UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2007 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission File Number: 000-51209 OC FINANCIAL, INC. ------------------------------------------------ (Name of Small Business Issuer 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 Office) (Zip Code) (800) 678-6228 ----------------------------------------------- (Issuer's Telephone Number including area code) Securities Registered Pursuant to Section 12(b) of the Act: NONE ---- Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $0.01 PER SHARE --------------------------------------- (Title of Class) Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act [ ] 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 twelve months (or for such shorter period that the Registrant was required to file reports) and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ___. Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendments to this Form 10-KSB. [X] Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ___ NO _X_ The Registrant's revenues for the fiscal year ended September 30, 2007 were $ 4,073,347. As of December 15, 2007, there were 560,198 shares issued and outstanding of the Registrant's Common Stock. The aggregate value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing price of the Common Stock as of December 1, 2007 was $6.0 million. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of Annual Report to Stockholders (Part II) Transitional Small Business Disclosure Format (Check One): YES ___ NO _X_ OC FINANCIAL, INC. FORM 10-KSB INDEX PAGE PART I.................................................................... 3 ITEM 1. DESCRIPTION OF BUSINESS................................ 3 ITEM 2. DESCRIPTION OF PROPERTY................................ 32 ITEM 3. LEGAL PROCEEDINGS...................................... 32 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.... 32 PART II................................................................... 33 ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES...................................... 33 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.............................................. 33 ITEM 7. FINANCIAL STATEMENTS................................... 34 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................... 34 ITEM 8A. CONTROLS AND PROCEDURES................................ 34 ITEM 8B. OTHER INFORMATION...................................... 34 PART III.................................................................. 34 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT...................... 34 ITEM 10. EXECUTIVE COMPENSATION................................. 37 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS............. 38 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.................................. 39 ITEM 13. EXHIBITS............................................... 40 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES................. 40 SIGNATURES................................................................ 42 2 PART I ITEM 1. DESCRIPTION OF BUSINESS FORWARD LOOKING STATEMENTS This Annual Report on Form 10-KSB contains certain "forward-looking statements" which may be identified by the use of words such as "believe," "expect," "anticipate," "should," "planned," "estimated" and "potential." Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates and most other statements that are not historical in nature. These factors include, but are not limited to, general and local economic conditions, competition, changes in interest rates, deposit flows, demand for mortgage, and other loans, real estate values; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing products and services. OC FINANCIAL, INC. OC Financial, Inc. (or the "Company") is the stock holding company for Ohio Central Savings. OC Financial, Inc. is chartered under Maryland law and currently owns 100% of the outstanding common stock of Ohio Central Savings. At September 30, 2007, OC Financial, Inc. had $65.5 million in consolidated assets, total net loans of $42.1 million and total deposits of $46.1 million. The executive office of OC Financial, Inc. is located at 6033 Perimeter Drive, Dublin, Ohio 43017, and its telephone number is (800) 678-6228. OC Financial, Inc. is subject to comprehensive regulation and examination by the Office of Thrift Supervision. OHIO CENTRAL SAVINGS Ohio Central Savings is a federally chartered savings association headquartered in Dublin, Ohio. Ohio Central Savings is a full-service, community-oriented savings institution. We provide financial services to individuals, families and businesses through our two full-service banking offices, located in Dublin and Cleveland Heights, Ohio. Ohio Central Savings was originally organized in 1949 as an Ohio-chartered credit union. As a credit union, Ohio Central Savings could only serve customers that were members of its field of membership group, which consisted of employees of about 200 various employers located in the State of Ohio. Ohio Central Savings converted to a federal mutual savings association in 1998 and as a result can serve any member of the public. Ohio Central Savings reorganized into the mutual holding company structure in September 2001 by becoming a wholly-owned subsidiary of TFS Financial Corporation which is a wholly-owned subsidiary of Third Federal Savings and Loan Association of Cleveland, MHC, a mutual holding company ("Third Federal"). On March 31, 2005, Ohio Central Savings divested itself from TFS Financial Corporation and reorganized into a wholly-owned subsidiary of OC Financial, Inc. The executive office of Ohio Central Savings is located at 6033 Perimeter Drive, Dublin, Ohio 43017, and its telephone number is (800) 678-6228. GENERAL Ohio Central Savings' business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, primarily in new and used automobile loans, as well as one- to four-family residential mortgage loans and in agency securities and mortgage-backed securities. We also make, to a much lesser extent, other consumer loans, commercial real estate loans and commercial business loans. In 2003, we also organized AUTOARM, LLC ("AutoARM") as a wholly-owned subsidiary to underwrite, fund and/or service automobile loans for other institutions. We currently have 15 institutions (exclusive of Ohio Central Savings) as clients and continue to actively market AutoARM's services to institutions in various states. We design our service delivery channels to suit the needs of our customers, with an emphasis on delivering services electronically and on-demand at our customers' convenience. 3 During our affiliation with Third Federal, a major part of our business was originating, selling and servicing automobile loans for Third Federal. The servicing of existing loans that we sold to Third Federal will continue until all the loans in the portfolio are repaid. The balance on loans sold to Third Federal as of September 30, 2007 was $5.6 million. We seek to distinguish ourselves through proactive customer service. We identify and meet customer needs in a professional manner through market research, continuing education of our employees, systems-based internal coordination and performance-tracking. MARKET AREA At September 30, 2007, we had a full-service banking office located in each of Dublin and Cleveland Heights, Ohio. Our primary market for deposit is currently concentrated around the areas where our full-service banking offices are located. Our primary lending area consists of the counties where our two offices are located and the counties contiguous to such counties. We have less than a 1% loan and deposit share in each of our market areas. At September 30, 2007, we had 49.3% of our loans based in Franklin County and 8.7% of our loans based in Cuyahoga County and we had 67.4% of our deposits in Franklin County and 21.9% of our deposits based in Cuyahoga County. Dublin is located in the Columbus, Ohio metropolitan area. Columbus is located in Franklin County. The county has a diversified economy, employment base and population base. The unemployment rate was 4.0% as of September 30, 2007, as compared to 4.7% in the United States as a whole at such date. Dublin is an upscale suburb of Columbus located on the northwest side with active residential and commercial development. Our office is located just off Interstate 270, the Columbus outer beltway. The office is easily accessible from the Columbus metropolitan area with travel time to the city center of less than 20 minutes. Two of the largest employers in Franklin County are the State of Ohio and The Ohio State University, each based in Columbus. Franklin County is also home to several major medical centers. The Cleveland office is located in the suburb of Cleveland Heights, Ohio. The office is located in Cuyahoga County. The county had an unemployment rate of 6.3% as of September 30, 2007, with the State of Ohio having an unemployment rate of 5.9% at such date. The area consists mainly of the campus of Case Western Reserve University and the Cleveland Clinic as well as several museums and the Cleveland Playhouse. The area is fairly congested and is not easily accessible for much of the Cleveland metropolitan area as it is not near a major highway. Cuyahoga County is home to two large automobile manufacturers in addition to the university. We have maintained relationships with the employer organizations that we served as a credit union. These employers still provide us with payroll deduction from their employees, and opportunities to solicit business from their employees and to continue to offer our programs and products to their employees. In Cleveland, these businesses are located close to our office. In Columbus, the businesses are more evenly distributed around the metropolitan area. Ohio Central Savings has continued to tailor its operations to ensure exceptional service to these sponsor organizations including establishing hours and operations to meet their specific needs. LENDING ACTIVITIES GENERAL. We primarily originate new and used automobile loans. While we have originated a limited amount of one- to four-family residential mortgage loans in the past two years, we plan to continue to emphasize the origination of one- to four-family residential mortgage loans, including home equity loans, in the future. In addition, we have originated a small amount of investment property loans consisting of one- to four-family rental properties, commercial real estate, commercial business loans and consumer loans. As of September 30, 2007, $22.9 million, or 54.1%, of our total gross loan portfolio consisted of new and used automobile loans, $17.7 million, or 41.9%, of our total gross loan portfolio consisted of one- to four-family residential real estate loans, including investment property loans. Home equity loans constituted $509,000 or 1.2% of our gross loan portfolio. Commercial real estate loans constituted $1.1 million or 2.6% of our total gross loan portfolio. 