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 June 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-51209
---------
OC FINANCIAL, INC.
(Exact name of small business issuer as specified in its charter)
Maryland 20-2111183
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6033 Perimeter Drive
Dublin, Ohio 43017
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (800) 678-6228.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the last practicable date.
Class Outstanding at August 13, 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
PART I. FINANCIAL INFORMATION
Page
Number
------
Item 1. Financial Statements .......................................... 1
Item 2. Management's Discussion and Analysis or Plan of Operation...... 10
Item 3. Controls and Procedures........................................ 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.... 18
Item 3. Defaults Upon Senior Securities................................ 18
Item 4. Submission of Matters to a Vote of Security Holders............ 18
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, 2007 (unaudited) and September 30, 2006
June 30, September 30,
2007 2006
---------------- ----------------
ASSETS
Cash and due from financial institutions $ 360,442 $ 456,730
Federal funds sold 6,504,000 6,273,000
---------------- ----------------
Total cash and cash equivalents 6,864,442 6,729,730
Securities held to maturity (fair value:
6/30/07 - $17,521,568; 09/30/06 - $20,846,386) 18,339,820 21,533,317
Federal Home Loan Bank stock 774,800 763,300
Loans, net of allowance of $236,508 at 6/30/07
and $240,932 at 09/30/06 40,329,938 36,708,128
Loans held for sale 46,443 56,102
Real Estate Owned 58,955 -
Premises and equipment, net 650,242 679,743
Accrued interest receivable 251,771 229,118
Prepaid expenses 218,745 170,844
Other assets 111,736 74,654
---------------- ----------------
Total assets $ 67,646,892 $ 66,944,936
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Savings deposits $ 10,023,388 $ 10,991,399
Demand deposits 5,227,258 5,865,445
Money market deposits 1,472,944 1,727,815
Time deposits 31,685,943 28,089,783
---------------- ----------------
Total deposits 48,409,533 46,674,442
Federal Home Loan Bank advances 11,200,000 10,200,000
Payments collected on loans sold 1,122,433 1,328,271
Accrued interest payable 93,323 55,117
Drafts in process 212,395 1,646,387
Other liabilities 189,435 226,109
---------------- ----------------
Total liabilities 61,227,119 60,130,326
Shareholders' Equity
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 4,952,957 4,951,052
Unearned ESOP shares (392,128) (425,743)
Retained earnings 1,853,342 2,283,699
---------------- ----------------
Total shareholders' equity 6,419,773 6,814,610
---------------- ----------------
Total liabilities and shareholders' equity $ 67,646,892 $ 66,944,936
================ ================
See accompanying notes to consolidated financial statements.
1
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended June 30, 2007 and 2006
(Unaudited)
For the three For the three
months ended months ended
June 30, 2007 June 30, 2006
--------------- ---------------
INTEREST INCOME
Loans, including fees $ 612,410 $ 449,175
Securities and other investments 222,954 248,800
Federal funds sold and other 65,738 92,758
--------------- ---------------
901,102 790,733
INTEREST EXPENSE
Deposits 421,671 367,543
Federal Home Loan Bank advances 162,289 124,955
--------------- ---------------
583,960 492,498
--------------- ---------------
NET INTEREST INCOME 317,142 298,235
Provision for loan losses - 15,000
--------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 317,142 283,235
NONINTEREST INCOME
Service charges and other deposit fees 67,322 81,921
Gain on loan sales 24,806 -
Income from servicing of loans 20,756 25,602
Visa and ATM interchange income 10,059 9,384
Other 16,915 23,009
--------------- ---------------
139,858 139,916
NONINTEREST EXPENSE
Compensation and benefits 293,790 313,615
Occupancy and equipment 23,628 26,018
Depreciation and amortization 23,488 25,663
Computer processing expense 31,796 30,343
VISA and ATM expense 19,771 2,827
Bank service charges 19,071 22,131
Collection and loan expense 11,115 11,067
Advertising and promotion 31,030 22,082
Other insurance premiums 10,567 6,090
Professional and supervisory fees 46,412 31,659
State franchise tax expense 19,371 23,850
Other 49,434 70,947
--------------- ---------------
579,473 586,292
--------------- ---------------
LOSS BEFORE INCOME TAXES (122,473) (163,141)
Income tax benefit - 56,239
--------------- ---------------
NET LOSS $ (122,473) $ (106,902)
=============== ===============
Net loss per share $ (0.24) $ (0.21)
=============== ===============
See accompanying notes to consolidated financial statements.
