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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended December 31, 2003
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period
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Commission File Number 0-49619
PEOPLES OHIO FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 31-1795575
------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
635 South Market Street, Troy, Ohio 45373
----------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, including Area Code (937) 339-5000
- ----------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filled all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filling requirements for the past 90 days.
Yes X No
-------------- ---------------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in rule 126-2 of the Exchange Act).
Yes No X
-------------- ---------------
As of FEBRUARY 12, 2004, there were 7,428,211 common shares of the registrant
issued and outstanding.
1
PEOPLES OHIO FINANCIAL CORPORATION
----------------------------------
INDEX
-----
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as
of December 31, 2003 and June 30, 2003.
Condensed Consolidated Statements of Income
for the three And six months ended December
31, 2003 and 2003.
Condensed Consolidated Statement of
Shareholders' Equity for three and six
months ended December 31, 2003.
Condensed Consolidated Statements of Cash
Flows for the six months ended December 31,
2003 and 2002.
Notes to Condensed Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Item 4. Controls and Procedures.
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings.
Item 2. Changes in Securities and Use of Proceeds.
Item 3. Defaults upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURE PAGE
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INDEX TO EXHIBITS
- -----------------
2
ITEM 1. FINANCIAL STATEMENTS
PEOPLES OHIO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31 JUNE 30
2003 2003
ASSETS (UNAUDITED)
------ ------------- -------------
Cash and cash equivalents $ 6,135,670 $ 15,835,436
Held-to -maturity securities (fair value $639,349 and $824,000) 604,367 779,425
Available-for-sale securities 19,416,932 16,687,228
Loans, net of allowance for loan losses of $860,124 and $862,235 151,185,710 160,608,931
Premises and equipment 4,495,691 4,654,915
Federal Home Loan Bank stock 5,379,500 5,272,800
Interest receivable 807,030 867,150
Bank-owned life insurance 4,098,115 0
Other assets 412,552 2,643,035
------------- -------------
Total assets $ 192,535,567 $ 207,348,920
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Deposits $ 115,088,292 $ 117,629,404
Federal Home Loan Bank (FHLB) advances 50,876,307 63,328,746
Interest payable 159,487 134,575
Other liabilities 1,299,395 1,274,964
------------- -------------
Total liabilities 167,423,481 182,367,689
------------- -------------
Commitments and Contingent Liabilities -- --
Equity from ESOP Shares 608,249 630,279
------------- -------------
Shareholders' equity:
Preferred stock, no par value, 1,000,000 shares
authorized; none issued or outstanding -- --
Common stock, no par value, 15,000,000 shares
authorized; 7,583,652 and 7,439,650 shares issued less
ESOP shares of 146,566 and 150,066 7,437,086 7,433,586
Additional paid-in capital 0 186,600
Treasury stock, at cost, 174,227 and 155,441 shares (725,879) (643,261)
Unrealized Gain on Available-for-Sale Securities 49,487 56,616
Retained earnings 17,743,143 17,317,411
------------- -------------
Total shareholders' equity 24,503,837 24,350,952
------------- -------------
$ 192,535,567 $ 207,348,920
============= =============
See notes to condensed consolidated financial statements
3
PEOPLES OHIO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2003 AND, 2002
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
31-DEC 31-DEC
2003 2002 2003 2002
---------- ---------- ---------- ----------
INTEREST INCOME
Interest and fees on loans $2,541,067 $3,535,377 $5,264,088 $7,319,102
Interest on mortgage-backed securities and other securities 150,410 16,524 265,168 34,960
Other interest and dividend income 68,708 112,644 142,235 188,289
---------- ---------- ---------- ----------
Total interest income 2,760,185 3,664,545 5,671,491 7,542,350
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 327,540 633,512 678,119 1,346,527
Borrowings 715,453 924,086 1,503,232 1,893,408
---------- ---------- ---------- ----------
Total interest expense 1,042,993 1,557,598 2,181,351 3,239,935
---------- ---------- ---------- ----------
Net interest income 1,717,192 2,106,948 3,490,140 4,302,415
PROVISION FOR LOAN LOSSES 30,000 35,000 60,000 80,000
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 1,687,192 2,071,948 3,430,140 4,222,415
