SECURITIES AND EXCHANGE COMMISSION
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, 1998
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
incorporation or organization) Identification No.)
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, 1999, the Registrant had issued and
outstanding 2,465,572 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, 1999, was
$26.7 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, 1998 and Part III of Form 10-KSB
- -Proxy Statement for Annual Meeting of Stockholders to be held in
1999.
<PAGE>
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". As of March 15, 1999, the Corporation had approximately
700 registered holders of OHSL common stock and approximately 550
additional holders whose shares are held in ?street? name.
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 five branch offices located on the west side
of Cincinnati. At December 31, 1998, OHSL had $267.2 million in
assets, deposits of $206.8 million and shareholders' equity of
$27.0 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.
Finally, the Company offers, on an agency basis through its
subsidiary, mutual funds, annuity products and financial planning
and other 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, loan originations and other sources of 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 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 area, and
its branch offices are located in Price Hill, Dent, Delhi(2
offices) and Sayler Park.
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 are 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., Federated Department Stores, Cinergy and Chiquita
Brands International, Inc. Additionally, major installations of
companies headquartered elsewhere include General Electric
(aircraft engine manufacturing), Ford Motor Company (automobile
manufacturing), and Bayer 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>
December 31,
1994 1995 1996 1997 1998
Amount Amount Amount Amount Amount
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Real Estate Loans:
One-to four-family $ 98,857 $ 99,782 $113,373 $124,334 $106,630
Non-residential 17,108 16,945 17,091 17,763 24,497
Multi-family 9,441 9,630 11,598 12,874 15,867
Construction or development 9,217 11,115 9,866 9,366 15,358
-------- -------- -------- -------- --------
Total real estate loans 134,623 137,472 151,928 164,337 162,352
-------- -------- -------- -------- --------
Other Loans:
Consumer Loans:
Home equity 2,915 2,949 3,411 4,132 3,351
Student 1,798 386 285 257 198
Automobile 1,167 3,045 4,091 4,070 2,780
Deposit 268 248 223 218 255
Home improvement 404 472 478 577 348
Other 886 1,397 2,184 1,343 871
-------- -------- -------- -------- --------
Total consumer loans 7,438 8,497 10,672 10,597 7,803
Commercial business loans 384 350 340 739 1,096
-------- -------- -------- -------- --------
<PAGE>
Total other loans 7,822 8,847 11,012 11,336 8,899
-------- -------- -------- -------- --------
Total loans receivable 142,445 146,319 162,940 175,673 171,251
Less:
Loans in process 3,957 3,116 4,065 3,203 6,123
Deferred fees and discount 753 537 355 173 (29)
Allowance for loan losses 507 515 499 529 562
-------- -------- -------- -------- --------
Loans receivable, net $137,228 $142,151 $158,021 $171,768 $164,595
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
The following table shows the composition of the Company's loan portfolio
by fixed and
adjustable rate at the dates indicated.
<TABLE>
December 31,
1994 1995 1996 1997 1998
Amount Amount Amount Amount Amount
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One-to four-family $ 51,037 $ 62,178 $ 73,523 $ 80,061 $ 80,359
Multi-family and commercial 13,805 13,577 14,032 14,985 19,742
-------- -------- -------- -------- --------
Total real estate loans 64,842 75,755 87,555 95,046 100,101
Consumer 3,725 5,204 6,839 6,270 4,044
Commercial business 70 57 54 111 677
-------- -------- -------- -------- --------
Total fixed-rate loans 68,637 81,016 94,448 101,427 104,822
Adjustable-Rate Loans:
Real estate:
One-to four-family 47,820 37,604 39,850 44,273 26,271
Multi-family and commercial 12,744 12,998 14,657 15,652 20,622
Construction or development 9,217 11,115 9,866 9,366 15,358
-------- -------- -------- -------- --------
Total real estate loans 69,781 61,717 64,373 69,291 62,251
Consumer 3,713 3,293 3,833 4,327 3,759
Commercial business 314 293 286 628 419
-------- -------- -------- -------- --------
Total loans 142,445 146,319 162,940 175,673 171,251
Less:
Loans in process 3,957 3,116 4,065 3,203 6,123
Deferred fees and discounts 753 537 355 173 (29)
Allowance for loan losses 507 515 499 529 562
-------- -------- -------- -------- --------
Loans receivable, net $137,228 $142,151 $158,021 $171,768 $164,595
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
<PAGE>
The following schedule sets forth the contractual maturity of the
Company's loan portfolio at December 31, 1998. 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.
<PAGE>
<TABLE>
Real Estate
Multi-Family Construction
One-to Four- and or Commercial
Family Commercial Development Consumer Business Total
------------- ---------- ------------- -------- ---------- ------
Amount Amount Amount Amount Amount Amount
------------- ---------- ------------- -------- ---------- ------
(Dollars in Thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Due During
Years Ending
December 31,
1999(1) $ 14,215 $16,365 $ 15,358 $ 4,167 $ 479 $ 50,584
2000 and 2001 11,412 2,348 -- 1,763 729 16,252
2002 and 2003 4,463 2,762 -- 1,475 89 8,789
2004 to 2008 10,243 11,754 -- 129 68 22,194
2009 to 2018 21,003 6,634 -- -- -- 27,637
2019 and following 45,294 501 -- -- -- 45,795
------------- ---------- ------------- -------- ---------- --------
TOTAL $106,630 $40,364 $ 15,358 $ 7,534 $1,365 $171,251
------------- ---------- ------------- -------- ---------- --------
------------- ---------- ------------- -------- ---------- --------
</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, 1998,
based on the above 15% limitation, the Company's regulatory
loan-to-one borrower limit was approximately $3.0 million. The
Company had no borrowers with aggregate loan balances in excess of
the regulatory limits at December 31, 1998. 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 $500,000 and less than $1.0 million are approved by the
Executive Committee of the Board of Directors. Mortgage related
loans up to $500,000 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, 1998, $108 million, or 62.4% 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 1998, the Company sold $18.4 million of fixed-rate, one-to
four-family loans in the secondary market, representing
approximately 32% 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, 1998, the Company had $40.4 million in multi-family
and commercial real estate loans, representing 23.4% 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, 1998,
the Company had one multi-family real estate loan (principal
balance of $197,150) which was on non-accrual status. Losses, if
any, on the resolution of this delinquent multi-family real estate
loan 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, 1998, the
Company had committed to fund $15.4 million of one-to four-family
residential construction loans, with outstanding balances totaling
$9.2 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, 1998, the Company had
approximately $7.2 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 appraiser or other qualified inspector
who reviews the project in connection with each disbursement
request. The Company regularly 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,
1998.
Number
of Loans Commitment Balance
----------- ---------- --------
(Dollars in
Thousands)
One-to four-family
residential(1) 51 $15,358 $ 9,235
Multi-family residential -- -- --
Non-residential -- -- --
Total construction or
Development loans 51 $15,358 $ 9,235
(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, 1998, the
Company's consumer loans totaled $7.8 million or 4.4% 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, 1998, the Company had $3.4 million of home equity
lines of credit and an additional $4.8 million of additional funds
committed, but undrawn, under such lines. Second mortgage loans
may carry fixed or adjustable interest rates. At December 31,
1998, the Company had $2.1 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.
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 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, 1998, the Company had $1.4 million 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.
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, 1998, approximately
$15.0 million of Oak Hills' loan portfolio was serviced by others
and the Company serviced $36.5 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, 1998.
<PAGE>
<TABLE>
Year Ended December 31,
1996 1997 1998
(In Thousands)
<CAPTION>
<S> <C> <C> <C>
Originations by type:
Adjustable-rate:
Real estate -one-to four-family $17,025 $22,164 $ 4,950
-multi-family 9,931 4,575 ---
-commercial 6,544 1,162 ---
Non-real estate -consumer 156 99 47
-commercial
business 257 1,122 257
------- ------- -------
Total adjustable-rate 33,913 29,122 5,254
Fixed-rate:
Real estate -one-to four-family 17,873 22,345 57,498
-multi-family 1,285 765 5,029
-commercial 2,587 4,446 11,155
Non-real estate -consumer 2,587 2,198 811
------- ------- -------
Total fixed-rate 22,517 29,754 74,493
------- ------- -------
Total loans originated 56,430 58,876 79,747
Purchases:
Real estate -one-to four-family --- --- ---
-multi-family --- --- ---
-commercial --- --- ---
Total purchases --- --- ---
Sales:
Real estate -one-to four-family 2,809 4,525 18,394
-multi-family --- --- ---
-commercial --- --- ---
-consumer 573 427 398
------- ------- -------
Total loan sales 3,382 4,952 18,792
Principal repayments 36,993 40,897 64,017
------- ------- -------
Total repayments 40,375 45,849 82,809
------- ------- -------
Increase in principal
Balance $16,055 $13,027 $(3,062)
------- ------- -------
------- ------- -------
</TABLE>
<PAGE>
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, 1998, 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, 1998:
<TABLE>
Past Due and Still Accruing:
60-89 Days 90 Days and Over Non-accrual Loans Delinquent Loans
Number Amount Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------ ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One-to four-family 8 $203 2 $122 -- $-- 10 $325
Multi-family -- -- -- -- 1 197 1 197
Commercial -- -- -- -- -- -- -- --
Construction or
development -- -- -- -- -- -- -- --
Consumer 5 26 -- -- -- -- 5 26
Commercial Business 1 13 -- -- -- -- 1 13
------ ------ ------ ------ ------ ------ ------ ------
Total 14 $242 2 $122 1 $ 197 17 $561
</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, 1998, the Company had classified a total of $563,000
of its loans, as follows:
Multi-Family
One-to and
Four Commercial
Family Real Estate Consumer Total
------ ----------- -------- -----
(In thousands)
Special Mention $169 $--- $26 $195
Substandard 151 177 13 341
Doubtful 5 20 2 27
Loss ---- ---- --- ----
---- ---- --- ----
$325 $197 $41 $563
---- ---- --- ----
---- ---- --- ----
The Company's classified assets consist of the non-performing
loans and other assets of concern discussed herein.
