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 March 31, 2006
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) 678-6228.
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 [X] NO [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). 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 May 15, 2006
Common Stock, $0.01 Par Value 560,198
Transitional Small Business Disclosure Format YES [ ] NO [x]
OC FINANCIAL, INC.
Form 10-QSB Quarterly Report
Table of Contents
PART I. FINANCIAL INFORMATION
Page Number
Item 1. Financial Statements ......................................................................... 1
Item 2. Management's Discussion and Analysis or Plan of Operation..................................... 8
Item 3. Controls and Procedures....................................................................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds................................... 17
Item 3. Defaults Upon Senior Securities............................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders........................................... 17
Item 5. Other Information............................................................................. 17
Item 6. Exhibits...................................................................................... 17
Signature Page ........................................................................................... 18
PART I: FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
OC FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 2006 and September 30, 2005
March 31, September 30,
2006 2005
------------ ------------
(UNAUDITED)
------------ ------------
ASSETS
Cash and due from financial institutions $ 509,470 $ 565,586
Federal funds sold 12,513,000 3,397,000
------------ ------------
Total cash and cash equivalents 13,022,470 3,962,586
Securities held to maturity (fair value:
3/31/06 - $24,994,180;
09/30/05 - $24,235,140) 25,919,366 24,714,143
Federal Home Loan Bank stock 741,800 721,100
Loans, net of allowance of $205,860 at 3/31/06 and
$179,822 at 09/30/05 30,190,406 29,305,852
Premises and equipment, net 651,104 691,845
Accrued interest receivable 226,197 201,288
Prepaid expenses 155,052 139,066
Other assets 59,665 74,807
------------ ------------
Total assets $ 70,966,060 $ 59,810,687
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Savings deposits $ 11,907,656 $ 12,965,475
Demand deposits 6,227,082 5,692,718
Money market deposits 2,228,022 2,575,233
Time deposits 29,661,609 11,858,712
------------ ------------
Total deposits 50,024,369 33,092,138
Federal Home Loan Bank advances 11,200,000 16,450,000
Payments collected on loans sold 1,876,472 2,119,105
Accrued interest payable 55,966 69,062
Drafts in process 479,901 429,350
Other liabilities 84,752 245,370
------------ ------------
Total liabilities 63,721,460 52,405,025
Preferred stock, $0.01 par value, 5,000,000 shares authorized,
0 shares issued and outstanding -- --
Common stock, $0.01 par value; 15,000,000 shares authorized,
560,198 shares issued and outstanding 5,602 5,602
Additional paid-in capital 4,949,797 4,949,797
Unearned ESOP shares (429,795) (448,150)
Retained earnings 2,718,996 2,898,413
------------ ------------
Total shareholders' equity 7,244,600 7,405,662
------------ ------------
Total liabilities and shareholders' equity $ 70,966,060 $ 59,810,687
============ ============
See accompanying notes to consolidated financial statements.
1
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)
For the three For the three
months ended months ended
March 31, March 31,
2006 2005
--------- ---------
INTEREST INCOME
Loans, including fees $ 424,446 $ 345,425
Securities and other investments 325,874 318,833
Federal funds sold and other 107,338 11,025
--------- ---------
857,658 675,283
INTEREST EXPENSE
Deposits 337,779 145,296
Federal Home Loan Bank advances 160,250 212,494
--------- ---------
498,029 357,790
--------- ---------
NET INTEREST INCOME 359,629 317,493
Provision for loan losses 15,000 --
--------- ---------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 344,629 317,493
NONINTEREST INCOME
Service charges and other deposit fees 78,600 86,898
Gain on loan sales -- 92,015
Income from servicing of loans 23,333 32,362
Visa and ATM interchange income 9,446 15,100
Other 12,627 13,847
--------- ---------
124,006 240,222
NONINTEREST EXPENSE
Compensation and benefits 303,975 261,542
Occupancy and equipment 27,972 29,186
Depreciation and amortization 29,672 29,704
Computer processing expense 28,341 21,805
VISA and ATM expense 19,313 25,149
Bank service charges 20,414 19,026
Collection and loan expense 10,342 7,502
Advertising and promotion 35,793 38,561
Other insurance premiums 4,999 4,452
Professional and supervisory fees 67,837 32,177
State franchise tax expense 23,850 10,875
Other 64,935 53,030
--------- ---------
637,443 533,009
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (168,808) 24,706
Income tax expense (benefit) (59,116) 8,854
--------- ---------
NET INCOME (LOSS) $(109,692) $ 15,852
========= =========
Net loss per share $ (0.21)
=========
See accompanying notes to consolidated financial statements.
