<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
------------------ -----------------
Commission file number 0-24120
WESTERN OHIO FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 31-1403116
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
28 East Main Street
Springfield, Ohio 45501-0719
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (513) 325-4683
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 $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES X . NO ___.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K.[ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the closing price of such stock on
the Nasdaq National Stock Market as of February 21, 1997, was approximately
$49.7 million. (The exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant.)
As of February 21, 1997, there were issued and outstanding 2,312,088
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Portions of the Annual Report to Stockholders for
the fiscal year ended December 31, 1996.
Part III of Form 10-K - Portions of the Proxy Statement for Annual Meeting of
Stockholders.
<PAGE>
PART I
Item 1. Business
General
Western Ohio Financial Corporation (the "Company"), a Delaware
corporation, was organized in March 1994 for the purpose of becoming the savings
and loan holding company. The Company owns all of the outstanding stock of
Springfield Federal Savings Bank ("Springfield"), Mayflower Federal Savings Bank
("Mayflower") and Seven Hills Savings Association ("Seven Hills") (collectively,
the "Banks").
The Company and each of its subsidiaries are subject to comprehensive
regulation, examination and supervision by the Office of Thrift Supervision,
Department of the Treasury ("OTS") and by the Federal Deposit Insurance
Corporation ("FDIC"). Springfield, Mayflower and Seven Hills are members of the
Federal Home Loan Bank ("FHLB") System and their deposits are backed by the full
faith and credit of the United States Government and are insured up to
applicable limits by the FDIC.
The Company's primary market area covers Clark, Greene and Hamilton
Counties, Ohio and parts of contiguous counties, and is serviced through its
main office in Springfield, Ohio and nine branch offices in Cincinnati, Enon,
New Carlisle, Springfield, Yellow Springs and Beavercreek. At December 31, 1996,
the Company had total assets of $392.8 million, deposits of $233.2 million and
stockholders' equity of $54.0 million, or 13.7% of total assets. The Company's
Common Stock is traded on the Nasdaq National Market under the symbol "WOFC."
On March 29, 1996, the Company acquired Mayflower. Each share of
Mayflower Financial Corporation, Cincinnati, Ohio, was exchanged for $28.50 in
cash, resulting in an approximate $10.0 million aggregate transaction. Mayflower
had total assets of $53.8 million as of March 31, 1996 following its acquisition
by the Company. The $53.8 million in total assets included core deposit goodwill
of $0.9 million and other goodwill of $2.4 million. The planned amortization of
goodwill for 1996 and 1997 will be $220,000 and $281,000, respectively. At
December 31, 1996, Mayflower had total assets of $68.8 million.
On November 12, 1996, the Company acquired Seven Hills. Each share of
Seven Hills Financial Corporation, Cincinnati, Ohio, was exchanged for $19.69782
in cash, resulting in an approximate $10.5 million aggregate transaction. Seven
Hills had total assets of $46.8 million as of December 31, 1996 following its
acquisition by the Company. The $46.8 million in total assets included core
deposit goodwill of $.9 million and other goodwill of $0. The planned
amortization of goodwill for 1996 and 1997 will be $25,000 and $146,000,
respectively. At December 31, 1996, Seven Hills had total assets of $46.8
million.
The Company has been, and intends to continue to be, a
community-oriented financial holding company offering a variety of financial
services to meet the needs of the communities it serves. The principal business
of the Company consists of attracting retail deposits from the general public
and investing those funds primarily in one-to-four family residential mortgage,
construction and commercial and multi-family real estate loans and, to a lesser
extent, consumer and commercial business loans, all primarily within the
Company's market areas.
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The executive offices of the Company are located at 28 East Main
Street, Springfield, Ohio 45501-0719, and the telephone number at that address
is (513) 325-4683.
Market Area
Springfield's primary market area consists of Clark County and parts of
contiguous counties. Clark County is located in west-central Ohio. Clark
County's economic environment consists of a traditional industrial base, its
service and support industries and its close proximity to a major U.S. military
installation, Wright Patterson Air Force Base. Navistar Truck Manufacturers is
the largest employer in the county and its Clark County operations have provided
stable employment for the area. Clark State Community College and Wittenberg
University are also two major employers in the area. In 1995, Clark County had
an unemployment rate of 4.4% as compared to the State of Ohio at 4.9% and the
United States at 5.2%. The unemployment rate in Clark County increased to 5.7%
in 1996 as compared with 4.9% for the State of Ohio and 5.4% for the United
States.
Clark County's population, the rate of increase of which lagged behind
the State of Ohio and national averages, nonetheless can be characterized as
stable, with a population of approximately 148,000 people. From 1990 to 1995,
Clark County's population grew .24%. For 1996, Clark County's median housing
value was approximately $88,265. Additionally, Clark County's per capita income
also lagged behind the State of Ohio and national averages. In the event that
real estate prices in Ohio or the market area substantially weaken or economic
conditions decline, the Company may be adversely affected.
The Company has also entered the Cincinnati, Ohio area market through
affiliations with mortgage brokers and the acquisitions of Mayflower and Seven
Hills. The Cincinnati metropolitan area, centered in the southwest corner of
Ohio, has a population of approximately 1.8 million. The economic base is
generally considered well diversified and stable. Employment is provided by
companies representing a broad spectrum of industrial sectors, including
services, wholesale/retail, manufacturing, government, and finance. Several
"Fortune 500" companies have headquarters in the Cincinnati area. The
unemployment rate is approximately 4.0% and the median home price is $96,500.
Lending Activities
General. While the Company primarily focuses its lending activities on
the origination of loans secured by first mortgages on owner-occupied,
one-to-four family residences, it also originates multi-family and commercial
real estate and construction loans and, to a lesser extent, consumer and
commercial business loans in its market area. At December 31, 1996, the
Company's net loan portfolio totalled $287.6 million. At December 31, 1996, the
Company's gross loan portfolio totalled $295.1 million, of which $242.6 million,
or 82.2%, was comprised of permanent loans secured by one-to-four family
residences.
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The department head of the loan department, and the chief underwriter
and her assistant have the authority to approve loans of up to $214,600, and up
to $249,999 with the approval of the Company's Executive Vice President, Finance
or Executive Vice President, Lending. The Executive Committee of the Board of
Directors review all completed applications and all applications that have been
denied to assure all avenues have been explored and that the applicant has been
treated in a fair manner. The Executive Committee also approves all loans in
excess of $250,000, any non-conforming loans, loan applications in excess of the
Company's loan to value policy limitations, and any exceptions to the Company's
lending policy.
The aggregate amount of loans that the Banks are permitted to make
under applicable federal regulations to any one borrower, including related
entities, or the aggregate amount that the Banks could have invested in any one
real estate project, is generally the greater of 15% of unimpaired capital and
surplus or $500,000. See "Regulation - Federal Regulation of Savings
Institutions." At December 31, 1996, the maximum amount which Springfield,
Mayflower and Seven Hills could have loaned to any one borrower and the
borrower's related entities was $4.5 million, $1.5 million and $1.4 million,
respectively. At December 31, 1996, the Banks did not have any loans outstanding
in excess of such limitation. The largest principal balance and commitment to
lend to any one borrower, or group of related borrowers at Springfield Federal
was $1.5 million secured by a medical building and a fast food restaurant, with
an additional $200,000 represented by a commercial line of credit. In addition,
three borrowers had a combined principal and commitment outstanding of $3.6
million at December 31, 1996. The first borrower's outstanding credit is secured
by a 74-unit apartment complex. The second borrower's outstanding credit is
secured by one to four family residences and land. The third borrower's
outstanding credit is secured by a mini warehouse storage facility and a 34-unit
apartment complex. The largest principal balance and commitment to lend to any
one borrower, or group of related borrowers at Mayflower, was $818,000 secured
by one to four family residential structures. The largest principal balance and
commitment to lend to any one borrower, or group of related borrowers at Seven
Hills, was $1.3 million secured by multiple warehouse facilities. The security
properties on all of these loans are located in the Company's market areas.
These loans are performing in accordance with their terms. The Banks did not
have any other loans to one borrower in excess of $1.0 million at December 31,
1996.
Management always reserves the right to change its emphasis on the
amount or type of lending in which the Company engages to adjust to market or
other factors, including changes in the Company's asset/liability management
policies.
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Loan Portfolio Composition. The following information concerning the
composition of the Company's loan portfolio in dollar amounts and in percentages
(before deductions for loans in process, deferred fees and discounts and
allowance for losses) as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ---------------- --------------- --------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
----------------- ---------------- --------------- --------------- ------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One-to-four family............... $242,600 82.21% $131,262 84.93% $89,184 83.37% $ 86,816 83.97% $ 89,224 88.14%
Multi-family..................... 12,476 4.23 4,502 2.91 4,194 3.92 3,466 3.35 2,851 2.82
Commercial real estate........... 20,531 6.96 10,531 6.81 8,463 7.91 6,002 5.81 5,469 5.40
Construction..................... 10,965 3.71 5,405 3.50 3,252 3.04 6,312 6.10 2,945 2.91
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans....... 286,572 97.11 151,700 98.15 105,093 98.24 102,596 99.23 100,489 99.27
-------- ------ ------- ------ ------- ------ -------- ------ -------- ------
Other Loans:
Consumer Loans:
Home equity.................... 2,188 0.74 474 0.31 77 0.07 --- --- --- ---
Deposit account................ 384 0.13 363 0.24 465 0.43 750 0.72 659 0.65
Home improvement............... 31 0.01 --- --- 6 0.01 29 0.03 58 0.06
Other secured.................. 3,689 1.25 942 0.61 788 0.74 --- --- --- ---
Retail mobile home............. --- --- 21 0.01 24 0.02 15 0.02 27 0.02
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans........... 6,292 2.13 1,800 1.17 1,360 1.27 794 0.77 744 0.73
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial business loans........ 2,244 0.76 1,056 0.68 525 0.49 --- --- --- ---
-------- ------ -------- ------ -------- ------- -------- ------ -------- ------
Total other loans............. 8,536 2.89 2,856 1.85 1,885 1.76 794 0.77 744 0.73
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans................... $295,108 100.00% $154,556 100.00% $106,978 100.00% $103,390 100.00% $101,233 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Less:
Loans in process................. (5,651) (2,768) (954) (3,225) (1,061)
Deferred fees and discounts...... (130) (538) (981) (1,291) (1,571)
Allowance for losses............. (1,716) (774) (774) (774) (37)
-------- -------- -------- -------- --------
Total loans receivable, net... $287,611 $150,476 $104,269 $ 98,100 $ 98,564
======== ======== ======== ======== ========
</TABLE>
5
<PAGE>
The following table shows the composition of the Company's loan
portfolio by fixed and adjustable rates at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1996 1995 1994
--------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent
--------- -------- --------- -------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
- -----------------
Real estate:
One-to-four family...................... $155,232 52.61% $111,117 71.89% $ 89,184 83.37%
Multi-family............................ 5,036 1.71 3,873 2.51 4,194 3.92
Commercial.............................. 9,276 3.14 9,307 6.02 8,463 7.91
Construction............................ 7,649 2.59 5,105 3.30 3,252 3.04
-------- ------ -------- ----- -------- -------
Total fixed-rate real estate loans... 177,193 60.05 129,402 83.72 105,093 98.24
-------- ------ -------- ------ -------- ------
Commercial business...................... 178 .06 401 0.26 --- ---
Consumer................................. 3,642 1.23 1,326 0.86 1,282 1.20
-------- ------ -------- ------ -------- ------
Total fixed-rate loans......... 181,013 61.34 131,129 84.84 106,375 99.44
-------- ------ -------- ------ -------- ------
Adjustable-Rate Loans
- ---------------------
Real estate:
One-to-four family...................... 87,368 29.61 20,145 13.04 --- ---
Multi family............................ 7,440 2.52 629 0.41 --- ---
Commercial.............................. 11,255 3.81 1,224 0.79 --- ---
Construction............................ 3,316 1.12 300 0.19 --- ---
-------- ------ -------- ------ -------- ------
Total adjustable-rate real
estate loans....................... 109,379 37.06 22,298 14.43 --- ---
-------- ------ -------- ----- -------- -------
Commercial business..................... 2,066 .70 655 0.42 525 0.49
Consumer................................. 2,650 .90 474 0.31 77 0.07
-------- ------ -------- ------ -------- ------
Total adjustable-rate loans.......... 114,095 38.66 23,427 15.16 602 0.56
-------- ------ -------- ------ -------- ------
Total loans.......................... 295,108 100.00% 154,556 100.00% 106,978 100.00%
-------- ====== -------- ====== -------- ======
Less:
- -----
Loans in process......................... (5,651) (2,768) (954)
Deferred fees and discounts.............. (130) (538) (981)
Allowance for loan losses................ (1,716) (774) (774)
-------- ------- -------
Total loans receivable, net........... $287,611 $150,476 $104,269
======== ======== ========
</TABLE>
<PAGE>
[RESTUBBED FROM TABLE ABOVE]
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1993 1992
---------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
- -----------------
Real estate:
One-to-four family...................... $ 86,816 83.97% $88,916 87.83%
Multi-family............................ 3,466 3.35 2,851 2.82
Commercial.............................. 6,002 5.81 5,411 5.35
Construction............................ 6,312 6.10 2,945 2.91
-------- ------ ------- ------
Total fixed-rate real estate loans... 102,596 99.23 100,123 98.91
-------- ------ ------- ------
Commercial business...................... --- --- --- ---
Consumer................................. 794 0.77 744 0.73
-------- ------ ------- ------
Total fixed-rate loans......... 103,390 100.00 100,867 99.64
-------- ------ ------- ------
Adjustable-Rate Loans
- ---------------------
Real estate:
One-to-four family...................... --- --- 308 0.30
Multi family............................ --- --- --- ---
Commercial.............................. --- --- --- ---
Construction............................ --- --- 58 0.06
-------- ------ ------- ------
Total adjustable-rate real
estate loans....................... --- --- 366 0.36
-------- ------ ------- ------
Commercial business..................... --- --- --- ---
Consumer................................. --- --- --- ---
-------- ------ ------- ------
Total adjustable-rate loans.......... --- --- 366 0.36
-------- ------ ------- ------
Total loans.......................... 103,390 100.00% 101,233 100.00%
------- ====== ------- ======
Less:
- -----
Loans in process......................... (3,225) (1,061)
Deferred fees and discounts.............. (1,291) (1,571)
Allowance for loan losses................ (774) (37)
-------- -------
Total loans receivable, net........... $ 98,100 $98,564
======== =======
</TABLE>
6
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The following schedule illustrates the maturities of the Company's loan
portfolio at December 31, 1996. Loans which have adjustable or renegotiable
interest rates are shown as maturing in the period during which the contract is
due. The schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
------------------------------------------------
Multi-family Commercial business
One-to-four family and Commercial and Consumer Total
---------------------- ---------------------- --------------------- --------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
-------- -------- -------- -------- ------- -------- -------- -------
(Dollars in Thousands)
Due During
Periods Ending
December 31,
------------
<C> <C> <C> <C> <C>
1997(1)................ $ 31,115 % $9,872 % $2,554 % $ 43,541 %
1998................... 6,773 2,253 143 9,169
1999................... 6,963 3,338 1,007 11,308
2000 and 2001.......... 6,267 4,572 1,471 12,310
2002 to 2006........... 17,587 3,678 3,048 24,313
2007 to 2016........... 69,281 9,728 313 79,322
2017 and following..... 114,319 826 --- 115,145
</TABLE>
- ----------
(1) Includes demand loans and loans having no stated maturity.
At December 31, 1996, the total amount of loans due after December 31,
1997 which have predetermined interest rates is $173.7 million, while $77.9
million loans due after such dates have floating or adjustable interest rates.
One-to-Four Family Residential Mortgage and Construction Lending. The
Company focuses its lending efforts on the origination of loans secured by first
mortgages on owner-occupied, one-to-four family residences. Residential loan
originations of this type are generated by the Company's marketing efforts, its
present customers, walk-in customers and referrals from real estate agents and
builders. At December 31, 1996, the Company's one-to-four family residential
permanent mortgage loans totalled $242.6 million, or 82.21% of the Company's
total gross loan portfolio.
At December 31, 1996, $155.2 million of the Company's one-to-four
family residential mortgage loans, or 52.61% of the Company's total gross loan
portfolio, had fixed interest rates. Historically, the Company has offered only
fixed-rate loans due to customer demand. For asset/liability management
purposes, the Company has recently begun offering adjustable-rate loans. From
time to time, the Company may purchase loans secured by one-to-four family
residences. See "- Originations, Purchases and Sales of Loans and
Mortgage-Backed Securities."
The Company currently originates up to a maximum of 30-year, owner
occupied one-to-four family residential mortgage loans in amounts up to 97% of
the appraised value of the
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security property provided that private mortgage insurance is obtained in an
amount sufficient to reduce the Company's exposure to at or below the 80%
loan-to-value level. The Company also offers loans on owner occupied one-to-four
family residences in amounts up to 85% of the appraised value of the property
without requiring private mortgage insurance. Interest rates charged on these
loans are priced on a regular basis according to market conditions. Residential
loans do not include prepayment penalties. The Company also originates up to a
maximum of 30-year one-to-four family residential loans to nonowner-occupants,
with loan-to-value ratios of up to 80%.
In underwriting one-to-four family residential real estate loans, the
Company evaluates, among other things, both the borrower's ability to make
monthly payments and the value of the property securing the loan. Currently,
most properties securing real estate loans made by the Company are appraised by
independent licensed fee appraisers approved by the Board of Directors. In the
past, however, the Company has utilized in-house appraisers. The Company
requires borrowers to obtain title, fire and property insurance (including flood
insurance, if necessary) in an amount not less than the amount of the loan. In
prior years, the Company had accepted title opinions. Real estate loans
originated by the Company generally contain a "due on sale" clause allowing the
Company to declare the unpaid principal balance due and payable upon the sale or
disposition of the secured property.
The Company originates a limited number of loans to finance the
construction of one-to-four family residences. At December 31, 1996, the Company
had loans to finance the construction of one-to-four family residences totaling
$9.6 million, or 3.3% of the Company's loan portfolio. Substantially all of
these loans are made to individuals who propose to occupy the premises upon
completion of construction. Construction loans are generally structured for up
to a 30-year term with a six month construction phase, during which the borrower
pays interest only. Upon completion of the construction phase, these loans
continue as permanent loans of the Company. Loan proceeds are disbursed in
increments as construction progresses and as inspections warrant.
Multi-Family and Commercial Real Estate Lending. The Company has also
engaged in commercial and multi-family real estate lending in its market areas.
At December 31, 1996, the Company had $33.0 million of permanent commercial and
multi-family real estate loans, which represented 11.2% of the Company's gross
loan portfolio. The Company also has $1.4 million in construction loans secured
by multi-family and commercial real estate.
The Company's commercial and multi-family real estate loan portfolio is
secured primarily by apartment buildings, office buildings, strip shopping
centers, motels, nursing homes, restaurants and churches located in the
Company's market area. Multi-family and commercial real estate loans generally
have terms that do not exceed 15 years. Generally, the loans are made in amounts
up to 75% of the appraised value of the secured property. The Company analyzes
the financial condition of the borrower, the borrower's credit history, and the
reliability and predictability of the cash flow generated by the property
securing the loan. Currently, appraisals on properties securing multi-family and
commercial real estate loans originated by the Company are performed by
independent licensed fee appraisers.
8
<PAGE>
Construction loans on multi-family and commercial real estate projects
are structured to be converted to permanent loans at the end of the construction
phase, which generally runs up to 12 months. These construction loans have rates
and terms which generally match any permanent multi-family or commercial real
estate loan then offered by the Company, except that during the construction
phase, the borrower pays interest only. These loans generally provide for the
payment of interest and loan fees from loan proceeds. At December 31, 1996, the
Company had $1.4 million of multi-family and commercial real estate construction
loans.
Construction and development loans are obtained principally through
continued business from developers and builders who have previously borrowed
from the Company, as well as referrals from existing customers and walk-in
customers. The application process includes a submission to the Company of
accurate plans, specifications and costs of the project to be
constructed/developed. These items are used as a basis to determine the
appraised value of the subject property. Loans are based on the lesser of
current appraised value and/or the cost of construction (land plus building).
In addition, the Company from time to time has purchased loans secured
by multi-family real estate. The Company, however, purchased no multi-family
real estate loans in fiscal 1996.
Loans secured by commercial and multi-family real estate properties are
generally larger and involve a greater degree of credit risk than one-to-four
family residential mortgage loans. Because payments on loans secured by
commercial real estate properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject to adverse conditions in the real estate market or the economy. If the
cash flow from the project is reduced (for example, if leases are not obtained
or renewed), the borrower's ability to repay the loan may be impaired.
Consumer Lending. The Company offers secured consumer loans, including
home improvement loans, home equity loans, loans secured by savings deposits and
equity securities, and retail mobile home loans. The Company has plans to expand
its consumer lending portfolio. The Company currently originates all of its
consumer loans in its primary market area. The Company originates consumer loans
on a direct basis by extending credit directly to the borrower and on an
indirect basis by extending credit through dealers.
