UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 latest practicable date.
Class Outstanding at January 31, 2007
- ----------------------------- -------------------------------
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
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.......................................... 1
Item 2. Management's Discussion and Analysis or Plan of Operation..... 7
Item 3. Controls and Procedures....................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds... 14
Item 3. Defaults Upon Senior Securities............................... 14
Item 4. Submission of Matters to a Vote of Security Holders........... 14
Item 5. Other Information............................................. 14
Item 6. Exhibits...................................................... 14
Signature Page.......................................................... 15
PART I: FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
OC FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2006 and September 30, 2006
December 31, September 30,
2006 2006
------------ -------------
(Unaudited)
ASSETS
Cash and due from financial institutions $ 458,614 $ 456,730
Federal funds sold 2,117,000 6,273,000
----------- -----------
Total cash and cash equivalents 2,575,614 6,729,730
Securities held to maturity (fair value: 12/31/06 - $20,002,263;
09/30/06 - $20,846,386) 20,646,934 21,533,317
Federal Home Loan Bank stock 774,800 763,300
Loans, net of allowance (12/31/06 - $243,159; 9/30/06 - $240,932) 38,716,018 36,708,128
Loans held for sale 65,357 56,102
Real Estate Owned 234,276 --
Premises and equipment, net 675,883 679,743
Accrued interest receivable 248,689 229,118
Prepaid expenses 138,587 170,844
Other assets 133,334 74,654
----------- -----------
Total assets $64,209,492 $66,944,936
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Savings deposits $ 9,940,436 $10,991,399
Demand deposits 5,541,078 5,865,445
Money market deposits 1,684,086 1,727,815
Time deposits 28,485,897 28,089,783
----------- -----------
Total deposits 45,651,497 46,674,442
Federal Home Loan Bank advances 10,200,000 10,200,000
Payments collected on loans sold 1,124,150 1,328,271
Accrued interest payable 69,258 55,117
Drafts in process 352,019 1,646,387
Other liabilities 159,032 226,109
----------- -----------
Total liabilities 57,555,956 60,130,326
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 4,951,951 4,951,052
Unearned ESOP shares (403,335) (425,743)
Retained earnings 2,099,318 2,283,699
----------- -----------
Total shareholders' equity 6,653,536 6,814,610
----------- -----------
Total liabilities and shareholders' equity $64,209,492 $66,944,936
=========== ===========
See accompanying notes to consolidated financial statements.
1
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended December 31, 2006 and 2005
(Unaudited)
For the three For the three
months ended months ended
December 31, December 31,
2006 2005
------------- -------------
INTEREST INCOME
Loans, including fees $ 564,147 $ 388,577
Securities and other investments 246,419 281,244
Federal funds sold and other 38,206 20,444
--------- ---------
848,772 690,265
INTEREST EXPENSE
Deposits 394,644 174,380
Federal Home Loan Bank advances 158,412 185,122
--------- ---------
553,056 359,502
--------- ---------
NET INTEREST INCOME 295,716 330,763
Provision for loan losses 5,000 15,000
--------- ---------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 290,716 315,763
NONINTEREST INCOME
Service charges and other deposit fees 76,485 92,782
Commercial Loan Referral Fee 10,000 --
Income from servicing of loans 16,551 24,217
Visa and ATM interchange income 13,696 10,800
Other 25,372 17,596
--------- ---------
142,104 145,395
NONINTEREST EXPENSE
Compensation and benefits 318,463 270,070
Occupancy and equipment 22,793 29,152
Depreciation and amortization 25,482 29,569
Computer processing expense 29,150 26,732
VISA and ATM expense 21,321 21,226
Bank service charges 22,863 22,902
Collection and loan expense 12,316 1,639
Advertising and promotion 13,350 32,775
Other insurance premiums 6,792 5,164
Professional and supervisory fees 44,542 63,293
State franchise tax expense 23,850 10,650
Other 76,279 54,919
--------- ---------
617,201 568,091
--------- ---------
LOSS BEFORE INCOME TAXES (184,381) (106,933)
Income tax benefit -- (37,206)
--------- ---------
NET LOSS $(184,381) $ (69,727)
========= =========
Net loss per share $ (0.36) $ (0.14)
========= =========
See accompanying notes to consolidated financial statements.
