UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-51209
---------
OC FINANCIAL, INC.
(Exact name of small business issuer as specified in its charter)
Maryland 20-2111183
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6033 Perimeter Drive
Dublin, Ohio 43017
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (800) 687-6228.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [ ] NO [x]
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the last practicable date.
Class Outstanding at March 25, 2005
Common Stock, $.01 Par Value None
Transitional Small Business Disclosure Format YES [ ] NO [x]
OC FINANCIAL, INC.
Form 10-QSB Quarterly Report
Table of Contents
PART I.
Page Number
Item 1. Financial Statements ............................................. 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 7
Item 3. Controls and Procedures........................................... 15
PART II.
Item 1. Legal Proceedings................................................. 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds....... 16
Item 3. Defaults Upon Senior Securities................................... 16
Item 4. Submission of Matters to a Vote of Security Holders............... 16
Item 5. Other Information................................................. 16
Item 6. Exhibits.......................................................... 16
Signature Page ............................................................ 17
OC Financial, Inc. is the proposed holding company for Ohio Central Savings. All
financial statements and related Management's Discussion and Analysis are those
of Ohio Central Savings. The financial statements of OC Financial, Inc. have
been omitted because OC Financial, Inc. has not yet issued any stock, has no
assets and no liabilities, and has not conducted any business other than of an
organizational nature.
PART I: FINANCIAL INFORMATION; Item 1
OHIO CENTRAL SAVINGS
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and September 30, 2004
- -----------------------------------------------------------------------------------------
December 31, September 30,
2004 2004
---- ----
(UNAUDITED)
ASSETS
Cash and due from financial institutions $ 631,612 $ 665,049
Federal funds sold 2,168,000 3,820,000
------------ ------------
Total cash and cash equivalents 2,799,612 4,485,049
Investment in mutual funds 0 58,196
Certificates of deposit in other financial institutions 99,000 99,000
Securities held to maturity (fair value:
12/31/04 - $26,288,300; 9/30/04 - $22,961,177) 26,333,628 22,970,895
Federal Home Loan Bank stock 696,200 688,900
Loans, net of allowance of $226,217 at December 31,
2004 and $230,585 at September 30, 2004 25,243,149 26,104,278
Loans held for sale 624,389 92,296
Premises and equipment, net 737,652 732,892
Accrued interest receivable 210,859 181,177
Prepaid expenses 63,731 70,627
Other assets 207,303 84,072
------------ ------------
Total assets $ 57,015,523 $ 55,567,382
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Savings deposits $ 13,604,235 $ 13,687,434
Demand deposits 6,543,111 6,838,187
Money market deposits 3,320,033 3,007,420
Time deposits 9,237,164 8,727,589
------------ ------------
Total deposits 32,704,543 32,260,630
Federal Home Loan Bank advances 17,700,000 16,450,000
Payments collected on loans sold 1,886,569 1,946,878
Accrued interest payable 69,891 67,342
Drafts in process 648,431 798,860
Other liabilities 288,710 289,242
------------ ------------
Total liabilities 53,298,144 51,812,952
Commitments and contingent liabilities (Note 12)
Common stock, $0.01 par value; 1,000
shares authorized, issued and outstanding 10 10
Additional paid-in capital 274,990 274,990
Retained earnings 3,442,379 3,479,430
------------ ------------
Total shareholders' equity 3,717,379 3,754,430
------------ ------------
Total liabilities and shareholders' equity $ 57,015,523 $ 55,567,382
============ ============
See accompanying notes to consolidated financial statements.
1
OHIO CENTRAL SAVINGS
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended December 31, 2004 and 2003
(Unaudited)
For the three For the three
months ended months ended
December 31, December 31,
2004 2003
---- ----
INTEREST INCOME
Loans, including fees $ 355,914 $ 420,591
Securities and other investments 278,045 249,204
Federal funds sold and other 9,544 2,098
-------------- ---------------
643,503 671,893
INTEREST EXPENSE
Deposits 134,846 130,522
Federal Home Loan Bank advances 200,347 188,587
-------------- ---------------
335,193 319,109
-------------- ---------------
NET INTEREST INCOME 308,310 352,784
Provision for loan losses 0 15,000
-------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 308,310 337,784
NONINTEREST INCOME
Service charges and other deposit fees 92,543 99,514
Gain on loan sales 18,718 104,075
Income from servicing of loans 31,960 32,538
Visa and ATM interchange income 20,311 16,721
Other 28,337 8,857
-------------- ---------------
191,869 261,705
NONINTEREST EXPENSE
Compensation and benefits 295,749 293,637
Occupancy and equipment 27,455 28,773
Depreciation and amortization 29,245 27,995
Computer processing expense 20,019 24,729
VISA and ATM expense 28,573 21,305
Bank service charges 20,116 17,232
Collection and loan expense 8,513 8,054
Advertising and promotion 30,550 45,614
Other insurance premiums 5,009 8,662
Professional and supervisory fees 27,023 10,768
State franchise tax expense 11,550 8,503
Other 53,110 58,385
-------------- ---------------
556,912 553,658
-------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES (56,733) 45,831
Income tax expense (benefit) (19,682) 16,152
--------------- ---------------
NET INCOME (LOSS) $ (37,051) $ 29,680
=============== ===============
See accompanying notes to consolidated financial statements.
