but less than eighteen months
prior to disposition, or short-term capital gain or loss if the optionee has
held the shares for one year or less prior to disposition.
If an optionee with a Non-Qualified Stock Option pays the exercise
price, in whole or in part, with previously acquired shares, the optionee will
recognize ordinary income in the amount by which the fair market value of the
shares received exceeds the exercise price. The optionee will not recognize gain
or loss upon delivering such previously acquired shares to OSFS. Shares received
by an optionee equal in number to the previously acquired shares exchanged
therefor will have the same basis and holding period as such previously acquired
shares. Shares received by an optionee in excess of the number of such
previously acquired shares will have a basis equal to the fair market value of
such additional shares as of the date ordinary income is recognized. The holding
period for such additional shares will commence as of the date of exercise or
such other relevant date.
PROPOSED AWARDS. If the shareholders approve the Stock Option Plan, the
Board of Directors of OSFS will grant the following options:
<TABLE>
<CAPTION>
Name Of Recipient Shares Subject To Options
------------------ -------------------------
<S> <C>
John O. Costine 3,171
Marianne Doyle 3,171
Michael P. Eddy 3,171
Anton M. Godez 3,171
Jon W. Letzkus 15,854
William E. Reline 3,171
Manuel C. Thomas 3,171
Sherri Yarbrough 3,171
</TABLE>
Options to purchase 19,025 common shares of OSFS are also expected to
be granted to employees of OSFS and Bridgeport who are not executive officers of
OSFS. No determination has been made with respect to the extent to which the
options granted to employees will be ISOs.
The Stock Option Committee may grant options under the Stock Option
Plan to the directors, officers and employees of OSFS and Bridgeport in the
future at such times as they deem most beneficial to OSFS and Bridgeport on the
basis of the individual participants responsibility, tenure and future
potential.
THE BOARD OF DIRECTORS OF OSFS RECOMMENDS THAT THE SHAREHOLDERS OF OSFS
APPROVE THE STOCK OPTION PLAN.
PROPOSAL THREE - APPROVAL OF THE BRIDGEPORT SAVINGS AND LOAN ASSOCIATION
MANAGEMENT RECOGNITION AND RETENTION PLAN AND TRUST
RECOGNITION AND RETENTION PLAN
The following is a summary of the terms of the RRP and is qualified in
its entirety by reference to the full text of the RRP, a copy of which is
attached hereto as Exhibit B.
GENERAL. Bridgeport has proposed the RRP to compensate its directors
and employees for services to OSFS and Bridgeport in a manner which will provide
such persons with an additional incentive to strive for the success of
Bridgeport and OSFS. Bridgeport expects to contribute sufficient funds to enable
the RRP to purchase up to 25,367 shares of OSFS. The shares to be awarded
pursuant to the RRP may be purchased by OSFS on the open market or may consist
of authorized but unissued shares of OSFS. In the event that all 25,367 shares
which may be awarded under the RRP consist of authorized but unissued shares of
OSFS, the interests of current shareholders will be diluted by approximately
3.9%.
-8-
<PAGE> 10
ADMINISTRATION AND ELIGIBILITY. The RRP will be administered by a
committee composed of at least three directors of Bridgeport (the "RRP
Committee"). The RRP Committee will determine which directors and employees of
Bridgeport and OSFS will be awarded shares under the RRP and the number of
shares awarded; provided, however, that the terms of the RRP provide that the
aggregate number of shares covered by awards to any one employee may not exceed
25% of the shares held pursuant to the RRP and directors who are not employees
of Bridgeport may not receive more than 5% of such shares individually or 30% in
the aggregate.
TERMS. Unless the RRP Committee specifically states a longer period of
time when an award of shares is made, one-fifth of such shares will become
earned and non-forfeitable on each of the first five anniversaries of the date
of the award. Until shares awarded are earned by the participant, such shares
will be forfeited in the event that the participant ceases to be either a
director or an employee of Bridgeport, except that in the event of the death or
disability of a participant all of the participant's awarded shares will be
deemed to be earned and nonforfeitable.
The shares, together with any cash dividends or distributions paid
thereon, will be distributed as soon as practicable after they are earned. A
participant may direct the voting of all shares which have been earned but have
not yet been distributed to him or her. Shares that have been awarded, but not
earned, may not be transferred.
TAX TREATMENT OF SHARES AWARDED UNDER THE RRP. Persons receiving shares
under the RRP generally will not recognize income upon the award of such shares,
but will recognize ordinary income when and to the extent the restrictions on
such shares lapse, in an amount equal to the fair market value of the shares at
the time such restrictions lapse plus the amount of any dividends distributed to
the participant with respect to such shares. If applicable withholding
requirements are satisfied, Bridgeport will be entitled to a deduction each year
in an amount equal to the income, if any, recognized by participants for such
year.
Under Section 83(b) of the Code, a participant may elect, within 30
days after the shares are awarded, to recognize ordinary income on the date the
shares are awarded based on the fair market value of the shares on such date. If
the election is made, Bridgeport would be entitled to a deduction for an
equivalent amount. A participant making such an election will have a tax basis
in the shares equal to the amount of ordinary income recognized, and the
participant's holding period for capital gains purposes for such shares will
commence on the date the shares are awarded. If a Section 83(b) election is
made, however, and the shares are subsequently forfeited, the participant will
not be entitled to either a deduction of the amount previously recognized as
income with respect to such shares or a refund of any tax paid thereon.
PROPOSED AWARDS. If the shareholders approve the RRP, OSFS expects to
contribute sufficient funds to enable the RRP to purchase up to 25,367 common
shares of OSFS at the market price at the time of such purchase. After such
purchase, the RRP Committee intends to make the following awards under the RRP:
<TABLE>
<CAPTION>
Name Of Recipient Shares Subject To Rrp Awards
------------------ ----------------------------
<S> <C>
John O. Costine 1,268
Marianne Doyle 1,268
Michael P. Eddy 1,522
Anton M. Godez 1,268
Jon W. Letzkus 6,342
William E. Reline 1,268
Manuel C. Thomas 1,268
Sherri Yarbrough 1,268
</TABLE>
The RRP Committee also expects to award 7,355 common shares of OSFS to
employees of OSFS and Bridgeport who are not executive officers of OSFS. The RRP
Committee may award shares under the RRP to the directors, officers and
employees of OSFS and Bridgeport in the future at such times as they deem most
beneficial to OSFS and Bridgeport on the basis of the individual participant's
responsibility, tenure and future potential.