2
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended March 31, 2006 and 2005
(Unaudited)
For the six For the six
months ended months ended
March 31, March 31,
2006 2005
----------- -----------
INTEREST INCOME
Loans, including fees $ 813,024 $ 701,340
Securities and other investments 607,118 596,877
Federal funds sold and other 127,782 20,569
----------- -----------
1,547,924 1,318,786
INTEREST EXPENSE
Deposits 512,159 280,142
Federal Home Loan Bank advances 345,372 412,841
----------- -----------
857,531 692,983
----------- -----------
NET INTEREST INCOME 690,393 625,803
Provision for loan losses 30,000 --
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 660,393 625,803
NONINTEREST INCOME
Service charges and other deposit fees 171,382 179,442
Gain on loan sales -- 110,733
Income from servicing of loans 47,550 64,322
Visa and ATM interchange income 20,246 35,410
Other 30,223 42,183
----------- -----------
269,401 432,090
NONINTEREST EXPENSE
Compensation and benefits 574,045 557,291
Occupancy and equipment 57,124 56,641
Depreciation and amortization 59,241 58,948
Computer processing expense 55,073 41,824
VISA and ATM expense 40,539 53,721
Bank service charges 43,316 39,142
Collection and loan expense 11,981 16,016
Advertising and promotion 68,568 69,112
Other insurance premiums 10,163 9,461
Professional and supervisory fees 131,130 59,200
State franchise tax expense 34,500 22,425
Other 119,853 106,139
----------- -----------
1,205,533 1,089,920
----------- -----------
LOSS BEFORE INCOME TAXES (275,739) (32,027)
Income tax benefit (96,322) (10,828)
----------- -----------
NET LOSS $ (179,417) $ (21,199)
=========== ===========
Net loss per share $ (0.35)
===========
See accompanying notes to consolidated financial statements
3
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Six Months ended March 31, 2006 and 2005
(unaudited)
- --------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Paid in Retained Unearned Comprehensive Shareholders'
Stock Capital Earnings ESOP (Loss) Equity
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 2004 $ 10 $ 274,990 $ 3,479,430 $ -- $ -- $ 3,754,430
Redemption of stock from Third
Federal Savings MHC (10) (274,990) (517,000) -- -- (792,000)
Issuance of common stock, net of
Offering costs 5,602 5,017,310 -- -- -- 5,022,912
Unearned ESOP Shares -- -- -- (448,150) -- (448,150)
Comprehensive Income:
Net Loss for the six months ended
March 31, 2005 -- -- (21,199) -- -- (21,199)
------------
Unrealized losses on securities
available for sale, net of tax -- -- -- -- (21,896) (21,896)
-----------
Comprehensive loss -- -- -- -- (21,896) (43,095)
-----------
BALANCE AT MARCH 31, 2005 $ 5,602 $ 5,017,310 $ 2,941,231 $ (448,150) $ (21,896) $ 7,494,097
=========== =========== =========== =========== =========== ===========
BALANCE AT SEPTEMBER 30, 2005 $ 5,602 $ 4,949,797 $ 2,898,413 $ (448,150) -- $ 7,405,662
Earned ESOP Shares -- -- -- $ 18,355 -- $ 18,355
Net Loss for the six months ended
March 31, 2006 -- -- (179,417) -- -- (179,417)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT MARCH 31, 2006 $ 5,602 $ 4,949,797 $ 2,718,996 $ (429,795) $ -- $ 7,244,600
=========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended March 31, 2006 and 2005
(Unaudited)
For the six For the six
months ended months ended
3/31/2006 3/31/2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (179,417) $ (21,199)
Adjustments to reconcile net income (loss) to net cash
from operating activities
Depreciation and amortization 59,241 50,651
Provision for loan losses 30,000 --
Deferred fee/costs amortization 6,013 2,804
Federal Home Loan Bank stock dividends (20,700) (15,000)
Net amortization on investment securities (20,878) 7,445
Gain on mutual funds -- (2,261)
Loans originated for sale (157,219) (1,962,573)
Proceeds from sale of loans 157,219 1,933,729
Net gains on sales of loans -- (110,733)
Changes in other assets and other liabilities (391,550) 69,001
------------ ------------
Net cash used in operating activities (517,291) (48,136)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities held to maturity
Purchases (2,954,688) (6,511,787)
Maturities, calls and principal payments 1,770,343 2,103,531
Securities available for sale
Purchases -- (4,118,221)
Net (increase)/decrease in loans (920,567) 108,148
Premises and equipment expenditures (18,500) 19,407
------------ ------------
Net cash used in investing activities (2,123,412) (8,398,922)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 16,932,232 525,490