4 At September 30, 2007, the maximum amount which we could have loaned to any one borrower and the borrower's related entities under applicable regulations generally was approximately $850,000. Our five largest lending relationships at September 30, 2007 were as follows: (1) a $735,000 loan secured by mortgages on one residential lot, two one- to four-family investment properties, and one multi-family investment property, (2) a $712,000 loan secured by a first mortgage on a one- to four-family primary residence and a commercial condominium, (3) a $622,000 loan secured by a first mortgage and a bridge mortgage on a one- to four-family dwelling unit, (4) a $572,000 loan secured by first and second mortgages on ten one- to four-family investment properties, and (5) a $556,000 lending relationship secured by first mortgages on eleven one- to four-family investment properties and one commercial condominium. LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition of our loan portfolio (including loans held for sale) by type of loan as of the dates indicated. <TABLE> AT SEPTEMBER 30, ---------------------------------------------------------------- 2007 2006 --------------------------- --------------------------- AMOUNT PERCENT AMOUNT PERCENT ------------ ----------- ------------ ----------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> RESIDENTIAL REAL ESTATE LOANS One- to four-family........................ $ 17,677 41.86% $ 14,007 37.85% Home equity................................ 509 1.21 510 1.38 Total residential real estate loans.... 18,186 43.07 14,517 39.23 ------------ ----------- ------------ ----------- OTHER LOANS Automobile (1)............................. 22,849 54.12 21,561 58.27 Other consumer............................. 99 0.23 86 0.23 ------------ ----------- ------------ ----------- Total consumer loans.................... 22,948 54.35 21,647 58.50 ------------ ----------- ------------ ----------- Commercial real estate..................... 1,087 2.58 823 2.22 Commercial business........................ -- -- 15 0.05 ------------ ---------- ------------ ----------- Total loans............................. 42,221 100.00% 37,002 100.00% ------------ =========== ------------ =========== Net deferred fees, costs and premiums...... 20 3 Allowance for loan losses.................. (166) (241) ------------- ------------ Total loans, net........................ $ 42,075 $ 36,764 ============ ============ </TABLE> -------------------- (1) At September 30, 2007 there were $30,416 in principal amount of automobile loans held for sale. At September 30, 2006 there were $56,102 in principal amount of automobile loans held for sale. 5 LOAN PORTFOLIO MATURITIES AND YIELDS. The following table summarizes the scheduled maturities of our loan portfolio at September 30, 2007. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. No effect is given to amortization or prepayments. <TABLE> ONE- TO FOUR-FAMILY HOME EQUITY AUTOMOBILE(2) OTHER CONSUMER ---------------------- ---------------------- ---------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE ---------- -------- ---------- -------- ---------- -------- ---------- -------- (DOLLARS IN THOUSANDS) <C> <C> <C> <C> <C> <C> <C> <C> <C> Due During the Years Ended September 30, ------------------- 2008(1)................ $ 322 7.84% $ 1 7.75% $ 337 4.72% $ 14 10.74% 2009 to 2012........... 208 5.04 80 8.60 21,523 5.67 85 12.77 2013 and beyond........ 17,147 6.35 428 8.60 989 6.55 -- -- ---------- ---------- ---------- ---------- Total......... $ 17,677 6.36% $ 509 8.60% $ 22,849 5.69% $ 99 12.48% ========== ========== ========== ========== COMMERCIAL REAL ESTATE TOTAL ---------------------- ---------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE ---------- -------- ---------- -------- (DOLLARS IN THOUSANDS) Due During the Years Ended September 30, -------------------- 2008 (1)............... $ -- --% $ 674 6.33% 2009 to 2012........... 25 4.50 21,921 5.70 2013 and beyond........ 1,062 7.81 19,626 6.46 ---------- ---------- Total......... $ 1,087 7.69% $ 42,221 6.06% ========== ========== </TABLE> ------------------------------- (1) Includes demand loans, loans having no stated repayment schedule or maturity, and overdraft loans. (2) Includes loans held for sale in the amount of $30,416. 6 LOAN REPRICING. The following schedule illustrates the interest rate sensitivity of Ohio Central Savings' loan portfolio (including loans available for sale) at September 30, 2007. Loans which have adjustable or renegotiable interest rates are shown as maturing in the period during which the loan reprices. The schedule does not include scheduled payments or potential prepayments. <TABLE> REAL ESTATE -------------------------------------------- ONE- TO FOUR- COMMERCIAL OTHER DUE FAMILY REAL ESTATE HOME EQUITY AUTOMOBILE(1) CONSUMER TOTAL --- ------------ ----------- ----------- ------------- ------------ ----------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Within 1 year.................... $ 1,554 $ 248 $ 501 $ 426 $ 21 $ 2,750 After 1 year through 5 years..... 1,558 440 8 21,621 78 23,705 Over 5 years..................... 14,565 399 -- 802 -- 15,766 ------------ ----------- ----------- ------------- ------------ ----------- Total............................ $ 17,677 $ 1,087 $ 509 $ 22,849 $ 99 $ 42,221 ============ =========== =========== ============= ============ =========== </TABLE> ------------------------------- (1) Includes loans held for sale in the amount of $30,416. 7 The following table shows the composition of Ohio Central Savings' loan portfolio by fixed- and adjustable-rate at the dates indicated for loans with maturity dates beyond one year. AT SEPTEMBER 30, 2007 --------------------------- AMOUNT PERCENT ----------- ----------- FIXED-RATE LOANS (DOLLARS IN THOUSANDS) RESIDENTIAL REAL ESTATE One- to four-family................ $ 14,719 37.29% Home equity loans ................. 8 0.02 ----------- ----------- Total residential loans......... 14,727 37.31% ----------- ----------- OTHER LOANS Automobile loans................... 22,425 56.81% Commercial real estate............. 399 1.01 Other consumer loans............... 78 0.20 ----------- ----------- Total consumer loans............ 22,902 58.02% ----------- ----------- Total fixed-rate loans........... 37,629 95.33% ----------- ----------- ADJUSTABLE-RATE LOANS RESIDENTIAL REAL ESTATE One- to four-family................ 1,400 3.55% Home equity loans ................. -- -- ----------- ----------- Total real estate loans.......... 1,400 3.55% ----------- ----------- OTHER LOANS Commercial real estate............. 440 1.12% Consumer........................... -- -- ----------- ----------- Total other loans............. 440 1.12% ----------- ----------- Total adjustable loans........ 1,840 4.67% ----------- ----------- Total loans................... $ 39,469 100.00% =========== =========== CONSUMER LOANS. We currently offer a variety of consumer loans. Consumer loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates. At September 30, 2007, our consumer loan portfolio, exclusive of automobile loans, totaled $98,500 or 0.23% of our gross loan portfolio. Such loans consisted of credit card loans, and other secured and unsecured consumer loans. The most significant component of our consumer lending is automobile loans. For the past 18 years automobile lending has been a primary focus of Ohio Central Savings. We originate automobile loans only on a direct basis with the borrower. At September 30, 2007, our loans secured by automobiles totaled $22.9 million, or 54.12% of our gross loan portfolio. Loans secured by used automobiles constituted $12.9 million of our automobile loan portfolio, or 30.53% of our gross loan portfolio at September 30, 2007. Automobile loans may be made for a maximum term of six years for new automobiles and a maximum term of five years for used automobiles and have fixed rates of interest. Loan to value ratios for automobile loans are up to 100% of the sales price for new automobiles and up to 100% of value on used cars, based on retail valuation from official used car guides. Approximately 60.0% of our automobile loan originations are generated through applications submitted through our website, many of which are to Ohio residents. Substantially all of these loans are closed in our offices where we make personal identification of the borrower. We only permit a closing off-site in the case of a refinance with an existing customer, or a new automobile with a dealer with whom we have an existing relationship. By maintaining 15 years of underwriting history we have developed policies and procedures that allow us to make these loans with good delinquency and loss experience. We also service automobile loans that we originated and sold to Third Federal prior to our divestiture. By servicing the loans we receive income for our services at a level sufficient to compensate us for our costs and obtain a customer relationship that affords us with marketing opportunities. Consumer loans may entail greater risk than one- to-four family residential mortgage loans, particularly in the case of consumer loans which are secured by rapidly depreciable assets, such as automobiles, and credit card loans that are unsecured. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent 8 on the borrower's continuing financial stability and, thus, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. We actively manage this risk and have been successful in managing this risk in the past. Our management begins with our policies that are carried out through detailed underwriting and proprietary processing and documentation. All closed loans are quality reviewed for accuracy. Collection activity is closely tracked and we promptly contact any delinquent borrower. ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LOANS. We offer both fixed-rate and adjustable-rate conforming one- to four-family residential mortgage loans. This portfolio totaled $17.7 million, or 41.9% of our total gross loan portfolio at September 30, 2007. A large portion of these loans were originated prior to our affiliation with and after our separation from Third Federal. During the partnership with Third Federal, we referred our residential loan customers to Third Federal. At September 30, 2007, we also had $509,000 in home equity loans, or 1.2% of our total gross loan portfolio. During our affiliation with Third Federal, we utilized Third Federal to underwrite, process and close residential mortgage loans for customers that we referred to Third Federal. These loans were retained by Third Federal. Following our divestiture from Third Federal on March 31, 2005, we began to use third party processors based in the Columbus metropolitan area to underwrite, process and close our residential mortgage loans. We intend to use these providers for the foreseeable future. We will fund and service these loans. We anticipate retaining a majority of these loans in our portfolio subject to our liquidity needs, capital levels and asset and liability management concerns. We intend to use these companies in order to offer our customers this loan product without the expense of an in-house residential mortgage loan department. We may use more than one provider depending on the level of service and volume of loans. Should we discontinue these relationships or otherwise be unable to use companies in the future, our ability to originate residential mortgage loans may be disrupted unless we are able to find a suitable replacement or have the capability to perform the function through our lending staff. Our income may be negatively affected if our lending program is disrupted. In the event the volume of our mortgage loan origination is unsatisfactory, we may purchase one- to four-family residential mortgage loans in our market area from brokers or other banks to increase our interest earning assets and for asset liability management. We currently offer fixed-rate conventional mortgage loans with terms of 10 to 30 years that are fully amortizing and adjustable-rate conventional mortgage loans