2
OHIO CENTRAL SAVINGS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Quarters ended December 31, 2004 and 2003
(unaudited)
- -------------------------------------------------------------------------------------------------------------------
Additional Total
Common Paid-in Retained Shareholders'
Stock Capital Earnings Equity
------ --------- -------- -------
BALANCE AT SEPTEMBER 30, 2003 10 274,990 3,454,719 3,729,719
Net income for the quarter ended
September 30, 2004 29,680 29,680
--------------- -------------- -------------- ---------------
BALANCE AT DECEMBER 31, 2003 $ 10 $ 274,990 $ 3,484,399 $ 3,759,399
=============== ============== ============== ===============
BALANCE AT September 30, 2004 $ 10 $ 274,990 $ 3,479,430 $ 3,754,430
Net income (loss) for the quarter ended
December 31, 2004 (37,051) (37,051)
--------------- -------------- --------------- ---------------
BALANCE AT DECEMBER 31, 2004 $ 10 $ 274,990 $ 3,442,379 $ 3,754,430
=============== ============== ============== ===============
See accompanying notes to consolidated financial statements.
3
OHIO CENTRAL SAVINGS
Consolidated Statements of CASH FLOWS
For the Three Months Ended December 31, 2004 and 2003
(Unaudited)
For the three For the three
months ended months ended
12/31/2004 12/31/2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (37,051) $ 29,680
Adjustments to reconcile net income (loss) to net cash
from operating activities
Depreciation and amortization 25,096 23,847
Provision for loan losses 0 15,000
Deferred fee/costs amortization 1,256 4,261
Federal Home Loan Bank stock dividends (7,300) (6,600)
Net amortization/(accretion) on investment securities 1,350 2,141
Purchases of mutual funds 0 (6,000)
Gain on mutual funds (2,261) (2,717)
Gain on sale of securities 0 0
Loans originated for sale (1,933,729) (8,351,590)
Proceeds from sale of loans 1,933,729 8,239,246
Net gains on sales of loans (18,718) (104,075)
Changes in other assets and other liabilities (335,134) (114,732)
-------------- -------------
Net cash from operating activities (372,762) (271,539)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities held to maturity
Purchases (4,490,903) (3,603,852)
Maturities, calls and principal payments 1,160,040 641,877
Net (increase)/decrease in loans 329,036 1,490,807
Net change in certificates of deposit in other financial institutions 0 300,000
Premises and equipment expenditures (4,760) (1,603)
-------------- -------------
Net cash from investing activities (3,006,587) (1,172,771)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 443,912 (347,878)
Proceeds from Federal Home Loan Bank advances 1,550,000 5,546,000
Repayment of Federal Home Loan Bank advances (300,000) (1,546,000)
-------------- -------------
Net cash from financing activities 1,693,912 3,652,122
-------------- -------------
Net change in cash and cash equivalents (1,685,437) 2,207,812
Cash and cash equivalents at beginning of quarter 4,485,049 1,878,351
-------------- -------------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 2,799,612 $ 4,086,163
============== =============
Supplemental disclosures of cash flow information
Cash paid during the quarter for:
Interest $ 335,194 $ 318,869
Income taxes 0 0
Noncash - transfer of credit card portfolio to held for sale 624,389 0
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
4
OHIO CENTRAL SAVINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
(Unaudited)
Note 1 - Basis of Presentation
OC Financial, Inc. (the "Company") was formed to serve as the stock holding
company for Ohio Central Savings (the "Bank") as part of the Bank's conversion
and reorganization from a mutual holding company structure. As of the date
hereof, the Bank has not completed its conversion and reorganization, and
accordingly, the Company has not yet issued any stock, has no assets or
liabilities, and has not conducted any business other than that of an
organizational nature. For a further discussion of the Company's formation and
operations, see the Company's Registration Statement on Form SB-2, as amended,
declared effective on February 11, 2005 (File Number 333-121411). Based upon the
foregoing, the Unaudited Interim Financial Statements filed as part of this
quarterly report are those of the Bank and its wholly owned subsidiary,
AutoARM(R), LLC ("AutoARM(R)"). All significant inter-company balances and
transactions have been eliminated in consolidation.
The unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with instructions for Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments
(all of which are normal and recurring in nature) considered necessary for a
fair presentation have been included. Operating results for the three-month
period ending December 31, 2004 are not necessarily indicative of the results
that may be expected for the year ending September 30, 2005. The Bank's
consolidated financial statements, as presented in the Company's Form SB-2, as
amended, declared effective on February 11, 2005, should be read in conjunction
with these statements.
Note 2 - Adoption of Plan of Conversion and Reorganization
On December 14, 2004, the Board of Directors adopted a plan of conversion and
reorganization pursuant to which the Bank would reorganize from a mutual holding
company structure and become a wholly-owned subsidiary of the Company which will
sell its common stock to eligible depositors of the Bank in a subscription
offering and, if necessary, to the general public if a syndicated community
offering is held.
Effective February 11, 2005, the Company received approval from both the
Securities and Exchange Commission and the Office of Thrift Supervision to
proceed with its planned stock offering equal to the pro forma market value of
the Company and its subsidiaries, after giving effect to the offering. The
offering is expected to close in March 2005 and the net proceeds from the
offering is anticipated to be not more than $7.4 million depending upon the
amount of stock sold. Offering costs are deferred and will be deducted from the
proceeds of the shares sold in the stock offering. If the offering is not
completed, all costs will be charged to expense. At December 31, 2004, $91,780
of costs had been incurred.
5
Note 3 - Use of Estimates
The preparation of consolidated financial statements, in conformity with
accounting principles generally acceptable in the United States of America,
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and the
reported amounts of income and expenses during the reported periods. Actual
results could differ from current estimates. Estimates associated with the
allowance for loan losses, realization of deferred tax assets, and the fair
values of securities and other financial instruments are particularly
susceptible to material change in the near term.
6
OC FINANCIAL, INC.
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
When used in this filing and in future filings by OC Financial, Inc.
with the Securities and Exchange Commission, in the Company's press releases or
other public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases, "anticipate,"
"would be," "will allow," "intends to," "will likely result," "are expected to,"
"will continue," "is anticipated," "estimated," "projected," or similar
expressions are intended to identify, "forward looking statements." Such
statements are subject to risks and uncertainties, including but not limited to
changes in economic conditions in OC Financial, Inc.'s market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for
loans in OC Financial, Inc.'s market area, changes in the position of banking
regulators on the adequacy of our allowance for loan losses, and competition,
all or some of which could cause actual results to differ materially from
historical earnings and those presently anticipated or projected.
OC Financial, Inc. wishes to caution readers not to place undue reliance
on any such forward-looking statements, which speak only as of the date made,
and advise readers that various factors, including regional and national
economic conditions, substantial changes in levels of market interest rates,
credit and other risks of lending and investing activities, and competitive and
regulatory factors, could affect OC Financial, Inc.'s financial performance and
could cause OC Financial, Inc.'s actual results for future periods to differ
materially from those anticipated or projected.
OC Financial, Inc. does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
GENERAL
On March 31, 1998, Ohio Central Savings converted its charter from a
federally-chartered credit union to a federally-chartered savings association
and became a taxable organization. Our principal business has historically
consisted of attracting deposits from the general public and the business
community and making loans secured by various types of collateral, including
vehicles, real estate and general business assets. Ohio Central Savings is
significantly affected by prevailing economic conditions as well as government
policies and regulations concerning, among other things, monetary and fiscal
affairs, housing and financial institutions. Deposit flows are influenced by a
number of factors, including interest rates paid on competing investments,
account maturities, fee structures, and level of personal income and savings.
Lending activities are influenced by the demand for funds, the number and
quality of lenders, and regional economic cycles. Sources of funds for lending
activities of Ohio Central Savings include deposits, borrowings, payments on
loans, maturities of securities and income provided from operations. Ohio
Central Savings' earnings are primarily dependent upon Ohio Central Savings' net
interest income, which is the difference between interest income and interest
expense.
Interest income is a function of the balances of loans and investments
outstanding during a given period and the yield earned on such loans and
investments. Interest expense is a function of the amount of deposits and
borrowings outstanding
7
during the same period and interest rates paid on such deposits and borrowings.