Proceeds from Federal Home Loan Bank advances -- 3,300,000
Repayment of Federal Home Loan Bank advances (5,250,000) (300,000)
Redemption of stock from Third Federal Savings MHC -- (792,000)
Proceeds from issuance of common stock, net of offering costs -- 5,022,912
Cash provided to ESOP for purchase of shares -- (448,150)
Cash received for earned ESOP shares 18,355 --
------------ ------------
Net cash provided by financing activities 11,700,587 7,308,252
------------ ------------
Net change in cash and cash equivalents 9,059,884 (1,138,806)
Cash and cash equivalents at beginning of period 3,962,586 4,485,049
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,022,470 $ 3,346,243
============ ============
Supplemental disclosures of cash flow information Cash paid during the six
months for:
Interest $ 870,627 $ 692,983
Income taxes 0 0
Noncash - transfer of credit card portfolio to held for sale 0 $ 624,389
See accompanying notes to consolidated financial statements
5
OC FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
Note 1 - Principles of Consolidation and Basis of Presentation
The consolidated financial statements include OC Financial, Inc. (the
"Company"), Ohio Central Savings (the "Bank") and its wholly-owned subsidiary,
AUTOARM, LLC, together referred to as "the Corporation." Intercompany
transactions and balances are eliminated in the consolidation.
The Company was formed to serve as the stock holding company for the Bank as
part of the Bank's conversion and reorganization from a mutual holding company
structure. On March 31, 2005, the Bank completed its conversion and
reorganization, and the Company issued stock to complete its offering. Prior to
the consummation of the reorganization, the Company had no assets or
liabilities. Accordingly, the Company's financial statements consist of those of
the Bank for the periods prior to March 31, 2005. For a further discussion of
the Company's formation see the Company's Registration Statement on Form SB-2,
as amended, declared effective on February 11, 2005 (File Number 333-121411).
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 March 31, 2006 are not necessarily indicative of the results that
may be expected for the year ending September 30, 2006. The Company's
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended September 30, 2005
should be read in conjunction with these statements. The Bank operates in one
business segment, banking.
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 and the fair values of securities are particularly
susceptible to change in the near term.
Note 2 - Adoption of Plan of Conversion and Reorganization
On December 14, 2004, the Board of Directors of the Bank adopted a plan of
conversion and reorganization pursuant to which the Bank reorganized from a
mutual holding company structure and became a wholly-owned subsidiary of the
Company which sold its common stock to eligible depositors of the Bank in a
subscription offering. The offering closed on March 31, 2005 with net proceeds
of $5.0 million received on the sale of 560,198 common shares. The net proceeds
were used for general corporate purposes, including the purchase of
mortgage-backed securities and funding of loans. The Company also provided
$448,000 to the newly-established employee stock ownership plan, as discussed in
Note 3.
6
Note 3 - Employee Stock Ownership Plan
In connection with the stock offering, the Company established an Employee Stock
Ownership Plan ("ESOP") for the benefit of its employees. The Company issued
44,815 shares of common stock to the ESOP in exchange for a 20-year note in the
amount of $448,150. The interest rate is Prime floating, with annual principal
and interest payments due on the last business day of December starting in 2005
and ending in 2024. The loan for the ESOP purchase was obtained from the
Company.
Shares issued to the ESOP are allocated to ESOP participants based on principal
and interest payments made by the ESOP on the loan from the Company. The loan is
secured by shares purchased with the loan proceeds and will be repaid by the
ESOP with funds from the Bank's contributions to the ESOP and earnings on ESOP
assets.
As shares are released from collateral, the Company will report compensation
expense equal to the current market price of the shares and the shares will
become outstanding for earnings-per-share (EPS) computations. Dividends on
allocated ESOP shares reduce retained earnings; dividends on unearned ESOP
shares reduce accrued interest.