THE BOARD OF DIRECTORS OF OSFS RECOMMENDS THAT THE SHAREHOLDERS OF OSFS
APPROVE THE RRP.
-9-
<PAGE> 11
NEW PLAN BENEFITS
The following table sets forth information regarding the options
expected to be granted pursuant to the Stock Option Plan and the awards expected
to be made pursuant to the RRP:
<TABLE>
<CAPTION>
Stock Option Plan RRP
------------------------- -----------------------------
Name And Position Shares Subject To Options Dollar Value (1) Shares
----------------- ------------------------- ---------------- ------
<S> <C> <C> <C>
Jon W. Letzkus 15,854 $110,985 6,342
All executive officers, as a
group (4 persons) 25,367 $ 71,015 4,058
All directors who are not
executive officers, as a
group (4 persons) 12,684 $ 88,778 5,073
All employees who are not
executive officers, as a
group (10 persons) 19,025 $128,713 7,355
- --------------------------------
</TABLE>
(1) Based upon the number of shares to be awarded multiplied by the $17.50
per share closing sale price quoted by the OTC Bulletin Board on March
3, 1998.
PROPOSAL FOUR - RATIFICATION OF SELECTION OF AUDITORS
The Board of Directors has selected S. R. Snodgrass as the auditors of
OSFS for the current fiscal year and recommends that the shareholders ratify the
selection. Management expects that a representative of S. R. Snodgrass will be
present at the Annual Meeting, will have the opportunity to make a statement if
he or she so desires and will be available to respond to appropriate questions.
PROPOSALS OF SHAREHOLDERS AND OTHER MATTERS
Any proposals of shareholders intended to be included in OSFS' proxy
statement for the 1999 Annual Meeting of Shareholders should be sent to OSFS by
certified mail and must be received by OSFS not later than November 13, 1998.
Management knows of no other business which may be brought before the
Annual Meeting. It is the intention of the persons named in the enclosed Proxy
to vote such Proxy in accordance with their best judgment on any other matters
which may be brought before the Annual Meeting.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. WHETHER OR NOT YOU
EXPECT TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO FILL IN, SIGN AND
RETURN THE PROXY IN THE ENCLOSED RETURN ENVELOPE.
Bridgeport, Ohio By Order of the Board of Directors
March 9, 1998
Jon W. Letzkus, President
-10-
<PAGE> 12
EXHIBIT A
OHIO STATE FINANCIAL SERVICES, INC.
1998 STOCK OPTION AND INCENTIVE PLAN
1. PURPOSE. The purpose of the Ohio State Financial Services, Inc. 1998
Stock Option and Incentive Plan (this "Plan") is to promote and advance the
interests of Ohio State Financial Services, Inc. (the "Company") and its
shareholders by enabling the Company to attract, retain and reward directors,
managerial and other employees of the Company and any Subsidiary (hereinafter
defined), and to strengthen the mutuality of interests between such directors
and employees and the Company's shareholders by providing such persons with a
proprietary interest in pursuing the long-term growth, profitability and
financial success of the Company.
2. DEFINITIONS. For purposes of this Plan, the following terms shall
have the meanings set forth below:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as
amended, or any successor thereto, together with the rules, regulations
and interpretations promulgated thereunder.
(c) "Committee" means the Committee of the Board constituted
as provided in Section 3 of this Plan.
(d) "Common Shares" means the common shares, without par
value, of the Company or any security of the Company issued in
substitution, in exchange or in lieu thereof.
(e) "Company" means Ohio State Financial Services, Inc., an
Ohio corporation, or any successor corporation.
(f) "Employment" means regular employment with the Company or
a Subsidiary and does not include service as a director only.
(g) "Exchange Act" means the Securities Exchange Act of 1934,
as amended, or any successor statute.
(h) "Fair Market Value" shall be determined as follows:
(i) If the Common Shares are traded on a
national securities exchange at the time of grant of the Stock
Option (hereinafter defined), then the Fair Market Value shall
be the average of the highest and the lowest selling price on
such exchange on the date such Stock Option is granted or, if
there were no sales on such date, then on the next prior
business day on which there was a sale.
(ii) If the Common Shares are quoted on The
Nasdaq Stock Market at the time of the grant of the Stock
Option, then the Fair Market Value shall be the mean between
the closing high bid and low asked quotation with respect to a
Common Share on such date on The Nasdaq Stock Market.
(iii) If the Common Shares are not traded on
a national securities exchange or quoted on The Nasdaq Stock
Market, then the Fair Market Value shall be as determined by
the Committee.
(i) "Incentive Stock Option" means any Stock Option granted
pursuant to the provisions of Section 6 of this Plan that is intended
to be and is specifically designated as an "incentive stock option"
within the meaning of Section 422 of the Code.
(j) "Non-Qualified Stock Option" means any Stock Option
granted pursuant to the provisions of Section 6 of this Plan that is
not an Incentive Stock Option.
(k) "OTS" means the Office of Thrift Supervision, Department
of the Treasury.
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<PAGE> 13
(l) "Participant" means an employee or director of the Company
or a Subsidiary who is granted a Stock Option under this Plan.
Notwithstanding the foregoing, for the purposes of the granting of any
Incentive Stock Option under this Plan, the term "Participant" shall
include only employees of the Company or a Subsidiary.
(m) "Plan" means the Ohio State Financial Services, Inc. 1998
Stock Option and Incentive Plan, as set forth herein and as it may be
hereafter amended from time to time.
(n) "Stock Option" means an award to purchase Common Shares
granted pursuant to the provisions of Section 6 of this Plan.