---------- ---------- ---------- ----------
OTHER INCOME
Service charges on deposit accounts and other 291,239 188,027 569,526 355,341
Fiduciary activities 133,144 171,065 283,234 338,784
Increase in cash value of bank owned life insurance 50,956 0 95,068 0
Other income 49,305 49,432 100,481 95,383
---------- ---------- ---------- ----------
Total other income 524,644 408,524 1,048,309 789,508
---------- ---------- ---------- ----------
OTHER EXPENSES
Salaries and employee benefits 756,395 750,997 1,484,833 1,458,187
Net occupancy expenses 109,805 103,459 229,501 214,280
Equipment expenses 37,036 35,002 75,192 78,225
Data processing fees 141,302 134,083 288,247 251,757
State of Ohio franchise taxes 66,165 60,250 132,330 120,500
Other expenses 512,269 416,483 923,201 829,690
---------- ---------- ---------- ----------
Total other expenses 1,622,972 1,500,273 3,133,304 2,952,639
---------- ---------- ---------- ----------
INCOME BEFORE FEDERAL INCOME TAX 588,864 980,198 1,345,145 2,059,284
FEDERAL INCOME TAX EXPENSE 198,228 337,852 440,844 709,820
---------- ---------- ---------- ----------
NET INCOME $ 390,637 $ 642,347 $ 904,301 $1,349,464
========== ========== ========== ==========
PER SHARES DATA:
BASIC EARNINGS PER SHARE $ 0.05 $ 0.08 $ 0.12 $ 0.18
DILUTED EARNINGS PER SHARE $ 0.05 $ 0.08 $ 0.12 $ 0.17
DIVIDENDS PER SHARE $ -- $ -- $ 0.060 $ 0.045
See notes to condensed consolidated financial statements
4
PEOPLES OHIO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
(unaudited)
2003 2002
------------ ------------
OPERATING ACTIVITIES
Net income $ 904,301 $ 1,349,464
Adjustments to reconcile net income
to net cash provided by operating activities
Provision for loan losses 60,000 80,000
Depreciation and amortization 190,280 193,094
Investment securities amortization (accretion), net (47,018) (97)
Federal Home Loan Bank stock dividends (106,700) (118,300)
Net change in other assets/ other liabilities 2,379,834 205,070
------------ ------------
Net cash provided by operating activites 3,380,697 1,709,231
------------ ------------
INVESTING ACTIVITIES
Net change in loans 9,363,221 18,099,515
Proceeds from maturities of securities held to maturity 175,058 183,080
Proceeds from maturities and sale of securities available for sale 8,770,296 0
Purchases of securities- available for sale (11,500,000) (6,200,000)
Purchase of Bank Owned Life Insurance (4,098,115) 0
Purchases of premises and equipment (31,055) (379,565)
------------ ------------
Net cash provided
by investing activities 2,679,405 11,703,030
------------ ------------
FINANCING ACTIVITIES
Net change in
Interest-bearing demand and savings deposits 1,305,817 4,594,561
Certificates of deposit (3,846,929) (5,300,079)
Proceeds from FHLB advances 5,000,000 32,000,000
Repayment of FHLB advances (17,452,439) (34,509,533)
Cash dividends (442,645) (341,264)
Proceeds from exercise of stock options 206,650 0
Purchase/Reissuance of treasury stock (530,321) (30,081)
------------ ------------
Net cash provided (used) by
financing activities (15,759,868) (3,586,396)
------------ ------------
Net Change in Cash and Cash Equivalents (9,699,766) 9,825,865
Cash and cash equivalents, Beginning of Period 15,835,436 5,680,517
------------ ------------
Cash and cash equivalents, End of Period $ 6,135,670 $ 15,506,382
============ ============
See notes to condensed consolidated financial statements
5
PEOPLES OHIO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003
(unaudited)
Additional Unrealized Gain Total
Common paid-in Retained Treasury on AFS shareholders'
stock capital earnings Stock Securities equity
-------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2003 $7,433,586 $186,600 $17,317,411 ($643,261) $56,616 $24,350,952
Net income - - 904,301 904,301
Cash dividends declared 0
on common stock ($.06 per share) - (442,645) (442,645)
Exercise of stock options 0 (186,600) (54,453) 447,703 206,650
Purchase of treasury stock, net - (530,321) (530,321)
Net change in Unrealized Gain/Loss 0
on AFS Securities (7,129) (7,129)
Net change in equity from ESOP 0
shares 3,500 18,529 22,029
-------------------------------------------------------------------------------------
BALANCE AT DEC 31, 2003 $7,437,086 $0 $17,743,143 ($725,879) $49,487 $24,503,837
=====================================================================================
See Notes to Condensed Consolidated Financial Statements
6
PEOPLES OHIO FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Form 10-Q instructions and Article 10 of Regulation S-X, and,
in the opinion of management, all adjustments necessary to present fairly the
financial position as of December 31, 2003 and June 30, 2003, the results of
operations and the cash flows for the three and six-month periods ended December
31, 2003 and 2002.