2
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Months ended December 31, 2006 and 2005
(unaudited)
Additional Total
Common Paid in Retained Shareholders'
Stock Capital Earnings Unearned ESOP Equity
------ ---------- ---------- ------------- -------------
BALANCE AT SEPTEMBER 30, 2005 $5,602 $4,949,797 $2,898,413 $(448,150) $7,405,662
Net Loss (69,727) (69,727)
------ ---------- ---------- ------------- ----------
BALANCE AT DECEMBER 31, 2005 $5,602 4,949,797 2,828,686 (448,150) 7,335,935
====== ========== ========== ========= ==========
BALANCE AT SEPTEMBER 30, 2006 $5,602 $4,951,052 $2,283,699 $(425,743) $6,814,610
Earned ESOP Shares 899 22,408 23,307
Net Loss (184,381) (184,381)
------ ---------- ---------- --------- ----------
BALANCE AT DECEMBER 31, 2006 $5,602 $4,951,951 $2,099,318 $(403,335) $6,653,536
====== ========== ========== ========= ==========
See accompanying notes to consolidated financial statements.
3
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended December 31, 2006 and 2005
(Unaudited)
For the three For the three
months ended months ended
December 31, December 31,
2006 2005
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (184,381) $ (69,727)
Adjustments to reconcile net loss to net cash
from operating activities
Depreciation and amortization 25,482 29,569
Provision for loan losses 5,000 15,000
Deferred fee/costs amortization 3,751 2,957
Earned ESOP Shares 23,307 --
Federal Home Loan Bank stock dividends (11,500) (10,400)
Net amortization on investment securities 2,570 2,756
Loans originated for sale (735,798) (68,402)
Proceeds from sale of loans 726,543 68,402
Changes in other assets (45,994) (71,655)
Changes in other liabilities (257,057) (573,219)
----------- -----------
Net cash from operating activities (448,077) (674,719)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities held to maturity
Maturities, calls and principal payments 883,813 892,100
Net (increase)/decrease in loans (2,250,917) 183,042
Net change in certificates of deposit in other financial institutions -- (177,549)
Premises and equipment expenditures (21,622) (3,054)
----------- -----------
Net cash from investing activities (1,388,726) 894,539
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (1,022,945) (150,893)
Repayment of Federal Home Loan Bank advances -- (1,750,000)
Decrease in Corporate Drafts in Process (1,294,368) (178,452)
Net cash from financing activities (2,317,313) (2,079,345)
----------- -----------
Net change in cash and cash equivalents (4,154,116) (1,859,525)
Cash and cash equivalents at beginning of period 6,729,730 3,962,586
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,575,614 $ 2,103,061
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the quarter for:
Interest $ 538,915 $ 367,306
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Transfer of loans to foreclosed real estate $ 234,276 $ --
See accompanying notes to consolidated financial statements
4
OC FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 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 have been 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. 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 ended December 31, 2006 are not necessarily indicative of the results
that may be expected for the fiscal year ending September 30, 2007. The Bank's
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended September 30,
2006 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
$448,150 to the newly-established employee stock ownership plan, as discussed in
Note 3.
5
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 would reduce retained earnings; dividends on unearned ESOP
shares would reduce accrued interest.
Note 4 - Net Loss Per Share
Net Loss per share for the three months ended December 31, 2006 and December 31,
2005 were $(0.36) and $(0.14), respectively. Common shares outstanding for
purposes of the earnings per share calculation were as follows:
2006 2005
------- -------
Average shares outstanding 560,198 560,198
Average unearned ESOP shares 41,454 44,815
------- -------
Weighted average common shares outstanding,
basic and diluted 518,744 515,383
======= =======
6
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 Company'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 Company
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
7
and borrowings. The Company's earnings are also affected by the Company's
provision for loan losses, 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, 2006 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
8
lending market area, changes in the quality of its lending staff, collection
practices and loan administration. Adverse changes in these areas could result
in increases in non-performing loans and loan charge-offs, requiring increases
to the provision and allowance for loan losses.
