UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended September 30, 2005
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period ________________________
Commission File Number 0-49619
PEOPLES OHIO FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 31-1795575
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
635 South Market Street, Troy, Ohio 45373
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, including Area Code (937) 339-5000
_________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
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 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILLING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
----- -----
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER(AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT).
YES NO X
----- -----
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT).
YES NO X
----- -----
As of NOVEMBER 14, 2005, there were 7,331,629 common shares of the registrant
issued and outstanding.
1
PEOPLES OHIO FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
2005 and June 30, 2005.
Condensed Consolidated Statements of Income for the
three months ended September 30, 2005 and 2004.
Condensed Consolidated Statements of Cash Flows for the
three months ended September 30, 2005 and 2004.
Condensed Consolidated Statement of Shareholders' Equity
for three months ended September 30, 2005.
Notes to Condensed Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Item 4. Controls and Procedures.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits.
SIGNATURE PAGE
INDEX TO EXHIBITS
2
ITEM 1. FINANCIAL STATEMENTS
PEOPLES OHIO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30
2005 JUNE 30
(UNAUDITED) 2005
------------ ------------
ASSETS
Cash and cash equivalents $ 5,912,006 $ 8,991,963
Held-to -maturity securities (fair value $459,000 and $486,000) 458,536 460,690
Available-for-sale securities 3,803,053 3,960,867
Loans, net of allowance for loan losses of $750,971 and $725,090 175,125,347 171,187,044
Premises and equipment 3,967,400 4,053,989
Federal Home Loan Bank stock 5,806,100 5,735,700
Interest receivable 771,487 733,000
Bank-owned life insurance 4,404,569 4,362,364
Other assets 360,755 395,252
------------ ------------
Total assets $200,609,253 $199,880,869
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $123,668,792 $126,520,450
Federal Home Loan Bank (FHLB) advances 49,380,529 46,123,030
Interest payable 273,591 156,400
Other liabilities 1,750,057 1,655,503
------------ ------------
Total liabilities 175,072,969 174,455,383
------------ ------------
Commitments and Contingent Liabilities -- --
Equity from ESOP Shares 634,499 500,278
Shareholders' equity:
Preferred stock, no par value, 1,000,000 shares
authorized; none issued or outstanding -- --
Common stock, no par value, 15,000,000 shares
authorized; 7,583,652 and 7,583,652 shares issued less
ESOP shares of 112,019 and 112,019 7,461,633 7,461,633
Additional paid-in capital 69,084 51,548
Treasury stock, at cost, 252,023 and 301,843 shares (1,064,525) (1,265,922)
Accumulated other comprehensive income (29,876) (6,455)
Retained earnings 18,465,469 18,684,404
------------ ------------
Total shareholders' equity 24,901,785 24,925,208
------------ ------------
Total liabilities and shareholders' equity $200,609,253 $199,880,869
============ ============
See notes to condensed consolidated financial statements
3
PEOPLES OHIO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
THREE MONTHS ENDED
30-SEP
-----------------------
2005 2004
---------- ----------
INTEREST INCOME
Interest and fees on loans $2,834,395 $2,480,863
Interest on mortgage-backed securities and other securities 42,569 152,728
Other interest and dividend income 100,574 74,084
---------- ----------
Total interest income 2,977,538 2,707,675
---------- ----------
INTEREST EXPENSE
Deposits 488,589 286,488
Borrowings 593,325 702,986
---------- ----------
Total interest expense 1,081,914 989,474
---------- ----------
Net interest income 1,895,624 1,718,201
PROVISION FOR LOAN LOSSES 30,000 30,000
---------- ----------
Net interest income after provision for loan losses 1,865,624 1,688,201
---------- ----------
OTHER INCOME
Service charges on deposit accounts and other 73,049 76,501
Service charges derived from ATM 51,645 45,981
Overdraft / NSF fees 231,804 232,264
Fiduciary activities 127,990 132,600
Increase in cash value of bank owned life insurance 46,806 49,024
Gain on sale of credit card portfolio 121,420 0
Other income 5,989 6,463
---------- ----------
Total other income 658,703 542,833
---------- ----------
OTHER EXPENSES
Salaries and employee benefits 829,990 720,258
Director fees 48,150 39,000
Net occupancy expenses 113,856 109,212
Equipment expenses 29,967 34,492
Professional services 88,130 74,408
Advertising 32,453 34,026
Data processing fees 149,145 183,769
State of Ohio franchise taxes 60,502 75,000
Other expenses 367,916 339,494
---------- ----------
Total other expenses 1,720,109 1,609,659
---------- ----------
INCOME BEFORE FEDERAL INCOME TAX 804,218 621,375
FEDERAL INCOME TAX EXPENSE 257,520 199,661