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.
<PAGE>
<TABLE>
At December 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Commercial real estate $224 $ 44 $--- $ 55 $197
Consumer 34 47 44 38 ---
Commercial business --- --- 46 --- ---
Total 258 91 90 93 197
Accruing loans delinquent
90 days or more:
One-to-four-family 668 572 807 424 122
Multi-family --- --- 80 --- ---
Commercial Real Estate 67 --- --- 208 ---
Total 735 572 887 632 122
---- ---- ---- ---- ----
Foreclosed assets:
One-to four family --- --- --- --- ---
Total --- --- --- --- ---
Total non-performing assets $993 $663 $977 $725 $319
Total as a percentage of
total assets .56% .32% .45% .30% .12%
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
<PAGE>
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 or other factors could result in adjustments to
the allowance for loan losses. Net earnings could be
significantly affected if substantial additions to the allowance
for loan losses are required 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.
<PAGE>
<TABLE>
At December 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 501 $ 507 $ 515 $ 499 $ 529
Charge-offs:
One-to four-family --- --- 22 --- ---
Commercial business --- --- 3 2 ---
Consumer 7 --- --- --- 8
Recoveries:
Consumer 3 --- --- --- 4
---- ----- ----- ----- -----
Net charge-offs 4 --- 25 2 4
Provision charged to operations 10 8 9 32 37
---- ----- ----- ----- -----
Balance at end of period $ 507 $ 515 $ 499 $ 529 $ 562
Ratio of net charge-offs during
'the period to average loans
'outstanding during the
period. .01% ---% .02% ---% ----%
---- ----- ----- ----- -----
---- ----- ----- ----- -----
Ratio of the allowance for loan
'losses to non-performing
loans at the end of the
period 51.1% 77.7% 39.5% 48.4% 100.2%
---- ----- ----- ----- -----
---- ----- ----- ----- -----
Ratio of the allowance for loan
'losses to net loans
(including loans held for sale)
at the end of the period .37% .36% .32% .31% .34%
---- ----- ----- ----- -----
---- ----- ----- ----- -----
The distribution of the Company's allowance for losses on loans at the dates indicated is
summarized as follows:
</TABLE>
<TABLE>
December 31,
1994 1995 1996 1997 1998
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 To Total To Total To Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ -------- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to four-
family $228 69.4% $222 68.2% $214 69.6% $220 70.8% $225 62.6%
Multi-family 10 6.6 13 6.6 11 7.1 16 7.4 18 9.2
Commercial real
estate 62 12.0 46 11.6 61 10.5 63 10.1 70 14.2
Construction Or
development 8 6.5 10 7.6 5 6.1 5 5.3 10 8.8
Consumer 25 5.2 31 5.8 33 6.5 35 6.0 45 4.4
Commercial
business -- .3 -- .2 -- .2 -- .4 5 .8
Unallocated 174 -- 193 -- 175 -- 190 --- 189 ---
---- ------ ---- ------ ---- ------ ---- ------ ---- ------
Total $507 100.0% $515 100.0% $499 100.0% $529 100.0% $529 100.0%
---- ------ ---- ------ ---- ------ ---- ------ ---- ------
---- ------ ---- ------ ---- ------ ---- ------ ---- ------
/TABLE
<PAGE>
Investment Activities
In the regular course of business, OHSL routinely invests in
U.S. 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, 1998, the
Company did not own any securities of a single issuer which
exceeded 10% of the Company's equity capital 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, 1998, OHSL's securities portfolio had a total
book value of $74.6 million. Of that total, $10.1 million are
Federal Agency obligations, $33.9 million are collateralized
mortgage obligations (which are securities derived by reallocating
cash flows from other mortgage instruments), $24.2 million are
mortgage-backed securities and $6.4 million are other obligations
(consisting of tax-free obligations, corporate bonds and mutual
funds).
At December 31, 1998, the majority of OHSL's mortgage-backed
securities are classified as held-to-maturity and accordingly are
included in its financial statements at amortized cost. 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, 1998.
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.
<PAGE>
<TABLE>
The following table sets forth the composition of OHSL's investment portfolio at the dates
indicated.
December 31,
1996 1997 1998
---- ---- ----
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 $10,731 76.8% $ 7,481 69.4% $ 6,046 64.5% 6.65%
Mutual funds 2,770 19.8 2,803 26.0 2,818 30.1 5.46
Other obligations 468 3.4 490 4.6 508 5.4 6.00
------- ------ ------- ------ ------- ------ ---------
$13,969 100.0% $10,774 100.0% $ 9,372 100.0% 6.26%
------- ------ ------- ------ ------- ------ ---------
------- ------ ------- ------ ------- ------ ---------
Held-to-Maturity
Securities:
Federal agency
obligations $17,330 59.4% $14,034 41.5% $10,102 15.5% 6.68%
Mortgage-backed
securities --- -- 4,806 14.2 18,199 27.9 6.86
Collateralized mortgage
obligations 11,022 37.8 13,927 41.1 33,908 51.9 6.47
Other obligations(1) 810 2.8 1,087 3.2 3,059 4.7 7.80
------- ------ ------- ------ ------- ------
$29,162 100.0% $33,854 100.0% $ 65,268 100.0% 6.67%
------- ------ ------- ------ ------- ------ ---------
------- ------ ------- ------ ------- ------ ---------
<FN>
(1) Consists solely of tax-exempt obligations, which are shown at their taxable equivalent
weighted average yield, using a tax rate of 34%.
</TABLE>
<TABLE>
The following table presents the contractual maturities
of the Corporation's securities portfolio at December 31, 1998.
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 1999.
<CAPTION>
2009 and Amortized Fair
1999 2000-2003 2004-2008 After Cost Value
---- --------- --------- -------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for Sale
Securities:
Mortgage-backed
securities $ 1,273 $ 2,830 $ 1,790 $ 108 $ 6,001 $ 6,046
Mutual funds 2,798 --- --- --- 2,798 2,818
Other obligations --- --- 500 --- 500 508
------ ------ ------- ------ ------ ------
4,071 2,830 2,290 108 9,299 9,372
------ ------ ------ ----- ------ ------
Held-to-Maturity
Securities:
Federal agency
obligations 1,096 2,881 --- 6,125 10,102 10,148
Mortgage-backed
Securities 3,640 8,596 4,143 1,820 18,199 18,243
Collateralized mortgage
obligations 6,782 11,868 11,867 3,391 33,908 34,022
Tax-free obligations(1) --- --- 263 2,796 3,059 3,113
----- ------ ------ ----- ------ ------
11,518 23,345 16,273 14,132 65,268 65,526
------ ------ ------ ------ ------ ------
Total Investments $ 15,589 $ 26,175 $ 18,563 $ 14,240 $ 74,567 $ 74,898
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Weighted Average Yield 6.32% 6.62% 6 57% 7.03% 6.62%
<FN>
(1) Shown at tax-equivalent yield
</TABLE>
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 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>
1996 1997 1998
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance $ 159,314 $ 169,486 $ 184,690
Add deposits
purchased during
the year --- --- 11,643
Deposits less
Withdrawals 2,029 6,170 885
------- -------- -------
Balance before
interest credited 161,343 175,656 197,218
Interest credited 8,143 9,034 9,537
------- ------ -------
Ending balance $ 169,486 $ 184,690 $ 206,755
--------- --------- --------
--------- --------- ---------
Net increase
(decrease) $ 10,172 $ 15,204 $ 22,065
--------- --------- --------
--------- --------- --------
Percent increase
(decrease) 6.38% 8.97% 11.95%
----- ----- ------
----- ----- ------
</TABLE>
<PAGE>
<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.
<CAPTION>
Year Ended December 31,
1996 1997 1998
---- ---- ----
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
Dollar in Thousands
<S> <C> <C> <C> <C> <C> <C>
Transaction Accounts:
- --------------------
Non-interest bearing deposits $ 2,669 1.6% $ 3,256 1.8% $ 4,509 2.2%
Savings accounts 24,322 14.4 26,862 14.5 32,822 15.9
NOW accounts 16,487 9.7 16,670 9.0 18,560 9.0
Money market accounts 11,545 6.8 9,395 5.1 9,360 4.5
------ ---- ------ --- ------ ---
Total Transaction Accounts 55,023 32.5 56,183 30.4 65,251 31.6
------ ---- ------ ---- ------ ----
Certificates:
2.00 -3.99% 906 .5 625 .3 2,159 1.0
4.00 - 57,360 33.9 58,458 31.7 97,313 47.1
5.99%
6.00 - 52,274 30.8 67,449 36.5 40,928 19.8
7.99%
8.00 - 3,923 2.3 1,975 1.1 1,104 .5
------ ---- ------ ---- ------ ----
9.99%
Total Certificates 114,463 67.5 128,507 69.6 141,504 68.4
------- ---- ------- ---- ------- ----
Total
Deposits 169,486 100.0% 184,690 100.0% 206,755 100.0%
----- ----- -----
----- ----- -----
Accrued Interest on deposit
accounts 119 97 55
------ ------ ------
Total Deposits and accrued
interest on deposit accounts $ 169,605 $ 184,787 $ 206,810
-------- -------- --------
-------- -------- --------
</TABLE>
<PAGE>
The following table indicates the amount of the Company's
certificates of deposit by time remaining until maturity as of
December 31, 1998.
Maturity
Over Over Over
3 Months 3 to 6 6 to 12 12
or Less Months Months Months Total
-------- ------ ------- ------- --------
(In Thousands)
Certificates of
deposit less
than $100,000 $17,779 $13,912 $32,112 $55,282 $119,085
Certificates of
deposit of
$100,000 or more 4,263 2,145 4,543 11,468 22,419
Public funds(1) -- -- -- -- --
------ ------ ------ ------ ------
Total certificates
of deposit $22,042 $16,057 $36,655 $66,750 $141,504
------ ------ ------ ------ -------
------ ------ ------ ------ -------
(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.