Ohio Central Savings' earnings are also affected by Ohio Central Savings'
provision for loan losses, service charges, gains from sales of loans,
commission income, interchange fees, other income, operating expenses and income
taxes.
CRITICAL ACCOUNTING POLICIES
Certain of our accounting policies are important to the portrayal of our
financial condition, since they require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently
uncertain. Estimates associated with these policies are susceptible to material
changes as a result of changes in facts and circumstances. Facts and
circumstances which could affect these judgments include, but without
limitation, changes in interest rates, changes in the performance of the economy
or in the financial condition of borrowers. Management believes that its
critical accounting policy is the determination of the allowance for loan
losses. Accounting policies considered critical to other financial institutions,
such as determining the fair value of securities, accounting for deferred income
taxes, and the valuation of intangible assets including goodwill, are not
considered critical to Ohio Central Savings, as the carrying value of its
securities is amortized cost since it holds its securities to maturity; it has
no significant temporary book to tax differences that involve significant
estimates or assumptions in determining its deferred tax assets; and it has no
intangible assets. These areas do not involve significant estimates or
assumptions for Ohio Central Savings. Ohio Central Savings' accounting policies
are discussed in detail in Note 1 of the "Notes to the Consolidated Financial
Statements" contained in its September 30, 2004 consolidated financial
statements included in the registration statement on Form SB-2, as amended.
The allowance for loan losses represents management's estimate of
probable losses inherent in the loan portfolio. Determining the amount of the
allowance is considered a critical accounting estimate because it requires
significant judgment about the collectibility of loans and the factors that
deserve consideration in estimating probable credit losses. The allowance for
loan losses is a valuation allowance for probable incurred credit losses,
increased by the provision for loan losses and decreased by charge-offs less
recoveries. Management estimates the allowance balance required using the past
loan loss experience, the nature and volume of the portfolio, information about
specific borrower situations and estimated collateral values, economic
conditions and other factors. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off. Loan losses are charged against
the allowance when management believes the uncollectibility of a loan balance is
confirmed. Management evaluates the adequacy of the allowance at least
quarterly. This evaluation is inherently subjective as it requires material
estimates that may be susceptible to significant change.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as special mention, substandard, or doubtful. The general
component covers non-classified loans and is based on historical loss experience
adjusted for current factors. Management relies on observable data from internal
and external sources to evaluate each of these factors, adjust assumptions and
recognize changing conditions to reduce differences between estimated and actual
observed losses from period to period. The evaluation of the allowance also
takes into consideration the inherent imprecision of loss estimation models and
techniques and includes general reserves for probable but undetected losses in
categories of loans. While Ohio Central Savings continually refines and enhances
the loss estimation models and techniques it
8
uses to determine the appropriateness of the allowance for loan losses, there
have been no material substantive changes to such models and techniques compared
to prior periods. The portfolio consists primarily of smaller balance
homogeneous loans, therefore, impaired loans are analyzed primarily on a pooled
basis for purposes of establishing the allowance for loan losses.
The allowance for loan losses and related provision expense can also be
susceptible to material change as a result of significant changes in individual
borrower circumstances on larger dollar loans. Given that Ohio Central Savings'
portfolio consists primarily of automobile loans, the variability in the
allowance and provision for loan losses would normally be the result of economic
and other trends in its lending market area, changes in the quality of its
lending staff, collection practices and loan administration. Adverse changes in
these areas could result in increases in non-performing loans and loan
charge-offs, requiring increases to the provision and allowance for loan losses.
BUSINESS STRATEGY
Prior to our affiliation with Third Federal Savings and Loan Association
of Cleveland ("Third Federal"), Ohio Central Savings was a full service
community-based savings institution generating a wide variety of loans for our
customers. As a result of our affiliation, and as part of our strategic plan,
our potential mortgage loan customers were referred to Third Federal. We also
increased our automobile lending program as part of the alliance through
marketing efforts with Third Federal. Since we affiliated with Third Federal we
originated $117.0 million in automobile loans, 80% of which were sold to Third
Federal. During our three-year affiliation our mortgage portfolio declined by
$11.3 million or about 63.1% from $17.9 million to $6.6 million. After our
separation from Third Federal we plan to reinitiate mortgage lending activity
within our market areas.
We believe that the business model we have developed over the past three
years is best suited for an independent organization rather than being
affiliated with a larger organization. Following completion of the conversion
and reorganization, we plan to retain automobile loans in our portfolio and
resume our mortgage lending program. We anticipate the increased lending
activity will result in higher levels of earnings, but there can be no guarantee
that we will be able to accomplish this objective.
