UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-51209
---------
OC FINANCIAL, INC.
(Exact name of small business issuer as specified in its charter)
Maryland 20-2111183
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6033 Perimeter Drive
Dublin, Ohio 43017
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (800) 678-6228.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the last practicable date.
Class Outstanding at May 15, 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....... 11
Item 3. Controls and Procedures......................................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..... 19
Item 3. Defaults Upon Senior Securities................................. 19
Item 4. Submission of Matters to a Vote of Security Holders............. 19
Item 5. Other Information............................................... 19
Item 6. Exhibits........................................................ 19
Signature Page............................................................. 20
PART I: FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
OC FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 2008 and September 30, 2007
March 31, September 30,
2008 2007
------------ ------------
(Unaudited)
ASSETS
Cash and due from financial institutions $ 840,474 $ 820,137
Federal funds sold 7,594,000 2,955,000
------------ ------------
Total cash and cash equivalents 8,434,474 3,775,137
Securities held to maturity (fair value: 3/31/08 - $15,476,462;
09/30/07 - $17,182,071) 15,498,408 17,746,925
Federal Home Loan Bank stock 774,800 774,800
Loans, net of allowance of $124,120 at 3/31/08 and
$165,950 at 09/30/07 42,779,908 42,044,805
Loans held for sale - 30,416
Real estate owned 63,058 62,003
Premises and equipment, net 596,654 640,815
Accrued interest receivable 264,965 260,917
Prepaid expenses 88,158 106,753
Other assets 37,487 56,669
------------ ------------
Total assets $ 68,537,912 $ 65,499,240
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Savings deposits $ 9,123,709 $ 9,614,137
Demand deposits 5,063,434 4,953,252
Money market deposits 1,555,163 1,701,961
Time deposits 30,806,735 29,874,985
------------ ------------
Total deposits 46,549,041 46,144,335
Federal Home Loan Bank advances 11,450,000 10,950,000
Federal Reserve Bank overnight advances 3,000,000 -
Payments collected on loans sold 719,200 1,076,410
Accrued interest payable 107,827 94,515
Drafts in process 662,972 899,113
Other liabilities 242,068 193,743
------------ ------------
Total liabilities 62,731,108 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 4,953,478 4,953,377
Unearned ESOP shares (369,724) (380,929)
Retained earnings 1,217,448 1,563,074
------------ ------------
Total shareholders' equity 5,806,804 6,141,124
------------ ------------
Total liabilities and shareholders' equity $ 68,537,912 $ 65,499,240
============ ============
See accompanying notes to consolidated financial statements.
1
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2008 and 2007
(Unaudited)
For the three For the three
months ended months ended
March 31, March 31,
2008 2007
------------ ------------
INTEREST INCOME
Loans, including fees $ 650,810 $ 605,555
Securities and other investments 196,254 237,045
Federal funds sold and other 15,537 25,332
------------ ------------
862,601 867,932
INTEREST EXPENSE
Deposits 388,751 393,828
Federal Home Loan Bank advances 147,245 156,815
------------ ------------
535,996 550,643
------------ ------------
NET INTEREST INCOME 326,605 317,289
Provision for loan losses 7,500 -
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 319,105 317,289
NONINTEREST INCOME
Service charges and other deposit fees 62,294 72,287
Gain on loan sales - 21,421
Income from servicing of loans 6,889 27,276
Visa and ATM interchange income 9,042 8,740
Other 32,166 16,233
------------ ------------
110,391 145,957
NONINTEREST EXPENSE
Compensation and benefits 225,756 283,736
Occupancy and equipment 22,808 25,037
Depreciation and amortization 21,120 23,574
Computer processing expense 33,264 31,184
VISA and ATM expense 19,440 23,150
Bank service charges 16,047 20,839
Collection and loan expense 11,098 11,594
Advertising and promotion 15,154 29,294
Other insurance premiums 12,336 10,032
Professional and supervisory fees 203,882 47,685
State franchise tax expense 22,550 21,900
Other 59,654 58,724
------------ ------------
663,109 586,749
------------ ------------
LOSS BEFORE INCOME TAXES (233,613) (123,503)
Income tax expense benefit - -
------------ ------------
NET INCOME (LOSS) $ (233,613) $ (123,503)
============ ============
Net loss per share $ (0.45) $ (0.24)
============ ============
See accompanying notes to consolidated financial statements.