At December 31, 1996, deposit loans were $384,000 or 0.1% of the
Company's gross loan portfolio. Home equity loans were $2.6 million or 0.9% of
the Company's gross loan portfolio as of that date.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. Loans secured by
deposit accounts at the Company are currently originated for up to 90% of the
account balance with a hold placed on the account restricting the withdrawal of
the account balance.
The underwriting standards employed by the Company for consumer loans,
other than loans secured by deposits, include an application, a determination of
the applicant's payment history on other debts and an assessment of ability to
meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is a primary consideration, the
9
<PAGE>
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than do residential
mortgage loans, particularly in the case of consumer loans which are unsecured.
In such cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss, depreciation or fluctuation in
value. In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be affected by
adverse personal circumstances. Furthermore, the application of various federal
and state laws, including bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans. At December 31, 1996, all of the Company's
consumer loans were performing in accordance with their terms. However, there
can be no assurance that delinquencies will not occur in the future.
Commercial Business Lending. Commercial business loans have been added
to the list of the Company's products. The outstanding balance of unsecured
commercial lines of credit was $1.2 million as of December 31, 1996. Commercial
loans secured other than by mortgage had outstanding balances of $1.0 million as
of December 31, 1996. The purpose of these loans will generally be for working
capital or expansion of existing businesses. These loans have been priced at
prime plus a specified spread, or at the one year constant maturity treasury
index plus a specified spread. All of these loans are payable on demand.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property the value of which tends to
be more easily ascertainable, commercial business loans typically are made on
the basis of the borrower's ability to make repayment from the cash flow of the
borrower's business. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself (which, in turn, is likely to be dependent upon the general
economic environment). The Bank's commercial business loans may be secured by
business assets. However, the collateral securing the loans may depreciate over
time, may be difficult to appraise and may fluctuate in value based on the
success of the business.
Originations, Purchases and Sales of Loans and Mortgage-Backed Securities
Loan originations are developed from advertising, continuing business
with depositors and borrowers, soliciting realtors and builders, walk-in
customers and correspondent relationships in other markets. Loans are originated
by salaried loan officers, field originators compensated by salary and
commission and outside mortgage companies. Loans are underwritten at the main
office of the Company and then submitted for approval to the head of the loan
department, the chief underwriter and her assistant, the Executive Vice
President, Finance, the Executive Vice President, Lending, and the Chief
Executive Officer, or the Executive Committee of the Board of Directors, as
appropriate, depending on the type and amount of the loan.
While the Company offers fixed-rate loans and has recently introduced
adjustable-rate loans, its ability to originate loans is dependent upon the
relative customer demand for loans in its market, which is affected by the
interest rate environment and other factors. In fiscal 1996,
10
<PAGE>
the Company originated $32.3 million in fixed-rate loans and $50.8 million in
adjustable-rate loans. In order to mitigate the consequences of an almost
entirely fixed-rate mortgage portfolio, during 1994, management invested $18.3
million of the proceeds of Springfield's mutual to stock conversion and the
Company's initial offering of Common Stock in adjustable-rate obligations. In
addition, the Company purchased a total of $10.6 million agency-backed
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduit ("REMIC") investments in fiscal 1995, all of which had adjustable rates.
The Company did not purchase any mortgage-backed securities in 1995. All of the
CMO and REMIC securities purchased in 1995 were purchased to be held in the
Company's available-for-sale portfolio. The Company also purchased $8.8 million
of loans in 1995 secured by owner-occupied, one-to-four family residences, most
of which had fixed interest rates. The Company has sold $17.8 million fixed rate
loans during 1996 and none during the preceding three years.
The Company also sold $21.8 million in CMO, REMIC and mortgage-backed
securities during 1996.
In periods of economic uncertainty, the ability of financial
institutions, including the Company, to originate large dollar volumes of real
estate loans may be substantially reduced or restricted, with a resultant
decrease in related loan origination fees, other fee income and operating
earnings.
11
<PAGE>
The following table shows the origination, purchase, sale and repayment
activities of the Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1996 1995 1994
------- ------- --------
(In Thousands)
Originations by type:
<S> <C> <C> <C>
Adjustable-rate:
Construction.................................... $11,256 $ 300 $ ---
Real estate - one to four family............... 33,075 11,380 ---
- multi-family...................... 357 629 ---
- commercial........................ 2,567 1,224 ---
Commercial business............................. 1,860 130 525
Consumer - home equity.......................... 1,562 397 77
Other........................................... 119 --- ---
Fixed-rate:
Commercial business............................. 388 457 ---
Consumer........................................ 3,422 430 ---
Real estate - one-to-four family................ 28,029 38,043 20,629
- multi-family...................... 500 584 488
- commercial........................ 60 --- 2,464
-------- ------- -------
Total loans originated................... 83,195 53,574 24,183
-------- ------- -------
Purchases:
Acquisitions:
Loans........................................... 66,433 --- ---
MBS............................................. 20,729 --- ---
One-to-four family................................ 45,236 8,765 ---
Real estate - commercial.......................... --- --- ---
- multifamily......................... --- --- 600
Consumer.......................................... --- --- 824
Mortgage derivative securities.................... --- 10,636 5,342
Mortgage-backed securities........................ --- --- 15,476
-------- ------- -------
Total purchased............................ 32,398 19,401 22,242
-------- ------- -------
Sales and Repayments:
Loans:
Loan sale....................................... 17,783 --- ---
MBS sale........................................ 21,770 --- ---
MBS payments.................................... 7,567 --- ---
Loan payments................................... 37,730 --- ---
Mortgage-backed securities........................ --- --- ---
Principal repayments.............................. --- 22,638 28,080
Effect of classification to available-for-sale.... --- (975) 57
-------- ------ -------
Total reductions........................... 84,850 21,663 28,137
-------- ------- -------
Increase (decrease) in other items, net........... (2,484) 81 2,466
-------- ------- -------
Net increase (decrease)................... $128,259 $51,393 $20,754
======== ======= =======
</TABLE>
12
<PAGE>
Non-Performing Assets and Classified Assets
When a borrower fails to make a required payment on real estate secured
loans and consumer loans a notice is sent 30 days after payment is due. At 60
days after the payment is due, the Company generally institutes collection
procedures by notice and/or telephone. In most cases, delinquencies are cured
promptly; however, if a loan secured by real estate or other collateral has been
delinquent for more than 90 days, satisfactory payment arrangements must be
adhered to or the Company will initiate proceedings for foreclosure or
repossession.
When a loan becomes delinquent 90 days or more or when the collection
of principal or interest becomes doubtful, the Company will place the loan on a
non-accrual status and, as a result, previously accrued interest income on the
loan is taken out of current income. The loan will remain on a non-accrual
status as long as the loan is 90 days or more delinquent.
The following table sets forth information concerning delinquent loans
at December 31, 1996. The amounts presented represent the total remaining
principal balances of the related loans, rather than the actual payment amounts
which are overdue and are reflected as a percentage of the type of loan
category.
<TABLE>
<CAPTION>
Loans Delinquent For:
---------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and over
---------------------------------------------------------------------------
Number Amount Percent Number Amount Percent Number Amount Percent
---------------------------------------------------------------------------
(Dollars in Thousands)
Real Estate:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family 50 $1,900 .78% 12 $ 450 .19% 21 $ 768 .32%
Non-residential .. 1 210 1.02 -- -- -- 3 1,266 6.75
Consumer ......... 1 9 .13 4 540 8.05 1 10 .15
</TABLE>
13
<PAGE>
The table below sets forth the amounts and categories of non-performing
assets in the Company's loan portfolio. For all periods presented, the Company
has had no troubled debt restructurings (which involve forgiving a portion of
interest or principal on any loans or making loans at a rate materially less
than that of market rates). Foreclosed assets include assets acquired in
settlement of loans.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One-to-four family ................ $ 674 $ 579 $ 75 $ 235 $ 312
Consumer .......................... 10 -- -- -- 346
Commercial real estate ............ 1,266 -- -- 294 --
------ ------ ------ ------ ------
Total .......................... 1,950 579 75 529 658
------ ------ ------ ------ ------
Accruing loans delinquent more
than 90 days ....................... 94 -- -- -- --
Foreclosed assets ................... 55 -- -- -- --
------ ------ ------ ------ ------
Total non-performing assets ......... $2,099 $ 579 $ 75 $ 529 $ 658
====== ====== ====== ====== ======
Total as a percentage of total assets .52% .25% .04% .36% .44%
=== === === === ===
</TABLE>
For the year ended December 31, 1996, gross interest income that would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to approximately $84,000. The Company did not
include any interest income on such loans in 1996.
Non-Performing Assets. Included in the table above in nonaccruing
one-to-four family loans at December 31, 1996, were 14 loans secured by
single-family residences located in the Company's primary market area. Also
included in non-performing assets are one consumer loan and three commercial
real estate loans.
Other Loans of Concern. Not categorized as non-performing assets at
December 31, 1996, were $809,000 of potential problem loans. The potential
problem loans consisted of 15 single family residences and two commercial loans.
Classified Assets. Federal regulations provide for the classification
of loans and other assets such as debt and equity securities considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." 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 the savings bank 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 "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
14
<PAGE>
Assets which do not currently expose the savings bank to sufficient risk to
warrant classification in one of the aforementioned categories, but possess
weaknesses, are required to be designated "special mention" by management.
When a savings association classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings bank classifies problem
assets as "loss," it is required either to establish a specific allowance for
losses equal to 100% of that portion of the asset so classified or to charge-off
such amount. A savings bank's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
savings bank's District Director at the regional OTS office, who may order the
establishment of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Bank regularly
reviews the loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations. On the basis of
management's review of its assets, at December 31, 1996, the Bank had classified
a total of $1.5 million of its assets as substandard, $0 as doubtful and $0 as
loss. At December 31, 1996, total classified assets were $2.3 million, or 0.6%
of the Bank's assets.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at
fair value. If fair value at the date of foreclosure is lower than the balance
of the related loan, the difference will be charged-off to the allowance at the
time of transfer. Valuations are periodically updated by management and if the
value declines, a specific provision for losses on such property is established
by a charge to operations.
Although management believes that it uses the best information
available to determine the allowances, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowances will be the result
of periodic loan, property and collateral reviews and thus cannot be predicted
in advance. At December 31, 1996, the Company had a total allowance for loan
losses of $1.7 million, or 0.6% of loans receivable, net. See Notes 1 and 4 of
the Notes to Consolidated Financial Statements in the Company's Annual Report to
Stockholders filed as Exhibit 13 hereto.
15
<PAGE>
The following table sets forth an analysis of the Company's allowance
for loan losses.
Year Ended December 31,
1996 1995 1994 1993 1992
-----------------------------------------
(Dollars in Thousands)
Balance at beginning of period $ 774 $ 774 $774 $ 37 $ 37
Beginning balance acquisition . 577 -- -- -- --
Charge-offs:
One-to-four family .......... 34 6 -- -- --
Recoveries .................... -- -- -- -- --
------ ------ ---- ----- ------
Net charge-offs ............... 34 6 -- -- --
Additions charged to operations 399 6 -- 737 --
------ ------ ---- ----- ------
Balance at end of period ...... $1,716 $ 774 $774 $ 774 $ 37
====== ====== ==== ===== ======
Ratio of net charge-offs during
the period to average loans
outstanding during the period .01% NM(1) --% --% --%
====== ====== ==== ===== ======
Ratio of net charge-offs during
the period to average non-
performing assets ............ 1.66% 2.99% --% --% --%
====== ====== ==== ===== ======
- ---------------
(1) Not meaningful.
The distribution of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One-to-four family.......................... $ 636 82.07% $287 84.93% $223 83.37%
Multi-family................................ 197 4.23 59 2.91 63 3.92
Commercial real estate...................... 504 6.96 253 6.81 210 7.91
Consumer.................................... 81 2.27 18 1.17 17 1.27
Construction................................ 46 3.71 22 3.50 58 3.04
Classified assets........................... 214 -- 108 -- 128 ----
Commercial.................................. 38 .76 21 0.68 12 0.49
Unallocated................................. -- -- 6 -- 62 --
------ ------ ----- ------ ---- ------
Total.................................. $1,716 100.00% $774 100.00% $774 100.00%
====== ====== ===== ====== ==== ======
</TABLE>
16
<PAGE>
Investment Activities
The Banks must maintain minimum levels of investments that qualify as
liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Bank has generally
maintained its liquid assets above the minimum requirements imposed by the OTS
regulations and at a level believed adequate to meet requirements of normal
daily activities, repayment of maturing debt and potential deposit outflows. As
of December 31, 1996, the Banks' liquidity ratios (liquid assets as a percentage
of net withdrawable savings deposits and current borrowings) was in compliance
with applicable regulations. See "Regulation - Liquidity."
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Company is to invest funds
among various categories of investments and maturities based upon the Company's
need for liquidity, to achieve the proper balance between its desire to minimize
risk and maximize yield, to provide collateral for borrowings, and to fulfill
the Company's asset/liability management policies.
At December 31, 1996, the Company's cash and interest-bearing deposits
in other financial institutions totaled $15.6 million, or 4.0% of total assets.
The Company also has a $5.9 million investment in the common stock of the FHLB
of Cincinnati in order to satisfy the requirement for membership therein.
OTS regulations restrict investments in corporate debt and equity
securities by the Bank. These restrictions include prohibitions against
investments in the debt securities of any one issuer in excess of 15% of the
Bank's unimpaired capital and unimpaired surplus as defined by federal
regulations, plus an additional 10% if the investments are fully secured by
readily marketable collateral. At December 31, 1996, the Banks were in
compliance with this regulation. See "Regulation - Federal Regulation of Savings
Institutions" for a discussion of additional restrictions on the Bank's
investment activities.
In November 1995, the Financial Accounting Standards Board issued a
special report, A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities, which provided technical
interpretations and guidance relating to the adoption of SFAS No. 115. The guide
allowed an enterprise to reassess the appropriateness of the classifications of
all securities held at that time and to account for any resulting
reclassification at fair value in accordance with SFAS No. 115. One-time
reassessments had to be made no later than December 31, 1995. Accordingly,
management reclassified approximately $32.1 million of mortgage-backed
securities from "held to maturity" to "available for sale" on December 14, 1995,
to reflect its intention regarding those investments. See Note 2 to the Notes to
Consolidated Financial Statements.
17
<PAGE>
The following table sets forth the composition of the Company's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Investment Securities:
U.S. government securities................ $ 794 1.50% $ --- ---% $5,884 18.27%
Federal agency obligations................ 35,298 66.79 12,039 45.06 10,015 31.10
------- ------ -------- ------ ------- ------
Subtotal............................... 36,092 68.29 12,039 45.06 15,899 49.37
------- ------ -------- ------ ------- ------
FHLB stock.................................. 5,862 11.09 1,602 6.00 1,293 4.01
FHLMC stock................................. 3 --- --- --- 990 3.07
------- ------ -------- ------ ------- -------
Total investment securities
and FHLB/FHLMC stock.................. 41,957 79.38 13,641 51.06 18,182 56.45
------- ------ -------- ------ ------- -------
Average remaining 4.78 years .24 years .56 years
life of investment securities..............
Other Interest-Earning Assets:
Interest-bearing deposits with banks...... 2,747 5.20 2,000 7.49 1,700 5.28
Federal funds sold........................ 8,148 15.42 11,075 41.45 12,325 38.27
------- ------ ------- ------ ------- ------
Total.................................. $52,852 100.00% $26,716 100.00% $32,207 100.00%
======= ====== ======= ====== ======= ======
Average remaining life or term to
repricing of investment securities and
other interest-earning assets, excluding
FHLB/FHLMC stock........................... 3.77 years .12 years .30 years
</TABLE>
The composition and maturities of the investment securities portfolio,
excluding FHLB of Cincinnati stock, are indicated in the following table.
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------
Less Than 1 to 5 Over 5
1 Year Years Years Total Investment Securities
---------- ---------- ---------- ------------------------------
Book Value Book Value Book Value Book Value Market Value
---------- ---------- ---------- ---------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
U.S. government securities........................... $ 299 $ 495 $ --- $ 794 $ 799
Federal agency obligations........................... 1,000 3,898 30,400 35,298 34,842
------ ------ ------- ------- -------
Total investment securities.......................... $1,299 $4,393 $30,400 $36,092 $35,641
====== ====== ======= ======= =======
Weighted average yield............................... 4. 91% 5.985% 7.325% 6.29% 6.29%
</TABLE>
Mortgage-Backed Securities. The Company had a $36.8 million portfolio
of mortgage-backed securities at December 31, 1996, all of which were insured or
guaranteed by the Federal National Mortgage Association ("FNMA") or the Federal
Home Loan Mortgage Corporation ("FHLMC"). Accordingly, management believes that
the Company's mortgage-backed securities
18
<PAGE>
are generally more resistant to credit problems than loans, which generally lack
such insurance or guarantees. Because these securities represent a passthrough
of principal and interest from underlying individual 30-year mortgages, such
securities do present prepayment risk. Any such individual security contains
mortgages that can be prepaid at any time over the life of the security. In a
rising interest rate environment the underlying mortgages are likely to extend
their lives versus a stable or declining rate environment. A declining rate
environment can result in rapid prepayment. There is no certainty as to the
security life or speed of prepayment. The geographic makeup and correlated
economic conditions of the underlying mortgages also play an important role in
determining prepayment. In addition to prepayment risk, interest rate risk is
inherent in holding any debt security. As interest rates rise the value of the
security declines and conversely as interest rates decline values rise.
Adjustable-rate mortgage-backed securities have the advantage of moving their
interest rate within limits with the contractual index used, subject to the risk
of prepayment. Interest rate adjustments to $20.9 million of the Company's
adjustable-rate mortgage-backed securities are tied to the One Year Constant
Maturity Treasury Index. At December 31, 1996, 86.6% of the Company's
mortgage-backed securities consisted of adjustable-rate mortgage-backed
securities.
Mortgage-backed securities can serve as collateral for borrowings and,
through sales and repayments, as a source of liquidity. For information
regarding the carrying and market values of the Company's mortgage-backed
securities portfolio, see Note 3 of the Notes to Consolidated Financial
Statements in the Company's Annual Report to Stockholders filed as Exhibit 13
hereto. Under the OTS risk-based capital requirement, mortgage-backed securities
have a risk weight of 20% (or 0% in the case of Government National Mortgage
Association securities) in contrast to the 50% risk weight carried by
residential loans. (See "Regulation.") Management has purchased mortgage-backed
securities in order to supplement loan originations and in 1994 converted a
portion of its fixed-rate mortgage-backed securities to adjustable-rate
mortgage-backed securities to mitigate the consequences of an entirely
fixed-rate mortgage portfolio. The CMO and REMIC securities held by the Company
carry certain risks. The principal represented by such securities may be repaid
over a longer period than that assumed in management's initial purchase analysis
which may hamper certain aspects of the Company's asset/liability management
strategy. In addition, these securities have maximum interest rate caps. If and
as market interest rate levels approach these caps, the value of the underlying
security will decline.
As of December 31, 1996, the Company held $11.0 million of CMO and
REMIC adjustable-rate securities. These securities are tied to the thirty day
London Interbank Offered Rate. Management purchased these investments to
supplement loan originations and to mitigate the consequences of its
predominantly fixed-rate mortgage portfolio.
19
<PAGE>
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities at December 31, 1996.
<TABLE>
<CAPTION>
Due in Due in Due In Over December 31, 1996
1 to 3 years 5 to 10 years 10 Years Balance Outstanding
------------ ------------- ---------- --------------------
(In Thousands)
<S> <C> <C> <C> <C>
FHLMC.......................... $367 $251 $14,347 $14,965
FNMA........................... --- --- 6,853 6,853
CMOs and REMICs................ --- --- 11,028 11,028
GNMA........................... --- --- 3,997 3,997
----- ----- ------- --------
$367 $251 $36,225 $36,843
==== ==== ======= =======
</TABLE>
Sources of Funds
General. The Company's primary sources of funds are deposits,
borrowings, repayment of loan principal, sales and repayments of mortgage-backed
securities, maturing investments in certificates of deposit, and funds provided
from operations. Borrowings, consisting of FHLB advances, may be used at times
to compensate for seasonal reductions in deposits or deposit inflows at less
than projected levels, and may be used on a longer-term basis to support
expanded lending activities.
Deposits. The Company offers a variety of deposit accounts having a
wide range of interest rates and terms. The Company's deposits consist of
passbook and statement savings accounts, NOW, and money market fund accounts,
and certificate accounts ranging in terms from six months to ten years. The
Company only solicits deposits from its market area and does not currently use
brokers to obtain deposits. The Company relies primarily on competitive pricing
policies, advertising and customer service to attract and retain these deposits.
The variety of deposit accounts offered by the Company has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Company has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The Company endeavors to manage the pricing of its deposits in
keeping with its asset/liability management and profitability objectives. The
ability of the Company to attract and maintain certificates of deposit accounts
and the rates paid on these deposits has been and will continue to be
significantly affected by market conditions.