Note 4 - Net Loss Per Share
Net Loss per share for the three months and the six months ended March 31, 2006
were $(0.18) and $(0.38), respectively. Common shares outstanding for purposes
of the earnings per share calculation were as follows for the three months and
the six months ended March 31, 2006:
Three Months Six Months
Ended Ended
MARCH 31, 2006 MARCH 31, 2006
-------------- --------------
Average shares outstanding 560,198 560,198
Average unearned ESOP shares 42,980 43,898
-------------- --------------
Weighted average common shares outstanding,
basic and diluted 517,218 516,300
============== ==============
The Company currently had no potentially dilutive securities as of March 31,
2006. On April 19, 2006 the Company's shareholders approved the 2006 Stock
Incentive Plan pursuant to which the Company may grant stock options and award
shares of restricted stock to directors, officers and employees. As of May 15,
2006, no options or shares of restricted stock had been granted.
7
OC FINANCIAL, INC.
ITEM 2 - Management's Discussion and Analysis or Plan of Operation
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, 2005, Ohio Central Savings became the wholly owned
subsidiary of OC Financial, Inc. after completing a conversion and
reorganization from the mutual form of organization and a divestiture from Third
Federal Savings and Loan Association of Cleveland, MHC ("Third Federal").
The Bank's 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. The Company 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 the Bank
include deposits, borrowings, payments on loans, maturities of securities and
income provided from operations. The Company's earnings are primarily dependent
upon the Company's 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 during the same period and interest rates paid on such
deposits and borrowings. The Company's earnings are also affected by the
Company's provision for loan losses,
8
service charges, gains from sales of loans, 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. OC Financial, Inc.'s and 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, 2005 consolidated financial
statements included in the Company's annual report on Form 10-KSB.
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 the Company continually refines and enhances the loss
estimation models and techniques it 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 the Company's
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
9
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 three and one-half year affiliation with 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. During our affiliation with Third Federal we originated $117.0 million
in automobile loans, 80% of which were sold to Third Federal. Also 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. Following our separation from Third
Federal we reinitiated our mortgage lending activity within our market areas and
retained automobile loans in our portfolio. 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 plan to retain these loans
in our portfolio, subject to our interest rate risk and liquidity management
needs, in order to improve our earnings.
We have continued to pursue growth in other loan products and deposit
accounts within our market areas, such as home equity loans and referrals for
the origination of credit card accounts to an outsourced provider. We will seek
deposit accounts in a blend of certificate of deposits, checking accounts and
money market accounts to provide funds for lending activities. Due to the limits
of our capital base prior to completing our stock conversion, our ability to
increase interest-earning assets had been constrained even though we otherwise
had the resources to increase our lending operations. Although we did not earn a
profit in the last quarter and the last fiscal year, we believe our increased
capital levels will allow us to improve our profitability through our efforts of
increasing interest-earning assets such as loans and reducing substantially our
reliance on income from securities in our investment portfolio.
We have also continued 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 third
party originator and servicer of direct automobile loans for other financial
institutions. 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 generate a gain on sale to the other institutions but will
generate servicing income. We had not actively marketed AutoARM's(R) services
until late 2004, as we were building the operational systems to support its
operations. During the quarter ended March 31, 2006, we entered into one new
agreement with AutoARM(R) partners to originate and service auto loans, bringing
the total number of institutions to eleven. We anticipate that the number of
AutoARM(R) customers will increase through our continued marketing efforts, but
we cannot guarantee the results of our efforts.
COMPARISON OF RESULTS OF OPERATION FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND
2005
GENERAL. Our net loss for the three months ended March 31, 2006 was
($109,692) compared to net income of $15,852 for the three months ended March
31, 2005.
A number of factors contributed to the decrease in income, including
decreased fee income, decreased loan sale gains, and increased operating
expenses, which offset the increase in net interest
10
income. Within our own portfolio, we continued replacement of lower interest
rate loans with higher interest rate loans as market rates increased over the
three month period ended March 31, 2006.
INTEREST INCOME. Interest income increased to $858,000 for the three
months ended March 31, 2006 from $675,000 for the three months ended March 31,
2005. The primary reason for the increase in interest income was an increase of
$79,000 in loan income. The increase in loan income was primarily due to an net
increase in the balance of our loan portfolio of $1.70 million from March 31,
2005 to March 31, 2006. As we intend to increase our emphasis on residential
mortgage lending, this trend of increasing interest-earning assets may continue.
