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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
For the transition period from to
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Commission File Number 0-29649
Ohio State Financial Services, Inc.
(Exact name of registrant as specified in its charter)
OHIO 31-1529204
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
435 Main Street, Bridgeport, OH 43912
(Address of principal executive offices)
(740) 635-0764
(Registrant's telephone
number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
As of November 2, 1999, the latest practicable date, 572,337 shares of the
registrant's common stock, without par value, were issued and outstanding.
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2
OHIO STATE FINANCIAL SERVICES, INC.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Financial Condition (Unaudited)
as of September 30, 1999 and December 31, 1998 3
Consolidated Statement of Operations (Unaudited)
for the Nine Months ended September 30, 1999 and 1998 4
Consolidated Statement of Operations (Unaudited)
for the Three Months ended September 30, 1999 and 1998 5
Consolidated Statement of Cash Flows (Unaudited)
for the Nine Months ended September 30, 1999 and 1998 6
Notes to Unaudited Consolidated Financial Statements 7 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Default Upon Senior Securities 14
Item 4. Submissions of Matters to a Vote of Security Holders 14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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3
OHIO STATE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (UNAUDITED)
September 30, December 31,
1999 1998
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ASSETS
Cash and cash equivalents:
Cash and amounts due from banks $ 596,613 $ 907,682
Interest-bearing deposits with other institutions 3,070,941 4,792,090
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Total cash and cash equivalents 3,667,554 5,699,772
Interest bearing time deposits 1,500,000 3,100,000
Investment securities:
Available for sale (cost approximates fair value) 408,500 388,500
Held to maturity (market value of $3,599,040 at
9/30/99; and $1,018,809 at 12/31/98) 3,716,696 967,117
Loans receivable, net 24,323,962 24,594,506
Office properties and equipment, net 458,278 466,335
Accrued interest receivable, loans and investments
(net of reserve for uncollected interest of $-0-
at 9/30/99; and $-0- at 12/31/98) 147,217 157,227
Other assets 188,331 63,262
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TOTAL ASSETS $ 34,410,538 $ 35,436,719
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LIABILITIES
Deposit accounts $ 25,508,615 $ 25,450,404
Short-term notes payable - 892,543
Advances by borrowers for taxes and insurance 103,742 182,061
Accrued interest payable and other liabilities 189,303 137,798
Deferred federal income taxes 72,264 72,264
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TOTAL LIABILITIES 25,873,924 26,735,070
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STOCKHOLDERS' EQUITY
Common stock, 3,000,000 shares authorized,
no par or stated value; 634,168 shares issued - -
Additional paid in capital 5,948,634 5,947,185
Treasury stock (61,831 shares at cost as of
9/30/99 and 35,708 shares at cost as of 12/31/98) (821,072) (494,283)
Unearned Employee Stock Ownership Plan
shares (ESOP) (451,633) (536,735)
Unearned Recognition and Retention Plan shares
(RRP) (324,208) (371,859)
Retained earnings - substantially restricted 4,184,893 4,157,341
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TOTAL STOCKHOLDERS' EQUITY 8,536,614 8,701,649
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,410,538 $ 35,436,719
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See accompanying notes to the unaudited consolidated financial statements
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4
OHIO STATE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Nine Months Ended September 30,
1999 1998
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INTEREST AND DIVIDEND INCOME
Loans $ 1,376,943 $ 1,471,221
Mortgage-backed securities 40,790 53,709
Interest-bearing deposits and
investment securities 348,590 415,871
Dividends on Federal Home Loan Bank stock 20,140 19,213
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Total interest and dividend income 1,786,463 1,960,014
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INTEREST EXPENSE
Savings deposits 746,848 774,032
Federal Home Loan Bank advances and notes payable 8,539 -
----------- -----------
Total interest expense 755,387 774,032
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NET INTEREST INCOME 1,031,076 1,185,982
PROVISION FOR LOAN LOSSES - 11,191
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,031,076 1,174,791
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NONINTEREST INCOME
Service charges 6,208 9,874
Gain on sale of other real estate - 12,108
Other income and fees 13,027 11,587
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Total noninterest income 19,235 33,569
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NONINTEREST EXPENSE
Salaries and benefits 400,460 388,291
Occupancy expense 41,001 46,341
Furniture and equipment expense 24,068 21,078
Federal insurance premium 20,085 22,601
Legal and accounting fees 82,841 80,047
Advertising and public relations 22,885 25,248
Franchise, payroll and other taxes 116,811 114,367
Stationery, printing and office expenses 40,802 37,285
Service bureau expense 43,263 45,739
Other operating expenses 72,344 90,237
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Total noninterest expense 864,560 871,234
