SECURITIES AND EXCHANGE COMMISSION
PRIVATE
Washington, D.C.20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended 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 0-20886.
OHSL FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)
Delaware 31-1362390 State or other
jurisdiction of (I.R.S.Employer Identification No.)
incorporation or organization)
5889 Bridgetown Road, Cincinnati, Ohio 45248
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (513) 574-3322
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such requirements
for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not be contained, to
the best of registrant'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]
As of February 28, 1998, the Registrant had issued and
outstanding 1,241,449 shares of the Registrant's Common Stock. The
aggregate market value of the voting stock held by non-affiliates
of the Registrant as of February 28, 1998, was $35.0 million.
(The exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the
Registrant that such person is an affiliate of the Registrant.)
The following documents are incorporated by reference: Parts
II and IV of Form 10-KSB - Annual Report to Stockholders for the
fiscal year ended December 31, 1997 and Part III of Form 10-KSB -
Proxy Statement for Annual Meeting of Stockholders to be held in
1998.
PART I
Item 1. Business
General
OHSL Financial Corp., (the "Corporation" or "OHSL") is a
Delaware corporation which was organized in 1992 by Oak Hills
Savings and Loan Company, F.A. ("Oak Hills" or the "Company") for
the purpose of becoming a savings and loan holding company. The
Corporation owns all of the outstanding stock of Oak Hills that
was issued on February 5, 1993, in connection with the completion
of its conversion from the mutual to the stock form of
organization (the "Conversion"). The Corporation issued 1,356,600
shares of Common Stock at a price of $10.00 per share in the
Conversion.
Oak Hills, the Corporation's sole subsidiary, was originally
chartered in 1907 as Lick Run Building and Loan Company ("Lick
Run"), an Ohio savings and loan association. Lick Run became Oak
Hills Savings and Loan Company in 1958 and merged with Rosemont
Savings Association in 1981. The Company converted to a federally
chartered thrift institution in 1990 and adopted its present name.
All references to the Corporation include Oak Hills, unless
otherwise indicated. The Corporation's common stock is quoted on
the National Association of Securities Dealers Automated
Quotations ("NASDAQ") National Market System under the symbol
"OHSL".
Both OHSL and Oak Hills are subject to comprehensive
regulation, examination and supervision by the Office of Thrift
Supervision, Department of the Treasury ("OTS") and by the Federal
Deposit Insurance Corporation ("FDIC"). Oak Hills is a member of
the Federal Home Loan Bank ("FHLB") System and its deposits are
backed by the full faith and credit of the United States
Government and are insured by the Savings Association Insurance
Fund ("SAIF") to the maximum extent permitted by the FDIC.
Oak Hills serves the financial needs of families and local
businesses in its primary market area, southwest Hamilton County,
Ohio through its main office located at 5889 Bridgetown Road,
Cincinnati, Ohio and four branch offices located on the west side
of Cincinnati. At December 31, 1997, OHSL had $238.9 million in
assets, deposits of $184.7 million and shareholders' equity of
$26.0 million.
As a community oriented financial institution, Oak Hills
seeks to serve the financial needs of the families and community
businesses in its market areas. The Company is principally
engaged in the business of attracting deposits from the general
public and using such deposits to originate residential loans in
its primary market area. To a lesser extent, the Company also
originates multi-family, commercial real estate, consumer,
construction and commercial business loans. In addition, the
Company invests in mortgage-backed investments, investment grade
securities and short-term liquid assets. The Company also offers
a Visa/MasterCard program to its customers in conjunction with
another financial institution. Finally, the Company offers, on an
agency basis through its subsidiary, mutual fund, annuity products
and financial planning services to its customers. See "Lending
Activities" and "Subsidiary Activities."
The Company's revenues are derived from interest on mortgage
loans, investments and consumer loans, income from service charges
and loan originations and loan servicing fee income. The
Company's operations are materially affected by general economic
conditions, the monetary and fiscal policies of the federal
government and the policies of the various regulatory authorities,
including the OTS and the Board of Governors of the Federal
Reserve System ("Federal Reserve Board"). Its results of
operations are largely dependent upon its net interest income,
which is the difference between the interest it receives on its
loan portfolio and its mortgage-backed investments and investment
securities portfolios and the interest it pays on its deposit
accounts and borrowings.
OHSL's main office is located at 5889 Bridgetown Road,
Cincinnati, Ohio. The Company's telephone number is (513) 574-3322.
Market Area
The Company's primary market area includes the western
portion of the city of Cincinnati containing the communities of
Covedale, Fairmount, Fernbank, Mt. Airy, Price Hill, Sayler Park,
Sedamsville, and Westwood; the cities of Addyston, Cheviot,
Cleves, and North Bend; and the nearby communities of Bridgetown,
Delhi, Dent, Elizabethtown, Hooven, Mack, and Monfort Heights.
The Company's main office is located in the Bridgetown/Mack area,
and its branch offices are located in Price Hill, Dent, and Delhi.
The Company's primary market area consists mostly of mature
residential communities, including densely populated urban areas
in western portions of the city of Cincinnati; less densely
populated suburban areas, much of which is subdivision-oriented,
to the west of Cincinnati; and moderately populated areas in rural
settings further to the west. The commercial segment of the
primary market area consists mostly of retail and service
businesses supporting the area's residential base and, to a lesser
extent, light manufacturing.
Cincinnati is the headquarters for a diverse group of
companies such as Procter & Gamble, The Kroger Co., American
Financial Corp., U.S. Shoe Corp., Mercantile Stores and Chiquita
Brands International, Inc. Additionally, major installations of
companies headquartered elsewhere include General Electric
(aircraft engine manufacturing), Ford Motor Company (automobile
manufacturing), and Monsanto Chemical (chemical manufacturing).
Other major employers include the University of Cincinnati and the
State of Ohio.
Lending Activities
General. The principal lending activity of the Company is
originating for its portfolio first mortgage loans secured by
owner-occupied one- to four-family residential properties located
in its primary market areas. In addition, in order to provide
more comprehensive financial services to families and community
businesses in the Company's primary market area, OHSL also
originates multi-family, commercial real estate, consumer,
construction and commercial business loans. See"-Originations,
Purchases and Sales of Loans."
Loan Portfolio Composition. The following table presents the
composition of the Company's loan portfolio (excluding loans held
for sale) in dollar amounts and in percentages (before deductions
for loans in process, deferred fees and discounts and the
allowances for loan losses) of total loans as of the dates
indicated.
<PAGE>
<TABLE>
<CAPTION>
December 31,
1993 1994 1995 1996 1997
Amount Amount Amount Amount Amount
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family... $ 85,880 $ 98,857 $ 99,782 $113,373 $124,334
Non-residential....... 17,585 17,108 16,945 17,091 17,763
Multi-family......... 10,111 9,441 9,630 11,598 12,874
Construction or
development... 11,795 9,217 11,115 9,866 9,366
------ ------- ------- ------- -------
Total real estate
loans... 125,371 134,623 137,472 151,928 164,337
------ ------- ------- ------- -------
Other Loans:Consumer Loans:
Home equity............ 3,007 2,915 2,949 3,411 4,132
Student................ 1,578 1,798 386 285 257
Automobile............. 555 1,167 3,045 4,091 4,070
Deposit................ 437 268 248 223 218
Home improvement...... 305 404 472 478 577
Other............... 985 886 1,397 2,184 1,343
------ ------- ------- ------- -------
Total consumer loans.... 6,867 7,438 8,497 10,672 10,597
Commercial business
loans... 315 384 350 340 739
------ ------- ------- ------- -------
Total other loans.... 7,182 7,822 8,847 11,012 11,336
------ ------- ------- ------- -------
Total loans receivable. 132,553 142,445 146,319 162,940 175,673
Less:
Loans in process....... 5,971 3,957 3,116 4,065 3,203
Deferred fees and
discount 937 753 537 355 173
Allowance for loan losses. 501 507 515 499 529
------ ------- ------- ------- -------
Loans receivable, net..$125,144 $137,228 $142,151 $158,021 $171,768
======= ======= ======= ======= =======
The following table shows the composition of the Company's loan portfolio by fixed and
adjustable rate at the dates indicated.
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------
1993 1994 1995 1996 1997
Amount Amount Amount Amount Amount
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family..$ 46,086 $ 51,037 $ 62,178 $ 73,523 $ 80,061
Multi-family and
commercial.. 3,177 3,220 1,947 4,346 4,595
------ ------ ------ ------ ------
Total real estate
loans... 49,263 54,257 64,125 77,869 84,656
Consumer............. 3,158 3,725 5,204 6,839 6,270
Commercial business.... 103 70 57 54 111
------ ------ ------ ------ ------
Total fixed-rate
loans..... 52,524 58,052 69,386 84,762 91,037
Adjustable-Rate Loans:
Real estate:
One- to four-family..... 39,794 47,820 37,604 39,850 44,273
Multi-family and
commercial.. 24,519 23,329 24,628 24,343 26,042
Construction or
development.. 11,795 9,217 11,115 9,866 9,366
------- ------ ------ ------ ------
Total real estate
loans... 76,108 80,366 73,347 74,059 79,681
Consumer............ 3,709 3,713 3,293 3,833 4,327
Commercial business.....
Total adjustable-rate
loans............... 212 314 293 286 628
------- ------ ------ ------ ------
Total loans... 132,553 142,445 146,319 162,940 175,673
Less:
Loans in process....... 5,971 3,957 3,116 4,065 3,203
Deferred fees and
discounts... 937 753 537 355 173
Allowance for loan losses. 501 507 515 499 529
------- ------ ------ ------ ------
Loans receivable,
net...... $125,144 $137,228 $142,151 $158,021 $171,768
======= ======= ======= ======= =======
</TABLE>
The following schedule sets forth the contractual maturity of the
Company's loan portfolio at December 31, 1997. Loans which
have adjustable interest rates are
shown as maturing in the period during which the contract is subject to
repricing. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
-----------
Multi-Family Construction Commercial
------------ ------------ ----------
One-to-Four- and or Consumer Business Total
------------ --- -- -------- -------- -----
Family Commercial Development
------ ---------- -----------
Amount Amount Amount Amount Amount Amount
------ ------ ------ ------ ------ ------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Due During
Years Ending
December 31,
- ------------
1998(1)...... $ 34,087 $12,712 $ 9,366 $ 4,801 $662 $ 61,628
1999 and 2000. 18,412 13,844 -- 1,259 23 33,538
2001 and 2002. 7,154 2,110 -- 3,311 19 12,594
2003 to 2007.. 23,440 1,719 -- 989 16 26,164
2008 to 2017.. 21,332 252 -- 237 19 21,840
2018 and
following.... 19,909 -- -- -- -- 19,909
------ ------ ----- ------ --- -------
TOTAL... $124,334 $30,637 $9,366 $10,597 $739 $175,673
======= ====== ===== ====== === =======
</TABLE>
(1) Includes demand loans and loans having no stated maturity.
<PAGE>
Under federal law, the aggregate amount of loans that the
Company is permitted to make to any one borrower is generally
limited to 15% of unimpaired capital and surplus (25% if the
security for such loan has a "readily ascertainable" value or 30%
for certain residential development loans). At December 31, 1997,
based on the above 15% limitation, the Company's regulatory loan-to-one
borrower limit was approximately $3.1 million. The Company
had no borrowers with aggregate loan balances in excess of the
regulatory limits at December 31, 1997. See "Regulation - Federal
Regulation of Savings Associations."
Loan applications are initially considered and approved at
various levels of authority, depending on the type and amount of
the loan. All loans greater than $1.0 million must be approved by
the Board of Directors. Generally, mortgage related loans greater
than $300,000 and less than $1.0 million are approved by the
Executive Committee of the Board of Directors. Mortgage related
loans up to $300,000 are approved by a management committee.
All of the Company's lending is subject to its written
underwriting standards and to loan origination procedures. The
Company is an equal opportunity lender. Decisions on loan
applications are made on the basis of detailed applications and
property valuations (consistent with the Company's written
appraisal policy) by qualified appraisers. The loan applications
are designed primarily to determine the borrower's ability to
repay and the more significant items on the application are
verified through use of credit reports, financial statements, tax
returns and/or confirmations.
The Company requires evidence of marketable title and lien
position (generally consisting of a title survey and title
insurance) as well as fire and extended coverage casualty
insurance in amounts at least equal to the principal amount of the
loan or the value of improvements on the property, depending on
the type of loan. The Company also requires flood insurance to
protect the property securing its interest when the property is
located in a flood plain or otherwise deemed prudent by
management. For loans originated prior to 1993, the Company
generally did not require title insurance. Title insurance is now
generally required on current originations.
One- to Four-Family Residential Real Estate Lending
The cornerstone of the Company's lending program has long
been the origination of long term permanent loans secured by
mortgages on owner-occupied one- to four-family residences. At
December 31, 1997, $124.3 million, or 70.8% of the Company's gross
loan portfolio consisted of permanent loans on one- to four-family
residences. Virtually all of the residential loans originated by
the Company are secured by properties located in the Company's
primary market area. See "- Originations and Purchases of Loans."
Historically, the Company originated for retention in its own
portfolio 30-year fixed-rate loans secured by one- to four-family
residential real estate. Beginning in 1982, in order to reduce
its exposure to changes in interest rates, Oak Hills began to
emphasize the origination of ARMs, subject to market conditions
and consumer preference. As a result of continued consumer
demand, particularly during periods of relatively low interest
rates, for fixed-rate loans, Oak Hills has continued to originate
for retention in its portfolio fixed-rate residential loans in
amounts and at rates which are monitored for compliance with the
Company's asset/liability management policy. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management" in the Annual Report to
Stockholders, attached hereto as Exhibit 13.
The Company's loans are underwritten and documented to permit
their sale, consistent with the Company's asset/liability
management objectives. The Company typically retains the
servicing of loans sold. The Company's fixed-rate loans are
originated with terms which conform to secondary market standards
(i.e., Federal Home Loan Mortgage Corporation ("FHLMC")
standards). Most of the Company's fixed-rate residential loans
have original contractual terms to maturity of 15 to 30 years.
During 1997, the Company sold $4.5 million of fixed-rate, one- to
four-family loans in the secondary market, representing
approximately 20.3% of originations of this type.
The Company has offered ARM loans at rates, terms and points
determined in accordance with market and competitive factors. The
programs currently offered generally meet the standards and
requirements of the secondary market for residential loans. The
Company's current one- to four-family residential ARMs are fully
amortizing loans with contractual maturities of up to 30 years.
The interest rates on the ARMs originated by the Company are
subject to adjustment at one or three-year intervals based on a
margin over an index based on the related U.S. Treasury Constant
Maturities Index for securities with terms to maturities of the
same length as the applicable adjustment period ("Treasury ARMs").
Decreases or increases in the interest rate of the Company's ARMs
are generally limited to 2% at any adjustment date and 6% over the
life of the loan. The Company's one- to four-family ARMs are not
convertible into fixed-rate loans, do not contain prepayment
penalties and do not produce negative amortization. ARM loans may
be assumed, provided home buyers meet the Company's underwriting
standards and the applicable fees are paid.
Multi-Family and Commercial Real Estate Lending
The Company has long made permanent multi-family and
commercial real estate loans in its primary market area. At
December 31, 1997, the Company had $30.6 million in multi-family
and commercial real estate loans, representing 17.4% of the
Company's gross loan portfolio.
The Company's multi-family portfolio includes loans secured
by residential buildings located primarily in the Company's
primary market area. The Company's commercial real estate
portfolio consists of loans on a variety of non-residential
properties including small shopping centers, office buildings and
manufacturing facilities and warehouses.
The Company has originated both adjustable-rate and fixed-rate
multi-family and commercial real estate loans. Rates on the
Company's adjustable-rate, multi-family and commercial real estate
loans generally adjust in a manner consistent with the Company's
ARMs except that the Company establishes a floor rate for
commercial real estate loans. Some loans may contain prepayment
penalties.
Multi-family and commercial real estate loans are generally
underwritten in amounts of up to 75% of the appraised value of the
underlying property.
Appraisals on properties securing multi-family and commercial
real estate loans originated by the Company are performed by a
qualified appraiser at the time the loan is made. In addition,
the Company's underwriting procedures generally require
verification of the borrower's credit history, income and
financial statements, banking relationships, references and income
projections for the property. Personal guarantees are generally
obtained for the Company's multi-family and commercial real estate
loans.
Multi-family residential and commercial real estate loans
generally present a higher level of risk than loans secured by
one- to four-family residences. This greater risk is due to
several factors, including the concentration of principal in a
limited number of loans and borrowers, the effects of general
economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of
loans. Furthermore, the repayment of loans secured by multi-family residential
and commercial real estate is typically
dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced (for
example, if leases are not obtained or renewed), the borrower's
ability to repay the loan may be impaired. At December 31, 1997,
the Company had two commercial real estate loans (combined
principal balance of $208,000) which were 90 days or more
delinquent and one commercial real estate loan (principal balance
of $55,000) which was on non-accrual status. Losses, if any, on
the resolution of these delinquent commercial real estate loans
are expected to be minimal.
Construction and Development Lending
The Company makes construction loans to individuals for the
construction of their residences and, on occasion, loans to
builders or developers for the acquisition of land and the
construction or development of small- or medium-sized projects.
Loans to individuals for the construction of their residences
and the acquisition of land typically run for eight months with a
possible extension of up to an additional one year. The borrower
is not required to pay principal during the construction period,
but must pay interest. Residential construction loans are
generally underwritten pursuant to the same guidelines used for
originating permanent residential loans. At December 31, 1997,
the Company had committed to fund $8.4 million of one- to four-family
residential construction loans, with outstanding balances
totaling $5.2 million, which includes both loans to
builders/developers and loans directly to owner/occupants.
Subject to future market conditions, the Company intends to
continue its construction lending activities to persons intending
to be owner-occupants.
As noted, the Company also originates construction loans to
builders and developers for the construction of one- to four-family residences
and commercial real estate and the acquisition
and development of one- to four-family lots in the Company's
primary market area. Construction loans to builders of one- to
four-family residences generally carry terms of up to twelve
months and generally do not permit the payment of interest and
loan fees from loan proceeds. At December 31, 1997, the Company
had approximately $6.8 million in approved construction loans to
builders and developers, all of which will be utilized for the
construction of one- to four-family residences, including
condominium projects.
Most of the Company's construction loans have been originated
with fixed rates of interest while lot loans may carry adjustable
or fixed interest rates. Construction loans are generally made in
amounts of up to a maximum loan-to-value ratio of 80% (75% in the
case of commercial real estate). Prior to making a commitment to
fund a construction loan, the Company requires an appraisal of the
property. The Company obtains personal guarantees for
substantially all of its construction loans. Personal financial
statements of guarantors are also generally obtained as part of
the Company's loan underwriting. Virtually all of the Company's
construction loans are located in its primary market area.
The Company's construction or development loan agreements
provide that loan proceeds are disbursed in increments as
construction progresses. In the case of large construction loans,
the amount of each disbursement is based on the construction cost
estimate of an independent architect, engineer or qualified
inspector who inspects the project in connection with each
disbursement request. The Company periodically reviews the
progress of the underlying construction project.
Construction loans are obtained from a variety of sources,
including real estate brokers, developers and builders who have
previously borrowed from the Company, as well as referrals from
such borrowers. The application process includes a submission to
the Company of plans, specifications and costs of the project.
These items are used as a basis to determine the appraised value
of the subject property. Loans are based on the lesser of current
appraised value and the cost of construction (land plus building).
The Company's construction loans to persons other than owner-occupants
generally involve larger principal balances than do its
one- to four-family residential loans.
The table below sets forth, by type of property, the number
and amount of the Company's construction loans at December 31,
1997.
Total Outstanding
Number Loan Principal
of Loans Commitment Balance
-------- ---------- -----------
(Dollars in Thousands)
One- to four-family
residential(1).............. 31 $ 8,366 $ 5,183
Multi-family residential..... -- -- --
Non-residential.............. 2 1,000 980
---- ----- -----
Total construction or
development loans........ 33 $ 9,366 $ 6,163
==== ===== =====
(1) Includes loans for the development of condominium projects
and loans to develop land (clearing, grading, roads, sewers, etc.)
in support of one- to four-family construction.
