UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
equity, as of the latest practicable date.
Class Outstanding at August 14, 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............................................................ 18
Item 6. Exhibits..................................................................... 18
Signature Page ...................................................................... 19
PART I: FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
OC FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2006 and September 30, 2005
June 30, September 30,
2006 2005
------------ ------------
(Unaudited)
ASSETS
Cash and due from financial institutions $ 441,584 $ 565,586
Federal funds sold 5,247,000 3,397,000
------------ ------------
Total cash and cash equivalents 5,688,584 3,962,586
Securities held to maturity (fair value:
6/30/06 - $21,076,015;
09/30/05 - $24,235,140) 22,193,477 24,714,143
Federal Home Loan Bank stock 752,400 721,100
Loans, net of allowance of $225,835 at 6/30/06 and
$179,822 at 09/30/05 32,717,119 29,305,852
Premises and equipment, net 682,754 691,845
Accrued interest receivable 220,983 201,288
Prepaid expenses 195,604 139,066
Other assets 81,249 74,807
------------ ------------
Total assets $ 62,532,170 $ 59,810,687
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Savings deposits $ 11,603,446 $ 12,965,475
Demand deposits 5,245,547 5,692,718
Money market deposits 2,060,903 2,575,233
Time deposits 26,982,888 11,858,712
------------ ------------
Total deposits 45,892,784 33,092,138
Federal Home Loan Bank advances 7,200,000 16,450,000
Payments collected on loans sold 1,513,224 2,119,105
Accrued interest payable 43,496 69,062
Drafts in process 651,982 429,350
Other liabilities 92,988 245,370
------------ ------------
Total liabilities 55,394,474 52,405,025
SHAREHOLDERS EQUITY
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 2,612,092 2,898,413
------------ ------------
Total shareholders' equity 7,137,696 7,405,662
------------ ------------
Total liabilities and shareholders' equity $ 62,532,170 $ 59,810,687
============ ============
See accompanying notes to consolidated financial statements.
1
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended June 30, 2006 and 2005
(Unaudited)
For the three For the three
months ended months ended
June 30, June 30,
2006 2005
------------ ------------
Interest income
Loans, including fees $ 449,175 $ 370,373
Securities and other investments 248,800 338,684
Federal funds sold and other 92,758 18,312
------------ ------------
790,733 727,369
Interest expense
Deposits 367,543 147,454
Federal Home Loan Bank advances 124,955 218,463
------------ ------------
492,498 365,917
------------ ------------
Net interest income 298,235 361,452
Provision for loan losses 15,000 12,000
------------ ------------
Net interest income after provision for
loan losses 283,235 349,452
Noninterest income
Service charges and other deposit fees 81,921 88,175
Gain on loan sales -- (3,878)
Gain on sale of securities -- 4,632
Income from servicing of loans 25,602 55,303
Visa and ATM interchange income 9,384 12,909
Other 23,009 12,039
------------ ------------
139,916 169,180
Noninterest expense
Compensation and benefits 313,615 282,117
Occupancy and equipment 26,018 30,031
Depreciation and amortization 25,663 29,718
Computer processing expense 30,343 23,428
VISA and ATM expense 2,827 24,329
Bank service charges 22,131 19,871
Collection and loan expense 11,067 7,251
Advertising and promotion 22,082 32,371
Other insurance premiums 6,090 4,896
Professional and supervisory fees 31,659 30,311
State franchise tax expense 23,850 10,725
Other 70,947 55,981
------------ ------------
586,292 551,029
------------ ------------
Loss before income taxes (163,141) (32,397)
Income tax benefit (56,239) (11,092)
------------ ------------
Net Loss $ (106,902) $ (21,305)
============ ============
Net loss per share $ (0.21) $ (0.04)
============ ============
See accompanying notes to consolidated financial statements.