BUSINESS STRATEGY
Prior to our three and a 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 and a half 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 certificates of deposit, 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 to us. During the quarter ended December 31, 2006, we
entered into one new agreement with an AutoARM(R) partner to originate and
service auto loans, bringing the total number of institutions to fifteen. 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 DECEMBER 31, 2006
AND 2005
GENERAL. Our net loss for the three months ended December 31, 2006 was
$184,000 compared to a net loss of $70,000 for the three months ended December
31, 2005.
A number of factors contributed to the decrease in income, including,
increased interest and non-interest expense partially offset by increasing
interest income. Within our loan portfolio, we have
9
continued to replace lower interest rate loans with higher interest rate loans
as market rates have remained relatively stable over the last 12 months.
INTEREST INCOME. Interest income increased $159,000 to $849,000 for the
three months ended December 31, 2006 from $690,000 for the three months ended
December 31, 2005. The primary reason for the increase in interest income was an
increase of $176,000 in loan income. The increase in loan income was primarily
due to a net increase in the average balance of our loan portfolio of $2.0
million for the three months ended December 31, 2006 compared to the three
months ended December 31, 2005 coupled with an increasing net yield on our loan
portfolio. 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 5.31% for the three months ended
December 31, 2005 to 5.93% for the three months ended December 31, 2006. The
weighted average yield on securities remained constant at 4.51% for the three
months ended December 31, 2006 as compared to the same period in 2005. Total
average interest-earning assets increased $7.1 million from $56.7 million for
the three months ended December 31, 2005 to $63.8 for the three months ended
December 31, 2006. The weighted average yield on interest-earning assets
increased 45 basis points from 4.87% for the three months ended December 31,
2005 to 5.32% for the three months ended December 31, 2006.
INTEREST EXPENSE. Interest expense increased $193,000 to $553,000 for the
three months ended December 31, 2006 from $360,000 for the three months ended
December 31, 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 2006 and 2005. Interest expense on deposits
increased $220,000 to $395,000 for the quarter ended December 31, 2006 from
$174,000 for the quarter ended December 31, 2005. The average balance of
deposits increased by $13.0 million from $33.1 for the three months ended
December 31, 2005 to $46.1 for the three months ended December 31, 2006. The
average deposit cost increased 131 basis points to 3.42% for the quarter ended
December 31, 2006 from 2.11% for the quarter ended December 31, 2005.
As interest rates stabilize, interest expense may begin to level out. Our
average weighted cost of funds was 3.93% for the three months ended December 31,
2006 compared to 3.03% for the three months ended December 31, 2005.
NET INTEREST INCOME. Net interest income decreased $35,000 to $296,000 for
the three months ended December 31, 2006 from $331,000 for the three months
ended December 31, 2005. The decrease in net interest income was primarily the
result of the increased costs associated with acquiring new deposits. Our net
interest margin was 1.85% for the three months ended December 31, 2006 compared
to 2.29% for the three months ended December 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.
10
Based on management's evaluation of the above factors, a provision was made
for the three months ended December 31, 2006 in the amount of $5,000 compared to
$15,000 made for the three months ended December 31, 2005. The decrease in
provision for loan losses is primarily attributable to marginal loan growth over
the period coupled with a low loss history. The amount of general allowance
allocations made for smaller balance homogeneous loans decreased during the
three months ended December 31, 2006 primarily resulting from the performance of
the portfolio, actual losses and recoveries. Loan charge-offs were $56,000, for
the three months ended December 31, 2006, up from $2,000 for the three months
ended December 31, 2005. Recoveries were $53,000 for the three months ended
December 31, 2006, compared to $700 for the three month period ended December
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, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for loan losses and
may require us to recognize additional provisions based on their judgment of
information available to them at the time of their examination. The allowance
for loan losses as of December 31, 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 $3,000 to $142,000 for
the three months ended December 31, 2006 from $145,000 for the three months
ended December 31, 2005. The overall decrease in non-interest income was
primarily due to lower deposit and loan servicing fee income offset in part by a
$10,000 referral fee received for a commercial loan package referred to another
financial institution by Ohio Central Savings during the three months ended
December 31, 2006. The commercial loan referred was in excess of Ohio Central
Savings loans-to-one borrower limitation.