<PAGE>
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 structure, 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.
Year Ended December 31,
1996 1997 1998
---- ---- ----
(In Thousands)
Maximum Balance:
FHLB advances $20,627 $29,308 $36,708
Other borrowings --- --- ---
Average Balance:
FHLB advances 17,961 25,574 31,394
Other borrowings --- --- ---
The following table sets forth certain information as to the
Company's FHLB advances and other borrowings at the dates
indicated.
Year Ended December 31,
1996 1997 1998
---- ---- ----
(In Thousands)
FHLB advances $19,116 $26,570 $31,118
Other borrowings --- --- ---
------ ------ ------
Total borrowings $19,116 $26,570 $31,118
------ ------ ------
------ ------ ------
Weighted average interest
rate of borrowings 5.96% 5.91% 5.47%
<PAGE>
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, 1998, the Company had an equity investment in CFSC
of $65,000. For the year ended December 31, 1998, CFSC received
commission income of $22,000.
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%.
<PAGE>
REGULATION
General
The Company is a federally chartered savings association,
whose deposits 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 examination of the Company was September 1997. Under agency
scheduling guidelines, it is likely that another examination will
be initiated in the near future. The FDIC has not examined the
Company within the past three year.
The OTS imposes an assessment on the institutions it
regulates. This assessment is generally intended to cover the
cost of such regulation. Effective November, 1998, the OTS has
adopted a new assessment formula, which is based on the savings
institution?s size, complexity of operations and condition. Based
upon this new formula, management believes that its fees for 1999
will be somewhat lower than its 1998 assessment(which totaled
$67,000) based upon current conditions.
The OTS has extensive enforcement authority over all savings
institutions and their holding companies. 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
the Company is prohibited from engaging in any activities not
permitted by such laws and regulations.
The Company's permissible lending limit for
loans-to-one-borrower is generally equal to the greater of
$500,000 or 15% of unimpaired capital and surplus. At December
31, 1998, the Company's lending limit under the 15% restriction
was $3.0 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 adoption of safety and
soundness standards, including enhanced federal supervision of
depository 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, has
issued safety and soundness standards on matters such as loan
underwriting and documentation, internal controls and audit
systems, interest rate risk exposure and employee compensation and
benefits.
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 to pose a
serious risk to the FDIC. The FDIC also has the authority to
initiate enforcement actions against savings associations, 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. These capital
requirements must be generally as strict 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, 1998, the Company had tangible capital of $18.9
million, or 7.3% of adjusted total assets, which is approximately
$15.0 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
generally maintain a core capital ratio of at least 4% to be
considered adequately capitalized.
At December 31, 1998, the Company had core capital equal to
$18.9 million, or 7.3% of adjusted total assets, which is $11.1
million above the minimum leverage ratio requirement of 3% as in
effect on that date.
The OTS risk-based capital 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,
1998, the Company had no capital instruments that qualify as
supplementary capital and $546,000 of general loss reserves.
On December 31, 1998, the Company had total risk-based
capital of $19.5 million and risk-weighted assets of $122.6
million, or total capital of 15.9% of risk-weighted assets. This
amount was $9.7 million above the 4.0% requirement.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions and 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, and certain other transactions.
(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. The Company meets
the requirements for a Tier 1 association. Tier 1 associations
proposing to make a capital distribution need only submit written
notice to the OTS 30 days prior to such distribution.
Tier 2 and Tier 3 associations that propose to make any
capital distributions must obtain OTS approval prior to making
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 institutions, including Oak Hills, is that the above
changes 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, 1998,
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, 1998, 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 that
are no more 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 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 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, 1998, 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 administer the home financing credit
function of savings associations. Each FHLB serves as a 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.
As a member, the Company is required to purchase and maintain
stock in the FHLB of Cincinnati. At December 31, 1998, the
Company had $2.0 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 1998.
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.
For the year ended December 31, 1998, dividends paid by the
FHLB of Cincinnati to the Company totaled $133,000, which
constitute a $21,000 increase over the amount of dividends
received in calendar year 1997. The $34,000 dividend received for
the quarter ended December 31, 1998 reflects an annualized rate of
7.00%. As virtually all dividends for 1998 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 $1.6
million at December 31, 1997 to $2.0 million at December 31, 1998.
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 in 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,
1998, 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.
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
1.4 percent of Oak Hills? 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 imposes a franchise tax of 5.21% on the first
$50,000 of OHSL's Ohio taxable income and 8.72% on taxable income
in excess of $50,000.
<PAGE>
Employees
At December 31, 1998, 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,
1998. At December 31, 1998, the Company's premises had an
aggregate net book value of approximately $2.6 million.
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 $ 850
Full Service
Branches
- ------------
4024 Glenway Avenue
Cincinnati, Ohio 45205 1982 Owned NA 52
6581 Harrison Avenue
Cincinnati, Ohio 45247 1982 Owned NA 1,289
5329 Foley Road
Cincinnati, Ohio 45238 1990 Leased 2000 70
6105 Cleves-Warsaw Pike
Cincinnati, Ohio 45233 1996 Leased 2001 171
6570 Gracely Drive
Cincinnati, Ohio 45233 1998 Owned NA 141
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, 1998.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Page 37 of the attached 1998 Annual Report to Stockholders is
herein incorporated by reference.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Pages 9 through 16 of the attached 1998 Annual Report to
Stockholders are herein incorporated by reference.
<PAGE>
<TABLE>
The following table presents for the periods indicated the total
dollar amount of interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. All
average balances are daily average balances.
<CAPTION>
1996 1997 1998
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Bearing Assets:
Loans Receivable(1) $ 150,934 $ 12,850 8.51% $ 166,831 $ 13,900 8.33% $ 169,607 $ 14,129 8.33%
Available-for-sale
securities(2) 14,370 958 6.67 11,762 783 6.66 9,968 628 6.30
Held-to-maturity
securities and
other investments 35,137 2,297 6.54 43,872 2,817 6.42 60,912 3,824 6.28
FHLB stock 1,451 102 7.03 1,560 112 7.18 1,852 133 7.18
Total interest-earning -------- ------- ----- -------- ------- ----- -------- ------ -----
Assets(1) 201,892 16,207 8.03 224,025 17,612 7.86 242,339 18,714 7.72
Interest-Bearing Liabilities:
Time deposits 117,934 7,057 5.98 121,239 7,467 6.16 130,169 7,883 6.06
Savings accounts 27,568 838 3.04 35,954 1,142 3.18 38,292 1,290 3.37
Interest-bearing demand
Deposit accounts 16,192 340 2.10 16,279 361 2.22 16,977 295 1.74
Borrowings 17,961 1,054 5.87 25,574 1,515 5.92 31,394 1,773 5.65
Total interest-bearing ------- ----- ---- ------- ------ ---- ------- ------ ----
Liabilities 179,655 9,289 5.17 199,046 10,485 5.27 216,832 11,241 5.18
----- ------ ------<PAGE>
Net interest income $ 6,918 $ 7,127 $ 7,473
------ ------ ------
------ ------ ------
Net interest rate spread 2.86% 2.59% 2.54%
Net earning assets $ 22,237 $ 24,979 $ 25,507
-------- -------- -------
-------- -------- -------
Net yield on average
interest- Earning assets 3.43% 3.18% 3.08%
Average interest-earning
assets to
To average interest-
bearing Liabilities 1.12x 1.13x 1.12x
<FN>
(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.
</TABLE>
<PAGE>
<TABLE>
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.
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1998 vs. 1997 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 $ 23 $ (2) $ 229 $1,329 $ (279) $ 1,050
Available-for-sale securities (115) (40) (155) (174) (1) (175)
Held-to-maturity securities and
other investments 1,071 (64) 1,007 562 (42) 520
FHLB stock 21 0 21 8 2 10
----- ----- ------ ---- ----- ------
Total interest-earning assets $1,208 $ (106) 1,102 $1,725 $ (320) $ 1,405
----- ------ ----- ----- ------ -------
----- ------ ----- ----- ------ -------
Interest-bearing liabilities:
Demand and NOW deposits $ 15 $ (81) (66) $ 2 $ 19 $ 21
Savings accounts 77 71 148 265 39 304
Time deposits 542 (126) 416 200 210 410
Borrowings 331 (73) 258 451 10 461
----- ------ ----- ----- ----- ------
Total interest-bearing
liabilities $ 965 $ (209) 756 $ 918 $ 278 1,196
----- ------ ----- ----- ------ ------
----- ------ ----- ----- ------ ------
Net interest income $ 346 $ 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, 1998 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 17
Consolidated Balance Sheets as of
December 31, 1998 and 1997 18
Consolidated Statements of Income
for the Years Ended December 31, 1998,
1997 and 1996 19
Consolidated Statements of Changes
in Shareholders' Equity for Years
Ended December 31, 1998, 1997 and 1996 20
Consolidated Statements of Cash Flows
for Years Ended December 31, 1998,
1997 and 1996 21-22
Notes to Consolidated Financial
Statements 23-35
With the exception of the aforementioned information, the
Corporation's Annual Report to Stockholders for the year ended
December 31, 1998, 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.
<PAGE>
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
1999, 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 47, 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 48, 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 48, 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 1999, 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 of Stockholders to be held in 1999, 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 1999, a copy of which will be filed not later than
120 days after the close of the fiscal year.
<PAGE>
<TABLE>
Item 14. Exhibits and Reports on Form 8-K
(a) Exhibits
<CAPTION>
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 10-K
- ----------- ----------------------------------------- ------------ ---------------
<S> <C> <C> <C>
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 53
13 Annual Report to Shareholders 13
21 Subsidiaries of Registrant 21 Page 54
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.
</TABLE>
(b) Reports on Form 8-K:
The Company filed a Form 8-K during the three month period
ended December 31, 1998 to report the following:
Date Filed Event
October 20, 1998 Earnings for the quarter ended Sept. 30,1998
December 2, 1998 Payment of a cash dividend
<PAGE>
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, 1999 By: /s/Kenneth L. Hanauer
---------------------------------
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.