that amortize up to 30 years. One- to four-family residential mortgage loans are generally underwritten according to Fannie Mae or Freddie Mac guidelines, and loans that conform to such guidelines are referred to as "conforming loans." We generally originate both fixed- and adjustable-rate loans in amounts up to the maximum conforming loan limits as established by Fannie Mae or Freddie Mac, which is currently $417,000 for single-family homes. Private mortgage insurance is required for first mortgage loans with loan-to-value ratios in excess of 85%. We intend to emphasize the origination of adjustable-rate loans and shorter term fixed-rate mortgages for our portfolio. We anticipate that we will sell mortgages with greater than 15-year maturities into the secondary market for interest rate risk management purposes. We do not originate or purchase stated income or interest only one- to four-family residential mortgage loans or loans that would be considered "sub-prime." We also offer loans above conforming limits, referred to as "jumbo loans," that have been underwritten to the credit standards of Fannie Mae or Freddie Mac. These loans are generally eligible for sale to various firms that specialize in the purchase of such non-conforming loans. We also originate loans at higher rates that do not fully meet the credit standards of Fannie Mae or Freddie Mac but are deemed to be acceptable risks. Our adjustable-rate loan products are secured by residential properties with rates that are fixed for an initial period ranging from one year to five years. After the initial fixed period, the interest rate on these loans is generally reset every year based upon a contractual spread or margin above the average yield on U.S. Treasury securities, adjusted to a constant maturity of one year, as published weekly by the Federal Reserve Board, subject to certain periodic and lifetime limitations on interest rate changes. Many of the borrowers who select these loans have shorter-term credit needs than those who select long-term, fixed-rate loans. Adjustable-rate mortgage loans generally pose different credit risks than fixed-rate loans primarily because the underlying debt service payments of the borrowers rise as interest rates rise, thereby increasing the potential for default. At September 30, 2007, our adjustable-rate mortgage portfolio was $2.8 million or 6.8% of our gross loan portfolio. 9 We require title insurance on all of our one- to four-family residential mortgage loans, and we also require that borrowers maintain fire and extended coverage casualty insurance (and, if appropriate, flood insurance) in an amount at least equal to the lesser of the loan balance or the replacement cost of the improvements. We do not require a mortgage escrow account from which disbursements are made for real estate taxes and for hazard and flood insurance. We do not conduct environmental testing on residential mortgage loans unless specific concerns for hazards are determined by the appraiser utilized in connection with the loan. In addition to traditional one- to four-family residential mortgage loans, we offer home equity loans and home equity lines of credit that are secured by the borrower's primary residence. The borrower is permitted to draw on a home equity line of credit during the first three years after it is originated and may repay the outstanding balance over a term not to exceed seven years from the date the home equity line of credit is originated. Our home equity lines of credit are originated with adjustable rates of interest and our home equity loans with fixed rates of interest. Home equity loans and home equity lines of credit are generally underwritten with the same criteria that we use to underwrite fixed-rate, one- to four-family residential mortgage loans. Home equity lines of credit and home equity loans may be underwritten with a loan-to-value ratio of 95% and 80%, respectively, when combined with the principal balance of the existing mortgage loan. We appraise the property securing the loan at the time of the loan application in order to determine the value of the property securing the home equity loan or line of credit. At the time we close a home equity loan or line of credit, we file a mortgage to perfect our security interest in the underlying collateral. COMMERCIAL REAL ESTATE AND COMMERCIAL BUSINESS LOANS. We make various types of secured commercial loans to customers in our market area for the purpose of financing equipment acquisition, expansion, working capital and other general business purposes. We also make real estate loans secured by commercial properties, typically small businesses or professional offices. The terms of these loans generally range from less than one year to 25 years. The loans are either negotiated on a fixed-rate basis or carry adjustable interest rates indexed to (i) a lending rate that is determined internally, or (ii) a short-term market rate index. At September 30, 2007, we had no commercial business loans outstanding and seven commercial real estate loans with an aggregate balance of $1.1 million, or 2.6% of our gross loan portfolio. We do not plan to actively market commercial loans, but rather to make such loans as the opportunity may arise. We have no current plans to originate commercial real estate construction loans. LOAN ORIGINATIONS, PURCHASES, SALES AND SERVICING. While we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon borrower demand, market interest rates, borrower preference for fixed- versus adjustable-rate loans, and the interest rates offered on each type of loan by other lenders competing in our market area. Loan originations are derived from a number of sources, including branch office personnel, our website, existing customers, borrowers, builders, attorneys, accountants and other professionals, real estate and mortgage brokers and walk-in customers. Our loan origination and sales activity may be adversely affected by a rising interest rate environment that typically results in decreased loan demand, while declining interest rates may stimulate increased loan demand. Accordingly, the volume of loan originations, the mix of fixed and adjustable-rate loans, and the profitability of this activity can vary from period to period. One- to four-family residential mortgage loans are generally underwritten to current Fannie Mae or Freddie Mac seller/servicer guidelines, and closed on standard Fannie Mae or Freddie Mac documents. If such loans are sold, the sales are conducted using standard Fannie Mae or Freddie Mac purchase contracts and master commitments as applicable. One- to four-family residential mortgage loans may be sold to Fannie Mae or Freddie Mac on a non-recourse basis whereby foreclosure losses are generally the responsibility of the purchaser. 10 The following table shows the loan origination, sale and repayment activities of Ohio Central Savings for the periods indicated. YEAR ENDED SEPTEMBER 30, ----------------------------- 2007 2006 ------------ ------------ (IN THOUSANDS) Beginning of period...................... $ 36,764 $ 29,306 ORIGINATIONS BY TYPE: Real estate mortgage: One- to four-family residential...... 6,821 6,116 Home equity.......................... 208 27 Consumer: Automobile (loans originated)........ 26,816 13,252 Other consumer....................... 187 47 Other:................................... 189 80 ------------ ------------ Total loans originated............. 34,221 19,522 SALES AND REPAYMENTS: Real estate mortgage sales: One- to four-family residential...... -- -- Home equity.......................... -- -- Consumer sales: Automobile........................... 7,904 1,813 Other consumer....................... -- -- Other:................................... -- -- ------------ ------------ Total loans sold................... 7,904 1,813 Principal repayments................... 21,095 10,213 ------------ ------------ Total reductions................... 28,999 12,026 Increase (decrease) in other items, net.. 89 (38) ------------ ------------ Net increase/(decrease)............ 5,311 7,458 ------------ ------------ Ending balance .................... $ 42,075 $ 36,764 ============ ============ LOAN APPROVAL AUTHORITY AND UNDERWRITING. Our board of directors grants lending authority to the Credit Committee (the members of which is one director and one loan officer), and individual executive officers and loan officers. Our lending activities are subject to written policies established by the board of directors. These policies are reviewed periodically. The Credit Committee may approve loans in accordance with applicable loan policies, including our policy governing loans to one borrower. This policy places limits on the aggregate dollar amount of credit that may be extended to any one borrower and related entities. The Credit Committee may approve loans up to an aggregate of approximately $850,000 to any one borrower and related borrowers. The Credit Committee also may approve unsecured loans in amounts up to $50,000. Our practices generally provide for a maximum loan-to-one-borrower limit of approximately $850,000. In connection with our residential and commercial real estate loans, we generally require property appraisals to be performed by independent appraisers who are approved by the board of directors. Appraisals are then reviewed by the appropriate loan underwriting areas. Under certain conditions, we may not require appraisals for loans under $250,000, but we obtain appraisals in many of these cases. We also require title insurance, hazard insurance and, if indicated, flood insurance on property securing mortgage loans. 11 DELINQUENT LOANS, OTHER REAL ESTATE OWNED AND CLASSIFIED ASSETS COLLECTION PROCEDURES. We send a computer-generated late notice by the 11th day after the payment due date on a loan requesting the payment due plus any late charge that is assessed. Accounts are distributed to a collector or account officer to contact borrowers, determine the reason for delinquency and arrange for payment, and accounts are monitored electronically for receipt of payments. If payments are not received within 30 days of the original due date, a letter demanding payment of all arrearages is sent and contact efforts are continued. If contact is not made and satisfactory arrangements are not made or if payment is not received, we generally accelerate loans and demand payment in full and take action to recover any collateral. In addition, failure to pay within 60 days of the original due date generally results in legal action, notwithstanding ongoing collection efforts. For secured consumer loans such as automobile loans, we may repossess the collateral. This is generally accomplished by using a third party provider that specializes in collateral repossession. Once the collateral is obtained, we assess the condition and value of the collateral and proceed to sell the collateral. We use a third party to sell the collateral, generally at a public auction. Typically the time between repossession and sale is within a month. In these cases, we typically record the repossession and sale as a single transaction with a net charge-off to the allowance for loan losses. In the event that the holding period were to extend over the end of a reporting period, our policy is to initially record the repossessed automobile at fair value when acquired, establishing a new cost basis. If fair value declines subsequent to repossession, an additional valuation allowance would be recorded. Gains or losses arising from sales of foreclosed or repossessed assets are recorded in the income statement. Any deficiency balance is then pursued with the debtor. Generally, deficiency balances are charged-off the balance sheet as uncollectible and pursued using a third party. Loans with no payments in 180 days are generally charged-off. For commercial loans, procedures may vary depending upon individual circumstances. LOANS PAST DUE AND NON-PERFORMING ASSETS. Loans are reviewed on a regular basis, and are placed on non-accrual status when either principal or interest is 90 days or more past due. In addition, we place loans on non-accrual status when we believe that there is sufficient reason to question the borrower's ability to continue to meet contractual principal or interest payment obligations. Interest accrued and unpaid at the time a loan is placed on non-accrual status is reversed from interest income. Interest payments received on non-accrual loans are not recognized as income unless warranted based on the borrower's financial condition and payment record. At September 30, 2007, we had non-accrual loans of $125,000. Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned ("REO") until such time as it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at its fair value, less estimated costs of disposal. If the fair value of the property is less than the loan balance, the difference is charged against the allowance for loan losses. At September 30, 2007, we had one REO property consisting of a one- to four-family residence, with an appraised value of $67,000 securing a loan with a balance of $62,000, including taxes and rehabilitation costs. 12 The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated. Loans delinquent for 90 days or more are also classified as non-accrual loans. <TABLE> LOANS DELINQUENT FOR --------------------------------------------- 60-89 DAYS 90 DAYS AND OVER TOTAL --------------------- --------------------- --------------------- NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT ---------- -------- ---------- -------- ---------- -------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> AT SEPTEMBER 30, 2007 One- to four-family........ 1 $ 618 1 $ 80 2 $ 698 Home equity................ -- -- -- -- -- -- Automobile................. -- -- 3 45 3 45 Other consumer............. -- -- -- -- -- -- Commercial real estate..... -- -- -- -- -- -- Commercial business........ -- -- -- -- -- -- ---------- -------- ---------- -------- ---------- -------- Total.................... 1 $ 618 4 $ 125 5 $ 743 ========== ======== ========== ======== ========== ======== AT SEPTEMBER 30, 2006 One- to four-family........ -- $ -- 1 $ 112 1 $ 112 Home equity................ -- -- -- -- -- -- Automobile................. 1 17 1 8 2 25 Other consumer............. -- -- -- -- -- -- Commercial real estate..... -- -- -- -- -- -- Commercial business........ -- -- -- -- -- -- ---------- -------- ---------- -------- ---------- -------- Total.................... 1 $ 17 2 $ 120 3 $ 137 ========== ======== ========== ======== ========== ======== </TABLE> The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. At each date presented, we had no troubled debt restructurings (loans for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates). AT SEPTEMBER 30, ---------------------------- 2007 2006 ------------ ------------ (DOLLARS IN THOUSANDS) Non-accrual loans: One- to four-family...................... $ 80 $ 112 Home equity.............................. -- -- Automobile............................... 45 17 Other consumer........................... -- -- Commercial real estate................... -- -- Commercial business...................... -- -- ------------ ------------ Total non-performing loans............. $ 125 $ 129 ============ ============ Real estate owned: One- to four-family...................... $ 54 $ -- Home equity.............................. -- -- Commercial real estate................... -- -- Total real estate owned................ -- -- ------------ ------------ Total non-performing assets................ $ 179 $ 129 ============ ============ Ratios: Non-performing loans to total loans...... 0.29% 0.35% Non-performing assets to total assets.... 0.27% 0.19% There is one real estate owned property, previously noted, consisting of a one -to four-family residence that is currently listed with a real estate agent for sale. We expect that the proceeds from the sale will be sufficient to cover the outstanding indebtedness and disposition costs. Management was not aware of any other loans not included in non-performing loans above where known information about possible credit problems causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms. There are no loans past due over ninety days still accruing interest at September 30, 2007. 13 For the year ended September 30, 2007, gross interest income that would have been recorded had the non-accrual loans at the end of the year remained on accrual status throughout the period amounted to $2,133. No interest income was recognized on these loans. CLASSIFICATION OF ASSETS. Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as a loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are required to be designated as special mention. When we classify assets as either substandard or doubtful, we allocate a portion of the related general loss allowances to such assets as we deem prudent. The allowance for loan losses represents amounts that have been established to recognize losses inherent in the loan portfolio that are both probable and reasonably estimable at the date of the financial statements. When we classify problem assets as loss, we charge-off such amount. Ohio Central Savings maintains an aggressive collection policy that generally results in loans classified as doubtful or a loss to be charged off at the time the determination is made. Our determination as to the classification of our assets and the amount of our loss allowances are subject to review by our regulatory agencies, which can require that we establish additional loss allowances. We regularly review our asset portfolio to determine whether any assets require classification in accordance with applicable regulations. At September 30, 2007, classified assets totaled $882,000 which were comprised of $139,000 of special mention and $743,000 of substandard assets. On the basis of our review of our assets at September 30, 2006, classified assets totaled $889,000 which were comprised of $581,000 of special mention, $264,000 of substandard and $44,000 of doubtful assets. The classified assets total consists of non-performing loans and all of our non-accrual loans. Any loan in excess of 90 days delinquent is classified as a non-accrual loan. For the fiscal year ended September 30, 2007, we had one loan which was foreclosed upon and taken into real estate owned. At September 30, 2007 and 2006, we had no loans that were classified as a troubled debt restructuring. The aggregate amount of our classified assets and special mention at the dates indicated were as follows: AT SEPTEMBER 30, ---------------------------- 2007 2006 ------------ ------------ (IN THOUSANDS) Loss.................... $ -- $ -- Doubtful................ -- 44 Substandard............. 743 264 Special Mention......... 139 581 ------------ ------------ Total................... $ 882 $ 889 ============ ============ The substantial increase in substandard assets was the result of one jumbo one -to four-family residential mortgage loan which is in the process of foreclosure. No loss on the disposition of this property is anticipated but cannot be assured. ALLOWANCE FOR LOAN LOSSES. We provide for loan losses based on the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable losses. We regularly review the loan portfolio and make provisions for loan losses in order to maintain the allowance for loan losses in accordance with accounting principles generally accepted in the United States of America. The allowance for loan losses consists of three components: (1) specific reserves established for any impaired one- to four-family and multi-family mortgage, commercial real estate, consumer and commercial loans for which the recorded investment in the loan exceeds the measured value of the loan; 14 (2) allowances for loan losses for each loan type based on historical loan loss experience; and (3) adjustments to historical loss experience (general reserves), maintained to cover uncertainties that affect our estimate of probable losses for each loan type. The adjustments to historical loss experience are based on our evaluation of several factors, including: o levels of, and trends in, past due and classified loans; o levels of, and trends in, charge-offs and recoveries; o trends in volume and terms of loans, including any credit concentrations in the loan portfolio; o experience, ability, and depth of lending management and other relevant staff; and o national and local economic trends and conditions. We evaluate the allowance for loan losses based upon the combined total of the specific, historical loss and general components. Generally when the loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase. Generally when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology results in a lower dollar amount of estimated probable, incurred losses currently in the portfolio, including allocations resulting from the increased volume of automobile loan originations retained on the balance sheet during the 2001 to 2003 portion of the mutual partnership with Third Federal that have not yet resulted in charge-offs. We consider commercial business loans and commercial real estate loans to have greater risk than one- to four-family residential mortgage loans. Commercial business loans involve a higher risk of default than residential loans of like duration since their repayment generally depends on the successful operation of the borrower's business and the sufficiency of collateral, if any. Commercial real estate loans also have greater credit risks compared to one- to four-family residential mortgage loans, as they typically involve large loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related real estate project and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy. We periodically evaluate the carrying value of loans and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, our regulatory agencies periodically review the allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgments of information available to them at the time of their examination. 15 The following table sets forth activity in our allowance for loan losses for the years indicated. <TABLE> AT OR FOR THE YEARS ENDED SEPTEMBER 30, ----------------------------- 2007 2006 ------------ ------------ (DOLLARS IN THOUSANDS) <S> <C> <C> Balance at beginning of year............................ $ 241 $ 180 Charge-offs: One- to four-family................................... 53 -- Home equity........................................... -- -- Automobile............................................ 30 12 Other consumer........................................ 5 1 Commercial real estate................................ -- -- Commercial business................................... -- -- ------------ ------------ Total charge-offs................................... 88 13 ------------ ------------ Recoveries: One- to four-family................................... -- -- Home equity........................................... -- -- Automobile............................................ 6 13 Other consumer........................................ 