20
<PAGE>
The following table sets forth the savings flows at the Company during
the periods indicated. The flow of deposits is influenced significantly by
general economic conditions, changes in money market and prevailing interest
rates, and competition.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1996 1995 1994
--------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance............................................ $139,129 $117,529 $125,620
Net deposits (withdrawals)................................. 80,678(1) 15,359 (12,942)
Interest credited.......................................... 13,396 6,241 4,851
--------- --------- ---------
Ending balance............................................. $233,203 $139,129 $117,529
======== ======== ========
Net increase (decrease).................................... $ 94,074 $ 21,600 $ (8,091)
======== ========= =========
Percent increase (decrease)................................ 67.6% 18.4% (6.44)%
==== ==== ========
</TABLE>
__________________
(1) Net deposit increase is primarily due to the Company's acquisition of
Mayflower and Seven Hills during fiscal 1996.
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Company for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1996 1995 1994
-------------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Transactions and Savings Deposits:
- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Passbook and Savings Accounts.............. $ 27,981 12.00% $24,437 17.56% $28,162 23.96%
NOW Accounts................................ 10,074 4.32 4,269 3.07 3,556 3.03
Money Market Accounts....................... 19,664 8.43 7,046 5.07 9,440 8.03
------- ------ -------- ------ --------- ------
Total Non-Certificates...................... 57,719 24.75 35,752 25.70 41,158 35.02
-------- ------ -------- ------ --------- ------
Certificates:
- -------------
0.00 - 3.49%.............................. 971 .42 465 .33 2,656 2.26
3.50 - 5.49%.............................. 45,927 19.70 27,171 19.53 42,145 35.86
5.50 - 7.49%.............................. 121,281 52.00 68,859 49.49 30,903 26.29
7.50 - 9.49%.............................. 7,305 3.13 6,882 4.95 667 .57
-------- ------ -------- ------ ---------- ------
Total Certificates.......................... 175,484 75.25 103,377 74.30 76,371 64.98
-------- ------ -------- ------ --------- ------
Total Deposits.............................. $233,203 100.00% $139,129 100.00% $117,529 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
21
<PAGE>
The following table shows rate and maturity information for the
Company's certificates of deposit as of December 31, 1996.
<TABLE>
<CAPTION>
0.00- 3.50- 5.50- 7.50- Percent
3.49% 5.49% 7.49% 9.49% Total of Total
------- ------- ------- ------- ------- --------
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending :
- --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, 1997................................... $259 $14,654 $ 6,317 $ 1 $ 21,231 12.10%
June 30, 1997.................................... 232 12,580 16,985 --- 29,797 16.98
September 30, 1997............................... 121 5,149 15,204 4,606 25,080 14.29
December 31, 1997................................ 129 2,953 32,286 2,154 37,522 21.38
March 31, 1998................................... 19 4,801 13,742 --- 18,562 10.58
June 30, 1998.................................... 33 2,627 8,312 --- 10,972 6.25
September 30, 1998............................... 23 972 8,823 --- 9,818 5.59
December 31, 1998................................ 16 1,103 6,236 42 7,397 4.22
March 31, 1999................................... 51 453 1,919 --- 2,423 1.38
June 30, 1999.................................... 50 282 2,972 121 3,425 1.95
September 30, 1999............................... 17 --- 4,168 --- 4,185 2.38
December 31, 1999................................ 21 2 1,864 --- 1,887 1.08
Thereafter....................................... --- 351 2,453 381 3,185 1.81
---- ------- -------- ------ -------- -----
Total......................................... $971 $45,927 $121,281 $7,305 $175,484 100.00%
==== ======= ======== ====== ======== ======
Percent of total.............................. 0.55% 26.17% 69.11% 4.16% 100.00%
==== ===== ===== ==== ======
</TABLE>
The following table indicates the amount of the Company's certificates
of deposit and other deposits by time remaining until maturity as of December
31, 1996.
<TABLE>
<CAPTION>
Maturity
---------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less
than $100,000.......................... $18,897 $27,339 $55,944 $56,092 $158,272
Certificates of deposit of
$100,000 or more....................... 2,334 2,458 6,884 5,536 17,212
------- -------- -------- -------- --------
Total certificates of deposit........... $21,231 $29,797 $62,828 $61,628 $175,484
======= ======= ======= ======= ========
</TABLE>
Borrowings. Another source of funds includes advances from the FHLB of
Cincinnati. As members of the FHLB of Cincinnati, the Banks are required to own
capital stock and are authorized to apply for advances. Each FHLB credit program
has its own interest rate, which may be fixed or variable, and includes a range
of maturities. The FHLB of Cincinnati may prescribe the acceptable uses to which
these advances may be put, as well as limitations in the size of the advances
and repayment provisions.
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During the years ended December 31, 1994 and 1993, the Banks utilized
FHLB advances to fund 30-year mortgages for asset/liability management purposes
and to supplement deposit outflows. During 1995, the Banks utilized a higher
level and a wider variety of FHLB advances than it had in the past. These
advances were utilized for increased investments and lending. The FHLB advances
were secured by the Bank's blanket agreement for advances and security agreement
and are not tied to specific investments or loans. Fixed rate advances of $20
million were taken to fund the purchase of callable securities. The remainder of
the borrowing was variable-rate or fixed-rate in nature and was intended to fund
mortgages.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances for the periods indicated.
Year Ended December 31,
----------------------------------
1996 1995 1994
-------- ------- ------
(In Thousands)
Maximum Balance:
FHLB advances........................ $102,602 $31,528 $3,689
Average Balance:
FHLB advances........................ $ 76,837 $12,985 $2,510
The following table sets forth certain information as to the Bank's
FHLB advances at the dates indicated.
December 31,
---------------------------------
1996 1995 1994
-------- ------- ------
(Dollars in Thousands)
FHLB advances...............................$102,602 $31,528 $3,689
Weighted average interest rate of
FHLB advances..............................5.84% 6.11% 7.03%
Service Corporation Activities
Savings institutions generally may invest a limited percentage of their
assets in service corporations. In addition, federal savings institutions may
invest up to 50% of their regulatory capital in conforming loans to their
service corporations. In addition to investments in service corporations,
federal savings institutions are permitted to invest an unlimited amount in
operating subsidiaries engaged solely in activities in which federal savings
institutions may engage directly.
At December 31, 1996, Springfield had a net book value investment of
$20,000 in Springfield-Home Community Reinvestment Corporation
("Springfield-Home"), a 50%-owned service corporation, for low income housing
lending.
During fiscal 1996, Springfield Federal created an operating subsidiary
known as West Central Financial Services. The focus of this organization will be
to generate consumer lending
23
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that does not overlap with the Company's current consumer lending. Springfield
capitalized the organization with $0.2 million. Additional money to fund loans
will be provided as an extension of credit to West Central Financial Services by
Springfield.
Competition
The Company faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from other commercial banks, savings institutions,
credit unions and mortgage bankers making loans secured by real estate located
in the Company's market areas. The Company competes for real estate and other
loans principally on the basis of the quality of services it provides to
borrowers, and loan fees it charges, and the types of loans it originates.
The Company attracts all of its deposits through its retail banking
offices, primarily from the communities in which those retail banking offices
are located; therefore, competition for those deposits is principally from other
commercial banks, savings associations, credit unions and brokerage firms
located in the same communities. The Company competes for these deposits by
offering a variety of deposit accounts at competitive rates, convenient business
hours, and convenient branch locations with interbranch deposit and withdrawal
privileges at each.
REGULATION
General
Springfield and Mayflower are federally chartered savings associations
and Seven Hills is an Ohio-chartered savings institution, the deposits of which
are federally insured and backed by the full faith and credit of the United
States Government. Accordingly, the Banks are subject to broad federal
regulation, and in Seven Hills' case state regulation, extending to all its
operations. The Banks are members of the FHLB of Cincinnati and subject to
certain limited regulation by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). As a savings and loan holding company, the
Company also is subject to federal regulation and oversight. The purpose of the
regulation of the Company and other holding companies is to protect subsidiary
savings associations. The Banks are members of the Savings Association Insurance
Fund ("SAIF"), which together with the Bank Insurance Fund (the "BIF") are the
two deposit insurance funds administered by the FDIC, and their deposits are
insured by the FDIC. As a result, the FDIC has certain regulatory and
examination authority over the Banks.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
24
<PAGE>
Federal Regulation of Savings Institutions
The OTS has extensive authority over the operations of federal savings
institutions. As part of this authority, Springfield and Mayflower are required
to file periodic reports with the OTS and are subject to periodic examinations
by the OTS and the FDIC. When these examinations are conducted by the OTS and
the FDIC, the examiners may require an institution to provide for higher general
or specific loan loss reserves. All savings associations are subject to a
quarterly assessment, based upon the savings association's total assets, to fund
OTS operations. Springfield's and Mayflower's OTS assessment for the fiscal year
ended December 31, 1996 was $64,000 and $9,000, respectively.
The OTS also has extensive enforcement authority over all federal
savings institution and their holding companies, including the Company. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. Except under certain
circumstances, public disclosure of final enforcement actions by the OTS is
required.
In addition, the investment, lending and branching authority of the
Springfield and Mayflower are prescribed by federal laws and they are prohibited
from engaging in any activities not permitted by such laws. For instance, no
savings association may invest in non-investment grade corporate debt
securities. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of total capital, except with approval of the OTS. Federal savings
associations are also generally authorized to branch nationwide. The Banks are
in compliance with the noted restrictions.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action.
As a savings and loan association chartered under the laws of Ohio,
Seven Hills is subject to regulation, examination and oversight by the
Superintendent of the Ohio Division of Financial Institutions. Because Seven
Hills' deposits are insured by the FDIC, Seven Hills also is subject to
regulation and examination by the OTS, as its primary federal regulator, and by
the FDIC. Seven Hills must file periodic reports with the Ohio Superintendent
and the OTS concerning its activities and financial condition. Examinations are
conducted periodically by these federal and state regulators to determine
whether Seven Hills is in compliance with various regulatory requirements and is
operating in a safe and sound manner. Because it accepts federally insured
deposits and offers transaction accounts, Seven Hills is also subject to certain
regulations issued by the Federal Reserve Board. Seven Hills is a member of the
FHLB of Cincinnati.
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<PAGE>
Regulatory Capital Requirements. Seven Hills is required by OTS
regulations to meet certain minimum capital requirements. The following table
sets forth the amount and percentage level of regulatory capital of Seven Hills
at December 31, 1996, and the amount by which it exceeds the minimum
requirements. Tangible and core capital are reflected as a percentage of
adjusted total assets. Risk-based (or total) capital, which consists of core and
supplementary capital, is reflected as a percentage of risk-weighted assets.
At December 30, 1996
--------------------------------
Amount Percent
-------------- -------
(In thousands)
Tangible capital....................... $8,744 19.07%
Requirement............................ 688 1.5
------ ----
Excess................................. $8,056 17.57%
====== ====
Core capital........................... $8,744 19.0%
Requirement............................ 1,376 3.0
------ ----
Excess................................. $7,368 16.07%
------ =====
Risk-based capital..................... $8,960 40.99%
Risk-based requirement................. 1,749 8.0
------ ----
Excess................................. $7,211 32.99%
====== =====
Current capital requirements call for tangible capital of 1.5% of
adjusted total assets, core capital (which for Seven Hills consists solely of
tangible capital) of 3.0% of adjusted total assets and risk-based capital (which
for Seven Hills consists of core capital and general valuation allowances) of 8%
of risk-weighted assets (assets are weighted at percentage levels ranging from
0% to 100% depending on their relative risk). The OTS has proposed to amend the
core capital requirement so that those associations that do not have the highest
examination rating and exceed an acceptable level of risk will be required to
maintain core capital of from 4% to 5%, depending on the association's
examination rating and overall risk. Seven Hills does not anticipate that it
will be adversely affected if the core capital requirement regulation is amended
as proposed.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, through the implementation of that component has been
delayed. Pursuant to that requirement, a savings association would have to
measure that impact of an immediate 200 basis point change in interest rates on
the value of its portfolio, as determined under the methodology established by
the OTS. If the measured interest rate risk is above the level deemed normal
under the regulation, the association will be required to deduct one-half of
that excess exposure from its total capital when determining its level of
risk-based capital. In general, an association with less than $300 million in
assets and a risk-based implementation of the interest rate risk component, the
OTS may adjust the risk-based capital requirement on an individualized basis to
take into account risks due to concentrations of credit and non-traditional
activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively
26
<PAGE>
lower defined capital category, an association is subject to more restrictive
and numerous mandatory or discretionary regulatory actions or limits, and the
OTS has less flexibility in determining how to resolve the problems of the
institution. In addition, the OTS generally can downgrade an association's
capital category, notwithstanding its capital level, if, after notice and
opportunity for hearing, the association is deemed to be engaging in an unsafe
or unsound practice because it has not corrected deficiencies that resulted in
it receiving a less than satisfactory examination rating on matters other than
capital or it is deemed to be in an unsafe or unsound condition. All
undercapitalized associations must submit a capital restoration plan to the OTS
within 45 days after it becomes undercapitalized. Such associations will be
subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging in
new lines of business. Furthermore, critically undercapitalized institutions
must be placed in conservatorship or receivership within 90 days of reaching
that capitalization level, except under limited circumstances. Seven Hills'
capital at December 31, 1996, met the standards for a well-capitalized
institution.
The Ohio Superintendent is responsible for the regulation and
supervision of Ohio savings and loan associations in accordance with the laws of
the State of Ohio and imposes assessments on Ohio associations based on their
asset size cover the cost of supervision and examination. Ohio law prescribes
the permissible investments and activities of Ohio savings and loan
associations, including the types of lending that such associations may engage
in and the investments real estate, subsidiaries and corporate or government
securities that such associations may make. The ability of Ohio associations to
engage in these state-authorized investments and activities is subject to
oversight and approval by the FDIC if such investments or activities are not
permissible for a federally chartered savings association. See "Federal Deposit
Insurance Corporation." The Ohio Superintendent also has approval authority over
any mergers involving or acquisitions of control of Ohio savings and loan
associations. The Ohio Superintendent may initiate certain supervisory measures
and formal enforcement actions against Ohio associations. Ultimately, if the
grounds provided by law exist, the Superintendent may place an Ohio association
in conservatorship or receivership.
In addition to being governed by the laws of Ohio specifically
governing savings and Loan associations, Seven Hills is also governed by Ohio
corporate law, to the extent such law does not conflict with the laws
specifically governing savings and loan associations.
Insurance of Accounts and Regulation by the FDIC
The Banks are members of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the United States Government. As insurer,
the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the SAIF or the BIF.
The FDIC also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices, or is in an unsafe or unsound condition.
27
<PAGE>
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF of the FDIC in order to maintain the reserve
ratio of the BIF at 1.25% of BIF insured deposits. As a result of the BIF
reaching its statutory reserve ratio, the FDIC revised the premium schedule for
BIF insured institutions to provide a range of .04% to .31% of deposits. The
revisions became effective in the third quarter of 1995. In addition, the BIF
rates were further revised, effective January 1996, to provide a range of 0% to
.27%. The SAIF rates, however, were not adjusted. At the time the FDIC revised
the BIF premium schedule, it noted that, absent legislative action (as discussed
below), the SAIF would not attain its designated reserve ratio until the year
2002. As a result, SAIF insured members would continue to be generally subject
to higher deposit insurance premiums than BIF insured institutions until, all
things being equal, the SAIF attained its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate has been
established at .657% of deposits by the FDIC and the resulting assessment of
$798,000 for Springfield, $271,000 for Mayflower was paid in November 1996. This
special assessment significantly increased noninterest expense and adversely
affected the Company's results of operations for the year ended December 31,
1996. As a result of the special assessment, the Banks' deposit insurance
premiums was reduced based upon its current risk classification and the new
assessment schedule for SAIF insured institutions. These premiums are subject to
change in future periods.
28
<PAGE>
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has promulgated regulations so
that the SAIF assessment is equalized with the BIF assessment schedule,
effective January 1, 1997, SAIF-insured institutions continue to be subject to a
higher FICO assessment. In this regard, the FDIC has imposed a FICO assessment
on SAIF-assessable deposits for the first semi-annual period of 1997 equal to
6.48 basis points per $100 of domestic deposits, while the FICO assessment on
BIF-assessable deposits for that same period equals 1.30 basis points per $100
of domestic deposits.
Regulatory Capital Requirements
Federally insured savings association are required to maintain a
minimum level of regulatory capital. The OTS has established capital standards,
including a tangible capital requirement, a leverage ratio (or core capital)
requirement and a risk-based capital requirement applicable to such savings
associations. These capital requirements must be generally as stringent as the
comparable capital requirements for national banks. The OTS is also authorized
to impose capital requirements in excess of these standards on individual
associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital. At December 31, 1996, the Banks
did not have any intangible assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries, the debt and equity investments in such subsidiaries are deducted
from assets and capital. The Banks' subsidiaries are includable subsidiaries.
At December 31, 1996, Springfield had tangible capital of $30.3
million, or 11.0% of adjusted total assets, which is $26.1 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
At December 31, 1996, Mayflower had tangible capital of $6.7 million,
or 10.2% of adjusted total assets, which is $5.7 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date.
At December 31, 1996, Seven Hills had tangible capital of $8.7 million,
or 19.1% of adjusted total assets, which is $8.0 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date.
29
<PAGE>
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. At December 31, 1996, the Banks had no intangibles which were
subject to these tests. As a result of the prompt corrective action provisions
discussed below, however, a savings association must maintain a core capital
ratio of at least 4% to be considered adequately capitalized unless its
supervisory condition is such to allow it to maintain a 3% ratio.
At December 31, 1996, Springfield had core capital equal to $30.3
million, or 11.0% of adjusted total assets, which is $22.0 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
At December 31, 1996, Mayflower had core capital equal to $6.7 million,
or 10.2% of adjusted total assets, which is $4.7 million above the minimum
leverage ratio requirement of 3% as in effect on that date.
At December 31, 1996, Seven Hills had core capital equal to $8.7
million, or 19.1% of adjusted total assets, which is $7.4 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1996, the Banks had
no capital instruments that qualify as supplementary capital and $1,170, $318
and $216 of general loss reserves, which was less than 1.25% of risk-weighted
assets for Springfield, Mayflower and Seven Hills, respectively.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Banks had no such
exclusions from capital and assets at December 31, 1996.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one-to-four family first lien mortgage loans not more than 90 days
delinquent and having a loan-to-value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS regulations also require that every savings association with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with
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<PAGE>
such requirement, an amount equal to 50% of its interest-rate risk exposure
multiplied by the present value of its assets. This exposure is a measure of the
potential decline in the net portfolio value of a savings association, greater
than 2% of the present value of its assets, based upon a hypothetical 200 basis
point increase or decrease in interest rates (whichever results in a greater
decline). Net portfolio value is the present value of expected cash flows from
assets, liabilities and off-balance sheet contracts. The rule will not become
effective until the OTS evaluates the process by which savings associations may
appeal an interest rate risk deduction determination. It is uncertain as to when
this evaluation may be completed. Any savings institution with less than $300
million in assets and a total capital ratio in excess of 12% is exempt from this
requirement unless the OTS determines otherwise.
On December 31, 1996, Springfield had total capital (as defined above)
of $31.4 million (including $30.3 million in core capital and $1,170 of general
loss reserves) and risk-weighted assets of $144.3 million; or total capital of
21.8% of risk-weighted assets. This amount was $19.9 million above the 8%
requirement in effect on that date.
On December 31, 1996, Mayflower had total capital (as defined above) of
$7.0 million (including $6.7 million in core capital and $318 of general loss
reserves) and risk-weighted assets of $36.9 million; or total capital of 19.1%
of risk-weighted assets. This amount was $4.1 million above the 8% requirement
in effect on that date.
On December 31, 1996, Seven Hills had total capital (as defined above)
of $9.0 million (including $8.7 million in core capital and $218 of general loss
reserves) and risk-weighted assets of $21.9 million; or total capital of 41.0%
of risk-weighted assets. This amount was $7.2 million above the 8% requirement
in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized
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<PAGE>
associations. In addition, the OTS must appoint a receiver (or conservator with
the concurrence of the FDIC) for a savings association, with certain limited
exceptions, within 90 days after it becomes critically undercapitalized. Any
undercapitalized association is also subject to the general enforcement
authority of the OTS and the FDIC, including the appointment of a conservator or
a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Banks may have a substantial adverse effect on the Company's operations and
profitability. The Company's stockholders do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Company.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings associations
with respect to their ability to make distributions of capital which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
Generally, savings associations that before and after the proposed
distribution meet their capital requirements, may make capital distributions
during any calendar year equal to the greater of 100% of net income for the
year-to-date plus 50% of the amount by which the lesser of the association's
tangible, core or risk-based capital exceeds its capital requirement for such
capital component, as measured at the beginning of the calendar year, or 75% of
their net income for the most recent four quarter period. However, an
association deemed to be in need of more than normal supervision by the OTS may
have its dividend authority restricted by the OTS. The Banks may pay dividends
in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is of supervisory
concern, and would remain adequately capitalized (as defined in the OTS prompt
corrective action regulations) following the proposed distribution. Savings
32
<PAGE>
associations that would remain adequately capitalized following the proposed
distribution but do not meet the other noted requirements must notify the OTS 30
days prior to declaring a capital distribution. The OTS stated it will generally
regard as permissible that amount of capital distributions that do not exceed
50% of the institution's excess regulatory capital plus net income to date
during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity
All savings associations are required to maintain an average daily
balance of liquid assets equal to a certain percentage of the sum of its average
daily balance of net withdrawable deposit accounts and borrowings payable in one
year or less. This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At December 31, 1996, Springfield, Mayflower and Seven Hills
were in compliance with both requirements, with an overall liquid asset ratio of
5.6%, 6.8% and 11.7% and a short-term liquid assets ratio of 4.6%, 2.3% and
10.3%, respectively.