2
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended June 30, 2007 and 2006
(Unaudited)
For the nine For the nine
months ended months ended
June 30, 2007 June 30, 2006
--------------- ---------------
INTEREST INCOME
Loans, including fees $ 1,782,112 $ 1,262,198
Securities and other investments 706,418 855,918
Federal funds sold and other 129,276 220,540
--------------- ---------------
2,617,806 2,338,656
INTEREST EXPENSE
Deposits 1,210,143 879,702
Federal Home Loan Bank advances 477,516 470,327
--------------- ---------------
1,687,659 1,350,029
--------------- ---------------
NET INTEREST INCOME 930,147 988,627
Provision for loan losses 5,000 45,000
--------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 925,147 943,627
NONINTEREST INCOME
Service charges and other deposit fees 216,094 253,303
Commercial Loan Referral Fee 10,000 -
Gain on loan sales 46,227 -
Income from servicing of loans 64,583 73,152
Visa and ATM interchange income 32,495 29,630
Other 58,520 53,232
--------------- ---------------
427,919 409,317
NONINTEREST EXPENSE
Compensation and benefits 895,989 887,660
Occupancy and equipment 71,458 83,142
Depreciation and amortization 72,544 84,904
Computer processing expense 92,130 85,416
VISA and ATM expense 64,242 43,366
Bank service charges 62,773 65,447
Collection and loan expense 35,025 23,048
Advertising and promotion 73,674 90,650
Other insurance premiums 27,391 16,253
Professional and supervisory fees 138,639 162,789
State franchise tax expense 65,121 58,350
Other 184,437 190,801
--------------- ---------------
1,783,423 1,791,826
--------------- ---------------
LOSS BEFORE INCOME TAXES (430,357) (438,882)
Income tax benefit - 152,561
--------------- ---------------
NET LOSS $ (430,357) $ (286,321)
=============== ===============
Net loss per share $ (0.83) $ (0.55)
=============== ===============
See accompanying notes to consolidated financial statements
3
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Nine Months ended June 30, 2007 and 2006
(unaudited)
- ------------------------------------------------------------------------------------------------------------------------
Additional Total
Common Paid in Retained Unearned Shareholders'
Stock Capital Earnings ESOP Equity
------------- ------------- ------------- ------------- -------------
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
============= ============= ============= ============= =============
BALANCE AT SEPTEMBER 30, 2006 $ 5,602 $ 4,951,052 $ 2,283,699 $ (425,743) $ 6,814,610
Earned ESOP Shares - 1,905 - 33,615 35,520
Net Loss for the nine months ended
June 30, 2007 - - (430,357) - (430,357)
------------- ------------- ------------- ------------- -------------
BALANCE AT JUNE 30, 2007 $ 5,602 $ 4,952,957 $ 1,853,342 $ (392,128) $ 6,419,773
============= ============= ============= ============= =============
See accompanying notes to consolidated financial statements.
