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, 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 latest practicable date.
Class Outstanding at February 15, 2008
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...... 9
Item 3. Controls and Procedures........................................ 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.... 16
Item 3. Defaults Upon Senior Securities................................ 16
Item 4. Submission of Matters to a Vote of Security Holders............ 16
Item 5. Other Information.............................................. 16
Item 6. Exhibits....................................................... 16
Signature Page ....................................................... 17
PART I: FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
OC FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2007 and September 30, 2007
(Unaudited)
December 31, September 30,
2007 2007
-------------- ---------------
ASSETS
Cash and due from financial institutions $ 1,514,636 $ 820,137
Federal funds sold 1,124,000 2,955,000
-------------- ---------------
Total cash and cash equivalents 2,638,636 3,775,137
Securities held to maturity (fair value: 12/31/07 - $16,554,558;
09/30/07 - $17,182,071) 17,051,643 17,746,925
Federal Home Loan Bank stock 774,800 774,800
Loans, net of allowance (12/31/07 - $163,671; 9/30/07 - $165,950) 42,359,078 42,044,805
Loans held for sale - 30,416
Premises and equipment, net 617,774 640,815
Accrued interest receivable 258,123 260,917
Prepaid expenses 48,958 106,753
Other assets 137,533 118,672
-------------- ---------------
Total assets $ 63,886,545 $ 65,499,240
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Savings deposits $ 8,863,081 $ 9,614,137
Demand deposits 5,171,730 4,953,252
Money market deposits 1,462,293 1,701,961
Time deposits 30,229,699 29,874,985
-------------- ---------------
Total deposits 45,726,803 46,144,335
Federal Home Loan Bank advances 10,450,000 10,950,000
Payments collected on loans sold 793,568 1,076,410
Accrued interest payable 92,730 94,515
Drafts in process 587,638 899,113
Other liabilities 200,701 193,743
-------------- ---------------
Total liabilities 57,851,440 59,358,116
Common stock, $0.01 par value; 20,000,000 shares authorized,
560,198 shares issued and outstanding 5,602 5,602
Additional paid-in capital 4,953,769 4,953,377
Unearned ESOP shares (375,327) (380,929)
Retained earnings 1,451,061 1,563,074
Total shareholders' equity 6,035,105 6,141,124
-------------- ---------------
Total liabilities and shareholders' equity $ 63,886,545 $ 65,499,240
============== ===============
See accompanying notes to consolidated financial statements.
1
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended December 31, 2007 and 2006
(Unaudited)
For the three For the three
months ended months ended
December 31, December 31,
2007 2006
-------------- --------------
INTEREST INCOME
Loans, including fees $ 652,371 $ 564,147
Securities and other investments 211,553 246,419
Federal funds sold and other 17,526 38,206
-------------- --------------
881,450 848,772
INTEREST EXPENSE
Deposits 409,368 394,644
Federal Home Loan Bank advances 153,154 158,412
-------------- --------------
562,522 553,056
-------------- --------------
NET INTEREST INCOME 318,928 295,716
Provision for loan losses 5,000 5,000
-------------- --------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 313,928 290,716
NONINTEREST INCOME
Service charges and other deposit fees 65,091 76,485
Commercial Loan Referral Fee - 10,000
Income from servicing of loans 8,343 16,551
Visa and ATM interchange income 9,458 13,696
Other 20,454 25,372
-------------- --------------
103,346 142,104
NONINTEREST EXPENSE
Compensation and benefits 231,410 318,463
Occupancy and equipment 22,628 22,793
Depreciation and amortization 23,041 25,482
Computer processing expense 29,285 29,150
VISA and ATM expense 18,474 21,321
Bank service charges 17,728 22,863
Collection and loan expense 15,001 12,316
Advertising and promotion 23,028 13,350
Other insurance premiums 12,805 6,792
Professional and supervisory fees 57,998 44,542
State franchise tax expense 22,018 23,850
Other 55,871 76,279
-------------- --------------
529,287 617,201
-------------- --------------
LOSS BEFORE INCOME TAXES (112,013) (184,381)
Income tax benefit - -
-------------- --------------
NET LOSS $ (112,013) $ (184,381)
============== ===============
Net loss per share $ (0.21) $ (0.36)
============== ===============
See accompanying notes to consolidated financial statements.
