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 December 31, 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 A LARGE ACCELERATED FILER,
AN ACCELERATED FILER, OR A NON-ACCELERATED FILER. SEE DEFINITION OF ACCELERATED
FILER AND LARGE ACCELERATED FILER IN RULE 12B-2 OF THE EXCHANGE ACT.
LARGE ACCELERATED FILER ACCELERATED FILER NON-ACCELERATED FILER 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 FEBRUARY 14, 2006, 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 December 31,
2005 and June 30, 2005.
Condensed Consolidated Statements of Income for the three
and six months ended December 31, 2005 and 2004.
Condensed Consolidated Statements of Cash Flows for the
six months ended December 31, 2005 and 2004.
Condensed Consolidated Statement of Shareholders' Equity
for the six months ended December 31, 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 1A. Risk Factors.
Item 2. Unregistered Sales of Equity in 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
DECEMBER 31
2005 JUNE 30
(UNAUDITED) 2005
------------ ------------
ASSETS
Cash and cash equivalents $ 5,904,228 $ 8,991,963
Held-to -maturity securities (fair value $458,000 and $486,000) 456,366 460,690
Available-for-sale securities 3,700,713 3,960,867
Loans, net of allowance for loan losses of $785,338 and $725,090 178,695,875 171,187,044
Premises and equipment 3,880,729 4,053,989
Federal Home Loan Bank stock 5,890,200 5,735,700
Interest receivable 777,798 733,000
Bank-owned life insurance 4,447,004 4,362,364
Other assets 289,325 395,252
------------ ------------
Total assets $204,042,238 $199,880,869
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $119,108,217 $126,520,450
Federal Home Loan Bank (FHLB) advances 56,194,640 46,123,030
Interest payable 394,919 156,400
Other liabilities 2,366,550 1,655,503
------------ ------------
Total liabilities 178,064,326 174,455,383
------------ ------------
Commitments and Contingent Liabilities -- --
Equity from ESOP Shares 652,802 500,278
------------ ------------
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
122,019 and 112,019 7,461,633 7,461,633
Additional paid-in capital 78,348 51,548
Treasury stock, at cost, 252,023 and 301,843 shares (1,064,525) (1,265,922)
Accumulated other comprehensive income (41,144) (6,455)
Retained earnings 18,890,798 18,684,404
------------ ------------
Total shareholders' equity 25,325,110 24,925,208
------------ ------------
Total liabilities and shareholders' equity $204,042,238 $199,880,869
============ ============
See notes to condensed consolidated financial statements
3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
31-DEC 31-DEC
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
INTEREST INCOME
Interest and fees on loans $2,860,345 $2,576,024 5,694,740 $5,056,887
Interest on mortgage-backed securities and other securities 46,288 96,305 88,857 249,033
Other interest and dividend income 114,601 82,923 215,175 157,007
---------- ---------- ---------- ----------
Total interest income 3,021,234 2,755,252 5,998,772 5,462,927
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 502,506 280,049 991,095 566,537
Borrowings 658,640 707,884 1,251,965 1,410,870
---------- ---------- ---------- ----------
Total interest expense 1,161,146 987,933 2,243,060 1,977,407
---------- ---------- ---------- ----------
Net interest income 1,860,088 1,767,319 3,755,712 3,485,520
PROVISION FOR LOAN LOSSES 30,000 30,000 60,000 60,000
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 1,830,088 1,737,319 3,695,712 3,425,520
---------- ---------- ---------- ----------
OTHER INCOME
Service charges on deposit accounts and other 68,266 73,019 141,315 149,520
Service charges derived from ATM 51,858 47,981 103,503 93,038
Overdraft / NSF fees 220,474 226,541 452,278 458,805
Fiduciary activities 118,971 97,959 246,961 230,559
Increase in cash value of bank owned life insurance 47,078 43,512 93,884 92,536
Gain on sale of credit card portfolio 0 0 121,420 0
Other income 5,774 5,011 11,763 12,398
---------- ---------- ---------- ----------
Total other income 512,421 494,023 1,171,124 1,036,856
---------- ---------- ---------- ----------
OTHER EXPENSES
Salaries and employee benefits 832,356 696,914 1,662,346 1,417,172