4
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 2007 and 2006
(Unaudited)
For the nine For the nine
months ended months ended
June 30, 2007 June 30, 2006
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (430,357) $ (286,321)
Adjustments to reconcile net loss to net cash
from operating activities
Depreciation and amortization 72,544 84,904
Provision for loan losses 5,000 45,000
Deferred fee/costs amortization 11,684 8,108
Earned ESOP Shares 35,520 18,355
Federal Home Loan Bank stock dividends (11,500) (31,300)
Net amortization (accretion) on investment securities 7,993 (34,670)
Loans originated and purchased for sale (6,527,258) (1,076,905)
Proceeds from sale of loans 6,583,144 1,076,905
Net gains on sales of loans (46,227) -
Changes in other assets (107,636) (82,675)
Changes in other liabilities (204,306) (783,829)
--------------- ---------------
Net cash used in operating activities (611,399) (1,062,428)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities held to maturity
Purchases - (2,954,688)
Maturities, calls and principal payments 3,185,504 5,510,024
Net increase in loans (3,697,449) (3,464,375)
Premises and equipment expenditures (43,043) (75,813)
--------------- ---------------
Net cash used in investing activities (554,988) (984,852)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 1,735,091 12,800,646
Proceeds from Federal Home Loan Bank advances 7,500,000 -
Repayment of Federal Home Loan Bank advances (6,500,000) (9,250,000)
Changes in drafts in process (1,433,992) 222,632
--------------- ---------------
Net cash provided by financing activities 1,301,099 3,773,278
--------------- ---------------
Net change in cash and cash equivalents 134,712 1,725,998
Cash and cash equivalents at beginning of period 6,729,730 3,962,586
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,864,442 $ 5,688,584
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the nine months for Interest $ 1,649,453 $ 1,350,029
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Transfer of loans to foreclosed real estate $ 234,276 $ -
Institution financed sale of REO $ 171,342 $ -
See accompanying notes to consolidated financial statements
5
OC FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(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 Bank's depositors to
complete its initial public 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 (a) condensed balance sheet as of September 30, 2006, which has been derived
from audited financial statements, and (b) the unaudited interim condensed
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 and nine-month
period ended June 30, 2007 are not necessarily indicative of the results that
may be expected for the year ending September 30, 2007. 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, 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 a
$448,150 loan to the newly-established employee stock ownership plan, as
discussed in Note 3.
6
Note 3 - Employee Stock Ownership Plan
In connection with the stock offering, the Company established an Employee Stock
Ownership Plan ("ESOP") for the benefit of its employees. The Company issued
44,815 shares of common stock to the ESOP in exchange for a 20-year note in the
amount of $448,150. The interest rate is Prime floating, with annual principal
and interest payments due on the last business day of December starting in 2005
and ending in 2024. The loan for the ESOP purchase was obtained from the
Company.
Shares issued to the ESOP are allocated to ESOP participants based on principal
and interest payments made by the ESOP on the loan from the Company. The loan is
secured by shares purchased with the loan proceeds and will be repaid by the
ESOP with funds from the Bank's contributions to the ESOP and earnings on ESOP
assets.
As shares are released from collateral, the Company will report compensation
expense equal to the current market price of the shares and the shares will
become outstanding for earnings-per-share (EPS) computations. Dividends on
allocated ESOP shares 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 and the nine months ended June 30, 2007
were $(.24) and $(0.83), 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, 2007:
Three Months Nine Months
Ended Ended
June 30, 2007 June 30, 2007
--------------- ---------------
Average shares outstanding 560,198 560,198
Average unearned ESOP shares 39,493 40,334
--------------- ---------------
Weighted average common shares outstanding,
basic and diluted 520,705 519,864
=============== ===============
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
=============== ===============
7
As of June 30, 2007, the Company currently had no potentially dilutive
securities. 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 June 30,
2007, no options or shares of restricted stock had been granted.
Note 5 - New Accounting Pronouncements
EITF 06-11
In March, 2007, the FASB ratified EITF Issue No. 06-11, "Accounting for Income
Tax Benefits of Dividends on Share-Based Payment Awards." EITF 06-11 required
companies to recognize the income tax benefit realized from dividends or
dividend equivalents that are charged to retained earnings and paid to employees
for nonvested equity-classified employee share-based payment awards as an
increase to additional paid-in capital. EITF 06-11 is effective for fiscal years
beginning after September 15, 2007. The Company does not expect EITF 06-11 will
have a material impact on its financial position, results of operations or cash
flows.