---------- ----------
NET INCOME $ 546,698 $ 421,714
========== ==========
PER SHARES DATA:
BASIC EARNINGS PER SHARE $ 0.07 $ 0.06
DILUTED EARNINGS PER SHARE $ 0.07 $ 0.06
DIVIDENDS PER SHARE $ 0.07 $ 0.065
See notes to condensed consolidated financial statements
4
PEOPLES OHIO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
2005 2004
------------ -----------
OPERATING ACTIVITIES
Net income $ 546,698 $ 421,714
Adjustments to reconcile net income
to net cash provided by operating activities
Provision for loan losses 30,000 30,000
Depreciation and amortization 87,782 96,903
Investment securities amortization (accretion), net 3,661 (6,389)
Federal Home Loan Bank stock dividends (70,400) (58,600)
Increase in cash surrender value of life insurance 42,205 45,815
Net change in other assets/ other liabilities 139,678 824,514
------------ -----------
Net cash provided by operating activities 779,624 1,353,957
------------ -----------
INVESTING ACTIVITIES
Net change in loans (3,968,303) (5,389,565)
Proceeds from maturities of securities held to maturity 1,908 2,062
Proceeds from maturities of securities available for sale 118,914 418,748
Purchases of premises and equipment (1,193) (3,352)
------------ -----------
Net cash provided (used) by investing activities (3,848,674) (4,972,107)
------------ -----------
FINANCING ACTIVITIES
Net change in
Interest-bearing demand and savings deposits 2,173,317 (4,606,152)
Certificates of deposit (5,024,975) (457,266)
Proceeds from FHLB advances 17,000,000 15,732,000
Repayment of FHLB advances (13,742,501) (9,201,850)
Cash dividends (513,214) (471,624)
Proceeds from exercise of stock options 96,466 (370,020)
Purchase/Reissuance of treasury stock 0 97,728
------------ -----------
Net cash provided (used) by financing activities (10,907) 722,816
------------ -----------
Net Change in Cash and Cash Equivalents (3,079,957) (2,895,334)
Cash and cash equivalents, Beginning of Period 8,991,963 10,875,107
------------ -----------
Cash and cash equivalents, End of Period $ 5,912,006 $ 7,979,773
============ ===========
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 964,723 $ 973,754
Income tax paid -- --
See notes to condensed consolidated financial statements
5
PEOPLES OHIO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
(UNAUDITED)
Accumulated
Additional other Total
Common paid-in Retained Treasury comprehensive shareholders'
stock capital earnings stock income equity
---------- ---------- ----------- ----------- ------------- -------------
BALANCE AT JUNE 30, 2005 $7,461,633 $51,548 $18,684,404 ($1,265,922) ($6,455) $24,925,208
Net income -- -- 546,698 546,698
Net change in Unrealized Gain/Loss
on AFS Securities (23,421) (23,421)
-----------
Total comprehensive income 523,277
Cash dividends declared
on common stock ($.07 per share) -- (513,214) (513,214)
Exercise of stock options (118,198) 201,397 83,199
Tax benefit from exercise of stock
options -- 4,269 0 4,269
Compensation expense related
to vested stock options 13,267 13,267
Net change in equity from ESOP
shares -- (134,221) (134,221)
---------- ------- ----------- ----------- -------- -----------
BALANCE AT SEPTEMBER 30, 2005 $7,461,633 $69,084 $18,465,469 ($1,064,525) ($29,876) $24,901,785
========== ======= =========== =========== ======== ===========
6
PEOPLES OHIO FINANCIAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Form 10-Q instructions and Article 10 of Regulation
S-X, and, in the opinion of management, reflect all adjustments necessary to
present fairly the financial position as of September 30, 2005 and June 30,
2005, the results of operations and the cash flows for the three-month periods
ended September 30, 2005 and 2004.
All adjustments to the financial statements were normal and recurring in nature.
These results have been determined on the basis of accounting principles
generally accepted in the United States of America. The results of operations
for the three months ended September 30, 2005, are not necessarily indicative of
results for the entire fiscal year.
The condensed consolidated balance sheet of the Peoples Ohio Financial
Corporation (the "Company") as of June 30, 2005 has been derived from the
audited consolidated balance sheet of the Company as of that date.
The condensed consolidated financial statements are those of the Company and
Peoples Savings Bank of Troy (the "Bank"). Certain information and footnote
disclosures normally included in the Company's financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to rules and regulations of the
Securities and Exchange Commission, although the Company believes that the
disclosures made are adequate and do not make the information misleading. These
condensed consolidated financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Company's
2005 Annual Report to Shareholders.
(2) Earnings Per Share
The following table is for the three-month periods ending September 30, 2005 and
2004 and reflects the weighted average number of shares of common stock for both
basic and diluted earnings per share ("EPS") as well as the dilutive effect of
stock options.