Director fees 29,825 39,000 77,975 78,000
Net occupancy expenses 111,773 105,484 225,629 214,696
Equipment expenses 29,253 34,963 59,220 69,455
Professional services 209,294 97,082 297,424 171,490
Advertising 36,787 37,388 69,240 71,414
Data processing fees 148,294 163,677 297,439 347,446
State of Ohio franchise taxes 53,251 75,000 113,753 150,000
Other expenses 243,760 321,926 611,676 661,420
---------- ---------- ---------- ----------
Total other expenses 1,694,593 1,571,434 3,414,702 3,181,093
---------- ---------- ---------- ----------
INCOME BEFORE FEDERAL INCOME TAX 647,916 659,908 1,452,134 1,281,283
FEDERAL INCOME TAX EXPENSE 204,284 219,245 461,804 418,906
---------- ---------- ---------- ----------
NET INCOME $ 443,632 $ 440,663 990,330 $ 862,377
========== ========== ======= ==========
PER SHARES DATA:
BASIC EARNINGS PER SHARE $ 0.06 $ 0.06 $ 0.14 $ 0.12
DILUTED EARNINGS PER SHARE $ 0.06 $ 0.06 $ 0.13 $ 0.12
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 SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004
(UNAUDITED)
2005 2004
------------ ------------
OPERATING ACTIVITIES
Net income $ 990,330 $ 862,377
Adjustments to reconcile net income
to net cash provided by operating activities
Provision for loan losses 60,000 60,000
Depreciation and amortization 174,453 190,356
Investment securities amortization (accretion), net 7,322 (24,180)
Federal Home Loan Bank stock dividends (154,500) (117,800)
Increase in cash value of life insurance 84,640 85,135
Net change in other assets/ other liabilities 863,554 963,335
------------ ------------
Net cash provided by operating activites 2,025,799 2,019,223
------------ ------------
INVESTING ACTIVITIES
Net change in loans (7,568,831) (10,931,692)
Proceeds from maturities of securities held to maturity 3,832 4,416
Proceeds from maturities of securities available for sale 200,765 10,735,018
Purchases of premises and equipment (1,193) (3,362)
------------ ------------
Net cash provided (used) by investing activities (7,365,427) (195,620)
------------ ------------
FINANCING ACTIVITIES
Net change in
Interest-bearing demand and savings deposits (3,765,086) (4,676,097)
Certificates of deposit (3,647,147) (309,972)
Proceeds from FHLB advances 35,500,000 21,732,000
Repayment of FHLB advances (25,428,390) (22,406,282)
Cash dividends (513,214) (471,624)
Proceeds from exercise of stock options 105,730 177,888
Purchase/Reissuance of treasury stock 0 (502,152)
------------ ------------
Net cash provided (used) by financing activities 2,251,893 (6,456,239)
------------ ------------
Net Change in Cash and Cash Equivalents (3,087,735) (4,632,636)
Cash and cash equivalents, Beginning of Period 8,991,963 10,875,107
------------ ------------
Cash and cash equivalents, End of Period $ 5,904,228 $ 6,242,471
============ ============
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 2,004,541 $ 1,958,790
Income tax paid -- --
See notes to condensed consolidated financial statements
5
PEOPLES OHIO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 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) $24,925,208
Net income -- -- 990,330 990,330
Net change in Unrealized Gain/Loss
on AFS Securities (34,689) (34,689)
----------
Total comprehensive income 955,641
Cash dividends declared
on common stock ($.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 22,531 22,531
Net change in equity from ESOP
shares -- (152,524) (152,524)
---------- ------- ----------- ----------- --------- -----------
BALANCE AT DECEMBER 31, 2005 $7,461,633 $78,348 $18,890,798 ($1,064,525) ($41,144) $25,325,110
========== ======= =========== =========== ========= ===========
See Notes to Condensed Consolidated Financial Statements
6
PEOPLES OHIO FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2005
(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 December 31, 2005 and June 30, 2005,
the results of operations for the three and six-month periods ended December 31,
2005 and 2004, and cash flows for the six-month periods ended December 31, 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 and six-month periods ended December 31, 2005, are not necessarily
indicative of results for the entire fiscal year.