NON-INTEREST EXPENSE. Non-interest expense increased $49,000 to $617,000
for the quarter ended December 31, 2006 from $568,000 for the quarter ended
December 31, 2005. The increase be can primarily attributed to increased
compensation and benefits expense, collection and loan expense along with an
increase in franchise tax expense. Increases were offset by a reduction in
advertising and promotion costs along with a reduction in professional and
supervisory expense.
CHANGES IN FINANCIAL CONDITION FROM SEPTEMBER 30, 2006 TO DECEMBER 31, 2006.
GENERAL. Total assets decreased by $2.7 million, or 4.09%, to $64.2 million
at December 31, 2006 from $66.9 million at September 30, 2006. The decline was
attributed primarily to a decline in Fed Funds balances of $4.2 million during
the quarter and a decrease in outstanding securities of $886,000 during the
quarter offset by an increase in net outstanding loans of $2.0 million.
ASSETS. Our loan portfolio increased $2.0 million from $36.8 million at
September 30, 2006 to $38.8 million at December 31, 2006 predominantly as a
result of auto loan originations. Outstanding Federal Funds sold decreased $4.2
million from $6.3 million at September 30, 2006 to $2.1 million at December 31,
2006. The decrease in outstanding Federal Funds sold is intentional as we seek
to more closely manage our liquidity to improve our net interest margin.
At December 31, 2006, we held four single-family residences in Real Estate
Owned. All four properties were non-owner occupied rental properties. Subsequent
to December 31, 2006, two of the properties have been sold and a third is
scheduled to be sold by the end of February, 2007. The fourth property is not
presently under contract.
11
The allowance for loan losses was $243,000 at December 31, 2006 or 0.63% of
loans, compared to $241,000, or 0.65% of loans at September 30, 2006. 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 $121,000 at December 31, 2006 and $129,000 at September 30, 2006,
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. The amount of
allowance for loan losses allocated to individual loan relationships at December
31, 2006, decreased to $22,000 from $78,000 at September 30, 2006.
DEPOSITS. Total deposits decreased by $1.0 million, or 2.19%, to $45.7
million at December 31, 2006 from $46.7 million at September 30, 2006. Time
deposits increased by $396,000 during our first fiscal quarter. Savings,
checking, and money market accounts decreased a total of $1.4 million during our
first fiscal quarter.
BORROWINGS. Federal Home Loan Bank advance balances were $10.2 million at
December 31, 2006, remaining unchanged from their balance at September 30, 2006.
We expect that Federal Home Loan Bank advances will continue to provide the
Company with a significant additional funding source to meet the needs of its
lending activities.
SHAREHOLDERS' EQUITY. Total consolidated shareholders' equity for OC
Financial, Inc. decreased $161,000, or 2.4%, to $6.7 million at December 31,
2006 from $6.8 million at September 30, 2006. The decrease in equity was
primarily the result of our net operating loss of $184,000 for the quarter.
CAPITAL RESOURCES. At December 31, 2006, capital at Ohio Central Savings
totaled $6.7 million. Management monitors the capital levels of Ohio Central
Savings to provide for current and future business opportunities and to meet
regulatory guidelines for "well-capitalized" institutions.
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Ohio Central Savings is required by the Office of Thrift Supervision to
meet minimum capital adequacy requirements. Ohio Central Savings' actual and
required levels of capital as reported to the Office of Thrift Supervision at
December 31, 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 December 31, 2006
- -----------------------
Total capital (to risk weighted assets)............ $6,368 16.93% $3,009 8.00% $3,761 10.00%
Tier 1 (core) capital (to risk weighted assets).... $6,138 16.32% $1,505 4.00% $2,257 6.00%
Tier 1 (core) capital (to adjusted total assets)... $6,138 9.49% $2,587 4.00% $3,233 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 December
31, 2006, Ohio Central Savings had additional borrowing capacity of $18.6
million with the Federal Home Loan Bank of Cincinnati. Additionally, Ohio
Central Savings has access to the Federal Reserve Bank of Cleveland discount
window for borrowing. The available line at the discount window is $18.2
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) for the quarter ended December 31, 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.
13
OC FINANCIAL, INC.
FORM 10-QSB
December 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.
14
OC FINANCIAL, INC.
FORM 10-QSB
December 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: February 12, 2007 /s/ Robert W. Hughes
----------------------------------------
Robert W. Hughes
Chairman, President, and Chief Executive
Officer
15