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INCOME BEFORE INCOME TAXES 185,751 337,126
PROVISION FOR INCOME TAXES 65,708 121,840
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NET INCOME $ 120,043 $ 215,286
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PER SHARE DATA
Earnings per share
Basic $ .24 $ .38
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Diluted $ .23 $ .37
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Average shares outstanding-basic 508,194 572,378
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Average shares outstanding-diluted 525,736 586,514
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See accompanying notes to the unaudited consolidated financial statements
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5
OHIO STATE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Three Months Ended September 30,
1999 1998
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INTEREST AND DIVIDEND INCOME
Loans $ 455,697 $ 495,704
Mortgage-backed securities 12,352 16,114
Interest-bearing deposits and
investment securities 119,300 132,032
Dividends on Federal Home Loan Bank stock 7,063 6,590
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Total interest and dividend income 594,412 650,440
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INTEREST EXPENSE
Savings deposits 249,258 258,814
NET INTEREST INCOME 345,154 391,626
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PROVISION FOR LOAN LOSSES - 11,191
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 345,154 380,435
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NONINTEREST INCOME
Service charges 2,160 3,835
Gain on sale of other real estate - 12,108
Other income and fees 4,879 4,109
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Total noninterest income 7,039 20,052
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NONINTEREST EXPENSE
Salaries and benefits 134,650 132,054
Occupancy expense 13,529 15,514
Furniture and equipment expense 7,892 8,727
Federal insurance premium 6,567 7,010
Legal and accounting fees 14,597 26,915
Advertising and public relations 6,059 8,791
Franchise, payroll and other taxes 37,173 37,084
Stationery, printing and office expenses 12,841 12,111
Service bureau expense 14,300 18,235
Other operating expenses 22,935 29,517
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Total noninterest expense 270,543 295,958
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INCOME BEFORE INCOME TAXES 81,650 104,529
PROVISION FOR INCOME TAXES 27,309 37,560
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NET INCOME $ 54,341 $ 66,969
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PER SHARE DATA
Earnings per share
Basic $ .11 $ .12
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Diluted $ .10 $ .11
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Average shares outstanding-basic 506,678 564,508
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Average shares outstanding-diluted 523,216 585,151
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See accompanying notes to the unaudited consolidated financial statements
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6
OHIO STATE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,
1999 1998
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CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 120,043 $ 215,286
Adjustments:
Depreciation 29,247 27,950
Investment accretion and amortization, net (159) (271)
ESOP and RRP amortization 134,202 96,898
Federal Home Loan Bank stock dividends (20,000) (19,100)
Deferred federal income taxes - (3,455)
Gain on the sale of real estate owned - (12,108)
Accrued interest receivable and other assets (115,059) (123,340)
Accrued interest payable and other liabilities 51,505 (23,037)
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Net cash provided by operating activities 199,779 158,823
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CASH FLOW FROM INVESTING ACTIVITIES
Term deposits, net 1,600,000 (700,000)
Proceeds from maturities of held
to maturity securities - 3,000,000
Proceeds from redemptions of
mortgage-backed certificates 148,129 167,318
Purchase of held to maturity securities (2,897,549) -
Net change in loans 270,544 (871,449)
Proceeds from sale of other real estate - 62,995
Acquisition of office properties and equipment (21,190) (17,281)
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Net cash provided by (used for)
investing activities (900,066) 1,641,583
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CASH FLOW FROM FINANCING ACTIVITIES
Payment of dividends (92,491) (87,528)
Short-term borrowings, net (892,543) 192,543
Purchase of treasury stock (326,789) (6,820)
Change in deposits, net 58,211 (889,589)
Change in mortgage escrow funds, net (78,319) (58,030)
Purchase of RRP - (416,000)
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Net cash used for financing activities (1,331,931) (1,265,424)
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Change in cash and cash equivalents (2,032,218) 534,982
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,699,772 3,177,832
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,667,554 $ 3,712,814
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits and borrowings $ 753,653 $ 772,092
Income taxes 114,118 208,178
Loans transferred to real estate
acquired in settlement - 50,887
Treasury stock pending settlement - 433,011
See accompanying notes to the unaudited consolidated financial statements
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7
OHIO STATE FINANCIAL SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of Ohio State Financial Services, Inc.