/s/Kenneth L. Hanauer /s/Norbet G. Brinker
- ----------------------------- ------------------------------
Kenneth L. Hanauer, President Norbert G. Brinker, Chairman
and Director of the Board
(Principal Executive Officer)
Date: March 24, 1999 Date: March 24, 1999
/s/William R. Hillebrand /s/Thomas M. Harron
- ----------------------------- -----------------------------
William R. Hillebrand, Director Thomas M. Herron, Director
Date: March 24, 1999 Date: March 24, 1999
/s/Alvin E. Hucke /s/Thomas E. McKiernan
- ------------------------------ ------------------------------
Alvin E. Hucke, Director Thomas E. McKiernan, Director
Date: March 24, 1999 Date: March 24, 1999
/s/Joseph J. Tenoever /s/Howard H. Zoellner
- ------------------------------ ------------------------------
Joseph J. Tenoever, Director Howard H. Zoellner, Director
Date: March 24, 1999 Date: March 24, 1999
/s/Patrick J. Condren
- ------------------------------
Patrick J. Condren, Treasurer
(Principal Financial and
Accounting Officer)
Date: March 24, 1999
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, 1998 this calculation is as
follows:
Net income for 1998 $2,161,000
---------
---------
Weighted average shares outstanding during 1998 2,488,942
Less average unallocated ESOP shares during 1998 59,354
---------
Average shares outstanding for EPS calculations 2,429,588
---------
---------
Earnings per share ($2,161,000 / 2,429,588) $0.89
----
----
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 1998 is
presented below:
Weighted average outstanding shares during 1998 2,429,588
Average options shares issued 98,315
Less Shares repurchased with option proceeds and
tax benefit. 40,119
--------
Weighted avg. shares for diluted earnings per
share 2,487,784
---------
---------
Earnings per share ($2,161,000 / 2,487,784) $0.87
----
----
<TABLE>
Exhibit 13
Selected portions of the 1998 Annual Report to Stockholders, which are incorporated in this Form
10-KSB by reference in Items 5, 6 and 7.
<CAPTION>
December 31,
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $175,902 $204,076 $215,668 $238,905 $267,176
Loans receivable, net 137,228 142,151 158,021 171,768 164,595
Investments 26,252 41,546 43,131 44,628 74,640
Deposits 135,587 159,314 169,486 184,690 206,755
Shareholders' equity 23,691 25,454 25,196 26,032 27,026
</TABLE>
<TABLE>
Year Ended December 31,
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income $ 12,259 $ 14,681 $ 16,207 $ 17,612 $ 18,714
Total interest expense 6,025 8,262 9,289 10,485 11,241
Net interest income 6,234 6,419 6,918 7,127 7,473
Provision for loan losses 10 8 9 32 37
Net interest income after provision
for loan losses 6,224 6,411 6,909 7,095 7,436
Non interest income 326 434 376 515 745
Non interest expense 4,053 4,027 5,401 4,580 4,733
Income before tax provision 2,497 2,818 1,884 3,030 3,448
Tax provision 850 963 650 1,023 1,287
Net income $ 1,647 $ 1,855 $ 1,234 $ 2,007 $ 2,161
Earnings per share $ 0.65 $ 0.76 $ 0.51 $ 0.84 $ 0.89
Diluted earnings per share 0.64 0.74 0.49 0.81 0.87
Dividends per share .31 .34 .38 .44 .485
Dividend payout ratio 48% 45% 75% 52% 54%
</TABLE>
<TABLE>
Year Ended December 31,
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income
to average total assets) .98% .98% .59% .87% .87%
Average interest rate spread(1) 3.37 2.92 2.86 2.59 2.54
Net interest margin(2) 3.89 3.52 3.43 3.18 3.08
Return on equity (ratio of net
income to average shareholders'
equity) 6.80 7.54 4.84 7.86 8.06
Asset Quality Ratios (end of period):
Allowance for loan losses to
non-performing loans 51.06 77.68 39.51 48.44 99.96
Allowance for loan losses to net
loans 0.37 0.36 0.32 0.31 0.34
Capital Ratio:
Shareholders' equity to total assets
at end of period 13.47 12.47 11.68 10.90 10.12
<FN>
(1) Average yield on earning assets less average cost
of interest-bearing liabilities.
(2) Net interest income divided by average
interest earning assets.
</TABLE>
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
General.
OHSL Financial Corp. ("OHSL") is a single thrift holding company
which owns 100% of the common stock of Oak Hills Savings and Loan
Company, F.A. ("Oak Hills" or the "Company"). Oak Hills serves
the financial needs of families and local businesses in its
primary market area of southwestern Ohio (mainly the counties of
Hamilton, Butler and Clermont) and southeastern Indiana (the
counties of Dearborn, Franklin and Ripley). As a federally
insured savings and loan association, Oak Hills' deposits are
insured up to applicable limits by the Federal Deposit Insurance
Corporation. Oak Hills has historically emphasized one-to-four
family residential lending within its own community.
The common stock of OHSL Financial Corp. trades under the symbol
of "OHSL" on the Nasdaq National Market tier of the Nasdaq Stock
Market.
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 discussion 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 Management's Discussion and Analysis of
Financial Condition and Results of Operations is hereby cautioned
of the risks and uncertainties inherent in the forward-looking
statements contained herein and is urged to consider such risks
and uncertainties concerning the future financial performance of
OHSL.
Financial Condition
Total assets increased from $238.9 million at December 31, 1997 to
$267.2 million at December 31, 1998, an increase of $28.3 million
or 11.8%. During 1998, cash and cash equivalents increased by
$2.8 million and held-to-maturity securities increased by $31.4
million. These increases were funded principally by a reduction
in loans receivable of $7.2 million and by increases in customer
deposits of $22.1 million and advances from the Federal Home Loan
Bank of Cincinnati of $4.5 million. These changes are largely the
result of several factors, including: (1) the Company's strategy
of seeking out investment opportunities which provide a favorable
interest rate spread; (2) the Company's purchase of the Sayler
Park branch of Cornerstone Bank (see the discussion of this
transaction below); and (3) the Company's efforts to increase its
market share of customer deposits by offering a varied selection
of deposit products to its customer base. The Company believes
that moderate growth is necessary in order to achieve income
objectives in the current low interest rate environment.
Loans receivable, as noted above, decreased by $7.2 million in
1998. Due to the continuation of the low interest rate
environment, the Company has experienced very strong mortgage loan
originations. However, much of this activity represents mortgage
loan refinancings rather than new originations. In addition, part
of the Company's interest rate risk management strategy involves
the sale, with servicing retained, of longer term fixed rate
mortgage loans. For these reasons, loans receivable at December
31, 1998 were below the level of the prior year end.
Held-to-maturity securities increased by $31.4 million in 1998.
Purchases during 1998 totaled $60.5 million and consisted of $15.7
million in U.S. government Agency securities, $42.8 million in
U.S. Government mortgage-related securities and $2.0 million in
investment-grade tax-free obligations. A portion of these
securities were acquired as part of an investment strategy wherein
the Company locks in certain favorable interest rate spreads by
funding the investment purchase with a borrowing of a similar
amount and/or term. The increase in Federal Home Loan Bank
advances relates to this investment strategy.
Shareholders' equity increased by $994,000 during 1998. The major
components of this increase are the Corporation's net income of
$2,161,000, offset by dividends paid to shareholders of
$1,180,000.
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, 1998 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, 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, data processing expense, deposit insurance
expense and franchise tax expense.
Comparison of Operating Results for the Years Ended December 31,
1998 and 1997
General. Net income for 1998 was $2,161,000, an increase of
$154,000 or 7.7% compared to 1997. This increase resulted
primarily from increases in net interest income of $346,000 and
non-interest income of $230,000, somewhat offset by an increase in
non-interest expense of $153,000 and an increase in income tax
expense of $264,000.
Net Interest Income. Net interest income for 1998 increased to
$7,473,000 from $7,127,000, an increase of $346,000 or 4.9%.
Generally, this increase was driven by increased volume, as the
Company's net interest margin (net interest income divided by
average earning assets) declined slightly from 3.18% in 1997 to
3.08% in 1998 and its net interest spread (the difference between
the average yield on interest-earning assets and the average cost
of interest-bearing liabilities) declined from 2.59% in 1997 to
2.54% in 1998. During 1998, average interest-earning assets
increased from $224.0 million to $242.3 million, an increase of
$18.3 million or 8.2%. Also during 1998, average interest-bearing
liabilities increased from $199.0 million to $216.8 million, an
increase of $17.8 million or 8.9%.
The major factors which management believes have contributed to
this reduction in margin and spread are: (1) the relatively flat
yield curve which has existed throughout 1998, which has made it
more difficult for OHSL to earn a significant spread between its
lending and investment activities in relation to its deposit and
borrowing activities; (2) the continuation of efforts to both
protect and enhance the Company's market share of deposits,
wherein certain premium interest rates were offered to retail
deposit customers; and (3) strong local competition for both loans
and deposits has affected the pricing of some products, resulting
in lower overall profitability in some areas.
Interest Income. Interest income on loans increased $229,000
during 1998 when compared to 1997. This increase is attributable
to an increase in the average outstanding balance of loans of $2.8
million. The weighted average yield on loans remained at 8.33%,
unchanged from its 1997 level.
Interest earned on securities (including available-for-sale
securities, held-to-maturity securities and other investments)
increased by $873,000 (a 23.5% increase) in 1998 when compared to
1997. The average outstanding balance of securities increased
from $57.2 million in 1997 to $72.7 million in 1998, an increase
of $15.5 million or 27.1%. This increase in volume was somewhat
offset by lower yields in 1998, as the general level of interest
rates declined throughout the year. The weighted average yield on
both available-for-sale and held-to-maturity securities declined
in 1998.