All adjustments to the financial statements were normal and recurring in nature.
These results have been determined on the basis of accounting principles
generally accepted in the United States of America. The results of operations
for the three and six-month periods ended December 31, 2003, are not necessarily
indicative of results for the entire fiscal year.
The condensed consolidated balance sheet of Peoples Ohio Financial Corporation
(the Company) as of June 30, 2003 has been derived from the audited consolidated
balance sheet of the Company as of that date.
The condensed consolidated financial statements are those of the Company and
Peoples Savings Bank of Troy (the Bank). Certain information and footnote
disclosures normally included in the Company's financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's 2003 Annual Report to Shareholders.
(2) Earnings Per Share
The following table is for the three and six-month period ending December 31,
2003 and 2002 and reflects the weighted average number of shares of common stock
for both basic and diluted EPS as well as the dilutive effect of stock options.
- ----------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
December 31, December 31,
------------ ------------
- ----------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
- ----------------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding (basic EPS) 7,394,349 7,583,652 7,394,711 7,515,193
- ----------------------------------------------------------------------------------------------------------------
Dilutive effect of stock options 187,911 175,402 201,700 214,786
--------- --------- --------- ---------
- ----------------------------------------------------------------------------------------------------------------
Weighted average number of common shares and
equivalents outstanding (diluted EPS) 7,582,260 7,759,054 7,596,411 7,729,979
========= ========= ========= =========
- ----------------------------------------------------------------------------------------------------------------
7
(3) Stock Options
The Company has a stock-based employee compensation plan. The Company accounts
for this plan under the recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related Interpretations.
No stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the grant date. The following table
illustrates the effect on net income and earnings per share as if the Company
had applied the fair value provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation. The proforma
effect on income for the periods presented includes the effect of forfeitures.
Three months ended Six months ended
December 31, December 31,
------------ ------------
-------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------------
Net income, as reported $ 390 $ 642 $ 904 $ 1,349
Less:
Total stock-based employee
compensation cost determined under the fair
value based method, net of income taxes (10) (3) (15) (9)
----- ----- ----- -------
Pro forma net income $ 380 $ 639 $ 889 $ 1,340
===== ===== ===== =======
Earnings per share:
Basic - as reported 0.5 0.8 0.12 0.18
Basic - pro forma 0.5 0.8 0.12 0.17
Diluted - as reported 0.5 0.8 0.12 0.18
Diluted - pro forma 0.5 0.8 0.12 0.17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Peoples Ohio Financial Corporation (the "Company") is based in west central Ohio
and is the parent company of Peoples Savings Bank of Troy (the "Bank"). The
Company was formed during the year ended June 30, 2002 to provide various
benefits to the Bank, as well as to take advantage of a more effective structure
for expanded financial activities. The Bank, a state chartered savings bank, was
originally chartered in 1890. The Bank is primarily engaged in attracting
deposits from Miami and northern Montgomery counties and originating mortgage
loans throughout those same areas. All references to the Company include the
Bank unless otherwise indicated.
FORWARD LOOKING STATEMENTS
In addition to historical information, this Form 10-Q may include certain
forward-looking statements based upon current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the composition or quality of the Bank's loan
and investment portfolios, changes in accounting principles, policies or
guidelines, and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices. A further description of the risks and uncertainties to the business are
included in detail under the caption "Liquidity and Capital Resources of the
Company and the Bank."
8
FINANCIAL CONDITION
Total consolidated assets of the Company at December 31, 2003 were $192,849,000,
compared to $207,349,000 at June 30, 2003, a decline of $14,500,000 or 7.0%.
CASH AND CASH EQUIVALENTS declined $9,699,000 or 61.3%, from $15,835,000 at June
30, 2003 to $6,136,000 at December 31, 2003. Management uses its short -term
"cash accounts" to hold funds generated from these regular banking activities as
it evaluates investment (loan) alternatives.
NET LOANS declined $9.4 million or 5.9%, from $160,609,000 at June 30, 2003, to
$151,186,000 at December 31, 2003. The following table illustrates changes in
the Bank's loan portfolio by category for each period presented.