(the Company"), include its wholly-owned subsidiary, Bridgeport Savings and
Loan Association (the "Association"). All significant inter-company balances
and transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and, therefore, do
not necessarily include all information that would be included in audited
financial statements. The information furnished reflects all adjustments
which are, in the opinion of management, necessary for a fair statement of the
results of operations. All such adjustments are of a normal recurring nature.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year.
These statements should be read in conjunction with the consolidated
statements as of and for the year ended December 31, 1998, and related notes
which are included on Form 10-KSB (file no. 0-23109).
NOTE 2-CONVERSION TO A STOCK FORM OF OWNERSHIP AND FORMATION OF HOLDING
COMPANY
On March 24, 1997, the Board of Directors of the Association approved a plan
of conversion (the "Plan") providing for the conversion of the Association
from a mutual savings and loan association to a capital stock savings and loan
association incorporated under Ohio law (the "Conversion") and the
simultaneous issuance of all of its outstanding stock to a newly-formed
holding company, Ohio State Financial Services, Inc. After approval by the
regulatory authorities and the Association's members, the Conversion was
completed on September 26, 1997. As a result of this transaction, the Company
was formed and the Association became a wholly-owned subsidiary of the
Company.
In connection with the conversion on September 26, 1997, the Company completed
the sale of 634,168 shares of common stock at $10.00 per share. From the
proceeds, $5,916,081 was allocated to additional paid in capital , which is
net of conversion costs of $425,599. The common shares of the Company have
no par or stated value per share. Included in the 634,168 shares were 50,653
acquired by the ESOP.
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8
NOTE 3 - RECENT ACCOUNTING STANDARDS
In June, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. SFAS No.
130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. It does not require a specific format for the financial
statement but requires an enterprise display an amount representing total
comprehensive income for the period in that financial statement. SFAS No. 130
requires that an enterprise (a) classify items of other comprehensive income
by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the Statement of Financial
Position. Under existing accounting standards, other comprehensive income
shall be classified separately into foreign currency items, minimum pension
liability adjustments, and unrealized gains and losses on certain investments
in debt and equity securities. The provisions of SFAS No. 130 became
effective for fiscal years beginning after December 15, 1997. The Company's
equity securities classified as available for sale consist of Federal Home
Loan Bank ("FHLB") stock and stock in the Company's data processing servicer
and reflect no unrealized gain or loss due to their restricted nature. The
adoption of SFAS No. 130 did not have a material impact on the disclosure
requirements of the Company due to the absence of any items of comprehensive
income.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 provides accounting and
reporting standards for derivatives instruments, including certain derivative
instruments embedded in other contracts, by requiring the recognition of those
items as assets or liabilities in the statement of financial position,
recorded at fair value. SFAS No. 133 precludes a held-to-maturity security
from being designated as a hedge item. However, at the date of initial
application of SFAS No. 133, an entity is permitted to transfer any
held-to-maturity security into the available-for-sale or trading categories.
The unrealized holding gain or loss on such transferred securities shall be
reported consistent with the requirements of SFAS No. 115, "Accounting for
Certain Investment in Debt and Equity Securities." Such transfers do not
raise an issue regarding an entity's intent to hold other debt securities to
maturity in the future. The FASB has also issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities-Deferral of the Effective
date of FASB Statement No. 133." SFAS No. 137 defers the effective date of
SFAS No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. Earlier adoption is permitted for any fiscal
quarter that begins after the issue date of SFAS No. 133. Management does not
believe the adoption of SFAS No. 133 will have a material impact on the
Company.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale
by a Mortgage Banking Enterprise." SFAS No. 134 amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities" and SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities" to require
that after the securitization of mortgage loans held for sale, an entity
engaged in mortgage banking activities classify the resulting mortgage-backed
securities or other retained interests based on its ability and intent to sell
or hold those investments. SFAS No. 134 is effective for the first fiscal
quarter beginning after December 15, 1998, and its adoption did not have a
material impact on the Company.
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9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Comparison of Financial Condition at September 30, 1999 and December 31, 1998
- -----------------------------------------------------------------------------
At September 30, 1999, the Company's assets decreased by approximately $1.0
million, or 2.9%, to $34.4 million from $35.4 million at December 31, 1998.