The condensed consolidated balance sheet of 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. 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 and six-month periods ending December 31,
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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Weighted average number of common shares
outstanding (basic EPS) 7,322,989 7,273,859 7,331,629 7,273,498
Dilutive effect of stock options 132,061 111,880 114,408 129,424
--------- --------- --------- ---------
Weighted average number of common shares
and equivalents outstanding (diluted EPS) 7,455,050 7,385,739 7,446,037 7,402,922
========= ========= ========= =========
Options to purchase 135,370 and 193,870 shares of common stock with exercise
prices ranging from $6.81 to $8.13 and $4.20 to $8.13 per share were outstanding
at December 31, 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.
7
(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 $9,000 and $22,500 in
compensation expense related to vested stock options less estimated forfeitures
for the three and six-month periods ended December 31, 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 SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
2005 2005
------------ ------------
(amounts in thousands except per share data)
Net income, as reported $ 441 $ 862
Less: Total stock-based employee
compensation cost determined under the
fair value based method, net of income
taxes (13) (24)
----- -----
Pro forma net income $ 428 $ 838
===== =====
Earnings per share:
Basic - as reported $0.06 $0.12
Basic - pro forma $0.06 $0.12
Diluted - as reported $0.06 $0.12
Diluted - pro forma $0.06 $0.11
8
(5) Employee Benefit Plans
The Bank has a noncontributory defined benefit pension plan (the Plan) covering
substantially all employees. Components of the net periodic benefits costs of
the plan are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ----------------
2005 2004 2005 2004
---- ---- ---- ----
(amounts in thousands)
Service cost $ 24 $ 24 $ 48 $ 48
Expected return on plan assets (14) (10) (28) (20)
Interest cost 21 19 42 38
Amortization of prior service cost (1) (1) (2) (2)
Recognized net actuarial loss 4 4 8 8
---- ---- ---- ----
Net periodic cost $ 34 $ 36 $ 68 $ 72
==== ==== ==== ====
Actual contributions to the plan $ 0 $ 0 $ 0 $ 0
On December 5, 2005, the Bank's Board of Directors took action to freeze the
Plan. No additional benefits will accrue to Plan participants as a result of
this action. A curtailment loss in accordance with FAS 88 was not recorded due
to the fact that it was immaterial to the financial statements.
(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 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.
The transaction is expected to close in the second calendar quarter of 2006;
however, it is subject to a number of conditions precedent. 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 Agreement and Plan of Merger.
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. As of
December 31, 2005, no accrual had been made for these charges.
9
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 second calendar 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 upon 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. A further description of the risks and uncertainties to the business are
included in detail under the caption "Liquidity and Capital Resources of the
Company and the Bank."
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's condensed 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
condensed consolidated financial statements. The allowance for loan 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
10
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 December 31, 2005 were $204,042,000,
as compared to $199,881,000 at June 30, 2005, an increase of $4,161,000 or 2.1%.
CASH AND CASH EQUIVALENTS declined $3,088,000 or 34.3%, from $8,992,000 at June
30, 2005 to $5,904,000 at December 31, 2005. Management uses its short-term
"cash accounts" to hold funds generated from these regular banking activities as
it evaluates investment (loan) alternatives.
11
NET LOANS increased $7.5 million or 4.4 %, from $171,187,000 at June 30, 2005,
to $178,696,000 at December 31, 2005. The following table illustrates changes in
the Bank's loan portfolio by category for each period presented.