(o) "Subsidiary" means any corporation or entity in which the
Company directly or indirectly controls 50% or more of the total voting
power of all classes of its stock having voting power and includes,
without limitation, Bridgeport Savings and Loan Association.
(p) "Terminated for Cause" means any removal of a director or
discharge of an employee for personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of a
material provision of any law, rule or regulation (other than traffic
violations or similar offenses), a material violation of a final
cease-and-desist order or any other action of a director or employee
which results in a substantial financial loss to the Company or a
Subsidiary.
3. ADMINISTRATION.
(a) This Plan shall be administered by the Committee to be
comprised of not less than three of the members of the Board who are
not employees of the Company or a Subsidiary. The members of the
Committee shall be appointed from time to time by the Board. Members of
the Committee shall serve at the pleasure of the Board and the Board
may from time to time remove members from, or add members to, the
Committee. A majority of the members of the Committee shall constitute
a quorum for the transaction of business. An action approved in writing
by a majority of the members of the Committee then serving shall be
fully as effective as if the action had been taken by unanimous vote at
a meeting duly called and held.
(b) The Committee is authorized to construe and interpret this
Plan and to make all other determinations necessary or advisable for
the administration of this Plan. The Committee may designate persons
other than members of the Committee to carry out its responsibilities
under such conditions and limitations as it may prescribe. Any
determination, decision or action of the Committee in connection with
the construction, interpretation, administration, or application of
this Plan shall be final, conclusive and binding upon all persons
participating in this Plan and any person validly claiming under or
through persons participating in this Plan. The Company shall effect
the granting of Stock Options under this Plan in accordance with the
determinations made by the Committee, by execution of instruments in
writing in such form as approved by the Committee.
4. DURATION OF, AND COMMON SHARES SUBJECT TO, THIS PLAN.
(a) Term. This Plan shall terminate on the date which is ten
(10) years from the date on which this Plan is adopted by the Board,
except with respect to Stock Options then outstanding. Notwithstanding
the foregoing, no Incentive Stock Option may be granted under this Plan
after the date which is ten (10) years from the date on which this Plan
is adopted by the Board or the date on which this Plan is approved by
the shareholders of the Company, whichever is earlier.
(b) Common Shares Subject to Plan. The maximum number of
Common Shares in respect of which Stock Options may be granted under
this Plan, subject to adjustment as provided in Section 9 of this Plan,
shall be ten percent of the total Common Shares sold in connection with
the conversion of Bridgeport Savings and Loan Association from mutual
to stock form.
For the purpose of computing the total number of Common Shares
available for Stock Options under this Plan, there shall be counted against the
foregoing limitations the number of Common Shares subject to issuance upon the
exercise or settlement of Stock Options as of the dates on which such Stock
Options are granted. If any Stock Options are forfeited, terminated or exchanged
for other Stock Options, or expire unexercised, the Common Shares which were
theretofore subject
A-2
<PAGE> 14
to such Stock Options shall again be available for Stock Options under this Plan
to the extent of such forfeiture, termination or expiration of such Stock
Options.
Common Shares which may be issued under this Plan may be either
authorized and unissued shares or issued shares which have been reacquired by
the Company. No fractional shares shall be issued under this Plan.
5. ELIGIBILITY AND GRANTS. Persons eligible for Stock Options under
this Plan shall consist of directors and managerial and other key employees of
the Company or a Subsidiary who hold positions with significant responsibilities
or whose performance or potential contribution, in the judgment of the
Committee, will benefit the future success of the Company or a Subsidiary. In
selecting the directors and employees to whom Stock Options will be awarded and
the number of shares subject to such Stock Options, the Committee shall consider
the position, duties and responsibilities of the eligible directors and
employees, the value of their services to the Company and the Subsidiaries and
any other factors the Committee may deem relevant.
6. STOCK OPTIONS. Stock Options granted under this Plan may be in the
form of Incentive Stock Options or Non-Qualified Stock Options, and such Stock
Options shall be subject to the following terms and conditions as the Committee
shall deem desirable:
(a) Grant. Stock Options may be granted under this Plan on
terms and conditions not inconsistent with the provisions of this Plan
and in such form as the Committee may from time to time approve and
shall contain such additional terms and conditions, not inconsistent
with the express provisions of this Plan, as the Committee shall deem
desirable; provided, however, that no more than 25% of the shares
subject to Stock Options may be awarded to any individual who is an
employee of the Company or a Subsidiary, no more than 5% of such shares
may be awarded to any director who is not an employee of the Company or
a Subsidiary and no more than 30% of such shares may be awarded to
non-employee directors of the Company or a Subsidiary in the aggregate.
(b) Stock Option Price. The option exercise price per Common
Share purchasable under a Stock Option shall be determined by the
Committee at the time of grant; provided, however, that in no event
shall the exercise price of a Stock Option be less than 100% of the
Fair Market Value of the Common Shares on the date of the grant of such
Stock Option. Notwithstanding the foregoing, in the case of a
Participant who owns Common Shares representing more than 10% of the
outstanding Common Shares at the time an Incentive Stock Option is
granted, the option exercise price shall in no event be less than 110%
of the Fair Market Value of the Common Shares at the time an Incentive
Stock Option is granted to such Participant.
(c) Stock Option Terms. Subject to the right of the Company to
provide for earlier termination in the event of any merger, acquisition
or consolidation involving the Company, the term of each Stock Option
shall be fixed by the Committee; except that the term of an Incentive
Stock Option will not exceed ten years after the date the Incentive
Stock Option is granted; provided, however, that in the case of a
Participant who owns a number of Common Shares representing more than
10% of the Common Shares outstanding at the time an Incentive Stock
Option is granted, the term of the Incentive Stock Option granted to
such Participant shall not exceed five years.
(d) Exercisability. Except as set forth in Section 6(f) and
Section 7 of this Plan, Stock Options awarded under this Plan shall
become exercisable at the rate of one-fifth per year commencing on the
date that is one year after the date of the grant of the Stock Option
and shall be subject to such other terms and conditions as shall be
determined by the Committee at the date of grant.