Construction lending generally affords the Company an
opportunity to receive interest at rates higher than those
obtainable from residential lending and to receive higher
origination and other loan fees. In addition, such loans are
generally made for relatively short terms. Nevertheless,
construction lending to persons other than owner-occupants is
generally considered to involve a higher level of credit risk than
one- to four-family residential lending due to the concentration
of principal in a limited number of loans and borrowers and the
effects of general economic conditions on construction projects,
real estate developers and managers. In addition, the nature of
these loans is such that they are more difficult to evaluate and
monitor. The Company's risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of the
property's value upon completion of the project and the estimated
cost (including interest) of the project. If the estimate of
value proves to be inaccurate, the Company may be confronted, at
or prior to the maturity of the loan, with a project with a value
which is insufficient to assure full repayment and/or the
possibility of having to make substantial investments to complete
and sell the project. Because defaults in repayment may not occur
during the construction period, it may be difficult to identify
problem loans at an early stage. When loan payments become due,
the cash flow from the property may not be adequate to service the
debt. In such cases, the Company may be required to modify the
terms of the loan.
Consumer Lending
Management believes that offering consumer loan products
helps to expand the Company's customer base and to create stronger
ties to its existing customer base. In addition, because consumer
loans generally have shorter terms to maturity and/or adjustable
rates and carry higher rates of interest than do residential
mortgage loans, they can be valuable asset/liability management
tools. For these reasons, the Company has increased its consumer
lending in recent periods. See "Management's Discussion and
Analysis of Financial Condition - Asset/Liability Management" in
the Annual Report to Stockholders.
The Company currently originates substantially all of its
consumer loans in its market area. At December 31, 1997, the
Company's consumer loans totalled $10.6 million or 6.0% of the
Company's loan portfolio.
Oak Hills offers a variety of secured consumer loans,
including second mortgage, home equity lines of credit and home
improvement loans, education loans (which carry a guaranty from a
State agency), loans secured by savings deposits and automobile
loans. Although the Company primarily originates consumer loans
secured by real estate, deposits or other collateral, the Company
also makes unsecured personal loans.
The Company's second mortgage and home equity loans are
generally limited to $100,000. The Company uses the same
underwriting standards for second mortgage loans and home equity
lines of credit as it uses for one- to four-family residential
mortgage loans. The Company's second mortgage loans and home
equity lines of credit are generally originated in amounts which,
together with the amount of the first mortgage, do not exceed 80%
of the appraised value of the property securing the loan. At
December 31, 1997, the Company had $4.1 million of home equity
lines of credit and an additional $4.6 million of additional funds
committed, but undrawn, under such lines. Second mortgage loans
may carry fixed or adjustable interest rates.At December 31, 1997,
the Company had $1.8 million of second mortgage loans, all of
which are classified in the Company's financial reports as one- to
four-family residential loans.
The terms of other types of consumer loans vary according to
the type of collateral, length of contract and creditworthiness of
the borrower. Lines of credit extended through the Company's
Visa/Mastercard credit card program are provided through a third
party lender.
The underwriting standards employed by the Company for
consumer loans include a determination of the applicant's payment
history on other debts and an assessment of the borrower's ability
to meet payments on the proposed loan along with his existing
obligations. In addition to the creditworthiness of the
applicant, the underwriting process also includes a comparison of
the value of the security, if any, in relation to the proposed
loan amount.
Consumer loans may entail greater risk than residential
mortgage loans, particularly in the case of consumer loans which
are unsecured or secured by rapidly depreciable assets such as
automobiles. In such cases, any repossessed collateral for
defaulted consumer loans may not provide adequate sources of
repayment for the outstanding loan balances as a result of the
greater likelihood of damage, loss or depreciation. In addition,
consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be
affected by adverse personal circumstances. Furthermore, the
application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans. Although the level of
delinquencies in the Company's consumer loan portfolio has
generally been low ($38,000 was on non-accrual status at December
31, 1997), there can be no assurance that delinquencies will not
increase in the future.
Commercial Business Lending
Federally chartered savings institutions, such as Oak Hills,
are authorized to make secured or unsecured loans and issue
letters of credit for commercial, corporate, business and
agricultural purposes and to engage in commercial leasing
activities, up to a maximum of 10% of total assets.
The Company engages in a limited amount of commercial
business lending activities, generally with its existing
customers. At December 31, 1997, the Company had $739,000 in
commercial business loans outstanding, representing less than one
percent of the Company's gross loan portfolio.
Unlike residential mortgage loans, which generally are made
on the basis of the borrower's ability to make repayment from his
or her employment and other income, and which are secured by real
property whose value tends to be more easily ascertainable,
commercial business loans are of higher risk and typically are
made on the basis of the borrower's ability to make repayment from
the cash flow of the borrower's business. The Company's
commercial business loans generally include personal guarantees
and are usually, but not always, secured by business assets, such
as accounts receivable, equipment and inventory as well as real
estate. However, the collateral securing the loans may depreciate
over time, may be difficult to appraise and may fluctuate in value
based on the success of the business.
Originations, Purchases and Sales of Loans
The Company originates real estate and other loans through
employees located at each of the Company's offices. Walk-in
customers and referrals from real estate brokers and builders are
also important sources of loan originations. The Company utilizes
the services of mortgage brokers with respect to the origination
of single family, multi-family and/or commercial real estate
loans. Such loans are underwritten to the same standards as
similar loans originated by the Company. Additionally, such loans
are normally located within the Company's primary market area.
In order to supplement its loan production, the Company may
purchase loans from third parties, generally other savings
associations or mortgage brokers. The Company will continue to
evaluate loan purchase opportunities as they arise and may make
purchases in the future depending on market conditions.
The Company will periodically sell its residential real
estate loans consistent with its asset/liability objectives. When
loans are sold, the Company generally retains the responsibility
for servicing the loan. Loan servicing fees associated with sold
loans for which the Company has retained the servicing are at
market rates, generally between .25% and .375%, and are based upon
the loan balances outstanding. At December 31, 1997,
approximately $15.5 million of Oak Hills' loan portfolio was
serviced by others and the Company serviced $26.0 million of loans
for others.
The following table shows the loan origination, purchase,
sale and repayment activities of the Company for the periods
indicated. Loans originated for sale are included in this table
at their current market value at December 31, 1997.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1995 1996 1997
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable-rate:
Real estate - one- to four-family... $ 7,781 $17,025 $22,164
- multi-family.......... 950 9,931 4,575
- commercial............ 2,397 6,544 1,162
Non-real estate - consumer.......... 115 156 99
- commercial
business......... 105 257 1,122
------ ------ ------
Total adjustable-rate........ 11,353 33,913 29,122
Fixed-rate:
Real estate - one- to four-family... 11,458 17,873 22,345
- multi-family.......... --- 1,285 765
- commercial............ 2,106 2,587 4,446
Non-real estate - consumer.......... 3,667 2,587 2,198
------ ------ ------
Total fixed-rate............. 17,231 22,517 29,754
------ ------ ------
Total loans originated....... 28,584 56,430 58,876
Purchases: Real estate - one- to
four-family... --- --- ---
- multi-family.......... --- --- ---
- commercial............ --- --- ---
Total purchases.............. --- --- ---
Sales: Real estate - one- to
four-family... 1,731 2,809 4,525
- multi-family.......... --- --- ---
- commercial............ --- --- ---
- consumer.............. 1,814 573 427
------ ------ ------
Total loan sales............. 3,545 3,382 4,952
Principal repayments................ 20,865 36,993 40,897
------ ------ ------
Total repayments............. 24,410 40,375 45,849
------ ------ ------
Increase in principal
balance.............................. 4,174 16,055 13,027
Increase (decrease) in other items,
net.................................. 1,049 (751) 1,014
------ ------ ------
Net increase................. $5,223 $15,304 $14,041
====== ======= =======
</TABLE>
Delinquency Procedures. When a borrower fails to make a
required payment on a loan, the Company attempts to cause the
delinquency to be cured in the shortest possible time.In the case
of residential loans, a late notice is mailed upon the expiration
of the 15 day grace period. A follow-up phone contact is
attempted if the payment is not received within 10 days of this
mailing. A collection letter is mailed if the account remains
past due at 30 days. If payment is not received by the 45th day
of delinquency, a second, more strongly worded collection letter
is sent. A request for a meeting is made if the account is not
paid by the 60th day of delinquency. Every attempt is made to
determine the borrower's ability and willingness to cooperate in
curing the delinquency. If the account is still delinquent after
75 days, a default notice is sent by certified mail. If by the
105th day of delinquency the account is still in default, the
account will be reviewed for possible foreclosure action.
Foreclosure is always viewed as a last resort. A decision as to
whether and when to initiate foreclosure proceedings is made by
the Loan Committee. This decision is then reviewed with the Board
of Directors at their next regular monthly meeting.
The Company's procedures for repossession and sale of
consumer collateral are subject to various requirements under Ohio
consumer protection laws.
Real estate acquired by the Company as a result of
foreclosure or by deed in lieu of foreclosure is classified
as real estate owned until it is sold. When property is acquired,
it is recorded at the lower of cost or estimated fair value at the
date of acquisition, and any
write-down resulting therefrom is charged to
the allowance for loan losses. Upon acquisition, all costs incurred
in maintaining the property are expensed. Costs relating to the
development and improvement of the property, however, are capitalized to
the extent of net realizable value. At December 31, 1997, no such real
estate owned was held by the Company.
The following table sets forth the Company's loan delinquencies
by type and amount at December 31, 1997
<TABLE>
<CAPTION>
Past Due and Still Accruing:
----------------------------------
Total
60-89 Days 90 Days and Over Non-accrual Loans Delinquent Loans
-------------- ---------------- ----------------- ----------------
Percent
of Loan
Number Amount Number Amount Number Amount Number Amount Category
------ ------ ------ ------ ------ ------ ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-
family.. 11 $ 284 5 $ 424 -- $ --- 16 $ 708 .57%
Multi-family... 1 78 -- -- -- --- 1 78 .61
Commercial... -- --- 2 208 1 55 3 263 1.48
Construction or
development.-- --- -- -- -- --- --- -- ---
Consumer....... 2 5 -- -- 7 38 9 43 .41
Commercial
Business -- --- -- -- -- --- --- -- ---
--- ----- --- ----- --- ---- --- ------ ----
Total......... 14 $ 367 7 $ 632 8 $ 93 29 $1,092 .62%
== ==== === ===== === ===== ==== ====== =====
/TABLE
<PAGE>
Classification of Assets. Federal regulations require that each
savings institution classify its own assets on a regular basis.
In addition, in connection with examinations of savings
institutions, OTS and FDIC examiners have authority to identify
problem assets and, if appropriate, require them to be classified.
There are three classifications for problem assets: Substandard,
Doubtful and 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 weaknesses of Substandard
assets, with the additional characteristics that the weaknesses
make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a
high possibility of loss. An asset classified Loss is considered
uncollectible and of such little value that continuance as an
asset of the institution is not warranted. The regulations have
also created a Special Mention category, consisting of assets
which do not currently expose a savings institution to a
sufficient degree of risk to warrant classification, but do
possess credit deficiencies or potential weaknesses deserving
management's close attention. Assets classified as Substandard or
Doubtful require the institution to establish prudent general
allowances for loan losses. If an asset or portion thereof is
classified as Loss, the institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of
the asset classified Loss, or charge off such amount.
On the basis of management's review of its assets, at
December 31, 1997, the Company had classified a total of
$1,009,000 of its loans, as follows:
<TABLE>
<CAPTION>
One- to Multi-Family
Four and Commercial
Family Real Estate Consumer Total
------- ------------ --------- -----
(In thousands)
<S> <C> <C> <C> <C>
Special Mention... $ 122 $ --- $ --- $ 122
Substandard.. 585 248 36 869
Doubtful....... --- 15 3 18
Loss.............. --- --- --- ---
------ ----- ----- ------
$ 707 $ 263 $ 39 $1,009
====== ===== ===== ======
The Company's classified assets consist of the non-performing
loans and other assets of concern discussed herein. As of the
date hereof, management believes that these asset classifications
re consistent with those of the OTS and FDIC.
Non-Performing Assets. The following table sets forth the amounts
and categories of non-performing assets in the Company's loan
portfolio. Loans are reviewed quarterly and delinquent loans may
be placed on non-accrual status, consistent with the Company's
classification policies. Real estate loans are placed on
nonaccrual status when either principal or interest is over 90
days past due, respectively, unless, in the judgement of
management, the loan is owner-occupied, well collateralized and in
the process of collection. Consumer loans are placed on non-accrual status if they remain delinquent after 90 days. If a loan
is deemed uncollectible by management, it is charged off. For all
years presented, the Company has had no troubled debt
restructurings (which involved forgiving a portion of interest or
principal on any loans or making loans at a rate materially less
than that of market rates). The amount of interest lost on non-accruing loans is not significant.
</TABLE>
<TABLE>
<CAPTION>
At December 31,
---------------
1993 1994 1995 1996 1997
---- ----- ----- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Commercial real estate.....$ --- $ 224 $ 44 $ --- $ 55
Consumer..................... 28 34 47 44 38
Commercial business.......... --- --- --- 46 ---
---- ----- ---- ---- ----
Total.................... 28 258 91 90 93
---- ----- ---- ---- ----
Accruing loans delinquent 90
days or more: One- to
four-family....279 668 572 807 424
Multi-family................. --- --- --- 80 --
Commercial Real Estate....... --- 67 --- --- 208
---- ----- ---- ---- ----
Total.....................279 735 572 887 632
---- ----- ---- ---- ----
Foreclosed assets: One- to
four-family.--- --- --- --- ---
---- ----- ---- ---- ----
Total.................... --- --- --- --- ---
---- ----- ---- ---- ----
Total non-performing
assets................$ 307 $ 993 $ 663 $ 977 $ 725
===== ===== ==== ===== ====
Total as a percentage of
total assets............. .18% .56% .32% .45% .30%
===== ==== ==== ===== ====
</TABLE>
Management has considered the Company's non-performing and
"of concern" assets in establishing its allowance for loan losses.
The allowance for loan losses is established through a
provision for loan losses charged to earnings based on
management's evaluation of the risk inherent in its loan portfolio
and changes in the nature and volume of its loan activity. Such
evaluation, which includes a review of all loans of which full
collectibility may not be reasonably assured, considers the
estimated net realizable value of the underlying collateral,
economic conditions, historical loan loss experience and other
factors that warrant recognition in providing for an adequate
allowance for loan losses. In determining the general valuation
allowance under these policies, historical charge-offs and
recoveries, changes in the mix and levels of the various types of
loans, the current loan portfolio and current economic conditions
are considered. The Company also requires additional valuation
allowances for all delinquent and classified loans.
While management believes that it uses the best information
available to determine the allowance for loan losses, unforeseen
market conditions could result in adjustments to the allowance for
loan losses, and net earnings could be significantly affected, if
circumstances differ substantially from the assumptions used in
making the final determination.
As of December 31, 1997, there were $122,000 of one- to four-family
residential loans which are being monitored by management
because they are delinquent between 30 and 89 days. There were no
other loans not included on the table or discussed above where
known information about the possible credit problems of borrowers
caused management to have serious doubts as to the ability of the
borrower to comply with present loan repayment terms and which may
result in disclosure of such loans in the future.
Loan Loss Reserve Analysis. The following table sets forth
the activity in the Company's allowance for loan losses for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period................ $ 454 $ 501 $ 507 $ 515 $ 499
Charge-offs: One- to
four-family.......... --- --- --- 22 ---
Commercial business..........--- --- --- 3 2
Consumer..................... 11 7 --- --- --
Recoveries: Consumer......--- 3 --- --- ---
---- ---- ---- ---- ----
Net charge-offs...............11 4 --- 25 2
Provision charged to
operations.................. 58 10 8 9 32
---- ---- ---- ---- ----
Balance at end of period.. $ 501 $ 507 $ 515 $ 499 $ 529
==== ==== ==== ==== ====
Ratio of net charge-offs during
the period to average loans
outstanding during
the period. .01% .01% ---% .02% ----%
==== ==== ==== ==== ====
Ratio of the allowance for loan
losses to non-performing loans
at the end of the period.163.2% 51.1% 77.7% 51.1% 73.0%
==== ==== ==== ==== ====
Ratio of the allowance for loan
losses to net loans (including
loans held for sale) at the
end of the period......... .39% .37% .36% .32% .31%
==== ==== ==== ==== ====
</TABLE>
The distribution of the Company's allowance for losses on loans at the
dates indicated is
summarized as follows:
<TABLE>
<CAPTION>
December 31,
1993 1994 1995 1996 1997
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
In Each in Each in Each in Each in Each
Category Category Category Category Category
To Total to Total in Total in Total in Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ------- ------ ------- ------ ------- ------ ------- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to
four-family...$ 180 64.8% $ 228 69.4% 222 68.2% $ 214 69.6% $ 220 70.8%
Multi-family..... 15 7.6 10 6.6 13 6.6 11 7.1 16 7.4
Commercial real
estate... 60 13.3 62 12.0 46 11.6 61 10.5 63 10.1
Construction
or development 5 8.9 8 6.5 10 7.6 5 6.1 5 5.3
Consumer.......... 28 5.2 25 5.2 31 5.8 33 6.5 35 6.0
Commercial
business.. 1 .2 -- .3 -- .2 -- .2 -- .4
Unallocated....... 212 -- 174 -- 193 -- 175 -- 190 --
---- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total..... $ 501 100.0% $ 507 100.0% $ 515 100.0% $ 499 100.0% $ 529 100.0%
===== ====== ===== ====== ===== ===== ===== ====== ===== =====
</TABLE>
<PAGE>
Investment Activities
As part of its asset/liability management strategy, the
Company regularly invests in U.S. government and agency
obligations, mortgage-backed securities, collateralized mortgage
obligations, investment grade corporate obligations and mutual
funds registered with the U.S. Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, and interest-bearing
deposits. At December 31, 1997, the Company did not own
any securities of a single issuer which exceeded 10% of the
Company's retained earnings, other than federal agency
obligations.
The Company is required by federal regulations to maintain a
minimum amount of liquid assets which may be available to meet
cash flow or other financial needs. Federal regulations govern the
types and amounts which may be invested in certain financial
instruments. In other cases, federal regulations specify certain
procedural requirements which must be followed prior to investing
in certain financial instruments or which must be maintained
during the period of ownership of the financial instrument.
The Company classifies securities as held-to-maturity or
available-for-sale. Securities are held to maturity and carried
at amortized cost only if OHSL has a positive intent and ability
to hold the securities to maturity. All other securities are
designated as available-for-sale and carried at fair value.
At December 31, 1997, OHSL's securities portfolio had a total
book value of $44.6 million. Of that total, $14.0 million are
Federal Agency obligations, $13.9 million are collateralized
mortgage obligations (which are securities derived by reallocating
cash flows from other mortgage instruments), $12.3 million are
mortgage-backed securities and $4.4 million are other obligations
(consisting primarily of tax-free obligations, corporate bonds and
mutual funds).
At December 31, 1997, the majority OHSL's mortgage-backed
securities are held in its available-for-sale portfolio and
accordingly are included in its financial statements at fair
value. OHSL's CMOs are held in its held-to-maturity portfolio and
accordingly are included in its financial statements at amortized
cost. See Note 2 of the Notes to the Consolidated Financial
Statements.
All of OHSL's mortgage-backed securities and collateralized
mortgage obligations are issued and backed by federal agencies or
carried a AAA rating from Standard & Poor as of December 31, 1997.
Accordingly, management believes that these securities are
generally resistant to credit problems.
OHSL purchases mortgage-backed securities in the regular
course of business. The type of security purchased is based upon
OHSL's asset/liability management strategy, balance sheet
objectives, yield potential, and other factors. For instance,
most of the mortgage-backed securities purchased over the last
several years have had adjustable interest rates or short to
intermediate effective terms to maturity.
See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Asset/Liability Management" in the
Annual Report to Stockholders, attached hereto as Exhibit 13.