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
2005 2004
--------- ---------
Weighted average number of common shares
outstanding (basic EPS) 7,314,348 7,273,138
Dilutive effect of stock options 96,756 146,967
--------- ---------
Weighted average number of common shares
and equivalents outstanding (diluted EPS) 7,411,104 7,420,105
========= =========
Options to purchase 135,370 shares of common stock with exercise prices ranging
from $6.81 to $8.13 per share were outstanding at September 30, 2005 and 2004,
but were not included in the computation of diluted EPS because such exercise
prices were greater than the average market price of the common shares.
(3) Change in Accounting Principle
Effective July 1, 2005, the Company adopted Statement of Financial Accounting
Standards No. 123 (R), Share-Based Payment ("SFAS 123 (R)"). SFAS 123 (R)
addresses all forms of share-based payment awards, including shares under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights. The Company has elected the modified prospective
application and, as a result, has recorded approximately $13,000 in compensation
expense related to vested stock options less estimated forfeitures for the
three-month period ended
7
September 30, 2005. Certain disclosures required by SFAS 123 (R), have been
omitted due to their immaterial nature.
(4) Stock Options
The Company has a stock-based employee compensation plan. Prior to July 1, 2005,
the Company accounted for this plan under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost was reflected
in net income, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the grant date. The
following table illustrates the effect on net income and earnings per share as
if the Company had applied the fair value provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
The pro-forma effect on income for the period presented includes the effect of
forfeitures.
THREE MONTHS
ENDED
SEPTEMBER 30,
-------------
2004
-------------
(amounts in thousands except per share data)
Net income, as reported $ 422
Less: Total stock-based employee compensation
cost determined under the fair value based
method, net of income taxes (11)
-----
Pro forma net income $ 411
=====
Earnings per share:
Basic - as reported $0.06
Basic - pro forma $0.06
Diluted - as reported $0.06
Diluted - pro forma $0.06
(5) Employee Benefit Plans
The Bank has a noncontributory defined benefit pension plan covering
substantially all employees. Components of the net periodic benefits costs of
the plan are as follows:
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
2005 2004
---- ----
(amounts in thousands)
Service cost $ 24 $ 24
Expected return on plan assets (14) (10)
Interest cost 21 19
Amortization of prior service cost (1) (1)
Recognized net actuarial loss 4 4
---- ----
Net periodic cost $ 34 $ 36
==== ====
Actual contributions to the plan $ 0 $ 0
(6) Merger Agreement
The Company and the Bank entered into an Agreement and Plan of Merger (the
"Merger Agreement") dated September 28, 2005, with MainsSource Financial Group,
Inc. A copy of the Merger Agreement was attached as an exhibit to the Company's
Current Report on Form 8-K, which was filed with the SEC on September 29, 2005.
A copy of the Merger Agreement was included as an exhibit to the Company's
Current Report on Form 8-K, filed on September 29, 2005, a copy of which can be
obtained free of charge at www.sec.gov.
8
The transaction is expected to close in the first quarter of 2006; however, it
is subject to a number of conditions precedent to the merger. While the Company
believes the transaction will occur, there can be no assurance. If the
transaction is terminated, the Company could incur certain costs as discussed in
the Merger Agreement.
Upon the closing of the proposed transaction, the Company will record a number
of charges including certain change-in-control payments to certain officers that
will have a material impact on the consolidated financial Statements. At
September 30, 2005, no accrual has been made for these charges.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Peoples Ohio Financial Corporation (the "Company") is based in west central Ohio
and is the parent company of Peoples Savings Bank of Troy (the "Bank"). The
Company was formed during the year ended June 30, 2002 to provide various
benefits to the Bank, as well as to take advantage of a more effective structure
for expanded financial activities. The Bank, a state chartered savings bank, was
originally chartered in 1890. The Bank is primarily engaged in attracting
deposits from Miami and northern Montgomery counties and originating mortgage
loans throughout those same areas. All references to the Company include the
Bank unless otherwise indicated.
On September 28, 2005, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with MainSource Financial Group, Inc. The Merger
Agreement provides that the Company will be merged with and into MainSource,
with MainSource being the surviving corporation. The Bank shall immediately
thereafter merge with and into a to-be-formed interim Ohio commercial bank and
wholly-owned subsidiary of MainSource. As a result of the transactions, the Bank
will become a wholly owned subsidiary of MainSource.
The Company's stockholders will receive, in exchange for shares of Company
stock, shares of MainSource common stock or cash, or a combination of stock and
cash, subject to MainSource's ability to limit such stock consideration to 75%
of the total consideration. The stock portion of the consideration furnished to
the Company's shareholders is intended to qualify as a tax-free transaction.