BALANCE BALANCE
DECEMBER 31, JUNE 30, CHANGE CHANGE
2005 2005 ($000'S) (%)
------------ -------- -------- ------
(000'S) (000'S)
Residential single-family mortgages $120,596 $111,985 $ 8,611 7.7%
Other residential and commercial mortgages 28,588 29,952 (1,364) (4.6)
-------- -------- -------
Total mortgage loans 149,184 141,937 7,247 5.1
Construction 18,344 18,281 63 0.3
Commercial business 7,655 6,805 850 12.5
Consumer 1,249 1,681 (432) (25.7)
Home improvement 9,540 8,598 942 11.0
Deposit and other 174 187 (13) (7.0)
-------- -------- -------
Gross loans 186,146 177,489 8,657 4.9
Deferred loan fees (49) (84) 35 41.7
Undisbursed portion of loans (6,616) (5,493) (1,123) (20.4)
Allowance for loan losses (785) (725) (60) (8.3)
-------- -------- -------
Total loans, net $178,696 $171,187 $ 7,509 4.4%
======== ======== =======
THE ALLOWANCE FOR LOAN LOSSES increased slightly to $785,000 at December 31,
2005 from $725,000 June 30, 2005. This was the result of a provision for loan
losses of $60,000 during the quarter ended December 31, 2005. The ratio of the
Company's allowance for loan losses to gross loans at December 31, 2005
increased slightly to 0.42% from 0.41% at 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 December 31, 2005 and June 30, 2005.
December 31, June 30,
2005 2005
------------ --------
Past due 90+ and still accruing $ 238,000 $334,000
Non-accrual 1,014,000 415,000
---------- --------
Total non-performing loans $1,252,000 $748,000
========== ========
The Bank's overall asset quality declined during the period with non-performing
loans increasing $504,000, from $748,000 at June 30, 2005 to $1,252,000 at
December 31, 2005.
Loans past-due 90 days or more and still accruing decreased from $334,000 at
June 30, 2005 to $238,000 at December 31, 2005. The decline was attributable to
the classification of three delinquent relationships totaling $146,000, as
non-accrual during the period (see further discussion below), and the sale
during the period of property securing a delinquent loan ($123,000) resulting
the full repayment of the past-due loan. These declines were offset by
deterioration in six other credit relationships. Five are single-family
residential properties in which the Bank holds a first mortgage position
totaling $265,000 ($57,000, $91,000, $71,000, $31,000 and $15,000). The sixth is
a commercial relationship totaling $25,000 in which the Bank holds a first
mortgage position. Note: At June 30, 2005, one loan ($276,000) was designated as
"non-accrual" although it was less than 30-days past due.
Non-accrual loans increased $599,000 during the period from $415,000 at June 30,
2005, to $1,014,000 at December 31, 2005. The increase was attributable to the
designation of four 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 ($31,000), is secured by a
first mortgage on commercial real estate, valued at $90,000, respectively. The
fourth relationship ($453,000), is secured by a first
12
mortgage on commercial real estate, which is valued at $760,000. 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
62.7% and 96.9% at December 31, 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 $7,412,000, or 5.6%, from $126,520,000 at June 30, 2005 to
$119,108,000 at December 31, 2005. The following table illustrates changes in
the various types of deposits for each period presented.
BALANCE BALANCE
DECEMBER 31, JUNE 30, CHANGE CHANGE
2005 2005 ($000'S) (%)
------------ -------- --------- ------
(000'S) (000'S)
Noninterest bearing accounts $ 11,675 $ 14,620 $ (2,945) 20.1%
NOW accounts 30,440 33,510 (3,070) (9.2)
Super NOW accounts 1,087 1,271 (184) (14.5)
Passbook accounts 20,519 24,049 (3,530) (14.7)
Money market accounts 11,011 12,400 (1,389) (11.2)
Certificates of deposit 44,376 40,670 3,706 9.1
-------- -------- --------
Total deposits $119,108 $126,520 ($7,412) (5.9)%
======== ======== ========
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. The decline in all
other transaction and savings deposit accounts was attributable to customers
migrating from lower yielding deposit accounts to certificates of deposit in
order to take advantage of higher yields.