(e) Method of Exercise. A Stock Option may be exercised, in
whole or in part, by giving written notice of exercise to the Company
specifying the number of Common Shares to be purchased. Such notice
shall be accompanied by payment in full of the purchase price in cash
or, if acceptable to the Committee in its sole discretion, in Common
Shares already owned by the Participant, or by surrendering outstanding
Stock Options. The Committee may also permit Participants, either on a
selective or aggregate basis, to simultaneously exercise Stock Options
and sell Common Shares thereby acquired, pursuant to a brokerage or
similar arrangement, approved in advance by the Committee, and use the
proceeds from such sale as payment of the purchase price of such
shares.
(f) Special Rule for Incentive Stock Options. With respect to
Incentive Stock Options granted under this Plan, to the extent the
aggregate Fair Market Value (determined as of the date the Incentive
Stock Option is granted) of the number of shares with respect to which
Incentive Stock Options are exercisable under all plans of the
A-3
<PAGE> 15
Company or a Subsidiary for the first time by a Participant during any
calendar year exceeds $100,000, or such other limit as may be required
by the Code, such Stock Options shall be Non-Qualified Stock Options to
the extent of such excess.
7. TERMINATION OF EMPLOYMENT OR DIRECTORSHIP.
(a) Except in the event of the death or disability of a
Participant, upon the resignation, removal or retirement from the board
of directors of any Participant who is a director of the Company or a
Subsidiary or upon the termination of Employment of a Participant who
is not a director of the Company or a Subsidiary, any Stock Option
which has not yet become exercisable shall thereupon terminate and be
of no further force or effect and, subject to extension by the
Committee, any Stock Option which has become exercisable shall
terminate if it is not exercised within 12 months of such resignation,
removal or retirement.
(b) Unless the Committee shall specifically state otherwise at
the time a Stock Option is granted, all Stock Options granted under
this Plan shall become exercisable in full on the date of termination
of a Participant's employment or directorship with the Company or a
Subsidiary because of his death or disability, and, subject to
extension by the Committee, all Stock Options shall terminate if not
exercised within 12 months of the Participant's death or disability.
(c) In the event the Employment or the directorship of a
Participant is Terminated for Cause, any Stock Option which has not
been exercised shall terminate as of the date of such termination for
cause.
8. NON-TRANSFERABILITY OF STOCK OPTIONS. No Stock Option under this
Plan and no rights or interests therein shall be assignable or transferable by a
Participant except by will or pursuant to the laws of descent and distribution.
During the lifetime of a Participant, Stock Options are exercisable only by, and
payments in settlement of Stock Options will be payable only to, the Participant
or his or her legal representative.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
(a) The existence of this Plan and the Stock Options granted
hereunder shall not affect or restrict in any way the right or power of
the Board or the shareholders of the Company to make or authorize the
following: any adjustment, recapitalization, reorganization or other
change in the Company's capital structure or its business; any merger,
acquisition or consolidation of the Company; any issuance of bonds,
debentures, preferred or prior preference stocks ahead of or affecting
the Company's capital stock or the rights thereof; the dissolution or
liquidation of the Company or any sale or transfer of all or any part
of its assets or business; or any other corporate act or proceeding,
including any merger or acquisition which would result in the exchange
of cash, stock of another company or options to purchase the stock of
another company for any Stock Option outstanding at the time of such
corporate transaction or which would involve the termination of all
Stock Options outstanding at the time of such corporate transaction.
(b) In the event of any change in capitalization affecting the
Common Shares of the Company, such as a stock dividend, stock split,
recapitalization, merger, consolidation, spin-off, split-up,
combination or exchange of shares or other form of reorganization, or
any other change affecting the Common Shares, such proportionate
adjustments, if any, as the Board in its discretion may deem
appropriate to reflect such change shall be made with respect to the
aggregate number of Common Shares for which Stock Options in respect
thereof may be granted under this Plan, the maximum number of Common
Shares which may be sold or awarded to any Participant, the number of
Common Shares covered by each outstanding Stock Option, and the
exercise price per share in respect of outstanding Stock Options.
10. AMENDMENT AND TERMINATION OF THIS PLAN. Without further approval of
the shareholders, the Board may at any time terminate this Plan or may amend it
from time to time in such respects as the Board may deem advisable, except that
the Board may not, without approval of the shareholders, make any amendment
which would (a) increase the aggregate number of Common Shares which may be
issued under this Plan (except for adjustments pursuant to Section 9 of this
Plan), (b) materially modify the requirements as to eligibility for
participation in this Plan, or (c) materially increase the benefits accruing to
Participants under this Plan. The above notwithstanding, the Board may amend
this Plan to take into account changes in applicable securities, federal income
tax and other applicable laws.
A-4
<PAGE> 16
11. MODIFICATION OF OPTIONS. The Board may authorize the Committee to
direct the execution of an instrument providing for the modification of any
outstanding Stock Option which the Board believes to be in the best interests of
the Company; provided, however, that no such modification, extension or renewal
shall reduce the exercise price or confer on the holder of such Stock Option any
right or benefit which could not be conferred on him by the grant of a new Stock
Option at such time and shall not materially decrease the Participant's benefits
under the Stock Option without the consent of the holder of the Stock Option,
except as otherwise permitted under this Plan.
12. MISCELLANEOUS.
(a) Tax Withholding. The Company shall have the right to
deduct from any settlement made under this Plan, including the delivery
or vesting of Common Shares, any federal, state or local taxes of any
kind required by law to be withheld with respect to such payments or to
take such other action as may be necessary in the opinion of the
Company to satisfy all obligations for the payment of such taxes. If
Common Shares are used to satisfy tax withholding, such shares shall be
valued based on the Fair Market Value when the tax withholding is
required to be made.
(b) No Right to Employment. Neither the adoption of this Plan
nor the granting of any Stock Option shall confer upon any employee of
the Company or a Subsidiary any right to continued Employment with the
Company or a Subsidiary, as the case may be, nor shall it interfere in
any way with the right of the Company or a Subsidiary to terminate the
Employment of any of its employees at any time, with or without cause.