2
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Months ended December 31, 2007 and 2006
(Unaudited)
Additional Total
Common Paid in Retained Shareholders'
Stock Capital Earnings Unearned ESOP Equity
----------- ------------ ------------ --------------- --------------
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
=========== ============ ============ =============== ==============
BALANCE AT SEPTEMBER 30, 2007 $ 5,602 $ 4,953,377 $ 1,563,074 $ (380,929) $ 6,141,124
Earned ESOP Shares 392 5,602 5,994
Net Loss (112,013) (112,013)
----------- ------------ ------------ --------------- --------------
BALANCE AT DECEMBER 31, 2007 $ 5,602 $ 4,953,769 $ 1,451,061 $ (375,327) $ 6,035,105
=========== ============ ============ =============== ==============
See accompanying notes to consolidated financial statements.
3
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended December 31, 2007 and 2006
(Unaudited)
For the three For the three
months ended months ended
December 31, December 31,
2007 2006
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (112,013) $ (184,381)
Adjustments to reconcile net loss to net cash
from operating activities
Depreciation and amortization 23,041 25,482
Provision for loan losses 5,000 5,000
Deferred fee/costs amortization 5,373 3,751
Earned ESOP Shares 5,995 23,307
Federal Home Loan Bank stock dividends - (11,500)
Net amortization on investment securities 1,381 2,570
Loans originated for sale - (735,798)
Proceeds from sale of loans 30,427 726,543
Changes in other assets 41,716 (45,994)
Changes in other liabilities (277,669) (257,057)
-------------- --------------
Net cash used in operating activities (276,749) (448,077)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities held to maturity
Maturities, calls and principal payments 693,901 883,813
Net increase in loans (324,646) (2,250,917)
Premises and equipment expenditures - (21,622)
-------------- --------------
Net cash provided by (used in) investing activities 369,255 (1,388,726)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (417,532) (1,022,945)
Proceeds from Federal Home Loan Bank advances 582,000 -
Repayment of Federal Home Loan Bank advances (1,082,000) -
Decrease in Corporate Drafts in Process (311,475) (1,294,368)
-------------- --------------
Net cash used in financing activities (1,229,007) (2,317,313)
-------------- --------------
Net change in cash and cash equivalents (1,136,501) (4,154,116)
Cash and cash equivalents at beginning of period 3,775,137 6,729,730
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,638,636 $ 2,575,614
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the quarter for:
Interest $ 564,307 $ 538,915
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, 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 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 the 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, 2007 are not necessarily indicative of the results
that may be expected for the fiscal year ending September 30, 2008. The
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended September 30,
2007 should be read in conjunction with these statements. The Company 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 then 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, 2007 and December 31,
2006 were $(0.21) and $(0.36), respectively. Common shares outstanding for
purposes of the earnings per share calculation were as follows:
2007 2006
Average shares outstanding 560,198 560,198
Average unearned ESOP shares 38,030 41,454
-----------------------
Weighted average common shares outstanding,
basic and diluted 522,168 518,744
=======================
6
Note 5 - New Accounting Standards
FIN 48
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109" (FIN 48), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that
companies recognize in their financial statements the impact of a tax position,
if that position is more likely than not of being sustained on audit, based on
the technical merits of the position. The provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006, with the cumulative effect of
the change in accounting principle recorded as an adjustment to opening retained
earnings. There was no impact of adopting FIN 48 on the Company's financial
statements.
FSP FIN 48-1
In May 2007, the FASB issued FASB Staff Position ("FSP") FIN 48-1
"Definition of Settlement in FASB Interpretation No. 48" (FSP FIN 48-1). FSP FIN
48-1 provides guidance on how to determine whether a tax position is effectively
settled for the purpose of recognizing previously unrecognized tax benefits. FSP
FIN 48-1 is effective for fiscal years beginning after December 15, 2006. We are
currently evaluating the impact of adopting FIN 48-1 on our financial
statements.
SFAS 157
In September 2006, the FASB issued Statement No. 157, Fair Value
Measurements ("SFAS 157"), which defines fair value, establishes a framework for
measuring fair value under GAAP, and expands disclosures about fair value
measurements. SFAS 157 applies to other accounting pronouncements that require
or permit fair value measurements. The new guidance is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and for
interim periods within those fiscal years. We are currently evaluating the
potential impact, if any, of the adoption of SFAS 157 on our financial
statements.