The transaction is subject to certain conditions as further described in the
Merger Agreement, including the prior approval of the Company's shareholders at
a future special shareholders meeting to be called by the Company's Board of
Directors, and applicable regulatory authorities. The merger is anticipated to
close in the first quarter of 2006. A copy of the Merger Agreement was included
as an exhibit to the Company's Current Report on Form 8-K, filed on September
29, 2005, a copy of which can be obtained free of charge at www.sec.gov.
FORWARD LOOKING STATEMENTS
In addition to historical information, this Form 10-Q may include certain
forward-looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the composition or quality of the Bank's loan
and investment portfolios, changes in accounting principles, policies or
guidelines, and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America and
reporting practices followed within the thrift industry. The application of
these principles requires management to make estimates, assumptions, and
judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions, and judgments are based on
information available as of the date of the financial statements; as this
information changes, the financial statements could reflect different estimates,
assumptions, and judgments.
Management believes the allowance for loan loss policy is a critical accounting
policy requiring significant estimates and assumptions in the preparation of the
consolidated financial statements. The allowance for loan
9
losses provides coverage for probable losses inherent in the Company's loan
portfolio. Management evaluates the adequacy of the allowance for credit losses
each quarter based on changes, if any, in underwriting activities, the loan
portfolio composition (including product mix and geographic, industry or
customer-specific concentrations), trends in loan performance, regulatory
guidance and economic factors. This evaluation is inherently subjective, as it
requires the use of significant management estimates. Many factors can affect
management's estimates of specific and expected losses, including volatility of
default probabilities, rating migrations, loss severity and economic and
political conditions. The allowance is increased through provisions charged to
operating earnings and reduced by net charge-offs.
The Company determines the amount of the allowance based on relative risk
characteristics of the loan portfolio. The allowance recorded for commercial
loans is based on reviews of individual credit relationships and an analysis of
the migration of commercial loans and actual loss experience. The allowance
recorded for homogeneous consumer loans is based on an analysis of loan mix,
risk characteristics of the portfolio, fraud loss and bankruptcy experiences,
and historical losses, adjusted for current trends, for each homogeneous
category or group of loans. The allowance for credit losses relating to impaired
loans is based on the loan's observable market price, the collateral for certain
collateral-dependent loans, or the discounted cash flows using the loan's
effective interest rate.
Regardless of the extent of the Company's analysis of customer performance,
portfolio trends or risk management processes, certain inherent but undetected
losses are probable within the loan portfolio. This is due to several factors
including inherent delays in obtaining information regarding a customer's
financial condition or changes in their unique business conditions, the
judgmental nature of individual loan evaluations, collateral assessments and the
interpretation of economic trends. Volatility of economic or customer-specific
conditions affecting the identification and estimation of losses for larger
non-homogeneous credits and the sensitivity of assumptions utilized to establish
allowances for homogenous groups of loans are among other factors. The Company
estimates a range of inherent losses related to the existence of these
exposures. The estimates are based upon the Company's evaluation of imprecision
risk associated with the commercial and consumer allowance levels and the
estimated impact of the current economic environment.
Other accounting policies followed by the Company are presented in Note 1 to the
consolidated financial statements. These policies, along with the disclosures
presented in the the audited financial statements and notes thereto included in
the Company's 2005 Annual Report to Shareholders, and in this financial review,
provide information on how significant assets and liabilities are valued in the
financial statements and how those values are determined.
FINANCIAL CONDITION
Total consolidated assets of the Company at September 30, 2005 were
$200,609,000, compared to $199,881,000 at June 30, 2005, an increase of $728,000
or 0.4%.
CASH AND CASH EQUIVALENTS declined $3,080,000 or 34.3%, from $8,992,000 at June
30, 2005 to $5,912,000 at September 30, 2005. Management uses its short -term
"cash accounts" to hold funds generated from these regular banking activities as
it evaluates investment (loan) alternatives.
10
NET LOANS increased $3.9 million or 2.3 %, from $171,187,000 at June 30, 2005,
to $175,125,000 at September 30, 2005. The following table illustrates changes
in the Bank's loan portfolio by category for each period presented.