The weighted average yield on loans increased from 5.33% for the three months
ended March 31, 2005 to 5.68% for the three months ended March 31, 2006. The
weighted average yield on securities increased from 4.69% for the three months
ended March 31, 2005 to 4.84% for the three months ended March 31, 2006. Total
average interest earning assets increased $10.5 million from the three months
ended March 31, 2005 to the three months ended March 31, 2006, and the weighted
average yield on interest earning assets increased 35 basis points from 4.65% to
5.00%.
INTEREST EXPENSE. Interest expense increased $140,000 to $498,000 for
the three months ended March 31, 2006 from $358,000 for the three months ended
March 31, 2005. The increase in interest expense is attributed to an increase in
the cost of deposits as a result of the increase in short-term market interest
rates during 2004 and 2005. In addition, deposits increased $17.2 million from
March 31, 2005 to March 31, 2006 primarily as the result of a certificate of
deposit promotion during the quarter ended March 31, 2006. Interest expense on
deposits increased $193,000 to $338,000 for the quarter ending March 31, 2006
from $145,000 for the quarter ending March 31, 2005. The average cost of
deposits increased 105 basis points to 2.82% for the quarter ending March 31,
2006 from 1.77% for the quarter ending March 31, 2005.
As interest rates stabilize or increase, we expect interest expense
will increase as our cost of interest bearing liabilities increase through
higher rates on existing deposits and on new deposits. Our average weighted cost
of funds was 3.36% for the three months ended March 31, 2006 compared to 2.73%
for the three months ended March 31, 2005.
NET INTEREST INCOME. Net interest income increased $28,000 to $345,000
for the three months ended March 31, 2006 from $317,000 for the three months
ended March 31, 2005. The increase in net interest income is primarily the
result of a continuing shift to loans from investments as described above offset
by increasing interest rates for deposits. Our net interest margin however has
declined to 2.04% for the three months ended March 31, 2006 compared to 2.19%
for the three months ended March 31, 2005.
PROVISION FOR LOAN LOSSES. The Company establishes 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.
11
Based on management's evaluation of the above factors, a provision was
made for the three months ended March 31, 2006 in the amount of $15,000 compared
to no provision made for the three months ended March 31, 2005. The increase in
provision for loan losses is primarily attributable to increased loan levels as
discussed above. The amount of general allowance allocations made for smaller
balance homogeneous loans has remained constant during the three months ended
March 31, 2006, primarily resulting from the performance of the portfolio,
actual losses and recoveries. Loan charge-offs were $12,000, for the three
months ended March 31, 2006, down from $35,000 for the three months ended March
31, 2005. Recoveries were $100 for the three months ended March 31, 2006,
compared to $1,000 for the three month period ended March 31, 2005.
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, our regulator, the Office of Thrift Supervision
("OTS"), as an integral part of their examination process, periodically reviews
the allowance for loan losses and may require us to recognize additional
provisions based on its judgment of information available at the time of the
examination. The allowance for loan losses as of March 31, 2006 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 $116,000 to $124,000
for the three months ended March 31, 2006 from $240,000 for the three months
ended March 31, 2005. The overall decrease in non-interest income was primarily
due to reduced gains on the sale of loans attributed to the severing of our
relationship with Third Federal in 2005.
NON-INTEREST EXPENSE. Non-interest expenses of $637,000 for the quarter
ended March 31, 2006 were $104,000 higher than the same period in 2005. The
increase is primarily due to an increase in professional fees of $36,000 and
compensation of $42,000 from the comparable period in 2005. The increase in
professional fees is attributed to legal and accounting costs associated with
increased regulatory and financial reporting as a result of our becoming a
public company.
INCOME TAX EXPENSE. Income tax benefit for the three months ended March
31, 2006 was $59,000. For the three months ended March 31, 2005, Ohio Central
incurred income tax expense of $9,000. The tax benefit during the March 31, 2006
quarter is attributed to our pre-tax loss.
COMPARISON OF RESULTS OF OPERATION FOR THE SIX MONTHS ENDED MARCH 31, 2006 AND
2005
GENERAL. Our net loss for the six months ended March 31, 2006 was
($179,417) compared to net loss of ($21,199) for the six months ended March 31,
2005.