EITF 06-4
In September 2006, the FASB's Emerging Issues Task Force (EITF) issued
EITF Issue No. 06-4, "Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements" ("EITF
06-4"). EITF 06-4 requires the recognition of a liability related to the
postretirement benefits covered by an endorsement split-dollar life insurance
arrangement. The consensus highlights that the employer (who is also the
policyholder) has a liability for the benefit it is providing to its employee.
As such, if the policyholder has agreed to maintain the insurance policy in
force for the employee's benefit during his or her retirement, then the
liability recognized during the employee's active service period should be based
on the future cost of insurance to be incurred during the employee's retirement.
Alternatively, if the policy holder has agreed to provide the employee with a
death benefit, then the liability for the future death benefit should be
recognized by following the guidance in SFAS No. 106 or Accounting Principles
Board (APB) Opinion No. 12, as appropriate. For transition, an entity can choose
to apply the guidance using either of the following approaches: (a) a change in
accounting principle through retrospective application to all periods presented
or (b) a change in accounting principle through a cumulative-effect adjustment
to the balance in retained earnings at the beginning of the year of adoption.
The disclosures required in fiscal years beginning after December 15, 2007, with
early adoption permitted. The adoption of this standard did not have a material
impact on the Company's consolidated financial statements.
7
EITF 06-5
In September 2006, the Task Force reached a conclusion on EITF Issue No.
06-5, "Accounting for Purchases of Life Insurance - Determining the Amount That
Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4,
Accounting for Purchases of Life Insurance" ("EITF 06-5"). The scope of EITF
06-5 consists of six separate issues relating to accounting for life insurance
policies purchased by entities protecting against the loss of "key persons." The
six issues are clarifications of previously issued guidance on FASB Technical
Bulletin No. 85-4. EITF 06-5 is effective for fiscal years beginning after
December 15, 2006. The Company does not expect it to have a material impact on
the Company's consolidated financial statements.
EITF 06-10
In March 2007, the FASB ratified Emerging Issues Task Force Issue No.
06-10 "Accounting for Collateral Assignment Split-Dollar Life Insurance
Agreements" (EITF 06-10). EITF 06-10 provides guidance for determining a
liability for the postretirement benefit obligation as well as recognition and
measurement of the associated asset on the basis of the terms of the collateral
assignment agreement. EITF 06-10 is effective for fiscal years beginning after
December 15, 2007. The Company is currently assessing the impact of EITF 06-10
on its consolidated financial position and results of operations.
SFAS 159
In February 2007, the FASB issued FASB Statement No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities-including an Amendment of
FASB Statement No. 115" ("FASB Statement 159"). FASB Statement 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. FASB Statement No. 159 is effective for our Company October 1,
2008. The Company is evaluating the impact that the adoption of FASB Statement
No. 159 will have on our consolidated financial statements.
SFAS 160
FASB statement No. 160 "Noncontrolling Interests in Consolidated Financial
Statements-an amendment of ARB No. 51" was issued in December of 2007. This
Statement establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. The
guidance will become effective as of the beginning of a company's fiscal year
beginning after December 15, 2008. The company believes that this new
pronouncement will have an immaterial impact on the Company's financial
statements in future periods.
SAB 109
Staff Accounting Bulletin No. 109 (SAB 109), "Written Loan Commitments Recorded
at Fair Value Through Earnings" expresses the views of the staff regarding,
written loan commitments that are accounted for at fair value through earnings
under generally accepted accounting principles. To make the staff's views
consistent with current authoritative accounting guidance, the SAB revises and
rescinds portions of SAB No. 105, "Application of Accounting Principles to Loan
Commitments." Specifically, the SAB revises the SEC staff's views on
incorporating expected net future cash flows related to loan servicing
activities in the fair value measurement of a written loan commitment. The SAB
retains the staff's views on incorporating expected net future cash flows
related to internally-developed intangible assets in the fair value measurement
of a written loan commitment. The staff expects registrants to apply the views
in Question 1 of SAB 109 on a prospective basis to derivative loan commitments
issued or modified in fiscal quarters beginning after December 15, 2007. The
Company does not expect SAB 109 to have a material impact on its financial
statements.