Total cash and cash equivalents decreased by $2.0 million to $3.7 million at
September 30, 1999, from $5.7 million at December 31, 1998. This decrease
represented the outflow of cash associated with the payment of dividends,
principal payments of short-term borrowing and purchases of held to maturity
securities and treasury stock offset by the inflow of cash associated with the
net maturity of term deposits, proceeds from the redemption of mortgage-backed
securities, and the net decrease in loans receivable.
Interest-bearing time deposits decreased by $1.6 million to $1.5 million at
September 30, 1999, from $3.1 million at December 31, 1998, as a net result of
matured time deposits. Investment securities increased by approximately $2.7
million to $4.1 million at September 30, 1999, from $1.4 million at December
31, 1998. The increase reflected the purchase of held to maturity securities
of $2.9 million in United States Government and Agency obligations offset by
the principal reduction of $148,000 in mortgage-backed certificates.
Net loans receivable decreased $271,000 to $24.3 million at September 30,
1999, from $24.6 at December 31, 1998. The decrease was primarily
attributable to a $594,000 decrease in consumer loans offset by a $333,000
increase in one- to-four family residential mortgage loans.
Deposits increased $58,000, or .2%, from $25.4 million at December 31, 1998,
to $25.5 million at September 30, 1999, as a result of the stability of
deposit account interest rates at the Association, compared to a reduction in
deposit interest rates for alternative investment products available.
Short-term notes payable in the amount of $892,543 at December 31, 1998 were
paid off as of September 30, 1999.
Shareholders' equity decreased $165,000, or 1.9%, to $8.5 million at September
30, 1999, compared to $8.7 million at December31, 1998. The decrease was
attributable to the use of $327,000 to repurchase shares for treasury and the
issuance of dividends in the amount of $92,000. Future dividend policies will
be determined by the Board of Directors in light of earnings and financial
condition of the Company, including applicable governmental regulations and
policies. The decrease in shareholders' equity was offset by net income of
$120,000, the recognition of shares in the Employee Stock Ownership Plan (the
"ESOP") amounting to $87,000 and the recognition of shares in the Recognition
and Retention Plan (the "RRP") in the amount of $48,000.
Comparison of Operating Results for the Nine Months Ended
- ---------------------------------------------------------
September 30, 1999 and 1998
- ---------------------------
NET INCOME. Net income decreased $95,000, or 44.2%, from net income of
$215,000 for the nine months ended September 30, 1998, to net income of
$120,000 for the same period in 1999. The decrease in net income was
primarily the result of a decrease in net interest income of $155,000, or
13.1%, and a decrease in non-interest income of $14,000, or 42.7%, offset by a
decrease in non-interest expenses of $7,000, or .8%, a decrease in the
provision for income taxes of $56,000, or 46.1%, and a decrease in the
provision for loan losses in the amount of $11,000.
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10
NET INTEREST INCOME. Net interest income decreased $155,000, or 13.1%, from
$1,186,000 for the nine months ended September 30, 1998, to $1,031,000 for the
nine months ended September 30, 1999. The Company's net yield on
interest-earning assets decreased from 4.51% for the nine months ended
September 30, 1998, to 4.12% for the same period in 1999. Interest and
dividend income decreased $174,000, or 8.9%, from $2.0 million for the nine
months ended September 30, 1998, to $1.8 million for the nine months ended
September 30, 1999, while interest expense decreased $19,000, or 2.4%, from
$774,000 for the 1998 period to $755,000 for the 1999 period.
INTEREST AND DIVIDEND INCOME. Total interest and dividend income decreased
$174,000, or 8.9%, for the nine months ended September 30, 1999, compared to
the same period in 1998. Interest income on loans decreased $94,000, or 6.4%,
from $1,471,000 for the nine months ended September 30, 1998, to $1,377,000
for the nine months ended September 30, 1999. The decrease in interest income
on loans was primarily the result of a decline in higher interest earning
consumer loans combined with an overall decrease in the average balance of
loans in the amount of $804,000. Interest income on investments, including
interest-bearing deposits, decreased $67,000 to $349,000, for the nine months
ended September 30, 1999, compared to $416,000 for the 1998 period. The
decrease in interest income on investments was directly attributable to the
$828,000 decrease in the average balance of investments for the nine months
ended September 30, 1999, compared to the 1998 period. Interest income on
mortgage-backed securities decreased $13,000 to $41,000 for the nine months
ended September 30, 1999, compared to $54,000 for the 1998 period. The
decrease was the direct result of the $180,000 decrease in the average balance
of mortgage-backed securities for the nine months ended September 30, 1999,
compared to the 1998 period.