The following table sets forth the composition of OHSL's investment
portfolio at the dates
indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1995 1996 1997
------------- ------------- ---------------------------
Book % of Book % of Book % of Weighted
Value Total Value Total Value Total Avg. Yield
----- ----- ----- ----- ----- ----- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Available for Sale Securities:
Mortgage-backed securities... 10,401 75.9% 10,731 76.8% 7,481 69.4% 6.59%
Mutual funds................. 2,810 20.5 2,770 19.8 2,803 26.0 6.10
Other obligations............ 492 3.6 468 3.4 490 4.6 6.00
------- ----- ------- ----- ------ ----- ----
$ 13,703 100.0% $ 13,969 100.0%$ 10,774 100.0% 6.44%
======= ====== ======= ====== ====== ===== ====
Held-to-Maturity Securities:
Federal agency obligations... $ 19,410 69.7%$ 17,330 59.4%$ 14,034 41.5% 6.80%
Mortgage-backed securities... --- -- --- -- 4,806 14.2 7.59
Collateralized mortgage
obligations................ 7,625 27.4 11,022 37.8 13,927 41.1 6.69
Other obligations......(1)...... 808 2.9 810 2.8 1,087 3.2 7.92
------- ----- ------- ----- ------ ----- ----
$ 27,843 100.0% $ 29,162 100.0%$ 33,854 100.0% 6.90%
======= ====== ======= ====== ====== ===== ====
</TABLE>
(1)Consists of tax-exempt obligations, which are shown at their taxable
equivalent weighted
average yield, using a tax rate of 34%.
The following table presents the contractual maturities of the
Corporation's securities portfolio at December 31, 1997. Obligations which are
callable by the issuer are shown as
maturing in the year which corresponds to the final stated maturity.
Mortgage-backed securities
and collateralized mortgage obligations are shown as maturing in the year(s) in
which the Corporation expects to receive the payment of principal, based upon
the recent payment history of the investment. As the mutual funds owned by the
Corporation have no stated maturity, they
are shown as maturing in 1998.
<TABLE>
<CAPTION>
2008 and Amortized Fair
1998 1999-2002 2003-2007 After Cost Value
----- --------- --------- --------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Available for Sale Securities:
Mortgage-backed securities. $ 2,070 $ 4,822 $ 411 $ 126 $ 7,429 $ 7,481
Mutual funds................. 2,798 --- --- --- 2,798 2,803
Other obligations............ --- --- 500 --- 500 490
------ ------ ----- ----- ------ ------
4,868 4,822 911 126 10,727 10,774
------ ------ ----- ----- ------ ------
Held-to-Maturity Securities:
Federal agency obligations..
Mortgage-backed Securities.. 1,184 480 4,491 2,910 5,388 1,215
2,970 201 14,034 4,806 14,101 4,884
Collateralized mortgage
obligations................. 1,200 6,000 4,350 2,377 13,927 14,031
Tax-free obligations(1)........ --- --- --- 1,087 1,087 1,129
------ ------ - ----- ----- ------ ------
2,864 13,401 10,953 6,635 33,854 34,145
------ ------ ------ ----- ------ ------
Total Investments $ 7,732 $ 18,223 $ 11,864 $ 6,761 $ 44,581 $ 44,919
====== ====== ======= ====== ====== ======
Weighted Average Yield 6.32% 6.79% 6.60% 7.19% 6.76%
====== ====== ======= ====== ====== ======
</TABLE>
(1) Shown at tax-equivalent yield
Sources of Funds
General. Deposit accounts have traditionally been the
primary source of the Company's funds for use in lending and for
other general business purposes. In addition to deposits, the
Company derives funds from loan repayments and cash flows
generated from operations. Scheduled loan payments are a
relatively stable source of funds, while deposit inflows and
outflows and the related cost of such funds have varied. Other
potential sources of funds available to the Company include
borrowings from the FHLB of Cincinnati and other borrowings.
Deposits. The Company attracts both short-term and long-term
deposits by offering a wide assortment of accounts and rates. The
Company offers regular passbook accounts, NOW accounts, money
market accounts and fixed interest rate certificates of deposits
with varying maturities and individual retirement accounts. The
Company also offers non-interest bearing personal and business
checking accounts. Deposit account terms vary, according to the
minimum balance required, the time period the funds must remain on
deposit and the interest rate, among other factors. The Company
has not actively sought deposits outside of its primary market
area.
In setting rates, the Company regularly evaluates (i) its
internal cost of funds, (ii) the rates offered by competing
institutions, (iii) its investment and lending opportunities and
(iv) its liquidity position. In order to decrease the volatility
of its deposits, the Company imposes penalties on early withdrawal
on its certificates of deposit. The Company does not have any
brokered deposits and has no present intention to accept or
solicit such deposits.
The following table sets forth the savings flows at the
Company during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1995 1996 1997
----- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance.... $ 135,587 $ 159,314 $ 169,486
Deposits less
Withdrawals... 16,302 2,029 6,170
------- ------- -------
Balance before
interest credited... 151,889 161,343 175,656
Interest credited.. 7,425 8,143 9,034
------- ------- -------
Ending balance..... $ 159,314 $ 169,486 $ 184,690
======= ======= =======
net increase
(decrease)........ $ 23,727 $ 10,172 $ 15,204
======= ======= =======
Percent increase
(decrease)........ 17.50% 6.38% 8.97%
======= ======= =======
</TABLE>
The following table sets forth the dollar amount of deposits in the
various types of programs offered by the Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1995 1996 1997
------------------- ---------------- ------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction Accounts:
Non-interest bearing
deposits....... $ 4,042 2.5% $ 2,669 1.6%$ 3,256 1.8%
Savings accounts............. 22,165 13.9 24,322 14.4 26,862 14.5
NOW accounts..................15,180 9.5 16,487 9.7 16,670 9.0
Money market accounts.........12,939 8.2 11,545 6.8 9,395 5.1
------- ----- ------- ----- ------- -----
Total Transaction Accounts...54,326 34.1 55,023 32.5 56,183 30.4
------- ----- ------- ----- ------- -----
Certificates: 2.00 - 3.99%.......912 .6 906 .5 625 .3
4.00 - 5.99%..................39,554 24.8 57,360 33.9 58,458 31.7
6.00 - 7.99%.................60,2253 7.8 52,274 30.8 67,449 36.5
8.00 - 9.99%.................. 4,297 2.7 3,923 2.3 1,975 1.1
------- ----- ------- ----- ------- -----
Total Certificates......... .104,988 65.9 114,463 67.5 128,507 69.6
------- ----- ------- ----- ------- -----
Total Deposits...............159,314 100.0% 169,486 100.0% 184,690 100.0%
------- ===== ------- ===== ------- =====
Accrued Interest on deposit
accounts. 8 119 97
------- ------- -------
Total Deposits and accrued interest
on deposit accounts......$ 159,322 $ 169,605 $ 184,787
======= ======= =======
/TABLE
<PAGE>
The following table shows rate and maturity information for
the Company's certificates of deposits as of December 31, 1997.
<TABLE>
<CAPTION>
2.00- 4.00- 6.00- 8.00- Percent
3.99% 5.99 7.99% 9.99% Total of Total
---- ---- ---- ---- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C. <C> <C> <C>
Certificate accounts
maturing
in quarter ending:
March 31, 1998.. $ 625 $16,284 $ 4,098 $ 442 $ 21,449 16.69%
June 30, 1998..... -- 9,115 11,403 174 20,692 16.10
September 30, 1998.... -- 9,012 8,218 9 17,239 13.41
December 31, 1998..... -- 11,012 7,459 211 18,682 14.54
March 31, 1999........ -- 5,121 2,600 387 8,108 6.31
June 30, 1999......... -- 2,664 715 469 3,848 2.99
September 30, 1999.... -- 477 1,510 171 2,158 1.68
December 31, 1999..... -- 555 2,515 --- 3,070 2.39
March 31, 2000........ -- 1,637 1,094 --- 2,731 2.13
June 30, 2000......... -- 129 3,238 --- 3,367 2.62
September 30, 2000.... -- 176 6,684 --- 6,860 5.34
December 31, 2000..... -- 144 4,176 12 4,332 3.37
Thereafter............ -- 2,132 13,739 100 15,971 12.43
Total............$ 625 $58,458 $67,449 $1,975 $128,507 100.00%
Percent of total... 0.50% 45.50% 52.50% 1.50%
The following table indicates the amount of the Company's
certificates of deposit by time remaining until maturity as of
December 31, 1997.
</TABLE>
<TABLE>
<CAPTION>
Maturity
------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
------- ------ ------ --------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less
than $100,000........ $19,885 $18,569 $29,420 $46,492 $114,366
Certificates of deposit of
$100,000 or more..... 1,564 1,923 6,501 3,953 13,941
Public funds(1).......... -- 200 --- -- 200
------ ------ ------ ------- -------
Total certificates of
deposit................$21,449 $20,692 $35,921 $50,445 $128,507
====== ====== ====== ======= ========
</TABLE>
(1) Deposits from governmental and other public entities.
For additional information regarding the composition of the
Company's deposits, see Note 6 of the Notes to the Consolidated
Financial Statements.
Borrowings. The Company's other available sources of funds
include advances from the FHLB of Cincinnati and other borrowings.
As a member of the FHLB of Cincinnati, the Company is required to
own capital stock in the FHLB of Cincinnati and is authorized to
apply for advances from the FHLB of Cincinnati. Each FHLB credit
program has its own interest rate, which may be fixed or variable,
and range of maturities. The FHLB of Cincinnati may prescribe the
acceptable uses for these advances, as well as limitations on the
size of the advances and repayment provisions.
The following table sets forth the maximum month-end balance
and average balance of FHLB advances and other borrowings for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1996 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances................ $17,400 $20,627 $29,308
Other borrowings............. --- --- ---
Average Balance: FHLB advances.. 15,865 17,961 25,574
Other borrowings............. --- --- ---
</TABLE>
The following table sets forth certain information as to the
Company's FHLB advances and other borrowings at the dates
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1996 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
FHLB advances.................. $17,400 $19,116 $26,570
Other borrowings............... --- --- ---
------ ------ ------
Total borrowings............. $17,400 $19,116 $26,570
====== ======= ======
Weighted average interest
rate of borrowings........... 5.92% 5.96% 5.91%
==== ==== ====
</TABLE>
Service Corporation
Federal associations generally may invest up to 2% of their
assets in service corporations, plus an additional 1% of assets if
for community purposes. In addition, federal associations may
invest up to 50% of their regulatory capital in conforming loans
to their service corporations.
The Company has one service corporation, CFSC, Inc. ("CFSC"),
which is engaged in the sale on an agency basis of tax-deferred
annuities, mutual fund products and financial planning services.
At December 31, 1997, the Company had an equity investment in CFSC
of $51,000. For the year ended December 31, 1997, CFSC received
commission income of $27,000 from its mutual fund and annuity
sales activities.
Competition
The Company faces strong competition both in originating real
estate loans and in attracting deposits. Competition in
originating loans comes primarily from other savings institutions,
commercial banks and mortgage bankers who also make loans secured
by real estate located in the Company's primary market area. The
Company competes for loans principally on the basis of the
interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers.
The Company faces substantial competition in attracting
deposits from other savings institutions, commercial banks,
securities firms, money market and mutual funds, credit unions and
other investment vehicles. The Company competes with numerous
savings institutions, commercial banks and credit unions which
operate through extensive branch offices in its primary market
area. The ability of the Company to attract and retain deposits
depends on its ability to provide an investment opportunity that
satisfies the requirements of investors as to rate of return,
liquidity, risk, convenient locations and other factors. The
Company competes for these deposits by offering a variety of
deposit accounts at competitive rates, convenient business hours
and a customer oriented staff. The Company estimates its market
share of savings deposits in the Hamilton County market area to be
less than 5%.
REGULATION
General
The Company is a federally chartered savings association,
the deposits of which are federally insured and backed by the full
faith and credit of the United States Government. Accordingly,
the Company is subject to broad federal regulation and oversight
extending to all its operations. The Company is a member of the
FHLB of Cincinnati and is subject to certain limited regulation by
the Board of Governors of the Federal Reserve System ("Federal
Reserve Board"). As the savings and loan holding company for Oak
Hills, OHSL also is subject to federal regulation and oversight.
The purpose of the regulation of OHSL and other holding companies
is to protect subsidiary savings associations. The Company is a
member of the SAIF and the deposits of the Company are insured by
the FDIC. As a result, the FDIC has certain regulatory and
examination authority over the Company.
Certain of these regulatory requirements and restrictions are
discussed below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of
savings associations. As part of this authority, the Company is
required to file periodic reports with the OTS and is subject to
periodic examinations by the OTS and the FDIC. The last regular
OTS and FDIC examinations of the Company were as of September 1997
and October 1990, respectively. Under agency scheduling
guidelines, it is likely that another examination will be
initiated in the near future.
The OTS has established a schedule for the assessment of fees
upon all savings associations to fund the operations of the OTS.
The general assessment is computed upon the savings association's
total assets, as reported in the association's latest quarterly
thrift financial report. Savings associations (unlike the
Company) that are classified as "troubled" (i.e., having a
supervisory rating of "4" or "5" or subject to a conservatorship)
are required to pay a 50% premium over the standard assessment.
The Company's OTS assessment for the year ended December 31, 1997,
was $63,000.
The OTS also has extensive enforcement authority over all
savings institutions and their holding companies, including the
Corporation and the Company. This enforcement authority includes,
among other things, the ability to assess civil money penalties,
to issue cease-and-desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the
basis for enforcement action, including misleading or untimely
reports filed with the OTS. Except under certain circumstances,
public disclosure of final enforcement actions by the OTS is
required.
In addition, the investment, lending, and branching authority
of the Company is prescribed by federal laws and regulations, and
it is prohibited from engaging in any activities not permitted by
such laws and regulations. For instance, no savings institution
may invest in non-investment grade corporate debt securities. In
addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may
not exceed 400% of regulatory capital, except with approval of the
OTS. The Company is in compliance with each of these
restrictions.
The Company's permissible lending limit for loans-to-one-borrower is equal
to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain
readily marketable collateral, in which case this limit is
increased to 25% of unimpaired capital and surplus). At
December 31, 1997, the Company's lending limit under the 15%
restriction was $3.1 million. The Company is in compliance with
the loans-to-one-borrower limitation.
In December 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted into law. FDICIA
provides for, among other things, the recapitalization of the Bank
Insurance Fund; adoption of safety and soundness standards,
including enhanced federal supervision of depository institutions,
including greater authority for the appointment of a conservator
or receiver for undercapitalized institutions; the establishment
of risk-based deposit insurance premiums; liberalization of the
qualified thrift lender test; greater restrictions on transactions
with affiliates; and mandated consumer protection disclosures with
respect to deposit accounts. See "- Insurance of Accounts and
Regulation by the FDIC," "- Regulatory Capital Requirements" and
"- Qualified Thrift Lender Test."
The OTS, as well as the other federal banking agencies, have
issued proposed safety and soundness standards on matters such as
loan underwriting and documentation, internal controls and audit
systems, interest rate risk exposure and compensation and other
employee benefits. The proposal also establishes the maximum
ratio of classified assets to total capital (which for this
purpose includes loss allowances exceeding the amount includable
for regulatory capital purposes) at 100% and the minimum level of
earnings sufficient to absorb losses without impairing capital.
Insurance of Accounts and Regulation by the FDIC
The Company is a member of the SAIF, which is administered by
the FDIC. Savings deposits are insured up to applicable limits by
the FDIC and such insurance is backed by the full faith and credit
of the United States government. As insurer, the FDIC imposes
deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such
action, and may terminate the deposit insurance if it determines
that the institution has engaged or is engaging in unsafe or
unsound practices, or is in an unsafe or unsound condition.
FDICIA also requires the FDIC to implement a risk-based
deposit insurance assessment system. Pursuant to this
requirement, the FDIC has adopted a transitional risk-based
assessment system, under which all insured depository institutions
will be placed into one of nine categories and assessed insurance
premiums, ranging from .23% to .31% of deposits, based upon their
level of capital and supervisory evaluation. The FDIC will review
the implementation of the transitional system in adopting the
permanent system. No assurance can be given that the permanent
system will be identical to the transitional system. Final
regulations have not yet been issued. Under the transitional
system, institutions classified as well capitalized (i.e., a core
capital ratio of at least 5%, a ratio of Tier 1 or core capital to
risk-weighted assets ("Tier 1 risk-based capital") of at least 6%
and a risk-based capital ratio of at least 10%) and considered
healthy would pay the lowest premium while institutions that are
less than adequately capitalized (i.e., core and Tier 1 risk-based
capital ratios of less than 4% or a risk-based capital ratio of
less than 8%) and considered of substantial supervisory concern
would pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual
assessment period.
The FDIC is authorized to increase assessment rates if it
determines that the reserve ratio of the SAIF will be less than
the designated reserve ratio of 1.25% of SAIF insured deposits.
Regulatory Capital Requirements
Federally insured savings associations, such as the Company,
are required to maintain a minimum level of regulatory capital.
The OTS has established capital standards, including a tangible
capital requirement, a leverage ratio (or core capital)
requirement and a risk-based capital requirement applicable to
such savings associations. These capital requirements must be
generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual
associations on a case-by-case basis.
The capital regulations require tangible capital of at least
1.5% of adjusted total assets (as defined by regulation).
Tangible capital generally includes stockholders' equity. At
December 31, 1997, the Company had tangible capital of $20.5
million, or 8.8% of adjusted total assets, which is approximately
$17.0 million above the minimum requirement of 1.5% of adjusted
total assets in effect on that date.
The capital standards also require core capital equal to at
least 3% of adjusted total assets (as defined by regulation).
Core capital generally consists of tangible capital plus certain
intangible assets, including supervisory goodwill (which is
phased-out over a five-year period). A savings association must
maintain a core capital ratio of at least 4% to be considered
adequately capitalized unless its supervisory condition is such to
allow it to maintain a 3% ratio.
As required by federal law, the OTS has proposed a rule
revising its minimum core capital requirement to be no less
stringent than that imposed on national banks. The OTS has
proposed that only those savings associations rated a composite
one (the highest rating) under the MACRO rating system for savings
associations will be permitted to operate at or near the
regulatory minimum leverage ratio of 3%. All other savings
associations will be required to maintain a minimum leverage ratio
of 4% to 5%. The OTS will assess each individual savings
association through the supervisory process on a case-by-case
basis to determine the applicable requirement. No assurance can
be given as to the final form of any such regulation, the date of
its effectiveness or the requirement applicable to the Company.
At December 31, 1997, the Company had core capital equal to
$20.5 million, or 8.8% of adjusted total assets, which is $11.2
million above the minimum leverage ratio requirement of 4% as in
effect on that date.
The OTS risk-based requirement requires savings associations to
have total capital of at least 8% of risk-weighted assets. Total
capital consists of core capital, as defined above, and
supplementary capital. Supplementary capital consists of certain
permanent and maturing capital instruments that do not qualify as
core capital and general valuation loan loss allowances up to a
maximum of 1.25% of risk-weighted assets. At December 31, 1997,
the Company had no capital instruments that qualify as
supplementary capital and $520,000 of general loss reserves.
On December 31, 1997, the Company had total risk-based
capital of $21.0 million and risk-weighted assets of $122.1
million, or total capital of 17.3% of risk-weighted assets. This
amount was $11.3 million above the 8.0% requirement in effect on
that date.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions or requirements
on associations with respect to their ability to pay dividends or
make other distributions of capital. OTS regulations prohibit an
association 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.
The OTS utilizes a three-tiered approach to permit
associations, based on their capital level and supervisory
condition, to make capital distributions which include dividends,
stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account (see "--Regulatory
Capital Requirements").
Generally, Tier 1 associations, which are associations that
before and after the proposed distribution meet their fully
phased-in capital requirements, may make capital distributions
during any calendar year equal to the greater of 100% of net
income for the 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, or
the amount authorized for a Tier 2 association. However, 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 as
a result of such a determination. The Company meets the
requirements for a Tier 1 association and has not been notified of
a need for more than normal supervision. Tier 2 associations,
which are associations that before and after the proposed
distribution meet their current minimum capital requirements, may
make capital distributions of up to 75% of net income over the
most recent four quarter period.