8
SFAS 157
In December 2007, the FASB issued proposed FASB Staff Position (FSP) 157-b,
"Effective Date of FASB Statement No. 157," that would permit a one-year
deferral in applying the measurement provisions of Statement No. 157 to
non-financial assets and non-financial liabilities (non-financial items) that
are not recognized or disclosed at fair value in an entity's financial
statements on a recurring basis (at least annually). Therefore, if the change in
fair value of a non-financial item is not required to be recognized or disclosed
in the financial statements on an annual basis or more frequently, the effective
date of application of Statement 157 to that item is deferred until fiscal years
beginning after November 15, 2008 and interim periods within those fiscal years.
This deferral does not apply, however, to an entity that applies Statement 157
in interim or annual financial statements before proposed FSP 157-b is
finalized. The Company is currently evaluating the impact, if any, that the
adoption of FSP 157-b will have on the Company's operating income or net
earnings.
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.
9
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 and borrowings. The Company's earnings are also affected by the
Company's provision for loan losses, service charges, and 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, 2007 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.
10
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.
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.
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. As of the quarter ended December 31, 2007, the
total number of AutoARM(R) partners to originate and service auto loans was
seventeen. 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.
11
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2007
AND 2006
GENERAL. Our net loss for the three months ended December 31, 2007 was
$112,000 compared to a net loss of $184,000 for the three months ended December
31, 2006.
A number of factors contributed to the decrease in our net loss, with the
largest factor being decreased salary expense during the middle of the quarter
due to the departure of our former President and CEO Robert Hughes, and to a
lesser extent an increase in our net interest income offset by a decrease in our
non-interest income.
INTEREST INCOME. Interest income increased $32,000 to $881,000 for the
three months ended December 31, 2007 from $849,000 for the three months ended
December 31, 2006. The primary reason for the increase in interest income was an
increase of $88,000 in loan income. The increase in loan income was partially
due to a net increase in the balance of our loan portfolio of $300,000 for the
three months ended December 31, 2007 compared to the three months ended December
31, 2006. As we intend to increase our emphasis on residential mortgage lending,
this trend of increasing the balance of our loan portfolio may continue. The
weighted average yield on loans increased to5.98% for the three months ended
December 31, 2007 from 5.72% for the three months ended December 31, 2006. The
weighted average yield on securities increased to 4.92% for the three months
ended December 31, 2007 from 4.51% for the three months ended December 31, 2006.
Total average interest-earning assets decreased $1.3 million to $62.5 million
for the three months ended December 31, 2007 from $63.8 million for the three
months ended December 31, 2006. The weighted average yield on interest-earning
assets increased 45 basis points to 5.77% for the three months ended December
31, 2007 from 5.32% for the three months ended December 31, 2006.
INTEREST EXPENSE. Interest expense increased $10,000 to $563,000 for the
three months ended December 31, 2007 from $553,000 for the three months ended
December 31, 2006. Interest expense on deposits increased $15,000 to $409,000
for the quarter ended December 31, 2007 from $395,000 for the quarter ended
December 31, 2006. The increase in interest expense was primarily attributed to
an increase in the cost of deposits as a result of the increase in short-term
market interest rates during most of 2007 and 2006. The average cost of deposits
increased 9 basis points to 3.51% for the quarter ended December 31, 2007 from
3.42% for the quarter ended December 31, 2006. The average balance of deposits
decreased by $108,000 from $46.1 million for the three months ended December 31,
2006 to $46.0 million for the three months ended December 31, 2007.
Our average weighted cost of funds was 4.14% for the three months ended
December 31, 2007 compared to 3.93% for the three months ended December 31,
2006.
Interest expense on Federal Home Loan Bank advances decreased $5,000 to
$153,000 for the three months ended December 31, 2007 from $158,000 for the
three months ended December 31, 2006.
NET INTEREST INCOME. Net interest income increased $23,000 to $319,000 for
the three months ended December 31, 2007 from $296,000 for the three months
ended December 31, 2006. The increase in net interest income was primarily the
result of the increased loan yield. Our net interest margin was 2.03% for the
three months ended December 31, 2007 compared to 1.85% for the three months
ended December 31, 2006.
12
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, a provision was
made for the three months ended December 31, 2007 in the amount of $5,000
compared to $5,000 made for the three months ended December 31, 2006. The
consistency in provision for loan losses was 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, 2007 primarily resulting
from the performance of the portfolio, actual losses and recoveries. Loan
charge-offs were $22,000, for the three months ended December 31, 2007, down
from $56,000 for the three months ended December 31, 2006. Recoveries were
$2,000 for the three months ended December 31, 2007, compared to $53,000 for the
three month period ended December 31, 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, 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, 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 decreased $39,000 to $103,000 for
the three months ended December 31, 2007 from $142,000 for the three months
ended December 31, 2006. The overall decrease in non-interest income was
primarily due to lower deposit and loan servicing fee income.