Qualified Thrift Lender Test
All savings associations are required to meet a qualified thrift lender
("QTL") test to avoid certain restrictions on their operations. This test
requires a savings association to have at least 65% of its portfolio assets (as
defined by regulation) in qualified thrift investments on a monthly average for
nine out of every 12 months on a rolling basis. As an alternative, the savings
association may maintain 60% of its assets in those assets specified in Section
7701(a)(19) of the Internal Revenue Code. Under either test, such assets
primarily consist of residential housing related loans and investments. At
December 31, 1996, the Banks met the test and have always met the test since its
effective date.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition,
33
<PAGE>
it must repay promptly any outstanding FHLB borrowings, which may result in
prepayment penalties. If any institution that fails the QTL test is controlled
by a holding company, then within one year after the failure, the holding
company must register as a bank holding company and become subject to all
restrictions on bank holding companies. (See "- Holding Company Regulation.")
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of the
Banks, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the Banks.
An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. Springfield, Mayflower and Seven
Hills were examined for CRA compliance in 1994 and received a rating of
satisfactory.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of the Banks include the Company and any
company which is under common control with the Banks. In addition, a savings
association may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of most affiliates.
Springfield-Home is not deemed an affiliate; however, the OTS has the discretion
to treat subsidiaries of savings institutions as affiliates on a case by case
basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
34
<PAGE>
Holding Company Regulation
The Company is a savings and loan holding company subject to regulatory
oversight by the OTS. As such, the Company is required to register and file
reports with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over the Company and its non-savings
association subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association.
The Company is a multiple savings and loan holding company (a "multiple
holding company"). The activities of a multiple holding company are limited to
those few activities specified in the Home Owners' Loan Act (which include
providing management services for the subsidiary savings association and
conducting an insurance agency) and those activities that the Federal Home Loan
Bank Board (the predecessor to the OTS) (the "FHLBB") by order or by regulation
approved as of March 5, 1987. The FHLBB approved a number of permissible
activities (e.g., data processing services, real estate development and the
underwriting of credit life insurance), although these activities are generally
not significantly broader than otherwise permissible service corporation
activities for a federally chartered savings association.
In addition, a multiple holding company may engage in activities
approved by the Federal Reserve Board for bank holding companies as being
"closely related to banking" (e.g., mortgage banking, leasing, data processing
and discount securities brokerage), unless the OTS imposes limits on any such
activity. The only method by which activities of multiple holding companies may
be expanded is if the Federal Reserve Board expands the activities permitted for
bank holding companies. Further, the activities of a multiple holding company
will be limited to those of a bank holding company if any subsidiary savings
association does not qualify as a QTL. See "- Qualified Thrift Lender Test."
Within one year of such event, the Company would be required to register as, and
would be subject to all restrictions applicable to, a bank holding company.
Management believes that the limits imposed on multiple holding companies
described above will not have a material adverse affect on the Company's
operations.
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured institution. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings institutions in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings institution.
Federal Securities Law
The stock of the Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Accordingly,
the Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public
35
<PAGE>
information requirements, each affiliate of the Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At December 31, 1996, the Banks were in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. (See "--Liquidity.")
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
The Banks are members of the FHLB of Cincinnati, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, the Banks are required to purchase and maintain stock in
the FHLB of Cincinnati. At December 31, 1996, Springfield, Mayflower and Seven
Hills had $4.6 million. $.7 million and $.5 million, respectively, in FHLB
stock, which was in compliance with this requirement. In past years, the Banks
have received substantial dividends on its FHLB stock. Over the past five
calendar years such dividends have averaged 5.5% and were 7.0% for 1996.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Banks' FHLB stock may result in a corresponding
reduction in the Banks' capital.
For the year ended December 31, 1996, dividends paid by the FHLB of
Cincinnati to the Bank totaled $294,000, which constituted a $202,000 increase
over the amount of dividends received in 1995.
36
<PAGE>
Federal and State Taxation
Savings associations that meet certain definitional tests relating to
the composition of assets and other conditions prescribed by the Internal
Revenue Code of 1986, as amended (the "Code"), had been permitted to establish
reserves for bad debts and to make annual additions thereto which may, within
specified formula limits, be taken as a deduction in computing taxable income
for federal income tax purposes. The amount of the bad debt reserve deduction
for "non-qualifying loans" is computed under the experience method. The amount
of the bad debt reserve deduction for "qualifying real property loans"
(generally loans secured by improved real estate) may be computed under either
the experience method or the percentage of taxable income method (based on an
annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially computed taxable income that is used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") is 8%. The
percentage bad debt deduction thus computed is reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permits qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
association may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a four year period.
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year. At
December 31, 1996, the 6% and 12% limitations restricted the percentage bad debt
deduction available to the Banks.
In August 1996, legislation was enacted that repeals the reserve method
of accounting (including the percentage of taxable income method) used by many
thrifts, including the Banks, to calculate their bad debt reserve for federal
income tax purposes. As a result, large thrifts such as the Bank must recapture
that portion of the reserve that exceeds the amount that could have been taken
under the specific charge-off method for post-1987 tax years. The legislation
also requires thrifts to account for bad debts for federal income tax purposes
on the same basis as commercial banks for tax years beginning after December 31,
1995. The recapture will occur over a six-year period, the commencement of which
will be delayed until the first taxable year
37
<PAGE>
beginning after December 31, 1997, provided the institution meets certain
residential lending requirements. The management of the Company does not believe
that the legislation will have a material impact on the Company or the Banks.
In addition to the regular income tax, corporations, including savings
associations such as the Banks, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Banks, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the institution's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of December 31, 1996, Springfield's, Mayflower's and Seven Hills'
Excess for tax purposes totaled approximately $6.2 million, $1.2 million and
$1.3 million, respectively.
The Company files consolidated federal income tax returns with the
Banks and its subsidiaries. Savings institutions, such as the Banks, that file
federal income tax returns as part of a consolidated group are required by
applicable Treasury regulations to reduce their taxable income for purposes of
computing the percentage bad debt deduction for losses attributable to
activities of the non-savings institution members of the consolidated group that
are functionally related to the activities of the savings institution member.
The Company has not been audited by the IRS during the last five years.
Ohio Taxation. The Banks are subject to an Ohio franchise tax based on
their net worth plus certain reserve amounts. Total net worth for this purpose
is reduced by certain exempted assets. The resultant net taxable value of stock
is taxed at a rate of 1.5% for 1996.
Ohio companies in a consolidated group, including the Company, are
subject to an Ohio franchise tax based on the greater of the tax on net worth or
the tax on net income, subject to various adjustments and varying rates. Local
taxes on property and income will also be imposed in certain jurisdictions.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual
38
<PAGE>
fee to the State of Delaware. The Company is also subject to an annual franchise
tax imposed by the State of Delaware.
Executive Officers
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. Each executive
officer of the Company is also an executive officer of the Bank. There are no
arrangements or understandings between the persons named and any other person
pursuant to which such officers were selected.
<TABLE>
<CAPTION>
Name Age Positions Held with the Company
---- --- -------------------------------
<S> <C> <C>
John T. Heckman 45 Interim President and Chief Executive Officer
Philip W. Christman 54 Executive Vice President, Mortgage Lending
Thomas A. Estep 46 Vice President, Treasurer and Chief Financial Officer
Jerry R. Mills 53 Vice President - Operations
</TABLE>
The business experience of each executive officer of the Company is set
forth below.
John T. Heckman. Mr. Heckman was named Interim President and Chief
Executive Officer of the Company and Springfield in January 1997. He was
Executive Vice President, Financial Operations of the Company and Springfield,
positions he had held since April 1995. Mr. Heckman had responsibility for all
operational areas of banking activity other than mortgage lending. From 1987 to
April 1995, Mr. Heckman served as an Assistant Director at the Office of Thrift
Supervision.
Philip W. Christman. Mr. Christman is Executive Vice President,
Mortgage Lending of the Company and Springfield, positions he has held since
April 1995. As such, he is responsible for all mortgage origination and
collection activities. Mr. Christman joined the Bank in November 1994.
Immediately prior to joining the Bank he was employed as Mortgage Loan
Origination Director at Amerifirst Bank, Xenia, Ohio. Prior to such time, Mr.
Christman was an Account Executive at Norwest Mortgage Incorporated, Cincinnati,
Ohio.
Thomas A. Estep. Mr. Estep is Vice President, Treasurer and Chief
Financial Officer of the Company and Springfield. He was appointed as Treasurer
in 1984 and as Vice President and Chief Financial Officer in 1993. Mr. Estep is
responsible for all data processing, accounting and investing functions.
Jerry R. Mills. Mr. Mills is the Vice President - Operations of the
Company and Springfield. He joined the Bank in August 1993. As Vice President -
Operations, he directly
39
<PAGE>
oversees the loan department and branch operations. From 1987 to 1993, he was
branch administrator and office manager of National City Bank, Springfield,
Ohio.
Employees
At December 31, 1996, the Company and its subsidiary had a total of 112
employees, including three part-time employees. The Company's employees are not
represented by any collective bargaining group. Management considers its
employee relations to be good.
Item 2. Properties
The Company conducts its business at its main office, executive office
and the Bank's four branch offices located in its market area. The following
table sets forth information relating to each of the Company's offices as of
December 31, 1996.
40
<PAGE>
<TABLE>
<CAPTION>
Total
Approximate Net Book
Date Square Value at
Location Acquired Footage December 31, 1996
- -------- -------- ------- -----------------
(In Thousands)
<S> <C> <C> <C>
Main Office:
28 E. Main Street 1900 5,721 $1,019
Springfield, Ohio
Branch Offices:
7601 Dayton Springfield Road 1983 2,528 79
Enon, Ohio
210 N. Main Street 1987 2,369 381
New Carlisle, Ohio
1480 Upper Valley Pike 1950 3,777 439
Springfield, Ohio
50 Kahoe Lane 1993 2,369 443
Yellow Springs, Ohio
3216 Seajay Drive 1996 1,925 342
Beavercreek, Ohio
8370 Colerain Avenue 1996 4,800 473
Cincinnati, Ohio
1440 Main Street 1996 3,800 295
Cincinnati, Ohio
4860 Hunt Road Leased 1,008 ---
Cincinnati, Ohio
6570 Gracely Drive 1996 1,200 199
Cincinnati, Ohio
</TABLE>
The Company owns all but one of its offices. The total net book value
of the Company's premises and equipment (including land, building and leasehold
improvements and furniture, fixtures and equipment) at December 31, 1996 was
$4.0 million. See Note 6 of the Notes to Consolidated Financial Statements in
the Annual Report to Stockholders filed as Exhibit 13 hereto.
The Company conducts its data processing through a service bureau. The
net book value of the data processing and computer equipment utilized by the
Company at December 31, 1996 was approximately $107,000.
41
<PAGE>
Item 3. Legal Proceedings
The Company and each of its subsidiaries are involved from time to time
as plaintiff or defendant in various legal actions arising in the normal course
of their businesses. While the ultimate outcome of pending proceedings cannot be
predicted with certainty, it is the opinion of management, after consultation
with counsel representing the Company, the Bank or its subsidiary in the
proceedings, that the resolution of these proceedings should not have a material
effect on the Company's consolidated financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1996.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
Page 8 of the Company's 1996 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Selected Financial Data
Pages 9 and 10 of the Company's 1996 Annual Report to Stockholders is
herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Pages 11 through 23 of the Company's 1996 Annual Report to Stockholders
are herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Pages 25 through 57 of the Company's 1996 Annual Report to Stockholders
are herein incorporated by reference.
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
There has been no Current Report on Form 8-K filed reporting a change
of accountants and/or reporting disagreements on any matter of accounting
principle or financial statement disclosure.
42
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning Directors of the Company is incorporated herein
by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on April 16, 1997 (except for
information contained under the headings "Compensation Committee Report on
Executive Compensation" and "Stock Performance Presentation"), a copy of which
will be filed not later than 120 days after the close of the fiscal year. For
information concerning executive officers of the Company who are not also
Directors, see "Executive Officers" in Part I of this Annual Report on Form
10-K.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on April 16, 1997 (except for information
contained under the headings "Compensation Committee Report on Executive
Compensation" and "Stock Performance Presentation"), a copy of which will be
filed not later than 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on
April 16, 1997 (except for information contained under the headings
"Compensation Committee Report on Executive Compensation" and "Stock Performance
Presentation"), a copy of which will be filed not later than 120 days after the
close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders scheduled to be held on April 16, 1997
(except for information contained under the headings "Compensation Committee
Report on Executive Compensation" and "Stock Performance Presentation"), a copy
of which will be filed not later than 120 days after the close of the fiscal
year.
43
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) (1) Financial Statements:
The following information appearing in the Company's Annual Report to
Stockholders for the year ended December 31, 1996, is incorporated by reference
in this Annual Report on Form 10-K as Exhibit 13.
<TABLE>
<CAPTION>
Pages in
Annual
Annual Report Section Report
--------------------- ------
<S> <C>
Consolidated Balance Sheets at
December 31, 1996 and 1995.......................................................................... 25
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994.................................................................... 26 - 27
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994................................................ 28 - 29
Consolidated Statements of Cash Flows for Years Ended
December 31, 1996, 1995 and 1994.................................................................... 30 - 31
Notes to Consolidated Financial Statements............................................................ 32 - 57
Independent Auditors' Report.......................................................................... 24
</TABLE>
(a) (2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information
is not required under the related instructions or is inapplicable.
44
<PAGE>
(a) (3) Exhibits:
Reference to Prior
Regulation Filing or Exhibit
S-K Exhibit Number Attached
Number Document Hereto
- ----------- -------- ------------------
2 Plan of acquisition, reorganization, None
arrangement, liquidation or
succession
3 (i) Certificate of Incorporation *
3 (ii) Bylaws *
4 Instruments defining the rights of *
security holders, including
indentures
9 Voting trust agreement None
10 Material contracts:
(a) 1995 Stock Option and **
Incentive Plan
(b) Management Recognition Plan **
(c) Employment Agreement with **
C. William Clark
(d) Employment Agreement with **
Jerry R. Mills
(e) Employment Agreement with **
Thomas A. Estep
(f) Employment Agreement with ***
Philip W. Christman
(g) Employment Agreement with ***
John T. Heckman
11 Statement re computation of per None
share earnings
12 Statements re computation of ratios None
13 Annual report to security holders 13
16 Letter re change in certifying None
accountant
18 Letter re change in accounting None
principles
45
<PAGE>
Reference to Prior
Regulation Filing or Exhibit
S-K Exhibit Number Attached
Number Document Hereto
- ----------- ------------------------------------- ------------------
21 Subsidiaries of the registrant 21
22 Published report regarding matters None
submitted to vote of security holders
23 Consents of experts and counsel 23
24 Power of attorney None
27 Financial data schedule 27
99 Additional exhibits None
- ----------
* Incorporated by reference to the Company's Registration Statement
No. 33-76734.
** Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994.
*** Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1995.
(b) Reports on Form 8-K:
On November 14, 1996, the Company filed a current report on Form 8-K
reporting the acquisition of Seven Hills. No other reports on Form 8-K were
filed during the quarter ended December 31, 1996.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
WESTERN OHIO FINANCIAL CORPORATION
Date: March 31, 1997 By: /s/John T. Heckman
-----------------------------------------------------
John T. Heckman, Interim President and Chief
Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
By: /s/John T. Heckman By: /s/David L. Dillahunt
-------------------------------------------------- -----------------------------------------------------
John T. Heckman, Interim President and David L. Dillahunt, Chairman of
Chief Executive Officer the Board
(Principal Executive Officer)
Date: March 31, 1997 Date: March 31, 1997
By: /s/Howard V. Dodds By: /s/John E. Field
-------------------------------------------------- -----------------------------------------------------
Howard V. Dodds, Director John E. Field, Director
Date: March 31, 1997 Date: March 31, 1997
By: /s/Carl. E. Mumma By: /s/William N. Scarff
-------------------------------------------------- -----------------------------------------------------
Carl. E. Mumma, Director William N. Scarff, Director
Date: March 31, 1997 Date: March 31, 1997
By: By:
/s/Jeffrey L. Levine /s/Thomas A. Estep
-------------------------------------------------- -----------------------------------------------------
Jeffrey L. Levine, Director Thomas A. Estep, Vice President, Treasurer
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 31, 1997 Date: March 31, 1997
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
As a savings and loan association holding company, Western Ohio Financial
Corporation ("the Company" or "WOFC"), holds Springfield Federal Savings Bank
("Springfield Federal"), Mayflower Federal Savings Bank ("Mayflower") and Seven
Hills Savings Association ("Seven Hills") whose principal business has
traditionally consisted of attracting deposits from the general public, and
making loans secured by residential real estate. Springfield Federal's,
Mayflower's and Seven Hills' profitability and consequently the Company's
profitability is primarily dependent upon their net interest income, which is
the difference between interest income on its loan and investment portfolio and
interest paid on deposits and other borrowed funds. Net interest income is
directly affected by the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on such
amounts. Springfield Federal's, Mayflower's and Seven Hills' profitability is
also affected by the provisions for loan losses and the level of non-interest
income and expense. Non-interest income consists primarily of service charges
and other fees, gains (losses) on sales of securities and other assets and
income from real estate operations. Non-interest expense includes salaries and
employee benefits, real estate operations, occupancy of premises, federal
deposit insurance premiums, franchise taxes, data processing expenses and other
operating expenses.
The operating results of the Company are also affected by general economic
conditions, the monetary and fiscal policies of federal agencies and the
policies of agencies that regulate financial institutions. The Company's cost of
funds is influenced by interest rates on competing investments and general
market rates of interest. Lending activities are influenced by the demand for
real estate loans and other types of loans, which is in turn affected by the
interest rates at which such loans are made, general economic conditions
affecting loan demand and the availability of funds for lending activities.
Management and the Board of Directors of the Company have sought to enhance
shareholder value by repurchasing outstanding shares and acquiring compatible
financial institutions in new geographic markets. On March 29, 1996, the Company
concluded its purchase of Mayflower at a cost of $10.0 million and on November
12, 1996, the Company closed on its purchase of Seven Hills at a cost of $10.5
million. These acquisitions represent a wide spread geographic entry to the
Cincinnati market. The Company offers a range of customer services and products,
including deposit accounts and loans with a special emphasis on one-to-four
family mortgage lending and, to a lesser extent, multi-family and commercial
real estate lending. Smaller portions of the Company's loans receivable consist
of construction, commercial and consumer loans. Management has expanded and
intends to continue to expand its consumer lending portfolio by soliciting its
existing customer base. In January 1996, Springfield Federal incorporated a
consumer finance subsidiary, West Central Financial Services in order to expand
Springfield Federal's consumer lending. In November 1996, Springfield Federal
sold approximately $17.9 million dollars in one-to-four family loans to FNMA.
The proceeds were primarily used to fund the acquisition of Seven Hills. Further
expansion is being planned by management.
<PAGE>
Analysis Of Financial Condition
Total assets of the Company increased $161.4 million in the year ending December
31, 1996, from $231.4 million in 1995 to $392.8 million in 1996. This increase
of 69.8% was primarily reflective of the acquisition of Mayflower and Seven
Hills.
Liabilities increased from $171.7 million at December 31, 1995, to $338.7
million at December 31, 1996, an increase of $167.0 million, or 97.3%. An
increase in deposits from $139.1 million at December 31, 1995, to $233.2 million
at December 31, 1996, (an increase of $94.1 million) combined with an increase
in advances from the Federal Home Loan Bank ("FHLB") of Cincinnati from $31.5
million at December 31, 1995, to $102.6 million at December 31, 1996, (an
increase of $71.1 million) were the primary sources of the increase in total
liabilities. The increase in deposits was primarily attributable to the
acquisition of Mayflower and Seven Hills. Company deposits also grew in response
to its continued aggressive advertising and competitive rates during 1996.
The Company's subsidiaries drew net advances from the FHLB of Cincinnati of
$68.4 million in 1996. The advance rates ranged from 5.20% to 6.30%. The nature
of these advances varied with the intended purpose of obtaining the funds.
Fixed-rate advances of $20.0 million were taken to fund the purchase of callable
securities. The remainder of the borrowing was variable-rate or fixed-rate in
nature and was intended to fund mortgages. The above mentioned advances are
secured by a blanket pledge of mortgages to the FHLB of Cincinnati and are not
tied to specific securities or mortgages.