2
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended March 31, 2008 and 2007
(Unaudited)
For the six For the six
months ended months ended
March 31, March 31,
2008 2007
------------ ------------
INTEREST INCOME
Loans, including fees $ 1,303,182 $ 1,169,702
Securities and other investments 407,807 483,464
Federal funds sold and other 33,062 63,538
------------ ------------
1,744,051 1,716,704
INTEREST EXPENSE
Deposits 798,119 788,472
Federal Home Loan Bank advances 300,399 315,227
------------ ------------
1,098,518 1,103,699
------------ ------------
NET INTEREST INCOME 645,533 613,005
Provision for loan losses 12,500 5,000
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 633,033 608,005
NONINTEREST INCOME
Service charges and other deposit fees 127,385 148,772
Commercial loan referral fee - 10,000
Gain on loan sales - 21,421
Income from servicing of loans 15,232 43,827
Visa and ATM interchange income 18,501 22,436
Other 52,620 41,605
------------ ------------
213,738 288,061
NONINTEREST EXPENSE
Compensation and benefits 457,166 602,199
Occupancy and equipment 45,436 47,830
Depreciation and amortization 44,161 49,056
Computer processing expense 62,548 60,334
VISA and ATM expense 37,913 44,471
Bank service charges 33,775 43,702
Collection and loan expense 26,099 23,910
Advertising and promotion 38,183 42,644
Other insurance premiums 25,141 16,824
Professional and supervisory fees 261,881 92,227
State franchise tax expense 44,568 45,750
Other 115,526 135,003
------------ ------------
1,192,397 1,203,950
------------ ------------
LOSS BEFORE INCOME TAXES (345,626) (307,884)
Income tax benefit - -
------------ ------------
NET LOSS $ (345,626) $ (307,884)
============ ============
Net loss per share $ (0.66) $ (0.59)
============ ============
See accompanying notes to consolidated financial statements
3
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Six Months ended March 31, 2008 and 2007
(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 - 1,430 - $ 28,011 $ 29,441
Net Loss for the six months ended
March 31, 2007 - - (307,884) - (307,884)
---------- ----------- ------------ ------------- ------------
BALANCE AT MARCH 31, 2007 $ 5,602 $ 4,952,482 $ 1,975,815 $ (397,732) $ 6,536,167
========== =========== ============ ============= ============
BALANCE AT SEPTEMBER 30, 2007 $ 5,602 $ 4,953,377 $ 1,563,074 $ (380,929) $ 6,141,124
Earned ESOP Shares - 101 - 11,205 $ 11,306
Net Loss for the six months ended
March 31, 2008 - - (345,626) - (345,626)
---------- ----------- ------------ ------------- ------------
BALANCE AT MARCH 31, 2008 $ 5,602 $ 4,953,478 $ 1,217,448 $ (369,724) $ 5,806,804
========== =========== ============ ============= ============
See accompanying notes to consolidated financial statements.