BALANCE BALANCE
SEPTEMBER 30, JUNE
2005 30, 2005 CHANGE CHANGE
(000'S) (000'S) ($000'S) (%)
------------- -------- -------- ------
Residential single-family mortgages $116,846 $111,985 $4,861 4.3%
Other residential and commercial mortgages 29,517 29,952 (435) (1.5)
-------- -------- ------
Total mortgage loans 146,363 141,937 4,426 3.1
Construction 17,492 18,281 (789) (4.3)
Commercial business 7,361 6,805 556 8.2
Consumer 1,535 1,681 (146) (8.7)
Home improvement 9,062 8,598 464 5.4
Deposit and other 178 187 (9) 4.8
-------- -------- ------ -----
Gross loans 181,991 177,489 4,502 2.5
Deferred loan fees (63) (84) (21) 25.0
Undisbursed portion of loans (6,052) (5,493) (559) (10.2)
Allowance for loan losses (751) (725) (26) (3.6)
-------- -------- ------
Total loans, net $175,125 $171,187 $3,938 2.3%
======== ======== ======
THE ALLOWANCE FOR LOAN LOSSES increased slightly to $751,000 at September 30,
2005 from $725,000 June 30, 2005. This was the result of a provision for loan
losses of $30,000 during the quarter ended September 30, 2005 and net
charge-offs of $4,000. The ratio of the Company's allowance for loan losses to
gross loans at September 30, 2005 remained unchanged at 0.41% as compared to
June 30, 2005. The allowance for loan losses is maintained to absorb loan losses
based on management's continuing review and evaluation of the loan portfolio and
its judgment regarding the impact of economic conditions on the portfolio.
The following table compares non-performing loans, which are loans past due 90
days or more and non-accruing loans, at September 30, 2005 and June 30, 2005.
September 30, June 30,
2005 2005
------------- --------
Past due 90+ and still accruing $179,000 $415,000
Non-accrual 641,000 333,000
-------- --------
Total non-performing loans $820,000 $748,000
======== ========
The Bank's overall asset quality declined during the quarter with loans greater
than 90 days past due and non-accruing increasing $72,000, from $748,000 at June
30, 2005 to $820,000 at September 30, 2005.
Non-performing loans, increased slightly from $748,000 at June 30, 2005, to
$820,000 at September 30, 2005. Loans past-due 90 days or more and still
accruing decreased from $415,000 at June 30, 2005 to $179,000 at September 30,
2005. This decline was primarily attributable to a decline in the status of five
credit relationships. Four are single-family properties in which the Bank holds
a first mortgage position totaling $468,000 ($276,000, $91,000, $30,000, and
$71,000). The fifth is a commercial business relationship totaling $62,000. The
commercial delinquency is a renewal in which the Bank is waiting to receive
updated financial statements. Note: At June 30, 2005, one loan ($276,000) was
designated as "non-accrual" although it was less than 30-days past due.
These declines were partially offset by a $52,000 principal payment received on
a non-accruing commercial real estate loan during the quarter.
Non-accrual loans increased $308,000 during the quarter from $333,000 at June
30, 2005, to $641,000 at September 30, 2005. The increase was attributable to
the designation of three relationships as non-accrual. The first relationship
($52,000 and $20,000), is secured by first and second mortgages on the
borrower's personal residence, which is valued at $86,000. The second loan
($55,000), is secured by a first mortgage on the borrower's personal residence,
which is valued at $77,000. The third relationship ($71,000 and $31,000), is
secured by first
11
mortgages on two tracts of commercial real estate, which are valued at $159,000
and $90,000, respectively. Management continues to work closely with these
borrowers to bring these loans current.
The ratio of the Company's allowance for loan losses to non-performing loans was
91.6% and 96.9% at September 30, 2005 and June 30, 2005, respectively.
Management believes that the problems with these loans are isolated and not
indicative of the loan portfolio in total.
DEPOSITS decreased $2,851,000, or 2.3%, from $126,520,000 at June 30, 2005 to
$123,669,000 at September 30, 2005. The following table illustrates changes in
the various types of deposits for each period presented.
BALANCE BALANCE
SEPTEMBER 30, JUNE 30,
2005 2005 CHANGE CHANGE
(000'S) (000'S) ($000'S) (%)
------------- -------- -------- ------
Noninterest bearing accounts $ 15,029 $ 14,620 $ 409 2.8%
NOW accounts 30,620 33,510 (2,890) (8.6)
Super NOW accounts 1,033 1,271 (238) (18.7)
Passbook accounts 22,942 24,049 (1,107) (4.6)
Money market accounts 12,241 12,400 (159) (12.8)
Certificates of deposit 41,804 40,670 1,134 2.8
-------- -------- -------- -----
Total deposits $123,669 $126,520 ($2,851) (2.3)%
======== ======== ======== =====
The decrease in NOW accounts was primarily attributable to lower account
balances being maintained in public fund deposits, which represent the
collateralized balances of local municipalities, school boards and other
government agencies. This decrease in public fund deposits was primarily the
result of the timing of real estate tax receipts by the local municipalities,
many of which were collected during June, 2005 and transferred out of such
public fund deposit accounts subsequent to June, 30, 2005.
