<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, 1997
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: (937) 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 March 6, 1998, was approximately $60.3
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 March 6, 1998, there were issued and outstanding 2,352,236 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, 1997.
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 a savings
and loan holding company. During fiscal 1997, the Company owned 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"). During fiscal 1997, the Company combined
these three institutions into one institution under the name "Cornerstone Bank"
(the "Bank"). Unless otherwise noted, reference during fiscal 1997 includes
Springfield, Mayflower and Seven Hills.
The Company is subject to supervision by the Office of Thrift
Supervision , Department of Treasury ("OTS") and the Bank is subject to
comprehensive regulation, examination and supervision by the OTS and by the
Federal Deposit Insurance Corporation ("FDIC"). Cornerstone Bank is a member of
the Federal Home Loan Bank ("FHLB") System and its 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, 1997,
the Company had total assets of $372.0 million, deposits of $246.9 million and
stockholders' equity of $54.6 million, or 14.7% of total assets. The Company's
Common Stock is traded on the Nasdaq National Market under the symbol "WOFC."
The Company has been, and intends to continue to be, a
community-oriented savings and loan 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.
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 (800) 600-1884.
The Company's primary market area consists of Clark County and portions
of contiguous counties. Located in west-central Ohio, Clark County's economic
environment consists of a traditional industrial base supplemented by the
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 industrial employer in the county. Its Clark County operations have
provided stable employment for the area over the last several decades. The
Community Hospital and Clark State Community College are also two major
employers in the area. In 1996, Clark County had an unemployment rate of 5.6% as
compared to the State of Ohio at 4.9% and the United States
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at 5.2%. The unemployment rate in Clark County decreased to 4.6% in 1997 as
compared with 4.5% for the State of Ohio and 5.1% 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 1997, Clark County's median housing
value was approximately $54,900. 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's market area also includes Cincinnati, Ohio. 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 3.7% and the median home price is $100,400.
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, 1997, the
Company's net loan portfolio totaled $277.7 million. At December 31, 1997, the
Company's gross loan portfolio totaled $283.6 million, of which $224.3 million,
or 79.1%, was comprised of permanent loans secured by one-to-four family
residences.
The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Bank 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, 1997, the maximum amount which the Bank could have loaned to any
one borrower and the borrower's related entities was $6.6 million. At December
31, 1997, 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 the Bank was $2.5 million secured by
real estate including four speculation homes, land for development, a personal
residence and a line of credit partially secured by real estate. In addition,
four borrowers had a combined principal and commitment outstanding of $5.3
million at December 31, 1997. The first borrower's outstanding credit is secured
by a twelve unit apartment complex, three two-family investment properties and
ten single-family investment properties. The second borrower's outstanding
credit is secured by a medical building, two fast food restaurants, and a
$200,000 commercial line of credit. The third borrower's outstanding credit is
secured by two warehouses. The fourth borrower's outstanding credit is secured
by a thirty-four unit apartment complex and a mini warehouse storage building.
The security properties on all of these loans are located in the Bank's market
areas. All but one of these loans are performing in accordance with their terms.
The loan to the largest borrower was 90 days delinquent as of December 31, 1997.
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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.