4
OC FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended March 31, 2008 and 2007
(Unaudited)
For the six For the six
months ended months ended
3/31/2008 3/31/2007
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (345,626) $ (307,884)
Adjustments to reconcile net loss to net cash
from operating activities
Depreciation and amortization 44,161 49,056
Provision for loan losses 12,500 5,000
Deferred fee/costs amortization 10,860 7,705
Earned ESOP Shares 11,306 29,441
Federal Home Loan Bank stock dividends - (11,500)
Net amortization (accretion) on investment securities 3,644 4,886
Loans originated and purchased for sale - (5,797,636)
Proceeds from sale of loans - 3,787,974
Net gains on sales of loans - (21,421)
Net (increase)/decrease in other assets 63,090 (86,701)
Net decrease in other liabilities (295,573) (60,765)
------------ ------------
Net cash used in operating activities (495,638) (2,401,845)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities held to maturity
Purchases - -
Maturities, calls and principal payments 2,244,873 2,092,882
Net (increase)/decrease in loans (758,463) (2,014,867)
Premises and equipment expenditures - (37,700)
------------ ------------
Net cash provided by investing activities 1,486,410 40,315
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 404,706 387,362
Proceeds from Federal Home Loan Bank advances 1,500,000 6,500,000
Repayment of Federal Home Loan Bank advances (1,000,000) -
Proceeds from Federal Reserve Bank advances 3,082,000 -
Repayment of Federal Reserve Loan Bank advances (82,000) -
Net decrease in drafts in process (236,141) (1,405,634)
------------ ------------
Net cash provided by financing activities 3,668,565 5,481,728
------------ ------------
Net change in cash and cash equivalents 4,659,337 3,120,198
Cash and cash equivalents at beginning of period 3,775,137 6,729,730
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,434,474 $ 9,849,928
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the six months for:
Interest $ 1,085,206 $ 1,070,429
See accompanying notes to consolidated financial statements
5
OC FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
(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 (a) condensed balance sheet as of September 30, 2007, 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- and six-month periods ended
March 31, 2008 are not necessarily indicative of the results that may be
expected for the year ending September 30, 2008. 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, 2007 should be read in
conjunction with these statements. The Bank operates in one business segment,
banking.
The preparation of consolidated financial statements, in conformity with
accounting principles generally acceptable in the United States of America,
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and the
reported amounts of income and expenses during the reported periods. Actual
results could differ from current estimates. Estimates associated with the
allowance for loan losses and the fair values of securities are particularly
susceptible to change in the near term.
Note 2 - Adoption of Plan of Conversion and Reorganization
On December 14, 2004, the Board of Directors of the Bank adopted a plan of
conversion and reorganization pursuant to which the Bank reorganized from a
mutual holding company structure and became a wholly-owned subsidiary of the
Company which sold its common stock to eligible depositors of the Bank in a
subscription offering. The offering closed on March 31, 2005 with net proceeds
of $5.0 million received on the sale of 560,198 common shares. The net proceeds
were used for general corporate purposes, including the purchase of
mortgage-backed securities and funding of loans. The Company also provided
$448,150 to the newly-established employee stock ownership plan, as discussed in
Note 3.
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 six months ended March 31, 2008
were $(0.45) and $(0.66), respectively. Common shares outstanding for purposes
of the earnings per share calculation were as follows for the three months and
the six months ended March 31, 2008:
Three Months Six Months
Ended Ended
March 31, 2008 March 31, 2008
-------------- --------------
Average shares outstanding 560,198 560,198
Average unearned ESOP shares 37,906 38,186
-------------- --------------
Weighted average common shares outstanding,
basic and diluted 522,292 522,012
============== ==============
Three Months Six Months
Ended Ended
March 31, 2007 March 31, 2007
-------------- --------------
Average shares outstanding 560,198 560,198
Average unearned ESOP shares 40,054 40,754
-------------- --------------
Weighted average common shares outstanding,
basic and diluted 520,144 519,444
============== ==============
As of March 31, 2008, the Company 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 May 15, 2008, no
options or shares of restricted stock had been granted.
7
Note 5 - Subsequent Events
On April 2, 2008, the Company entered into a merger agreement with First Place
Financial Corp. ("First Place Financial"), the parent holding company for First
Place Bank. Pursuant to the agreement, the Company will be merged with and into
First Place Financial. Capitalized terms not defined herein shall have the
meaning set forth in the merger agreement.