TOTAL STOCKHOLDERS' EQUITY remained relatively unchanged from $24,925,000 at
June 30, 2005, to $24,902,000 at September 30, 2005. The slight decrease was the
result of $513,000 in dividends paid to the Company's stockholders, a $23,000
increase in the unrealized loss on securities available for sale and $134,000
related to the net change in equity related to the Company's ESOP during the
quarter ended September 30, 2005, offset by $547,000 in net earnings and
$101,000, in net options exercised related to the repurchase of stock, during
the quarter ended September 30, 2005.
RESULTS OF OPERATIONS--COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2005
AND 2004
The Company reported earnings of $547,000 for the three months ended September
30, 2005, an increase of $125,000, or 29.6%, from the $422,000 reported for the
same period in 2004. Basic and diluted earnings per share increased $0.01 or
16.7% from $0.06 for the three months ended September 30, 2004 to $0.07 for the
three months ended September 30, 2005. The Company's return on average assets
was 1.09% for the three months ended September 30, 2005 compared to 0.87% for
the same period in 2004. Return on average equity was 8.78% for the three months
ended September 30, 2005, compared to 6.96% for the same period in 2004.
NET INTEREST INCOME was $1,896,000 for the three months ended September 30,
2005, $178,000, or 10.4%, greater than the $1,718,000 reported for three months
ended September 30, 2004. Total interest income was $2,978,000 for the quarter
ended September 30, 2005, an increase of $270,000, or 10.0% from the $2,708,000
reported during the quarter ended September 30, 2004. The increase in interest
income was partially offset by a $93,000 increase in interest expense from
$989,000 for the three months ended September 30 2004, to $1,082,000 for the
three months ended September 30, 2005.
The increase was attributed to an increase in the balance of loans outstanding
coupled with slightly higher interest rates earned on those loans. Average loans
outstanding increased by $22.9 million or 15.2% from 151.0 million during the
quarter ended September 30, 2004, to $173.9 during the quarter ended September
30, 2005.
Interest expense was $1,082,000 for the three months ended September 30, 2005,
$93,000 or 9.4%, greater than the $989,000 recorded for the three months ended
September 30 2004, as interest expense paid on certificates of deposit increased
significantly in comparison to the same period in the previous year. Interest
expense on
12
certificates of deposit was $325,000, $156,000 or 92.3% higher than the $169,000
recorded in three months ended September 30, 2004. The average balance of
certificates of deposit increased by $5,069,000, from $29,872,000 for the three
months ended September 30, 2004, to $34,941,000 for three months ended September
30, 2005. In addition, the average rate paid on those certificates of deposit
increased by 145 basis points, from 2.24% during the three months ended
September 30, 2004, to 3.69 % during the three months ended September 30, 2005.
Interest expense on FHLB advances was $593,000, $110,000 or 15.6 % lower than
the $703,000 recorded in the three months ended September 30, 2004. The average
balance of FHLB advances declined by $6,868,000, from $55,500,000 for the three
months ended September 30, 2004 to $48,632,000 for the three months ended
September 30, 2005. In addition, the average interest rate paid on those FHLB
advances decreased 19 basis points, from 5.03% during the three months ended
September 30, 2004, to 4.84% during the same period in 2005.
THE PROVISION FOR LOAN LOSSES for the three months ended September 30, 2005
remained unchanged at $30,000, as compared to the same period in 2004. The
provision for both periods reflects management's analysis of the Bank's loan
portfolio based on information that is currently available to it at such time.
In particular, management considers the level of non-performing loans and
potential problem loans. Net charge-offs for three months ended September 2005
were $4,000, as compared to $31,000 during the same period in 2004. While
management believes that the allowance for loan losses is sufficient based on
information currently available to it, no assurances can be made that future
events, conditions, or regulatory directives will not result in increased
provisions for loan losses which may adversely effect income.
NONINTEREST INCOME was $659,000 for the three months ended September 30, 2005,
$116,000 or 21.4% higher than the $543,000 reported for the three months ended
September 30, 2004. The increase was almost entirely attributable to a $121,000
gain on the sale of the Company's credit card loan portfolio. Management
believes that, in addition to protecting the Company from future losses
associated with unsecured credit card lending, the Company will be more able to
focus on other forms of consumer lending.