4
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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,
----------------------------------------------------------------------------------
1997 1996 1995
Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One-to-four family............... $224,289 79.10% $242,600 82.21% $131,262 84.93%
Multi-family..................... 11,247 3.97 12,476 4.23 4,502 2.91
Commercial real estate............ 21,583 7.61 20,531 6.96 10,531 6.81
Construction...................... 7,275 2.57 10,965 3.71 5,405 3.50
---------- ----- --------- ------- -------- ------
Total real estate loans........ 264,394 93.25 286,572 97.11 151,700 98.15
---------- ----- --------- ------- -------- ------
Other Loans:
Consumer Loans:
Home equity..................... 6,906 2.43 2,188 0.74 474 0.31
Deposit account................. 485 .17 384 0.13 363 0.24
Home improvement................ 18 --- 31 0.01 --- ---
Other secured................... 5,374 1.90 3,689 1.25 942 0.61
Other........................... 2,493 .88 --- --- 21 0.01
---------- ----- --------- ------- -------- ------
Total consumer loans............ 15,276 5.38 6,292 2.13 1,800 1.17
---------- ----- --------- ------- -------- ------
Commercial business loans......... 3,886 1.37 2,244 0.76 1,056 0.68
---------- ----- --------- ------- -------- ------
Total other loans.............. 19,162 6.75 8,536 2.89 2,856 1.85
---------- ----- --------- ------- -------- ------
Total loans.................... $283,556 100.00% $295,108 100.00% $154,556 100.00%
========= ====== ======== ====== ======== ======
Less:
Loans in process.................. (1,784) (5,651) (2,768)
Deferred fees and discounts....... (119) (130) (538)
Allowance for losses.............. (3,922) (1,716) (774)
---------- --------- --------
Total loans receivable, net.... $277,731 $287,611 $150,476
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1994 1993
-------------------------- --------------------------
Amount Percent Amount Percent
------------------------------------------------------
<S> <C> <C> <C> <C>
Real Estate Loans:
One-to-four family............... $89,184 83.37% $ 86,816 83.97%
Multi-family..................... 4,194 3.92 3,466 3.35
Commercial real estate............ 8,463 7.91 6,002 5.81
Construction...................... 3,252 3.04 6,312 6.10
-------- -------- --------- ------
Total real estate loans........ 105,093 98.24 102,596 99.23
-------- -------- --------- ------
Other Loans:
Consumer Loans:
Home equity..................... 77 0.07 --- ---
Deposit account................. 465 0.43 750 0.72
Home improvement................ 6 0.01 29 0.03
Other secured................... 788 0.74 --- ---
Other........................... 24 0.02 15 0.02
-------- -------- --------- ------
Total consumer loans............ 1,360 1.27 794 0.77
-------- -------- --------- ------
Commercial business loans......... 525 0.49 --- ---
-------- -------- --------- ------
Total other loans.............. 1,885 1.76 794 0.77
-------- -------- --------- ------
Total loans.................... $106,978 100.00% $103,390 100.00%
======== ====== ======== ======
Less:
Loans in process.................. (954) (3,225)
Deferred fees and discounts....... (981) (1,291)
Allowance for losses.............. (774) (774)
-------- ---------
Total loans receivable, net.... $104,269 $ 98,100
======== ========
</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,
----------------------------------------------------------------------------------
1997 1996 1995
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....................... $126,375 44.57% $155,232 52.61% $111,117 71.89%
Multi-family............................. 3,355 1.18 5,036 1.71 3,873 2.51
Commercial............................... 8,533 3.01 9,276 3.14 9,307 6.02
Construction............................. 477 .17 7,649 2.59 5,105 3.30
--------- ------ --------- ------- --------- -------
Total fixed-rate real estate loans.... 138,740 48.93 177,193 60.05 129,402 83.72
--------- ------ --------- ------- --------- -------
Commercial business....................... 804 .28 178 .06 401 0.26
Consumer.................................. 7,161 2.53 3,642 1.23 1,326 0.86
--------- ------ --------- ------- --------- -------
Total fixed-rate loans.......... 146,705 51.74 181,013 61.34 131,129 84.84
--------- ------ --------- ------- --------- -------
Adjustable-Rate Loans
Real estate:
One-to-four family....................... 97,969 34.55 87,368 29.61% 20,145 13.04%
Multi family............................. 7,892 2.78 7,440 2.52 629 0.41
Commercial............................... 13,049 4.60 11,255 3.81 1,224 0.79
Construction............................. 6,798 2.40 3,316 1.12 300 0.19