Interest Expense. Interest expense for 1998 increased by $756,000
when compared to 1997. Generally, this increase resulted from the
carrying of larger balances of deposits and advances during 1998.
This increase was offset somewhat by a reduction in the weighted
average cost of deposits and advances in 1998 when compared to
1997.
During 1998, the Company continued its efforts to protect and to
enhance its market share of retail deposits. During 1998, the
average outstanding balance in each category of customer deposits
increased over 1997 average levels. These increases are the
result of the Company's efforts discussed above, as well as the
Company's purchase of the deposit accounts of the
Sayler Park branch of Cornerstone Bank in November of 1998. This
purchase resulted in an increase in total deposits of $11.6
million. The weighted average cost of the Company's
interest-bearing deposit accounts declined from 5.17% in 1997 to
5.11% in 1998.
The Company increased its borrowings from the Federal Home Loan
Bank of Cincinnati in 1998. The average outstanding balance of
borrowings increased from $25.6 million in 1997 to $31.4 million
in 1998, while the costs of those funds declined from 5.92% in
1997 to 5.65% in 1998. The Company utilizes Federal Home Loan
Bank advances for its funding needs 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 areas. The increase in borrowings
in 1998 was primarily related to the purchase of securities.
Provision for Loan Losses. The 1998 provision for loan losses was
$37,000 compared to $32,000 in 1997. This provision was increased
slightly over 1997 in order to recognize modest changes in the
Company's loan portfolio. As the Company has historically
followed strict underwriting guidelines in its loan origination
process, and, as the Company has prompt collection efforts in
place, minimal loan losses have been suffered. The strong asset
quality of the Company's loan portfolio has been a hallmark of the
Company for more than a decade. The Company's allowance for loan
losses as a percentage of its net loans is 0.34%, up just slightly
from 1997's 0.31%. Management believes that its asset quality
compares favorably to industry peers, and, that the allowance for
loan losses is adequate.
Non- Interest Income. Non-interest income increased from $515,000
in 1997 to $745,000 in 1998, an increase of $230,000 or 44.7%.
The primary contributor to this increase was an increase in the
net gains on loans originated for sale of $208,000. In the
current low interest rate environment, management believes that it
is prudent to sell longer-term, fixed rate residential mortgage
loans in order to manage the Company's interest rate risk. It is
likely that management will continue to sell such loans in the
future if the low interest rate environment continues. See the
Asset/Liability Management section for a further discussion of
interest rate risk.
Non-interest expense. Non-interest expense increased from
$4,580,000 in 1997 to $4,733,000 in 1998, an increase of $153,000
or 3.3%. The major factors in this change are salaries and
employee benefits and other expenses.
Salaries and benefits expense increased from $2,424,000 in 1997 to
$2,598,000 in 1998. Increases in employee compensation ($152,000)
and Employee Stock Ownership Plan ("ESOP") expense ($81,000) were
somewhat offset by reductions in health care benefits expense
($59,000).
The increase in employee compensation was the result of additional
staffing, as well as increases in incentive-based compensation
paid to loan origination personnel and to salaries attributable to
the Sayler Park branch, which was purchased by the Company in
mid-November of 1998. The increase in ESOP expense is directly
attributable to the higher levels of OHSL's stock price in
mid-1998 upon which the amount of the ESOP expense is based.
Health care costs returned to somewhat moderate levels when
compared to 1997, as certain exit and other fees were incurred in
1997 in relation to the Company's former health care plan. No
such costs were incurred in 1998.
Other costs decreased from $898,000 in 1997 to $814,000 in 1998, a
decrease of $84,000 or 9.4%. Cost reductions in several areas,
including advertising, telephone expense and outside consulting
fees, contributed to this cost reduction.
Income Tax Provision. The income tax provision increased from
$1,023,000 in 1997 to $1,287,000 in 1998, an increase of $264,000
or 25.8%. This increase is generally the result of higher levels
of pre-tax earnings recorded in 1998 when compared to 1997.
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 prior year.
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 the provision for loan losses of $23,000 and an
increase in income tax expense of $373,000.
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 higher levels of average interest-earning
assets and interest-bearing liabilities 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 in 1997 when compared to 1996. In
1996, the net interest rate spread was 2.86% for OHSL, compared to
2.59% in 1997.
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. While the
weighted average yield received on OHSL's available-for-sale
portfolio remained virtually unchanged, 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 has therefore acted
to somewhat offset the aforementioned increase in portfolio
balance.
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 deposits 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
increased over 1996 levels. The weighted average cost of the
deposit accounts also rose slightly in each category.
The Company increased its borrowings from the Federal Home Loan
Bank 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.
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.
Non-Interest Income. Non-interest income increased from $376,000
in 1996 to $515,000 in 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 14.8%. The major components of this decrease are
salaries and employee benefits expense, occupancy and equipment
expense, computer services, deposit insurance and other expenses.
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 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 branch at Cleves-Warsaw, 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, cost increases in this area were
experienced. The Company's ESOP expense, which derives its cost
from 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.
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 a 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.
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 costs 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. 133, "Accounting for Derivative Instruments and Hedging
Activities"
Effective January 1, 2000, FAS 133 will require all derivatives to
be recorded at fair value. Unless designated as hedges, changes
in these fair values will be recorded in the income statement.
Fair value changes involving hedges will generally be recorded by
offsetting gains and losses on the hedge and on the hedged item,
even if the fair value of the hedged item is not otherwise
recorded. Upon adoption of this Standard, entities may
redesignate securities as either available-for-sale or
held-to-maturity. Management does not expect adoption of this
Standard to have a material effect but the effect will depend upon
derivative holdings upon adoption.
Year 2000 Issues
Pursuant to the "Year 2000 Information and Readiness Disclosure
Act", the attached discussion of Year 2000 Issues is hereby
designated a "Year 2000 Readiness Disclosure" by OHSL Financial
Corp. and by its subsidiary, Oak Hills Savings and Loan Company,
F.A.
It is well documented that some data processing systems may
experience processing difficulties upon encountering the
millenium. This "Year 2000 Problem" is believed to be material
for virtually every public company. The following section
describes the steps which OHSL is taking to handle this serious
matter. It should be noted that this section in particular, as
well as the "Management's Discussion and Analysis" area in
general, contains "forward looking statements" which represent the
opinions of management. Such forward looking statements are
subject to numerous risks and uncertainties which obviously
accompany any discussion of future actions, performances or
results. The reader of these discussions is hereby warned of the
uncertain nature of these discussions and is urged to use caution
in relying on such forward looking statements in forming any
opinions concerning the financial results, condition or operations
of OHSL and Oak Hills.
The overall responsibility for Year 2000 readiness rests with
Kenneth L. Hanauer, the President and Chief Executive Officer of
OHSL. Due to the many diverse areas which may be affected by the
Year 2000 problem, a team approach is being utilized. Teams have
been formed to handle the following areas: (1) the review and
testing of the Company's in-house data processing system; (2) the
review of vendors (suppliers of critical services); (3) the review
of major loan customers (to determine whether interruptions of
their operations are likely and to assess the impact of such
interruptions on their ability to remit loan payments, for
example); (4) contingency planning; and (5) the review of
examination results as provided by the Company's primary
regulators.
The Company believes that its overall state of readiness at
December 31, 1998 can be described as satisfactory. An ongoing
review of the in-house data processing system is taking place,
with the major data systems already certified as Year 2000
compliant. The Company's major vendors have all been contacted,
with approximately 80% reporting Year 2000 compliance for their
product or service. The customer contact group is currently in
the process of evaluating responses from major customers. The
contingency planning group has the task of working with all areas
in order to assure uninterrupted operations and to have plans
available in the event that mission critical vendors are not Year
2000 ready.
A separate group has been formed to test the many software
applications which exist within the Company's framework. Such
tests may include mission critical areas, such as certain
applications within the Company's in-house data processing system,
as well as non-critical applications such as the video
surveillance systems within a branch office. This group intends
to test all available areas in which a proper test can be
performed.
The Company's examination group works with our primary regulator,
the OTS, in reviewing our overall progress and in addressing any
areas where deficiencies are noted. The Company believes that its
Year 2000 efforts are considered satisfactory by its primary
regulator.
The principal expense factor in addressing the Year 2000 Issue has
consisted of employee time. Year 2000 tasks have been
incorporated into the daily work routine of the Company's
employees, with minimal interruption to work flow. It is
management's opinion that some vendors will require additional
compensation for software upgrades that will need to be installed
in certain equipment in order to make such equipment Year 2000
compliant. It is management's opinion that such additional
expense will not exceed $25,000, and will therefore not materially
impact the Company's financial performance.
The risks for the Company and for OHSL in the event that certain
mission-critical systems are not Year 2000 compliant are
substantial. As a financial institution, the Company's largest
volume of transactions involve loan related matters (loan
originations, the acceptance of loan payments, escrow handling and
so forth) and deposit accounts (new account openings, additions
and withdrawals from accounts, interest crediting, checking
account transactions, etc.). The inability of the Company to
process these transactions in an efficient and timely manner would
greatly impact the Company's operations. No estimate is available
concerning possible lost revenue in the event of a material Year
2000 problem. However, such loss of revenue would likely be a
material amount which could have a serious negative impact on the
Company's financial performance and operations.
The contingency planning team is in the process of evaluating all
systems and outside vendors in order to determine which areas, if
any, require contingency plans. As of December 31, 1998, the
evaluation process continues, with no specific contingency plans
yet in place. It is anticipated that contingency plans will be
required in some areas. Decisions concerning areas requiring
contingency plans will be made over the next several months as
further information is received.
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. 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 committee
consisting of all of the Company's directors and executive
officers. This committee meets at least once per quarter to
review the Company's interest rate risk position and to make
recommendations for adjusting such position if necessary. In
addition, the asset/liability 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,
place somewhat greater emphasis on maximizing its net interest
income rather than on the strict matching of 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 estimated maturity of its asset and liability
portfolios can often provide high enough returns to justify the
increased exposure which may result from such a mismatch. The
Board of Directors has established limits on the Company's
interest rate risk based on the interest rate risk simulation
model utilized by its primary regulator, the OTS. There can be no
assurance, however, 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 routinely seeks to sell its
longer term, fixed rate mortgage loans in the secondary market.