FIN 48
In July 2006, the FASB issued FASB Interpretation No. 48 "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 ("FIN
48"). FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken in a
tax return. The Company must presume the tax position will be examined by the
relevant tax authority and determine whether it is more likely than not that the
tax position will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of the
position. A tax position that meets the more-likely-than-not recognition
threshold is measured to determine the amount of benefit to recognize in the
financial statements. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The cumulative effect of applying the provisions of FIN 48
represents a change in accounting principle and shall be reported as an
adjustment to the opening balance of retained earnings. The Company is currently
evaluating the impact of adopting FIN 48 on its Consolidated Financial
Statements.
SFAS 157
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. The changes to current practice
resulting from the application of SFAS No. 157 relate to the definition of fair
value, the methods used to measure fair value and the expanded disclosures about
fair value measurements. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. Earlier application
is encouraged, provided that the reporting entity has not yet issued financial
statements for that fiscal year, including financial statements for an interim
period within that fiscal year. The provisions of SFAS No. 157 should be applied
prospectively as of the beginning of the fiscal year in which is initially
applied, except for certain financial instruments which require retrospective
application as of the beginning of the fiscal year of initial application (a
limited form of retrospective application). The transition adjustment, measured
as the difference between the carrying amounts and the fair values of those
financial instruments at the date SFAS No. 157 is initially applied, should be
recognized as a cumulative-effect adjustment to the opening balance of retained
earnings. The Company is currently evaluating the impact of adopting SFAS No.
157 on its Consolidated Financial Statements and whether to adopt its provisions
prior to the required effective date.
8
SAB 108
In September 2006, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin ("SAB") 108. This release expresses the staff's view
regarding the process of quantifying financial statement misstatements and
addresses diversity in practice in quantifying financial statement misstatements
and the potential under current practice for the build up of improper amounts on
the balance sheet. SAB No. 108 is effective for annual financial statements
covering the first fiscal year ending after November 15, 2006. The Company has
reviewed the SAB in connection with our condensed consolidated financial
statements for the current and prior periods, and has determined that its
adoption will not have an impact on any of these financial statements.
SFAS 159
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115." SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected will be
recognized in earnings at each subsequent reporting date. SFAS No. 159 is
effective for our company January 1, 2008. The Company is evaluating the impact
that the adoption of SFAS No. 159 will have on our consolidated financial
statements.
9
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 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, service charges, gains from sales of loans,
interchange fees, other income, operating expenses and income taxes.
10
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 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.
11
BUSINESS STRATEGY
Prior to our three and a half year affiliation with Third Federal, from
November, 2001 to March, 2005, 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
loan 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 March, 2005, we
reinitiated our mortgage lending activity within our market areas and retained
automobile loans in our portfolio. This strategy of increased lending activity
is intended to 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
the new 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 June 30, 2007, we did
not enter into any new agreements with AutoARM(R) partners to originate and
service auto loans. At June 30, 2007 we had a total of seventeen AutoARM(R)
partners.
COMPARISON OF RESULTS OF OPERATION FOR THE THREE MONTHS ENDED JUNE 30, 2007 AND
2006
GENERAL. Our net loss for the three months ended June 30, 2007 was
$122,000 compared to a net loss of $107,000 for the three months ended June 30,
2006. Our loss before income taxes for the three months ended June 30, 2007 was
$122,000 compared to a loss before income taxes of $163,000 for the three months
ended June 30, 2006.
The increase in our net loss can also be attributed to not recognizing any
income tax benefit on our operating losses offset by an increase of $19,000 in
our net interest income for the quarter ended June 30, 2007 as compared to the
same quarter in 2006. Within our own loan portfolio, we continued replacement of
lower interest rate loans with higher interest rate loans as market rates
increased over the three month period ended June 30, 2007 as compared with the
same period a year earlier.
12
INTEREST INCOME. Interest income increased $110,000 to $901,000 for the
three months ended June 30, 2007 from $791,000 for the three months ended June
30, 2006. The primary reason for the increase in interest income was an increase
of $163,000 in loan income offset by a reduction in interest income on
securities and other investments of $26,000 and a reduction in federal funds
interest of $27,000. The increase in loan income was primarily due to a net
increase in the balance of our loan portfolio of $7.6 million from June 30, 2006
to June 30, 2007. As we intend to increase our emphasis on residential mortgage
and consumer lending, this trend of increasing interest-earning assets may
continue. The weighted average yield on loans increased from 5.72% for the three
months ended June 30, 2006 to 6.14% for the three months ended June 30, 2007.