Tier 3 associations (which are associations that do not meet
current minimum capital requirements) that propose to make any
capital distribution and Tier 2 associations that propose to make
a capital distribution in excess of the noted safe harbor level
must obtain OTS approval prior to making such distribution. 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. See "-Regulatory Capital
Requirements."
Liquidity
All savings associations, including Oak Hills, are required
under the Home Owners' Loan Act to hold a prescribed amount of
statutorily defined liquid assets. The Director of the OTS may
vary this liquidity requirement, but only within pre -
established statutory limits. Effective November 24, 1997, the
Director lowered the liquidity requirement from 5.0% to 4.0%, the
lowest level permitted by regulation. The Director also enacted
other changes at that time, including the expansion of the
categories of liquid assets that count toward satisfaction of the
liquidity requirement and other technical revisions. The net
effect for most savings and institutions, as well as for Oak
Hills, is that the above requirement make it substantially easier
to meet the liquidity requirement as currently defined. Penalties
may be imposed for failure to meet the liquidity requirement. At
December 31, 1997, Oak Hills was in compliance with the liquidity
requirement.
Investment Accounting
An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment
activities of a savings association must be in compliance with
approved and documented investment policies and strategies, and
must be accounted for in accordance with GAAP. Under the policy
statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for
investment, sale or trading) with appropriate documentation.
Management believes that the Company is in compliance with this
OTS policy statement.
Qualified Thrift Lender Test
All savings associations, including the Company, are required
to meet a qualified thrift lender ("QTL") test to avoid certain
restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (which
consists of total assets less intangibles, properties used to
conduct the savings association's business and liquid assets not
exceeding 20% of total assets) in qualified thrift investments on
a monthly average for nine out of every 12 months on a rolling
basis. At December 31, 1997, the Company met the test and has
always met the test since it went into effect.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as
favorable to the association as transactions with non-affiliates.
In addition, certain of these transactions are restricted to a
percentage of the association's capital. Affiliates of Oak Hills
include OHSL and any company which is under common control with
the Company. In addition, a savings association may not lend to
any affiliate engaged in activities not permissible for a bank
holding company or acquire the securities of most affiliates. Oak
Hills' subsidiaries are generally not deemed affiliates.
Certain transactions with affiliated persons are also subject
to conflict of interest regulations enforced by the OTS.
Affiliated persons would currently include officers and directors.
Holding Company Regulation
OHSL is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, OHSL is required to
register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has
enforcement authority over OHSL and its non-savings association
subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the
subsidiary savings association.
As a unitary savings and loan holding company, OHSL generally
is not subject to activity restrictions. If OHSL acquires control
of another savings association as a separate subsidiary, it would
become a multiple savings and loan holding company, and the
activities of OHSL and any of its subsidiaries (other than Oak
Hills or any other SAIF-insured savings association) could become
subject to such restrictions.
If the Company fails the QTL test, the Company must obtain
the approval of the OTS prior to continuing after such failure,
directly or through its other subsidiaries, any business activity
other than those approved for multiple savings and loan holding
companies or their subsidiaries. In addition, within one year of
such failure, the Company must register as (and will become
subject to the restrictions applicable to) a bank holding company.
The activities authorized for a bank holding company are more
limited than are the activities authorized for a unitary or
multiple savings and loan holding company. See "--Qualified
Thrift Lender Test."
OHSL must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisitions
are generally prohibited if they result in a multiple savings and
loan holding company controlling savings associations in more than
one state. However, such interstate acquisitions are permitted
based on specific state authorization or in a supervisory
acquisition of a failing savings association.
Federal Securities Law
The stock of the Corporation is registered with the SEC under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Corporation is subject to the information, proxy
solicitation, insider trading restrictions and other requirements
of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Corporation
may not be resold without registration or unless sold in
accordance with certain resale restrictions. If the Corporation
meets specified current public information requirements, each
affiliate of the Corporation is able to sell in the public market,
without registration, a limited number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at
specified levels against their transaction accounts (primarily NOW
checking accounts) and non-personal time deposits. At December
31, 1997, the Company was in compliance with these reserve
requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to
satisfy liquidity requirements that may be imposed by the OTS.
See "--Liquidity."
Savings associations are authorized to borrow from the
Federal Reserve Bank "discount window," but Federal Reserve Board
regulations require associations to exhaust other reasonable
alternative sources of funds, including FHLB borrowings, before
borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
The Company is a member of the FHLB of Cincinnati, which is
one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a
reserve or central bank for its members within its assigned
region. It is funded primarily from proceeds derived from the
sale of consolidated obligations of the FHLB System. It makes
loans to members (i.e., advances) in accordance with policies and
procedures established by the board of directors of the FHLB.
These policies and procedures are subject to the regulation and
oversight of the Federal Housing Finance Board. All advances from
the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances
are required to provide funds for residential home financing.
As a member, the Company is required to purchase and maintain
stock in the FHLB of Cincinnati. At December 31, 1997, the
Company had $1.6 million in FHLB stock, which was in compliance
with this requirement. In past years, the Company has received
dividends on its FHLB stock which have generally been in the form
of additional shares of FHLB stock. Dividends on FHLB stock
averaged 7.19% for calendar year 1997.
Under federal law, the FHLBs are required to provide funds
for the resolution of troubled savings associations and to
contribute to low and moderately priced housing programs through
direct loans or interest subsidies on advances targeted for
community investment and low and moderate income housing projects.
These contributions have adversely affected the level of FHLB
dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of
FHLB stock in the future. A reduction in value of the Company's
FHLB stock may result in a corresponding reduction in the
Company's capital.
For the year ended December 31, 1997, dividends paid by the
FHLB of Cincinnati to the Company totaled $112,000, which
constitute a $10,000 increase over the amount of dividends
received in calendar year 1996. The $29,000 dividend received for
the quarter ended December 31, 1997 reflects an annualized rate of
7.25%. As virtually all dividends for 1997 were paid in the form
of additional shares of FHLB stock, the effect of these dividends
was to increase the Company's investment in FHLB stock from $1.5
million at December 31, 1996 to $1.6 million at December 31, 1997.
Federal and State Taxation
OHSL Financial Corp. and Oak Hills are both subject to the
federal tax laws and regulations which apply to corporations
generally. 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 Oak Hills, 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 the reserve method
of Section 593 of the Code.
Under Section 593, a thrift institution annually could 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
and 1994, Oak Hills used the percentage of taxable income method
because such method provided a higher bad debt deduction than the
experience method.
Section 1616 of the Act repealed the Section 593 reserve
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. The
percentage of taxable income method of accounting for bad debts is
no longer available for any financial institution.
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 Oak Hills, 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 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 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
requires recapture in the case of certain excessive distributions
to shareholders. The pre-1988 reserve 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 Oak Hills to the
Corporation is deemed paid out of its pre-1988 reserves under
these rules, the pre-1988 reserves would be reduced and Oak Hills'
gross income 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, Oak Hills' pre-1988 reserves for tax purposes totaled
approximately $2.7 million.
In addition to the regular income tax, OHSL and Oak Hills are
subject to a minimum tax. An alternative minimum tax 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, 1988.
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.
In addition, for taxable years after 1986 and before 1996, both
OHSL and Oak Hills are also subject to an environmental tax equal
to 0.12% of the excess of alternative minimum taxable income for
the taxable year (determined without regard to net operating
losses and the deduction for the environmental tax) over $2.0
million.
Oak Hills has been audited by the IRS with respect to
federal income tax returns through 1995. With respect to years
examined by the IRS, all deficiencies have been satisfied. In the
opinion of management, any examination of these and other still
open returns (including returns of subsidiaries) would not result
in a deficiency which could have a material adverse effect on the
financial condition of OHSL.
Delaware Taxation. As a Delaware holding company, OHSL is
exempted from Delaware corporate income tax but is required to
file an annual report with and pay an annual fee to the State of
Delaware. OHSL is also subject to an annual franchise tax imposed
by the State of Delaware.
Ohio Taxation. The State of Ohio imposes a franchise
tax of 1.5 percent of the Company's regulatory capital determined
under GAAP, as adjusted for goodwill and with allocations pursuant
to prescribed formulas for property held outside the State of
Ohio. The State of Ohio also imposes a fee based upon the shares
issued by OHSL as a foreign corporation.
Employees
At December 31, 1997, the Company had a total of 43 full-time
employees and 31 part-time employees. None of the Company's
employees are represented by any collective bargaining group.
Management considers its employee relations to be excellent.
Item 2. Properties
The following table sets forth information concerning the
main office and each branch office of the Company at December 31,
1997. At December 31, 1997, the Company's premises had an
aggregate net book value of approximately $2.1 million.
<PAGE>
Lease (In Thousands)
Year Owned or Expiration Net Book
Location Opened Leased Date Value
- -------- ------ ------- ---------- -----------
Main Office
5889 Bridgetown Road
Cincinnati, Ohio 45248 1953 Owned NA $ 343
Full Service
Branches
4024 Glenway Avenue
Cincinnati, Ohio 45205 1982 Owned NA 60
6581 Harrison Avenue
Cincinnati, Ohio 45247 1982 Owned NA 1,438
5329 Foley Road
Cincinnati, Ohio 45238 1990 Leased 2000 100
6105 Cleves-Warsaw Pike
Cincinnati, Ohio 45233 1996 Leased 2001 207
The Company conducts the majority of its administrative
activities at its Harrison Avenue branch. The Company believes
that its current facilities are adequate to meet present and
immediately foreseeable needs.
Item 3. Legal Proceedings
The Corporation and the Company are involved from time to
time as plaintiff or defendant in various legal actions arising in
the normal course of its business. While the ultimate outcome of
any such legal proceedings cannot be predicted with certainty, it
is the opinion of management, after consultation with counsel
representing the Corporation and Oak Hills, that the resolution of
such legal proceedings should not have a material effect on the
Corporation's consolidated financial position or results of
operations.
PART II
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders,
through the solicitation of proxies or otherwise, during the
quarter ended December 31, 1997.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Page 34 of the attached 1997 Annual Report to Stockholders is
herein incorporated by reference.
OHSL has approximately 800 stockholders at December 31,1997.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Pages 6 through 14 of the attached 1997 Annual Report to
Stockholders are herein incorporated by reference. The following
schedule should be reviewed in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of
Operation, which are herein incorporated by reference.
The following schedule presents the dollar amount of changes
in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It
distinguishes between the increases related to changes in
outstanding balances and those due to changes in interest rates.
For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old
rate) and (ii) changes in rate (i.e., changes in rate multiplied
by old volume). For purposes of this table, changes attributable
to both rate and volume, which cannot be segregated, have been
allocated proportionately.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1996 vs. 1995 1997 vs. 1996
Increase Increase
(Decrease) (Decrease)
Due to Due to
---------- -----------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ------ ---------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable.................$ 703 $ 19 $ 722 $1,329 $ (279) $ 1,050
Available-for-sale securities.......(151) 85 (66) (174) (1) (175)
Held-to-maturity securities and
other investments............... 878 (17) 861 562 (42) 520
FHLB stock.................... 7 2 9 8 2 10
----- ------ ----- ----- ----- -------
Total interest-earning assets.. $1,437 $ 89 1,526 $1,725 $ (320) $ 1,405
===== ====== ===== ===== ====== =======
Interest-bearing liabilities:
Demand and NOW deposits......... $ (14) $ (40) (54) $ 2 $ 19 $ 21
Savings accounts................ (32) (264) (296) 265 39 304
Time deposits................... 1,075 216 1,291 200 210 410
Borrowings...................... 124 (38) 86 451 10 461
----- ------ ----- ----- ----- -------
Total interest-bearing
liabilities.................. $ 1,153 $ (126) 1,027 $ 918 $ 278 1,196
===== ===== ===== ==== ==== =====
Net interest income.............. $ 499 $ 209
======= ========
</TABLE>
<PAGE>
Item 7. Financial Statements
The following information appearing in the Company's Annual
Report to Stockholders for the year ended December 31, 1997 is
incorporated by reference in this Annual Report on Form 10-KSB as
Exhibit 13.
Annual Report Section Pages in Annual Report
- --------------------- ----------------------
Report of Independent Auditors 15
Consolidated Balance Sheets as of
December 31, 1997 and 1996 16
Consolidated Statements of Income
for the Years Ended December 31, 1997,
1996 and 1995 17
Consolidated Statements of Changes
in Shareholders' Equity for Years
Ended December 31, 1997, 1996 and 1995 18
Consolidated Statements of Cash Flows
for Years Ended December 31, 1997,
1996 and 1995 19-20
Notes to Consolidated Financial
Statements 21-33
With the exception of the aforementioned information, the
Corporation's Annual Report to Stockholders for the year ended
December 31, 1997, is not deemed filed as part of this Annual
Report on Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
There has been no Current Report on Form 8-K filed within 24
months prior to the date of the most recent financial statements
reporting a change of accountants and/or reporting disagreements
on any matter of accounting principle or financial statement
disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act
Directors
Information concerning directors of the Corporation is
incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in
1998, a copy of which will be filed not later than 120 days after
the close of the fiscal year.
Executive Officers
Information regarding the business experience of the
executive officers of the Corporation and the Company contained in
Part I of this Form 10-KSB is incorporated herein by reference.
Item 10. Additional Information - Executive Officers
The following information as to the business experience
during the past five years is supplied with respect to executive
officers of OHSL and Oak Hills who do not serve on either entity's
Board of Directors. There are no arrangements or understandings
between the persons named and any other person pursuant to which
such officers were selected.
Patrick J. Condren, C.P.A., age 46, is Treasurer, a position
he has held since 1988. In 1993, Mr. Condren was appointed Chief
Financial and Accounting Officer. As Treasurer and Chief
Financial and Accounting Officer, Mr. Condren is responsible for
the accounting, investment and other financial matters of OHSL and
Oak Hills. Mr. Condren joined Oak Hills in 1986 as Controller.
Terry E. Todd, age 47, has served as Vice President and
Director of Lending of Oak Hills since May of 1991. As Director
of Lending, Mr. Todd is responsible for overseeing the
origination, processing and servicing of loans for Oak Hills.
Prior to joining Oak Hills in 1991, Mr. Todd was a loan officer in
the Cincinnati office of National City Mortgage, a mortgage
lending firm located in Cleveland, Ohio, from 1986 to 1991. As a
Loan Officer, Mr. Todd was responsible for residential mortgage
loan originations.
Marilyn R. Wieland, age 47, is Senior Vice President and
Secretary of Oak Hills, a position she has held since 1989. Ms.
Wieland is responsible for oversight of the savings department and
is the director of human resources. Ms. Wieland served as Vice
President and Secretary of Oak Hills from 1985 to 1989. Ms.
Wieland is the daughter of Norbert Brinker, the Chairman of the
Board of OHSL and Oak Hills.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated
herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1998, a copy of which
will be filed not later than 120 days after the close of the
fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information concerning security ownership of certain
beneficial owners and management is incorporated herein by
reference from the definitive Proxy Statement for the Annual
Meeting Stockholders to be held in 1998, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related
transactions is incorporated herein by reference from the
definitive Proxy Statement for the Annual Meeting of Stockholders
to be held in 1998, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Item 14. Exhibits and Reports on Form 8-K
(a) Exhibits
Sequential
Reference to Page Number
Prior Filing Where Attached
or Exhibit Exhibits Are
Regulation Number Located in This
S-K Exhibit Attached Annual Report
Number Document Hereto On Form 8-K
- --------- --------------------- -------- --------------
3 Articles of Incorporation
and Bylaws. * Not applicable
4 Instruments defining the rights of
security holders, including
indentures:
Common Stock Certificate.. * Not applicable
10 Material contracts: Stock
Option and Incentive Plan... * Not applicable
Bank Incentive Plan......... * Not applicable
11 Statement re computation of per
share earnings............. 11 Page 54
13 Annual Report to
Shareholders........... 13
21 Subsidiaries of Registrant. 21 Page 55
23 Consent of Accountants..... 23
*Filed as exhibits to the Registrant's Registration Statement No.
33-53398 on Form S-1 filed on October 16, 1992. All of such
previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three-month period
ended December 31, 1997, except for a Form 8-K filed
October 27, 1997 to report earnings for the quarter ended
September 30, 1997 and a Form 8-K filed on December 2, 1997 to
report the payment of a cash dividend.
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.
OHSL FINANCIAL CORP.
Date: March 24, 1998 By: /s/
Kenneth L. Hanauer, President
and Director
Pursuant to the requirements of the Securities Exchange Act
of 1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<PAGE>
/s/ /s/
Kenneth L. Hanauer, President Norbert G. Brinker, Chairman
and Director of the Board
(Principal Executive Officer)
Date: March 24, 1998 Date: March 24, 1998
/s/ /s/
William R. Hillebrand, Director Thomas M. Herron, Director
Date: March 24, 1998 Date: March 24, 1998
/s/ /s/
Alvin E. Hucke, Director Thomas E. McKiernan, Director
Date: March 24, 1998 Date: March 24, 1998
/s/ /s/
Joseph J. Tenoever, Director Howard H. Zoellner, Director
Date: March 24, 1998 Date: March 24, 1998
/s/
Patrick J. Condren, Treasurer
(Principal Financial and
Accounting Officer)
Date: March 24, 1998
Exhibit 11. Earnings Per Share
The calculation of earnings per share ("EPS") is presented
below. Earnings per share are calculated by dividing the
Corporation's net income by the weighted average shares
outstanding during the period. Weighted average shares
outstanding do not include any shares held by the Company's
Employee Stock Ownership Plan ("ESOP") which have not been
allocated to the ESOP's participants.
For the year ended December 31, 1997 this calculation is as
follows:
Net income for 1997.................................. $2,007,000
Weighted average shares outstanding during 1997...... 1,240,761
Less average unallocated ESOP shares during 1997..... 41,547
Average shares outstanding for EPS calculations...... 1,199,214
Earnings per share ($2,007,000 / 1,199,214)......... $1.67
The calculation of diluted earnings per share involves the
re-calculation of weighted average outstanding shares by assuming
that all unexercised stock options are exercised at the exercise
price ( in this case, $10.00 per share). These shares therefore
increase the weighted average outstanding shares. It is then
assumed that the proceeds from this exercise, including the value
of the tax benefit derived by the Corporation due to the exercise
(the Corporation receives a tax benefit which corresponds to the
taxability of any options exercised by directors of the
Corporation), are used to repurchase shares at the average market
price during the year. These repurchases act to reduce the
weighted average outstanding shares for EPS calculation purposes.
The net income for the year is then divided by the "diluted"
weighted average shares outstanding to arrive at diluted earnings
per share.
The calculation of diluted earning per share for 1997 is
presented below:
Weighted average outstanding shares during 1997...... 1,199,214
Average options shares issued........................ 68,951
Shares repurchased with option proceeds and tax benefit. 32,651
Weighted avg. shares for diluted earnings per share... 1,235,514
Earnings per share ($2,007,000 / 1,235,514).......... $1.62
<PAGE>
Exhibit 13
R.S. Rowe & Company, Inc.; Job No. 6345; Proof of 03-04-98
(617) 482-7765; (212) 926-2444; (800) 324-6202; FAX No. (617) 423-6308
EMAIL Address: [email protected]
PM6\ANNUAL\OHSL-1
OHSL
FINANCIAL CORP.
1997
ANNUAL
REPORT<PAGE>
TABLE OF CONTENTS
Corporate Profile 1
Letter to Stockholders 2
Selected Financial Data 3
Financial Section:
Management's Discussion and Analysis 6
Report of Independent Auditors 15
Consolidated Statements of Financial
Condition 16
Consolidated Statements of Income 17
Consolidated Statements of Changes in
Shareholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 21
Stockholder Information 34
Directors and Executive Officers of OHSL
Financial Corp. and Oak Hills Savings
and Loan Co., F.A. 35
CORPORATE PROFILE
OHSL Financial Corp. ("OHSL") is a single thrift holding
company established in October, 1992 to own 100% of the common
stock of Oak Hills Savings and Loan Company, F.A. upon the
completion of its conversion to a stock form of organization which
occurred on February 5, 1993.