We will also pursue growth in other loan and deposit accounts within our
market areas. We plan to market home equity loans, automobile loans and credit
card accounts. We will seek deposit accounts in a blend of certificate of
deposits, NOW accounts and money market accounts to provide funds for lending
activities. We plan to retain these loans in our portfolio in order to improve
our earnings. Due to the limits of our capital base, our ability to increase
interest earning assets has been constrained even though we otherwise have the
resources to increase our lending operations. Our profitability was marginal in
the last fiscal year. Following completion of the conversion and reorganization,
however, we believe our higher capital levels will allow us to improve our
profitability by increasing interest earning assets such as loans and to reduce
substantially our reliance on income from securities in our investment
portfolio. We do not anticipate the need to hire any new employees, however, in
connection with the conversion and reorganization.
We will also continue to pursue our automobile loan origination and
servicing business offered to other financial institutions through our
AutoARM(R) subsidiary. This subsidiary was formed in August 2003 and is a
proposed third party originator and
9
servicer of direct automobile loans for other financial institutions. AutoARM(R)
has not generated any earnings as of December 31, 2004. We had not actively
marketed AutoARM's(R) services until late 2004 as we were building the
operational systems to support its operations. As a result, AutoARM(R) had not
contracted with any financial institutions as of December 31, 2004. AutoARM(R)
is a program designed by Ohio Central Savings to offer these services to other
financial institutions in a manner similar to the method that was developed to
be used with Third Federal. Loans originated and funded by AutoARM(R) will not
earn a gain on sale to the other institutions but will generate servicing income
for us.
We plan to continue our marketing initiative for AutoARM(R) into 2005.
Several presentations have been made to potential customers. As a result of
these efforts, negotiations are currently underway with three institutions. Two
institutions are considering AutoARM(R) for origination and servicing of new
loans and one institution is considering origination and servicing of new loans
and also retaining AutoARM(R) to service their existing portfolio.
We also intend to focus on the following:
o GROWING OUR ASSETS. Immediately following completion of the
conversion and reorganization, we intend to increase our assets
by purchasing mortgage-backed securities and one- to four-family
residential mortgage loans to increase our earnings until we are
able to originate a sufficient volume of loans to provide a
higher level of earnings.
o RETAINING LOANS. We intend to retain more loans, such as
residential mortgage loans, in our loan portfolio in order to
increase our interest-earning assets and income. Due to our
restricted capital base we have not been able to retain as many
loans as we could with the larger capital base we expect to have
following the conversion and reorganization.
o REDUCING OUR SECURITIES PORTFOLIO. Over the first few years
following completion of the conversion and reorganization, we
intend to reduce our mortgage-backed and other mortgage related
securities portfolio (including those securities that we
purchase soon after the completion of the conversion and
reorganization as discussed above) by reinvesting the cash flows
from held to maturity securities in residential mortgage and
other loans that should provide a higher yield. Available for
Sale securities may be sold to meet loan demand that cannot be
funded through deposit acquisition or other funding sources. We
will continue to invest in such securities as necessary for
interest-rate risk and liquidity management.
o MAINTAINING THE QUALITY OF OUR LOAN PORTFOLIO. The quality of
our loan portfolio is a key factor in managing our growth. We
will continue to use risk management techniques, such as
independent internal and external loan reviews and risk-focused
portfolio credit analysis, in overseeing the performance of our
loan portfolio.
o ACHIEVING EFFICIENT GROWTH BY LEVERAGING OUR EXISTING
OPERATIONAL AND MANAGEMENT RESOURCES. We have invested
significant resources in developing a management team and a
technology infrastructure that are capable of managing a larger
asset and deposit base than we have
10
currently. As a result, we have a loan department staffed with
experienced professionals who are capable of promoting the
continued growth and oversight of our loan portfolio, and we
intend to approach future growth opportunities with a view
toward achieving improved economies of scale.
o INCREASING OUR NON-INTEREST INCOME BY DIVERSIFYING PRODUCTS AND
SERVICES. We intend to supplement our interest income by
increasing our fee income from new products and services.
COMPARISON OF RESULTS OF OPERATION FOR THE THREE MONTHS ENDED DECEMBER 31, 2004
AND 2003
GENERAL. Our loss for the three months ended December 31, 2004 was
$37,000 compared to $30,000 in income for the three months ended December 31,
2003.