2
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended June 30, 2006 and 2005
(Unaudited)
For the nine For the nine
months ended months ended
June 30, June 30,
2006 2005
------------ ------------
Interest income
Loans, including fees $ 1,262,198 $ 1,071,713
Securities and other investments 855,918 935,562
Federal funds sold and other 220,540 33,881
------------ ------------
2,338,656 2,041,156
Interest expense
Deposits 879,702 427,596
Federal Home Loan Bank advances 470,327 631,304
------------ ------------
1,350,029 1,058,900
------------ ------------
Net interest income 988,627 987,256
Provision for loan losses 45,000 12,000
------------ ------------
Net interest income after provision for
loan losses 943,627 975,256
Noninterest income
Service charges and other deposit fees 253,303 267,616
Gain on loan sales -- 106,855
Gain on sale of securities -- 4,632
Income from servicing of loans 73,152 119,624
Visa and ATM interchange income 29,630 48,319
Other 53,232 54,223
------------ ------------
409,317 601,269
Noninterest expense
Compensation and benefits 887,660 839,408
Occupancy and equipment 83,142 86,672
Depreciation and amortization 84,904 88,666
Computer processing expense 85,416 65,253
VISA and ATM expense 43,366 78,050
Bank service charges 65,447 59,013
Collection and loan expense 23,048 23,267
Advertising and promotion 90,650 101,482
Other insurance premiums 16,253 14,357
Professional and supervisory fees 162,789 89,511
State franchise tax expense 58,350 33,150
Other 190,801 162,118
------------ ------------
1,791,826 1,640,947
------------ ------------
Loss before income taxes (438,882) (64,422)
Income tax benefit (152,561) (21,919)
------------ ------------
Net Loss $ (286,321) $ (42,503)
============ ============
Net loss per share $ (0.55) $ (0.04)
============ ============
See accompanying notes to consolidated financial statements
3
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Nine Months ended June 30, 2006 and 2005
(unaudited)
Additional Total
Common Paid in Retained Unearned Shareholders'
Stock Capital Earnings ESOP 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)
Capital transfer for conversion costs (67,512) (67,512)
Net Loss for the nine months ended
June 30, 2005 -- -- (42,503) -- (42,504)
------------ ------------ ------------ ------------ ------------
Balance at June 30, 2005 $ 5,602 $ 4,949,797 $ 2,919,926 (448,150) $ 7,427,176
============ ============ ============ ======== ============
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 nine months ended
June 30, 2006 -- -- (286,321) -- (286,321)
------------ ------------ ------------ ------------ ------------
Balance at June 30, 2006 $ 5,602 $ 4,949,797 $ 2,612,092 $ (429,795) $ 7,137,696
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
4
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 2006 and 2005
(Unaudited)
For the nine For the nine
months ended months ended
6/30/2006 6/30/2005
------------ ------------
Cash flows from operating activities
Net income (loss) $ (286,321) $ (42,503)
Adjustments to reconcile net income (loss) to net cash
from operating activities
Depreciation and amortization 84,904 76,221
Provision for loan losses 45,000 12,000
Deferred fee/costs amortization 8,108 5,127
Earned ESOP Shares 18,355 --
Federal Home Loan Bank stock dividends (31,300) (23,500)
Net amortization (accretion) on investment securities (34,670) 2,509
Gain on mutual funds -- (2,261)
Gain on sale of securities -- (4,632)
Loans originated for sale (1,076,905) (2,150,907)
Proceeds from sale of loans 1,076,905 2,122,063
Net gains on sales of loans -- (106,855)
Changes in other assets and other liabilities (643,872) 502,220
------------ ------------
Net cash provided by (used in) operating activities (839,796) 447,678
------------ ------------
Cash flows from investing activities
Securities held to maturity
Purchases (2,954,688) (6,511,787)
Maturities, calls and principal payments 5,510,024 7,351,705
Securities available for sale
Purchases -- (4,118,221)
Net increase in loans (3,464,375) (2,049,348)
Premises and equipment expenditures (75,813) 47,997
------------ ------------
Net cash used in investing activities (984,852) (5,279,653)
------------ ------------
Cash flows from financing activities
Net change in deposits 12,800,646 7,696
Proceeds from Federal Home Loan Bank advances -- 3,545,000
Repayment of Federal Home Loan Bank advances (9,250,000) (3,545,000)
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)
------------ ------------
Net cash provided by financing activities 3,550,646 3,790,458
------------ ------------
Net change in cash and cash equivalents 1,725,998 (432,586)
Cash and cash equivalents at beginning of period 3,962,586 4,485,049
------------ ------------
Cash and cash equivalents at end of period $ 5,688,584 $ 4,052,463
============ ============
Supplemental disclosures of cash flow information
Cash paid during the nine months for:
Interest $ 1,350,029 $ 692,983
Income taxes -- --
Noncash - transfer of credit card portfolio to held for sale -- $ 624,389
See accompanying notes to consolidated financial statements
5
OC FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 the public 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 only 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 by the Securities and Exchange
Commission 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 and nine
month periods ended June 30, 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 the funding of new 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 Bank 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 which began in
2005 and will end 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 nine months ended June 30, 2006
were $(0.21) and $(0.55), respectively. Common shares outstanding for purposes
of the earnings per share calculation were as follows for the three months and
the nine months ended June 30, 2006:
Three Months Nine Months
Ended Ended
June 30, 2006 June 30, 2006
------------- -------------
Average shares outstanding 560,198 560,198
Average unearned ESOP shares (42,980) (43,592)
------------- -------------
Weighted average common shares outstanding,
basic and diluted 517,218 516,606
============= =============
The Company had no potentially dilutive securities as of June 30, 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 August 14, 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 the Company 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 the Company's market area, changes in policies
by regulatory agencies, fluctuations in interest rates, demand for loans in the
Company'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.