Mortgage loan originations and purchases increased $61.0 million from $61.3
million in 1995 to $122.3 million in 1996. The higher level of mortgage loan
originations in 1996 was the result of a more aggressive lending effort and the
addition of Mayflower's origination efforts. Net loans receivable increased by
$137.1 million from 1995 to 1996 primarily as the result of the acquisition of
Mayflower and Seven Hills. Also contributing to the increase in net loans
receivable was an increase in non-mortgage loans of $6.1 million. The increase
was a combination of commercial and consumer lending.
Total equity decreased $5.6 million due largely to the buyback of treasury
stock. During 1996, 188,112 shares were repurchased with a total buyback
expenditure of $4.2 million. Earnings of $1.1 million less dividends of $2.3
million decreased retained earnings by $1.2 million in 1996 compared to an
increase of $467,000 in 1995.
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 1996 and December 31, 1995
The Company's results of operations depend primarily on the level of its net
interest income and non-interest income and the level of its operating expenses.
Net interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them. In
addition, the Company receives fees from loan originations, late payments, loan
servicing and payments for service related to transaction and other deposit
accounts, and from dividends on its FHLB stock.
GENERAL. Net income for the year ended December 31, 1996, was $1.1 million a
decrease of $1.8 million compared to the year ended December 31, 1995. Net
interest income increased by $2.6 million from $7.8 million to $10.4 million, or
33.5%, primarily as a result of a higher volume of average interest-earning
assets. Non-interest income declined substantially as a result of a decline in
gain on sale of investment securities of $1.0 million. For the year ended
December 31, 1995, non-interest income also included a $681,000 gain from the
termination of benefit plans at Springfield Federal. Non-interest expense also
increased $3.4 million, from $5.4 million at December 31, 1995, to $8.8 million
at December 31, 1996, primarily due to a $1.1 million special assessment to
recapitalize SAIF. The increase in non-interest expense also reflects the new
costs of operating Seven Hills and Mayflower. Income taxes decreased by $800,000
from $1.5 million at December 31, 1995, to $707,000 at December 31, 1996,
primarily as a result of lower income.
INTEREST INCOME. Total interest income increased $9.4 million or 63.1% for the
year ended December 31, 1996 compared to the prior year. This increase is
chiefly due to the higher volume of interest earning assets. This higher volume
is due mostly to a higher volume of loans receivable which reflects the
Company's aggressive lending efforts and the addition of Mayflower and Seven
Hills. Interest from investment securities and other sources rose by $878,000
primarily due to the increased investment in callable securities. Interest
income from the available for sale mortgage-backed securities showed little
change over 1995.
INTEREST EXPENSE. Total interest expense increased $6.7 million or 95.9% for the
year ended December 31, 1996, compared to the prior year. The increase was due
primarily to a higher volume of both deposits and borrowings and a 0.52%
increase in the average rate paid on deposits and borrowings.
PROVISION FOR LOAN LOSSES. The provision for loan losses is a result of
management's periodic analysis of the adequacy of the allowance for loan losses.
There was a $399,000 additional provision for loan losses during the year ended
December 31, 1996. This is an increase of $393,000 from a $6,000 provision
during the prior year. Management believes that the total allowance of $1.7
million is adequate given the area economic conditions and its loan portfolio
composition. At December 31, 1996, the Company was aware of no regulatory
directives or suggestions that the Company make additional provisions for losses
on loans.
The Company will continue to review its allowance for loan losses and make
further allowances as economic and regulatory conditions dictate. Although the
Company maintains its allowance for loan losses at a level that it considers to
be adequate to provide for potential losses, there can be no assurance that
future losses will not exceed estimated amounts or that additional provisions
for loan losses will not be required in future periods. In addition, the
Company's determination as to the amount of the allowance for loan losses is
subject to review by the OTS and FDIC, which can order the establishment of
additional or specific allowances.
<PAGE>
NON-INTEREST INCOME. Non-interest income decreased from $2.0 million in 1995 to
$550,000 in 1996. This decrease is due primarily to a $1.2 million gain on the
sale in 1995 of FHLMC common stock that had been held as an investment security.
Further, the Company realized gains in 1995 of $476,000 and $205,000 from the
curtailment of its defined benefit pension plan and its retiree health care
benefits respectively at Springfield Federal. These plans were eliminated and
replaced with other benefits in an effort to control expanding compensation and
benefit costs.
NON-INTEREST EXPENSE. Total non-interest expense increased from $5.4 million in
1995 to $8.8 million in 1996. The increase is primarily the result of a $1.1
million special assessment to recapitalize SAIF. Additionally, the 1996 expenses
included nine months of operations at Mayflower and one and one half months of
operations at Seven Hills.
INCOME TAX EXPENSE. Income tax expense was $707,000 for the year ended December
31, 1996, a decrease of $800,000, or 63.3%, from the same period the prior year.
Income taxes increased primarily as a result of increased earnings before income
taxes.
Comparison of Years Ended December 31, 1995 and December 31, 1994
The Company's results of operations depend primarily on the level of its net
interest income and non-interest income and the level of its operating expenses.
Net interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them. In
addition, the Company receives fees from loan originations, late payments and
payments for service related to transaction and other deposit accounts, and from
dividends on its FHLB stock.
GENERAL. Net income for the year ended December 31, 1995, was $2.9 million, an
increase of $266,000 compared to the year ended December 31, 1994. Net interest
income increased by $508,000 from $7.3 million to $7.8 million, or 7.0%,
primarily as a result of a higher volume of average interest-earning assets.
Non-interest income, consisting primarily of gains on sales of investment
securities, increased from $72,000 for the year ended December 31, 1994, to $2.0
million for the year ended December 31, 1995. Non-interest expense also
increased $2.0 million, from $3.3 million at December 31, 1994, to $5.3 million
at December 31, 1995, primarily due to increases in compensation and benefits as
the Company hired additional personnel to staff its expanding operations. Income
taxes increased by $141,000 from $1.4 million at December 31, 1994, to $1.5
million at December 31, 1995, primarily as a result of higher income.
INTEREST INCOME. Total interest income increased $2.4 million or 19.0% for the
year ended December 31, 1995, compared to the prior year. This increase is
chiefly due to the higher volume of interest earning assets. This higher volume
is due mostly to a higher volume of loans receivable and to a lesser degree the
higher volume of mortgage-backed securities. Interest from investment securities
and other sources were little changed over 1994. The increase in volume of
interest earning assets was offset in part by a 71 basis point decline in the
average yield earned on loans receivable.
INTEREST EXPENSE. Total interest expense increased $1.9 million or 35.8% for the
year ended December 31, 1995, compared to the prior year. The increase was due
primarily to a higher volume of both deposits and borrowings and a 1.22%
increase in the average rate paid on time deposits. The increase in rates paid
on time deposits is due in part to management aggressively seeking deposits.
<PAGE>
PROVISION FOR LOAN LOSSES. The provision for loan losses is a result of
management's periodic analysis of the adequacy of the allowance for loan losses.
There was a $6,000 additional provision for loan losses during the year ended
December 31, 1995. This was an increase of $6,000 from no provision during the
prior year. Management believed that the total allowance of $774,000 was
adequate given the local economic conditions and its loan portfolio composition.
At December 31, 1995, the Company was aware of no regulatory directives or
suggestions that the Company make additional provisions for losses on loans.
NON-INTEREST INCOME. Non-interest income increased from $72,000 in 1994 to $2.0
million in 1995. This increase is due primarily to a $1.2 million gain on the
sale of FHLMC common stock which had been held as an investment security. The
gain was the result of the Company's desire to shift the resulting sale proceeds
into other assets. Further, the Company realized gains of $476,000 and $205,000
from the curtailment of its defined benefit pension plan and its retiree health
care benefits respectively. These plans were eliminated and replaced with other
benefits in an effort to control expanding compensation and benefit costs.
NON-INTEREST EXPENSE. Total non-interest expense increased from $3.3 million in
1994 to $5.3 million in 1995. The increase is primarily a result of an increase
in compensation and benefits. This item increased substantially due to expanded
staffing levels to cover the higher volume of lending and in anticipation of
acquisitions. A new branch is to be opened early in 1996. The amortization of
the cost of the Company's Management Recognition Plan and recognition of a full
year's cost of the ESOP also contributed to the increase in compensation and
benefits.
INCOME TAX EXPENSE. Income tax expense was $1,507,000 for the year ended
December 31, 1995, an increase of $141,000, or 10.3%, from the same period the
prior year. Income taxes increased primarily as a result of increased earnings
before income taxes.
<PAGE>
AVERAGE BALANCES, INTEREST RATES AND YIELDS. The following table presents for
the periods indicated the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
rates. No tax equivalent adjustments were made. All average balances are monthly
average balances. Nonaccruing loans have been included in the table as loans
carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
---------- --------- -------- ---------- --------- ------ ---------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans Receivable $ 235,936 $ 18,436 7.81% $ 121,373 $ 9,942 8.19% $ 100,505 $ 8,944 8.90%
Mortgage-backed securities 43,243 2,854 6.60 42,606 2,876 6.75 31,427 1,832 5.83
Investment securities 27,190 2,043 7.51 12,045 833 6.92 11,696 667 5.70
Interest-bearing deposits 8,293 536 6.46 16,655 1,067 6.41 20,408 933 4.57
FHLB stock 3,914 291 7.43 1,381 91 6.59 1,245 69 5.54
---------- --------- ---------- --------- ---------- --------
Total interest-earning assets $ 318,576 24,160 7.58 $ 194,060 14,809 7.63 $ 165,281 12,445 7.53
========== --------- ========== --------- ========== --------
Interest-bearing liabilities:
Time deposits $ 134,757 8,188 6.08 $ 90,805 5,277 5.81 $ 75,545 3,470 4.59
Demand and NOW deposits 12,851 146 1.14 11,932 277 2.32 17,891 439 2.45
Savings deposits 28,334 926 3.27 25,175 687 2.73 36,577 1,111 3.04
Borrowings 74,832 4,523 6.04 13,374 793 5.93 2,343 158 6.74
---------- --------- ---------- --------- ---------- --------
Total interest-bearing
liabilities $ 250,774 13,783 5.50 $ 141,286 7,034 4.98 $ 132,356 5,178 3.91
========== --------- ========== --------- ========== --------
Net interest income $ 10,377 $ 7,775 $ 7,267
========= ========= ========
Net interest rate spread 2.08% 2.65% 3.62%
======= ====== ======
Net earning assets $ 67,802 $ 52,774 $ 32,925
========== ========== ==========
Net yield on average interest-
earning assets 3.26% 4.01% 4.40%
======= ======= ======
Average interest-earning assets to
average interest-bearing liabilities 1.27x 1.37x 1.25x
======= ======= =======
</TABLE>
<PAGE>
RATE/VOLUME ANALYSIS. The following schedule presents the dollar amount of
changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes
between the increase or decrease related to changes in average outstanding
balances and that due to the volatility of interest rates. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (i.e., changes in
volume multiplied by new rate) and (ii) changes in rate (i.e., changes in rate
multiplied by old volume). For purposes of this table, changes attributable to
both rate and volume, which cannot be segregated have been allocated
proportionately to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
----------------------------------- --------------------------------------
1995 vs. 1996 1994 vs. 1995
----------------------------------- --------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
------------------- Increase ------------------ Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- -------- ------ ---- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $8,972 $(478) $8,494 $1,710 $(712) $ 998
Mortgage-backed securities 43 (65) (22) 755 289 1,044
Investments securities 1,132 78 1,210 24 142 166
Other (353) 22 (331) (233) 389 156
------ ----- ------ ------ ----- ------
Total interest-earning assets $9,794 $(443) $9,351 $2,256 $ 108 $2,364
====== ===== ====== ====== ===== ======
Interest-bearing liabilities:
Time deposits 2,661 250 2,911 887 921 1,808
Demand and NOW deposits 20 (151) (131) (138) (24) (162)
Savings deposits 93 146 239 (311) (114) (425)
Borrowings 3,714 16 3,730 654 (19) 635
------ ----- ------ ------ ----- ------
Total interest-bearing liabilities $6,488 $ 261 $6,749 $1,092 $ 764 $1,856
====== ===== ====== ====== ===== ======
Net interest income $2,602 $ 508
====== ======
</TABLE>
<PAGE>
ASSET/LIABILITY MANAGEMENT
NET PORTFOLIO VALUE. The measurement and analysis of the exposure of the
Company's subsidiaries to changes in the interest rate environment are referred
to as asset/liability management. One method used to analyze the Company's
sensitivity to changes in interest rates is the "net portfolio value" ("NPV")
methodology used by the OTS as part of its capital regulations. The Company's
subsidiaries are not currently subject to the NPV regulation because such
regulation does not apply to institutions with less than $300 million in assets
and risk-based capital in excess of 12%. The application of the NPV methodology
may illustrate the Company's interest rate risk.
NPV is generally considered to be the present value of the difference between
expected incoming cash flows on interest-earning and other assets and expected
outgoing cash flows on interest-bearing and other liabilities. The application
attempts to quantify interest rate risk as the change in the NPV which would
result from a theoretical 200 basis point (1 basis point equals .01%) change in
market interest rates. Both a 200 basis point increase in market interest rates
and a 200 basis point decrease in market interest rates are considered.
Presented below, as of September 30, 1996 and December 31, 1995, is an analysis
of Springfield Federal's, Mayflower's and Seven Hills' interest rate risk as
measured by changes in NPV for instantaneous and sustained parallel shifts of
100 basis points in market interest rates. The tables also contain the policy
limits set by the Board of Directors of each institution as the maximum change
in NPV that the Board of Directors deems advisable in the event of various
changes in interest rates. Such limits have been established with consideration
to the impact on the NPV capital position of various rate changes and each
institution's strong capital position.
As illustrated in the tables, each institution's NPV is more sensitive to rising
rates than declining rates. From an overall perspective, such difference in
sensitivity occurs principally because, as rates rise, borrowers do not prepay
fixed-rate loans as quickly as they do when interest rates are declining. Thus,
in a rising interest rate environment, because the Company has primarily
fixed-rate loans in its loan portfolio, the amount of interest the Company would
receive on its loans would increase relatively slowly as loans are slowly
prepaid and new loans at higher rates are made. Moreover, the interest the
Company would pay on its deposits would increase rapidly because the Company's
deposits generally have shorter periods to repricing. Assumptions used in
calculating the amounts in these tables are OTS assumptions.
<PAGE>
SPRINGFIELD FEDERAL SAVINGS BANK
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------------ -------------------------
Change in Interest Rate Board limit $ change % change $ change % change
(Basis Points) % change in NPV in NPV in NPV in NPV
- ------------------------ ---------- ------------ ---------- ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+300 (60) (24,754) (53) (13,334) (27)
+200 (40) (16,538) (36) (8,352) (17)
+100 (20) (8,130) (18) (3,762) (8)
0 0 0 0 0 0
-100 (20) 7,049 15 2,337 5
-200 (40) 11,538 25 3,229 7
-300 (60) 14,942 32 6,253 9
</TABLE>
MAYFLOWER FEDERAL SAVINGS BANK
September 30, 1996
------------------------
Change in Interest Rate Board limit $ change % change
(Basis Points) % change in NPV in NPV
- ------------------------ ---------- ------------ ----------
(Dollars in thousands)
+300 (50) (2,451) (34)
+200 (25) (1,494) (21)
+100 (10) (662) (9)
0 0 0 0
-100 (10) 434 6
-200 (25) 654 9
-300 (50) 869 12
SEVEN HILLS SAVINGS ASSOCIATION
September 30, 1996
------------------------
Change in Interest Rate Board limit $ change % change
(Basis Points) % change in NPV in NPV
- ------------------------ ---------- ------------ ----------
(Dollars in thousands)
+300 (60) (2,755) (32)
+200 (30) (1,782) (21)
+100 (15) (843) (10)
0 0 0 0
-100 (15) 668 8
-200 (30) 1,036 12
-300 (60) 1,304 15
<PAGE>
As of September 30, 1996, the percentage change in NPV resulting from certain
changes in interest rates were within the policy limits of each institution's
Board of Directors. It should be noted that the above tables and the regulation
of concern only pertains to each institution and does not apply to the holding
company. The Company's assets are all of a short term or short term to repricing
nature and therefore are not subject to significant interest rate risk.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to change in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making risk calculations.
In the event that interest rates continue to rise from the recent historically
low levels, each institution's net interest income could be expected to be
negatively affected. Moreover, rising interest rates could negatively affect
Springfield Federal's, Mayflower's and Seven Hills' earnings and thereby the
Company's earnings due to diminished loan demand. As part of the Company's
interest rate risk strategy, the Company has attempted to utilize adjustable
rate and short term duration loans and investments at its subsidiaries.
The Company fully intends to limit the addition of fixed rate long duration
loans and securities to its portfolio. In addition to this restructuring it has
also begun to offer consumer products at its subsidiaries that reprice on a
monthly basis. It is expected that as the size of these portfolio segments grows
the interest rate risk will be lessened, though not eliminated.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Western Ohio Financial Corporation's liquidity, primarily represented by cash
equivalents, is a result of its operating, investing and financing activities.
These activities are summarized below for the years ended December 31, 1996,
1995 and 1994.
Year Ended December 31,
--------------------------------------
1996 1995 1994
------ ------ ------
Net income $ 1,062 $ 2,893 $ 2,627
Adjustments to reconcile net income
to net cash from operating
activities (324) (1,825) (253)
-------- -------- --------
Net cash from operating activities 738 1,068 2,374
Net cash from investment activities (82,460) (45,838) (26,969)
Net cash from financing activities 79,728 42,424 33,631
-------- -------- --------
Net change in cash and cash
equivalents (1,994) (2,346) 9,036
Cash and cash equivalents at
beginning of period 17,605 19,951 10,915
-------- -------- --------
Cash and cash equivalents at
end of period $ 15,611 $ 17,605 $ 19,951
======== ======== ========
At December 31, 1996 , the Company had no outstanding commitments to sell loans
or securities.
The OTS requires minimum levels of liquid assets. OTS regulations presently
require Springfield Federal, Mayflower and Seven Hills to maintain an average
daily balance of liquid assets (United State Treasury, federal agency, and other
investments having maturities of five years or less) equal to at least 5.0% of
the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. Such requirements may be changed from
time to time by the OTS to reflect changing economic conditions.
Such investments are intended to provide a source of relatively liquid funds
upon which Springfield Federal, Mayflower and Seven Hills may rely, if
necessary, to fund deposit withdrawals and other short-term funding needs.
Springfield Federal's average regulatory liquidity at December 31, 1996 was
5.51%. Mayflower's average regulatory liquidity at December 31, 1996 was 6.86%.
Seven Hills average regulatory liquidity at December 31, 1996 was 9.46%.
The Company's primary sources of funds consist of deposits and repayments of
loans and interest earned on securities. The Company maintains a higher ratio of
loans to deposits in comparison with other similarly sized savings institutions.
Historically, this has not had a material affect on the Company's liquidity as
it has utilized other potential sources of funds including borrowings from the
FHLB of Cincinnati to maintain liquidity and to meet operating expenses.
Management believes that loan repayments and other sources of funds will be
adequate to meet the Company's foreseeable liquidity needs.
The primary financing activity of the Company during 1996 was the proceeds from
FHLB advances of $88.0 million. Also a major financing activity was the net
increase in savings deposits of $17.3 million. The Company paid $2.3 million in
dividends and acquired treasury stock for $4.2 million in 1996.
<PAGE>
Liquidity management is a daily and long-term responsibility of management. The
Company adjusts its investments in liquid assets based upon assessment of (i)
expected loan demand, (ii) expected deposit flows, (iii) yields available on
interest-bearing deposits and (iv) the objectives of its asset/liablity
management program. Excess liquidity is invested generally in interest-bearing
overnight deposits and other short-term government and agency obligations. If
the Company requires additional funds beyond its internal ability to generate,
it has additional borrowing capacity with the FHLB of Cincinnati.
The Company anticipates that it will have sufficient funds available to meet
current loan commitments. At December 31, 1996, the Company had outstanding
commitments to extend credit that amounted to $5.4 million.
Under The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), the capital requirements applicable to all savings institutions,
including the Company, were substantially increased. However, Springfield
Federal, Mayflower and Seven Hills are in compliance with all applicable capital
requirements and expects to remain so.
OTS regulations require that institutions maintain "tangible capital" of not
less than 1.5% of the institution's adjusted total assets. Tangible capital is
defined as "core capital" less any intangible assets.
Core capital is comprised of common stockholders' equity (including retained
earnings). OTS regulations require core capital to be maintained at 3% of total
institution assets.
OTS regulations require the institution to maintain "risk-based capital" in an
amount not less than 8% of risk-weighted assets. Risk-based capital is defined
as core capital plus certain additional items. Springfield Federal's adjustment
to core capital includes the portion of the loan and lease loss allowance over
the amount required for loans classified as loss. This adjustment is $1.2
million as of December 31, 1996. Mayflower's adjustment to core capital includes
the portion of the loan and lease loss allowance over the amount required for
loans classified as loss. This adjustment is $330,000 as of December 31, 1996.
Seven Hills' adjustment to core capital includes the portion of the loan and
lease loss allowance over the amount required for loans classified as loss. This
adjustment is $216,000 as of December 31, 1996.