The weighted average yield on securities increased from 4.01% for the three
months ended June 30, 2006 to 4.56% for the three months ended June 30, 2007.
The total average balance of interest-earning assets increased $1.4 million from
$65.1 million for the three months ended June 30, 2006 to $66.5 million for the
three months ended June 30, 2007. The weighted average yield on interest-earning
assets increased 56 basis points from 4.86% for the three months ended June 30,
2006 to 5.42% for the three months ended June 30, 2007.
INTEREST EXPENSE. Interest expense increased $92,000 to $584,000 for the
three months ended June 30, 2007 from $492,000 for the three months ended June
30, 2006. 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 the three months ended June 30, 2007 as compared to the three months
ended June 30, 2006. From June 30, 2006 to June 30, 2007, our outstanding
deposits increased $2.5 million. Interest expense on deposits increased $54,000
to $422,000 for the quarter ended June 30, 2007 from $368,000 for the quarter
ended June 30, 2006. The average cost of deposits increased 46 basis points to
3.53% for the quarter ended June 30, 2007 from 3.07% for the quarter ended June
30, 2006.
As interest rates appear to have stabilized, we expect interest expense
will begin to level off in the coming months. Our average weighted cost of funds
was 3.90% for the three months ended June 30, 2007 compared to 3.46% for the
three months ended June 30, 2006.
NET INTEREST INCOME. Net interest income increased $19,000 to $317,000 for
the three months ended June 30, 2007 from $298,000 for the three months ended
June 30, 2006. The increase in net interest income was primarily the result of
our gradual shift to loans from securities and other investments as described
above offset in part by increasing interest rates on deposits. Our net interest
margin has increased to 1.91% for the three months ended June 30, 2007 compared
to 1.83% 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 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, no provision was
made for the three months ended June 30, 2007. A provision of $15,000 was made
for the three months ended June 30, 2006. The amount of general allowance
allocations made for smaller balance homogeneous loans has remained constant
during the three months ended June 30, 2007, primarily resulting from the
performance of the portfolio, actual losses and recoveries. Loan charge-offs
were $7,000, for the three months ended June 30, 2007, as compared to $200 for
the three months ended June 30, 2006. Recoveries were $4,000 for the three
months ended June 30, 2007, compared to $5,000 for the three month period ended
June 30, 2006.
13
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, 2007 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 remained constant at $140,000 for
the three months ended June 30, 2007 and the three months ended June 30, 2006.
For the three months ended June 30, 2007, the Bank recognized a gain of $25,000
on the sale of a pool of auto loans. Service charges on deposit accounts were
$67,000 for the quarter ended June 30, 2007, a decrease of $15,000, as compared
to $82,000 for the three months ended June 30, 2006.
NON-INTEREST EXPENSE. Non-interest expense decreased $7,000 to $579,000
for the quarter ended June 30, 2007 from $586,000 for the same period in 2006.
The decrease was primarily due to reductions in compensation expenses of $20,000
and other expenses of $22,000 offset by increases in professional fees of
$15,000 and Visa and ATM expenses of $17,000, from the comparable period in
2006.
INCOME TAX EXPENSE (BENEFIT). No income tax expense or benefit was
recognized for the three months ended June 30, 2007 due to our continuing
operating losses which has required the establishment of a valuation allowance
on our deferred tax assets related to our net operating loss carry forwards. An
income tax benefit of $56,000 was recognized for the three months ended June 30,
2006.
COMPARISON OF RESULTS OF OPERATION FOR THE NINE MONTHS ENDED JUNE 30, 2007 AND
2006
GENERAL. Our net loss for the nine months ended June 30, 2007 was $430,000
compared to a net loss of $286,000 for the nine months ended June 30, 2006.