Such sales in 1998 totaled $18.4 million. Second, the Company
holds a significant portfolio of multi-family and commercial real
estate loans having short terms to maturity and/or adjustable rate
features. Third, the Company has invested a substantial portion
of its mortgage-related securities in products having relatively
short average lives. The Company also maintains a sizeable
portfolio of short-term investments, such as mutual funds,
commercial paper and overnight type funds, which will provide a
cushion in the event of an increase in interest rates. Fourth,
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 longer-term borrowings from the Federal Home Loan
Bank in an effort to extend the term to maturity of its
liabilities.
The OTS provides quarterly Interest Rate Risk Exposure Reports for
the associations which it regulates. These reports project the
impact on the Company's "net portfolio value" under specified
interest rate movements. Net portfolio value generally consists
of the estimated value of the Company's interest sensitive assets
less the estimated value of its interest sensitive liabilities
under different interest rate scenarios. Under this methodology,
assets and liabilities (including such "off-balance sheet" items
as commitments to make loans, unused lines of credit and other
items not yet reflected as assets or liabilities) are valued
following an immediate and permanent.interest rate shock. The
resulting impact of such interest rate shocks - which are provided
for rate increases and decreases of 100, 200, 300 and 400 basis
points - are reviewed by the asset/liability committee. The
estimated impact of such interest rate shocks is provided in both
dollars and percentages. The asset/liability committee reviews
such estimated changes and compares them with guidelines adopted
in this area. The guidelines specify the maximum percentage
change which the Company is willing to accept in a given interest
rate shock environment. Any deviations in excess of board
guidelines must be analyzed by management, with prompt corrective
measures outlined for board approval.
Management and the board of directors believe that interest rate
shocks of up to 200 basis points (increase and decrease) offer the
most likely scenario and the Company's interest rate risk is
primarily designed to protect the Company's net portfolio value in
those circumstances. The following table reflects the estimated
change in the Company's net portfolio value for September 30, 1998
and 1997 under these rate shock scenarios.
Immediate Percentage change
change in rates in net portfolio value at:
Sept. 30, 1998 Sept. 30, 1997
+200 basis points -13% -17%
+100 basis points - 4% - 8%
0 basis points 0% 0%
-100 basis points - 1% + 4%
-200 basis points - 1% + 4%
All percentage changes reflected above are within board
guidelines. Management believes that its interest rate risk
position is in line with peers.
<PAGE>
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,
1998 and 1997 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, 1998. 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, 1998 and
1997, and the results of its operations and cash flows for each of
the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Indianapolis, Indiana
January 27, 1999
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and 1997
(Dollars in thousands, except per share amounts)
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,387 $ 4,652
Short-term investments 15,625 11,572
-------- --------
Cash and cash equivalents 19,012 16,224
Interest-bearing balances with
financial institutions 100 100
Available-for-sale securities 9,372 10,774
Held-to-maturity securities
(fair value of $65,526 and $34,145) 65,268 33,854
Loans held for sale 1,360 730
Loans, net of allowance ($562 and $529) 164,595 171,768
Premises and equipment - net 2,573 2,148
Federal Home Loan Bank stock 1,977 1,630
Accrued interest receivable 1,530 1,355
Other assets 1,389 322
-------- --------
$267,176 $238,905
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 4,509 $ 3,256
Interest bearing 202,246 181,434
-------- --------
Total 206,755 184,690
Advances from Federal Home Loan Bank 31,118 26,570
Accrued expenses and other liabilities 2,277 1,613
-------- --------
240,150 212,873
Shareholders' equity
Common stock ($.005 par value -
3,500,000 shares authorized;
2,870,820 and 2,852,790 shares issued) 14 14
Additional paid-in capital 14,512 14,157
Retained earnings 16,776 15,795
Unamortized cost of bank incentive plan - (1)
Unearned shares held by employee stock
ownership plan (237) (356)
Treasury stock (402,292 and 368,792 shares) (4,087) (3,607)
Accumulated other comprehensive income 48 30
-------- --------
27,026 26,032
-------- --------
$267,176 $238,905
-------- --------
-------- --------
/TABLE
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME
Loans, including related fees $14,129 $13,900 $12,850
Securities 3,727 3,244 2,977
Other 858 468 380
------- ------- -------
18,714 17,612 16,207
INTEREST EXPENSE
Deposits 9,468 8,970 8,235
Federal Home Loan Bank advances 1,773 1,515 1,054
------- ------- -------
11,241 10,485 9,289
------- ------- -------
NET INTEREST INCOME 7,473 7,127 6,918
Less provision for loan losses 37 32 9
------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,436 7,095 6,909
------- ------- -------
NON-INTEREST INCOME
Service charges and fees 279 241 224
Net gain/(loss) on loans
originated for sale 330 122 45
Gain/(loss) on securities - (4) 10
Other 136 156 97
------- ------- -------
745 515 376
NON-INTEREST EXPENSE
Salaries and employee benefits 2,598 2,424 2,194
Occupancy and equipment, net 703 679 577
Computer services 161 144 357
Deposit insurance 113 109 1,272
Franchise taxes 344 326 332
Other 814 898 669
------- ------- -------
4,733 4,580 5,401
------- ------- -------
INCOME BEFORE INCOME TAXES 3,448 3,030 1,884
Income tax expense 1,287 1,023 650
------- ------- -------
NET INCOME $ 2,161 $ 2,007 $ 1,234
------- ------- -------
------- ------- -------
Per share data
Earnings per share $ .89 $ .84 $ .51
Earnings per share,
assuming dilution .87 .81 .49
/TABLE
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Benefit Treasury Comprehensive
Stock Capital Earnings Plans Stock Income Total
------ ---------- -------- ------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $14 $13,429 $14,526 $(639) $(1,904) $28 $25,454
Bank incentive plan
amortization expense - - - 30 - - 30
Exercise of stock options
(19,764 shares) - 99 - - - - 99
Acquisition of treasury
stock (79,542 shares) - - - - (847) - (847)
Employee stock ownership
shares earned - 124 - 119 - - 243
Cash dividends ($.38/share) - - (921) - - - (921)
Comprehensive income
Net income - - 1,234 - - - 1,234
Change in net unrealized
gain (loss) on securities
available for sale, net
of reclassification and
tax effects - - - - - (96) (96)
Total comprehensive
income - - - - - - 1,138
--------------------------------------------------------------------
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
(49,568 shares) - 337 - - - - 337
Acquisition of treasury
stock (74,090 shares) - - - - (856) - (856)
Employee stock ownership
shares earned - 168 - 119 - - 287
Cash dividends ($.44/share) - - (1,051) - - - (1,051)
Comprehensive income
Net income - - 2,007 - - - 2,007
Change in net unrealized
gain (loss) on securi-
ties available for
sale, net of reclassi-
fication and tax
effects - - - - - 98 98
Total comprehensive
income - - - - - - 2,105
--------------------------------------------------------------------
Balance, December 31, 1997 14 14,157 15,795 (357) (3,607) 30 26,032
Bank incentive plan
amortization expense - - - 1 - - 1
Exercise of stock options
(18,030 shares) - 106 - - - - 106
Acquisition of treasury
stock (33,500 shares) - - - - (480) - (480)
Employee stock ownership
shares earned - 249 - 119 - - 368
Cash dividends ($.47/share) - - (1,180) - - - (1,180)
Comprehensive income
Net income - - 2,161 - - - 2,161
Change in net unrealized
gain (loss) on securi-
ties available for
sale, net of reclassi-
fication and tax
effects - - - - - 18 18
Total comprehensive
income - - - - - - 2,179
--------------------------------------------------------------------
Balance, December 31, 1998 $14 $14,512 $16,776 $(237) $(4,087) $48 $27,026
--------------------------------------------------------------------
--------------------------------------------------------------------
/TABLE
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
(Dollars in thousands)
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,161 $ 2,007 $ 1,234
Reconciling items
Depreciation and amortization 339 352 247
Net amortization/(accretion) on securities (20) (57) 16
Amortization of intangible assets 10 - -
Provision for loan losses 37 32 9
(Gain)/loss on securities - 4 (10)
Deferred loan fees (202) (194) (194)
Federal Home Loan Bank stock dividends (133) (112) (101)
Employee stock ownership shares earned 368 287 243
Net change in:
Loans held for sale (630) (294) 566
Interest receivable and other assets (274) 28 (192)
Accrued expenses and other liabilities 655 (220) 63
-------- -------- --------
Net cash from operating activities 2,311 1,833 1,881
Cash flows from investing activities
Net change in interest-bearing balances with
financial institutions - - 500
Purchase of held-to-maturity securities (57,837) (17,519) (13,220)
Proceeds from maturities and repayments of
held-to-maturity securities 26,462 12,859 11,897
Purchase of available-for-sale securities (3,300) - (3,815)
Proceeds from maturities and repayments of
available-for-sale securities 4,710 1,561 1,399
Proceeds from sales of available-for-sale securities - 1,805 2,004
Purchase of FHLB Stock (214) - -
Loans made to customers net of payments received 7,338 (13,585) (15,685)
Purchase of property and equipment (626) (102) (1,125)
Net cash received upon branch acquisition 10,543 - -
-----------------------------------
Net cash from investing activities (12,924) (14,981) (18,045)
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
(Dollars in thousands)
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from financing activities
Net change in deposits $10,423 $15,204 $10,172
Activity in Federal Home Loan Bank advances
Draws 28,000 23,500 28,500
Repayments (23,452) (16,046) (26,784)
Purchase of treasury stock (480) (856) (847)
Exercise of stock options 90 248 99
Cash dividends (1,180) (1,051) (921)
-----------------------------------
Net cash from financing activities 13,401 20,999 10,219
-----------------------------------
Net change in cash and cash equivalents 2,788 7,851 (5,945)
Cash and cash equivalents at beginning of year 16,224 8,373 14,318
Cash and cash equivalents at end of year $19,012 $16,224 $ 8,373
-----------------------------------
-----------------------------------
Cash paid during the period for
Interest $11,274 $10,467 $ 9,164
Income taxes 876 1,029 602
</TABLE>
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and 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.