Our loss resulted primarily from the change in the volume of loans sold
to Third Federal, decreasing to $2.1 million for the three months ended December
31, 2004 from $8.2 million for the three months ended December 31, 2003. This
represents a reduction in auto loans sold of $6.1 million. Gain from loan sales
was $19,000 for the three months ended December 31, 2004, compared to $104,000
for the three months ended December 31, 2003, a decrease of $85,000. In
addition, continued replacement of higher interest rate automobile loans with
new, lower interest rate loans and replacing the lack of mortgage loan
originations with lower yielding mortgage-backed securities also had a negative
effect on income.
INTEREST INCOME. Interest income decreased to $644,000 for the three
months ended December 31, 2004 from $672,000 for the three months ended December
31, 2003. The primary reason for the decrease in interest income was the
decrease in loan income from $421,000 to $356,000 for the three months ended
December 31, 2003 and 2004, respectively. An increase in investment and other
interest income from $249,000 for the three months ended December 31, 2003 to
$278,000 for the three months ended December 31, 2004 partially offset the
decrease in loan interest income. The decrease in loan income was primarily due
to declining yields in the portfolio as older, higher rate loans were repaid and
replaced by loans at currently low rates. The weighted average yield on loans
decreased from 6.42% for the three months ended December 31, 2003 to 5.46% for
the three months ended December 31, 2004. This decrease was due to decreases in
market interest rates and the short term nature of the majority of our loan
portfolio. The weighted average yield on securities decreased from 4.49% for the
three months ended December 31, 2003 to 4.41% for the three months ended
December 31, 2004 as longer duration mortgage-backed securities were added to
the portfolio to offset prepayments and amortization on older, higher yielding
securities. Total average interest earning assets increased $4.1 million from
the three months ended December 31, 2003 to the three months ended December 31,
2004, and the weighted average yield on interest earning assets declined 61
basis points from 5.35% to 4.74%. As we intend to increase our emphasis on
residential mortgage lending, this trend of increasing interest earning assets
may continue.
INTEREST EXPENSE. Interest expense increased $16,000 to $335,000 for the
three months ended December 31, 2004 from $319,000 for the three months ended
December 31, 2003. The increase in interest expense was primarily due to an
increase in Federal Home Loan Bank advances of $1.2 million. Interest expense on
Federal Home Loan Bank advances increased $11,000 to $200,000 for the three
months ended December 31, 2004 from $189,000 for the three months ended December
31, 2003.
11
Federal Home Loan Bank advances increased to $17.7 million at December 31, 2004
from $16.5 million at December 31, 2003. This increase was partially offset by a
35 basis point decrease in the weighted average cost of Federal Home Loan Bank
advances to 4.78% for the three months ended December 31, 2004, from 5.13% the
three months ended December 31, 2003.
As interest rates stabilize or increase, we expect interest expense will
increase as our cost of interest bearing liabilities increase. Our average
weighted cost of funds was 2.75% for the three months ended December 31, 2004
compared to 2.89% for the three months ended December 31, 2003. Interest expense
on deposits increased $4,000 to $135,000 for the three months ended December 31,
2004 from $131,000 for the three months ended December 31, 2003. The decrease in
interest expense was attributable to declines in interest rates paid on deposit
accounts and borrowings, which was more than offset by additional interest
expense incurred due to the increase in average interest bearing liabilities of
$4.6 million for the three months ended December 31, 2004 compared to the three
months ended December 31, 2003.
NET INTEREST INCOME. Net interest income decreased $44,000 to $308,000
for the three months ended December 31, 2004 from $352,000 for the three months
ended December 31, 2003. The decrease in net interest income is primarily the
result of declining interest rates and a continuing shift from loans to
investments as described above. Our net interest margin was 2.27% for the three
months ended December 31, 2004 compared to 2.81% for the three months ended
December 31, 2003.
PROVISION FOR LOAN LOSSES. We establish provisions for loan losses,
which are charged to operations, at a level required to reflect probable and
estimable credit losses in the loan portfolio. In evaluating the level of the
allowance for loan losses, management considers historical loss experience, the
types of loans and the amount of loans in the loan portfolio, adverse situations
that may affect borrowers' ability to repay, estimated value of any underlying
collateral, and prevailing economic conditions. Large groups of smaller balance
homogeneous loans, such as automobile loans, residential real estate and other
consumer loans, are evaluated in the aggregate using historical loss factors
adjusted for current economic conditions and other relevant data. Larger
non-homogeneous loans such as commercial loans for which management has concerns
about the borrowers' ability to repay are evaluated individually, and specific
allowances are provided for such loans when necessary.
Based on management's evaluation of these factors, no provision was made
for the three months ended December 31, 2004 compared to $15,000 made for the
three months ended December 31, 2003. The decrease in provision for loan losses
is primarily attributable to decreased loan levels as discussed above. The
amount of general allowance allocations made for smaller balance homogeneous
loans decreased during the three months ended December 31, 2004 primarily
resulting from the performance of the portfolio, actual losses and recoveries.