TOTAL STOCKHOLDERS' EQUITY increased from $24,925,000 at June 30, 2005, to
$25,325,000 at December 31, 2005. The increase was the result of $990,000 in net
earnings and $110,000, in net changes related to the company's option plan and
the exercise of options during the period ended December 31, 2005, offset by
$513,000 in dividends paid to the Company's stockholders, a $35,000 increase in
the unrealized loss on securities available for sale and $153,000 related to the
net change in equity related to the Company's ESOP, during the period ended
December 31, 2005.
RESULTS OF OPERATIONS--COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2005 AND
2004
The Company reported earnings of $990,000 for the six months ended December 31,
2005, an increase of $128,000, or 14.8%, from the $862,000 reported for the same
period in 2004. Basic and fully diluted earnings per share were $0.14 for the
six months ended December 31, 2005, an increase of $0.01 or 8.3% in comparison
to the $0.12 for both basic and fully diluted earnings per share for the same
period in 2004. The Company's return on average assets was 0.98% for the six
months ended December 31, 2005 compared to 0.90% for the same period in 2004.
Return on average equity was7.90% for the six months ended December 31, 2005,
compared to 7.09% for the same period in 2004.
NET INTEREST INCOME was $3,756,000 for the six months ended December 31, 2005,
an increase of $270,000 or 7.7% when compared to the $3,486,000 reported for six
months ended December 31, 2004. Total interest income was $5,999,000 for the six
months ended December 31, 2005, an increase of $536,000, or 9.8% from the
$5,463,000 reported during the six months ended December 31, 2004. This increase
in interest income was partially offset by a $266,000 or 13.5% increase in
interest expense from $1,977,000 for the six months ended December 31 2004, to
$2,243,000 for the six months ended December 31, 2005.
Average loans outstanding increased from $155,000,000 during the six months
ended December 31, 2004, to $178,000,000 during the six months ended December
31, 2005. This increase was the result of strong demand for residential
construction, commercial real estate and home equity loans during the period and
a continued effort by management to grow this shorter-term portion of its loan
portfolio. The increase in average loans outstanding was
13
mitigated by the continued low interest rate environment's impact on the average
yield of the Company's loan portfolio. Management noted that the average yield
on the Company's loan portfolio declined 10 basis points from 6.45% during the
six months ended December 31, 2004 to 6.35% during the six months ended December
31, 2005.
Interest expense was $2,243,000 for the six months ended December 31, 2005,
$266,000 or 13.5%, greater than the $1,977,000 recorded for the six months ended
December 31 2004. While interest expense on all types of deposits grew, this
increase was primarily attributable to the increase in interest paid on
certificates of deposit. Interest expense on certificates of deposit was
$669,000, $338,000 or 102.1% higher than the $331,000 recorded in six months
ended December 31, 2004. The average balance of certificates of deposit
increased by $13,274,000 or 56.2% from $23,606,000 for the six months ended
December 31, 2004, to $36,880,000 for six months ended December 31, 2005. In
addition to this increase in average certificates of deposit outstanding, the
average rate paid on those certificates increased 78 basis points, from 2.82%
during the six months ended December 31, 2004, to 3.60% during the six months
ended December 31 2005.
The increase in interest expense was partially offset by a decline in interest
expense paid on FHLB advances. Interest expense paid on FHLB advances was
$1,252,000, for the six months ended December 31, 2005, $159,000 or 11.3% lower
than the $1,411,000 recorded in the six months ended December 31, 2004. While
the average balance of FHLB advances remained fairly stable, increasing
$927,000, from $55,320,000 for the six months ended December 31, 2004 to
$56,247,000 for the six months ended December 31, 2005, the average rate paid on
those advances declined 64 basis points, from 5.06% during the six months ended
December 31 2004, to 4.42% during the same period in 2005.
THE PROVISION FOR LOAN LOSSES was $60,000 for six months ended December 31, 2005
and 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
the six months ended December 31, 2005 were $0 compared to $270,000 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 $1,171,000 for six months ended December 31, 2005,
$134,000 or 12.9% greater than the $1,037,000 reported for the six months ended
December 31, 2004. The increase was almost entirely attributable to a $121,000
gain on the sale of the Bank's credit card portfolio during the period.