A number of factors contributed to the increase in net loss, including an
increase in our interest expense offset in part by an increase in our interest
income. We also have not recognized a tax benefit on our operating losses for
the nine months ended June 30, 2007 compared to the nine months ended June 30,
2006. We have seen a compression in our net interest margin as a result of the
flat yield curve and its effects on our loan and deposit pricing abilities. As
of June 30, 2007, our net interest margin was 1.91% as compared to 2.09% as of
June 30, 2006. Within our own loan portfolio, we have continued to replace lower
interest rate loans with higher interest rate loans over the nine month period
ended June 30, 2007.
INTEREST INCOME. Interest income increased to $2.6 million for the nine
months ended June 30, 2007 from $2.3 million for the nine months ended June 30,
2006. The primary reason for the increase in interest income was an increase of
$520,000 in loan income offset by reductions of $150,000 and $91,000 in
securities and investment income and interest on federal funds, respectively.
The increase in loan income was primarily due to a net increase in the balance
of our loan portfolio of $7.6 million from June 30, 2006 to June 30, 2007. As we
continue to increase our emphasis on residential mortgage and consumer lending,
this trend of increasing interest-earning assets may continue. The weighted
average yield on loans increased from 5.54% for the nine months ended June 30,
2006 to 6.08% for the nine months ended June 30, 2007. The weighted average
yield on securities increased from 4.49% for the nine months ended June 30, 2006
to 4.52% for the nine months ended June 30, 2007. The average balance of
interest-earning assets increased $1.7 million from the nine months ended June
30, 2006 to the nine months ended June 30, 2007, and the weighted average yield
on interest-earning assets increased 45 basis points from 4.94% to 5.39%.
14
INTEREST EXPENSE. Interest expense increased $338,000 to $1.7 million for
the nine months ended June 30, 2007 from $1.4 million for the nine months ended
June 30, 2006. 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 for the nine months ended June 30, 2007 as compared to the same period in
the prior year. Interest expense on deposits increased $330,000 to $1.2 million
for the nine months ended June 30, 2007 from $880,000 for the nine months ended
June 30, 2006. The average cost of deposits increased 70 basis points to 3.44%
for the nine months ended June 30, 2007 from 2.74% for the nine months ended
June 30, 2006.
As interest rates appear to have stabilized, we expect interest expense
may level off in the coming months. Our average weighted cost of funds was 3.89%
for the nine months ended June 30, 2007 compared to 3.29% for the nine months
ended June 30, 2006.
NET INTEREST INCOME. Net interest income decreased $58,000 to $930,000 for
the nine months ended June 30, 2007 from $988,000 for the nine months ended June
30, 2006. The decrease in net interest income was primarily the result of
increasing interest rates for deposits offset in part by of a gradual shift to
loans from investments as described above. Our net interest margin has declined
to 1.91% for the nine months ended June 30, 2007 compared to 2.09% for the nine
months ended June 30, 2006 as the negative effects of the flat yield curve
continue to impact our earnings.
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, 2007 in the amount of $5,000 compared to a provision
of $45,000 for the nine months ended June 30, 2006. The decrease in provision
for loan losses was primarily attributable to management's ongoing assessment of
risk within our loan portfolio. Based upon this assessment, management believes
the current provision for loan losses to be adequate. The amount of general
allowance allocations made for smaller balance homogeneous loans has remained
constant during the nine months ended June 30, 2007 primarily resulting from the
performance of the portfolio, actual losses and recoveries. Loan charge-offs
were $12,000, for the nine months ended June 30, 2007, down from $13,000 for the
nine months ended June 30, 2006. Recoveries were $5,000 for the nine months
ended June 30, 2007, compared to $14,000 for the nine month period ended June
30, 2006.
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, 2007 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 increased $19,000 to $428,000 for
the nine months ended June 30, 2007 from $409,000 for the nine months ended June
30, 2006. The overall increase in non-interest income was attributed primarily
to a $46,000 gain on the sale of two auto loan pools in March and April, 2007 as
well as a $10,000 commercial loan referral fee received in October, 2006 offset
by a reduction in our service charges and deposit fees of $37,000.