(c) Annulment of Stock Options. The grant of any Stock Option
under this Plan payable in cash is provisional until cash is paid in
settlement thereof. The grant of any Stock Option payable in Common
Shares is provisional until the Participant becomes entitled to the
certificate in settlement thereof. In the event the Employment or the
directorship of a Participant is Terminated for Cause, any Stock Option
which is provisional shall be annulled as of the date of such
termination.
(d) Other Company Benefit and Compensation Programs. Payments
and other benefits received by a Participant under a Stock Option made
pursuant to this Plan shall not be deemed a part of a Participant's
regular, recurring compensation for purposes of the termination
indemnity or severance pay law of any country and shall not be included
in, nor have any effect on, the determination of benefits under any
other employee benefit plan or similar arrangement provided by the
Company or a Subsidiary unless expressly so provided by such other plan
or arrangement, or except where the Committee expressly determines that
a Stock Option or portion of a Stock Option should be included to
accurately reflect competitive compensation practices or to recognize
that a Stock Option has been made in lieu of a portion of competitive
annual cash compensation. Stock Options under this Plan may be made in
combination with or in tandem with, or as alternatives to, grants,
stock options or payments under any other plans of the Company or a
Subsidiary. This Plan notwithstanding, the Company or any Subsidiary
may adopt such other compensation programs and additional compensation
arrangements as it deems necessary to attract, retain and reward
directors and employees for their service with the Company and its
Subsidiaries.
(e) Securities Law Restrictions. No Common Shares shall be
issued under this Plan unless counsel for the Company shall be
satisfied that such issuance will be in compliance with applicable
federal and state securities laws. Certificates for Common Shares
delivered under this Plan may be subject to such stock-transfer orders
and other restrictions as the Committee may deem advisable under the
rules, regulations, and other requirements of the Securities and
Exchange Commission, any stock exchange upon which the Common Shares
are then listed, and any applicable federal or state securities law.
The Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
(f) Stock Option Agreement. Each Participant receiving a Stock
Option under this Plan shall enter into an agreement with the Company
in a form specified by the Committee agreeing to the terms and
conditions of the Stock Option and such related matters as the
Committee shall, in its sole discretion, determine.
(g) Cost of Plan. The costs and expenses of administering this
Plan shall be borne by the Company.
(h) Governing Law. This Plan and all actions taken hereunder
shall be governed by and construed in accordance with the laws of the
State of Ohio, except to the extent that federal law shall be deemed
applicable.
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<PAGE> 17
(i) Effective Date. This Plan shall be effective upon the
later of adoption by the Board and approval by the Company's
shareholders. This Plan shall be submitted to the shareholders of the
Company for approval at an annual or special meeting of shareholders to
be held no sooner than six months after the effective date of the
Conversion.
A-6
<PAGE> 18
EXHIBIT B
BRIDGEPORT SAVINGS AND LOAN ASSOCIATION
RECOGNITION AND RETENTION PLAN
AND TRUST AGREEMENT
ARTICLE I
DEFINITIONS
The following words and phrases when used in this Agreement with an
initial capital letter shall have the meanings set forth below. Wherever
appropriate, the masculine pronoun shall include the feminine pronoun and the
singular shall include the plural:
1.01 "Agreement" means the Bridgeport Savings and Loan Association
Recognition and Retention Plan and Trust Agreement.
1.02 "Association" means Bridgeport Savings and Loan Association, a
savings and loan association organized under the laws of the State of Ohio.
1.03 "Award" means a right granted to a Director or an Employee under
this Plan to receive Plan Shares.
1.04 "Beneficiary" means the person or persons designated by a
Recipient to receive any benefits payable under this Plan in the event of such
Recipient's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's estate.
1.05 "Board" means the Board of Directors of the Association.
1.06 "Committee" means the Recognition and Retention Plan Committee
appointed by the Board pursuant to Article IV hereof.
1.07 "Common Shares" means common shares of the Corporation.
1.08 "Conversion" means the conversion of the Association from mutual
to stock form.
1.09 "Corporation" means Ohio State Financial Services, Inc., a savings
and loan holding company incorporated under the laws of the State of Ohio for
the purpose of holding all of the common shares of the Association issued in
connection with the Conversion.
1.10 "Director" means any person who is a member of the Board of
Directors of the Corporation, the Association or a Subsidiary.
1.11 "Employee" means any person who is employed by the Corporation,
the Association or a Subsidiary.
1.12 "Person" means an individual, corporation, partnership, trust,
bank, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein.
1.13 "Plan" means the Recognition and Retention Plan established by
this Agreement.
1.14 "Plan Shares" means the Common Shares held pursuant to the Trust
or which may be purchased by the Trustee pursuant to Section 5.02 of this
Agreement.
1.15 "Plan Share Reserve" means the Common Shares held by the Trustee
pursuant to Sections 5.02 and 5.03 of this Agreement.
1.16 "Recipient" means any Director or Employee who receives an Award
under the Plan.
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<PAGE> 19
1.17 "Subsidiary" means a subsidiary of the Association, if any, which,
with the consent of the Board, agrees to participate in the Plan.
1.18 "Trust" means the trust established by this Agreement.
1.19 "Trustee" means the person or persons or entity approved by the
Board pursuant to Sections 4.01 and 4.02 to hold legal title to the Plan assets
for the purposes set forth herein.
ARTICLE II
ESTABLISHMENT OF THE PLAN AND TRUST
2.01 The Association hereby establishes a Recognition and Retention
Plan and Trust upon the terms and subject to the conditions set forth in this
Agreement.
2.02 The Trustee hereby accepts the Trust and agrees to hold the Trust
assets existing on the date of this Agreement and all additions and accretions
thereto upon the terms and conditions of this Agreement.
ARTICLE III
PURPOSE OF THE PLAN
3.01 The purpose of the Plan is to reward and retain the Directors and
Employees of the Corporation, the Association and the Subsidiaries by providing
such Directors and Employees with an equity interest in the Corporation as
reasonable compensation for their contributions to the Corporation, the
Association and any Subsidiary.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 ROLE OF THE COMMITTEE. The Plan shall be administered and
interpreted by the Committee, which shall consist of not less than three members
of the Board. The Committee shall have all of the powers set forth in this Plan.