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 multi-family 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 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 in other
comprehensive income. Other securities such as Federal Home Loan
Bank stock are carried at cost.
Interest income includes amortization of purchase premium or
discount. Gains and losses on sales are based on the amortized
cost of the security sold. Securities are written down to fair
value when a decline in fair value is not temporary.
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. Payments received on such loans are
reported as principal reductions.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 form 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.
Foreclosed Assets: Assets acquired through or instead of loan
foreclosures are initially recorded at fair value when acquired,
establishing a new cost basis. If fair value declines, a
valuation allowance is recorded through expense. Costs after
acquisition are expensed.
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, secondary,
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.
Intangibles: Purchased intangibles consisting of goodwill and
core deposit value, are recorded at cost and amortized over their
estimated lives of 18 and 10 years.
Employee Stock Ownership Plan: The cost of shares issued to the
ESOP, but not yet allocated to participants, is shown as a
reduction of shareholders' equity. Compensation expense is based
on the market price of shares as they are committed to be released
to participant accounts. Dividends on allocated ESOP shares
reduce retained earnings; dividends on unearned ESOP shares reduce
debt and accrued interest.
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.
Long-term Assets: These assets are reviewed for impairment when
events indicate their carrying amounts may not be recoverable from
future undiscounted cash flows. If impaired, the assets are
recorded at discounted amounts.
Loss Contingencies: Loss contingencies, including claims and
legal actions arising in the ordinary course of business, are
recorded as liabilities when the likelihood of loss is probable
and an amount or range of loss can be reasonably estimated.
Management does not believe there now are such matters that will
have a material effect on the financial statements.
Earnings Per Share: Earnings per share is net income divided by
the weighted average number of common shares outstanding during
the period. ESOP shares are considered outstanding for this
calculation unless unearned. Diluted earnings per share includes
the dilutive effect of additional potential common shares issuable
under stock options. Earnings and dividends per share are
restated for all stock splits and dividends through the date of
issue of the financial statements.
Dividend Restriction: Banking regulations require the maintenance
of certain capital levels and may limit the amount of dividends
which may be paid by the Company to OHSL or by OHSL to its
shareholders.
Financial Instruments: Financial instruments include credit
instruments, such as commitments to make loans and standby letters
of credit, issued to meet customer financing needs. The face
amount of these items represents the exposure to loss, before
considering customer collateral or ability to pay.
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.
Comprehensive Income: Comprehensive income consists of net income
and other comprehensive income. Other comprehensive income
includes unrealized gains and losses on securities available for
sale which are also recognized as separate components of equity.
The accounting standard that requires reporting comprehensive
income first applies for 1998, with prior information restated to
be comparable.
New Accounting Pronouncements: Beginning January 1, 2000, a new
accounting standard will require all derivatives to be recorded at
fair value. Unless designated as hedges, changes in these fair
values will be recorded in the income statement. Fair value
changes involving hedges will generally be recorded by offsetting
gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is
not expected to have a material effect but the effect will depend
on derivative holdings when this standard applies.
Industry Segment: Internal financial information is primarily
reported and aggregated in one line of business, banking.
<PAGE>
NOTE 2 - SECURITIES
<TABLE>
Year-end securities were as follows:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-Sale Cost Gains Losses Value
-----------------------------------------------------
<S> <C> <C> <C> <C>
1998
Corporate notes $ 500 $ 8 $ - $ 508
Mutual funds 2,798 59 (39) 2,818
Mortgage-backed securities 6,001 48 (3) 6,046
-----------------------------------------------------
$ 9,299 $115 $ (42) $ 9,372
-----------------------------------------------------
-----------------------------------------------------
1997
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
-----------------------------------------------------
-----------------------------------------------------
Held-to-Maturity
1998
Obligations of U.S. Government Agencies $10,102 $ 71 $ (25) $10,148
Tax-free obligations 3,059 74 (20) 3,113
Collateralized mortgage obligations 33,908 184 (70) 34,022
Mortgage-backed securities 18,199 75 (31) 18,243
-----------------------------------------------------
$65,268 $404 $ (146) $65,526
-----------------------------------------------------
-----------------------------------------------------
1997
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
<PAGE>
NOTE 2 -- SECURITIES (Continued)
Sales of available-for-sale securities generated gross gains of $2
and $22, and gross losses of $6 and $12 in 1997 and 1996. There
were no sales of available-for-sale securities in 1998.
The amortized cost and fair value of securities at December 31,
1998, by contractual 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.
<PAGE>
<TABLE>
Available-for-Sale Held-to-Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
Due within one year $ - $ - $ 1,096 $ 1,099
Due after one year through five years - - 2,881 2,933
Due after five years through ten years 500 508 263 285
Due after ten years - - 8,921 8,944
Mutual funds 2,798 2,818 - -
Collateralized mortgage obligations
and mortgage backed securities 6,001 6,046 52,107 52,265
-------------------------------------------------------
$9,299 $9,372 $65,268 $65,526
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
To secure public deposits at December 31, 1998 and 1997, the
Company has pledged a portion of one of its mortgage-backed
securities. The carrying and fair value of the pledged
portion was $525 at December 31, 1998.
<PAGE>
<TABLE>
NOTE 3 - LOANS
Loans consist of the following:
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Mortgage loans secured by:
One-to-four family residences $103,158 $109,506
Other properties 41,766 43,619
Construction 15,358 9,366
Loans on savings accounts 255 218
Second mortgage loans 2,070 1,846
Home improvement loans 348 577
Consumer loans 5,318 6,214
Automobile loans 2,780 4,070
Educational loans 198 257
-------- ---------
Gross loans receivable 171,251 175,673
Allowance for loan losses (562) (529)
Undisbursed portion of loans
in process (6,123) (3,203)
Deferred loan fees, net 29 (173)
-----------------------
$164,595 $171,768
-----------------------
-----------------------
</TABLE>
Mortgage loans serviced for others, primarily the FHLMC, are not
included above and totaled $36,527 and $26,042 at year-end 1998
and 1997.
Activity for capitalized originated mortgage servicing rights was
as follows:
1998 1997 1996
---------------------------
Beginning of year $ 60 $ 27 $ -
Additions 208 53 33
Amortized to expense (77) (20) (6)
---------------------------
End of year $191 $ 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, 1998 or 1997.
The balance of loans on non-accrual status was not significant at
December 31, 1998 or 1997.
The Company had no loans designated as impaired at December 31,
1998 or 1997, nor were any loans so designated during 1998, 1997
or 1996.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are summarized as
follows:
1998 1997 1996
---------------------------
Balance at beginning of period $529 $499 $515
Provision for loan losses 37 32 9
Loan charge-offs (8) (2) (25)
Recoveries 4 - -
---------------------------
Balance at end of period $562 $529 $499
---------------------------
---------------------------
NOTE 5 - PREMISES AND EQUIPMENT
A summary of office properties and equipment is as follows:
1998 1997
Land $ 145 $ 126
Premises and improvements 3,004 2,407
Furniture and equipment 2,728 2,580
-------------------
$5,877 $5,113
Accumulated depreciation
and amortization 3,304 2,965
-------------------
$2,573 $2,148
-------------------
-------------------
NOTE 6 - DEPOSITS
At December 31, 1998, scheduled maturities of time deposits are as
follows:
1999 $ 74,754
2000 40,761
2001 15,981
2002 3,907
2003 5,058
Thereafter 1,043
--------
$141,504
Time deposits of $100 or more were $22,419 and $20,862 at year-end
1998 and 1997.
NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Cincinnati (FHLB) at
December 31, 1998 consist of the following:
Weighted Average
Interest Rate
at December 31,
Final Maturity 1998 Amount
- -------------------------------------------------------------
1999 5.84% $ 833
2000 6.25 300
2001 5.26 7,417
2002 5.99 4,000
2006 6.57 1,568
2008 5.31 17,000
--------
$31,118
--------
--------
Required annual principal payments are as follows:
Year Ending
- -----------
1999 $ 1,200
2000 267
2001 7,083
2002 4,000
2003 -
Thereafter 18,568
-------
$31,118
-------
-------
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. Several of
the Company's advances are subject to call by the FHLB. Such
call(s), if realized, could significantly alter the maturity
structure of advances as shown above.
NOTE 8 - CAPITAL REQUIREMENTS
The Company is subject to 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, 1998 and 1997.<PAGE>
<TABLE>
At December 31, under these capital requirements the Company had:
<CAPTION>
OTS FDIC
Minimum Required
Required For Capital Minimum To Be
Actual Adequacy Purposes "Well Capitalized"
-----------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
Total Capital (to Risk
Weighted Assets) $19,473 15.88% $9,809 8.00% $12,261 10.00%
Tier I Capital (Core
Capital) (to Risk
Weighted Assets) 18,927 15.44% 4,904 4.00% 7,357 6.00%
Tier 1 Capital (Core
Capital) (to Adjusted
Assets) 18,927 7.30% 7,776 3.00% 12,960 5.00%
Tangible Capital (to
Adjusted Assets) 18,927 7.30% 3,888 1.50% N/A N/A
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% 7,020 3.00% 11,702 5.00%
Tangible Capital
(to Adjusted Assets) 20,515 8.77% 3,510 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 $546 and $520 at December 31, 1998 and 1997.
The Qualified Thrift Lender test requires at least 65% of assets
be maintained in housing-related finance and other specified
areas. If this test is not met, limits are placed on growth,
branching, new investments, FHLB advances and dividends, or the
Company must convert to a commercial bank charter. Management
believes that this test is met.