2 1 Commercial real estate................................ -- -- Commercial business................................... -- -- ------------ ------------ Total recoveries.................................... 8 14 ------------ ------------ Net charge-offs......................................... 80 1 ------------ ------------ Provision for loan losses............................... 5 60 ------------ ------------ Balance at end of year.................................. $ 166 $ 241 ============ ============ Ratios: Net charge-offs to average loans outstanding............ 0.19% 0.00% Allowance for loan losses to non-performing loans....... 133.25% 185.94% Allowance for loan losses to total loans................ 0.39% 0.65% </TABLE> ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth the allowance for loan losses allocated by loan category, the total loan balances by category (excluding loans held for sale) and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories. <TABLE> AT SEPTEMBER 30, --------------------------------------------------------------------------------------------------- 2007 2006 ------------------------------------------------ ------------------------------------------------ PERCENT OF LOANS PERCENT OF LOANS ALLOWANCE FOR LOAN BALANCES IN EACH CATEGORY ALLOWANCE FOR LOAN BALANCES IN EACH CATEGORY LOAN LOSSES BY CATEGORY TO TOTAL LOANS LOAN LOSSES BY CATEGORY TO TOTAL LOANS ------------- ------------- ---------------- ------------- ------------- ---------------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> One- to four-family..... $ 109 $ 17,677 41.86% $ 91 $ 14,007 37.85% Home equity............. 5 509 1.21 3 510 1.38 Automobile.............. 34 22,849 54.12 140 21,561 58.28 Other consumer.......... 5 99 0.23 1 86 0.23 Commercial real estate.. 13 1,087 2.58 5 823 2.22 Commercial business..... -- -- -- 1 15 0.04 ------------- ------------- ---------------- ------------- ------------- ---------------- Total................ $ 166 $ 42,221 100.00% $ 241 $ 37,002 100.00% ============= ============= ================ ============= ============= ================ </TABLE> 16 INVESTMENT ACTIVITIES Our securities investment policy is established by our board of directors. This policy dictates that investment decisions be made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets and consistency with our interest rate risk management strategy and meeting the qualified thrift lender test. Our asset/liability management committee ("ALCO"), which consists of senior management, oversees our investing strategies. The asset/liability management committee of the board of directors then reviews the ALCO's activities and strategies, and reports to the full board of directors, which evaluates on an ongoing basis our investment policy and objectives. Our chief financial officer is responsible for making securities portfolio decisions in accordance with established policies. Our chief financial officer has the authority to purchase and sell securities within specific guidelines established by the investment policy. In addition, all transactions are reviewed by the ALCO at least monthly. Our current investment policy generally permits securities investments in debt securities issued by the U.S. government and U.S. agencies, municipal bonds, and corporate debt obligations, as well as investments in preferred and common stock of government agencies and government sponsored enterprises such as Fannie Mae, Freddie Mac and the Federal Home Loan Bank of Cincinnati (federal agency securities) and, to a much lesser extent, other equity securities. Securities in these categories are classified as "investment securities" for financial reporting purposes. The policy also permits investments in mortgage-backed securities, including pass-through securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae as well as collateralized mortgage obligations ("CMOs") issued or backed by securities issued by these government agencies. Also permitted are investments in securities issued or backed by the Small Business Administration, privately issued mortgage-backed securities and asset-backed securities collateralized by automobile loans, credit card receivables, and home equity and home improvement loans. Our current investment strategy uses a risk management approach of diversified investing in fixed-rate securities with short- to intermediate-term maturities, as well as adjustable-rate securities, which may have a longer term to maturity. The emphasis of this approach is to increase overall investment securities yields while managing interest rate risk. SFAS No. 115 requires that, at the time of purchase, we designate a security as held to maturity, available-for-sale, or trading, depending on our ability and intent. Securities available-for-sale and trading securities are reported at fair value, while securities held to maturity are reported at amortized cost. We did not have any securities as available for sale or trading securities at September 30, 2007 or 2006. MORTGAGE-BACKED SECURITIES. We purchase mortgage-backed securities in order to generate positive interest rate spreads with minimal administrative expense, lower credit risk as a result of the guarantees provided by Fannie Mae and Ginnie Mae, and increased liquidity. We invest primarily in mortgage-backed securities issued or sponsored by Fannie Mae and Ginnie Mae. To a lesser extent, we also invest in securities backed by U.S. government agencies. At September 30, 2007, our mortgage-backed securities portfolio had a book value of $16.0 million, consisting of $14.8 million of pass-through securities and $1.2 million of CMOs and Real Estate Mortgage Investment Conduits ("REMICs"). Mortgage-backed securities are created by pooling mortgages and issuing a security collateralized by the pool of mortgages with an interest rate that is less than the interest rate on the underlying mortgages. Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although most of our mortgage-backed securities are collateralized by single-family mortgages. The issuers of such securities (generally U.S. government agencies and government sponsored enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell the participation interests in the form of securities to investors, such as Ohio Central Savings, and guarantee the payment of principal and interest to these investors. Investments in mortgage-backed securities involve a risk that actual prepayments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments, thereby affecting the net yield on such securities. We review prepayment estimates for our mortgage-backed securities at the time of purchase to ensure that prepayment assumptions are reasonable considering the underlying collateral for the securities at issue and current interest rates, and to determine the yield and estimated maturity of the mortgage-backed securities portfolio. Periodic reviews of current prepayment speeds are performed in order to ascertain whether prepayment estimates require modification that would cause amortization or accretion adjustments. 17 A portion of our mortgage-backed securities portfolio is invested in CMOs and REMICs backed by Fannie Mae and Freddie Mac. CMOs and REMICs are types of debt securities issued by a special-purpose entity that aggregates pools of mortgages and mortgage-backed securities and creates different classes of securities with varying maturities and amortization schedules, as well as a residual interest, with each class possessing different risk characteristics. The cash flows from the underlying collateral are generally divided into "tranches" or classes that have descending priorities with respect to the distribution of principal and interest cash flows, while cash flows on pass-through mortgage-backed securities are distributed pro rata to all security holders. Our practice is to limit fixed-rate CMO investments primarily to the early-to-intermediate tranches, which have the greatest cash flow stability. Floating rate CMOs are purchased with emphasis on the relative trade-offs between lifetime interest rate caps, prepayment risk and interest rates. Over the past two years our portfolio of mortgage-backed securities has decreased. Maintenance of these securities helps Ohio Central Savings meet its Community Reinvestment Act obligations, compliance with the qualified thrift lender test and the limitation of the aggregate amount of consumer loans that we may hold in our portfolio. These securities are of various maturities in order to conform to our interest rate risk management policy. In addition, these securities are qualifying collateral for Federal Home Loan Bank advances that were obtained to provide funding for the securities. EQUITY SECURITIES. At September 30, 2007, our equity securities consisted exclusively of shares of common stock issued by the Federal Home Loan Bank of Cincinnati and our ownership interest of AutoARM(R). We hold the Federal Home Loan Bank of Cincinnati common stock to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds under the Federal Home Loan Bank of Cincinnati's advance program. There is no market for the common stock, but it is the current practice of the Federal Home Loan Bank of Cincinnati to redeem tendered shares at par value on the same day the redemption request is made. The aggregate carrying value of our Federal Home Loan Bank of Cincinnati common stock as of September 30, 2007 was $774,800, based on its cost since it is a restricted stock that can only be sold back to the Federal Home Loan Bank. Due to our receipt of stock dividends and reduction of our outstanding advances, we owned shares of Federal Home Loan Bank of Cincinnati common stock at September 30, 2007 with a par value that was $678,000 more than we were required to own to maintain our membership in the Federal Home Loan Bank System and to be eligible to obtain advances. We had no mutual fund investments at fiscal year ends September 30, 2007 or September 30, 2006. 18 HELD TO MATURITY PORTFOLIO. The following table sets forth the composition of our held to maturity portfolio at the dates indicated. <TABLE> AT SEPTEMBER 30, ------------------------------------------------------------------- 2007 2006 ------------------------------- ------------------------------- AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE ---------------- ------------ ---------------- ------------ (IN THOUSANDS) <S> <C> <C> <C> <C> INVESTMENT SECURITIES: Federal agency obligations.............. $ 1,748 $ 1,736 $ 2,593 $ 2,545 MORTGAGE-BACKED SECURITIES: Pass-through securities: Ginnie Mae............................. $ 4,939 $ 4,782 $ 5,929 $ 5,762 Fannie Mae............................. 9,383 9,011 10,958 10,546 Other.................................. 456 450 577 566 CMOs and REMICs.......................... 1,221 1,203 1,476 1,427 ---------------- ------------ ---------------- ------------ Total mortgage-backed securities ........ $ 15,999 $ 15,446 $ 18,940 $ 18,301 ---------------- ------------ ---------------- ------------ Total securities held to maturity........ $ 17,747 $ 17,182 $ 21,533 $ 20,846 ================ ============ ================ ============ </TABLE> 19 PORTFOLIO MATURITIES AND YIELDS. The composition and maturities of the investment debt securities portfolio and the mortgage-backed securities portfolio at September 30, 2007 are summarized in the following table. At September 30, 2007, we held no debt securities or mortgage-backed securities for sale. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. <TABLE> MORE THAN ONE YEAR MORE THAN FIVE YEARS ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS ------------------- ------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE COST YIELD COST YIELD COST YIELD --------- -------- --------- -------- --------- -------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> HELD TO MATURITY: MORTGAGE-BACKED SECURITIES Fannie Mae.................... $ -- --% $ -- --% $ 817 4.00% Ginnie Mae.................... -- -- -- -- -- -- Other CMO..................... -- -- -- -- -- -- --------- --------- --------- Total....................... -- -- -- -- 817 4.00 INVESTMENT SECURITIES Agency securities............. 1,248 3.16 500 4.00 -- -- --------- --------- --------- Total debt securities held to maturity................. $ 1,248 3.16% $ 500 4.00% $ 817 4.00% ========= ========= ========= MORE THAN TEN YEARS TOTAL SECURITIES ------------------- ------------------------------ WEIGHTED WEIGHTED AMORTIZED AVERAGE AMORTIZED FAIR AVERAGE COST YIELD COST VALUE YIELD --------- -------- --------- --------- -------- HELD TO MATURITY: MORTGAGE-BACKED SECURITIES Fannie Mae.................... $ 8,566 4.89% $ 9,383 $ 9,011 4.81% Ginnie Mae.................... 4,939 4.73 4,939 4,782 4.73 Other CMO..................... 1,677 4.29 1,677 1,653 4.29 --------- --------- --------- Total....................... 15,182 4.77 15,999 15,446 INVESTMENT SECURITIES Agency securities............. -- -- 1,748 1,736 3.40 --------- --------- Total debt securities held to maturity................. $ 15,182 4.77% $ 17,747 $ 17,182 4.60% ========= ========= ========= </TABLE> 20 SOURCES OF FUNDS GENERAL. Deposits, borrowings, repayments and prepayments of loans and securities, proceeds from sales of loans and securities, proceeds from maturing securities and cash flows from operations are the primary sources of our funds for use in lending, investing and for other general purposes. DEPOSITS. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of savings accounts, NOW accounts, checking accounts, money market accounts, club accounts, certificates of deposit and IRAs and other qualified plan accounts. We provide commercial checking accounts for businesses. In addition, we provide low-cost checking account services for low-income customers. At September 30, 2007, our total deposits, all of which were interest bearing, totaled $46.1 million. We have no demand deposits. NOW, savings and money market deposits totaled $16.2 million at September 30, 2007. At September 30, 2007, we had a total of $29.9 million in certificates of deposit, of which $21.5 million had maturities of one year or less. Although we have a significant portion of our deposits in shorter-term certificates of deposit, we monitor activity on these accounts and, based on historical experience and our current pricing strategy, we believe we will retain a large portion of these accounts upon maturity. Our deposits are obtained predominantly from the areas in which our branch offices are located. We rely on our favorable locations, customer service and competitive pricing to attract and retain these deposits. In addition, we continue to maintain our relationships developed as a credit union. These relationships include employer organizations that provide payroll deduction from their employees to Ohio Central Savings. These relationships also allow Ohio Central Savings to distribute marketing materials and solicit deposits and loans from their employees. We do accept certificates of deposit in excess of $100,000 for which we may provide preferential rates, however, we generally do not solicit such deposits as they are more difficult to retain than core deposits. We do not solicit brokered deposits. The following tables set forth the distribution of total deposit accounts, by account type, for the periods indicated. <TABLE> YEARS ENDED SEPTEMBER 30, ---------------------------------------------------------------------------- 2007 2006 ------------------------------------ ------------------------------------ AVERAGE WEIGHTED AVERAGE WEIGHTED BALANCE PERCENT AVERAGE RATE BALANCE PERCENT AVERAGE RATE --------- --------- ------------ --------- --------- ------------ (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> NOW deposits.................. $ 5,370 11.53% 2.34% $ 5,847 13.44% 2.14% Savings deposits.............. 9,986 21.45 0.25 11,492 26.42 0.25 Money market deposits......... 1,600 3.44 1.49 2,112 4.85 1.37 Certificates of deposit....... 29,606 63.58 4.80 24,054 55.29 4.38 --------- --------- --------- --------- Total deposits.............. $ 46,562 100.00% 3.46% $ 43,505 100.00% 2.84% ========= ========= ========= ========= </TABLE> 21 The following table sets forth, by interest rate ranges, information concerning certificates of deposit at the dates indicated. <TABLE> AT SEPTEMBER 30, 2007 ----------------------------------------------------------------------------- PERIOD TO MATURITY ----------------------------------------------------------------------------- LESS THAN ONE TO TWO TO MORE THAN PERCENT ONE YEAR TWO YEARS THREE YEARS THREE YEARS TOTAL OF TOTAL ----------- ----------- ------------- ------------- --------- ---------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Interest Rate Range: 2.00% and below...... $ 825 $ -- $ -- $ -- $ 825 2.76% 2.01% to 3.00%....... 1,021 34 -- -- 1,055 3.53 3.01% to 4.00%....... 470 108 56 63 697 2.33 4.01% to 5.00%....... 2,222 1,606 1,612 470 5,910 19.78 5.01% to 6.00%....... 16,904 2,220 427 1,826 21,377 71.55 6.01% and above...... 11 -- -- -- 11 0.05 ----------- ----------- ------------- ------------- --------- ---------- Total................ $ 21,453 $ 3,968 $ 2,095 $ 2,359 $ 29,875 100.00% =========== =========== ============= ============= ========= ========== </TABLE> The following table sets forth certificates of deposit by time remaining until maturity as of September 30, 2007. <TABLE> MATURITY -------------------------------------------------- 3 MONTHS OVER 3 TO OVER 6 TO OVER 12 OR LESS 6 MONTHS 12 MONTHS MONTHS TOTAL ---------- ---------- ----------- ---------- --------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Certificates of deposit of less than $100,000..... $ 4,644 $ 5,865 $ 6,698 $ 5,434 $ 22,641 Certificates of deposit of $100,000 or more (1)... 872 1,567 1,801 2,994 7,234 ---------- ---------- ----------- ---------- --------- Total of certificates of deposit.................. $ 5,516 $ 7,432 $ 8,499 $ 8,428 $ 29,875 ========== ========== =========== ========== ========= </TABLE> ----------------------- (1) The weighted average interest rates for these accounts, by maturity period, are: 4.36% for 3 months or less; 4.87% for over 3 to 6 months; 4.94% for over 6 to 12 months; and 4.93% for over 12 months. The overall weighted average interest rate for accounts of $100,000 or more was 4.85%. BORROWINGS. Our borrowings consist of Federal Home Loan Bank advances and repurchase agreements. The following table sets forth information concerning balances and interest rates on our borrowings at the dates and for the periods indicated. <TABLE> AT OR FOR THE YEARS ENDED SEPTEMBER 30, --------------------------- 2007 2006 ------------ ------------ (DOLLARS IN THOUSANDS) <S> <C> <C> Balance at end of period............................... $ 10,950 $ 10,200 Average balance during period.......................... 10,796 11,642 Maximum outstanding at any month end................... 16,700 16,450 Weighted average interest rate at end of period........ 5.66% 6.18% Average interest rate during period.................... 5.86% 5.45% </TABLE> At September 30, 2007, we had access to additional Federal Home Loan Bank advances of up to $16.7 million. In addition $22.8 million of our automobile loan portfolio was pledged to the Federal Reserve Bank of Cleveland to secure up to $18.2 million in potential advances. COMPETITION We face significant competition in both originating loans and attracting deposits. The Dublin and Cleveland metropolitan areas and the counties in which we operate have a high concentration of financial institutions, many of which are significantly larger institutions and have greater financial resources than we do, and many of which are our competitors to varying degrees. We have less than a 1% market share of both deposits and loans in these markets. Our competition for loans comes principally from commercial banks, savings banks, mortgage banking companies, credit unions, leasing companies, insurance companies and other financial service companies. Our most direct competition for deposits has historically come from commercial banks, savings banks and credit unions. We face additional competition for deposits from nondepository competitors such as the mutual fund industry, securities and brokerage firms and insurance companies. 22 We seek to meet this competition by emphasizing personalized banking and the advantage of local decision-making in our banking business. Specifically, we promote and maintain relationships and build customer loyalty within local communities by emphasizing decentralized regional management and by focusing our marketing and community involvement on the specific needs of individual neighborhoods. In addition, we seek to meet competition for loans by offering our current and prospective borrowers preferred rates and terms on deposit products for new lending business. We do not rely on any individual, group, or entity for a material portion of our deposits. EMPLOYEES As of September 30, 2007, we had thirteen full-time employees and seven part-time employees. The employees are not represented by a collective bargaining unit and we consider our relationship with our employees to be good. SUBSIDIARY ACTIVITIES Ohio Central Savings has one wholly-owned subsidiary, AutoARM(R), which was incorporated in August, 2003. AutoARM(R) was formed to provide loan origination funding and/or servicing for new and used automobiles for third party financial institutions. Its programs were initially developed as part of our automobile loan sales and servicing relationship with Third Federal. For the year ended September 30, 2007, AutoARM(R) had no net income. The program continues to be actively marketed and we have agreements with 15 other institutions. The program was conceived with the flexibility to serve more than one institution allowing Ohio Central Savings to pursue additional business. EXPENSE AND TAX ALLOCATION Ohio Central Savings has entered into an agreement with OC Financial, Inc. to provide it with certain administrative support services for compensation not less than the fair market value of the services provided. In addition, Ohio Central Savings and OC Financial, Inc. have entered into an agreement to establish a method for allocating and for reimbursing the payment of their consolidated tax liability. FEDERAL AND STATE TAXATION FEDERAL TAXATION GENERAL. OC Financial, Inc. and Ohio Central Savings file consolidated federal income tax returns and are subject to federal income taxation in the same general manner as other corporations with some exceptions discussed below. The following discussion of federal income taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to OC Financial, Inc. and Ohio Central Savings. Ohio Central Savings has never been audited by the Internal Revenue Service. OVERALL METHOD OF ACCOUNTING. For federal income tax purposes, Ohio Central Savings currently reports its income and expenses on the accrual method of accounting and uses a tax year ending September 30th. BAD DEBT RESERVES. For fiscal years beginning before December 31, 1996, savings institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for nonqualifying loans was computed using the experience method. 