Oak Hills Savings and Loan Company, F.A.. ("Oak Hills" or
"Company") was chartered by the State of Ohio in 1907 as Lick Run
Building and Loan Company. In 1958, Lick Run changed its name to
Oak Hills Savings and Loan Company. In 1981, the Company merged
with Rosemont Savings Association and in 1990, the Company
converted to a federally chartered thrift institution.
Oak Hills serves the financial needs of families and local
businesses in its primary market area, which includes Hamilton,
Butler and Clermont counties in Ohio and Dearborn, Franklin and
Ripley counties in Indiana, through its main office and four
branch offices. Its deposits are insured up to applicable limits
by the Federal Deposit Insurance Corporation. The Company has
historically emphasized one-to-four family residential lending
within its own community.
At December 31, 1997, OHSL had shareholders' equity of $26.0
million or 10.9% of total assets.
The common stock of OHSL Financial Corp. trades under the
symbol of "OHSL" on the Nasdaq National Market tier of the Nasdaq
Stock Market.
<PAGE>
Dear Valued Stockholder:
Each year as I sit down to write this cover letter, I pause
to consider what our industry is going to look like by the end of
the year. The financial services industry in general continues to
undergo consolidation. As customers are shuttled from one
institution to another as ownership in their BANK changes, they
find themselves with a new set of rules to adhere to, and more
times than not, an expanded fee schedule for the services to which
they have grown accustomed. Other companies, like Oak Hills
Savings & Loan Company, F.A., offering competitively priced
products, are now presented with a valuable opportunity to market
their services to a new customer base. By employing some of the
latest technology available, we have positioned our Company in
such a manner to effectively compete for this new business well
into the 21st century.
Allow me to present a few of the highlights from 1997:
OHSL recorded net income after tax of $2,007,000 which
represents an all time high for us, equating to $1.67 per share
($1.62 on a diluted basis). The two earnings per share numbers are
also records for us.
Net interest income rose to $7,127,000 during a time
when we saw interest spreads throughout the industry begin to
compact. Our objective in 1998 is to continue our efforts in
enhancing non-interest income, helping us to mitigate the negative
effects of a flat yield curve. The stock market in general was
kind to investors during 1997 and our stock was no exception. We
had a closing price of $27.00 for the year, up $5.625 from $21.375
as of December 31, 1996, an increase of 26.3%. This, coupled with
our $.88 per share dividend for the year, helps fulfill the desire
of your Board of Directors by enhancing long term shareholder
value. Our total assets, loans receivable and deposits reached
record levels in 1997, demonstrating our customers' acceptance of
the products and services we are proud to deliver.
As we go forward throughout 1998, please be assured we are ever
mindful of the expectations placed on us by the investing
community to deliver results that warrant your trust. We believe
our stock performance in 1997 created a solid value for our
stockholders. It is our intention to work hard for you in 1998, so
that similar results might be realized. I want to thank you for
the trust and support you have displayed by your ownership of our
Company, and look forward to serving you in the future.
Sincerely,
Kenneth L. Hanauer
President and Chief
Executive Officer
<PAGE>
<TABLE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<CAPTION>
December 31,
------------------------------------------------
1993 1994 1995 1996 1997
------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition
Data:
Total assets $169,198 $175,902 $204,076 $215,668 $238,905
Loans receivable, net 125,144 137,228 142,151 158,021 171,768
Available-for-sale securities -- 13,761 13,703 13,969 10,774
Held-to-maturity securities 27,239 12,491 27,843 29,162 33,854
Deposits 135,842 135,587 159,314 169,486 184,690
Total borrowings 7,450 15,150 17,400 19,116 26,570
Shareholders' equity 24,334 23,691 25,454 25,196 26,032
Year Ended December 31,
-----------------------------------------------
1993 1994 1995 1996 1997
-----------------------------------------------
(In thousands)
Selected Operations Data:
Total interest income $ 12,308 $12,259 $14,681 $16,207 $17,612
Total interest expense 6,694 6,025 8,262 9,289 10,485
------------------------------------------------
Net interest income 5,614 6,234 6,419 6,918 7,127
Provision for loan losses 58 10 8 9 32
------------------------------------------------
Net interest income after
provision for loan losses 5,556 6,224 6,411 6,909 7,095
Non interest income 600 326 434 376 515
Non interest expense 3,938 4,053 4,027 5,401 4,580
------------------------------------------------
<PAGE>
Income before tax provision
and effect of accounting
Change 2,218 2,497 2,818 1,884 3,030
Tax provision 782 850 963 650 1,023
------------------------------------------------
Income before effect of
accounting change 1,436 1,647 1,855 1,234 2,007
Effect of accounting change 75 -- -- -- --
------------------------------------------------
Net income $ 1,511 $ 1,647 $ 1,855 $ 1,234 $ 2,007
================================================
Earnings per share $ 1.19 $ 1.31 $ 1.52 $ 1.01 $ 1.67
Diluted earnings per share 1.17 1.27 1.48 0.98 1.62
Dividends per share .30 .62 .68 .76 .88
Dividend payout ratio 25.2% 47.3% 44.7% 75.2% 52.7%
Year Ended December 31,
-----------------------------------------------
1993 1994 1995 1996 1997
-----------------------------------------------
Selected Financial Ratios and
Other Data:
Performance Ratios:
Return on assets (ratio of net
income to average total
assets) .92% .98% .98% .59% .87%
Average interest rate
spread(1) 2.98 3.37 2.92 2.86 2.59
Net interest margin(2) 3.56 3.89 3.52 3.43 3.18
Ratio of operating expense to
average total assets 2.39 2.40 2.12 2.56 1.99
Return on equity (ratio of
net income to average
shareholders' equity) 6.59 6.80 7.54 4.84 7.86
Asset Quality Ratios (end of
period):
Non-performing loans to total
assets 0.18 0.56 0.32 0.59 0.46
Allowance for loan losses to
non-performing loans 163.19 51.06 77.68 39.51 48.44
Allowance for loan losses to
net loans 0.39 0.37 0.36 0.32 0.31
Capital Ratios:
Shareholders' equity to total
assets at end of period 14.38 13.47 12.47 11.68 10.90
Average shareholders' equity
to average assets 13.85 14.36 12.98 12.11 11.07
Ratio of average interest-
earning assets to average
interest-bearing
liabilities 1.14x 1.14x 1.13x 1.12x 1.13x
Number of full service offices 4 4 4 5 5
</TABLE>
- -------------------------------
(1) Average yield on earning asets less average cost of interest-bearing
liabilities.
(2) Net interest income divided by average interest earning assets.
Bar Graph Depicting Bar Graph Depicting Bar Graph Depicting
Earnings Per Share Dividends Per Share December 31 Stock
From 1993-1997, From 1993-1997, Performance From
Inclusive Inclusive 1993-1997, Inclusive
<PAGE>
The following table presents for the periods indicated the total dollar
amount of interest income from average interest earning
assets and the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars
and rates. All average balances are daily average balances.
<TABLE>
<CAPTION>
Year Ended December 31,
______________________________________________________________________________________________
1995 1996 1997
______________________________________________________________________________________________
Average Interest Average Interest Average Interest
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:
Loans receivable (1) $ 142,671 $ 12,128 8.50% $ 150,934 $ 12,850 8.51% $ 166,831 $ 13,900 8.33%
Available-for-sale
securities(2) 16,703 1,024 6.13 14,370 958 6.67 11,762 783 6.66
Held-to-maturity
securities and other
investments 21,710 1,436 6.61 35,137 2,297 6.54 43,872 2,817 6.42
FHLB stock 1,354 93 6.87 1,451 102 7.03 1,560 112 7.18
______________________________________________________________________________________________
Total interest-earning
assets (1) 182,438 14,681 8.05 201,892 16,207 8.03 224,025 17,612 7.86
______________________________________________________________________________________________
Interest-Bearing
Liabilities:
Time deposits 99,869 5,766 5.77 117,934 7,057 5.98 121,239 7,467 6.16
Savings accounts 28,383 1,134 4.00 27,568 838 3.04 35,954 1,142 3.18
Interest-bearing demand
deposit accounts 16,810 394 2.34 16,192 340 2.10 16,279 361 2.22
Borrowings 15,865 968 6.10 17,961 1,054 5.87 25,574 1,515 5.92
______________________________________________________________________________________________
Total interest-bearing
liabilities 160,927 8,262 5.13 179,655 9,289 5.17 199,046 10,485 5.27
______________________________________________________________________________________________
Net interest income $ 6,419 $ 6,918 $ 7,127
==============================================================================================
Net interest rate spread 2.92% 2.86% 2.59%
==============================================================================================
Net earning assets $21,511 $22,237 $24,979
==============================================================================================
Net yield on average
interest-earning assets 3.52% 3.43% 3.18%
===============================================================================================
Average interest-earning
assets to average
interest-bearing
liabilities 1.13x 1.12x 1.13x
===============================================================================================
</TABLE>
______________________
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
(2) Yield is calculated without consideration of the net unrealized gain (loss)
on available-for-sale securities.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Oak Hills Savings and Loan Company, F.A. ("Oak Hills" or the
"Company") converted from a federally insured mutual savings and
loan association to a federally insured stock savings and loan
association on February 5, 1993. In this conversion, a total of
1,356,600 shares of common stock were sold, generating net
proceeds after conversion expenses of $12.9 million. Of this
amount, $6.5 million was utilized to purchase 100% of the common
stock of the Company and the balance was utilized to purchase
investments and for other corporate purposes.
Forward-Looking Statements
The following pages present management's discussion and
analysis of the financial condition and results of operations of
OHSL for the time periods indicated. Such analysis inherently
includes management's opinions on the reasons supporting OHSL's
financial performance. The discussions presented may contain
certain opinions concerning past or future events. Such forward-looking
statements involve management's opinion, and are subject
to the risks and uncertainties which accompany any discussions of
future actions or performance.
The reader of the following Management's Discussion and
Analysis of Financial Condition and Results of Operations is
hereby cautioned of the risks and uncertainties inherent in such
forward-looking statements and is urged to consider such risks and
uncertainties in forming any opinions concerning the future
financial performance of OHSL.
Financial Condition
Total assets increased from $215.7 million at December 31,
1996 to $238.9 million at December 31, 1997, an increase of $23.2
million or 10.8%. During 1997, cash and cash equivalents increased
by $7.9 million, held to-maturity securities increased by $4.7
million and loans receivable increased by $13.7 million. These
increases were funded principally by a reduction in available-for
sale securities of $3.2 million, an increase in deposits of $15.2
million and by an increase in advances from the Federal Home Loan
Bank of Cincinnati of $7.5 million.
The above changes are largely the result of growth
initiatives adopted by the Company, wherein the Company seeks to
increase its holdings of loan and investment products. The growth
in these loan and investment products is to be funded primarily
through customer deposits, with advances from the Federal Home
Loan Bank utilized as a supplementary source of funding. This
increased volume, although at a lesser net interest spread, can
result in increased net interest income and help offset reductions
in its net interest margin which result from the current flat
yield curve which exists in the market. The Company believes that
the current flat interest rate environment will continue in the
near term.
Loans receivable, as noted above, increased $13.7 million in
1997. Due to the relatively low interest rate environment which
existed throughout 1997, the Company has experienced strong loan
originations during this time period. The increase in the
Company's holdings of one-to-four family residential properties
accounted for $11.4 million of this increase.
Held-to-maturity securities increased by $4.7 million during
1997. While the balance of U.S. Government obligations declined by
$3.3 million during this time, the balance of collateralized
mortgage obligations increased by $7.7 million during 1997. During
1997, the Company sought to take advantage of certain
opportunities to purchase collateralized mortgage obligations and
fund them with deposits or advances at a favorable spread. These
transactions resulted in the increase in collateralized mortgage
obligations in 1997. Tax-free obligations increased by $0.3
million in 1997.
Results of Operations
OHSL's results of operations depend primarily on the levels
of net interest income, the provision for loan losses, non-interest income and
non-interest expenses. Net interest income is
dependent upon the volume of interest-earning assets and interest-bearing
liabilities and on the interest rates which are earned or
paid on these items. Net interest income is the difference between
interest income earned on OHSL's interest-earning assets and
interest expense paid on OHSL's interest-bearing liabilities. The
primary interest-earning assets are short-term investments,
securities (which may be available-for-sale or held-to-maturity)
and loans. The primary interest-bearing liabilities are deposit
accounts and borrowings. Net interest income is affected by
regulatory, economic, and competitive factors that influence
interest rates. The Company, like other thrift institutions, is
subject to interest rate risk to the extent that its interest-earning assets
may mature or reprice at different times or to a
different degree than its interest-bearing liabilities.
In addition to net interest income, the results of operations
are also affected by the provision for loan losses. The Company
establishes its provision for loan losses and evaluates the
adequacy of the resultant allowance for loan losses based on a
number of factors, including historical loan loss experience,
trends in the levels of non-performing loans, the composition of
the loan portfolio and the general economic environment within
which the Company operates. Management believes that the allowance
for loan losses at December 31, 1997 is sufficient to absorb
losses which may currently exist in the Company's loan portfolio.
There is no guarantee, however, that future additions to the
allowance for loan losses will not be required as the result of
deteriorating economic conditions, local employment conditions or
other factors which could affect the condition of the loan
portfolio.
The Company's operating results are also affected by the
levels of non-interest income, such as fees and service charges on
deposit and/ or transaction accounts and gains (or losses) on the
sale of loans and securities, and non-interest expense, such as
salaries and employee benefits, occupancy and equipment expense,
computer service expense, deposit insurance expense and franchise
tax expense.
Comparison of Operating Results for the Years Ended December 31,
1997 and 1996
General. Net income for the year ended December 31, 1997 was
$2,007,000, an increase of $773,000 or 62.6% from the year ended
December 31, 1996. This increase resulted primarily from increases
in net interest income of $209,000 and non-interest income of
$139,000 and a decrease in non-interest expense of $821,000,
offset by an increase in provision for loan losses of $23,000 and
an increase in income tax expense of $373,000.
Bar Graph Depicting
Net Income (in Thousands
of Dollars) from
1993-1997, Inclusive
Net Interest Income. Net interest income for the year ended
December 31, 1997 increased to $7,127,000 from $6,918,000 for
1996, an increase of $209,000 or 3.0%. Generally, this increase is
attributable to an increase in net interest-earning assets of OHSL
(the excess of average interest-earning assets over the average of
interest-bearing liabilities), which increased from $22.2 million
in 1996 to $25.0 million in 1997. This increase was substantially
offset by a reduction in the net yield on average interest-earning
assets, which decreased from 3.43% in 1996 to 3.18% in 1997. This
yield reduction is the result of a smaller interest rate spread
(defined as the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities) in 1997 when compared to 1996. In 1996, the
net interest rate spread was 2.86% for OHSL, compared to 2.59% in
1997. The major factors which management believes have contributed
to this reduction in spread are: (a) the relatively flat yield
curve which existed throughout 1997, which made it more difficult
for OHSL to earn a significant spread between its lending and
investment activities in relation to the cost of its deposit and
borrowing activities; (b) the continuation of efforts (begun in
1996) to reacquire market share in the deposit area, wherein
certain premium interest rates were offered to retail deposit
customers in order to increase deposit account levels; and (c)
strong local competition for loan originations resulted in lower
yields on some loan products.
Bar Graph Depicting
Net Interest Income
(in Thousands of Dollars)
from 1993-1997, Inclusive
Interest Income. Interest income on loans increased
$1,050,000 during 1997 when compared to 1996. This increase is
attributable to an increase in the average outstanding balance of
loans receivable of $15.9 million (a 10.5% increase), which was
somewhat offset by a reduction in the weighted average yield on
those loans of 18 basis points (from 8.51% in 1996 to 8.33% in
1997).
Interest earned on securities (including available-for-sale
securities, held-to-maturity securities and other investments)
increased by $355,000 (a 10.6% increase) in 1997 when compared to
1996. The average outstanding balance of securities increased from
$49.5 million in 1996 to $55.6 million in 1997, an increase of
$6.1 million. While the weighted average yield received on OHSL's
available-for-sale portfolio remained virtually unchanged (a one
basis point reduction occurred), OHSL's weighted average yield on
its held-to-maturity portfolio declined from 6.54% in 1996 to
6.42% in 1997. This yield reduction, therefore, has acted to
somewhat offset the aforementioned increase in portfolio balance.
As noted in the Financial Condition section previously, OHSL has
increased its levels of securities to take advantage of spread
opportunities during 1997.
Interest Expense. Interest expense for the year ended
December 31, 1997 increased by $1,196,000 when compared to 1996.
Generally, this increase resulted from the carrying of larger
balances of deposit and advances during 1997 as well as from a
somewhat higher overall cost of deposits and advances in 1997 when
compared to 1996.
During 1997, the Company continued its efforts to gain market
share in the area of retail deposits. During 1997, the average
outstanding balance in all of the Company's deposit categories
(time deposits, savings accounts and interest-bearing demand
deposits) increased over 1996 average levels. The weighted average
cost of the deposit accounts also rose slightly in each category,
as time deposits increased from 5.98% in 1996 to 6.16% in 1997,
savings accounts increased from 3.04% in 1996 to 3.18% in 1997 and
interest-bearing demand accounts increased from 2.10% in 1996 to
2.22% in 1997.
The Company increased its borrowings from the Federal Home
Loan Bank of Cincinnati in 1997. The average outstanding balance
of borrowings increased from $18.0 million in 1996 to $25.6
million in 1997, and the cost of these funds increased from 5.87%
in 1996 to 5.92% in 1997. The Company utilizes Federal Home Loan
Bank advances for funding in times of low cash availability, as
well as to fund specific needs, such as large loan originations
and the purchase of securities. Management believes that these
advances are a prudent means for capturing attractive interest
rate spreads when they become available in both the lending and
investment area. The increase in 1997 was primarily related to the
securities purchases discussed earlier. Federal Home Loan Bank
advances may also be used in the control of interest rate risk
when appropriate.
Provision for Loan Losses. The 1997 provision for loan losses
was $32,000, an increase of $23,000 over the provision for 1996.
The provision for loan losses, while minor in relation to other
costs, was increased over the prior year in response to the
somewhat higher balance of total loans carried, as well as to
recognize modest changes in the Company's mix of loans held in
portfolio. The Company has historically followed strict
underwriting guidelines in its loan origination process, and this
is considered to be one of many factors which have resulted in
minimal loan losses over the last decade. Management believes that
the allowance for loan losses is adequate.
The ratio of non-performing loans to total assets at December
31, 1997 was 0.46% compared to 0. 59% at December 31, 1996.
Management believes that this ratio compares favorably to peer
ratios for non-performing loans.
Non Interest Income. Non interest income increased from
$376,000 in 1996 to $515,000 for 1997, an increase of $139,000 or
37.0%. The principal reason for this increase was an increase in
the net gain on loans originated for sale. During 1997, the
Company realized net gains in this area totaling $122,000 compared
to $45,000 in 1996. In response to the continuing low interest
rate environment which existed throughout 1997, the Company sold
$4.7 million of loans (mortgage loans and education loans) in the
secondary market in order to manage its interest rate risk. Such
sales were primarily responsible for the aforementioned gains.
Non Interest Expense. Non interest expense decreased from
$5.4 million in 1996 to $4.6 million in 1997, a decrease of $0.8
million or 17.9%. The major components of this decrease are
salaries and employee benefits expense (an increase of $230,000 or
10.5%), occupancy and equipment expense (an increase of $102,000
or 17.7%), computer service expense (a decrease of $213,000 or
59.7%), deposit insurance (a decrease of $1,163,000 or 91.4%) and
other expenses (an increase of $229,000 or 34.2%).