NONINTEREST EXPENSE was $1,720,000 for the three months ended September 30,
2005, $110,000 or 6.8% higher than the $1,610,000 reported for the three months
ended September 30, 2004. The increase was attributable to increases in salaries
and employee benefits, director fees, professional services and other
noninterest expenses partially offset by declines in data processing fees and
franchise taxes. Salaries and employee benefits increased $110,000 or 15.3% as a
result of an increase in full time equivalents employees from 58 for the quarter
ended September 30, 2004 to 60 for the quarter ended September 30, 2005, due to
the addition of a new commercial lending officer and a banking center manager
late in the fourth quarter of fiscal 2005. The balance of the increase in
salaries and benefits was due to regular annual compensation increases. The
$9,000 increase in director fees was attributable to an increase in the number
of meetings during the quarter as the directors met to consider the previously
discussed sale of the Company. Likewise, the $14,000 increase in professional
fees during the quarter ended September 30, 2005 as compared to the same quarter
in the previous year was primarily attributable to assistance provided in
analyzing the potential sale of the Company. Other noninterest expense increased
$29,000 during the quarter ended September 30, 2005 as compared to the same
quarter in the previous year. This increase was the result of approximately
$90,000 in expenses related to the previously mentioned sale of the Company's
credit card portfolio which was offset by declines in nearly every category of
other noninterest expense at management continued to focus on controlling costs.
These increases were partially offset by declines in data processing fees and
franchise tax expense. Data processing fees decline $35,000 due to fees charged
by one of the trust department's third-party service providers in the quarter
ended September 30, 2004, that were not incurred during the quarter ended
September 30, 2005. In addition, franchise taxes declined $14,000 as a result of
tax planning strategies implemented in the previous year to lower the Company's
franchise tax expense.
TOTAL INCOME TAX EXPENSE was $258,000 (an effective tax rate of 32.1%) for the
three months ended September 30, 2005, compared to $199,000 (an effective tax
rate of 32.0%) during the three months ended September 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY AND THE BANK
Banking regulations require the Bank to maintain sufficient liquidity to ensure
its safe and sound operation. The Bank's regulatory liquidity was 12.31 % and
17.16% on September 30, 2005 and 2004, respectively. The primary source of
funding for the Company is dividend payments from the Bank. Dividend payments by
the Bank have been used primarily by the Company to pay dividends to its
stockholders.
13
The Bank's liquidity is a product of its operating, investing and financing
activities. The primary investment activity of the Bank is the origination of
mortgage loans and, to a lesser extent, commercial and consumer loans. The
primary sources of funds are deposits, FHLB borrowings, prepayments and
maturities of outstanding loans, mortgage-backed securities, and investments.
While scheduled payments of loans and mortgage-backed securities and maturing
investments are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by interest rates, economic conditions and
competition. The Bank utilizes FHLB borrowings to leverage its capital base and
provide funds for lending and to better manage its interest rate risk. The sole
investment of the Company is its investment in the Bank's stock.
At September 30, 2005, the Bank had outstanding commitments to fund existing
construction loans of $6,020,000, originate mortgage loans of $5,830,000,
open-end consumer lines of credit of $6,251,000, unused commercial lines of
credit of $3,916,000 and standby letters of credit of $3,136,000. As of
September 30, 2005, certificates of deposit scheduled to mature in one year or
less totaled $26,728,000. Based on historical experience, management believes
that a significant portion of maturing deposits will remain with the Bank.
Management anticipates that the Bank will continue to have sufficient funds,
through deposits, borrowings, and normal operations to meet its commitments.
The Bank is required by Office of Thrift Supervision ("OTS") regulations to meet
certain minimum capital requirements. At September 30, 2005, the Bank exceeded
all of its regulatory capital requirements with tangible and tier 1 capital both
at $ 22,956,000 or 11.49 % of adjusted total assets, and risk-based capital at $
23,707,000 or 17.53 % of risk-weighted assets. The required minimum ratios of
the OTS are 1.5% for tangible capital to adjusted total assets, 4.0% for tier 1
capital to adjusted total assets and 8.0% for risk-based capital to
risk-weighted assets.
The Bank's most liquid assets are cash and cash equivalents. The level of cash
and cash equivalents is dependent on the Bank's operating, financing lending and
investing activities during any given period. At September 30, 2005, the Bank's
cash and cash equivalents totaled $5,912,000. The Company's and Bank's future
short -term requirements for cash are not expected to significantly change.
However, in the event that the Bank should require funds in excess of its
ability to generate them internally, additional sources of funds are available,
including additional FHLB advances. With no parent company debt and sound
capital levels, Management believes the Company should have many options
available for satisfying its longer-term cash needs such as borrowing funds,
raising equity capital and issuing trust preferred securities.
Management is not aware of any current recommendations or government proposals
which, if implemented would have a material effect on the Company's liquidity,
capital resources or operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no significant change in the Company's market risk since June 30,
2005, except as discussed in the Management's Discussion and Analysis of
Financial Condition and Results of Operations set forth in Item 2, above. For
information regarding the Company's Market Risk, refer to the Company's Form
10-K for the year ending June 30, 2005.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-Q, the
Company's Chief Executive Officer and Chief Financial Officer evaluated, with
the participation of the Company's management, the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")). Based upon their evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective to ensure that information required to be disclosed
in the reports that the Company files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms.