The interpretation and construction by the Committee of any provisions of this
Agreement or of any Award granted hereunder shall be final, conclusive and
binding. The Committee shall act by the vote, or the written consent, of a
majority of its members. The Committee shall report actions and decisions with
respect to the Plan to the Board upon request by the Board.
4.02 ROLE OF THE BOARD. The members of the Committee and the Trustee
shall be appointed or approved by and shall serve at the pleasure of the Board.
The Board may in its discretion from time to time remove members from or add
members to the Committee and may remove, replace or add one or more Trustees.
The Board, in its absolute discretion, may take any action under or with respect
to the Plan which the Committee is authorized to take and may reverse or
override any action taken or decision made by the Committee under or with
respect to the Plan or take any other action reserved to the Board under this
Agreement; provided, however, that the Board may not revoke any Award already
granted under this Agreement. All decisions, determinations and interpretations
of the Board shall be final, conclusive and binding upon all parties having an
interest in the Plan.
4.03 LIMITATION ON LIABILITY. No member of the Board or the Committee,
nor any Trustee, shall be liable for any determination made in good faith with
respect to the Plan or any Plan Shares or Awards granted under the Plan. If a
member of the Board or of the Committee or any Trustee is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of anything done or not done by such member in such capacity under or
with respect to this Plan, the Association shall indemnify such member against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such member in connection with
such action, suit or proceeding if such member acted in good faith and in a
manner such member reasonably believed to be in or not opposed to the best
interests of the Corporation, the Association and any Subsidiary and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
such member's conduct was unlawful.
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<PAGE> 20
ARTICLE V
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 AMOUNT AND TIMING OF CONTRIBUTIONS. The Board shall determine the
amounts (or the method of computing the amounts) to be contributed by the
Association to the Trust. Such amounts shall be paid to the Trustee at the time
of contribution. No contributions to the Trust by Directors or Employees shall
be permitted.
5.02 INVESTMENT OF TRUST ASSETS. Except as otherwise permitted by
Section 8.02 of this Agreement, the Trustee shall initially invest all of the
Trust's assets, after providing for any required withholding as needed for tax
purposes, exclusively in Common Shares; provided, however, that the Trust shall
not purchase a number of Common Shares equal to more than four percent (4%) of
the number of Common Shares issued in connection with the Conversion. After such
investment, the Common Shares shall be held by the Trustee in the Plan Share
Reserve until such Common Shares are subject to one or more Awards. Any funds
held by the Trust shall be invested by the Trustee in such accounts at the
Association or elsewhere or such other instruments or investments as the Trustee
shall determine to be appropriate.
5.03 EFFECT OF ALLOCATIONS, RETURNS AND FORFEITURES UPON PLAN SHARE
RESERVES. Upon the allocation of Awards under Section 6.02 of this Agreement, or
the decision of the Committee to return Plan Shares to the Corporation, the Plan
Share Reserve shall be reduced by the number of Plan Shares so allocated or
returned. Any Plan Shares subject to an Award which is subject to forfeiture by
the Recipient pursuant to Section 7.01 of this Agreement shall be retained in
the Plan Share Reserve.
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 ELIGIBILITY. Directors and Employees are eligible to receive
Awards within the sole discretion of the Committee.
6.02 ALLOCATIONS. The Committee will determine which of the Directors
and Employees will be granted Awards and the number of Plan Shares covered by
each Award; provided, however, if this Plan is implemented prior to the first
anniversary of the effective date of the Conversion, the following restrictions
shall apply: (a) the aggregate number of Plan Shares covered by Awards to any
one Employee shall not exceed 25% of the total number of Plan Shares, (b) no
more than 5% of the Plan Shares shall be awarded to any Director who is not an
Employee, and (c) no more than 30% of the Plan Shares shall be awarded in the
aggregate to Directors who are not Employees. In the event Plan Shares are
forfeited for any reason or additional Plan Shares are purchased by the Trustee,
the Committee may, from time to time, determine which of the Employees and
Directors will be granted additional Awards to be awarded from forfeited or
additional Plan Shares.
In selecting the Directors and Employees to whom Awards will be granted
and the number of shares covered by such Awards, the Committee shall consider
the position, duties and responsibilities of the eligible Directors and
Employees, the value of their services to the Corporation, the Association and
any Subsidiary and any other factors the Committee may deem relevant.
6.03 FORM OF ALLOCATION. As promptly as practicable after a
determination is made pursuant to Section 6.02 of this Agreement that an Award
is to be made, the Committee shall notify the Recipient in writing of the grant
of the Award, the number of Plan Shares covered by the Award and the terms upon
which the Plan Shares subject to the Award may be earned. The date on which the
Committee determines that an Award is to be made or a later date designated by
the Committee shall be considered the date of grant of the Awards. The Committee
shall maintain records as to all grants of Awards under the Plan.
6.04 ALLOCATIONS NOT REQUIRED. None of the Directors or Employees,
either individually or as a group, shall have any right or entitlement to
receive an Award under the Plan. The Committee may, with the approval of the
Board, and shall, if so directed by the Board, return all Common Shares and
other assets in the Plan Share Reserve to the Corporation at any time and
thereafter cease issuing Awards.
6.05 SHAREHOLDER APPROVAL. If this Plan is implemented prior to the
first anniversary of the effective date of the Conversion, this Agreement shall
be submitted to the shareholders of the Corporation at an annual or special
meeting to be
B-3
<PAGE> 21
held no sooner than six months after the effective date of the Conversion and no
Awards shall be granted hereunder until the shareholders of the Corporation
approve this Agreement.
ARTICLE VII
EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 EARNING PLAN SHARES; FORFEITURES.
(a) GENERAL RULES. Unless the Committee shall specifically
state a longer period of time over which Awards shall be earned and
non-forfeitable at the time an Award is granted, if this Plan is implemented
prior to the first anniversary of the effective date of the Conversion, Plan
Shares covered by each Award shall be earned and non-forfeitable by a Recipient
over a period of five years at the rate of one-fifth per year commencing on the
date which is one year after the date of the grant of such Award. As Plan Shares
become earned and non-forfeitable, any cash dividends, returned capital and
earnings thereon shall also be earned and non-forfeitable.