NON-INTEREST EXPENSE. Non-interest expense decreased $88,000 to $529,000
for the quarter ended December 31, 2007 from $617,000 for the quarter ended
December 31, 2006. The decrease was primarily attributed to decreased
compensation and benefits expense of $87,000 due to the resignation of our prior
President and CEO, and an overall focus on expense reduction.
CHANGES IN FINANCIAL CONDITION FROM SEPTEMBER 30, 2007 TO DECEMBER 31, 2007.
GENERAL. Total assets decreased by $1.6 million, or 2.46%, to $64.0
million at December 31, 2007 from $65.5 million at September 30, 2007. The
decline was attributed primarily to a decline in Fed Funds balances of $1.8
million during the quarter and a decrease in outstanding securities of $700,000
during the quarter.
ASSETS. Our loan portfolio increased $314,000 from $42.0 million at
September 30, 2007 to $42.3 million at December 31, 2007 predominantly as a
result of increased automobile loan originations. Outstanding Federal Funds sold
decreased $1.8 million from $3.0 million at September 30, 2007 to $1.2 million
at December 31, 2007. The decrease in outstanding Federal Funds sold is
intentional as we seek to more closely manage our liquidity to improve our net
interest margin.
13
At December 31, 2007, we held one single-family residence in Real Estate
Owned. This property is a non-owner occupied rental property. This property is
on the market to be sold and is not presently under contract.
The allowance for loan losses was $164,000 at December 31, 2007 or 0.38%
of loans, compared to $166,000, or 0.39% of loans at September 30, 2007. 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 $146,000 at December 31, 2007 and $125,000 at September 30, 2007,
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, 2007, decreased to $77,000 from $93,000 at September 30, 2007.
DEPOSITS. Total deposits decreased by $418,000, or 0.90%, to $45.7 million
at December 31, 2007 from $46.1 million at September 30, 2007. Time deposits
increased by $355,000 and checking accounts increased by $218,000 during our
first fiscal quarter. Savings and money market accounts decreased a total of
$991,000 during our first fiscal quarter due to better interest rates available
on certificates of deposit.
BORROWINGS. Federal Home Loan Bank advance balances were $10.5 million at
December 31, 2007, representing a decrease of $500,000 from $11.0 million at
September 30, 2007. 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 $106,000, or 1.73%, to $6.0 million at December 31,
2007 from $6.1 million at September 30, 2007. The decrease in equity was
primarily the result of our net operating loss of $112,000 for the quarter.
CAPITAL RESOURCES. At December 31, 2007, capital at Ohio Central Savings
totaled $6.0 million. Management monitors the capital levels of Ohio Central
Savings to provide for current and future business opportunities and to meet
regulatory guidelines for "well-capitalized" institutions.
Ohio Central Savings is required by the Office of Thrift Supervision to
meet minimum capital adequacy requirements. Ohio Central Savings' actual and
required levels of capital as reported to the Office of Thrift Supervision at
December 31, 2007 were as follows:
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
As of December 31, 2007
- ------------------------
Total capital (to risk weighted
assets)......................... $ 5,659 14.39% $ 3,146 8.00% $ 3,932 10.00%
Tier 1 (core) capital (to risk
weighted assets)................ $ 5,495 13.97% $ 1,573 4.00% $ 2,359 6.00%
Tier 1 (core) capital (to
adjusted total assets).......... $ 5,495 8.63% $ 2,859 4.00% $ 3,574 5.00%
14
LIQUIDITY
Management maintains a liquidity position that it believes will adequately
provide funding for loan demand and deposit run-off that may occur in the normal
course of business. 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, 2007, Ohio Central Savings had additional borrowing capacity of $17.8
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 as of December
31, 2007 was $18.8 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, 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.
15
OC FINANCIAL, INC.
FORM 10-QSB
December 31, 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.
16
OC FINANCIAL, INC.
FORM 10-QSB
December 31, 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: February 25, 2008 /s/ Diane M. Gregg
-------------------------------------
Diane M. Gregg
President and Chief Executive Officer
17