Salaries and benefits expense increased from $2,194,000 in
1996 to $2,424,000 in 1997. Increases in employee compensation
($160,000), health insurance costs ($47,000) and in Employee Stock
Ownership Plan ("ESOP") expense ($44,000) were the primary factors
in this increase. Employee compensation expense increased
primarily as the result of salaries related to the Company's
newest branch (Cleves Warsaw-Ebenezer), wherein 1997 was the
branch's first full year of operations, as well as additional
staffing requirements due to the Company's growth and to merit
increases to continuing staff. Health insurance costs increased
during 1997 when compared to 1996. Despite efforts to modify the
Company's health care plans, 1997 cost increases in this area were
experienced. The Company's ESOP expense, which derives its cost
based upon the average market price of OHSL's stock which is
allocated to employees during the year, experienced a substantial
increase as the market value of OHSL common stock climbed
throughout the year. The stock closed 1996 at $21.375 per share
and rose throughout 1997, closing at $27.00 per share at December
31, 1997.
Occupancy and equipment expense increased from $577,000 in
1996 to $679,000 in 1997. Higher expenses for depreciation of
fixtures and equipment ($114,000) and higher maintenance costs for
equipment ($18,000) were the primary components of this increase.
Both of these expense areas are discussed immediately below, as
these increases are a direct result of changes in the data
processing area.
Computer service costs decreased during 1997 when compared to
1996 as the result of the Company's decision to perform its own
data processing rather than outsourcing this activity. The expense
reduction for 1997 when compared to 1996 ($213,000) is a direct
result of this change. While computer service costs did decrease
during this time, increases were experienced in the areas of
equipment depreciation and equipment maintenance, as the Company
was required to purchase data processing equipment and to provide
for maintenance on this equipment as an integral part of this
change.
Deposit insurance expense decreased substantially during 1997
when compared to 1996. This decrease ($1,163,000) is a direct
result of the special assessment which was assessed by the Federal
Deposit Insurance Corporation ("FDIC") through the Savings
Association Insurance Fund ("SAIF") in 1996. This one-time
assessment totaled $927,000 for the Company. The purpose of this
assessment was to recapitalize the SAIF and to place the cost of
bank and thrift deposit insurance on a relatively level basis.
Other expenses increased from $669,000 in 1996 to $898,000 in
1997, an increase of $229,000. A variety of factors contributed to
this increase, including higher utility costs, consulting fees and
service charges assessed to the Company.
Income Tax Provision. The income tax provision increased
from $650,000 in 1996 to $1,023,000 in 1997, an increase of
$373,000. This increase is the result of higher levels of pre-tax
income recorded in 1997 compared to 1996, as the effective tax
rate was approximately 34% in both periods.
Bar Graph Depicting
Total Assets (in Millions
of Dollars) from 1993-1997,
Inclusive
Comparison of Operating Results for the Years Ended December 31,
1996 and 1995
General. Net income for the year ended December 31, 1996 was
$1,234,000, a decrease of $621,000 or 33.5% from the net income
for the year ended December 31, 1995. This decline resulted
primarily from an increase in net interest income of $499,000 and
a decrease in the income tax provision of $313,000, offset by an
increase in non-interest expense of $1,374,000, the majority of
which ($954,000 or 69.4% of the increase) was the increase in
deposit insurance expense related to the special assessment to
recapitalize the Savings Association Insurance Fund (SAIF).
Net Interest Income. Net interest income for the year ended
December 31, 1996 increased to $6,918,000 from $6,419,000 for
1995, an increase of $499,000 or 7.8%. Generally, this increase is
attributable to an increase in net interest-earning assets. The
net interest-earning assets of OHSL (the excess of average
interest-earning assets over the average of interest-bearing
liabilities) increased from $21.5 million in 1995 to $22.2 million
in 1996. This increase was offset somewhat by a reduction in the
net yield on average interest earning assets, which decreased from
3.52% in 1995 to 3.43% in 1996. This yield reduction is the result
of a somewhat smaller interest rate spread (defined as the
difference between the weighted average yield on interest-earning
assets and the weighted average cost of interest-bearing
liabilities) in 1996 when compared to 1995. In 1995, the net
interest rate spread was 2.92% compared to 2.86% in 1996. The
major factors which contributed to this reduction were believed to
be: (a) the relatively flat yield curve which existed throughout
1996, which made it more difficult for OHSL to earn a significant
spread between its lending and investment activities compared to
its deposit and borrowing activities; (b) management's efforts to
reacquire market share in deposits required the establishment of
some accounts at rates over current market; and (c) strong
competition for loan originations resulted in lower yields than
desired on some loan products.
Interest Income. Interest income on loans increased $722,000
during 1996 when compared to 1995. This increase is attributable
to an increase in the average outstanding balance of loans
receivable of $8.3 million (a 5.8% increase) and a minor increase
of 1 basis point (from 8.50% in 1995 to 8.51% in 1996) in the
weighted average yield on those loans.
Interest earned on investments (including available-for-sale
securities, held-to-maturity securities and other investments)
increased by $795,000 in 1996 when compared to 1995. The average
outstanding balance of investments increased from $38.4 million in
1995 to $49.5 million in 1996, an increase of $11.1 million. The
Company acquired $9.0 million of callable U.S. Government Agency
obligations during 1996. However, despite these acquisitions, due
to the call structure of these acquired bonds, as well as the call
features and scheduled maturities of the Company's other
investments, the Company's holdings of these securities at
December 31, 1996 was actually below the December 31, 1995 totals
for these securities. The average balance for these securities for
1996 was significantly higher than the year-end balance however,
and these investments contributed to the higher yield attained in
1996 from the securities portfolio.
Interest Expense. Interest expense for the year ended
December 31, 1996 increased by $ 1.0 million when compared to
1995. Generally, this increase resulted from the carrying of
larger deposit and borrowed fund balances during 1996, and also
from the slightly higher overall cost of the deposits when
compared to 1995 amounts.
During 1996, the Company continued its programs designed to
enable it to reacquire market share in the deposit area. During
1996, the average outstanding balance of time deposits increased
by $18.1 million, while the average outstanding balance for
savings accounts and interest-bearing demand deposit accounts
declined during 1996 by $0.8 million and $0.6 million
respectively.
Overall, the weighted average cost of deposit accounts
increased slightly during 1996. The weighted average cost of time
deposits rose from 5.77% in 1995 to 5.98% in 1996. However, this
increase was substantially offset by a decline in the weighted
average cost of savings accounts, from 4.00% in 1995 to 3.04% in
1996, and interest-bearing deposit accounts, where 1995's cost of
2.34% was reduced to 2.10% in 1996.
The Company increased its borrowings from the Federal Home
Loan Bank of Cincinnati during 1996. The average outstanding
balance of borrowings increased from $15.9 million in 1995 to
$18.0 million in 1996, and the cost of these funds declined from
6.10% in 1995 to 5.87% in 1996.
Provision for Loan Losses. The 1996 provision for loan losses
was $9,000, an increase of $1,000 over the 1995 amount. The
Company has historically followed strict underwriting guidelines
in its loan origination process, and this is considered to be one
of many factors which have resulted in minimal loan losses over
the last decade. Management believes that the allowance for loan
losses is adequate.
Non Interest Income. Non interest income decreased from
$434,000 in 1995 to $376,000 in 1996, a decline of $58,000 or
13.4%. The principal reason for this decrease was a reduction in
the net gain on loans originated for sale. During 1996, the
Company realized gains on the sale of loans (including mortgage
loans and education loans) of $71,000 compared to $54,000 in 1995.
However, this increase in realized gains was offset by the effect
of unrealized gains/losses. As the Company identifies certain
loans which it originates as "held for sale", these loans are
accounted for at the lower of their historical cost or their
current market value. During 1996, due to interest rate movements,
the market value of the loans in this category declined, resulting
in a net write down of $13,000 for 1996, whereas in 1995 a net
write-up of $ 81,000 was recorded.
Non Interest Expense. Non interest expense increased from
$4.0 million in 1995 to $5.4 million in 1996, an increase of $1.4
million or 34.1%. The major components of this increase are
salaries and benefits expense (an increase of $83,000 or 3.9%),
occupancy and equipment expense (an increase of $180,000 or
45.3%), computer service (an increase of $47,000 or 15.2%),
deposit insurance (an increase of $954,000 or 300.0%) and other
expenses (an increase of $87,000 or 14.9%).
Salaries and benefits expense increased modestly during 1996,
from $2,111,000 in 1995 to $2,194,000 in 1996, an increase of
$83,000. Increases in employee compensation ($95,000), and in
Employee Stock Ownership Plan expense ($21,000) were somewhat
offset by reductions in the expense for the Company's Bank
Incentive Plan ($33,000) and in the Company's 401(k) benefit
program ($22,000).
Occupancy and equipment expense increased from $397,000 in
1995 to $577,000 in 1996, an increase of $180,000. The major
components of this increase were an increase in rent expense of
$15,000 resulting primarily from the leasing of the Company's
Cleves-Warsaw branch (which began service in April 1996), an
increase in depreciation expense for equipment of $98,000 and
increases in maintenance costs for buildings and equipment of
$49,000. The increases in depreciation expense and maintenance
costs are directly related to the computer conversion discussed
below.
Computer service costs increased during 1996, from $310,000
in 1995 to $357,000 in 1996, an increase of $47,000. Much of this
increase consists of conversion costs incurred during 1996 as the
Company began performing its own data processing rather than
outsourcing this activity. The Company expects computer service
costs to decline in the future as efficiencies occur in this area.
The expenses recorded during 1996 included non-recurring
conversion costs and, for two-thirds of the year, outside service
bureau costs, which will not be incurred in the future.
The Company's deposit insurance provider, the Federal Deposit
Insurance Corporation ("FDIC"), through the Savings Association
Insurance Fund ("SAIF"), collected a special assessment during
1996. This assessment was intended to recapitalize the SAIF and to
place the cost of bank and thrift deposit insurance on a
relatively level basis. This one-time assessment totaled $927,000
for OHSL. The Company's deposit insurance increased by $954,000
during 1996 over 1995, with the special assessment being the
primary reason. Larger deposit balances during 1996 when compared
to 1995 account for the balance of this increase.
Other expenses increased during 1996, from $582,000 to
$669,000, an increase of $87,000. Principal components of this
increase include supplies expense ($23,000 increase) and
advertising expense ($49,000 increase).
Income Tax Provision. The income tax provision decreased from
$963,000 in 1995 to $650,000 in 1996, a decrease of $313,000. This
decrease is the result of lower levels of pre-tax income recorded
in 1996, compared to 1995.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto
presented herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical
dollars without considering the changes in the relative purchasing
power of money over time due to inflation. The impact of inflation
is reflected in the increased cost of OHSL's operations. Unlike
most industrial companies, nearly all of OHSL'S assets and
liabilities are monetary in nature. As a result, interest rates
have a greater impact on OHSL'S performance than do the effects of
general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of
goods and services.
New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issues
Financial Accounting Standards ("FAS") that affect OHSL.
FAS No. 130, "Reporting Comprehensive Income"
FAS No. 130 is effective for both interim and year-end
financial statements for fiscal years beginning after December 15,
1997 and establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements.
Comprehensive income is defined as all changes in equity other
than those resulting from investments by owners or distributions
to owners. Net income is, therefore, a component of comprehensive
income. The most common items of other comprehensive income
include unrealized gains or losses on securities available for
sale, gains and losses on certain foreign currency transactions,
and minimum pension liability adjustments. While full disclosure
for each reported period is required in year-end financial
statements, interim financial statements need only disclose total
comprehensive income for each reported period.
The Standard does not mandate a specific format for reporting
comprehensive income, but it does require that all items that are
required to be recognized as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. Implementation of this
Standard will require a revised presentation in future financial
statements but will not otherwise affect OHSL.
FAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information"
FAS No. 131 is effective for reported periods included in
year-end financial statements for fiscal years beginning after
December 15, 1997 and for all reported periods in interim
financial statements for reporting periods, following the first
required full fiscal year disclosure. FAS No. 131 establishes new
guidance for the way that public business enterprises report
information about operating segments in annual financial
statements and requires that those enterprises report selected
information about reportable operating segments in interim
financial reports issued to shareholders. FAS No. 131 supersedes
the industry approach to segment disclosures previously required
by FAS No. 14, Financial Reporting for Segments of a Business
Enterprise, replacing it with a method of segment reporting which
is based on the structure of an enterprise's internal organization
reporting. The Statement also establishes standards for related
disclosures about products and services, geographic areas and
major customers.
Management does not believe that implementation of this
Standard will result in the identification of other reportable
business segments at this time.
Year 2000 Issues
It is well documented that data processing systems may
experience processing difficulties unless the systems are
reconfigured to handle the change to the Year 2000. OHSL is
addressing the "Year 2000 problem" in several ways. The
Corporation has designated its data processing manager as head of
a team whose primary objective is to review the Year 2000 problem
both internally and externally. Internally, the focus remains on
our in-house data processing system, and the vendors who support
this in-house system. Externally, OHSL is contacting all vendors
who sell, service or support data processing products that impact
our data processing or other operations. Examples of these are
vendors who provide data processing for our investment portfolio
or for our loan review function. All vendors are being required
to provide evidence in support of their efforts to address the
Year 2000 problem. OHSL will review the progress shown by our
vendors and, if not satisfactory, will consider other vendors or
other means for obtaining such products or services. All Year
2000 matters are being evaluated on a priority basis, with greater
attention being given to more significant areas of operation and
less attention to areas of little impact in the event of non-compliance.
It is anticipated that this review will continue
through the changeover date, as OHSL anticipates that new vendors
and suppliers will be added over time. OHSL believes that the
cost for dealing with the Year 2000 problem will not be material.
OHSL believes that its efforts in this area will prevent any
Year 2000 problems which will pose a material impact upon the
financial condition, liquidity, capital resources or operations of
OHSL or Oak Hills Savings and Loan Company, F.A.
Asset/Liability Management
The measurement and analysis of OHSL's exposure to changes in
the interest rate environment is referred to as asset/liability
management. One way to analyze the Company's interest rate
sensitivity is to measure the Company's interest rate sensitivity
"gap," which is the difference between the amount of interest-earning
assets which are anticipated to mature or reprice within
that period and the amount of interest-bearing liabilities which
are expected to mature or reprice within the same period. OHSL
relies on certain assumptions, such as the amount and timing of
loan prepayments, for example, in the measurement of the interest
rate sensitivity gap. A gap measurement is referred to as
positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. Conversely, a
negative gap indicates a situation where the amount of liabilities
which mature or reprice in a given period exceeds the amount of
interest rate sensitive assets.
In a period of declining interest rates, a negative gap would
tend to enhance (that is, to increase) net interest income as
maturing and/or repricing liabilities can be replaced with lower
rate liabilities more quickly than maturing assets. Conversely, a
positive gap would generally adversely affect net interest income
in a period of declining rates.
In a period of rising interest rates, a positive gap could
enhance net interest income as maturing assets could be reinvested
at higher rates faster than liabilities would increase in rate. A
negative gap would adversely affect net interest income in a
period of rising interest rates.
In an attempt to manage its exposure to changes in interest
rates, management closely monitors the Company's interest rate
risk. The Company has an asset/liability management committee
consisting of all of the Company's directors and executive
officers which meets at least once per quarter to review the
Company's interest rate risk position and to make recommendations
for adjusting such position. In addition, the asset/liability
management committee reviews the estimated effect on the Company's
earnings and capital under various interest rate scenarios.
In managing its asset/liability mix, the Company may, at
times-depending on the relationship between long- and short-term
interest rates, market conditions and consumer preference-place
somewhat greater emphasis on maximizing its net interest margin
than on strictly matching the interest rate sensitivity of its
assets and liabilities. The Board of Directors believes that the
increased net income resulting from a modest mismatch in the
maturity of its asset and liability portfolios can, during periods
of stable interest rates, provide high enough returns to justify
the increased exposure which can result from such a mismatch. The
Board of Directors has established limits on the Company's
interest rate risk based on an interest rate risk simulation
model. However, there can be no assurance that management's
efforts to limit interest rate risk will be successful.
To the extent consistent with interest rate spread
objectives, the Company attempts to reduce its interest rate risk
by taking various steps. First, the Company focuses a portion of
its 1-4 family residential lending program on adjustable-rate
mortgage loans ("ARMs"). Despite the decline in ARM originations
over the last several years as a result of the decline in market
interest rates (resulting in greater customer demand for fixed
rate loans), at December 31, 1997, approximately $52.3 million
(42.5%) of the Company's 1-4 family residential loans consisted of
ARMS. Second, the Company has maintained a significant portfolio
of multi-family and commercial real estate loans having adjustable
rates. Third, the Company seeks to maintain its portfolio of
consumer and construction loans having short terms to maturity
and/or adjustable interest rates. Fourth, the Company maintains a
substantial portion of its investment portfolio in instruments
having adjustable interest rates and/or short or intermediate
effective terms to maturity. Fifth, the Company has from time to
time offered attractive interest rates and other promotions to
attract transaction accounts, which are considered to be more
resistant to changes in interest rates than certificate accounts.
Finally, the Company may from time to time utilize long-term
borrowings and/or promotions which are designed to attract
intermediate to long-term deposits in an effort to extend the term
to maturity of its liabilities
The table which follows sets forth the anticipated repricing
or maturity of OHSL's assets and liabilities as of December 31,
1997, based on the following significant assumptions:
(i) Fixed-rate certificate accounts will not be withdrawn
prior to maturity.
(ii) Transaction accounts are assumed to reprice during the
first time period included in the table.
(iii) Adjustable-rate mortgage loans which reprice annually on
1-4 family residential properties are assumed to prepay at a rate
of approximately 47% per year and the amortized balances are shown
as being due in the period in which the interest rates are next
subject to change. Adjustable-rate mortgage loans on non-residential
properties are assumed to prepay at a rate of
approximately 15% per year.
(iv) Fixed-rate 1-4 family loans with remaining terms to
maturity of five years or less are assumed to prepay at a rate of
14% per year. Loans with remaining terms to maturity of over five
years will prepay annually as follows:
Mortgage Loan Prepayment
Interest Rate Assumptions
Less than 8% 10%
8% to 8.99% 14%
9% to 9.99% 21%
10% or greater 22%
The prepayment assumptions are based on recent prepayment
history of similar loans in the State of Ohio.
<PAGE>
The following table does not necessarily indicate the impact of general
interest rate
movements on OHSL's net interest margin, as the repricing of some assets and
liabilities is
subject to outside forces which may be beyond the Company's control, such as
a decision by a
U.S. government agency such as the Federal Home Loan Bank to call a security
owned by the
Company for payment. Accordingly, there is no certainty that OHSL's assets and
liabilities will, in fact, mature or reprice within the time frames indicated
in the following table.
<TABLE>
<CAPTION>
Maturing or Repricing
-----------------------------------------------------------------
Total
0-3 4-12 Within Over1-3 Over3-5 Over
Months Months One Year Years Years 5 Years Total
-----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Adjustable-rate/residential
1 to 4(1) $ 16,544 $30,642 $47,186 $4,476 $ 611 $ -- $ 52,273
Fixed-rate/residential
1 to 4 5,277 12,090 17,367 16,899 12,139 24,540 70,945
Other residential and all
Non-residential 4,407 12,718 17,125 16,541 2,562 2,418 38,646
Consumer loans 5,643 1,606 7,249 3,160 927 -- 11,336
Available-for-sale securities 3,249 1,619 4,868 2,706 2,163 1,037 10,774
Held-to-maturity securities
and other 15,487 7,446 22,933 11,151 4,090 7,352 45,526
-----------------------------------------------------------------
Total interest-earning assets 50,607 66,121 116,728 54,933 22,492 35,347 229,500
-----------------------------------------------------------------
Savings deposits 26,859 -- 26,859 -- -- -- 26,859
NOW and money markets 26,068 -- 26,068 -- -- -- 26,068
Certificates 43,991 38,965 82,956 28,889 12,387 4,275 128,507
FHLB advances 14,500 2,000 16,500 3,334 4,583 2,153 26,570
-----------------------------------------------------------------
Total interest-bearing
liabilities 111,418 40,965 152,383 32,223 16,970 6,428 208,004
-----------------------------------------------------------------
Interest-earning assets less
Interest-bearing
liabilities $ (60,811)$ 25,156 $(35,655) $ 22,710 $ 5,522 $28,919 $ 21,496
===================================================================
Cumulative interest-rate
sensitivity gap $ (60,811)$(35,655) $(35,655) $(12,945) $(7,423) $21,496
==========================================================
Cumulative interest-rate
gap as a percentage of
Interest-earning assets (26.50)% (15.54)% (15.54)% (5.64)% (3.23)% 9.37%
==========================================================
</TABLE>
___________________________
(1) Includes loans held for sale of $730.