BALANCE BALANCE
DECEMBER 31, JUNE 30, CHANGE CHANGE
2003 2003 ($'s) (%)
---- ---- ----- ---
Residential single-family mortgages $ 108,864 $ 115,175 ($ 6,491) (5.6)
Other residential and commercial mortgages 26,311 25,021 1,290 5.2
--------- --------- ---------
Total mortgage loans 140,196 (5,201) (3.7)
Construction 7,554 12,802 (5,248) (41.0)
Commercial business 4,710 5,573 (863) (15.5)
Consumer 2,340 2,452 (112) (4.8)
Home improvement 5,418 4,772 646 13.5
Deposit and other 266 290 24 8.3
--------- --------- ---------
Gross loans 155,283 166,085 (10,802) (6.5)
Deferred loan fees (205) (209) (4) (1.9)
Undisbursed portion of loans (3,032) (4,405) (1,373) (31.2)
Allowance for loan losses (860) (862) (2) (.2)
--------- --------- ---------
Total loans, net $ 151,186 $ 160,609 (9,423) (5.9)
========= ========= =========
While the Bank continues to be a strong residential lender throughout the
communities in which it operates, management has been reluctant to portfolio
long-term fixed rate mortgages during this period of historically low interest
rates. As a result, the Bank has seen some decline in its residential
single-family mortgage loan portfolio. Management continued to focus on
shorter-term commercial real estate, commercial business and consumer lending.
THE ALLOWANCE FOR LOAN LOSSES was relatively unchanged, declining from $862,000
at June 30, 2003 to $860,000 at December 31, 2003. This decrease was the result
of a provision for loan losses of $60,000 during the quarter ended December 31,
2003 and net charge-offs of $80,000. The ratio of the Company's allowance for
loan losses to gross loans was 0.57% and 0.53% at December 31, 2003 and June 30,
2003, respectively. The allowance for loan losses is maintained to absorb loan
losses based on management's continuing review and evaluation of the loan
portfolio and its judgment regarding the impact of economic conditions on the
portfolio.
The following table compares non-performing loans, which are loans past due 90
days or more and non-accruing loans, at December 31, 2003 and June 30, 2003.
December 31, June 30,
2003 2003
---------- ----------
Past due 90+ and still accruing $ 750,000 $2,559,000
Non-accrual 894,000 634,000
---------- ----------
Total non-performing loans $1,644,000 $3,193,000
========== ==========
Non-performing loans, declined from $3,193,000 at June 30, 2003, to $1,644,000
at December 31, 2003. Loans past-due 90 days or more declined from $2,559,000 at
June 30, 2003 to $750,000 at December 31, 2003. This decline was primarily
attributable to six accounts which were brought current during the six month
period, two
9
commercial loans totaling $250,000 and $499,000 which are secured by business
assets, and four first mortgage loans totaling $70,000, $197,000, $348,000 and
$192,000, respectively. Non-accrual loans increased from $634,000 at June 30,
2003 to $894,000 at December 31, 2003. This increase in non-accrual loans was
attributable to placing a commercial real estate loan ($375,000) on non-accrual
status during the quarter. Management continues to work closely with these
borrowers to bring these loans current.
The ratio of the Company's allowance for loan losses to non-performing loans was
42.6% and 22.5% at December 31, 2003 and June 30, 2003, respectively. Management
believes that the problems with these loans are isolated and not indicative of
the loan portfolio in total.
BANK-OWNED LIFE INSURANCE increased from $0 at June 30, 2003 to $4,091,000 at
December 31, 2003. in June 2003, both the Company's and Bank's Board of
Directors authorized the purchased life insurance on several key executives in
an effort to protect the Bank against projected increases in employee benefit
costs and to help mitigate the costs associated with replacing key members of
management in the event of their untimely death. It should be noted that no
benefits were provided by the Bank to these executives as a result of this
transaction.
DEPOSITS remained fairly stable, increasing $2,541,000 or 2.2%, from
$117,629,000 at June 30, 2003 to $115,088,000 at December 31, 2003. The
following table illustrates changes in the various types of deposits for each
period presented.
BALANCE BALANCE
DECEMBER 31, JUNE 30, CHANGE CHANGE
2003 2003 ($'s) (%)
-------- -------- -------- ----
Noninterest bearing accounts $ 6,629 $ 5,815 814 14.0
NOW accounts 22,943 21,700 1,243 5.7
Super NOW accounts 1,643 1,095 548 50.0
Passbook accounts 21,090 20,823 267 1.3
Money market accounts 26,594 26,763 (169) (.6)
Certificates of deposit 36,189 41,433 (5,244) (12.7)
-------- -------- -------- ----
Total deposits $115,088 $117,629 ($ 2,541) (2.2)
======== ======== ======== ====
Increases in noninterest bearing, NOW, super NOW, passbook and money market
accounts were primarily attributable to the opening of new accounts. In addition
to new retail accounts and a significant new public fund customer, a portion of
the growth in virtually all types of deposit accounts was the result of
customers transferring proceeds from maturing certificates of deposit into these
accounts.