23 Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts for large corporations and the percentage of taxable income method for tax years beginning after 1995 and required savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves. Since Ohio Central Savings was not a taxable entity prior to December 31, 1996, it has no such reserves. NET OPERATING LOSS CARRYOVERS. A financial institution may carry back net operating losses to the preceding two taxable years (five years for losses incurred in 2001 and 2002) and forward to the succeeding 20 taxable years. At September 30, 2007, Ohio Central Savings has net operating loss carryforwards expiring in 2025, 2026 and 2027 in the amounts of $95,413, $566,710 and $739,763 respectively. CORPORATE DIVIDENDS. OC Financial, Inc. may exclude from its taxable income 100% of dividends received from Ohio Central Savings as a member of the same affiliated group of corporations. Any future dividends paid by OC Financial, Inc. to its stockholders will be taxable as dividend income to those stockholders. STATE AND LOCAL TAXATION MARYLAND STATE TAXATION. As a Maryland business corporation, OC Financial, Inc. is required to file annual property tax returns and pay annual fees to the State of Maryland. Since OC Financial, Inc. does not earn income in Maryland, it is exempt from Maryland corporate income tax. OHIO STATE TAXATION. OC Financial, Inc. is subject to the Ohio corporation franchise tax, which is a tax measured by both net income and net worth. In general, the tax liability is the greater of 5.1% on the first $50,000 of computed Ohio taxable income and 8.5% of computed Ohio taxable income in excess of $50,000, or 0.40% of taxable net worth. Various formulas determine the jurisdictions to which total net income and total net worth are apportioned or allocated. The minimum tax is $50 per year and maximum tax liability as measured by net worth is limited to $150,000 per year. A special litter tax also applies to all corporations, including OC Financial, Inc., subject to the Ohio corporation franchise tax. If a corporation pays franchise tax on the basis of net income, the litter tax is equal to 0.11% of the first $50,000 of computed Ohio taxable income and 0.22% of computed Ohio taxable income in excess of $50,000. If a corporation pays franchise tax on the basis of net worth, the litter tax is equal to 0.014% of taxable net worth. This litter tax does not apply to "financial institutions," such as Ohio Central Savings. A statutory exemption from the net worth tax is available to OC Financial, Inc. if certain conditions are satisfied. OC Financial, Inc. expects to qualify for this exemption, which would restrict its tax liability to the tax measured by net income. Ohio Central Savings is a financial institution for Ohio tax purposes. Accordingly, it must pay tax imposed annually at a rate of 1.3% of its apportioned book net worth, determined under generally accepted accounting principles, less any statutory deduction. As a financial institution, Ohio Central Savings does not pay any Ohio tax based upon net income. SUPERVISION AND REGULATION GENERAL Ohio Central Savings is examined and supervised by the Office of Thrift Supervision. This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the Federal Deposit Insurance Corporation's deposit insurance funds and depositors. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Following completion of its examination, the federal agency critiques the institution's operations and assigns its rating (known as an institution's CAMELS rating). Under federal law, an institution may not disclose its CAMELS rating to the public. Ohio Central Savings also is a member of and owns stock in the Federal Home Loan Bank of Cincinnati, which is one of the twelve regional banks in the Federal Home Loan Bank System. Ohio Central Savings also is regulated to a 24 lesser extent by the Board of Governors of the Federal Reserve System, governing reserves to be maintained against deposits and other matters. The Office of Thrift Supervision examines us and prepares reports for the consideration of our board of directors on any operating deficiencies. Ohio Central Savings' relationship with its depositors and borrowers also is regulated to a great extent by federal laws, especially in matters concerning the ownership of deposit accounts and the form and content of Ohio Central Savings' mortgage documents. Any change in these laws or regulations, whether by the Federal Deposit Insurance Corporation, the Office of Thrift Supervision or the United States Congress, could have a material adverse impact on OC Financial, Inc. and Ohio Central Savings and their operations. FEDERAL BANKING REGULATION BUSINESS ACTIVITIES. A federal savings association derives its lending and investment powers from the Home Owners' Loan Act, as amended, and the regulations of the Office of Thrift Supervision. Under these laws and regulations, Ohio Central Savings may invest in mortgage loans secured by residential real estate without limitation as a percentage of assets and non-residential real estate loans which may not in the aggregate exceed 400% of capital, commercial business loans up to 20% of assets in the aggregate and consumer loans up to 35% of assets in the aggregate together with certain types of debt securities and certain other assets. Ohio Central Savings also may establish subsidiaries that may engage in activities not otherwise permissible for Ohio Central Savings, including real estate investment. CAPITAL REQUIREMENTS. Office of Thrift Supervision regulations require savings associations to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for associations receiving the highest rating on the CAMELS rating system) and an 8% risk-based capital ratio. The risk-based capital standard for savings associations requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision, based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders' equity (including retained earnings), certain non-cumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. Additionally, a savings association that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the recourse back to the savings association. Ohio Central Savings does not typically engage in asset sales. At September 30, 2007, Ohio Central Savings' capital exceeded all applicable requirements. LOANS-TO-ONE BORROWER. A federal savings association generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of September 30, 2007, Ohio Central Savings was in compliance with the loans-to-one borrower limitations. QUALIFIED THRIFT LENDER TEST. As a federal savings association, Ohio Central Savings must satisfy the qualified thrift lender, or "QTL," test. Under the QTL test, Ohio Central Savings must maintain at least 65% of its "portfolio assets" in "qualified thrift investments" in at least nine of the most recent 12-month period. "Portfolio assets" generally means total assets of a savings institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association's business. 25 "Qualified thrift investments" include various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, and loans for personal, family, household and certain other purposes up to a limit of 20% of portfolio assets. "Qualified thrift investments" also include 100% of an institution's credit card loans, education loans and small business loans. Ohio Central Savings also may satisfy the QTL test by qualifying as a "domestic building and loan association" as defined in the Internal Revenue Code. A savings association that fails the qualified thrift lender test must either convert to a bank charter or operate under specified restrictions. At September 30, 2007, Ohio Central Savings satisfied this test. CAPITAL DISTRIBUTIONS. Office of Thrift Supervision regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the capital account. A savings association must file an application for approval of a capital distribution if: o the total capital distributions for the applicable calendar year exceed the sum of the association's net income for that year to date plus the association's retained net income for the preceding two years; o the association would not be at least adequately capitalized following the distribution; o the distribution would violate any applicable statute, regulation, agreement or Office of Thrift Supervision-imposed condition; or o the association is not eligible for expedited treatment of its filings. Even if an application is not otherwise required, every savings association that is a subsidiary of a holding company must still file a notice with the Office of Thrift Supervision at least 30 days before the Board of Directors declares a dividend or approves a capital distribution. The Office of Thrift Supervision may disapprove a notice or application if: o the association would be undercapitalized following the distribution; o the proposed capital distribution raises safety and soundness concerns; or o the capital distribution would violate a prohibition contained in any statute, regulation or agreement. In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution, if after making such distribution the institution would be undercapitalized. LIQUIDITY. A federal savings association is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation. COMMUNITY REINVESTMENT ACT AND FAIR LENDING LAWS. All savings associations have a responsibility under the Community Reinvestment Act and related regulations of the Office of Thrift Supervision to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In connection with its examination of a federal savings association, the Office of Thrift Supervision is required to assess the association's record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An association's failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the Office of Thrift Supervision, as well as other federal regulatory agencies and the Department of Justice. Ohio Central Savings received a satisfactory Community Reinvestment Act rating in its most recent federal examination. 