The Company 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 the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company 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, the Bank became the wholly owned subsidiary of the
Company 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 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.
9
Business Strategy
Prior to our three and one-half year affiliation with Third Federal,
the Bank was a full service community-based savings institution generating a
wide variety of loans for our customers. Beginning in 2001, as a result of our
affiliation with Third Federal, 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 in 2005, 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 both originated mortgage and consumer 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
automobile lending 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 for us. 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 June 30,
2006, we entered into three new agreements with AutoARM(R) partners to originate
and service auto loans, bringing the total number of institutions in the program
to fourteen. We anticipate that the number of AutoARM(R) customers will increase
through our continued marketing efforts, but we cannot guarantee continued
growth of the program.
Comparison of Results of Operation for the Three Months Ended June 30, 2006 and
2005
General. Our net loss for the three months ended June 30, 2006 was
($106,902) compared to our net loss of ($21,305) for the three months ended June
30, 2005.
A number of factors contributed to the increase in net loss, including
decreased fee income, decreased loan sale gains, and increased operating
expenses, coupled with a decrease in net interest income. Within our own
portfolio, we continued replacement of lower interest rate loans with higher
interest rate loans as market rates have increased over the three month period
ended June 30, 2006.
10
Interest Income. Interest income increased to $791,000 for the three
months ended June 30, 2006 from $727,000 for the three months ended June 30,
2005. The primary reason for the increase in interest income was an increase in
loan income of $79,000 coupled with a small decrease in securities and fed funds
income of $15,000. The increase in loan income was primarily due to a net
increase in the balance of our loan portfolio of $4.5 million from June 30, 2005
to June 30, 2006. As we intend to increase our emphasis on residential mortgage
lending, this trend of increasing interest-earning assets should continue. The
weighted average yield on loans increased from 5.42% for the three months ended
June 30, 2005 to 5.72% for the three months ended June 30, 2006. The weighted
average yield on securities decreased from 4.56% for the three months ended June
30, 2005 to 4.01% for the three months ended June 30, 2006. Total average
interest earning assets increased $5.8 million from the three months ended June
30, 2005 to the three months ended June 30, 2006, and the weighted average yield
on interest earning assets remained constant at 4.86%.
During the quarter ended June 30, 2006, an adjustment to interest on
investment securities was made to correct an over accrual in interest income on
a security held by Ohio Central Savings. The adjustment goes back to January,
2006 and was an offset to interest income of $30,000. Without the adjustment,
the yield on securities would have been 4.67% and the weighted average yield on
interest earning assets would have been 5.11%.
Interest Expense. Interest expense increased $126,000 to $492,000 for
the three months ended June 30, 2006 from $366,000 for the three months ended
June 30, 2005. The increase in interest expense was attributed to an increase in
the cost of deposits as a result of the increase in short-term market interest
rates during 2005 and 2006. In addition, our deposit base has increased $13.2
million from June 30, 2005 to June 30, 2006 attributed primarily to a
certificate of deposit promotion during January and February, 2006. Interest
expense on deposits increased $221,000 to $368,000 for the quarter ending June
30, 2006 from $147,000 for the quarter ended June 30, 2005. The average cost of
deposits increased 128 basis points to 3.07% for the quarter ended June 30, 2006
from 1.79% for the quarter ended June 30, 2005.
As interest rates stabilize or increase, we expect our interest expense
will increase as our cost of interest bearing liabilities will increase through
higher rates on existing deposits and on new deposits. Our average weighted cost
of funds was 3.46% for the three months ended June 30, 2006 compared to 2.88%
for the three months ended June 30, 2005.
Net Interest Income. Net interest income decreased $63,000 to $298,000
for the three months ended June 30, 2006 from $361,000 for the three months
ended June 30, 2005. The decrease in net interest income was primarily the
result of the overall increase in cost of funds tied to the continued rising
interest rate environment. Our net interest margin has declined to 1.83% for the
three months ended June 30, 2006 compared to 2.42% for the three months ended
June 30, 2005.
As was previously mentioned, during the quarter ended June 30, 2006, an
adjustment to interest on investment securities was made to correct an over
accrual in interest income on a security held by Ohio Central Savings. The
adjustment goes back to January, 2006 and was an offset to interest income of
$40,000. Without the adjustment, the net interest margin would have been 2.08%
for the three months ended June 30, 2006.