TOTAL STOCKHOLDERS' EQUITY increased $153,000, or 0.6%, from $24,351,000 million
at June 30, 2003, to $25,504,000 million at December 31, 2003. The increase was
the result of $904,000 in net earnings, $207,000 contributed from the exercise
of options, and $22,000 related to the net change in equity related to the
Company's ESOP. These increases to stockholders' equity were somewhat offset by
$443,000 in dividends paid to the Company's stockholders, $530,000 related to
the repurchase of stock, and a $7,000 decrease in the unrealized gain on
securities available for sale during the six month period ended December 31,
2003. During July 2003, the Company's Board of Directors authorized the
repurchase of up 350,000 shares of the Company's common stock. Treasury stock
purchases are made on the open market and used for general corporate purposes.
RESULTS OF OPERATIONS--COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2003 AND
2002
The Company reported earnings of $904,000 for the six months ended December 31,
2003, a decline of $445,000, or 33.0%, from the $1,349,000 reported for the same
period in 2002. Basic earnings per share declined $0.06 or 33.3% from $0.18 for
the six months ended December 31, 2002 to $0.12 for the six months ended
December 31, 2003. Diluted earnings per share declined $0.05 or 29.4% from $0.17
for the six months ended December 31, 2002 to $0.12 for the six months ended
December 31, 2003. The Company's return on average assets was 0.90% for the six
months ended December 31, 2003 compared to 1.22% for the same period in 2002.
Return on average equity was 7.43% for the six months ended December 31, 2003,
compared to 11.42% for the same period in 2002.
Earnings declined as a result of a decline in net interest income of $812,000,
or 18.9%, from $4,302,000 reported for the six months ended December 31, 2002 to
$3,490,000 for six months ended December 31, 2003. This
10
decrease was partially offset by an increase in noninterest income of $258,000
or 32.7%, from $790,000 reported for six months ended December 31, 2002 to
$1,048,000 three months ended September, 2003.
NET INTEREST INCOME was $3,490,000 for the six months ended December 31, 2003,
$812,000, or 18.9%, less than the $4,302,000 reported for six months ended
December 31, 2002. Total interest income was $5,671,000 for the six months ended
December 31, 2003, a decline of $1,871,000, or 24.8% from the $7,542,000
reported during the six months ended December 31, 2002. The decline in interest
income was partially offset by a $1,059,000 or 32.7% decline in interest expense
from $3,240,000 for the six months ended December 31 2002, to $2,181,000 for the
six months ended December 31, 2003.
The decrease in total interest income was attributable to a decline in average
loans outstanding from $197,334,000 during the six months ended December 31,
2002, to $151,881,000 during the six months ended December 31, 2003. This
decline was the result of the Company taking advantage of the prolonged low
interest rate environment to divest of longer-term fixed rate assets (primarily
30-year fixed rate mortgages) in favor of shorter-term interest earning assets
(primarily investment securities with weighted-average-maturities ranging from 1
to 3 years) in an effort to reduce the Company's exposure to interest rate risk
and better position the Company should longer-term interest rates begin to
increase. The continued low interest rate environment on the average yield of
the Company's loan portfolio and declines in average loans outstanding were the
primary reasons for this decline in total interest income. Management noted that
the average yield on the Company's loan portfolio declined 48 basis points from
7.30% during the six months ended December 31, 2002 to 6.82% during the six
months ended December 31, 2003.
Interest expense was $2,181,000 for the six months ended December 31, 2003,
$1,059,000 or 32.7%, lower than the $3,240,000 recorded for the six months ended
December 31 2002, as interest expense paid on certificates of deposit and
Federal Home Loan Bank ("FHLB") advances declined significantly in comparison to
the same period in the previous year. Interest expense on certificates of
deposit was $484,000, $139,000 or 22.3% lower than the $623,000 recorded in six
months ended December 31, 2002. The average balance of certificates of deposit
declined by $5,712,000, from $44,099,000 for the six months ended December 31,
2003, to $38,387,000 for six months ended December 31, 2003. In addition, the
average rate paid on those certificates of deposit decreased by 106 basis
points, from 3.56% during the six months ended December 31, 2002, to 2.50%
during the six months ended December 31 2003. Interest expense on FHLB advances
was $1,503,000, $390,000 or 20.6% lower than the $1,893,000 recorded in the six
months ended December 31, 2002. The average balance of FHLB advances declined by
$19,513,000, from $73,775,000 for the six months ended December 31, 2002 to
$54,262,000 for the six months ended December 31, 2003. The impact of the
decline in average FHLB advances outstanding was somewhat offset by an increase
in the average rate paid on those advances of 36 basis points, from 5.13% during
the six months ended December 31 2002, to 5.49% during the same period in 2003.