26 BRANCHING. Subject to certain limitations, the Home Owners' Loan Act and Office of Thrift Supervision regulations permit federally chartered savings associations to establish branches in any state of the United States. The authority to establish such a branch is available: (i) in states that expressly authorize branches of savings associations located in another state; and (ii) to an association that qualifies as a "domestic building and loan association" under the Code, which imposes qualification requirements similar to those for a qualified thrift lender under the Home Owners' Loan Act. The authority for a federal savings association to establish an interstate branch network would facilitate a geographic diversification of the association's activities. This authority under the Home Owners' Loan Act and Office of Thrift Supervision regulations preempts any state law purporting to regulate branching by federal savings associations. PRIVACY STANDARDS. Effective July 2001, financial institutions, including Ohio Central Savings, became subject to Office of Thrift Supervision regulations implementing the privacy protection provisions of the Gramm-Leach-Bliley Act. These regulations require Ohio Central Savings to disclose its privacy policy, including identifying with whom it shares "non-public personnel information" to customers at the time of establishing the customer relationship and annually thereafter. The regulations also require Ohio Central Savings to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, Ohio Central Savings is required to provide its customers with the ability to "opt-out" of having Ohio Central Savings share their non-public personal information with unaffiliated third parties before it can disclose such information, subject to certain exceptions. The implementation of these regulations did not have a material adverse effect on Ohio Central Savings. The Gramm-Leach-Bliley Act also provides for the ability of each state to enact legislation that is more protective of consumers' personal information. We cannot predict whether Ohio may enact such legislation or what impact, if any, it would have if enacted. On February 1, 2001, the Office of Thrift Supervision and other federal banking agencies adopted guidelines establishing standards for safeguarding customer information to implement certain provisions of the Gramm-Leach-Bliley Act. The guidelines describe the agencies' expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer. Ohio Central Savings has implemented these guidelines and such implementation did not have a material adverse effect on our operations. TRANSACTIONS WITH RELATED PARTIES. A federal savings association's authority to engage in transactions with its affiliates is limited by Office of Thrift Supervision regulations and by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W. An affiliate is a company that controls, is controlled by, or is under common control with an insured depository institution such as Ohio Central Savings. OC Financial, Inc. is an affiliate of Ohio Central Savings. In general, loan transactions between an insured depository institution and its affiliate are subject to certain quantitative and collateral requirements. In this regard, transactions between an insured depository institution and its affiliate are limited to 10% of the institution's unimpaired capital and unimpaired surplus for transactions with any one affiliate and 20% of unimpaired capital and unimpaired surplus for transactions in the aggregate with all affiliates. Collateral in specified amounts ranging from 100% to 130% of the amount of the transaction must usually be provided by affiliates in order to receive loans from the association. In addition, Office of Thrift Supervision regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. The Office of Thrift Supervision requires savings associations to maintain detailed records of all transactions with affiliates. 27 Ohio Central Savings' authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Ohio Central Savings' capital. In addition, extensions of credit in excess of certain limits must be approved by Ohio Central Savings' Board of Directors. ENFORCEMENT. The Office of Thrift Supervision has primary enforcement responsibility over federal savings institutions and has the authority to bring enforcement action against all "institution-affiliated parties," including stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action by the Office of Thrift Supervision may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The Federal Deposit Insurance Corporation also has the authority to terminate deposit insurance or to recommend to the Director of the Office of Thrift Supervision that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take action under specified circumstances. STANDARDS FOR SAFETY AND SOUNDNESS. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate risk exposure, asset growth, compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. PROMPT CORRECTIVE ACTION REGULATIONS. Under the prompt corrective action regulations, the Office of Thrift Supervision is required and authorized to take supervisory actions against undercapitalized savings associations. For this purpose, a savings association is placed in one of the following five categories based on the association's capital: o well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital); o adequately capitalized (at least 4% leverage capital, 4% Tier 1 risk-based capital and 8% total risk-based capital); o undercapitalized (less than 8% total risk-based capital, 4% Tier 1 risk-based capital or 3% leverage capital); o significantly undercapitalized (less than 6% total risk-based capital, 3% Tier 1 risk-based capital or 3% leverage capital); and o critically undercapitalized (less than 2% tangible capital). 28 Generally, the banking regulator is required to appoint a receiver or conservator for an association that is "critically undercapitalized" within specific time frames. The regulations also provide that a capital restoration plan must be filed with the Office of Thrift Supervision within 45 days of the date an association receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." The criteria for an acceptable capital restoration plan include, among other things, the establishment of the methodology and assumptions for attaining adequately capitalized status on an annual basis, procedures for ensuring compliance with restrictions imposed by applicable federal regulations, the identification of the types and levels of activities the savings association will engage in while the capital restoration plan is in effect, and assurances that the capital restoration plan will not appreciably increase the current risk profile of the savings association. Any holding company for the savings association required to submit a capital restoration plan must guarantee the lesser of: an amount equal to 5% of the savings association's assets at the time it was notified or deemed to be under capitalized by the Office of Thrift Supervision, or the amount necessary to restore the savings association to adequately capitalized status. This guarantee remains in place until the Office of Thrift Supervision notifies the savings association that it has maintained adequately capitalized status for each of four consecutive calendar quarters, and the Office of Thrift Supervision has the authority to require payment and collect payment under the guarantee. Failure by a holding company to provide the required guarantee will result in certain operating restrictions on the savings association, such as restrictions on the ability to declare and pay dividends, pay executive compensation and management fees, and increase assets or expand operations. The Office of Thrift Supervision may also take any one of a number of discretionary supervisory actions against undercapitalized associations, including the issuance of a capital directive and the replacement of senior executive officers and directors. At September 30, 2007, Ohio Central Savings met the criteria for being considered "well-capitalized." INSURANCE OF DEPOSITS. Our deposit accounts are insured by the FDIC generally up to a maximum of $100,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. Ohio Central Savings' deposits, therefore, are subject to FDIC insurance assessments. The FDIC regulations assess insurance premiums based on an institution's risk. Under this assessment system, the FDIC evaluates the risk of each financial institution based on its supervisory rating, financial ratios, and long-term debt issuer rating. The rates for nearly all of the financial institutions industry vary between five and seven cents for every $100 of domestic deposits. Federal law requires the FDIC to establish a deposit reserve ratio for the deposit insurance fund of between 1.15% and 1.50% of estimated deposits. The FDIC has designated the reserve ratio for the deposit insurance fund through the first quarter of 2008 at 1.25% of estimated insured deposits. Effective March 31, 2006, the FDIC merged the Bank Insurance Fund and the Savings Association Insurance Fund into a single fund called the Deposit Insurance Fund. In addition to the FDIC assessments, the Financing Corporation ("FICO") is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended September 30, 2007, the annualized FICO assessment was equal to 1.14 basis points for each $100 in domestic deposits maintained at an institution. PROHIBITIONS AGAINST TYING ARRANGEMENTS. Federal savings associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution. FEDERAL HOME LOAN BANK SYSTEM. Ohio Central Savings is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of Cincinnati, Ohio Central Savings is required to acquire and hold shares of capital stock in the Federal Home Loan Bank of Cincinnati in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its borrowings from the Federal Home Loan Bank of Cincinnati, whichever is greater. As of September 30, 2007, Ohio Central Savings was in compliance with this requirement. 29 FEDERAL RESERVE SYSTEM. The Federal Reserve Board regulations require savings associations to maintain noninterest-earning reserves against their transaction accounts, such as negotiable order of withdrawal and regular checking accounts. At September 30, 2007, Ohio Central Savings was in compliance with these reserve requirements. THE USA PATRIOT ACT. The USA PATRIOT Act (the "Act") gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Certain provisions of the Act impose affirmative obligations on a broad range of financial institutions, including savings associations, like Ohio Central Savings. These obligations include enhanced anti-money laundering programs, customer identification programs and regulations relating to private banking accounts or correspondence accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States). SARBANES-OXLEY ACT OF 2002 In July 2002, the Sarbanes-Oxley Act of 2002 (the "Act") was enacted, which implemented legislative reforms intended to address corporate and accounting fraud. In addition to the establishment of a new accounting oversight board that will enforce auditing, quality control and independence standards and will be funded by fees from all publicly traded companies, the Act places certain restrictions on the scope of services that may be provided by accounting firms to their public company audit clients. Any non-audit services being provided to a public company audit client will require preapproval by the company's audit committee. In addition, the Act makes certain changes to the requirements for partner rotation after a period of time. The Act requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission, subject to civil and criminal penalties if they knowingly or willingly violate this certification requirement. In addition, under the Act, counsel will be required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself. Under the Act, longer prison terms will apply to corporate executives who violate federal securities laws; the period during which certain types of suits can be brought against a company or its officers is extended; and bonuses issued to top executives prior to restatement of a company's financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan "blackout" periods, and loans to company executives (other than loans by financial institutions permitted by federal rules and regulations) are restricted. In addition, a provision directs that civil penalties levied by the Securities and Exchange Commission as a result of any judicial or administrative action under the Act be deposited to a fund for the benefit of harmed investors. The Federal Accounts for Investor Restitution provision also requires the Securities and Exchange Commission to develop methods of improving collection rates. The legislation accelerates the time frame for disclosures by public companies, as they must immediately disclose any material changes in the