(b) REVOCATION. Unless otherwise permitted by applicable
laws and regulations, any Plan Shares and any cash dividends, returned capital
and earnings thereon that have not been earned and are not non-forfeitable in
accordance with Section 7.01(a) of this Agreement shall be forfeited in the
event that (i) a Recipient who is a Director ceases to serve on the Board or
(ii) a Recipient who is not a Director of the Association ceases to be an
Employee of the Association, except as otherwise provided in subsection (c) of
this Section 7.01.
(c) EXCEPTION FOR TERMINATIONS DUE TO DEATH OR DISABILITY.
All Plan Shares and cash dividends, returned capital and earnings thereon
subject to an Award held by a Recipient whose service as a Director or Employee
of the Corporation, the Association or any Subsidiary terminates due to (i)
death or (ii) disability (as determined by the Committee) shall be deemed fully
earned and non-forfeitable as of the later of the Recipient's last day of
service as a Director or as an Employee and shall be distributed as soon as
practicable thereafter.
7.02 DISTRIBUTION OF PLAN SHARES.
(a) TIMING OF DISTRIBUTIONS: GENERAL RULE. Except as
otherwise provided in this Agreement, Plan Shares shall be distributed to the
Recipient or his or her Beneficiary, as the case may be, as soon as practicable
after they have been earned, together with any cash distributions, returned
capital and earnings thereon with respect to such Plan Shares that have been
earned.
(b) FORM OF DISTRIBUTION. All distributions of Plan Shares,
together with any shares representing stock dividends, shall be distributed in
the form of Common Shares. No fractional shares shall be distributed. Payments
representing cash dividends, returned capital and earnings thereon shall be made
in cash.
(c) WITHHOLDING. The Trustee may withhold from any cash
payment made under this Plan sufficient amounts to cover any applicable
withholding and employment taxes and, if the amount of such cash payment is not
sufficient, the Trustee may require the Recipient or Beneficiary to pay to the
Trustee the amount required to be withheld as a condition of delivering the Plan
Shares. The Trustee shall pay over to the Association or the Subsidiary which
employs or employed such Recipient or which the Recipient serves or served as a
Director, any such amount withheld from or paid by the Recipient or Beneficiary.
(d) REGULATORY EXCEPTIONS. Notwithstanding anything to the
contrary in this Agreement, no Plan Shares, upon becoming fully earned and
non-forfeitable, shall be distributed unless and until all of the requirements
of all applicable laws and regulations shall have been met.
7.03 VOTING OF PLAN SHARES. All Common Shares held by the Trustee in
the Plan Share Reserve which have not yet been earned by a Recipient pursuant to
Section 7.01 of this Agreement shall be voted by the Trustee. A Recipient shall
be entitled to direct the voting of Plan Shares which have been earned pursuant
to Section 7.01 of this Agreement but have not yet been distributed to him.
B-4
<PAGE> 22
ARTICLE VIII
TRUST
8.01 TRUST. The Trustee shall receive, hold, administer, invest and
make distributions and disbursements from the Trust in accordance with the
provisions of the Plan and the Trust and the applicable directions, rules,
regulations, procedures and policies established by the Committee pursuant to
this Agreement.
8.02 MANAGEMENT OF TRUST. The Trustee shall have complete authority and
discretion with respect to the management, control and investment of the Trust,
and the Trustee shall invest all assets of the Trust, except those attributable
to cash dividends or returned capital paid with respect to Plan Shares not held
in the Plan Share Reserve, in Common Shares to the fullest extent practicable,
and except to the extent that the Trustee determines that the holding of monies
in cash or cash equivalents is necessary to meet the obligations of the Trust.
The Trustee shall have the power to do all things and execute such instruments
as may be deemed necessary or proper with respect to the duties of the Trustee
hereunder, including the following powers:
(a) To invest up to 100% of all Trust assets in Common
Shares without regard to any law now or hereafter in force limiting
investments for trustees or other fiduciaries. The investment
authorized herein may constitute the only investment of the Trust, and,
in making such investment, the Trustee is authorized to purchase Common
Shares from the Corporation or from any other source. Such Common
Shares so purchased may be outstanding, newly issued or treasury
shares;
(b) To invest any Trust assets not otherwise invested in
accordance with Section 8.02(a) of this Agreement in such deposit
accounts and certificates of deposit (including those issued by the
Association), obligations of the United States government or its
agencies or such other investments as shall be considered the
equivalent of cash;
(c) To sell, exchange or otherwise dispose of any property
at any time held or acquired by the Trust;
(d) To cause stocks, bonds or other securities to be
registered in the name of a nominee, without the addition of words
indicating that such security is an asset of the Trust (but accurate
records shall be maintained showing that such security is an asset of
the Trust);
(e) To hold cash without interest in such amounts as may be
reasonable, in the opinion of the Trustee, for the proper operation of
the Plan and the Trust;
(f) To employ brokers, agents, custodians, consultants and
accountants;
(g) To hire counsel to render advice with respect to the
rights, duties and obligations of the Trustee hereunder, and such other
legal services or representation as the Trustee may deem desirable; and
(h) To hold funds and securities representing the amounts to
be distributed to a Recipient or his or her Beneficiary as a
consequence of a dispute as to the disposition thereof, whether in a
segregated account or held in common with other assets of the Trust.
Notwithstanding anything herein contained to the contrary, the Trustee shall not
be required to make any inventory, appraisal or settlement or report to any
court, or to secure any order of court for the exercise of any power herein
contained, or to give bond.
8.03 RECORDS AND ACCOUNTS. The Trustee shall maintain accurate and
detailed records and accounts of all transactions of the Trust, which shall be
available at all reasonable times for inspection by any legally entitled person
or entity to the extent required by applicable law, or any other person
determined by the Committee.