Loan charge-offs were $5,000 for the three months ended December 31, 2004, down
from $15,000 for the three months ended December 31, 2003. Recoveries were
$1,000 during each of the three month periods ended December 31, 2004 and 2003.
While management uses available information to recognize losses on
loans, future loan loss provisions may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for loan losses and
may require us to recognize additional provisions based on their judgment of
information available to them at the time of their examination. The allowance
for loan losses as of December 31,
12
2004 was maintained at a level that represents management's best estimate of
probable incurred losses in the loan portfolio.
NON-INTEREST INCOME. Non-interest income decreased $70,000 to $192,000
for the three months ended December 31, 2004 from $262,000 for the three months
ended December 31, 2003. The overall decrease in non-interest income was
primarily due to lower auto loan sales to Third Federal as discussed above. On
December 22, 2004, the Bank signed a commitment letter, subject to negotiation
of a final agreement, to sell our credit card portfolio, with an aggregate
principal balance of $624,000, to another financial institution. We expect to
record an after-tax gain of approximately $60,000 when the sale is completed in
the first calendar quarter of 2005.
NON-INTEREST EXPENSE. Non-interest expense was virtually unchanged, with
category increases offsetting category decreases for the three months ended
December 31, 2004 compared to the three months ended December 31, 2003. With the
reduction in loan volume, all categories of operating expense other than
compensation and audit decreased compared to the prior period. The increases in
audit and compensation expense were the result of our proposed separation from
Third Federal. The proposed transaction required an audit of Ohio Central
Savings separate from the audit of Third Federal. Increased compensation
expenses are being incurred due to the termination of Third Federal benefit
plans.
INCOME TAX EXPENSE. Income tax credit for the three months ended
December 31, 2004 was $20,000. In the three months ended December 31, 2003,
income tax expense was $16,000. Ohio Central Savings' effective federal income
tax rate was 34.69% and 35.24% for fiscal 2004 and fiscal 2003, respectively.
CHANGES IN FINANCIAL CONDITION FROM SEPTEMBER 30, 2004 TO DECEMBER 31, 2004.
GENERAL. Total assets increased by $1.4 million, or 2.6%, to $57.0
million at December 31, 2004 from $55.6 million at September 30, 2004. The
increase was primarily the result of an increase in investments of $3.4 million,
offset by a decrease in federal funds sold of $1.7 million and a decrease in net
loans and loans held for sale of $329,000. The increase in total assets was
funded by an increase in customer deposits of $444,000 and an increase in
Federal Home Loan Bank advances of $1.3 million, offset by decreases in other
liabilities of $209,000 at December 31, 2004.
ASSETS. Our loan portfolio decreased by $300,000 from $26.2 million
(including loans held for sale of $92,000) to $25.9 million (including loans
held for sale of $624,000) from September 30, 2004 to December 31, 2004. Our
lending strategy has changed significantly during the past three years,
emphasizing the origination of auto loans and decreasing originations of
mortgage loans since our affiliation with Third Federal. As a result, first
mortgage loans were unchanged at $6.6 million in September 30, 2004 and December
31, 2004. Second mortgage loans were paid down by $100,000 and automobile loan
balances decreased by $200,000 as portfolio amortization and prepayments
exceeded originations for the quarter.
The allowance for loan losses was $226,000 at December 31, 2004 or 0.87%
of loans, compared to $231,000, or 0.87% of loans at September 30, 2004. The
allowance for loan losses consists of general allowance allocations made for
pools of homogeneous loans and specific allowances on individual loans for which
management has significant concerns regarding the borrowers' ability to repay
the loans in accordance with the terms of the loans. Non-performing loans
totaled $77,000 and $39,000 at December 31, 2004 and September 30, 2004,
respectively. In determining the amount of allowance for
13
loan loss allocations needed for non-performing loans, management has considered
expected future borrower cash flows and the fair value of underlying collateral.
The amount of allowance for loan losses allocated to individual loan
relationships remained fairly stable in the three months ended December 31,
2004, increasing to $81,000 at December 31, 2004 from $77,000 at September 30,
2004.
DEPOSITS. Total deposits increased by $444,000, or 1.4%, to $32.7
million at December 31, 2004 from $32.3 million at September 30, 2004. NOW
accounts and money market accounts were relatively unchanged while time deposits
increased $510,000 and savings deposits decreased $83,000. The increase in
deposits was a result of our efforts to expand our customer base in existing
markets through improved products and marketing. The number of deposit accounts
has declined in recent years as we have focused on attracting larger depositors,
and we have implemented fee programs that discourages accounts with very low
balances. We plan to continue this strategy following completion of the
conversion and reorganization.