The following table summarizes Springfield Federal's regulatory capital
requirements and actual capital at December 31, 1996.
SPRINGFIELD FEDERAL SAVINGS BANK
<TABLE>
<CAPTION>
Excess of Actual
Capital Over Current
Actual Capital Current Requirement Requirement
------------------------ ------------------------- ------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital $30,262 11.03% $ 4,116 1.50% $26,146 9.53%
Core Capital 30,262 11.03 8,234 3.00 22,028 8.03
Risk-Based Capital 31,432 21.77 11,542 8.00 19,890 13.77
</TABLE>
<PAGE>
MAYFLOWER FEDERAL SAVINGS BANK
<TABLE>
<CAPTION>
Excess of Actual
Capital Over Current
Actual Capital Current Requirement Requirement
------------------------ ------------------------- ------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital $6,714 10.24% $ 984 1.50% $5,730 8.74%
Core Capital 6,714 10.24 1,968 3.00 4,746 7.24
Risk-Based Capital 7,044 19.08 2,948 8.00 4,096 11.08
</TABLE>
SEVEN HILLS SAVINGS ASSOCIATION
<TABLE>
<CAPTION>
Excess of Actual
Capital Over Current
Actual Capital Current Requirement Requirement
------------------------ ------------------------- ------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital $8,744 19.07% $ 688 1.50% $8,056 17.57%
Core Capital 8,744 19.07 1,376 3.00 7,368 16.07
Risk-Based Capital 8,960 40.99 1,749 8.00 7,211 32.99
</TABLE>
IMPACT OF NEW ACCOUNTING STANDARDS
In October 1994, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 119, Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments. This statement requires
disclosures about the amounts, nature and terms of derivative financial
instruments that are not subject to Statement 105, Disclosures of Information
about Financial Instruments and Off-Balance-Sheet Risk, because they do not
result in off-balance-sheet risk of accounting loss. It requires that a
distinction be made between financial instruments held or issued for trading
purposes (including dealing and other trading activities measured at fair value
with gains and losses recognized in earnings) and financial instruments held or
issued for purposes other than trading. SFAS No. 119 is effective for financial
statements for fiscal years ending after December 15, 1995. The Company and its
subsidiaries held no securities for trading activities nor are any of the
securities held considered a futures, forward, swap or option contract.
Considering the preceding factors, no material impact resulted from the adoption
of this standard.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 122, Accounting for Mortgage Servicing Rights.
This statement requires that a mortgage banking enterprise recognize as separate
assets rights to service mortgage loans for others, however those servicing
rights are acquired. A mortgage banking enterprise that acquires mortgage
servicing rights through either the purchase or origination of mortgage loans
and sells or securitizes those loans with servicing rights retained would
allocate the total cost of the mortgage loans to the mortgage servicing rights
and the loans based on their relative fair value. SFAS No. 122 is effective for
fiscal years beginning after December 31, 1995. A sale of loans which had not
been originated for sale took place in November 1996. The servicing rights were
valued in accordance with SFAS No. 122.
<PAGE>
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, establishing financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 encourages all entities to
adopt a new method of accounting to measure the compensation cost of all
employee stock compensation plans based on the estimated fair value of awards at
the date they are granted. Companies are, however, allowed to continue to
measure compensation costs for those plans using the intrinsic value based
method of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to retain their existing
accounting method are required to disclose in a footnote to the financial
statements pro forma net income and, if presented, earnings per share as if SFAS
No. 123 had been adopted. The accounting requirements of SFAS No. 123 are
effective for transactions entered into during fiscal years that begin after
December 15, 1995. Companies are required, however, to disclose information for
awards granted in their first fiscal year ending after December 15, 1994.
Disclosure of information regarding awards is included in the footnotes to the
following audited financial statements.
In June 1996, the FASB issued SFAS No 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities, which
established accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities. The standards are based on a
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred and ceases recognizing financial assets when control has been
surrendered and ceases recognizing liabilities when they have been extinguished.
SFAS No. 125 provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. SFAS
No. 125 supersedes SFAS No. 122. SFAS No. 125 is effective for transactions
occurring after December 31, 1996. Management does not expect an impact from
adoption of SFAS No. 125.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented herein have
been prepared according to generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. An exception to historical cost
presentation is the valuation of securities available for sale under FASB No.
115. The primary assets and liabilities of the Company are monetary in nature.
As a result, interest rates have a more significant impact on the Company's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or magnitude as the prices of goods
and services.
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Western Ohio Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Western Ohio Financial Corporation and its wholly-owned subsidiaries,
Springfield Federal Savings Bank (formerly Springfield Federal Savings and Loan
Association), Mayflower Federal Savings Bank and Seven Hills Savings
Association, as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Western Ohio
Financial Corporation and its subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for investment and mortgage-backed securities available for
sale in 1994 to conform to new accounting guidelines.
Clark, Schaefer, Hackett & Co.
January 25, 1997
Springfield, Ohio
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
Consolidated Statements of Income
($000's in thousands except earnings per share data)
Years Ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Interest income:
Loans receivable:
First mortgage loans $ 18,074 9,763 8,867
Other loans 363 179 77
Securities available for sale 2,305 833 667
Mortgage-backed securities available for sale 2,854 740 102
Mortgage-backed securities at amortized cost - 2,136 1,730
Other 564 1,158 1,002
-------- -------- -------
Total interest income 24,160 14,809 12,445
-------- -------- -------
Interest expense:
Deposits 9,260 6,241 5,020
Federal Home Loan Bank advances 4,523 793 158
-------- -------- -------
Total interest expense 13,783 7,034 5,178
-------- -------- -------
Net interest income 10,377 7,775 7,267
Provision for loan losses 399 6 -
-------- -------- -------
Net interest income after provision for loan losses 9,978 7,769 7,267
-------- -------- -------
Non-interest income:
Gain on sales of securities 234 1,207 2
Gain from termination of benefit plans - 681 -
Fees and other charges 156 60 53
Gain on sale of assets 106 - -
Other 54 32 17
-------- -------- -------
Total non-interest income 550 1,980 72
-------- -------- -------
Non-interest expense:
Compensation and benefits 3,731 2,848 1,722
Occupancy and equipment 773 579 368
SAIF deposit insurance premium 1,465 277 313
Franchise taxes 898 797 321
Legal, accounting and examinations 360 175 161
Advertising 265 203 127
Amortization of goodwill 246 - -
Other 1,021 470 334
-------- -------- -------
Total non-interest expense 8,759 5,349 3,346
-------- -------- -------
Income before income taxes $ 1,769 4,400 3,993
Provision for income taxes 707 1,507 1,366
-------- -------- -------
Net income $ 1,062 2,893 2,627
======== ======== =======
Earnings per share (since conversion at July 29, 1994): $ 0.47 1.18 0.42
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
Consolidated Statements of Stockholders' Equity
($000's in thousands)
Years Ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Unrealized Unallocated
Gain (Loss) on Shares Held
Additional Seurities By Employee
Common Paid-In Available Stock Owner-
Stock Capital For Sale ship Plan
--------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 $ - - - -
Addition at adoption of SFAS No. 115, net of deferred taxes - - 1,125 -
Sale of 2,496,219 shares of common stock $16 per share, net of related expenses 25 38,694 - -
Issuance of 148,781 shares to Employee Stock Option Plan at $16 per share 1 2,379 - (2,380)
Net income for year ended December 31, 1994 - - - -
Dividends paid ($.125 per share) - - - -
Employee Stock Ownership Plan shares committed to be allocated,
at average market price - - - 119
Net change for year, net of deferred taxes - - (585) -
---- ------- ----- ------
Balance, December 31, 1994 26 41,073 540 (2,261)
Net income for year ended December 31, 1995 - - - -
Dividends paid ($1.00 per share) - - - -
Transfer from "held to maturity" to "available for sale", net of deferred taxes - - 490 -
Net change for year, net of deferred taxes - - (399) -
Treasury shares acquired - - - -
Shares awarded under Management Recognition Plan - (88) - -
Management Recognition Plan expense - - - -
Employee Stock Ownership Plan shares committed to be allocated,
at average market price - 63 - 238
---- ------- ----- ------
Balance, December 31, 1995 26 41,048 631 (2,023)
Net income for year ended December 31, 1996 - - - -
Dividends paid ($1.00 per share) - - - -
Net change for year, net of deferred taxes - - (873) -
Treasury shares acquired - - - -
Management Recognition Plan expense and related tax benefit - 31 - -
Employee stock options exercised - (7) - -
Employee Stock Ownership Plan shares committed to be allocated,
at average market price - 86 - 238
----- ------- ----- ------
Balance, December 31, 1996 $ 26 41,158 (242) (1,785)
===== ======= ===== ======
</TABLE>
<PAGE>
(RESTUBBED TABLE FROM ABOVE)
<TABLE>
<CAPTION>
Deferred
Management
Recognition Treasury Retained
Plan Expense Stock Earnings Total
------------- ---------- --------- -------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 - - 21,664 21,664
Addition at adoption of SFAS No. 115, net of deferred taxes - - - 1,125
Sale of 2,496,219 shares of common stock $16 per share, net of related expenses - - - 38,719
Issuance of 148,781 shares to Employee Stock Option Plan at $16 per share - - - -
Net income for year ended December 31, 1994 - - 2,627 2,627
Dividends paid ($.125 per share) - - (311) (311)
Employee Stock Ownership Plan shares committed to be allocated,
at average market price - - - 119
Net change for year, net of deferred taxes - - - (585)
----- ------ ------ ------
Balance, December 31, 1994 - - 23,980 63,358
Net income for year ended December 31, 1995 - - 2,893 2,893
Dividends paid ($1.00 per share) - - (2,426) (2,426)
Transfer from "held to maturity" to "available for sale", net of deferred taxes - - - 490
Net change for year, net of deferred taxes - - - (399)
Treasury shares acquired - (4,769) - (4,769)
Shares awarded under Management Recognition Plan (1,231) 1,319 - -
Management Recognition Plan expense 220 - - 220
Employee Stock Ownership Plan shares committed to be allocated,
at average market price - - - 301
----- ------ ------ ------
Balance, December 31, 1995 (1,011) (3,450) 24,447 59,668
Net income for year ended December 31, 1996 - - 1,062 1,062
Dividends paid ($1.00 per share) - - (2,275) (2,275)
Net change for year, net of deferred taxes - - - (873)
Treasury shares acquired - (4,187) - (4,187)
Management Recognition Plan expense and related tax benefit 247 - - 278
Employee stock options exercised - 58 - 51
Employee Stock Ownership Plan shares committed to be allocated,
at average market price - - - 324
----- ------ ------ ------
Balance, December 31, 1996 (764) (7,579) 23,234 54,048
===== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
($000's in thousands)
Years Ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,062 2,893 2,627
Adjustments to reconcile net income to net cash provided
by operating activities:
ESOP expense 324 301 119
Management Recognition Plan expense 247 220 -
Depreciation and amortization of premises and equipment 245 220 69
Amortization of goodwill 246 - -
Stock dividends, Federal Home Loan Bank (294) (92) (71)
Deferred loan origination fees (345) (155) (305)
Premiums and discounts on loans, mortgage-backed
securities and investments (58) (334) 28
Deferred income taxes 21 129 16
Provision for loan losses 399 6 -
Net gain on sales of:
Mortgage-backed securities (208) - -
Other securities (26) (1,207) (2)
Loans (83) - -
Premises and equipment (23) - (6)
Changes in:
Prepaid expenses and other assets 469 (299) 7
Accrued expenses and other liabilities (9) (420) 280
Accrued interest receivable (999) (282) (21)
Federal income taxes accrued or refundable (230) 88 (367)
-------- ------- -------
Net cash provided by operating activities 738 1,068 2,374
-------- ------- -------
Cash flows from investing activities:
Federal Home Loan Bank stock:
Purchases (3,141) (217) -
Investment securities:
Available for sale:
Purchases (23,000) (12,000) (18,650)
Sales 51 1,287 9,791
Maturities 2,321 16,335 3,000
Mortgage-backed securities:
Available for sale:
Purchases - (10,636) (3,427)
Collections 7,567 186 -
Sales 21,770 - -
</TABLE>
(Continued)
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
Consolidated Statements of Cash Flows (Continued)
($000's in thousands)
Years Ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Cash flows from investing activities: (Continued)
At amortized cost:
Purchases - - (17,318)
Sales - - -
Collections - 6,171 6,109
Loans:
Originations (83,195) (53,574) (24,183)
Purchases (45,236) (8,765) -
Collections 37,730 16,281 18,319
Sales 17,783 - -
Premises and equipment:
Additions (699) (725) (599)
Sales proceeds 13 - 9
Investment in joint venture - - (20)
Acquisition of subsidiaries, net of cash received (14,424) (181) -
------- ------- -------
Net cash used by investing activities (82,460) (45,838) (26,969)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock upon conversion - - 38,719
Net increase (decrease) in deposits 17,284 21,600 (8,091)
Net increase in advances from borrowers for taxes and insurance 463 212 71
Advances from Federal Home Loan Bank:
Net borrowings 87,963 32,876 3,265
Repayments (19,571) (5,037) (22)
Dividends paid (2,275) (2,458) (311)
Stock options exercised, net 51 - -
Treasury stock acquired (4,187) (4,769) -
------- ------- -------
Net cash provided by financing activities 79,728 42,424 33,631
------- ------- -------
Net increase (decrease) in cash and cash equivalents (1,994) (2,346) 9,036
Cash and cash equivalents:
Beginning 17,605 19,951 10,915
------- ------- -------
Ending $ 15,611 17,605 19,951
======= ======= =======
Supplemental information:
Interest paid $ 13,396 6,875 5,160
======= ======= =======
Income taxes paid $ 861 1,290 1,530
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
($000'S in Thousands)
1. Organization and Summary of Significant Accounting Policies:
The following describes the Company and the significant accounting policies
followed in the preparation of these financial statements.
Organization and principles of consolidation
Western Ohio Financial Corporation (the "Company") is a holding company
formed in 1994 in conjunction with the conversion of Springfield Federal
Savings and Loan Association from a mutual savings association to a
stock savings bank on July 29, 1994. The Company's financial statements
include the accounts of its wholly-owned subsidiaries, Springfield
Federal Savings Bank, and its subsidiary West Central Financial
Services, Inc., Mayflower Federal Savings Bank and Seven Hills Savings
Association (collectively referred to as "Banks").
Springfield Federal Savings Bank (formerly Springfield Federal Savings
and Loan Association) was organized in 1884. Mayflower Federal Savings
Bank and Seven Hills Savings Association were acquired on March 29, 1996
and November 12, 1996, respectively. Operating results reflect only
transactions since acquisition dates. All significant intercompany
transactions have been eliminated.
Each institution is a member of the Federal Home Loan Bank system (FHLB)
and subject to regulation by the Office of Thrift Supervision (OTS), an
Office of the U.S. Department of Treasury. As members of the FHLB
system, each institution maintains a required investment in capital
stock of the Federal Home Loan Bank of Cincinnati.
The Company conducts a general banking business in west central and
southwestern Ohio which consists of attracting deposits from the general
public and applying those funds to the origination of loans for
residential, consumer and nonresidential purposes. The Company's
profitability is significantly dependent on its net interest income,
which is the difference between interest income generated from
interest-earning assets (i.e., loans and investments) and the interest
expense paid on interest-bearing liabilities (i.e., customer deposits
and borrowed funds). Net interest income is affected by the relative
amount of interest-earning assets and interest-bearing liabilities and
the interest received or paid on these balances. The level of interest
rates paid or received by the Company can be significantly influenced by
a number of environmental factors, such as governmental monetary policy,
that are outside of management's control.
Savings accounts are insured by Savings Association Insurance Fund
(SAIF), a division of the Federal Deposit Insurance Corporation (FDIC),
within certain limitations. Quarterly premiums are required by SAIF for
the insurance of such savings accounts.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets
<PAGE>
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates and such estimates may change in the future.
Areas involving the use of management's estimates and assumptions
include, but are not limited to, the allowance for loan losses, the
realization of deferred tax assets, the determination and carrying value
of impaired loans, the carrying value of other real estate owned,
recognition and measurement of loss contingencies, and depreciation of
premises and equipment.
Cash and cash equivalents
For the purpose of presentation in the consolidated statements of cash
flows, cash and cash equivalents include cash and amounts due from
depository institutions and federal funds.
Investments and mortgage-backed securities
The Company may classify its investment and mortgage-backed securities
into held-to-maturity, available-for-sale or trading categories.
Held-to-maturity securities are those which the Company has the positive
intent and ability to hold to maturity, and are reported at cost.
Available-for-sale securities are those which the Company could sell for
liquidity, cash management, or other reasons. Available-for-sale
securities are reported at fair value, with unrealized gains or losses
included as a separate component of equity, net of tax. Trading
securities are those purchased principally to sell in the near term and
are carried at fair value, with unrealized holding gains and losses
reflected in earnings. All investment and mortgage-backed securities are
classified as available-for-sale as of December 31, 1996.
Gains and losses on the sale of available-for-sale securities are
determined using the specific-identification method.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities. This statement
addresses the accounting and reporting for securities based on
management's intent and ability to hold such securities to maturity.
Securities classified as "available-for-sale," as defined, are reported
at fair value, with unrealized gains and losses excluded from earnings
and reported in a separate component of stockholders' equity. The
Company adopted the statement as of January 1, 1994. The effect of
adopting this pronouncement is shown on the statement of changes in
stockholders' equity, and had no impact on net income.
In November, 1995, FASB issued a special report, A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in
Debt and Equity Securities, which provided technical interpretations and
guidance relating to the adoption of SFAS No. 115. The guide allows an
enterprise to reassess the appropriateness of the classifications of all
securities held at that time and to account for any resulting
reclassification at fair value in accordance with SFAS No. 115. One-
time reassessments were able to be made no later than December 31, 1995.
Accordingly, management reclassified $31,328 (market value $32,070) of
mortgage-backed securities from "held to maturity" to "available for
sale" at December 31, 1995 to reflect its intention regarding those
investments.
<PAGE>
In October, 1994, FASB issued SFAS No. 119, Disclosures about Derivative
Financial Instruments and Fair Value of Financial Instruments. This
Statement requires disclosures about the amounts, nature and terms of
derivative financial instruments that are not subject to SFAS No. 105,
Disclosures of Information about Financial Statements and Off-Balance
Sheet Risk and Financial Instruments with Concentrations of Credit Risk,
because they do not result in off-balance sheet risk of accounting loss.
It requires that a distinction be made between financial instruments
held or issued for trading purposes (including dealing and other trading
activities measured at fair market value with gains and losses
recognized in earnings) and financial instruments held or issued for
purposes other than trading. SFAS No. 119 was effective beginning in
1995. The adoption of this pronouncement had no effect on the financial
statements.
Loans receivable
Loans receivable are stated at unpaid principal balances less the
allowance for loan losses, adjusted for deferred fees or costs on
originated loans and unamortized premiums or discounts on purchased
loans.
Discounts on purchased residential real estate loans are amortized to
income using the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb potential losses inherent
in the loan portfolio. The amount of allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, trends in historical
loss experience, specific impaired loans, and economic conditions.
Allowances for impaired loans generally are determined based on
collateral values or the present value of estimated cash flows. The
allowance is increased by a provision for loan losses, which is charged
to expense and reduced by charge-offs, net of recoveries. Changes in the
allowance relating to impaired loans are charged or credited to the
provision for loan losses. Because of uncertainties inherent in the
estimation process, management's estimate of credit losses inherent in
the loan portfolio and the related allowance may change in the near
term. However, the amount of the change that is reasonably possible
cannot be estimated.
Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's
periodic evaluation. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent that cash payments are
received until, in management's judgment, the borrower's ability to make
periodic interest and principal payments is back to normal, in which
case the loan is returned to accrual status.
In May 1993, FASB issued SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. This standard amends SFAS No. 5 to clarify that a
creditor should evaluate the collectibility of both contractual interest
and contractual principal on all loans when assessing the need for a
loss accrual. In October, 1994, FASB issued SFAS No. 118, Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosure,
which amends Statement No. 114 to allow a creditor to use existing
methods for recognizing interest income on impaired loans. The
statements were effective beginning in 1995.
<PAGE>
For impairment recognized in accordance with SFAS No. 114, as amended,
the entire change in present value of expected cash flows is reported as
bad debt expense in the same manner in which impairment initially was
recognized or as a reduction in the amount of bad debt expense that
otherwise would be reported. Interest on impaired loans is reported on
the cash basis. Impaired loans are loans that are considered to be
permanently impaired in relation to principal or interest based on the
original contract. Impaired loans would be charged off in the same
manner as all loans subject to charge off. For the year ended December
31, 1996, the Company had no loans that were impaired as described in
the pronouncement and therefore no interest income was recognized or
received on impaired loans.