The balance of the decline in interest expense was attributable to declines in
the interest paid to the Company's demand deposit and savings account customers.
The average balance of the Company's interest-bearing NOW and money market
accounts increased $5,395,000, from $54,586,000 for the six months ended
December 31, 2002, to $59,981,000 for the six months ended December 31, 2003,
while the average balance of the Company's savings accounts increased $616,000
during the same period. The impact of the increases in average demand deposit
and savings accounts outstanding was completely offset by a decrease in the
average rate paid on those deposits during the six months ended December 31
2003, in comparison to the same period in 2002.
THE PROVISION FOR LOAN LOSSES was $60,000 for six months ended December 31, 2003
compared to $80,000 for the same period in 2002. The provision for both periods
reflects management's analysis of the Bank's loan portfolio based on information
that is currently available to it at such time. In particular, management
considers the level of non-performing loans and potential problem loans. Net
charge-offs for the six months ended December 31, 2003 were $62,000 compared to
$59,000 during the same period in 2002. While management believes that the
allowance for loan losses is sufficient based on information currently available
to it, no assurances can be made that future events, conditions, or regulatory
directives will not result in increased provisions for loan losses which may
adversely effect income.
NONINTEREST INCOME was $1,048,000 for six months ended December 31, 2003,
$258,000 or 32.7% higher than the $790,000 reported for the six months ended
December 31, 2002. The increase was primarily attributable to a $215,000
increase in service charges earned on deposit accounts and a $95,000 increase in
the cash surrender value of life insurance. These increases were somewhat offset
by a $56,000 decline in income generated from fiduciary activities (trust
services).
NONINTEREST EXPENSE was $3,133,000 for six months ended December 31, 2003,
$180,000 or 6.1% higher than the $2,953,000 reported for the six months ended
December 31, 2002. While most noninterest expense categories
11
experienced slight increases, salaries and employee benefits increased $27,000
or 1.9%, data processing fees increased $36,000 or 14.3% other noninterest
expense increased $93,000 or 11.2% from $830,000 for six months ended December
31, 2002, to $923,000 for the same period in 2003. The increase in salaries and
employee benefits were the result of normal salary increases while the increase
in data processing fees was attributable to periodic maintenance on the Bank's
processing hardware. The $93,000 increase in other noninterest expense was
attributable to a $24,000 increase in office supplies expense, a $24,000
increase in regulatory examination fees which were both the result of "timing
differences" and a $5,000 increase in administrative expenses related to the
Bank's purchase of life insurance which was made in July 2003, a $15,000
increase in the Bank's merchant services fees due to heavier usage than the
previous period, a $7,000 increase in expenses related to the Bank's internet
banking product which was introduced in March 2003 and $14,000 in fees related
to the Bank's overdraft privilege product which was also introduced in March of
2003.
TOTAL INCOME TAX EXPENSE was $441,000 (an effective tax rate of 32.8%) for the
six months ended December 31, 2003, compared to $710,000 (an effective tax rate
of 34.5%) during the six months ended December 31, 2002.
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
The Company reported earnings of $390,000 for the three months ended December
31, 2003, a decline of $252,000, or 39.3%, from the $642,000 reported for the
same period in 2002. Both basic and diluted earnings per share decreased $0.03,
or 37.5%, from $0.08 for the three months ended December 31, 2002, to $0.05 for
the three months ended December 31, 2003. The Company's return on average assets
was 0.79% for the three months ended December 31, 2003 compared to 1.16% for the
same period in 2002 while return on average equity was 6.42% for the three
months ended December 31, 2003 compared to 10.76% for the same period 2002.
NET INTEREST INCOME was $1,717,000 for the three months ended December 31, 2003,
$390,000, or 18.5%, less than the $2,107,000 reported for three months ended
December 31, 2002.