Under the terms of the merger agreement, each share of the Company's common
stock issued and outstanding at the Effective Time of the merger will be
converted into and exchanged for the right to receive 0.9615 shares of First
Place Financial common stock; provided, if as of the calendar month ending
immediately before the Effective Time (providing such Effective Time is after
the 15th day of the month and if not the previous calendar month) the Company
stockholders' equity is less than $5.7 million but not less than $5.2 million,
the Per Share Stock Consideration ratio of 0.9615 shall be adjusted by 1.2 times
the percentage by which the stockholders' equity is less than $5.7 million. If
the Company's stockholders' equity declines below $5.2 million First Place
Financial may terminate the merger. Cash will be paid in lieu of fractional
shares.
Closing of the merger, which is expected to occur late in the second quarter of
2008, is subject to certain conditions. The merger agreement and the
transactions contemplated thereby are subject to the approval of the
stockholders of the Company, regulatory approvals and other customary closing
conditions.
Note 6 - New Accounting Pronouncements
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.
SFAS 157-b
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.
8
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. SAB 109
did not have a material impact on the Company's financial statements.
FSP FAS 140-3
In February 2008, the FASB issued a FASB Staff Position (FSP) FAS 140-3,
"Accounting for Transfers of Financial Assets and Repurchase Financing
Transactions." This FSP addresses the issue of whether or not these transactions
should be viewed as two separate transactions or as one "linked" transaction.
The FSP includes a "rebuttable presumption" that presumes linkage of the two
transactions unless the presumption can be overcome by meeting certain criteria.
The FSP will be effective for fiscal years beginning after November 15, 2008 and
will apply only to original transfers made after that date; early adoption will
not be allowed. The Company is currently evaluating the potential impact the new
pronouncement will have on its consolidated financial statements.
9
Note 7 - New Accounting Pronouncements Adopted
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. There was no
impact of adopting FIN 48 on the Company's financial statements.
10
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.
11
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.
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.
12
COMPARISON OF RESULTS OF OPERATION FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND
2007
GENERAL. Our net loss for the three months ended March 31, 2008 was
$234,000 compared to a net loss of $124,000 for the three months ended March 31,
2007.
The most significant factor contributing to the increase in net loss was
due to additional professional and supervisory expenses relating to our proposed
sale to First Place Financial partially offset by the reduction in compensation
and benefits expense due to the resignation of the former chief executive and
chief financial officers.
INTEREST INCOME. Interest income decreased to $863,000 for the three
months ended March 31, 2008 from $868,000 for the three months ended March 31,
2007. The primary reason for the decrease in interest income was a reduction in
interest income on securities and other investments of $40,000 and a decrease in
interest on fed funds sold of $10,000, offset by an increase in loan income of
$45,000. The reduction in interest income on securities was primarily due to the
decline in the average balance of securities of $3.9 million between the three
months ended March 31, 2007 and the three months ended March 31, 2008. The
increase in loan income was primarily due to an increase in the average balance
of our loan portfolio of $4.4 million between the three months ended March 31,
2007 and the three months ended March 31, 2008. 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
decreased from 6.05% for the three months ended March 31, 2007 to 5.86% for the
three months ended March 31, 2008. The weighted average yield on securities
increased from 4.54% for the three months ended March 31, 2007 to 4.84% for the
three months ended March 31, 2008. Total average interest earning assets
decreased $1.2 million from $60.0 million for the three months ended March 31,
2007 to $58.8 million for the three months ended March 31, 2008. The weighted
average yield on interest earning assets increased 1 basis point from 5.79% for
the three months ended March 31, 2007 to 5.80% for the three months ended March
31, 2008.
INTEREST EXPENSE. Interest expense decreased $15,000 to $536,000 for the
three months ended March 31, 2008 from $551,000 for the three months ended March
31, 2007. The decrease in interest expense was primarily attributed to a
decrease in the average balance of outstanding deposits. Between the three
months ended March 31, 2007 and the three months ended March 31, 2008, our
average outstanding deposits decreased $513,000. Interest expense on deposits
decreased $5,000 to $389,000 for the quarter ended March 31, 2008 from $394,000
for the quarter ended March 31, 2007. The average cost of deposits remained
constant at 3.41% for the quarters ended March 31, 2007 and 2008. Interest
expense on Federal Home Loan Bank advances decreased $10,000 to $147,000 for the
three months ended March 31, 2008 from $157,000 for the three months ended March
31, 2007.