Loan origination fees, commitment fees, and related costs
Loan fees are accounted for in accordance with SFAS No. 91, Accounting
for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases. Loan fees and
certain direct loan origination costs are deferred, and the net fee or
cost is recognized as an adjustment to interest income using the
interest method over the contractual life of the loans, adjusted for
prepayments. Commitment fees and costs relating to commitments, the
likelihood of exercise of which is remote, are recognized over the
commitment period on a straight-line basis. If the commitment is
subsequently exercised during the commitment period, the remaining
unamortized commitment fee at the time of exercise is recognized over
the life of the loan as an adjustment of yield.
Real estate acquired in settlement of loans
Real estate acquired in settlement of loans results when property
collateralizing a loan is foreclosed upon or otherwise acquired by the
Company in satisfaction of the loan. Real estate acquired in settlement
of loans is recorded at the lower of the recorded investment in the loan
satisfied or the fair value of the assets received at the time of
acquisition. The fair value of the assets received is based upon a
current appraisal adjusted for estimated carrying and selling costs.
Valuations are periodically performed by management, and an allowance
for losses is established by a charge to operations if the carrying
value of a property exceeds its estimated net realizable value.
Premises and equipment
Land is carried at cost. Company premises, furniture, and equipment are
carried at cost less accumulated depreciation and amortization computed
principally by the straight-line and accelerated methods over the
estimated useful lives of the assets.
Acquisition goodwill
Core deposit goodwill arising from acquisition of subsidiaries is being
amortized over ten years under the sum-of-the-years method. Other
goodwill arising from acquisitions is being amortized over twenty years
using the straight-line method.
Income taxes
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes
in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
<PAGE>
Employee Stock Ownership Plan
Shares committed to be allocated to the Employee Stock Ownership Plan
(ESOP) are charged to expense at the average market price for the year.
The excess of average market value over cost of shares is added to
additional paid-in capital.
Dividends are paid only on shares allocated to beneficiary's accounts.
Management Recognition Plan
The cost, measured by the market value of shares at the date of the
award, of 69,846 shares awarded to Directors and employees under the
Management Recognition Plan is being amortized to expense over the
vesting periods of the awards on the straight-line method.
Mortgage servicing rights
Mortgage servicing rights are accounted for under SFAS No. 122,
Accounting for Mortgage Servicing Rights. This statement requires that a
mortgage banking enterprise recognize as separate assets rights to
service mortgage loans for others, however those servicing rights are
acquired. A mortgage banking enterprise that acquires mortgage servicing
rights through either the purchase or origination of mortgage loans and
sells or securitizes those loans with servicing rights retained
allocates the total cost of mortgage loans to the mortgage servicing
rights and the loans based on their relative fair value. SFAS No. 122
was effective for fiscal years beginning after December 31, 1995.
Concentration of credit risk
The Company grants residential real estate, consumer and commercial
loans to customers located in Clark, Hamilton and contiguous counties in
Ohio and Kentucky. 82.1% of loans are secured by one-to-four family
residences.
Earnings per share
Earnings per share has been computed on the basis of the weighted
average number of common shares outstanding. The weighted number of
common shares outstanding includes shares awarded under the Management
Recognition Plan, and shares allocated and committed to be allocated
under the Employee Stock Ownership Plan. The Company completed its
conversion from a mutual savings association to a stock savings bank on
July 29, 1994; accordingly, the earnings per share for the year ended
December 31, 1994, reflect only operations from the date of the
conversion.
Reclassifications
Certain amounts appearing in the 1995 and 1994 consolidated financial
statements and notes to consolidated financial statements have been
reclassified to conform to the 1996 presentation.
<PAGE>
2. Securities:
Securities available for sale
The Company had investment securities available for sale carried at market
value, at December 31, 1996 and 1995, as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1996:
Obligations of U.S. government agencies $ 36,092 4 (455) 35,641
FHLMC Stock 3 85 - 88
--------- ---- ------ --------
$ 36,095 89 (455) 35,729
========= ==== ====== ========
December 31, 1995:
Obligations of U.S. government agencies $ 12,000 39 - 12,039
========= ==== ====== ========
</TABLE>
The amortized cost and estimated market values of obligations of U.S.
government agencies available for sale at December 31, 1996, by contractual
maturity, are shown below. Expected maturities may differ from contractual
maturities because the U. S. government agencies may call the obligations
with or without call or prepayment penalties in 1997.
Estimated
Amortized Fair
Cost Value
--------- ---------
Due in one year or less $ 1,299 1,299
Due after one year through five years 4,393 4,378
Due after five years through ten years 30,000 29,566
Due after ten years 400 398
-------- -------
$ 36,092 35,641
======== ======
At December 31, 1996, the Company recorded an unrealized loss of $366, net
of $123 in deferred taxes, to decrease investment securities available for
sale to market value. The net unrealized loss of $243 is included as a
component of stockholders' equity.
Proceeds and resulting gains realized from sales of investment securities
available for sale during the year ended December 31, 1996, were as follows:
Gross Gross Gross Net Realized
Proceeds Gains Losses Gain
-------- ----- ------ ------------
$ 51 26 - 26
==== == = ==
<PAGE>
3. Mortgage-Backed Securities:
Mortgage-backed securities available for sale
The Company had mortgage-backed securities available for sale carried at
market value, at December 31, 1996 and 1995, as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1996:
Collateralized mortgage obligations $ 489 - (8) 481
Mortgage pass-through certificates 25,714 316 (215) 25,815
Real estate mortgage investment conduits 10,639 - (92) 10,547
------- ----- ------ ------
$ 36,842 316 (315) 36,843
====== === ==== ======
December 31, 1995:
Mortgage pass-through certificates $ 29,046 655 - 29,701
Real estate mortgage investment conduits 15,754 412 148 16,018
------ ------ ------- ------
$ 44,800 1,067 148 45,719
====== ===== ======= ======
</TABLE>
The amortized cost and estimated market values of mortgage-backed securities
available for sale at December 31, 1996, by contractual maturity, are shown
below. Expected maturities will differ from final maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
Estimated
Amortized Fair
Cost Value
--------- ---------
Due in one year or less $ 379 365
Due after one year through five years - -
Due after five years through ten years 285 291
Due after ten years 36,178 36,187
-------- -------
$ 36,842 36,843
======== ======
At December 31, 1996, the Company recorded an unrealized gain of $1, net of
deferred taxes, to increase mortgage-backed securities available for sale to
market value. The net unrealized gain is included as a component of
stockholders' equity.
Proceeds and resulting gains realized from the sale of mortgage-backed
securities available for sale during the year ended December 31, 1996, were
as follows:
Gross Gross Gross Net Realized
Proceeds Gains Losses Gain
-------- ----- ------ ------------
$ 21,770 208 - 208
======== === == ===
<PAGE>
Mortgage-backed securities at amortized cost
As a result of the transfer, during 1995, of mortgage-backed securities from
"held to maturity" to "available for sale", the Company had no
mortgage-backed securities at amortized cost at December 31, 1996.
4. Loans Receivable:
Loans receivable at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Principal balances of first mortgage loans secured by:
One-to-four family residences $ 242,185 131,262
Other properties 33,007 15,034
Construction loans 10,965 5,405
--------- -------
286,157 151,701
--------- -------
Adjustments for:
Undisbursed portion of construction loans (5,651) (2,768)
Net deferred loan fees, premiums and discounts (45) (538)
Allowance for loan losses (1,716) (774)
--------- -------
(7,412) (4,080)
--------- -------
Total first mortgage loans 278,745 147,621
--------- -------
Principal balances of consumer and other loans:
Consumer 3,668 800
Commercial 2,244 1,056
Loans on savings deposits 384 363
Home improvement loans 31 -
Home equity 2,603 474
Other 21 162
--------- -------
8,951 2,855
Less:
Unearned discounts (85) -
--------- -------
Total consumer and other loans 8,866 2,855
--------- -------
$ 287,611 150,476
========= =======
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the
years ended December 31:
1996 1995 1994
---- ---- ----
Balance at beginning of year $ 774 774 774
Beginning balance acquisitions 577 - -
Provision charged to income 399 6 -
Charge-offs, net of recoveries (34) (6) -
------ --- ---
Balance at end of year $1,716 774 774
====== === ===
<PAGE>
Certain directors, officers, and associates of such persons have loans with
the Company. Such loans, which were made in the ordinary course of business,
aggregated $1,445 and $350 at December 31, 1996 and 1995, respectively.
Activity with respect to such aggregate loans for the two years ended
December 31, 1996, consists of the following:
Balance, December 31, 1994 $ 439
New loans 57
Repayments (146)
------
Balance, December 31, 1995 350
1996 acquisitions 338
New loans 949
Repayments (192)
------
Balance, December 31, 1996 $1,445
======
5. Accrued Interest Receivable:
Accrued interest receivable at December 31 is summarized as follows:
1996 1995
---- ----
Investment securities $ 728 235
Mortgage-backed securities 227 370
Loans receivable 1,215 86
------- ----
$ 2,170 691
======= ====
6. Premises and Equipment:
Premises and equipment at December 31 are summarized as follows:
1996 1995
---- ----
Land $ 1,159 815
Buildings and improvements 3,789 2,550
Furniture, fixtures and equipment 1,813 1,095
------- -----
6,761 4,460
Accumulated depreciation (2,807) (1,918)
------- ------
$ 3,954 2,542
======= ======
7. Joint Venture
The Company is a 50% stockholder, with another local financial institution,
in the Springfield-Home Community Reinvestment Corporation (the
"Corporation"). The purpose of the Corporation is to underwrite higher risk
loans than either stockholder is able to underwrite individually.
As of December 31, 1996, the Company had invested $20 in the Corporation and
is accounting for the investment under the equity method. Any additional
funding of the Corporation will be based on the relative total assets of the
stockholders. The Corporation had a $4 loss for the year ended December 31,
1996 and a $1 net profit for the year ended December 31, 1995.
<PAGE>
8. Acquisition of Subsidiaries:
On March 29, 1996, the Company completed its acquisition of Mayflower
Federal Savings Bank, and on November 12, 1996, the Company completed its
acquisition of Seven Hills Savings Association. Both banks are located in
Cincinnati, Ohio and operate in southwestern Ohio and northern Kentucky. The
acquisitions have been treated for accounting purposes as purchases.
Details of the acquisition costs are as follows:
<TABLE>
<CAPTION>
Mayflower Seven Hills
--------- -----------
<S> <C> <C>
Purchase price and related expenses $10,149 10,652
======= ======
Amount assigned to specific assets and liabilities $ 6,755 9,794
Amount assigned to goodwill:
Core deposits 945 858
Other 2,449 -
------- ------
$10,149 10,652
======= ======
</TABLE>
The goodwill assigned to core deposit goodwill is being amortized over ten
years by the sum-of-the-years method; other goodwill is being amortized
over twenty years by the straight-line method.
Goodwill amortization expense for 1996 totalled $246.
The approximate scheduled amortization of goodwill is as follows:
1997 $ 427
1998 395
1999 362
2000 330
2001 298
2002 and years thereafter 2,194
------
$4,006
======
Results of operations of the subsidiaries are included in the statement of
income of the Company since the dates of acquisition. Pro forma (unaudited)
results of operations of the Company as if the acquisition had taken place
at January 1, 1995 are shown in the following schedule:
<TABLE>
<CAPTION>
1996 1995
------------------------- --------------------------
Pro Forma Pro Forma
As Reported (Unaudited) As Reported (Unaudited)
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Interest income $ 24,160 27,830 14,809 21,383
Interest expense 13,783 16,370 7,034 11,701
--------- ------ ------ ------
Net interest income 10,377 11,460 7,775 9,682
Provision for loan losses 399 565 6 26
--------- ------ ------ ------
Net interest income after provision
for loan losses $ 9,978 10,895 7,769 9,656
========= ====== ====== ======
Net income $ 1,062 380 2,893 2,203
========= ====== ====== ======
Earnings per share $ 0.47 0.17 1.18 0.90
========= ====== ====== ======
</TABLE>
<PAGE>
9. Deposits:
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
Weighted Average Rate 1996 1995
At December 31, ------------------- -------------------
1996 Amount Percent Amount Percent
--------------------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Demand and NOW accounts 0.93% $ 10,074 5.11 4,269 3.0
Money market accounts 4.70% 19,664 8.36 7,046 5.1
Passbook savings accounts 2.67% 27,981 11.90 24,437 17.6
------ ------ ------- -----
57,719 25.37 35,752 25.7
------ ------ ------- -----
Certificates of deposit:
0-11 months 4.88% 18,076 7.69 17,552 12.6
12-17 months 5.69% 41,019 17.44 17,673 12.7
18-23 months 5.36% 17,162 7.30 14,794 10.6
24-35 months 6.52% 56,268 23.93 21,068 15.2
36-47 months 6.24% 28,299 12.03 24,740 17.8
48-59 months 5.92% 6,210 2.64 6,775 4.8
60 months and greater 6.55% 8,450 3.59 775 .6
------- ------ -------- ------
175,484 74.63 103,377 74.3
------- ------ ------- -----
$ 233,203 100.00 139,129 100.0
======= ====== ======= =====
</TABLE>
At December 31, 1996, scheduled maturities of certificates of deposit are as
follows:
Within 1 year $ 113,856
1 to 3 years 58,446
3 to 5 years 2,499
Over 5 years 683
---------
$ 175,484
=========
Certificates of deposit with balances of one hundred thousand dollars or
more totaled $16,164 and $11,424 at December 31, 1996 and 1995,
respectively.
Interest expense on deposits for the years ended December 31 is summarized
as follows:
1996 1995 1994
---- ---- ----
Money market accounts $ 361 202 365
Passbook savings accounts 653 687 1,111
Demand and NOW accounts 63 75 74
Certificates of deposit 8,183 5,277 3,470
------ ----- -----
$9,260 6,241 5,020
====== ===== =====
10. Fair Values of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires that the Company disclose estimated fair values for its financial
instruments. Fair value estimates, methods and assumptions are set forth
below for the Company's financial instruments:
<PAGE>
Cash and equivalents
The carrying amounts reported in the balance sheet for cash and
equivalents approximate those assets' fair values.
Investment and mortgage-backed securities
For investment securities (debt instruments) and mortgage-backed
securities, fair values are based on quoted market prices where
available. If a quoted market price is not available, fair value is
estimated using quoted market prices of comparable instruments.
Loans receivable
The fair value of the loan portfolio is estimated by evaluating
homogeneous categories of loans with similar financial characteristics.
Loans are segregated by types, such as residential mortgage, commercial
real estate, and consumer. Each loan category is further segmented into
fixed and adjustable rate interest, terms, and performing and
nonperforming categories.
The fair value of performing loans, except residential mortgage loans,
is calculated by discounting contractual cash flows using estimated
market discount rates which reflect the credit and interest rate risk
inherent in the loan. For performing residential mortgage loans, fair
value is estimated by discounting contractual cash flows adjusted for
prepayment estimates using discount rates based on secondary market
sources. The fair value for significant nonperforming loans is based on
recent internal or external appraisals. Assumptions regarding credit
risk, cash flow, and discount rates are judgmentally determined by using
available market information.
Accrued interest receivable and Federal Home Loan Bank Stock
The carrying amounts of these items are a reasonable estimate of their fair
values.
Deposit liabilities
The fair values of passbook accounts, NOW accounts, money market savings and
demand deposit accounts approximate their carrying values. The fair value of
fixed maturity certificates of deposit is estimated using a discounted cash
flow calculation that applies interest rates currently offered in the
Company's market for deposits of similar remaining maturities.
Advances from FHLB
The fair value of variable rate borrowings, which reprice frequently, are
based on carrying values. For fixed-rate borrowings, fair values were
estimated using discounted cash flow analyses, based on current incremental
borrowing rates for similar types of borrowing arrangements.
Commitments to originate loans and extend credit
The fair value of commitments to originate loans approximates the
contractual amount due to the comparability of current levels of interest
rates and the committed rates. The fair value of commitments to extend
credit is not material.
<PAGE>
The estimated fair values of the Company's instruments at December 31 are as
follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----- ---------- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and interest bearing deposits $ 15,611 15,611 17,605 17,605
Investment and mortgage-backed securities 72,572 72,572 57,758 57,758
Loans receivable 287,611 287,827 150,476 151,549
Accrued interest receivable 2,170 2,170 691 691
Investment in FHLB stock 5,862 5,862 1,602 1,602
Financial liabilities:
Deposits 233,203 234,629 139,129 140,227
Advances from FHLB 102,602 102,332 31,528 31,590
Unrecognized financial instruments:
Commitments to originate loans 5,357 5,357 671 671
</TABLE>
While these estimates of fair value are based on management's judgment of
appropriate factors, there is no assurance that, were the Company to have
disposed of such items at December 31, 1996 and 1995, the estimated fair
values would necessarily have been achieved at that date, since market
values may differ depending on various circumstances. The estimated fair
values at December 31, 1996 and 1995 should not necessarily be considered to
apply at subsequent dates.
In addition, other assets, such as property and equipment, and liabilities
of the Company that are not defined as financial instruments are not
included in the above disclosures. Also, nonfinancial instruments typically
not recognized in financial statements nevertheless may have value but are
not included in the above disclosures. These include, among other items, the
estimated earning power of core deposit accounts, the trained work force,
customer goodwill and similar items.
11. Employee Benefit Plans:
Pension plan:
On October 19, 1995, the Board of Directors authorized the termination of
the defined benefit pension plan and the implementation of a 401(k) profit
sharing plan for all eligible employees. The benefits under the plan were
frozen at the benefit amount accrued as of December 31, 1995. Benefit
liabilities were satisfied by distributions permitted by the plan.
The following table sets forth the Plan's funded status and amounts
recognized in the Company's statements of financial condition at the
measurement date of October 1 and the termination date:
<TABLE>
<CAPTION>
December 31 October 1
----------- -----------------
1995 1995 1994
---- ---- ----
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
Vested $ 926 901 643
Non-vested - 7 5
------ ---- ---
$ 926 908 648
====== ==== ===
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31 October 1
----------- -----------------
1995 1995 1994
---- ---- ----
<S> <C> <C> <C>
Projected benefit obligation for services rendered to date $ 926 1,530 1,341
Plan assets at fair value; primarily cash, certificates of
deposit, cash value of life insurance and mortgages 1,210 1,202 999
------ ----- -----
Projected benefit obligation (over) under of plan assets 284 (328) (342)
Termination expense (212) - -
Unrecognized net loss from past experience different
from that assumed and effects of changes in assumptions (103) (103) (170)
Prior service cost not yet recognized in periodic pension cost 186 322 335
Unrecognized net transition asset being amortized over 28.5 years (155) (155) (161)
------ ----- -----
Accrued pension cost at end of period $ - (264) (338)
====== ===== =====
</TABLE>
The components of net pension expense for the periods ended are as
follows:
<TABLE>
<CAPTION>
Three months ended Years Ended
December 31 September 30
------------------ ---------------
1995 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost benefits earned during the year $ 35 100 87
Interest cost on projected benefit obligation 28 103 92
Actual return on assets (22) (50) (50)
Net amortization and deferral (209) (24) (20)
Curtailment gain 644 - -
----- --- ---
$ 476 129 109
===== === ===
Assumptions used to develop the net periodic
pension cost were:
Discount rate 7.5% 7.5% 7.5%
Expected long-term rate of return on assets 7.5% 7.5% 7.5%
Rate of increase in compensation levels 5.5% 5.5% 5.5%
</TABLE>
Postretirement healthcare plan
The Company provided a postretirement healthcare plan for retirees. The Plan
provided for the payment of an equivalent employer portion of medical
insurance premiums for retirees and dependents at age 62 and a supplemental
equivalent employer portion of medical insurance premiums for a Medicare
supplement at age 65.
The Plan was an unfunded plan and did not contain any limitations on the
commitment to increase monetary benefits.
In December 1990, the FASB issued SFAS No. 106, Employers' Accounting for
Postretirement Benefits Other than Pensions, which requires accrual, during
the years the employee renders the necessary service, of the expected cost
of providing the above-mentioned healthcare benefits to an employee and the
employee's beneficiaries and covered dependents. The Company adopted SFAS
No. 106 in 1993.
<PAGE>
During 1995, the Board of Directors terminated the plan and beneficiaries
received a cash payment for their vested benefits as of the termination
date.
The changes in the accrued postretirement healthcare benefit cost and
accumulated postretirement benefit obligation during 1995 is summarized as
follows:
Accumulated
Accumulated Postretirement
Postretirement Healthcare
Healthcare Benefit/
Benefit Cost Obligation
-------------- --------------
Beginning of year $(277) (277)
----- ----
Recognition of components of
net periodic post-retirement
healthcare benefit cost:
Service cost (14) (14)
Interest cost (18) (18)
--- ----
(32) (32)
Experience gains 33 33
Settlement increase 171 171
Benefit payments 105 105
----- ----
Net change 277 277
----- ----
End of year $ - -
===== ====
A weighted average assumed discount rate of 7.5% was used to measure the
accumulated postretirement benefit obligation.
Employee stock ownership plan
Concurrent with the conversion from a mutual savings and loan association to
a stock savings bank, the Company issued 148,781 shares to the Employee
Stock Ownership Plan. Management intends to allocate these shares to
eligible employees' accounts over ten years starting in 1994. The plan
covers all salaried employees who meet age and service requirements.