REPORT OF INDEPENDENT AUDITORS
Board of Directors
OHSL Financial Corp.
Cincinnati, Ohio
We have audited the accompanying consolidated statements of
financial condition of OHSL Financial Corp. as of December 31,
1997 and 1996 and the related consolidated statements of income,
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 Corporation's management.
Our responsibility is to express an opinion on these 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
condition of OHSL Financial Corp. as of December 31, 1997 and
1996, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Indianapolis, Indiana
January 22, 1998
<PAGE>
<TABLE>
OHSL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1997 and 1996
(Dollars in thousands, except per share amounts)
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,652 $ 4,680
Short-term investments 11,572 3,693
------ -------
Cash and cash equivalents 16,224 8,373
Interest-bearing balances with financial
institutions 100 100
Available-for-sale securities (Note 2) 10,774 13,969
Held-to-maturity securities
(fair value of $34,145 and $28,953) (Note 2) 33,854 29,162
Loans held for sale 730 436
Loans receivable (Note 3) 172,297 158,520
Less: Allowance for loan losses (Note 4) (529) (499)
------- --------
Loans-net 171,768 158,021
Office properties and equipment-net (Note 5) 2,148 2,398
Federal Home Loan Bank stock, at cost 1,630 1,518
Accrued interest receivable 1,355 1,371
Other assets 322 320
------- -------
$238,905 $215,668
======= =======
LIABILITIES AND SHAREHOLDERS'EQUITY
Liabilities
Deposits (Note 6) $184,690 $169,486
Advances from Federal Home Loan Bank (Note 7) 26,570 19,116
Accrued interest payable 233 215
Advances from borrowers for taxes and insurance 737 690
Other liabilities 643 965
------- --------
212,873 190,472
Shareholders' equity
Common stock ($.01 par value-3,500,000 shares
authorized and 1,426,395 and 1,401,611 shares
issued) 14 14
Additional paid-in capital 14,157 13,652
Retained earnings 15,795 14,839
Unamortized cost of bank incentive plan (1) (15)
Unearned shares held by employee stock
ownership plan (356) (475)
Treasury stock (184,396 and 147,351 shares,
at cost) (3,607) (2,751)
Net unrealized gain/(loss) on available-for-sale
securities 30 (68)
------- -------
26,032 25,196
------- -------
$238,905 $215,668
======= =======
</TABLE>
See accompanying notes.<PAGE>
<TABLE>
OHSL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share amounts)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
INTEREST INCOME
Loans, including related fees $13,900 $12,850 $12,128
Securities 3,244 2,977 2,014
Other 468 380 539
------ ------ ------
17,612 16,207 14,681
------ ------ ------
INTEREST EXPENSE
Deposits 8,970 8,235 7,294
Federal Home Loan Bank advances 1,515 1,054 968
------ ------ ------
10,485 9,289 8,262
------ ------ ------
NET INTEREST INCOME 7,127 6,918 6,419
Less provision for loan losses (Note 4) 32 9 8
------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 7,095 6,909 6,411
------ ------ ------
NONINTEREST INCOME
Service charges and fees 241 224 230
Net gain on loans originated for sale 122 45 99
Gain/(loss) on securities (Note 2) (4) 10 -
Commissions 27 10 20
Other 129 87 85
------ ------ ------
515 376 434
NONINTEREST EXPENSE
Salaries and employee benefits
(Note 9) 2,424 2,194 2,111
Occupancy and equipment, net 679 577 397
Computer service 144 357 310
Deposit insurance 109 1,272 318
Franchise taxes 326 332 309
Other 898 669 582
------ ------- ------
4,580 5,401 4,027
------ ------- ------
INCOME BEFORE INCOME TAXES 3,030 1,884 2,818
Income tax expense (Note 11) 1,023 650 963
------ ------ ------
NET INCOME $ 2,007 $ 1,234 $ 1,855
====== ====== ======
Per share data (Note 12):
Earnings per share $ 1.67 $ 1.01 $ 1.52
Earnings per share, assuming dilution 1.62 .98 1.48
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
OHSL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share amounts)
<CAPTION>
Net
Unrealized
Gain/(Loss) on
Additional Available
Common Paid-in Retained Benefit Treasury for-Sale
Stock Capital Earnings Plans Stock Securities Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $ 14 $ 13,156 $ 13,497 $ (821) $ (1,544) $ (611) $23,691
Bank incentive plan
amortization expense - - - 63 - - 63
Exercise of stock options
(17,065 shares) - 171 - - - - 171
Acquisition of treasury
stock (20,365 shares) - - - - (360) - (360)
Employee stock ownership
shares earned - 102 - 119 - - 221
Net income - - 1,855 - - - 1,855
Cash dividends ($.68/share) - - (826) - - - (826)
Change in net unrealized
gain/(loss) - - - - - 639 639
-------------------------------------------------------------------------------
Balance, December 31, 1995 14 13,429 14,526 (639) (1,904) 28 25,454
Bank incentive plan
amortization expense - - - 30 - - 30
Exercise of stock options
(9,882 shares) - 99 - - - - 99
Acquisition of treasury
(Stock (39,771 shares) - - - - (847) - (847)
Employee stock ownership
shares earned - 124 - 119 - - 243
Net income - - 1,234 - - - 1,234
Cash dividends ($.76/share) - - (921) - - - (921)
Change in net unrealized
gain/(loss) - - - - - (96) (96)
-------------------------------------------------------------------------------
Balance, December 31, 1996 14 13,652 14,839 (490) (2,751) (68) 25,196
Bank incentive plan
amortization expense - - - 14 - - 14
Exercise of stock options
(24,784 shares) - 337 - - - - 337
Acquisition of treasury
stock (37,045 shares) - - - - (856) - (856)
Employee stock ownership
shares earned - 168 - 119 - - 287
Net income - - 2,007 - - - 2,007
Cash dividends ($.88/share) - - (1,051) - - - (1,051)
Change in net unrealized
gain/(loss) - - - - - 98 98
-------------------------------------------------------------------------------
Balance, December 31, 1997 $ 14 $ 14,157 $ 15,795 $ (357) $ (3,607) $ 30 $26,032
===============================================================================
</TABLE>
<TABLE>
OHSL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
<CAPTION>
_______________________________________________________________________________
1997 1996 1995
________________________________________________________________________________
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,007 $ 1,234 $ 1,855
Reconciling items
Depreciation and amortization 352 247 147
Net amortization/(accretion) on securities (57) 16 20
Provision for loan losses 32 9 8
(Gain)/loss on securities 4 (10) -
Gain on sale of loans (122) (45) (99)
Net change in loans held for sale (172) 611 (236)
Deferred loan fees (194) (194) (229)
Federal Home Loan Bank stock dividends (112) (101) (93)
Employee stock ownership shares earned 287 243 221
Change in assets and liabilities
Interest receivable 16 (52) (175)
Other assets 12 (140) 41
Accrued interest payable 18 125 20
Income tax payable (6) 48 106
Other liabilities (279) (3) 7
_______________________________
Net cash from operating activities 1,786 1,988 1,593
Cash flows from investing activities
Net change in interest-bearing balances with
financial institutions - 500 546
Purchase of held-to-maturity securities (17,519) (13,220) (11,103)
Proceeds from maturities and repayments of
Held-to-maturity securities 12,859 11,897 4,879
Purchase of available-for-sale securities - (3,815) (9,892)
Proceeds from maturities and repayments of
available-for-sale securities 1,561 1,399 1,771
Proceeds from sales of available-for-sale
securities 1,805 2,004 -
Loans made to customers net of payments
received (13,585) (15,685) (6,515)
Proceeds from sale of loans - - 1,848
Purchase of property and equipment (102) (1,125) (102)
______________________________________
Net cash investing activities (14,981) (18,045) (18,568)
</TABLE>
<TABLE>
OHSL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
<CAPTION>
_______________________________________________________________________________________________________________
1997 1996 1995
____________________________________________________________________________________________________________
<S> <C> <C> <C>
Cash flows from financing activities
Net change in deposits $ 15,204 $ 10,172 $ 23,727
Proceeds from Federal Home Loan Bank advances 23,500 28,500 26,500
Payments on advances from Federal Home Loan Bank (16,046) (26,784) (24,250)
Net change in advances from borrowers for taxes
and insurance 47 (107) 100
Purchase of treasury stock (856) (847) (360)
Exercise of stock options 248 99 171
Cash dividends (1,051) (921) (826)
________________________________________
Net cash from financing activities 21,046 10,112 25,062
________________________________________
Net change in cash and cash equivalents 7,851 (5,945) 8,087
Cash and cash equivalents at beginning of period 8,373 14,318 6,231
________________________________________
Cash and cash equivalents at end of period $ 16,224 $ 8,373 $ 14,318
========================================
Cash paid during the period for:
Interest $ 10,467 $ 9,164 $ 8,242
Income taxes 1,029 602 857
</TABLE>
OHSL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share amounts)
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements
include the accounts of OHSL Financial Corp. (OHSL) and its
wholly-owned subsidiary, Oak Hills Savings and Loan Company, FA
(Company) and the Company's wholly-owned subsidiary, CFSC, Inc.
Intercompany transactions are eliminated in consolidation.
Nature of Operations: OHSL operates primarily in the banking
industry which accounts for more than 90% of its revenues,
operating income and assets. OHSL generates mortgage and consumer
loans and receives deposits from customers located primarily in
the counties of Hamilton, Butler and Clermont in Ohio, and Ohio
county in Indiana. A substantial portion of the loan portfolio is
secured by single family and multifamily mortgages. CFSC, Inc.
sells investment products, primarily mutual fund and annuity
products, to retail customers. The majority of the Company's
revenue is derived from retail lending activities and securities.
Use of Estimates: To prepare financial statements in conformity
with generally accepted accounting principles, management makes
estimates and assumptions based on available information. These
estimates and assumptions affect the amounts reported in the
financial statements and disclosures provided, and future results
could differ. The allowance for loan losses and the fair values of
financial instruments (and status of contingencies) are
particularly subject to change.
Securities: Securities are classified as held to maturity and
carried at amortized cost when management has the positive intent
and ability to hold them to maturity. Securities are classified as
available for sale when they might be sold before maturity.
Available for sale securities are carried at fair value, with
unrealized holding gains and losses reported separately in
shareholders' equity, net of tax. Securities are written down to
fair value when a decline in fair value is not temporary. Interest
and dividend income, adjusted by amortization of purchase premium
or discount, is included in earnings.
Loans: Loans are reported at the principal balance outstanding,
net of unearned interest, deferred loan fees and costs, and an
allowance for loan losses. Loans held for sale are reported at the
lower of cost or market, on an aggregate basis.
Loan Income: Interest income is reported on the interest method
and includes amortization of net deferred loan fees and costs over
the loan term. Interest income is not reported when full loan
repayment is in doubt, typically when payments are past due over
90 days (180 days for residential mortgages). Payments received on
such loans are reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a
valuation allowance, increased by the provision for loan losses
and decreased by charge-offs less recoveries. Management estimates
the allowance balance required based on past loan loss experience,
known and inherent risks in the portfolio, information about
specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations of the
allowance may be made for specific loans, but the entire allowance
is available for any loan that, in management's judgment, should
be charged-off.
Loan impairment is reported when full payment under the loan terms
is not expected. Impairment is evaluated collectively for smaller-balance loans
of similar nature such as residential mortgage,
consumer, and credit card loans, and on an individual loan basis
for other loans. If a loan is impaired, a portion of the allowance
is allocated so that the loan is reported, net, at the present
value of estimated future cash flows using the loan's existing
rate or at the fair value of collateral if repayment is expected
solely from the collateral. Loans are evaluated for impairment
when payments are delayed, typically 90 days or more, or when it
is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
Other Real Estate: Real estate acquired through foreclosure is
carried at the lower of cost (fair value at the date of
foreclosure) or the fair value less estimated selling costs.
Losses are recognized by a charge to income and the creation of a
valuation allowance. The allowance may increase or decrease by
charges or credits to income. Expenses incurred in carrying other
real estate are charged to operations as incurred. At December
31, 1997, no other real estate was held by the Company.
Servicing Rights: Servicing rights represent both purchased rights
and the allocated value of servicing rights retained on loans
sold. Servicing rights are expensed in proportion to, and over the
period of, estimated net servicing revenues. Impairment is
evaluated based on the fair value of the rights, using groupings
of the underlying loans as to interest rates and then,
secondarily, as to geographic and prepayment characteristics. Any
impairment of a grouping is reported as a valuation allowance.
Premises and Equipment: Premises and equipment are stated at cost
less accumulated depreciation, computed using both the straight-line and
accelerated methods.
Benefit Plans: The Company maintains an Employee Stock Ownership
Plan (ESOP) covering substantially all full time employees. The
expense recognized is based on the current market value of shares
earned by participants. Unearned shares are not considered to be
outstanding shares for the purpose of computing earnings per
share. The difference between the cost of ESOP shares earned, and
their market value, is reflected as an addition to additional
paid-in capital.
Income Taxes: Income tax expense is the sum of the current year
income tax due or refundable and the change in deferred tax assets
and liabilities. Deferred tax assets and liabilities are the
expected future tax consequences of temporary differences between
the carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be
realized.
Earnings Per Share: Earnings per share is based on weighted-average common
shares outstanding. Diluted earnings per share
further assume issue of any dilutive potential common shares. The
accounting standard for computing earnings per share was revised
for 1997, and all earnings per share previously reported are
restated to follow the new standard.
Dividend Restriction: Banking regulations require the maintenance
of certain capital levels and may limit the amount of dividends
which may be paid by the bank to the holding company or by the
holding company to shareholders.
Fair Values of Financial Instruments: Fair values of financial
instruments are estimated using relevant market information and
other assumptions, as more fully disclosed separately. Fair value
estimates involve uncertainties and matters of significant
judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions
could significantly affect the estimates. The fair value estimates
of existing on-and off-balance sheet financial instruments does
not include the value of anticipated future business or the values
of assets and liabilities not considered financial instruments.
Future Accounting Changes: New accounting standards have been
issued which will require future reporting of comprehensive income
(net income plus changes in holding gains and losses on available
for sale securities) and may require redetermination of industry
segment financial information.
<PAGE>
<TABLE>
OHSL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share amounts)
NOTE 2 - SECURITIES
The year-end amortized cost and fair value of available-for-sale securities were as follows:
<CAPTION>
1997
_____________________________________________________________________
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_____________________________________________________________________
<S> <C> <C> <C> <C>
Corporate notes $ 500 $ - $ (10) $ 490
Mutual funds 2,798 40 (35) 2,803
Mortgage-backed securities 7,429 57 (5) 7,481
_____________________________________________________________________
$ 10,727 $ 97 $ (50) $ 10,774
_____________________________________________________________________
</TABLE>
<TABLE>
<CAPTION>
1996
_____________________________________________________________________
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_____________________________________________________________________
<S> <C> <C> <C> <C>
Corporate notes $ 500 $ - $ (32) $ 468
Mutual funds 2,798 11 (39) 2,770
Mortgage-backed securities 10,774 29 (72) 10,731
_____________________________________________________________________
$ 14,072 $ 40 $ (143) $ 13,969
=====================================================================
</TABLE>
The amortized cost and fair value of available-for-sale securities at December
31, 1997, by contractual maturity, are shown below.
Actual maturities may differ from contractual maturities because issuers may
have the right to call or repay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
_____________________________
<S> <C> <C>
Due within one year $ - $ -
Due after one year through five years - -
Due after five years through ten years 500 490
Due after ten years - -
Mutual funds 2,798 2,803
Mortgage-backed securities 7,429 7,481
______________________________
$ 10,727 $ 10,774
==============================
</TABLE>
Sales of available-for-sale securities generated gross gains of $2 and $22, and
gross losses of $6 and $12 in 1997 and 1996,
respectively.
<TABLE>
OHSL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share amounts)
The year-end amortized cost and fair value of held-to-maturity securities were as follows:
<CAPTION>
1997
_____________________________________________________________________
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_____________________________________________________________________
<S> <C> <C> <C> <C>
Obligations of U.S. Government
agencies $ 14,034 $ 78 $ (11) $ 14,101
Tax-free obligations 1,087 42 - 1,129
Collateralized mortgage obligations 18,733 211 (29) 18,915
_____________________________________________________________________
$ 33,854 $ 331 $ (40) $ 34,145
_____________________________________________________________________
</TABLE>
<TABLE>
<CAPTION>
1996
_____________________________________________________________________
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_____________________________________________________________________
<S> <C> <C> <C> <C>
Obligations of U.S. Government
agencies $ 17,330 $ 74 $ (126) $ 17,278
Tax-free obligations 810 11 (3) 818
Collateralized mortgage obligations 11,022 3 (168) 10,857
_____________________________________________________
$ 29,162 $ 88 $ (297) $ 28,953
=====================================================================
</TABLE>
The amortized cost and fair value of held-to-maturity securities at
December 31, 1997, by contracutal maturity, are shown below.
Actual maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
_____________________________
<S> <C> <C>
Due within one year $ 1,185 $ 1,183
Due after one year through five years 4,491 4,513
Due after five years through ten years 5,627 5,688
Due after ten years 3,818 3,846
Collateralized mortgage obligations 18,733 18,915
______________________________
$ 33,854 $ 34,145
==============================
</TABLE>
To secure public deposits at December 31, 1997 and 1996,
the Company has pledged a portion of one of its
mortgage-backed securities. The carrying value of the poledged
portion was $526 at December 31, 1997, and the market value was
approximately $523.
<PAGE>
NOTE 3 - LOANS RECEIVABLE
Loans receivable consist of the following:
1997 1996
------------------------
Mortgage loans secured by:
One-to-four family residences $ 122,488 $ 111,054
Other properties 30,637 28,689
Construction 9,366 9,866
Loans on savings accounts 218 223
Second mortgage loans 1,846 2,319
Home improvement loans 577 478
Consumer loans 6,214 5,935
Automobile loans 4,070 4,091
Educational loans 257 285
-----------------------
Gross loans receivable 175,673 162,940
Undisbursed portion of loans in
process (3,203) (4,065)
Unearned interest, premiums and
discounts, net -- 12
Deferred loan fees, net (173) (367)
-----------------------
$ 172,297 $ 158,520
=======================
Mortgage loans serviced for others are not included in the
accompanying Consolidated Statements of Financial Condition. The
unpaid principal balances of these loans are summarized as
follows:
1997 1996 1995
-------------------------------
Mortgage loan portfolios
serviced for:
FHLMC $ 20,119 $ 18,503 $ 17,835
Other investors 5,923 5,331 5,471
-------------------------------
$ 26,042 $ 23,834 $ 23,306
===============================
Activity for capitalized originated mortgage servicing rights was
as follows:
1997 1996
-------------------------
Beginning of year: $ 27 $ --
Additions 53 33
Amortized to expense (20) (6)
-------------------------
End of year $ 60 $ 27
=========================
Certain of OHSL's officers and directors are loan customers of the
Company. The balance of loans outstanding to these individuals
was not significant at December 31, 1997 or 1996.
The balance of loans on non-accrual status was not significant at
December 31, 1997 or 1996.