INTEREST EXPENSE. Total interest expense decreased by $19,000, or 2.4%, from
the 1998 period to the 1999 period. Interest expense on deposit accounts
decreased $27,000, or 3.5%, from $774,000 for the nine months ended September
30, 1998 to $747,000 for the nine months ended September 30, 1999. The
Association's cost of deposit funds decreased from 3.98% for the nine months
ended September 30, 1998, to 3.87% for the 1999 period, while average
outstanding deposits declined $157,000, or .6%, from $25.9 million for the
period ended September 30, 1998 to $25.7 million for the same period ended
September 30, 1999. The decrease in the average balance of deposits was the
result of customers electing not to renew maturing certificates of deposit at
prevailing interest rates. This decrease was offset by an increase in
interest expense on notes payable in the amount of $9,000. The interest was
paid during the nine months ended September 30, 1999 on the outstanding note
payable balance existing at December 31, 1998. Interest expense on notes
payable was not incurred during the nine months ended September 30, 1998 since
there were no borrowed funds during the period.
PROVISION FOR LOAN LOSSES. No provision for losses on loans was made for the
nine months ended September 30, 1999. The provision for losses on loans for
the nine months ended September 30, 1998 was $11,000 in order to replenish the
reserve for loan losses to a level management believed adequate after
charge-offs. Management judges the adequacy of the allowance for loan losses
and any additions to it based on maintaining a level which is deemed adequate to
absorb credit losses inherent in the loan portfolio. The amount of the
allowance is based on management's evaluation of the collectibility of the
loan portfolio, including the nature of the portfolio, credit concentrations,
trends in historical loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral, and current economic
conditions. Based on management's evaluation, the amount of the allowance was
deemed adequate with no additional provision necessary. Although management
believes that its loan loss allowance at September 30, 1999, is adequate based
upon the available facts and circumstances, there can be no assurance that
additions to such allowance will not be necessary in future periods, which
could adversely affect the Company's results of operations.
<PAGE>
11
NONINTEREST INCOME. Noninterest income totaled $19,000 for the nine months
ended September 30, 1999 compared to $34,000 for the same period in 1998. The
decline was due to a $12,000 gain on the sale of other real estate during the
nine months ended September 30, 1998 which did not occur in the 1999 period.
NONINTEREST EXPENSE. Noninterest expenses decreased $7,000, or .8%, from
$871,000 for the nine months ended September 30, 1998, to $865,000 for the
1999 period. The decrease in noninterest expense was attributable to a
decrease in other operating expenses of $18,000 from $90,000 for the nine
months ended September 30, 1998 to $72,000 for the same period in 1999. The
decrease was the result of a decrease in conference expenses and other
miscellaneous expenses. This decrease was offset by a $12,000 increase in
salaries and benefits from the 1998 to the 1999 period.
INCOME TAXES. The provision for income taxes totaled $66,000 for the nine
months ended September 30, 1999, a decrease of $56,000, or 46.1%, from the
$122,000 in the same 1998 period due to a decrease in pretax income.
Comparison of Operating Results for the Three Months Ended
- ----------------------------------------------------------
September 30, 1999 and 1998
- ---------------------------
NET INCOME. Net income decreased $13,000, or 18.9%, from net income of
$67,000 for the three months ended September 30, 1998, to net income of
$54,000 for the same period in 1999. The decrease in net income was primarily
the result of a decrease in net interest income of $47,000, or 11.9%, and a
decrease in non-interest income of $13,000, or 64.9%, offset by a decrease in
non-interest expenses of $25,000, or 8.6%, a decrease in the provision for
income taxes of $10,000, or 27.3%, and a decrease in the provision for loan
losses in the amount of $11,000.
NET INTEREST INCOME. Net interest income decreased $47,000, or 11.9%, from
$392,000 for the three months ended September 30, 1998, to $345,000 for the
three months ended September 30, 1999. The Company's net yield on
interest-earning assets decreased from 4.48% for the three months ended
September 30, 1998, to 4.17% for the same period in 1999. Interest and
dividend income decreased $56,000, or 8.6%, from $650,000 for the three
months ended September 30, 1998, to $594,000 for the three months ended
September 30, 1999, while interest expense decreased $10,000, or 3.7%, from
$259,000 for the 1998 period to $249,000 for the 1999 period.