OTS regulations limit capital distributions by savings
institutions. The least restriction is placed on "tier 1"
institutions, defined as well-capitalized and with favorable
qualitative OTS examination ratings, which can make distributions
in a year up to one-half the capital in excess of the most
stringent capital requirement at the beginning of the year plus
net income to date. Other institutions have more stringent
requirements, the most restrictive being prior OTS approval of any
capital distribution. The Company is a tier 1 institution.
The Company converted from a mutual to a stock institution, and a
"liquidation account" was established at $10,998, which was net
worth reported in the conversion prospectus. Eligible depositors
who have maintained their accounts, less annual reductions to the
extent they have reduced their deposits, would receive a
distribution from this account if the Company liquidated.
NOTE 9 - BENEFIT PLANS
OHSL shareholders approved a Stock Option Plan which reserved
271,320 shares of common stock for granting options to directors
and officers of OHSL and the Company. Options are to be granted
at values not less than the fair market value of the shares at the
date of the grant and must be exercised within ten years of grant.
There were 249,592 options granted during 1993 at a price of $5
per share and all were exercisable upon grant. No options have
been granted since that time and no options have been forfeited.
At December 31, 1998, 91,972 options remain outstanding and all
are currently vested and exercisable.
The ESOP purchased 7%, or 189,924 shares, of the stock offered in
the conversion. The funds used by the EOSP to purchase the stock
were provided by a loan from OHSL which will be repaid by
contributions to the ESOP by the Company. Pursuant to the ESOP,
23,740 shares are allocated to participants annually, based upon
employee compensation levels during the year. ESOP expense
totaled $368, $287 and $243 for 1998, 1997 and 1996.
Information regarding the ESOP at year end is as follows:
1998 1997
Unearned shares $71,224 $94,964
Fair value of unsecured shares $ 988 $ 1,282
Share released for allocation 23,740 23,740
Shares allocated to participants 94,960 71,220
The Company maintains a noncontributing 401(k) profit sharing
plan. Contributions are at the discretion of the Board of
Directors and totaled $97, $77 and $67 for 1998, 1997 and 1996.
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
Some financial instruments, such as loan commitments, credit
lines, letters of credit and overdraft protection, are issued to
meet customer financing needs. These are agreements to provide
credit or to support the credit of others, as long as conditions
established in the contract are met, and usually have expiration
dates. Commitments may expire without being used. Off-balance-sheet risk to
credit loss exists up to the face amount of these
instruments, although material losses are not anticipated. The
same credit policies are used to make such commitments as are used
for loans, including obtaining collateral at exercise of the
commitment.
At year-end these financial instruments are summarized as follows:
1998 1997
Commitments to make loans:
Fixed rate $2,263 $ 822
Variable rate 208 160
Unused portions of lines of credit 5,576 4,608
Standby letters of credit 71 41
The commitments to make loans relate to residential mortgage
loans. Generally such commitments are for 45 days. At December
31, 1998, the fixed rate loan commitments had an average rate of
7.15%. The lines of credit are primarily variable rate home
equity lines of credit.
NOTE 11 - INCOME TAX EXPENSE
An analysis of income tax expense is as follows:
1998 1997 1996
Current $1,253 $ 834 $ 567
Deferred 34 189 83
----------------------------
$1,287 $1,023 $ 650
The difference between the financial statement income tax expense
and amounts computed using the statutory federal tax rate of 34%
is reconciled as follows:
1998 1997 1996
Income tax provision computed
at statutory rate $1,172 $1,029 $ 641
Effect of:
Tax-exempt interest (32) (17) (15)
ESOP expense 85 57 42
Other 62 (46) (18)
----------------------------
$1,287 $1,023 $ 650
Year-end deferred tax assets and liabilities were due to the
following factors:
1998 1997
Deferred tax receivable from:
Deferred loan fees $ - $ 59
Other 11 8
------------------
11 67
Deferred tax liability for:
Bad debt deductions (143) (221)
FHLB stock dividends (338) (293)
Depreciation (56) (41)
Mortgage servicing rights (65) (20)
Unrealized gain on available-
for-sale securities (25) (17)
Other (9) (58)
-------------------
(636) (650)
Valuation allowance for deferred
tax assets - -
-------------------
Net $(625) $(583)
-------------------
-------------------
Federal income tax laws provided additional bad debt deductions
through 1987, totaling $2,300. Accounting standards do not
require a deferred tax liability to be recorded on this amount,
which liability otherwise would total $782 at December 31, 1998.
If the Company was liquidated or otherwise ceased to be a thrift
or if tax laws were to change, this amount would be expensed.
Under 1996 tax law changes, bad debts are based on actual loss
experience and tax bad debt reserves accumulated since 1987 are to
be reduced. This requires payment of approximately $67 over six
years beginning in 1998.
NOTE 12 - EARNINGS PER SHARE
The following table presents the number of shares used to compute
earnings per share:
1998 1997 1996
Weighted average shares
outstanding used to
compute earnings per
share 2,429,588 2,398,428 2,440,722
Effect of potentially
dilutive shares 58,196 72,600 70,482
Shares used to compute
diluted earnings per
share 2,487,784 2,471,028 2,511,204
<PAGE>
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
The fair values of the Company's financial instruments are as follows:
<CAPTION>
1998 1997
Carrying Fair Carrying Fair
Value Value Value Value
-------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and short-term investments $ 19,112 $ 19,112 $ 16,324 $ 16,324
Available-for-sale securities 9,372 9,372 10,774 10,774
Held-to-maturity-securities 65,268 65,526 33,854 34,145
Loans (net) 165,955 169,603 172,498 177,538
FHLB stock 1,977 1,977 1,630 1,630
Accrued interest receivable 1,530 1,530 1,355 1,355
Financial liabilities
Deposits (206,755) (208,057) (184,690) (185,481)
FHLB Advances (31,118) (32,846) (26,570) (26,456)
Accrued interest payable (200) (200) (233) (233)
</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.
<PAGE>
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
December 31, 1998 and 1997
1998 1997
ASSETS
Cash and cash equivalents $ 2,189 $ 454
Investment in subsidiary 19,923 20,457
Securities 4,843 4,516
Loan to ESOP 356 475
Other assets 83 207
-----------------------
$27,394 $26,109
-----------------------
-----------------------
LIABILITIES 368 77
SHAREHOLDERS' EQUITY 27,026 26,032
-----------------------
$27,394 $26,109
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
Dividends from the Company $3,000 $1,200 $1,200
Other income 273 312 312
Operating expenses (161) (151) (162)
Income tax provision (37) (6) (52)
Equity in undistributed income
of the Company (914) 652 (64)
----------------------------------
Net income $2,161 $2,007 $1,234
----------------------------------
----------------------------------
<PAGE>
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating
activities
Net income $2,161 $2,007 $1,234
Adjustments:
Equity in undistributed
Company income 914 (652) 64
Net accretion on securities (7) (14) (7)
Change in other assets 137 (13) 18
Change in other liabilities 291 (670) 453
------------------------------
Net cash from operating
activities 3,496 658 1,762
Cash flows from investing
activities
Purchase of securities (2,583) (959) -
Maturity of securities 2,273 602 627
ESOP loan repayment 119 119 119
------------------------------
Net cash from investing
activities (191) (238) 746
Cash flows from financing
activities
Cash dividends (1,180) (1,051) (921)
Purchase of treasury stock (480) (856) (847)
Exercise of stock options 90 248 99
------------------------------
Net cash from financing
activities (1,570) (1,659) (1,669)
Net changes in cash and cash
equivalents 1,735 (1,239) 839
Cash and cash equivalents at
beginning of year 454 1,693 854
------------------------------
Cash and cash equivalents at
end of year $2,189 $ 454 $1,693
------------------------------
------------------------------
</TABLE>
NOTE 15 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as
follows:
1998 1997 1996
Unrealized holding gains and losses
available-for-sale securities $26 $146 $(135)
Less reclassification adjustments
for gains and losses later
recognized in income - 4 (10)
-----------------------------
Net unrealized gains and losses 26 150 (145)
Tax effect (8) (52) 49
-----------------------------
$18 $ 98 $ (96)
NOTE 16 - BRANCH ACQUISITION
During November 1998, the Company completed the acquisition of a
branch facility. Deposit liabilities with a fair value of $11,642
were assumed and fixed assets with a fair value of $138 were
acquired. The Company recorded an intangible asset of $961,
representing core deposit value and goodwill.
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
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 27, 1999, on the consolidated
statements of financial condition of OHSL Financial Corp. as of
December 31, 1998 and 1997 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, 1998, which
report is included in Form 10-KSB of OHSL Financial Corp. for the
year ended December 31, 1998.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
March 30, 1999
Indianapolis, Indiana
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,387
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 7,003
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,372
<INVESTMENTS-CARRYING> 65,268
<INVESTMENTS-MARKET> 65,526
<LOANS> 172,330
<ALLOWANCE> 562
<TOTAL-ASSETS> 267,176
<DEPOSITS> 206,755
<SHORT-TERM> 1,588
<LIABILITIES-OTHER> 2,277
<LONG-TERM> 29,530
0
0
<COMMON> 14
<OTHER-SE> 27,012
<TOTAL-LIABILITIES-AND-EQUITY> 267,176
<INTEREST-LOAN> 3,453
<INTEREST-INVEST> 1,135
<INTEREST-OTHER> 129
<INTEREST-TOTAL> 4,717
<INTEREST-DEPOSIT> 2,402
<INTEREST-EXPENSE> 2,840
<INTEREST-INCOME-NET> 1,877
<LOAN-LOSSES> 11
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,240
<INCOME-PRETAX> 835
<INCOME-PRE-EXTRAORDINARY> 835
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 524
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.21
<YIELD-ACTUAL> 2.98
<LOANS-NON> 197
<LOANS-PAST> 122
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 551
<CHARGE-OFFS> 0
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 562
<ALLOWANCE-DOMESTIC> 377
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 185
</TABLE>