NET INTEREST INCOME. Net interest income increased $10,000 to $327,000 for
the three months ended March 31, 2008 from $317,000 for the three months ended
March 31, 2007. Our net interest margin improved to 2.22% for the three months
ended March 31, 2008 compared to 2.12% for the three months ended March 31,
2007.
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.
13
Based on management's evaluation of the above factors, a provision of
$7,500 was made for the three months ended March 31, 2008 as compared to no
provision made for the three months ended March 31, 2007. The amount of general
allowance allocations made for smaller balance homogeneous loans has remained
constant during the three months ended March 31, 2008 as compared to the three
months ended March 31, 2007, primarily resulting from the performance of the
portfolio, actual losses and recoveries. Loan charge-offs were $49,000 for the
three months ended March 31, 2008, up from $5,000, for the three months ended
March 31, 2007. The increase in loan charge-offs was due to two automobile loans
that are in the process of being sold, which will result in recoveries during
the upcoming quarter. Recoveries were $2,000 for the three months ended March
31, 2008, compared to $1,000 for the three-month period ended March 31, 2007.
While management uses available information to recognize losses on loans,
future loan loss provisions may be necessary based on changes in economic
conditions. In addition, our regulator, the Office of Thrift Supervision
("OTS"), as an integral part of their examination process, periodically reviews
the allowance for loan losses and may require us to recognize additional
provisions based on its judgment of information available at the time of the
examination. The allowance for loan losses as of March 31, 2008 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 $36,000 to $110,000 for
the three months ended March 31, 2008 from $146,000 for the three months ended
March 31, 2007. The overall decrease in non-interest income was attributed
primarily to a gain on the sale of a pool of automobile loans in March, 2007,
and the decline in servicing of loans.
NON-INTEREST EXPENSE. Non-interest expense was $663,000 for the quarter
ended March 31, 2008, compared to $587,000 for the same period in 2007. The
increase was primarily due to an increase in professional and supervisory fees
of $156,000, relating to our proposed sale to First Place Financial partially
offset by a decrease in compensation and benefits expense of $58,000 and a
decrease in advertising expense of $14,000 for the three months ended March 31,
2008 as compared to the three months ended March 31, 2007.
INCOME TAX EXPENSE. No income tax expense or benefit was recognized for
the three months ended March 31, 2008 and 2007.
COMPARISON OF RESULTS OF OPERATION FOR THE SIX MONTHS ENDED MARCH 31, 2008 AND
2007
GENERAL. Our net loss for the six months ended March 31, 2008 was $346,000
compared to a net loss of $308,000 for the six months ended March 31, 2007.
The primary factor for the increase in net loss was additional
professional and supervisory expenses relating to our proposed sale to First
Place Financial. Within our own portfolio, we continued replacement of lower
interest rate loans with higher interest rate loans over the six-month period
ended March 31, 2008. Overall interest income and interest expense was
comparable for the six months ended March 31, 2008 as compared to the same
period in 2007. Non-interest income decreased for the six months ended March 31,
2008 as compared to the six months ended March 31, 2007 primarily as a result of
having no gain on the sale of automobile loans during the six months ended March
31, 2008, a decline in service charges and a decline in income from the
servicing of loans.
14
INTEREST INCOME. Interest income increased slightly to $1.74 million for
the six months ended March 31, 2008 from $1.72 million for the six months ended
March 31, 2007. The primary reason for the slight increase in interest income
were increases of $133,000 in loan income offset by reductions of $77,000 and
$27,000 in security and investment income and interest on fed funds,
respectively. The increase in loan income was primarily due to a net increase in
the average balance of our loan portfolio of $2.7 million from the six months
ended March 31, 2007 to the six months ended March 31, 2008. As we continue to
increase our emphasis on residential mortgage and consumer automobile lending,
this trend of increasing interest-earning assets may continue. The weighted
average yield on loans increased from 5.99% for the six months ended March 31,
2007 to 6.09% for the six months ended March 31, 2008. The weighted average
yield on securities increased to 5.01% for the six months ended March 31, 2008
from 4.56% for the six months ended March 31, 2007. Total average interest
earning assets was $59.5 million for the six months ended March 31, 2008 and
March 31, 2007, and the weighted average yield on interest earning assets
increased 9 basis points from 5.77% for the six months ended March 31, 2007 to
5.86% for the six months ended March 31, 2008.