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
11
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 the above factors, a provision was
made for the three months ended June 30, 2006 in the amount of $15,000 compared
to $12,000 for the three months ended June 30, 2005. The increase in provision
for loan losses was 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 June 30,
2006, primarily resulting from the performance of the portfolio, actual losses
and recoveries. Loan charge-offs were $200 for the three months ended June 30,
2006, down from $2,000 for the three months ended June 30, 2005. Recoveries were
$5,100 for the three months ended June 30, 2006, compared to $700 for the three
month period ended June 30, 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 June 30, 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 $29,000 to $140,000
for the three months ended June 30, 2006 from $169,000 for the three months
ended June 30, 2005. The overall decrease in non-interest income was primarily
due to reduced loan servicing income attributed in large part to the severing of
our relationship with Third Federal in 2005.
Non-Interest Expense. Non-interest expenses of $586,000 for the quarter
ended June 30, 2006 were $35,000 higher than the same period in 2005. The
increase was primarily due to an increase in compensation of $31,000 from the
comparable period in 2005.
Income Tax Expense. Income tax benefit for the three months ended June
30, 2006 was $56,000. For the three months ended June 30, 2005, Ohio Central
incurred an income tax benefit of $11,000. The tax benefit for the quarters
ended June 30, 2006 and June 30, 2005 were attributed to our pre-tax losses.
Comparison of Results of Operation for the Nine Months Ended June 30, 2006 and
2005
General. Our net loss for the nine months ended June 30, 2006 was
($286,321) compared to net loss of ($42,503) for the nine months ended June 30,
2005.
A number of factors contributed to the increase in net loss, including
decreased fee income, decreased loan sale gains, and increased operating
expenses, along with the decrease in net interest income. Within our own
portfolio, we continued replacement of lower interest rate loans with higher
interest rate loans over the nine month period ended June 30, 2006.
Interest Income. Interest income increased to $2.3 million for the nine
months ended June 30, 2006 from $2.0 million for the nine months ended June 30,
2005. The primary reasons for the increase in interest income were increases of
$190,000 in loan income and $187,000 in interest on Fed Funds.
12
The increase in loan income was primarily due to a net increase in the balance
of our loan portfolio of $4.5 million from June 30, 2005 to June 30, 2006. As we
intend to increase our emphasis on residential mortgage lending, this trend of
increasing interest-earning assets should continue. The weighted average yield
on loans increased from 5.36% for the nine months ended June 30, 2005 to 5.54%
for the nine months ended June 30, 2006. The increase in income on Fed Funds was
attributed to an increase in our Fed Funds balance of $3.1 million from June 30,
2005 to June 30, 2006 along with an increase in Fed Funds rates of 200 basis
points from June 30, 2005 to June 30, 2006. The weighted average yield on
securities increased from 4.28% for the nine months ended June 30, 2005 to 4.49%
for the nine months ended June 30, 2006. Total average interest earning assets
increased $6.9 million from the nine months ended June 30, 2005 to the nine
months ended June 30, 2006, and the weighted average yield on interest earning
assets increased 27 basis points from 4.67% to 4.94% during the same period.
Interest Expense. Interest expense increased $291,000 to $1.4 million
for the nine months ended June 30, 2006 from $1.0 million for the nine months
ended June 30, 2005. The increase in interest expense was attributed to an
increase in the cost of deposits as a result of the increase in short-term
market interest rates during 2005 and 2006. In addition, deposits increased
$13.2 million from June 30, 2005 to June 30, 2006 attributed primarily to a
certificate of deposit promotion in January and February, 2006. Interest expense
on deposits increased $452,000 to $880,000 for the nine months ended June 30,
2006 from $428,000 for the nine months ended June 30, 2005. The average cost of
deposits increased 101 basis points to 2.74% for the nine months ended June 30,
2006 from 1.73% for the nine months ended June 30, 2005.
As interest rates stabilize or increase, we expect our interest expense
will increase as our cost of interest bearing liabilities will increase through
higher rates on existing deposits and on new deposits. Our average weighted cost
of funds was 3.29% for the nine months ended June 30, 2006 compared to 2.75% for
the nine months ended June 30, 2005.
Net Interest Income. Overall, net interest income remained fairly
constant for the nine months ended June 30, 2006 from June 30, 2005 with only a
$1,400 increase to $989,000. Our net interest margin however has declined to
2.09% for the nine months ended June 30, 2006 compared to 2.25% for the nine
months ended June 30, 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
nine months ended June 30, 2006 in the amount of $45,000 compared to $12,000 for
the nine months ended June 30, 2005. The increase in provision for loan losses
was 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 nine months ended June 30, 2006 primarily
resulting from the performance of the portfolio, actual losses and recoveries.