BORROWINGS. Federal Home Loan Bank advances increased $1.3 million, or
7.6% to $17.7 million at December 31, 2004 from $16.5 million at September 30,
2004. The additional Federal Home Loan Bank advances obtained during the first
quarter of fiscal 2005 were used to fund investment portfolio growth to improve
net interest income. We expect that Federal Home Loan Bank advances will
continue to provide Ohio Central Savings with a significant additional funding
source to meet the needs of its lending activities.
SHAREHOLDERS' EQUITY. Total shareholders' equity decreased $37,000, or
0.99%, to $3.72 million at December 31, 2004 from $3.75 million at September 30,
2004. The decrease in equity was due to the net loss resulting primarily from
the reduction in gain on sale for auto loans sold to Third Federal, discussed in
more detail in the "Comparison of Results of Operation for the Three Months
Ended December 31, 2004 and 2003."
CAPITAL RESOURCES. At December 31, 2004, equity totaled $3.72 million.
Management monitors the capital levels of Ohio Central Savings to provide for
current and future business opportunities and to meet regulatory guidelines for
"well-capitalized" institutions.
Ohio Central Savings is required by the Office of Thrift Supervision to
meet minimum capital adequacy requirements. Ohio Central Savings' actual and
required levels of capital as reported to the Office of Thrift Supervision at
December 31, 2004 are as follows:
TO BE WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
----------------------- ----------------------- ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ---------- ----------- ---------- ---------- ------------
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31, 2004
Total capital (to risk weighted
assets)......................... $ 3,944 13.70% $ 2,310 8.0% $ 2,887 10.0%
Tier 1 (core) capital (to risk
weighted assets)................ $ 3,717 12.91% $ 1,155 4.0% $ 1,732 6.0%
Tier 1 (core) capital (to
adjusted total assets).......... $ 3,717 6.52% $ 2,281 4.0% $ 2,851 5.0%
14
LIQUIDITY
Management maintains a liquidity position that it believes will
adequately provide funding for loan demand and deposit run-off that may occur in
the normal course of business. Ohio Central Savings relies on a number of
different sources in order to meet its potential liquidity demands. The primary
sources are increases in deposit accounts and cash flows from loan payments and
the securities portfolio.
In addition to these primary sources of funds, management has several
secondary sources available to meet potential funding requirements. As of
December 31, 2004, Ohio Central Savings had additional borrowing capacity of
$7.6 million with the Federal Home Loan Bank of Cincinnati. Additionally, Ohio
Central Savings has access to the Federal Reserve Bank of Cleveland discount
window for borrowing. The available line at the discount window is $12.6
million. The stock offering will increase our liquidity until such time that we
deploy the net proceeds from cash and other short-term investments to loans
consistent with our business plan submitted to the Office of Thrift Supervision
in connection with the stock offering and our business strategy discussion in
this Prospectus.
Our stock offering will provide significant additional liquidity and
capital resources. As our liquidity positions have historically been maintained
to provide for loan demand and deposit run-off, the stock offering proceeds may
provide excess liquidity in the near term. The additional liquidity and capital
resources from the stock offering will help provide for the future growth of
Ohio Central Savings.
ITEM 3 - Controls and Procedures
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
or 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as
amended) as of December 31, 2004. Based on such evaluation, our Chief Executive
Officer and Chief Financial Officer, have concluded that our disclosure controls
and procedures are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Securities Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and regulations and are operating in an effective manner.
No change in our internal controls over financial reporting (as defined
in Rules 13a-15(f) or 15(d)-15(f) under the Securities Exchange Act of 1934)
occurred during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
15
OC FINANCIAL, INC.
FORM 10-QSB
December 31, 2004
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or
its subsidiaries is a party other than ordinary routine litigation incidental to
their respective businesses.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS
a. Exhibits
31.1 Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
16
OC FINANCIAL, INC.
FORM 10-QSB
December 31, 2004
PART II - OTHER INFORMATION
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.
OC FINANCIAL, INC.
(Registrant)
Date: March 25, 2005 /s/ Robert W. Hughes
-------------------------------------------
Robert W. Hughes - Chairman, President and
Chief Executive Officer
Date: March 25, 2005 /s/ H. Stewart Fitz Gibbon III
-------------------------------------------
H. Stewart Fitz Gibbon III - Vice President
and Chief Financial Officer
17