Expense for shares committed to be allocated during 1996, 1995 and 1994 was
$324, $301 and $119, respectively. The status of ESOP shares at December 31,
1996 is as follows:
Shares
------
Allocated (including shares withdrawn) 22,317
Committed to be allocated 14,878
Unearned 111,586
-------
Total 148,781
=======
The market value of unearned shares at December 31, 1996 was $2,427.
<PAGE>
401(k) profit sharing plan
The 401(k) profit sharing plan became effective on January 1, 1996.
Participants may elect to contribute up to 15% of compensation each year,
subject to dollar limits. The Company will match 50% of the amount
contributed up to 6% of compensation. $16 was expensed under the plan in
1996.
Non-qualified deferred compensation plan
On October 19, 1995, the Board of Trustees voted to establish a
non-qualified deferred compensation plan for all employees who meet certain
service requirements. Eligible employees may contribute up to 15% of
compensation. The company will match 50% of the amount contributed (up to 6%
of compensation deferred) for participants with up to ten years of service
or 62.5% of the amount contributed (up to 8% of compensation deferred) for
participants with ten or more years of service. The Deferred Compensation
Plan became effective January 1, 1996.
Stock option and incentive plan
On January 31, 1995, the shareholders approved the 1995 Stock Option and
Incentive Plan. Under the provisions of the Plan, 264,500 shares have been
allocated for non-qualified and incentive stock options to be granted to
directors and selected employees. Grantees are awarded 10-year options to
acquire shares at the market price on the date the option is granted in five
equal annual installments commencing one year after the date of the grant.
Set forth below is activity under the plan.
<TABLE>
<CAPTION>
1995 12/31/96
Options Options Options Options Option Price
Date of Grant Granted Exercised Forfeited Outstanding Per Share
------------- ------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
January 31, 1995 197,599 3,000 6,000 188,599 $ 17.50
April 19, 1995 27,672 - - 27,672 18.50
May 22, 1995 5,000 - - 5,000 19.75
July 19, 1995 5,000 - - 5,000 20.50
August 17, 1995 1,000 - - 1,000 21.25
------- ----- ----- ------- -------------
Total grants outstanding 236,271 3,000 6,000 227,271 $ 17.50-21.25
======= ===== ===== ======= =============
Exercisable in 1997 45,751 $ 17.50-21.25
======= =============
Shares available for future
grants at December 31, 1996 34,229
=======
</TABLE>
The Company applies Accounting Principles Board (APB) Opinion 25, Accounting
for Stock Issued to Employees, and related Interpretations in accounting for
its option plans. Accordingly, no compensation cost has been recognized. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under
<PAGE>
those plans consistent with the method of FASB Statements 123, Accounting
for Stock-Based Compensation, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
1996 1995
---- ----
Net income:
As reported $1,062 2,893
Additional compensation cost 88 88
Pro forma 974 2,805
Earnings per share:
As reported $ 0.47 1.18
Pro forma 0.43 1.14
The estimated fair value of options granted was calculated by the
Black-Scholes method. Assumptions used in the calculations are as follows:
Risk-free interest rate U.S. Treasury Strips rate on dates of grants
which ranged from 6.26% to 7.24%
Expected life Life of the options which is ten years
Expected volatility 0.17% based on the 30-month history of
prices since conversion
Expected dividends $1 per share
Management recognition plan
On January 31, 1995, the shareholders approved the Management Recognition
Plan. Under the provisions of the Plan, 105,800 shares have been allocated
for awards to directors and selected officers of the company. At December
31, 1996, 69,846 shares have been awarded under the plan at a total cost of
$1,231. The cost of awards, measured by the market value of the shares
awarded at the dates of the grants, is being amortized over the sixty-month
vesting periods from the dates of the grants. $247 and $220 was amortized to
expense in 1996 and 1995, respectively. Grantees have all the benefits of
shareholders, including the right to receive dividends, except for certain
restrictions on the transferability of the shares.
Deferred compensation plan
During 1996, the Bank adopted a non-qualified compensation plan for two
officers. Under the plan, those covered agreed to defer a portion of their
current compensation in exchange for future payments. The liability for the
future payments is secured by single-premium life insurance policies on each
of the individuals covered. The premium on the policies totaling $365 is
included in other assets on the accompanying statement of financial
position.
<PAGE>
12. Advances From the Federal Home Loan Bank:
Advances from the Federal Home Loan Bank consist of the following:
<TABLE>
<CAPTION>
Current
Weighted Average
Interest Rate 1996 1995
--------------------- ---- ----
<S> <C> <C> <C>
Fixed rate advances, with monthly interest
payments, principal due in:
1996 5.95% $ - 10,000
1997 5.90% 37,254 -
1998 6.30% 25,500 7,000
1999 5.50% 20,000 -
2001 8.35% 340 340
-------- ------
83,094 17,340
-------- ------
Variable rate advances, with monthly interest
payments, principal due in:
1997 5.85% 11,007 10,641
1998 6.80% 4,000 -
2000 6.10% 1,000 -
-------- ------
16,007 10,641
-------- ------
Fixed rate advances, with monthly principal
and interest payments, final principal due in:
2003 5.89% 428 434
2004 7.01% 2,761 2,798
2005 7.16% 312 315
-------- ------
3,501 3,547
-------- ------
$102,602 31,528
======== ======
</TABLE>
Principal payments due in the five years from December 31, 1996 are detailed
as follows:
1997 $ 48,305
1998 29,548
1999 20,051
2000 1,056
2001 398
Thereafter 3,244
--------
$ 102,602
Pursuant to a collateral agreement with the Federal Home Loan Bank (FHLB),
advances are secured by all stock owned in the FHLB and qualifying first
mortgage loans totaling 150% of the advanced balance.
Interest expense on borrowed funds for the years ended December 31, 1996,
1995, and 1994 was $4,523, $793 and $158, respectively.
<PAGE>
13. Income Taxes:
Income tax expense for the years ended December 31 is summarized as follows:
1996 1995 1994
---- ---- ----
Current $ 686 1,378 1,350
Deferred 21 129 16
----- ----- -----
$ 707 1,507 1,366
===== ===== =====
Total income tax expense differed from the amounts computed by applying the
U.S. federal income tax rate of 34 percent to income before income taxes and
cumulative effects of changes in accounting principles as a result of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Expected income tax expense at federal tax rate $ 601 1,496 1,355
Dividend exclusion (1) (2) (7)
Amortization of intangible assets 81 - -
Miscellaneous 26 13 18
----- ----- -----
$ 707 1,507 1,366
===== ===== =====
</TABLE>
Temporary differences that gave rise to deferred income tax assets and
liabilities at December 31, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------ --------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liability Assets Liability
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
FHLB stock dividends not taxable $ - 453 - 220
Basis adjustments for investments
and mortgage-backed securities
available for sale 136 - - 325
Basis difference for intangible assets 2 105 - -
Amortization of discounts on loans
acquired in reciprocal loan sale - 16 - -
Loan loss reserve not currently
deductible 416 - 209 -
Adjustment for former use of cash basis
accounting method for income tax
reporting - 100 - -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1996 1995
------------------------ --------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liability Assets Liability
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Deferred loan fees previously included
in taxable income 3 - - -
Depreciation differences for income tax
reporting - 19 - -
Director deferred compensation and
management recognition plan
expense not currently deductible 131 - 75 -
--- ---- --- ---
$ 688 693 284 545
===== ==== ==== ===
</TABLE>
Legislation repealing the percentage of earnings bad debt reserve provisions
of the Internal Revenue Code previously applicable to qualifying thrift
institutions was enacted into law on August 20, 1996. The legislation, which
is part of The Small Business Job Protection Act of 1996 (the Jobs Act),
requires all thrift institutions to pay tax on or recapture excess bad debt
reserves accumulated since 1988. The legislation substantially equalizes the
taxation of banks and thrift institutions, but it protects thrifts from
taxes on bad debt reserves established prior to 1988. The new law eliminates
the percentage of taxable income method for deducting bad debt reserves for
all thrifts for tax years beginning after December 31, 1995. All thrifts are
required to recapture or pay tax on all or a portion of their bad debt
reserves added since the base year (i.e., the last taxable year beginning
before January 1, 1988). The amount of reserves to be recaptured will depend
upon whether or not an institution is a "large institution" (i.e., assets
exceed $500 million) under the bad debt rules for commercial banks. Large
institutions will have to switch to the specific charge-off method.
Institutions with assets of $500 million or less, such as the Company, will
be permitted to use the experience method to compute their bad debt
deduction. The amount to be paid by the Company is not material.
An institution is required to recapture the excess of its bad debt reserves
over the balance of the bad debt reserves outstanding at the end of the base
year ratably over a six year period beginning with the first taxable year
after December 31, 1995. Institutions can postpone the payment of these
taxes for two years if they meet a residential loan requirement during tax
years beginning before January 1, 1998. Generally, to meet the residential
loan requirement, an institution's mortgage lending activity must equal or
exceed its average mortgage lending activity for the six taxable years
preceding 1996, adjusted for inflation.
Retained earnings at December 31, 1996 and 1995, include approximately
$6,209, for which no deferred federal income tax liability has been
recognized. This amount represents an allocation of income to bad debt
deductions for tax purposes only. Reduction of amounts so allocated for
purposes other than tax bad debt losses or adjustments arising from
carryback of net operating losses would create income for tax purposes only,
which would be subject to the then current corporate income tax rate. The
unrecorded deferred income tax liability on the above amount was
approximately $2,111 at December 31, 1996 and 1995.
<PAGE>
14. Stockholders' Equity:
At the time of the conversion, July 29, 1994, the Company established a
liquidation account in an amount of $21,664, which is equal to the Company's
regulatory capital at December 31, 1993. The liquidation account will be
maintained for the benefit of eligible savings account holders who maintain
their savings account in the Company after conversion.
In the event of a complete liquidation (and only in such event), each
eligible savings account holder will be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current
adjusted balance of savings accounts held before any liquidation
distribution may be made with respect to capital stock. Except for the
repurchase of stock and payment of dividends by the Company, the existence
of the liquidation account will not restrict the use or application of such
related earnings.
The Company may not declare or pay a cash dividend on, or repurchase any of,
its capital stock if the effect thereof would cause the regulatory capital
of the Company to be reduced below either the amount required for the
liquidation account or the regulatory capital requirements imposed by the
OTS.
During 1996 and 1995, the Company reacquired 188,112 and 227,760 shares of
its common stock, respectively. Management intends to use the reacquired
shares to fund the Management Recognition Plan and Stock Option Plan.
15. Summarized Financial Information of the Parent Company:
The following condensed financial statements of the financial condition of
Western Ohio Financial Corporation as of December 31, 1996 and 1995 and the
condensed statements of operations and cash flows for the years ended
December 31, 1996 and 1995 should be read in conjunction with the
consolidated financial statements and notes thereto.
Western Ohio Financial Corporation
Statements of Financial Condition
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Assets:
Cash and cash equivalents $ 4,959 11,237
Investments and mortgage-backed securities - 2,912
Accrued interest receivable - 25
Investment in Springfield Federal Savings Bank 20,562 20,562
Investment in Mayflower Federal Savings Bank 10,021 -
Investment in Seven Hills Savings Association 9,647 -
Deferred federal income taxes 75 49
Prepaid expenses and other assets 10 74
Deferred acquisition costs - 180
Intercompany receivables 375 223
------- -------
Total Assets $45,649 35,262
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Liabilities:
Federal income taxes payable $ 64 145
Accrued expenses and other liabilities 1,028 20
-------- -------
1,092 165
-------- -------
Stockholders' equity:
Common stock $.01 par value, 7,250,000 shares authorized
and 2,645,000 shares issued 26 26
Additional paid in capital 41,130 41,048
Unrealized gain (loss) on available for sale securities
(net of income taxes) - 51
Unallocated shares held by employee stock ownership plan (1,785) (2,023)
Deferred MRP expense (764) (1,010)
Retained earnings 13,529 455
-------- -------
52,136 38,547
Treasury stock (7,579) (3,450)
-------- -------
44,557 35,097
-------- -------
Total Liabilities and Stockholders' Equity $ 45,649 35,262
======== =======
Statements of Income
1996 1995
---- ----
Interest income:
Interest from loan to subsidiary for funding of employee
stock ownership plan $ 143 160
Other 357 997
-------- -------
500 1,157
Non-interest income 78 -
Dividends from subsidiaries 15,500 -
-------- -------
16,078 1,157
Non-interest expenses (805) (714)
-------- -------
Income before income taxes 15,273 443
Provision for income taxes 76 151
-------- -------
Net Income $ 15,349 292
======== =======
Statements of Cash Flows
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 15,349 292
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of investments (54) -
Amortization - (89)
ESOP and MRP expense not requiring cash 566 522
Change in:
Other assets 63 4
Other liabilities 927 84
-------- -------
Net cash provided by operating activities 16,851 813
-------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from investing activities:
Investment in subsidiaries (19,488) -
Proceeds from sale of investments 2,915 -
Maturities and principal collected - 6,623
Deferred acquisition costs - (180)
Intercompany advance (152) (223)
-------- -------
Net cash provided (used) by investing activities (16,725) 6,220
-------- -------
Cash flows from financing activities:
Dividends paid (2,275) (2,440)
Treasury shares acquired (4,129) (4,769)
-------- -------
Net cash provided by financing activities (6,404) (7,209)
-------- -------
Net decrease in cash and cash equivalents (6,278) (176)
Cash and cash equivalents:
Beginning 11,237 11,413
-------- -------
Ending $ 4,959 11,237
======== =======
Supplemental information:
Income taxes paid $ - 64
======= =======
</TABLE>
16. Regulatory Capital Requirements:
In connection with the insurance of its deposits by the Federal Deposit
Insurance Corporation, the Banks are required to maintain certain minimum
capital requirements. If the Banks fail to meet their minimum capital
requirements in the future, the Office of Thrift Supervision may take such
action as it deems appropriate to protect the deposit insurance fund, the
Banks and their depositors and investors. Such action may include various
regulatory actions to limit the Banks' operations.
The following is a summary of the Banks' consolidated regulatory capital and
ratios at December 31, 1996:
Amount %
------ ---
Tangible capital:
Banks' $ 45,720 11.8
Requirement 5,788 1.5
-------- ----
Excess $ 39,932 10.3
======== ====
Core capital:
Banks' $ 45,720 11.8
Requirement 11,578 3.0
-------- ----
Excess $ 34,142 8.8
======== ====
Risk-based capital:
Banks' $ 47,436 23.4
Requirement 16,239 8.0
-------- ----
Excess $ 31,197 15.4
======== ====
<PAGE>
A reconciliation of the Banks' consolidated capital in accordance with
generally accepted accounting principles (GAAP) and regulatory capital is as
follows at December 31, 1996:
Stockholders' equity per financial statements $ 54,048
--------
Parent company's equity not available
for regulatory purposes:
Equity of parent company (44,557)
Less investment in subsidiaries 40,230
--------
(4,327)
--------
Equity of subsidiary holding companies (179)
--------
Equity of subsidiaries 49,542
Unamortized mortgage servicing rights (58)
Acquisition goodwill (4,006)
Unrealized loss on securities available for sale 242
--------
Total tangible and core capital 45,720
Allowance for loan losses as defined 1,716
--------
Total risk based capital $ 47,436
========
17. Commitments and Contingencies:
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying financial statements. The principal commitments of the Company
are as follows:
Loan commitments and commitments to extend credit
At December 31, 1996, the Company had outstanding firm commitments to
originate loans and extend credit as follows:
Fixed Variable
Rate Rate Total
----- -------- -----
First mortgage loans $ - 1,197 1,197
Consumer and other loans - - -
Commitments to extend credit:
Home equity - 3,349 3,349
Commercial - 811 811
--- ----- -----
$ - 5,357 5,357
=== ===== =====
Fees received in connection with these commitments have not been recognized
in income.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates
<PAGE>
or other termination clauses. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
Deposit insurance fund recapitalization
The United States Congress enacted legislation to recapitalize the Federal
Deposit Insurance Corporation's Savings Association Insurance Fund (SAIF)
through a one-time special assessment of $0.657 per $100 of deposits held by
the Company on March 31, 1995. The Company paid an additional assessment of
$1,064 that was charged to expense and reduced net income in 1996.
18. Selected Quarterly Financial Data (Unaudited):
Selected quarterly financial data are presented below for the quarters
ending December 31, 1996 and 1995. Year-end reclassifications have not been
reflected.
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total interest income $ 4,505 5,868 6,491 7,296
Total interest expense 2,392 3,462 3,746 4,183
------- ----- ------ ------
Net interest income 2,113 2,406 2,745 3,113
Provision for losses 80 64 195 60
------- ----- ------ ------
Net interest income after
provision for losses 2,033 2,342 2,550 3,053
Total non-interest income 23 131 310(1) 86
Total non-interest expenses (1,576) (1,937) (3,098)(2) (2,148)
------ ------ ------ ------
Income before income expense 480 536 (238) 991
Income tax expense (benefit) 200 184 (71) 394
------- ------ ------ ------
Net Income $ 280 352 (167) 597
====== ====== ====== ======
Earnings per share $ 0.12 0.15 (0.07) 0.27
====== ====== ====== ======
Market range:
High bid $ 24 23-3/4 23 21-3/4
Low bid $ 21-1/4 22-1/4 19-1/2 19-1/2
</TABLE>
- -----------
(1) Third quarter earnings include $234 gain from sale of investments.
(2) Third quarter expenses include special SAIF assessment of $1.1 million.
<PAGE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total interest income $ 3,423 3,424 3,747 4,215
Total interest expense (1,414) (1,584) (1,847) (2,189)
-------- ------ ------ ------
Net interest income 2,009 1,840 1,900 2,026
Provision for losses - (6) - -
-------- ------ ------ ------
Net interest income after
provision for losses 2,009 1,834 1,900 2,026
Total non-interest income(1)(2) 298 313 327 1,042
Total non-interest expenses (1,357) (1,283) (1,314) (1,395)
-------- ------ ------ ------
Income before income expense 950 864 913 1,673
Income tax expense 309 280 297 621
-------- ------ ------ ------
Net Income $ 641 584 616 1,052
======== ====== ====== ======
Earnings per share $ 0.26 0.24 0.25 0.43
======== ====== ====== ======
Market range:
High bid 19-1/4 20 22-1/4 24-3/4
Low bid 14-3/4 18 19 21-1/2
</TABLE>
- -----------
(1) 1995 quarterly earnings include gains from sales of interest-earning assets
of $279, $294, $310 and $324.
(2) Fourth-quarter 1995 earnings include gains from termination of pension and
health-care plans of $681.
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Parent Subsidiary Ownership Organization
- ---------------------- ----------------------------- --------- ------------
<S> <C> <C> <C>
Western Ohio Financial Springfield Federal Savings 100% Federal
Corporation Bank
Western Ohio Financial Mayflower Federal Savings Bank 100% Federal
Corporation
Western Ohio Financial Seven Hills Savings Association 100% Federal
Corporation
Springfield Federal Savings Springfield-Home Community 50% Ohio
Bank Reinvestment Corporation
Springfield Federal Savings West Central Financial Services, 100% Ohio
Bank Inc.
</TABLE>
The financial statements of the Registrant are consolidated with those
of its subsidiaries.
<PAGE>
Exhibit 23
Clark, Schaefer, Hackett & Co.
Certified Public Accountants
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Registration Nos. 33-97586 and 33-97588) of Western Ohio Financial
Corporation (the "Company") of our report dated January 25, 1997, on the 1996
consolidated financial statements of the Company, which report is included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996.
/s/ Clark, Schaefer, Hackett & Co.
CLARK, SCHAEFER, HACKETT & CO.
Springfield, Ohio
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 4716
<INT-BEARING-DEPOSITS> 5406
<FED-FUNDS-SOLD> 5489
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 35,729
<INVESTMENTS-CARRYING> 36,095
<INVESTMENTS-MARKET> 35,729
<LOANS> 287,611
<ALLOWANCE> (1716)
<TOTAL-ASSETS> 392,765
<DEPOSITS> 233,203
<SHORT-TERM> 48,261
<LIABILITIES-OTHER> 2,912
<LONG-TERM> 54,341
0
0
<COMMON> 26
<OTHER-SE> 54,022
<TOTAL-LIABILITIES-AND-EQUITY> 392,765
<INTEREST-LOAN> 18,437
<INTEREST-INVEST> 5,159
<INTEREST-OTHER> 564
<INTEREST-TOTAL> 24,160
<INTEREST-DEPOSIT> 9,260
<INTEREST-EXPENSE> 4,523
<INTEREST-INCOME-NET> 10,377
<LOAN-LOSSES> 399
<SECURITIES-GAINS> 234
<EXPENSE-OTHER> 8,759
<INCOME-PRETAX> 1,769
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,062
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
<YIELD-ACTUAL> 3.26
<LOANS-NON> 2,099
<LOANS-PAST> 2,044
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 809
<ALLOWANCE-OPEN> (774)
<CHARGE-OFFS> 34
<RECOVERIES> 0
<ALLOWANCE-CLOSE> (1,716)
<ALLOWANCE-DOMESTIC> (1,716)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