INTEREST AND DIVIDEND INCOME. Total interest and dividend income decreased
$56,000, or 8.6%, for the three months ended September 30, 1999, compared to
the same period in 1998. Interest income on loans decreased $40,000, or 8.1%,
from $496,000 for the three months ended September 30, 1998, to $456,000 for
the three months ended September 30, 1999. The decrease in interest income on
loans was primarily the result of a decline in higher interest earning
consumer loans combined with an overall decrease in the average balance of
loans in the amount of $778,000. Interest income on investments, including
interest-bearing deposits, decreased $13,000 to $119,000, for the three months
ended September 30, 1999, compared to $132,000 for the 1998 period. The
decrease in interest income on investments was directly attributable to the
$1.1 million decrease in the average balance of investments for the three
months ended September 30, 1999, compared to the 1998 period. Interest
income on mortgage-backed securities decreased $4,000 to $12,000 for the three
months ended September 30, 1999, compared to $16,000 for the 1998 period. The
decrease was the direct result of the $172,000 decrease in the average balance
of mortgage-backed securities for the three months ended September 30, 1999,
compared to the 1998 period.
INTEREST EXPENSE. Total interest expense decreased by $10,000, or 3.7%, from
the 1998 period to the 1999 period. The Association's cost of deposit funds
decreased from 4.00% for the three months ended September 30, 1998, to 3.88%
for the 1999 period. The decrease in interest expense was the result of
customers electing not to renew maturing certificates of deposit at prevailing
interest rates.
<PAGE>
12
PROVISION FOR LOAN LOSSES. Based on management's evaluation of the adequacy
of the loan loss allowance, no provision for losses on loans was made for the
three months ended September 30, 1999. The provision for losses on loans for
the three months ended September 30, 1998 was $11,000 in order to replenish
the reserve for loan losses to a level management believed adequate after
charge-offs.
NONINTEREST INCOME. Noninterest income totaled $7,000 for the three months
ended September 30, 1999 compared to $20,000 for the same period in 1998. The
decline was due to a $12,000 gain on the sale of other real estate during the
three months ended September 30, 1998 which did not occur in the 1999 period.
NONINTEREST EXPENSE. Noninterest expenses decreased $25,000, or 8.6%, from
$296,000 for the three months ended September 30, 1998, to $271,000 for the
1999 period. The decrease in noninterest expense was partly attributable to a
$12,000 decrease in legal and accounting fees from $27,000 for September 30,
1998 to $15,000 for September 30, 1999, due to a reduction in expenses related
to public filings. Other operating expenses also decreased by $7,000 from the
1998 to 1999 period.
INCOME TAXES. The provision for income taxes totaled $27,000 for the three
months ended September 30, 1999, a decrease of $11,000, or 27.3%, from the
$38,000 in the same 1998 period due to a decrease in pretax income.
Year 2000
- ---------
Rapid and accurate data processing is essential to the Association's
operations. Many computer programs that can only distinguish the final two
digits of the year entered (a common programming practice in earlier years)
are expected to read entries for the Year 2000 as the year 1900 or as zero and
incorrectly attempt to compute payment, interest, delinquency, and other data.
The Association has been evaluating both information technology (computer
systems) and non-information technology systems (e.g., vault timers and
electronic door locks). Based upon such evaluations, management has
determined that the Association has Year 2000 risk in three areas: (1) the
Association's own computers (2) the computers of others used by the
Association's borrowers, and (3) the computers of others who provide the
Association with data processing.
ASSOCIATION'S OWN COMPUTERS. The Association has upgraded its computer system
to eliminate the Year 2000 risk. The Association does not expect to have
material additional costs to address this risk. The upgrade costs were
approximately $17,000.
COMPUTERS OF OTHERS USED BY THE ASSOCIATION'S BORROWERS. The Association has
evaluated most of their borrowers and does not believe the Year 2000 problem
should, on an aggregate basis, impact their customer's ability to make
payments to the Association. The Association believes that most of its
residential borrowers are not dependent on their home computers for income and
that none of its commercial borrowers are so large that a Year 2000 problem
would render them unable to collect revenue or rent and, in turn, continue to
make loan payments to the Association. The Association does not expect any
material costs to address this risk area.