15
NON-INTEREST EXPENSE. Non-interest expense was $1.8 million for the nine
months ended June 30, 2007 and was comparable to non-interest expense recognized
during the comparable nine month period ended June 30, 2006.
INCOME TAX EXPENSE (BENEFIT). No income tax expense or benefit was
recognized for the nine months ended June 30, 2007 due to our continuing
operating losses which has required the establishment of a valuation allowance
on our deferred tax assets related to our net operating loss carry forwards. For
the nine months ended June 30, 2006, the Company recognized a tax benefit of
$153,000.
CHANGES IN FINANCIAL CONDITION FROM SEPTEMBER 30, 2006 TO JUNE 30, 2007.
GENERAL. Total assets increased by $702,000, or 1.05%, to $67.6 million at
June 30, 2007 from $66.9 million at September 30, 2006. The increase was
attributed primarily to $1.0 million of short term Federal Home Loan Bank
advances obtained in June, 2007. The advances were invested in federal funds for
the purpose of growing our balance sheet in order to meet the consumer loan
percentage of asset limitations as imposed by the Home Owners' Loan Act.
ASSETS. Our loan portfolio increased $3.6 million from $36.7 million at
September 30, 2006 to $40.3 million at June 30, 2007. Loans held for sale
decreased $10,000 from $56,000 at September 30, 2006 to $46,000 at June 30,
2007.
Federal Funds outstanding increased $231,000 from $6.3 million at
September 30, 2006 to $6.5 million at June 30, 2007. Federal Home Loan Bank
advances of $1.0 million, obtained in June, 2007, were invested in federal funds
for the purpose of growing our balance sheet in order to meet the consumer loan
percentage of asset limitations as imposed by the Home Owners' Loan Act.
The allowance for loan losses was $237,000 at June 30, 2007 or 0.59% 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 $49,000 at June 30, 2007 and $130,000 at September 30, 2006,
respectively. The decrease was attributed primarily to the payoff of one
non-performing residential mortgage loan during the period. 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. As of June 30, 2007, one single-family residence is
being held as real estate owned.
DEPOSITS. Total deposits increased $1.7 million, or 3.64%, to $48.4
million at June 30, 2007 from $46.7 million at September 30, 2006. This increase
was primarily the result of new monies invested by existing customers or
existing customer referrals.
BORROWINGS. Federal Home Loan Bank advance balances were $11.2 million at
June 30, 2007 and $10.2 million at September 30, 2006. Short-term advances
increased $1.0 million during the quarter ended June 30, 2007 to grow our
balance sheet in order to meet consumer loan percentage of asset limitations as
imposed by the Home Owners' Loan Act. 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.
SHAREHOLDERS' EQUITY. Total consolidated shareholders' equity for the
Company decreased $395,000, or 5.79%, to $6.4 million at June 30, 2007 from $6.8
million at September 30, 2006. The decrease in equity was primarily the result
of our operating loss of $430,000 for the nine month period.
16
CAPITAL RESOURCES. At June 30, 2007, capital at the Bank totaled $5.9
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, 2007 are as follows:
TO BE WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
-------------------- -------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
As of June 30, 2007
- -------------------
Total capital (to risk
weighted assets)................. $ 6,138 15.69% $ 3,130 8.00% $ 3,913 10.00%
Tier 1 (core) capital
(to risk weighted assets)........ $ 5,902 15.09% $ 1,565 4.00% $ 2,348 6.00%
Tier 1 (core) capital (to
adjusted total assets)........... $ 5,902 8.66% $ 2,716 4.00% $ 3,395 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,
2007, Ohio Central Savings had additional borrowing capacity of $15.9 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 $18.3 million.
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 June 30, 2007. 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.
17
OC FINANCIAL, INC.
FORM 10-QSB
June 30, 2007
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.
18
OC FINANCIAL, INC.
FORM 10-QSB
June 30, 2007
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 13, 2007 /s/ Diane M. Gregg
----------------------------------------
Diane M. Gregg
President, and Chief Executive Officer
19