8.04 EARNINGS. All earnings, gains and losses with respect to Trust
assets shall be allocated, in accordance with a reasonable procedure adopted by
the Committee, to bookkeeping accounts for Recipients or to the general account
of the Trust, depending on the nature and allocation of the assets generating
such earnings, gains and losses. Without limiting the generality of the
foregoing, any earnings on cash dividends or returned capital received with
respect to Plan Shares shall be allocated (a) to accounts for Recipients, if
such shares which are the subject of outstanding Awards, and shall become
B-5
<PAGE> 23
earned and distributed as specified in Article VII of this Agreement or (b)
otherwise to the Plan Share Reserve if such Plan Shares are not the subject of
outstanding awards.
8.05 EXPENSES. All costs and expenses incurred in the operation and
administration of the Plan shall be paid by the Association.
ARTICLE IX
MISCELLANEOUS
9.01 ADJUSTMENTS FOR CAPITAL CHANGES. The aggregate number of Plan
Shares available for issuance pursuant to the Awards and the number of Plan
Shares to which any Award relates shall be proportionately adjusted for any
increase or decrease in the total number of outstanding Common Shares issued
subsequent to the effective date of the Plan if such increase or decrease
resulted from any split, subdivision or consolidation of shares or other capital
adjustment, or other increase or decrease in such shares effected without
receipt or payment of consideration by the Corporation.
9.02 AMENDMENT AND TERMINATION OF PLAN. The Board may, by resolution,
at any time amend or terminate the Plan. The power to amend or terminate the
Plan shall include the power to direct the Trustee to return to the Corporation
or the Association all or any part of the assets of the Trust, including Common
Shares held in the Plan Share Reserve, as well as Common Shares and other assets
subject to Awards which are not yet earned by the Directors or Employees to whom
they are allocated; provided, however, that the termination of the Trust shall
not affect a Recipient's right to earn Awards and to the distribution of Common
Shares relating thereto, including earnings thereon, in accordance with the
terms of this Agreement and the grant by the Committee or the Board.
9.03 NONTRANSFERABLE. Awards shall not be transferable by a Recipient.
During the lifetime of the Recipient, an Award may only be earned by and paid to
the Recipient who was notified in writing of the Award by the Committee pursuant
to Section 6.03 of this Agreement. No Recipient or Beneficiary shall have any
right in or claim to any assets of the Plan or the Trust, nor shall the
Corporation, the Association or any Subsidiary be subject to any claim for
benefits hereunder.
9.04 DIRECTORSHIP RIGHTS. Neither this Agreement nor any grant of an
Award hereunder nor any action taken by the Trustee, the Committee or the Board
in connection with the Plan shall create any right, either express or implied,
on the part of any Director to continue to serve as a Director of the
Association or any Subsidiary.
9.05 EMPLOYMENT RIGHTS. Neither this Agreement nor any grant of an
Award hereunder nor any action taken by the Trustee, the Committee or the Board
in connection with the Plan shall create any right, either express or implied,
on the part of any Employee to continue in the employ of the Corporation, the
Association or any Subsidiary.
9.06 VOTING AND DIVIDEND RIGHTS. No Recipient shall have any voting or
dividend rights or other rights of a shareholder in respect of any Plan Shares
covered by an Award, except as expressly provided in Sections 7.01, 7.02 and
7.03 of this Agreement, prior to the time such Plan Shares are actually
distributed to such Recipient.
9.07 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Ohio, except to the extent that federal law shall
be deemed applicable.
9.08 EFFECTIVE DATE. Subject to Section 6.05 of this Agreement,
this Agreement shall be effective as of the 15th day of April, 1998.
9.09 TERM OF PLAN. The Plan shall remain in effect until the earlier of
(a) the termination of the Plan by the Board or (b) the distribution of all
assets from the Trust. The termination of the Plan shall not affect any Awards
previously granted and such Awards shall remain valid and in effect until they
have been earned and paid or by their terms expire or are forfeited.
9.10 TAX STATUS OF TRUST. It is intended that the trust established
hereby be treated as a grantor trust of the Association under the provisions of
Section 671, et seq., of the Internal Revenue Code of 1986, as amended (26
U.S.C. ss. 671 et seq.).
B-6
<PAGE> 24
IN WITNESS WHEREOF, the following Trustees execute this Agreement,
accepting and binding themselves to undertake and perform the obligations and
duties of the Trustee hereunder and consenting to the foregoing Agreement
effective the ___ day of _________________, 1998.
By: (Trustee)
-----------------------------
By: (Trustee)
-----------------------------
IN WITNESS WHEREOF, the Association has caused this Agreement to be
executed by its duly authorized officer and duly attested, all as of the ___ day
of _________________, 1998.
BRIDGEPORT SAVINGS AND LOAN ASSOCIATION
By:
--------------------------------------
Jon W. Letzkus
its President
ATTEST:
- ----------------------------------
- ----------------------------------
its
-------------------------------
B-7
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF OHIO STATE FINANCIAL SERVICES, INC.
<TABLE>
<CAPTION>
State of
Name Incorporation Ownership
<S> <C> <C>
Bridgeport Savings and Loan Ohio 100%
Association
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 524
<INT-BEARING-DEPOSITS> 7,254
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 363
<INVESTMENTS-CARRYING> 4,147
<INVESTMENTS-MARKET> 4,224
<LOANS> 24,590
<ALLOWANCE> 141
<TOTAL-ASSETS> 37,344
<DEPOSITS> 26,334
<SHORT-TERM> 0
<LIABILITIES-OTHER> 449
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 10,561
<TOTAL-LIABILITIES-AND-EQUITY> 37,344
<INTEREST-LOAN> 1,954
<INTEREST-INVEST> 580
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,534
<INTEREST-DEPOSIT> 1,145
<INTEREST-EXPENSE> 1,146
<INTEREST-INCOME-NET> 1,388
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 866
<INCOME-PRETAX> 557
<INCOME-PRE-EXTRAORDINARY> 557
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 363
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
<YIELD-ACTUAL> 4.07
<LOANS-NON> 98
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 143
<CHARGE-OFFS> 2
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 141
<ALLOWANCE-DOMESTIC> 141
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