INTEREST EXPENSE. Interest expense decreased $5,000 to $1.09 million for
the six months ended March 31, 2008 from $1.10 million for the six months ended
March 31, 2007. Interest expense declined slightly due to a decrease in the
expense of borrowings of $15,000 to $300,000 for the six months ended March 31,
2008 from $315,000 for the six months ended March 31, 2007, offset by the
increase of interest expense on deposits of $10,000 to $798,000 for the six
months ended March 31, 2008 from $788,000 for the six months ended March 31,
2007. The average cost of deposits increased 7 basis points from 3.42% for the
six months ended March 31, 2007 to 3.49% for the six months ended March 31,
2008.
As interest rates stabilize, we expect interest expense will decrease and
our cost of interest bearing liabilities will decrease as our deposits will
reprice into lower rates as a result of the Federal Reserve's recent actions to
reduce short term interest rates. Our average weighted cost of funds was 3.85%
for the six months ended March 31, 2008 and 2007.
NET INTEREST INCOME. Net interest income increased $33,000 to $646,000 for
the six months ended March 31, 2008 from $613,000 for the six months ended March
31, 2007. The increase in net interest income was primarily the result of a
continuing shift to loans from investments as described above and in part by
decreasing interest rates for deposits. Our net interest margin has increased to
2.17% for the six months ended March 31, 2008 compared to 1.91% for the six
months ended March 31, 2007.
PROVISION FOR LOAN LOSSES. The Company establishes provisions for loan
losses, which are charged to operations, at a level required to reflect probable
and estimable credit losses in the loan portfolio. Based on management's
evaluation of the factors previously discussed, a provision was made for the six
months ended March 31, 2008 in the amount of $12,500 compared to a provision of
$5,000 for the six months ended March 31, 2007. The increase 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 six months ended March 31, 2008 primarily resulting from the
performance of the portfolio, actual losses and recoveries. Loan charge-offs
were $71,000 for the six months ended March 31, 2008, up from $5,000 for the six
months ended March 31, 2007. The increase in loan charge-offs was primarily due
to two automobile loans that are in the process of being sold, which will result
in recoveries during the upcoming quarter. Recoveries were $4,000 for the six
months ended March 31, 2008, compared to $1,000 for the six months ended March
31, 2007.
15
While management uses available information to recognize losses on loans,
future loan loss provisions may be necessary based on changes in economic
conditions. In addition, the OTS, as an integral part of its examination
process, periodically reviews the allowance for loan losses and may require us
to recognize additional provisions based on its judgment of information
available at the time of the examination. The allowance for loan losses as of
March 31, 2008 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 $74,000 to $214,000 for
the six months ended March 31, 2008 from $288,000 for the six months ended March
31, 2007. The overall decrease in non-interest income was attributed primarily
to a decline in service charges of $21,000 and a decline in income from
servicing of loans of $29,000. Additionally, there were no gains on the sale of
automobile loans or commercial referral fees in the six months ended March 31,
2008 as compared to $31,000 for the six months ended March 31, 2007.
NON-INTEREST EXPENSE. Non-interest expense declined $12,000 to $1.19
million for the six months ended March 31, 2008 as compared to $1.20 million
during the comparable six-month period ended March 31, 2007. This decline was
primarily due to a decline in compensation and benefits expense of $145,000 and
a reduction of $19,000 in other expenses during the six months ended March 31,
2008 as compared to the six months ended March 31, 2007 because of the
resignation of the former chief executive officer and chief financial officer
offset by a large increase in professional and supervisory fees in the amount of
$170,000 primarily relating to our proposed sale to First Place Financial.