A number of factors contributed to the decrease in net income,
including decreased fee income, decreased loan sale gains, and increased
operating expenses, which offset the increase in net interest income. Within our
own portfolio, we continued replacement of lower interest rate loans with higher
interest rate loans over the six month period ended March 31, 2006.
INTEREST INCOME. Interest income increased to $1,548,000 for the six
months ended March 31, 2006 from $1.3 million for the six months ended March 31,
2005. The primary reason for the increase in interest income were increases of
$112,000 in loan income and $107,000 in interest on Fed Funds. The increase in
loan income was primarily due to a net increase in the balance of our loan
portfolio of $1.7 million from March 31, 2005 to March 31, 2006. As we intend to
increase our emphasis on residential mortgage lending, this trend of increasing
interest-earning assets may continue. The weighted average yield on loans
increased from 5.41% for the six months ended March 31, 2005 to 5.50% for the
six
12
months ended March 31, 2006. The increase in income on Fed Funds is attributed
to an increase in our Fed Funds Balance of $10.0 million from March 31, 2005 to
March 31, 2006. This increase occurred primarily during the three months ended
March 31, 2006 as the result of running a certificate of deposit promotion which
resulted in $16.0 million of new time deposits. The proceeds obtained will be
used to pay down FHLB advances and fund loan growth. The weighted average yield
on securities increased from 4.39% for the six months ended March 31, 2005 to
4.68% for the six months ended March 31, 2006. Total average interest earning
assets increased $6.7 million from the six months ended March 31, 2005 to the
six months ended March 31, 2006, and the weighted average yield on interest
earning assets increased 22 basis points from 4.72% to 4.94%.
INTEREST EXPENSE. Interest expense increased $165,000 to $858,000 for
the six months ended March 31, 2006 from $693,000 for the six months ended March
31, 2005. The increase in interest expense is attributed to an increase in the
cost of deposits as a result of the increase in short-term market interest rates
during 2004 and 2005. In addition, deposits increased $17.2 million from March
31, 2005 to March 31, 2006 primarily as the result of a certificate of deposit
promotion during the quarter ended March 31, 2006. Interest expense on deposits
increased $232,000 to $512,000 for the six months ended March 31, 2006 from
$280,000 for the six months ended March 31, 2005. The average cost of deposits
increased 80 basis points to 2.53% for the six months ended March 31, 2006 from
1.73% for the six months ended March 31, 2005.
As interest rates stabilize or increase, we expect interest expense
will increase as our cost of interest bearing liabilities increase through
higher rates on existing deposits and on new deposits. Our average weighted cost
of funds was 3.16% for the six months ended March 31, 2006 compared to 2.75% for
the six months ended March 31, 2005.
NET INTEREST INCOME. Net interest income increased $64,000 to $690,000
for the six months ended March 31, 2006 from $626,000 for the six months ended
March 31, 2005. The increase in net interest income is primarily the result of a
continuing shift to loans from investments as described above offset by
increasing interest rates for deposits. Our net interest margin however has
declined to 2.20% for the six months ended March 31, 2006 compared to 2.24% for
the six months ended March 31, 2005.
PROVISION FOR LOAN LOSSES. The Company establishes provisions for loan
losses, which are charged to operations, at a level required to reflect probable
and estimable credit losses in the loan portfolio. Based on management's
evaluation of the factors previously discussed, a provision was made for the six
months ended March 31, 2006 in the amount of $30,000 compared to no provision
for the six months ended March 31, 2005. The increase in provision for loan
losses is primarily attributable to increased loan levels as discussed above.
The amount of general allowance allocations made for smaller balance homogeneous
loans has remained constant during the six months ended March 31, 2006 primarily
resulting from the performance of the portfolio, actual losses and recoveries.
Loan charge-offs were $14,000, for the six months ended March 31, 2006, down
from $40,000 for the six months ended March 31, 2005. Recoveries were $800 for
the six months ended March 31, 2006, compared to $2,000 for the six month period
ended March 31, 2005.
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, the OTS, as an integral part of its examination
process, periodically reviews the allowance for loan losses and may require us
to recognize additional provisions based on its judgment of information
available at the time of the examination. The allowance for loan losses as of
March 31, 2006 was maintained at a level that represents management's best
estimate of probable incurred losses in the loan portfolio.
13
NON-INTEREST INCOME. Non-interest income decreased $163,000 to $269,000
for the six months ended March 31, 2006 from $432,000 for the six months ended
March 31, 2005. The overall decrease in non-interest income was primarily due to
reduced gains on the sale of loans attributed to the severing of our
relationship with Third Federal in 2005.