No changes were made to the Company's internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act)
during the Company's most recent fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal actions incident to its
business, none of which is believed by management to be material to
the financial condition of the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY IN SECURITIES AND USE OF PROCEEDS
In the quarter ended September 30, 2005, the Company made the
following repurchases of common stock:
TOTAL NUMBER MAXIMUM NUMBER OF
TOTAL NUMBER AVERAGE OF SHARES PURCHASED SHARES THAT MAY BE
OF PRICE PAID AS PART OF PUBLICLY PURCHASED UNDER THE
PERIOD SHARES PURCHASED PER SHARE ANNOUNCED PLANS (1) PLANS OR PROGRAMS
------ ---------------- ---------- -------------------- -------------------
July 1-31, 2005 ........ 0 N/A 0 246,000
August 1-31, 2005 ...... 0 N/A 0 N/A
September 1-30, 2005 ... 0 N/A 0 N/A
(1) During July, 2004, the Company's Board of Directors authorized the
repurchase of up to 365,000 shares of the Company's common stock, which
expired in July, 2005. As indicated in the table, there were no share
repurchases during the quarter.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting was held on October 27, 2005 at Edison
Junior College in Piqua, Ohio at 3:00 p.m. Proxies were solicited from
shareholders pursuant to Regulation 14A of the Exchange Act. The
meeting included the following matters voted upon by shareholders:
1. The election of Thomas E. Robinson, Donald Cooper and Richard W.
Klockner to two-year terms on the Company's Board of Directors.
The vote was 4,081,704 in favor and 99,841 withheld for Thomas E.
Robinson, 4,172,384 in favor and 9,161 withheld for Donald Cooper
and 4,173,320 in favor and 8,225 withheld for Richard W.
Klockner. Incumbent Directors who were not nominees for election
at the meeting are: William J. McGraw, III, Ronald B. Scott and
James S. Wilcox.
2. The ratification of BKD, LLP to serve as the Company's
independent auditors for the fiscal year ending June 30, 2006.
The vote was 4,167,946 in favor and 7,007 against, with 6,792
abstaining.
ITEM 5. OTHER INFORMATION
Not Applicable
15
ITEM 6. EXHIBITS
a. Exhibits
2.1 Agreement and Plan of Merger by and among MainSource Financial
Group, Inc., Peoples Ohio Financial Corporation and Peoples
Savings Bank of Troy dated September 28, 2005 (incorporated by
reference to the Form 8-K filed with the SEC on September 29,
2005, Exhibit 2.1).
3.1 Peoples Ohio Financial Corporation Articles of Incorporation
(incorporated by reference to the Form 8-A filed with the SEC on
February 8, 2002 (the "Form 8-A"), Exhibit 2(a))
3.2 Peoples Ohio Financial Corporation Amended and Restated Code of
Regulations (Incorporated by reference to the Form 8-A, Exhibit
2(b))
31.1 Certification of Ronald B. Scott, Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Richard J. Dutton, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Ronald B. Scott, Chief Executive Officer and
Richard J. Dutton, Chief Financial Officer, perusuent to Section
906 of The Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements 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.
PEOPLES OHIO FINANCIAL CORPORATION
Dated: November 14, 2005 By /s/ Ronald B. Scott
-------------------------------------
Ronald B. Scott
President, Chief Executive Officer
By /s/ Richard J. Dutton
-------------------------------------
Richard J. Dutton
Vice-President,
Chief Financial Officer
16
INDEX TO EXHIBITS
Exhibit No. Description of Exhibits
- ----------- -----------------------
2.1 Agreement and Plan of Merger by and among MainSource Financial
Group, Inc., Peoples Ohio Financial Corporation and Peoples
Savings Bank of Troy dated September 28, 2005 (incorporated by
reference to the Form 8-K filed with the SEC on September 29,
2005, Exhibit 2.1).
3.1 Peoples Ohio Financial Corporation Articles of Incorporation
(incorporated by reference to the Form 8-A filed with the SEC on
February 8, 2002 (the "Form 8-A"), Exhibit 2(a))
3.2 Peoples Ohio Financial Corporation Amended and Restated Code of
Regulations (Incorporated by reference to the Form 8-A, Exhibit
2(b))
31.1 Certification of Ronald B. Scott, Chief Executive Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Richard J. Dutton, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Ronald B. Scott, Chief Executive Officer, and
Richard J. Dutton, Chief Financial Officer, perusuent to Section
302 of The Sarbanes-Oxley Act of 2002
17