INCOME TAX EXPENSE. No income tax expense or benefit was recognized for
the six months ended March 31, 2008 and 2007.
CHANGES IN FINANCIAL CONDITION FROM SEPTEMBER 30, 2007 TO MARCH 31, 2008.
GENERAL. Total assets increased by $3.0 million, or 4.64%, to $68.5
million at March 31, 2008 from $65.5 million at September 30, 2007. The increase
was attributed primarily to an overnight Federal Reserve Bank Discount Window
advance of $3.0 million obtained in March 2008 which were utilized as a means to
meet the consumer percentage of asset limitations as imposed by the Home Owner's
Loan Act by increasing our assets.
LOANS. Our loan portfolio increased $735,000 from $42.0 million at
September 30, 2007 to $42.8 million at March 31, 2008, as a result of increased
residential mortgage lending.
The allowance for loan losses was $124,000 at March 31, 2008 or 0.29% 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 $232,000 at March 31, 2008 and $125,000 at September 30, 2007,
respectively. This increase in non-performing loans was due to the addition of
two small mortgage loans. Payment arrangements have been made on both of these
loans and management anticipates that they will be removed from this category in
the near future. 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.
16
DEPOSITS. Total deposits increased by $405,000, or 0.88%, to $46.5 million
at March 31, 2008 from $46.1 million at September 30, 2007. Time deposits
increased $932,000 during the same period primarily as a result of the
certificate of deposit promotion conducted in the three months ended March 31,
2008.
BORROWINGS. Federal Home Loan Bank advance balances were $11.5 million at
March 31, 2008 and $11.0 million at September 30, 2007. Short-term advances
increased $3.0 million during the quarter ended March 31, 2008 to fund loan
acquisitions and were utilized as a means to meet consumer percentage of asset
limitations as imposed by the Home Owner's Loan Act by increasing our assets. 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 $334,000, or 5.44%, to $5.8 million at March 31, 2008 from
$6.1 million at September 30, 2007. The decrease in equity was primarily the
result of our net operating loss of $346,000 for the six-month period ended
March 31, 2008.
CAPITAL RESOURCES. At March 31, 2008, capital at the Bank totaled $5.8
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 and at March 31, 2008 was classified as well capitalized. The
Bank's actual and required levels of capital as reported to the OTS at March 31,
2008 are as follows:
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------ ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
As of March 31, 2008
- --------------------
Total capital (to risk weighted assets).............. $ 5,551 13.94% $ 3,186 8.00% $ 3,982 10.0%
Tier 1 (core) capital (to risk weighted assets)...... $ 5,427 13.63% $ 1,593 4.00% $ 2,389 6.0%
Tier 1 (core) capital (to adjusted total assets)..... $ 5,427 7.98% $ 2,722 4.00% $ 3,402 5.0%
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.
17
In addition to these primary sources of funds, management has several
secondary sources available to meet potential funding requirements. At March 31,
2008, Ohio Central Savings had a total borrowing capacity of $14.7 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 March 31, 2008 was $18.5
million.
Our stock offering provided significant additional liquidity and capital
resources. As our liquidity positions have historically been maintained to
provide for loan demand and deposit run-off, the stock offering proceeds may
provide excess liquidity in the near term. The additional liquidity and capital
resources from the stock offering will help provide for the future growth of the
Company.
ITEM 3 - Controls and Procedures
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
or 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as
amended) as of March 31, 2008 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.
18
OC FINANCIAL, INC.
FORM 10-QSB
March 31, 2008
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.
19
OC FINANCIAL, INC.
FORM 10-QSB
March 31, 2008
PART II - OTHER INFORMATION
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OC FINANCIAL, INC.
(Registrant)
Date: May 20, 2008 /s/ Diane M. Gregg
----------------------------------------
Diane M. Gregg
President and Chief Executive Officer
20