NON-INTEREST EXPENSE. Non-interest expenses of $1.2 million for the six
months ended March 31, 2006 were $116,000 higher than the same period in 2005.
The increase is primarily due to an increase in professional fees of $72,000
from the comparable period in 2005. The increase in professional fees is
attributed to legal and accounting costs associated with increased regulatory
and financial reporting as a result of our becoming a public company.
INCOME TAX EXPENSE. Income tax benefit for the six months ended March
31, 2006 was $96,000. For the six months ended March 31, 2005, Ohio Central
realized a tax benefit of $11,000. The tax benefits during the six months ended
March 31, 2006 and March 31, 2005 are attributed to our pre-tax losses.
CHANGES IN FINANCIAL CONDITION FROM SEPTEMBER 30, 2005 TO MARCH 31, 2006.
GENERAL. Total assets increased by $11.2 million, or 18.7%, to $71.0
million at March 31, 2006 from $59.8 million at September 30, 2005. The increase
is attributed primarily to funds obtained through a certificate of deposit
promotion conducted in the three months ended March 31, 2006. As a result of
this promotion, we raised $16.0 million in new certificates with terms of 3
months to 5 years. The proceeds from this promotion are being used to repay
Federal Home Loan Bank advances and as liquidity to fund new loan originations.
ASSETS. Our loan portfolio increased $885,000 from $29.3 million at
September 30, 2005 to $30.2 million at March 31, 2006. The loan portfolio is
beginning to grow as loan originations are beginning to increase.
The allowance for loan losses was $206,000 at March 31, 2006 or 0.68%
of loans, compared to $180,000, or 0.61% of loans at September 30, 2005. 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 $15,000 at March 31, 2006 and $47,000 at September 30, 2005,
respectively. In determining the amount of allowance for loan loss allocations
needed for non-performing loans, management has considered expected future
borrower cash flows and the fair value of underlying collateral.
DEPOSITS. Total deposits increased by $16.9 million, or 51.2%, to $50.0
million at March 31, 2006 from $33.1 million at September 30, 2005. Time
deposits increased $17.8 million during the same period primarily as a result of
the certificate of deposit promotion conducted in the three months ended March
31, 2006.
BORROWINGS. Federal Home Loan Bank advance balances were $11.2 million
at March 31, 2006 and $16.5 million at September 30, 2005. A portion of Federal
Home Loan Bank advances that were used to fund investment portfolio growth to
improve net interest income were repaid during the three months ending March 31,
2006. We expect that Federal Home Loan Bank advances will continue to provide
the Company with an additional funding source to meet the needs of its lending
activities.
14
SHAREHOLDERS' EQUITY. Total consolidated shareholders' equity for the
Company decreased $161,000, or 2.17%, to $7.2 million at March 31, 2006 from
$7.4 million at September 30, 2005. The decrease in equity was primarily the
result of our operating loss of $179,000 for the six month period.
CAPITAL RESOURCES. At March 31, 2006, capital at the Bank totaled $6.7
million. Management monitors the capital levels of the Bank to provide for
current and future business opportunities and to meet regulatory guidelines for
"well-capitalized" institutions.
15
The Bank is required by the OTS to meet minimum capital adequacy
requirements. The Bank's actual and required levels of capital as reported to
the OTS at March 31, 2006 are as follows:
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
AS OF MARCH 31, 2006
Total capital (to risk weighted
assets) ....................... $6,919 20.57% $2,691 8.00% $3,364 10.00%
Tier 1 (core) capital (to risk
weighted assets) .............. $6,724 19.99% $1,346 4.00% $2,019 6.00%
Tier 1 (core) capital (to
adjusted total assets) ........ $6,724 9.42% $2,856 4.00% $3,570 5.00%
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. The Company 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. At March 31,
2006, Ohio Central Savings had additional borrowing capacity of $13.5 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 $14.7 million.
Our stock offering provided 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 the
Company.
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, 2005. 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.
16
OC FINANCIAL, INC.
FORM 10-QSB
March 31, 2006
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 and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
17
OC FINANCIAL, INC.
FORM 10-QSB
March 31, 2006
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: May 15, 2006 /S/ ROBERT W. HUGHES
------------------------------------
Robert W. Hughes
Chairman, President, and Chief Executive Officer
18