NONINTEREST EXPENSE was $3,415,000 for six months ended December 31, 2005,
$234,000 or 7.4% higher than the $3,181,000 reported for the six months ended
December 31, 2004. Increases in salaries and employee benefits were primarily
responsible for the increase: salaries and employee benefits increased $245,000
or 17.3% and professional services increased $126,000 or 73.7%. These increases
in noninterest expense were partially offset by a decline in data processing
fees of $50,000 or 14.4%, a decline in State of Ohio franchise taxes of $36,000
or 24.0% and a decline in other noninterest expense of $49,000 or 7.4%.
The increase in salaries and employee benefits was due to the addition of a new
commercial lending officer and a banking center manager late in the fourth
quarter of fiscal year 2005. The balance of the increase in salary and employee
benefits was due to regular annual increases. The increase in other professional
services was attributable to services provided in conjunction with the Company's
pending sale. Partially offsetting these increases were declines in data
processing fees and State of Ohio franchise taxes. The decline in data
processing fees were the result of fees charged by one of the trust department's
third-party service providers in the first quarter of fiscal 2005 that were not
incurred in the current period. The decline in State of Ohio franchise taxes was
the result of strategies implemented in the previous year to lower the Company's
franchise tax expense. The decline in other noninterest expense, as well as,
several of the other noninterest expense categories was the result of
management's continued focus on controlling the Bank's noninterest expense.
TOTAL INCOME TAX EXPENSE was $462,000 (an effective tax rate of 31.8%) for the
six months ended December 31, 2005, compared to $419,000 (an effective tax rate
of 32.7%) during the six months ended December 31, 2004.
14
RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2005
AND 2004.
The Company reported earnings of $444,000 for the three months ended December
31, 2005, an increase of $3,000, or 0.7%, from the $441,000 reported for the
same period in 2004. Both basic and diluted earnings per share were unchanged at
$0.06 for the three months ended December 31, 2005, and 2004. The Company's
return on average assets was 0.88% for the three months ended December 31, 2005
compared to 0.92% for the same period in 2004 while return on average equity was
7.07% for the three months ended December 31, 2005 compared to 7.26% for the
same period 2004.
NET INTEREST INCOME was $1,860,000 for the three months ended December 31, 2005,
$93,000, or 5.3%, greater than the $1,767,000 reported for three months ended
December 31, 2004.
Interest income increased to $3,021,000 for the three months ended December 31,
2005, from $2,755,000 for the three months ended December 31 2004. Interest
income earned on loans increased by $284,000 or 11.0%, from $2,576,000 for the
three months ended December 31, 2004, to $2,860,000 for the three months ended
December 31, 2005. This was attributable to an increase in the average balance
of total loans outstanding, from $158,100,000 for the quarter ended December 31,
2004 to $176,200,000 for the quarter ended December 31, 2005, coupled with a
slight increase in the overall yield on loans of 8 basis points from 6.41%
during the quarter ended December 31, 2004, to 6.49% during the quarter ended
December 31, 2005. Interest income earned on investment securities and other
interest earning assets declined by $18,000 or 10.1%, from $179,000 for the
three months ended December 31, 2004, to $131,000 for the three months ended
December 31, 2005. This decline was solely the result of management's
reinvestment of proceeds from maturing investment securities into the loan
portfolio.
Interest expense was $1,161,000 for the three months ended December 31, 2005, an
increase of $173,000 or 17.5%, $988,000 for the three months ended December 31
2004. This increase was the result of the higher interest rate environment
coupled with a change in funding from FHLB advances to customer deposits.
Average total deposits increased $10,600,000, from $113.200,000 for the quarter
ended December 31, 2004, to $123,800,000 during the quarter ended December 31,
2005, while the average rate paid on deposit accounts increased from 0.98%
during the quarter ended December 31, 2004, to 1.63 % during the quarter ended
December 31, 2005. The Bank paid-off maturing long-term FHLB advances during the
period, accordingly, the average balance of FHLB borrowings declined from
$55,100,000 during the quarter ended December 31, 2004, to $51,900,000 during
the quarter ended December 31, 2005, the average rate paid on those advances
declined slightly from 5.11% during the quarter ended December 31, 2004, to
5.08% during the quarter ended December 31, 2005.