COMPUTERS OF OTHERS WHO PROVIDE THE ASSOCIATION WITH DATA PROCESSING. This
risk is primarily focused on one third-party service bureau that provides
virtually all of the Association's data processing. This service bureau has
advised the Association that it has completed the upgrades necessary for Year
2000 readiness. The service bureau has tested these upgrades and Year 2000
compliance has been successfully completed.
<PAGE>
13
CONTINGENCY PLAN. The Association is monitoring its service bureau and is
being provided with periodic updates on its status. If the Association's
service bureau fails at any time, the Association will attempt to locate an
alternative service bureau that is Year 2000 compliant. If the Association is
unsuccessful, the Association will enter deposit balances and interest with
its existing computer system. If this labor intensive approach is necessary,
management and employees will become much less efficient. However, the
Association believes that it would be able to operate in this manner
indefinitely, until its existing service bureau, or its replacement, is able
to again provide data processing services. If very few financial institution
service bureaus were operating in the Year 2000, the Association's replacement
costs, assuming the Association could negotiate an agreement, could be
material.
Liquidity and Cash Flows
- ------------------------
The Association's primary sources of funds are deposits, amortization and
prepayment of loans, maturities of investment securities, and funds provided
from operations. While scheduled loan repayments are a relatively predictable
source of funds, deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions, and competition. In addition,
the Association invests excess funds in overnight deposits which provide
liquidity to meet lending requirements.
The Association has other sources of liquidity if a need for additional funds
arises. Additional sources of funds include FHLB of Cincinnati advances. At
September 30, 1999, the Association's total borrowing capacity from the FHLB
totaled approximately $7.9 million, of which there were no advances
outstanding.
As of September 30, 1999, the Association has $322,000 in outstanding mortgage
and construction loan commitments. Management believes that it has adequate
sources to meet the actual funding requirements.
Management monitors the Association's tangible, core, and risk-based capital
ratios in order to assess compliance with the Office of Thrift Supervision
(the "OTS") relations. At September 30, 1999, the Association exceeded the
minimum capital ratio requirements imposed by the OTS.
At September 30, 1999, the Association's capital ratios were as follows:
Association
Requirement Actual
----------- ------
Tangible capital 1.50% 18.58%
Core capital 4.00% 18.58%
Risk-based capital 8.00% 37.26%
Risk Elements
- -------------
Nonperforming assets include nonaccrual loans, renegotiated loans, loans 90
days or more past due, other real estate loans, and repossessed assets. A
loan is classified as nonaccrual when, in the opinion of management, there are
serious doubts about collectibility of interest and principal. Once the
accrual of interest is discontinued, future income is recognized only when
cash is received. Renegotiated loans are those loans which terms have been
renegotiated to provide a reduction or deferral of principal or interest as a
result of the deterioration of the financial condition of the borrower. There
were no nonperforming assets outstanding as of September 30, 1999 and December
31, 1998.
Management believes the level of the allowance for loan losses at September
30, 1999, is sufficient; however, there can be no assurance that the current
allowance for loan losses will be adequate to absorb all future loan losses.
The relationship between the allowance for loan losses and outstanding loans
is a function of the credit quality and known risk attributed to the loan
portfolio. The on-going loan review program and the credit approval process
is used to determine the adequacy of the allowance for loan losses.
<PAGE>
14
PART II - OTHER INFORMATION
Item 1 - Legal proceedings
NONE
Item 2 - Changes in securities
NONE
Item 3 - Defaults upon senior securities
NONE
Item 4 - Submission of matters to a vote of security holders
NONE
<PAGE>
15
Item 5 - Other information
NONE
Item 6 - Exhibits and reports on Form 8-K
Financial Data Schedule
<PAGE>
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OHIO STATE FINANCIAL SERVICES, INC.
Date: November 2 , 1999 By: /s/ Jon W. Letzkus
-------------------------------------
Jon W. Letzkus
President and Chief Executive Officer
(Principal Executive Officer)
Signature Title Date
--------- ----- ----
/s/ Jon W. Letzkus
- --------------------------
Jon W. Letzkus President and CEO November 2, 1999
/s/ Michael P. Eddy
- --------------------------
Michael P. Eddy Treasurer and
Chief Financial Officer November 2, 1999
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