Loan charge-offs were $13,000 for the nine months ended June 30, 2006, down from
$65,000 for the nine months ended June 30, 2005. Recoveries were $14,000 for the
nine months ended June 30, 2006, compared to $3,000 for the nine month period
ended June 30, 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
June 30, 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 $192,000 to $409,000
for the nine months ended June 30, 2006 from $601,000 for the nine months ended
June 30, 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 coupled with reduced earnings on the
servicing of loans. In addition, our VISA and ATM interchange income has seen a
decrease as a result of the sale of our VISA portfolio in February, 2005.
Non-Interest Expense. Non-interest expenses of $1.8 million for the
nine months ended June 30, 2006 were $151,000 higher than the same period in
2005. The increase was primarily due to an increase in professional fees of
$73,000 from the comparable period in 2005 along with an increase in
compensation and benefits of $48,000 for the same period. The increase in
professional fees was attributed to legal and accounting costs associated with
increased regulatory and financial reporting as a result of our becoming a
public company.
Income Tax Benefit. Income tax benefit for the nine months ended June
30, 2006 was $153,000. For the nine months ended June 30, 2005, Ohio Central
realized a tax benefit of $22,000. The tax benefits during the nine months ended
June 30, 2006 and June 30, 2005 were attributed to our pre-tax losses.
Changes in Financial Condition From September 30, 2005 to June 30, 2006.
General. Total assets increased by $2.7 million, or 4.6%, to $62.5
million at June 30, 2006 from $59.8 million at September 30, 2005. The increase
was attributed primarily to funds obtained through a certificate of deposit
promotion conducted during the months of January and February, 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 $3.4 million from $29.3 million at
September 30, 2005 to $32.7 million at June 30, 2006. The loan portfolio is
beginning to grow as loan originations continue to increase.
The allowance for loan losses was $226,000 at June 30, 2006 or 0.69% 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 $127,000 at June 30, 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 $12.8 million, or 38.7%, to $45.9
million at June 30, 2006 from $33.1 million at September 30, 2005. Time deposits
increased $15.1 million during the same period primarily as a result of the
certificate of deposit promotion conducted in January and February, 2006.
Borrowings. Federal Home Loan Bank advance balances were $7.2 million
at June 30, 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 ended June 30,
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 $268,000, or 3.6%, to $7.1 million at June 30, 2006 from $7.4
million at September 30, 2005. The decrease in equity was primarily the result
of our operating loss of $286,000 for the nine month period ended June 30, 2006.
Capital Resources. At June 30, 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.
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 June 30, 2006 were 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 June 30, 2006
Total capital (to risk weighted
assets) .................................... $ 6,845 20.25% $ 2,704 8.00% $ 3,380 10.00%
Tier 1 (core) capital (to risk weighted
assets) .................................... $ 6,633 19.62% $ 1,352 4.00% $ 2,028 6.00%
Tier 1 (core) capital (to adjusted total
assets) .................................... $ 6,633 10.53% $ 2,517 4.00% $ 3,147 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 June 30,
2006, Ohio Central Savings had additional borrowing capacity of $19.4 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 $15.9 million.
15
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 June 30, 2006. 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
June 30, 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
---------------------------------------------------
The annual meeting of the stockholders of OC Financial, Inc. (the "Company"),
was held on April 19, 2006. There were present at the meeting, in person,
holders of 560,198 shares of Company common stock, constituting a quorum.
Matters Submitted:
- -----------------
Results of Stockholder Vote
---------------------------
Abstention
and Broker
For Against Withheld Non-Votes
-----------------------------------------------
1) Election of the following directors for
terms expiring at the 2009 Annual Meeting
of the stockholders, and until their
successors are duly elected and qualified:
Nils C. Muladore 469,548 N/A 18,195 N/A
Michael B. Bowman 469,548 N/A 18,195 N/A
2) The stockholders of the Company approved
the 2006 OC Financial, Inc. Stock-Based
Incentive Plan by a vote of: 253,443 21,075 N/A 8,575
3) The stockholders of the Company ratified
the appointment of Beard Miller Company LLP
as the auditors of the Company for the
fiscal year ending September 30, 2006 by a
vote of: 265,643 17,400 N/A 50
17
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.
18
OC FINANCIAL, INC.
FORM 10-QSB
June 30, 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: August 14, 2006 /s/ ROBERT W. HUGHES
------------------------------------------------
Robert W. Hughes
Chairman, President, and Chief Executive Officer
19