Interest income was $2,760,000 for the three months ended December 31, 2003, a
decrease of $905,000 or 24.7%, from $3,665,000 for the three months ended
December 31 2002 which was primarily attributable to a decline in interest
income earned on loans from $3,535,000 for the three months ended December 31,
2002, $994,000 or 28.1% less than the $2,541,000 earned the three months ended
December 31, 2003. This decline was the result of both, a lower average balance
of total loans outstanding, which declined from $191.7 million for the quarter
ended December 31, 2002 to $150.1 for the quarter ended December 31, 2003, and a
decline in the overall yield on loans, from 7.38% during the quarter ended
December 31, 2002, to 6.73% during the quarter ended December 31, 2003.
Interest expense was $1,043,000 for the three months ended December 31, 2003, a
decrease of $515,000 or 33.1%, $1,558,000 for the three months ended December 31
2002. This decline was the result of the lower interest rate environment coupled
with a change in the mix of deposits and FHLB advances used to fund the Bank's
assets. Average total deposits decreased $5.6 million, from $123.4 million for
the quarter ended December 31, 2002, to $117.8 million during the quarter ended
December 31, 2003. In addition, the composition of those deposits changed
significantly shifting from longer-term higher rate certificates of deposit to
shorter-term lower rate demand deposit and savings accounts. As a result, the
average rate paid on deposit account during the quarter ended December 31, 2003
was 1.11% compared to 2.05% during the quarter ended December 31, 2002. In
addition, the Bank paid off maturing FHLB advances which resulted in a decline
in the average balance of FHLB advances outstanding from $72.1 million during
the quarter ended December 31, 2002, to $51.0 million during the quarter ended
December 31, 2003, which in turn, lowered the interest expense associated with
those advances.
THE PROVISION FOR LOAN LOSSES was $30,000 for three months ended December 31,
2003 compared to $35,000 for the same period in 2002. The provision for both
periods reflects management's analysis of the Bank's loan portfolio based on
information that is currently available to it at such time. In particular,
management considers the level of non-performing loans and potential problem
loans. Total charge-offs for three months ended December 2003 were $28,000
compared to $45,000 during the same period in 2002. While management believes
that the allowance for loan losses is sufficient based on information currently
available to it, no assurances can be made that future events, conditions, or
regulatory directives will not result in increased provisions for loan losses
which may adversely affect income.
NONINTEREST EXPENSE was $1,623,000 for three months ended December 31, 2003,
$123,000 or 8.2% higher than the $1,500,000 reported for the three months ended
December 31, 2002. While each of the other noninterest expense categories
experienced slight increases, other noninterest expense increased $96,000 or
23.1% from $416,000 for three months ended December 31, 2002 compared to
$512,000 for the same period in 2003. The $96,000 increase in other noninterest
expense was primarily attributable to a $24,000 increase in office supplies
12
expense, a $24,000 increase in regulatory examination fees which were both the
result of "timing differences" and a $3,000 increase in administrative expenses
related to the Bank's purchase of life insurance which was made in July 2003, a
$15,000 increase in the Bank's merchant services fees due to heavier usage than
the previous period, a $3,000 increase in expenses related to the Bank's
internet banking product which was introduced in March 2003 and $10,000 in fees
related to the Bank's overdraft privilege product which was also introduced in
March of 2003. The balance of the increase was attributable to small increases
in virtually all other noninterest expense items.
TOTAL INCOME TAX EXPENSE was $198,000 (an effective tax rate of 33.6%) for the
three months ended December 31, 2003, compared to $338,000 (an effective tax
rate of 34.5%) during the three months ended December 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY AND THE BANK
Banking regulations require the Bank to maintain sufficient liquidity to ensure
its safe and sound operation. The Bank's regulatory liquidity was 15.80% and
19.12% at December 31, 2003 and 2002, respectively. The primary source of
funding for the Company is dividend payments from the Bank. Dividend payments by
the Bank have been used primarily by the Company to pay dividends to its
stockholders.
The Bank's liquidity is a product of its operating, investing and financing
activities. The primary investment activity of the Bank is the origination of
mortgage loans and, to a lesser extent, commercial and consumer loans. The
primary sources of funds are deposits, FHLB borrowings, prepayments and
maturities of outstanding loans, mortgage-backed securities, and investments.
While scheduled payments of loans and mortgage-backed securities and maturing
investments are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by interest rates, economic conditions and
competition. The Bank utilizes FHLB borrowings to leverage its capital base and
provide funds for lending and to better manage its interest rate risk. The sole
investment of the Company is its investment in the Bank's stock.
At December 31, 2003, the Bank had outstanding commitments to originate loans of
$3,417,000, open-end consumer lines of credit of $7,011,000, unused commercial
lines of credit of $2,727,000 and standby letters of credit of $182,000. As of
December 31, 2003, certificates of deposit scheduled to mature in one year or
less totaled $21,770,000. Based on historical experience, management believes
that a significant portion of maturing deposits will remain with the Bank.