THE PROVISION FOR LOAN LOSSES was $30,000 for three months ended December 31,
2005 and for 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. Total charge-offs for
three months ended December 2005 were $6,000 compared to $244,000 during the
same period in 2004. Included in the $244,000 charged-off during the three
months ended December 31, 2004, was $156,000 related to a problem credit that
had been specifically reserved for in a prior period. 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 affect income.
NONINTEREST INCOME remained fairly stable increasing $18,000 or 3.6% from the
three-month period ending December 31, 2004, compared to the same period in
2005.
NONINTEREST EXPENSE was $1,695,000 for three months ended December 31, 2005,
$124,000 or 7.9% greater than the $1,571,000 reported for the three months ended
December 31, 2004. This increase was primarily the result of a $135,000 or 19.4%
increase in salary and employee benefits due to regular salary increases and the
previously mentioned new commercial loan officer and banking center manager, and
a $112,000 increase in professional services related to the pending sale of the
Company. These increases were partially offset by a decline in other noninterest
expense of $78,000 or 24.2% from $322,000 for the quarter ending December 31,
2004 to $244,000 for the quarter ending December 31,2005, as management
continued its focus on cost control.
TOTAL INCOME TAX EXPENSE was $204,000 (an effective tax rate of 31.5%) for the
three months ended December 31, 2004, compared to $219,000 (an effective tax
rate of 33.2%) during the three months ended December 31, 2004.
15
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 11.59% and
14.28% at December 31, 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.
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 December 31, 2005, the Bank had outstanding commitments to fund existing
construction loans of $6,616,000, originate loans of $4,446,000, open-end
consumer lines of credit of $6,856,000, unused commercial lines of credit of
$4,685,000 and standby letters of credit of $2,988,000. As of December 31, 2005,
certificates of deposit scheduled to mature in one year or less totaled
$31,130,000. 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 December 31, 2005, the Bank exceeded
all of its regulatory capital requirements with tangible and tier 1 capital both
at $23,456,000 or 11.55% of adjusted total assets, and risk-based capital at $
24,282,000 or 17.78% of risk-weighted assets. The minimum ratios required by 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 December 31, 2005, the Bank's
cash and cash equivalents totaled $5,904,000. 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, 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.
16
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.
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 1A. RISK FACTORS
Not Applicable
ITEM 2. UNREGISTERED SALES OF EQUITY IN SECURITIES AND USE OF PROCEEDS
In the quarter ended December 31, 2005, the Company made no repurchases of
common stock:
TOTAL NUMBER MAXIMUM
OF SHARES NUMBER OF
PURCHASED AS PART SHARES THAT MAY BE
TOTAL NUMBER AVERAGE OF PUBLICLY PURCHASED UNDER
OF PRICE PAID ANNOUNCED PLANS THE PLANS OR
PERIOD SHARES PURCHASED PER SHARE (1) PROGRAMS
------ ---------------- ---------- ----------------- ------------------
October 1-31, 2005 .... 0 N/A 0 N/A
November 1-30, 2005 ... 0 N/A 0 N/A
December 1-31, 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 information contained in Part II Item 4 of the Company's Form 10-Q filed
with the SEC on November 14, 2005, for the period ended September 30, 2005, is
incorporated herein by reference.
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS
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))
10.1 Peoples Savings Bank of Troy 2001 Stock Option and Incentive Plan
(Incorporated by reference to Appendix D to the prospectus/proxy
statement filed on Form S-4 (Registration No. 333-68802)).
31.1 Certification of Ronald B. Scott, Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
17
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: February 17, 2006 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
18
INDEX TO EXHIBITS
Exhibit No. Description of Exhibits
- ----------- -----------------------
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))
10.1 Peoples Savings Bank of Troy 2001 Stock Option and Incentive Plan
(Incorporated by reference to Appendix D to the prospectus/proxy
statement filed on Form S-4 (Registration No. 333-68802)).
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
19