The Company had no loans designated as impaired at December 31,
1997 or 1996, nor were any loans so designated during 1997, 1996
or 1995.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are summarized as
follows:
1997 1996 1995
-------------------------------
Balance at beginning of period $ 499 $ 515 $ 507
Provision for loan losses 32 9 8
Loan charge-offs (2) (25) --
Recoveries -- -- --
-------------------------------
Balance at end of period $ 529 $ 499 $ 515
===============================
NOTE 5 - PREMISES AND EQUIPMENT
A summary of office properties and equipment is as follows:
1997 1996
-------------------------
Land $ 126 $ 126
Office buildings and improvements 2,407 2,396
Furniture and equipment 2,580 2,489
-------------------------
5,113 5,011
Accumulated depreciation and
amortization 2,965 2,613
-------------------------
$ 2,148 $ 2,398
=========================
NOTE 6 - DEPOSITS
Deposits are summarized as follows:
1997 1996
------------------------
Amount Percent Amount Percent
------------------------------------
Non interest-bearing deposits $ 3,256 1.8% $ 2,669 1.6%
NOW accounts 16,670 9.0 16,487 9.7
Savings accounts and MMDA's 36,257 19.6 35,867 21.2
----------------------------------
56,183 30.4 55,023 32.5
----------------------------------
Certificates of deposit
2.00% to 3.99% 625 .3 906 0.5
4.00% to 5.99% 58,458 31.7 57,360 33.9
6.00% to 7.99% 67,449 36.5 52,274 30.8
8.00% to 9.99% 1,975 1.1 3,923 2.3
----------------------------------
128,507 69.6 114,463 67.5
----------------------------------
$ 184,690 100.0% $169,486 100.0%
===================================
At December 31, 1997, scheduled maturities of certificates of
deposit are as follows:
1998 $ 78,062
1999 17,184
2000 17,290
2001 11,843
2002 3,958
Thereafter 170
--------
$128,507
========
The aggregate amount of certificates of deposit in denominations
of $100 or more was $13,861 and $11,858 at December 31, 1997 and
1996, respectively.
NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Cincinnati (FHLB) at
year-end consist of the following:
1997 1996
----------------------------------
Weighted Weighted
Average Average
Year of Interest Interest
Final Maturity Rate Balance Rate Balance
- ----------------------------------------------------------------
1997 5.77% $ 5,750
1998 5.93% $ 4,667 5.65 5,500
1999 5.75 2,667 6.00 1,500
2000 6.25 500 6.25 700
2001 6.18 2,583 6.23 2,750
2002 6.00 14,000 6.57 2,916
2006 6.57 2,153
--------------------------------
$ 26,570 $19,116
================================
<PAGE>
OHSL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Dollars in thousands, except per share amounts)
NOTE 7-ADVANCES FROM FEDERAL HOME LOAN BANK(continued)
Required annual principal payments at December 31, 1997 are as
follows:
Year Ending
- -----------
1998 $6,867
1999 1,201
2000 267
2001 2,082
2002 14,000
Thereafter 2,153
------
$26,570
=======
These advances require monthly interest payments and are secured
by a blanket collateral agreement covering the majority of the
Company's residential mortgage loans and securities. Certain
advances may be prepaid, without penalty, prior to maturity.
Others may not be prepaid without penalty. The advances maturing
in 2006 are mortgage-matched advances. Required principal payments
on these advances are based on the expected repayment of pools of
mortgage loans with similar terms.
NOTE 8-CAPITAL REQUIREMENTS
At the time of its conversion to a stock form of organization, the
Company established a liquidation account in an amount equal to
its total net worth as of the date of the latest statement of
financial condition appearing in the final prospectus, which was
$10,998. The liquidation account is maintained for the benefit of
eligible depositors who continue to maintain their accounts at the
Company after the conversion. The liquidation account declines
annually to the extent that eligible depositors 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, each eligible depositor 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. The balance allocated to the
liquidation account is not available for payment of dividends.
The Company has qualified under provisions of the Internal Revenue
Code which permit it to deduct from taxable income a provision for
bad debts in excess of the provision for such losses charged
against income in the financial statements, if any. If, in the
future, this portion of retained earnings is used for any purpose
other than to absorb bad debt losses, federal income taxes would
be imposed at the then applicable rates. In accordance with FAS
No. 109, the Company has not recorded a tax liability for $2,300
of the tax reserve which accumulated prior to January 1, 1988. At
current tax rates, the tax due on that amount would be $782.
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet the
Office of Thrift Supervision's (OTS) minimum capital requirements
can result in certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could
have a direct material effect on the financial statements. These
guidelines and the Federal Deposit Insurance Corporation's (FDIC)
regulatory framework for prompt corrective action involve
quantitative measures of capital, assets, liabilities, and certain
off balance-sheet items as calculated under regulatory accounting
practices as well as qualitative judgments by the regulators about
components, risk weightings, and other factors. The Company's
capital ratios resulted in it being designated "well capitalized"
at December 31, 1997 and 1996.
<PAGE>
<TABLE>
OHSL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share amounts)
_______________________________________________________________________________________________
<CAPTION>
At December 31, under these capital requirements the Company had:
OTS FDIC
-------------------------------------------
Minimum Required
Required For Capital Minimum To Be
Actual Adequacy Purposes "Well Capitalized"
------------------------------------------------------------------
Amount Amount Amount
($000) Ratio ($000) Ratio ($000) Ratio
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997
- ----
Total Capital
(to Risk Weighted Assets) $21,035 17.26% $ 9,748 8.00% $12,185 10.00%
Tier I Capital (Core Capital)
(to Risk Weighted Assets) 20,515 16.84 4,874 4.00 7,311 6.00
Tier 1 Capital (Core Capital)
(to Adjusted Assets) 20,515 8.77 9,361 4.00 11,702 5.00
Tangible Capital
(to Adjusted Assets) 20,515 8.77 3,510 1.50 N/A N/A
1996
- ----
Total Capital
(to Risk Weighted Assets) $19,968 18.40% $ 8,681 8.00% $10,851 10.00%
Tier I Capital (Core Capital)
(to Risk Weighted Assets) 19,481 17.95 4,341 4.00 6,510 6.00
Tier 1 Capital (Core Capital)
(to Adjusted Assets) 19,481 9.24 8,435 4.00 10,544 5.00
Tangible Capital
(to Adjusted Assets) 19,481 9.24 3,163 1.50 N/A N/A
/TABLE
<PAGE>
Total capital differs from tangible and core capital due to the
inclusion of the Company's general valuation allowance which
totaled $520 and $487 at December 31, 1997 and 1996.
NOTE 9-BENEFIT PLANS
OHSL shareholders approved a Stock Option Plan in 1993 which
reserved 135,660 shares of common stock for granting options to
directors and officers of OHSL and the Company. Under the terms of
the Plan, options would be granted at values not less than the
fair market value of the shares at the date of the grant. Options
must be exercised within ten years of grant. There were 124,796
options granted during 1993 at a price of $10 per share. No
options have been granted since that time and no options have been
forfeited. At December 31, 1997, 55,001 options remain outstanding
and all are currently vested and exercisable.
In 1993, the Company established a Bank Incentive Plan (BIP) that
awarded 40,696 shares of stock to certain officers and directors
of the Company. The stock awarded under the Plan is restricted as
to certain rights at the time of issuance. These restrictions are
removed over a two year period for directors and a four year
period for officers. The cost of these shares is amortized over
the vesting periods described above. Expense recorded for the BIP
totalled $14 in 1997, $30 in 1996 and $63 in 1995.
The Company maintains an ESOP which purchased 7%, or 94,962
shares, of the stock offered in the conversion. The funds used by
the ESOP to purchase the stock were provided by a loan from OHSL
which will be repaid by contributions to the ESOP by the Company
in the future. Pursuant to the ESOP, 11,870 of the 94,962 shares
are to be allocated to participants annually. Shares are allocated
based upon employee compensation levels during the year. ESOP
expense is based on the fair value of shares earned and totaled
$287, $243 and $221 for 1997, 1996 and 1995. At December 31,
1997,47,482 shares with a fair value of $1,282 were unearned and
held in suspense by the ESOP, 11,870 shares had been released for
allocation and 35,610 shares had been allocated to participants.
Dividends paid on unreleased shares are used to service ESOP debt.
NOTE 10-COMMITMENTS AND CONTINGENT LIABILITIES
Expense for leased premises was $38, $32 and $17 for the years
ended December 31, 1997, 1996 and 1995. Future minimum lease
payments at December 31, 1997 for all non-cancelable leases are as
follows:
1998 $ 38
1999 39
2000 40
2001 15
____
$132
====
Some financial instruments are used to meet customer financing
needs and to reduce exposure to interest rate changes. These
financial instruments include commitments to extend credit and
standby letters of credit. These involve, to varying degrees,
credit and interest-rate risk in excess of the amount reported in
the balance sheet.
At year-end these financial instruments are summarized as follows:
1997 1996
__________________
Commitments to make loans:
Fixed rate $ 822 $1,339
Variable rate 160 382
Unused portions of lines of credit 4,608 4,311
Standby letters of credit 41 221
The commitments to make loans relate to residential mortgage
loans. Generally such commitments are for 45 days. At December 31,
1997, the fixed rate loan commitments had an average rate of
7.85%. The lines of credit are primarily variable rate home equity
lines of credit.
OHSL and the Company are party to various legal actions arising in
the course of its business. In the opinion of management, OHSL and
the Company have adequate legal defenses and/or insurance coverage
with respect to these actions. Management does not believe their
resolution will materially affect the operations or financial
position of OHSL.
NOTE 11-INCOME TAX EXPENSE
An analysis of income tax expense is as follows:
1997 1996 1995
______________________________
Current $ 834 $567 $ 816
Deferred 189 83 147
______________________________
$1,023 $650 $963
==============================
<PAGE>
OHSL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,1997,1996 and 1995
(Dollars in thousands, except per share amounts)
__________________________________________________________________
NOTE 11- INCOME TAX EXPENSE (Continued)
The difference between the financial statement income tax expense
and amounts computed using the statutory federal tax rate of 34%
is reconciled as follows:
1997 1996 1995
-------------------------------
Income tax provision
computed at statutory rate $1,030 $ 641 $ 958
Add (subtract) tax effect of
Tax-exempt interest (17) (15) (7)
Other 10 24 12
-------------------------------
$1,023 $ 650 $ 963
===============================
The net deferred tax liability, as of December 31, 1997 and 1996,
reflected in the consolidated statements of financial position is
comprised of the following components:
1997 1996
---------------------
Deferred tax receivable from:
Deferred loan fees $ 59 $ 136
Unrealized loss on available-for-sale
securities - 35
Other 8 21
---------------------
67 192
Deferred tax liability for:
Bad debt deductions (221) (231)
FHLB stock dividends (293) (255)
Unrealized gain on available-for-sale
securities (17) -
Other (119) (48)
---------------------
(650) (534)
Valuation allowance for deferred tax
receivable - -
---------------------
Net deferred tax liability $ (583) $ (342)
=====================
NOTE 12 - EARNINGS PER SHARE
The following table presents the number of shares used to compute
earnings per share:
1997 1996 1995
-------------------------------
Weighted average shares
outstanding used to
compute earnings per
share 1,199,214 1,220,361 1,217,578
Effect of potentially dilutive
shares 36,300 35,241 39,318
-------------------------------
Shares used to compute diluted
earnings per share 1,235,514 1,255,602 1,256,896
===============================
OHSL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,1997,1996 and 1995
(Dollars in thousands, except per share amounts)
__________________________________________________________________
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and short-term investments $ 16,324 $ 16,324 $ 8,473 $ 8,473
Available-for-sale securities 10,774 10,774 13,969 13,969
Held-to-maturity-securities 33,854 34,145 29,162 28,953
Loans (net) 172,498 177,538 158,457 161,742
Accrued interest receivable 1,355 1,355 1,371 1,371
Financial liabilities
Deposits (184,690) (185,481) (169,486) (170,982)
FHLB Advances (26,570) (26,456) (19,116) (19,056)
Accrued interest payable (233) (233) (215) (215)
</TABLE>
Estimated fair value approximates carrying amount for all items except those
described below.
Estimated fair value for securities is based on quoted market values for the
individual
securities or for equivalent securities. Estimated fair value for loans is
based on the quoted
market prices for similar loans or pools of loans. Estimated fair value for
time deposits and
FHLB Advances is based on the rates paid at year end for new deposits or
borrowings, applied
until maturity. Estimated fair value for off-balance sheet loan commitments
are considered
nominal.
<TABLE>
OHSL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share amounts)
NOTE 14-PARENT COMPANY FINANCIAL STATEMENTS
<CAPTION>
CONDENSED BALANCE SHEETS
December 31, 1997 and 1996
1997 1996
-----------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 454 $ 1,693
Investment in subsidiary 20,457 19,418
Securities
4,516 4,118
Loan to ESOP 475 594
Other assets 207 120
-----------------------------
Total assets $ 26,109 $ 25,943
===========================
LIABILITIES
$ 77 $ 747
SHAREHOLDERS' EQUITY 26,032 25,196
----------------------------
Total liabilities and
shareholders' equity $ 26,109 $ 25,943
=============================
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
Operating income
Dividends from the Company $ 1,200 $ 1,200 $ 1,200
Other 312 312 331
--------------------------------
Total operating income 1,512 1,512 1,531
Operating expenses 151 162 141
--------------------------------
Income before taxes and equity
in undistributed income of
the Company 1,361 1,350 1,390
Income tax provision 6 52 67
--------------------------------
Income before equity in undistributed
income of the Company 1,355 1,298 1,323
Equity in undistributed income of
the Company 652 (64) 532
-------------------------------
Net income $ 2,007 $1,234 $1,855
===============================
</TABLE>
OHSL FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share amounts)
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
----------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,007 $ 1,234 $ 1,855
Adjustments to reconcile net income to net
cash from operating activities:
Equity in undistributed income of the
Company (652) 64 (532)
Net accretion on securities (14) (7) (7)
Change in other assets (13) 18 2
Change in other liabilities (670) 453 8
-----------------------------
Net cash from operating activities 658 1,762 1,326
Cash flows from investing activities
Purchase of securities (959) - (550)
Maturity of securities 602 627 674
ESOP loan repayment 119 119 119
-----------------------------
Net cash from investing activities (238) 746 243
Cash flows from financing activities
Cash dividends (1,051) (921) (826)
Purchase of treasury stock (856) (847) (360)
Exercise of stock options 248 99 171
-----------------------------
Net cash from financing activities (1,659) (1,669) (1,015)
-----------------------------
Net changes in cash and cash equivalents (1,239) 839 554
Cash and cash equivalents at beginning of year 1,693 854 300
-----------------------------
Cash and cash equivalents at end of year $ 454 $ 1,693 $ 854
================================
</TABLE>
STOCKHOLDER INFORMATION
__________________________________________________________________
Stock Listing Information
Oak Hills Savings and Loan Company, F.A. converted from a mutual
to a stock company effective February 5, 1993, and formed OHSL
Financial Corp., the holding company. OHSL Financial Corp. common
stock is traded on the Nasdaq National Market tier of the Nasdaq
Stock Market under the symbol "OHSL."
Stock Price Information
Shares of common stock were made available to qualified
subscribers at $ 10 per share during the initial public offering.
The following table sets forth the high and low sales prices for
OHSL'S common stock as reported on the Nasdaq Market. At December
31, 1997, the closing price for OHSL common stock was $27.00 per
share.
Low High
------------
Quarter ended:
March 31, 1996 $19.75 $21.50
June 30, 1996 19.50 22.00
September 30, 1996 19.50 21.00
December 31, 1996 19.50 21.50
Quarter ended:
March 31, 1997 $21.00 $23.75
June 30, 1997 22.63 25.25
September 30, 1997 23.25 26.00
December 31, 1997 26.00 28.25
Annual Meeting of Stockholders
The Annual Meeting of Stockholders of OHSL Financial Corp. will be
held at 2:00 P.M., April 16, 1998 at the following location:
Dante's Restaurant
Rybolt Road and 1-74
Cincinnati, Ohio
Stockholders are invited to attend.
Annual Report on Form 10-KSB and Investor information
A copy of the OHSL Financial Corp. annual report on Form 10-KSB,
filed with the Securities and Exchange Commission, is available
without charge by writing:
Patrick J. Condren, C.P.A.
Chief Financial and Accounting Officer
OHSL Financial Corp.
5889 Bridgetown Road
Cincinnati, Ohio 45248
Stock Transfer Agent
Inquiries regarding stock transfer, registration, lost
certificates or changes in name and address should be directed to
the stock transfer agent and registrar by writing:
The Fifth Third Bank
Attn: Stock Transfer Department
38 Fountain Square Plaza
Cincinnati, Ohio 45263
Dividends
Dividends are paid upon the determination of the Board of
Directors that such payment is consistent with the long-term
interests of OHSL and Oak Hills. The factors affecting this
determination include OHSL'S current and projected earnings,
operating results, financial condition, regulatory restrictions,
future growth plans and other relevant factors. OHSL declared
quarterly dividends during 1997 as follows:
Record date Payment date Per share amount
- -------------------------------------------------
Mar.31, 1997 April 15, 1997 $0.22
June 30, 1997 July 15, 1997 $0.22
Sept. 30, 1997 Oct. 15, 1997 $0.22
Dec. 31, 1997 Jan. 15, 1998 $0.22
Corporate Office
OHSL Financial Corp.
5889 Bridgetown Road
Cincinnati, Ohio 45248
(513) 574-3322
Legal Counsel
Dinsmore & Shohl
1900 Chemed Center
255 East Fifth Street
Cincinnati, Ohio 45202
Independent Auditor
Crowe, Chizek and Company LLP
2100 Market Tower
10 West Market Street
Indianapolis, Indiana 46204
Market Makers
The following investment-brokerage firms make a market in OHSL's
common stock: EVEREN Securities, Inc., ABN-Amro Chicago Corp.,
McDonald & Company and Stifel, Nicolaus & Co., Inc.<PAGE>
EXHIBIT 22. SUBSIDIARIES OF THE REGISTRANT
State of
Incorporation
Percent of or
Parent Subsidiary Ownership Organization
OHSL Financial Corp. Oak Hills
Savings and
Loan Company, F.A. 100% Delaware
Oak Hills Savings
and Loan Company,
F.A. CFSC, Inc. 100% Ohio
<PAGE>
Exhibit 23
Consent of Independent Auditors
Board of Directors
OHSL Financial Corp.
Cincinnati, Ohio
We consent to the incorporation by reference in the Registration
Statement on Form S-8 of OHSL Financial Corp. of our Report of
Independent Auditors, dated January 22, 1998, on the consolidated
statements of financial condition of OHSL Financial Corp. as of
December 31, 1997 and 1996 and on the consolidated statements of
income, changes in shareholders' equity and cash flows for each of
the years in the three year period ended December 31, 1997, which
report is included in the Form 10-KSB of OHSL Financial Corp. for
the year ended December 31, 1997.
Crowe, Chizek and Company LLP
March 28, 1998
Indianapolis, Indiana
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000893235
<NAME> OHSL FINANCIAL CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,652
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 3,893
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,774
<INVESTMENTS-CARRYING> 33,854
<INVESTMENTS-MARKET> 34,145
<LOANS> 172,297
<ALLOWANCE> 529
<TOTAL-ASSETS> 238,905
<DEPOSITS> 184,690
<SHORT-TERM> 6,867
<LIABILITIES-OTHER> 1,613
<LONG-TERM> 19,703
0
0
<COMMON> 14
<OTHER-SE> 26,018
<TOTAL-LIABILITIES-AND-EQUITY> 238,905
<INTEREST-LOAN> 13,900
<INTEREST-INVEST> 3,244
<INTEREST-OTHER> 468
<INTEREST-TOTAL> 17,612
<INTEREST-DEPOSIT> 8,970
<INTEREST-EXPENSE> 10,485
<INTEREST-INCOME-NET> 7,127
<LOAN-LOSSES> 32
<SECURITIES-GAINS> (4)
<EXPENSE-OTHER> 4,580
<INCOME-PRETAX> 3,030
<INCOME-PRE-EXTRAORDINARY> 3,030
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,007
<EPS-PRIMARY> $1.67
<EPS-DILUTED> $1.62
<YIELD-ACTUAL> 3.18
<LOANS-NON> 93
<LOANS-PAST> 632
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 499
<CHARGE-OFFS> 2
<RECOVERIES> 32
<ALLOWANCE-CLOSE> 529
<ALLOWANCE-DOMESTIC> 339
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 190
</TABLE>