Management anticipates that the Bank will continue to have sufficient funds,
through deposits, borrowings, and normal operations to meet its commitments.
The Bank is required by Office of Thrift Supervision ("OTS") regulations to meet
certain minimum capital requirements. At December 31, 2003, the Bank exceeded
all of its regulatory capital requirements with tangible and tier 1 capital both
at $22,847,000 or 11.98% of adjusted total assets, and risk-based capital at $
23,707,000 or 19.23% of risk-weighted assets. The required minimum ratios 1.5%
for tangible capital to adjusted total assets, 4.0% for tier 1 capital to
adjusted total assets and 8.0% for risk-based capital to risk-weighted assets.
The Bank's most liquid assets are cash and cash equivalents. The level of cash
and cash equivalents is dependent on the Bank's operating, financing lending and
investing activities during any given period. At December 31, 2003, the Bank's
cash and cash equivalents totaled $6,136,000. The Company's and Bank's future
short -term requirements for cash are not expected to significantly change.
However, in the event that the Bank should require funds in excess of its
ability to generate them internally, additional sources of funds are available,
including additional FHLB advances. With no parent company debt and sound
capital levels, the Company should have many options available for satisfying
its longer-term cash needs such as borrowing funds, raising equity capital and
issuing trust preferred securities.
Management is not aware of any current recommendations or government proposals
which, if implemented would have a material effect on the Company's liquidity,
capital resources or operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no significant change in the Company's market risk since June 30,
2003, except as discussed in the Management's Discussion and Analysis of
Financial Condition and Results of Operations set forth in Item 2, above. For
information regarding the Company's Market Risk, refer to the Company's Form
10-K for the year ending June 30, 2003.
13
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form
10-Q, the Company's Chief Executive Officer and Chief Financial Officer
evaluated, with the participation of the Company's management, the effectiveness
of the Company's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")). Based upon their evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission's rules and forms.
No changes were made to the Company's internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act)
during the Company's most recent fiscal quarter that have materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
14
PART II. OTHER INFORMATION
- -------- -----------------
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal actions incident to
its business, none of which is believed by management to be
material to the financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information contained in Part II Item 4 of the Company's
Form 10-Q filed with the SEC on November 12, 2003, for the
period ended September 30, 2003, is incorporated herein by
reference.
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3.1 Peoples Ohio Financial Corporation Articles of Incorporation
(incorporated by reference to the Form 8-A filed with the
SEC on February 8, 2002 (the "Form 8-A"), Exhibit 2(a))
3.2 Peoples Ohio Financial Corporation Amended and Restated Code
of Regulations (Incorporated by reference to the Form 8-A,
Exhibit 2(b))
31.1 Certification of Ronald B. Scott, Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Richard J. Dutton, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Ronald B. Scott, Chief Executive Officer
and Richard J. Dutton, Chief Financial Officer, perusuent to
Section 906 of The Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K
1. On October 14, 2003, the Company filed a Current Report on
Form 8-K reporting information under Item 5, incorporating a
press release dated October 10, 2003, relating to the hiring
of John Wannamacher as Vice President, Senior Trust Officer.
2. On November 6, 2003, the Company filed a Current Report on
Form 8-K reporting information under Item 5, incorporating a
press release dated November 6, 2003, relating to the
Company's earnings for fiscal year 2003.
15
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.
PEOPLES OHIO FINANCIAL CORPORATION
Dated: February 12, 2004 By /s/ Ronald B. Scott
-----------------------------------------
Ronald B. Scott
President, Chief Executive Officer
By /s/ Richard J. Dutton
------------------------------
Richard J. Dutton
Vice-President, Chief Financial Officer
16
INDEX TO EXHIBITS
Exhibit No. Description of Exhibits
- ----------- -----------------------
3.1 Peoples Ohio Financial Corporation Articles of Incorporation
(incorporated by reference to the Form 8-A filed with the SEC
on February 8, 2002 (the "Form 8-A"), Exhibit 2(a))
3.2 Peoples Ohio Financial Corporation Amended and Restated Code
of Regulations (Incorporated by reference to the Form 8-A,
Exhibit 2(b))
31.1 Certification of Ronald B. Scott, Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Richard J. Dutton, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Ronald B. Scott, Chief Executive Officer, and
Richard J. Dutton, Chief Financial Officer, perusuent to
Section 906 of The Sarbanes-Oxley Act of 2002.
17