--------- ------ --------- ------- --------- -------
Total adjustable-rate real estate loans 125,708 44.33 109,379 37.06 22,298 14.43
--------- ------ --------- ------- --------- -------
Commercial business...................... 3,082 1.09 2,066 .70 655 0.42
Consumer.................................. 8,061 2.84 2,650 .90 474 0.31
--------- ------ --------- ------- --------- -------
Total adjustable-rate loans........... 136,851 48.26 114,095 38.66 23,427 15.16
--------- ------ --------- ------- --------- -------
Total loans........................... 283,556 100.00% 295,108 100.00% 154,556 100.00%
------- ====== --------- ====== ------- ======
Less:
Loans in process.......................... (1,784) (5,651) (2,768)
Deferred fees and discounts............... (119) (130) (538)
Allowance for loan losses................. (3,922) (1,716) (774)
---------- ---------- ------------
Total loans receivable, net............ $277,731 $287,611 $150,476
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1994 1993
-------------------------- --------------------------
Amount Percent Amount Percent
------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One-to-four family....................... $ 89,184 83.37% $ 86,816 83.97%
Multi-family............................. 4,194 3.92 3,466 3.35
Commercial............................... 8,463 7.91 6,002 5.81
Construction............................. 3,252 3.04 6,312 6.10
-------- ------- -------- -------
Total fixed-rate real estate loans.... 105,093 98.24 102,596 99.23
-------- ------- -------- -------
Commercial business....................... --- --- --- ---
Consumer.................................. 1,282 1.20 794 0.77
-------- ------- -------- -------
Total fixed-rate loans.......... 106,375 99.44 103,390 100.00
-------- ------- -------- -------
Adjustable-Rate Loans
Real estate:
One-to-four family....................... --- --- --- ---
Multi family............................. --- --- --- ---
Commercial............................... --- --- --- ---
Construction............................. --- --- --- ---
-------- ------- -------- -------
Total adjustable-rate real estate loans --- --- --- ---
-------- ------- -------- -------
Commercial business...................... 525 0.49 --- ---
Consumer.................................. 77 0.07 --- ---
-------- ------- -------- -------
Total adjustable-rate loans........... 602 0.56 --- ---
-------- ------- -------- -------
Total loans........................... 106,978 100.00% 103,390 100.00%
-------- ====== -------- ======
Less:
Loans in process.......................... (954) (3,225)
Deferred fees and discounts............... (981) (1,291)
Allowance for loan losses................. (774) (774)
-------- --------
Total loans receivable, net............ $104,269 $ 98,100
======== ========
</TABLE>
6
<PAGE>
The following schedule illustrates the maturities of the Company's loan
portfolio at December 31, 1997. 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,
- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998(1)................ 2,637 8.54% 1,285 8.76% 3,109 8.64% 7,031 8.62%
1999................... 127 9.48 417 9.47 494 8.84 1,038 9.17
2000................... 254 9.14 1,106 9.54 5,551 8.83 6,911 8.96
2001 and 2002.......... 2,787 9.01 6,839 9.11 1,253 8.09 10,879 8.97
2003 to 2007........... 19,438 8.17 4,451 9.01 7,107 8.41 30,996 8.35
2008 to 2017........... 66,811 7.85 15,592 8.59 1,177 10.71 83,580 8.03
2018 and following..... 137,913 7.73 4,790 8.79 418 9.15 143,121 7.77
</TABLE>
- -------------
(1) Includes demand loans and loans having no stated maturity.
At December 31, 1997, the total amount of loans due after December 31,
1998 which have predetermined interest rates is $144.9 million, while $131.6
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, 1997, the Company's one-to-four family residential
permanent mortgage loans totaled $224.3 million, or 79.1% of the Company's total
gross loan portfolio.
At December 31, 1997, $126.4 million of the Company's one-to-four
family residential mortgage loans, or 44.6% of the Company's total gross loan
portfolio, had fixed interest rates. 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 security
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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. 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. Most
properties securing real estate loans made by the Company are appraised by
independent licensed fee appraisers approved by the Board of Directors. 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, 1997, the Company
had loans to finance the construction of one-to-four family residences totaling
$5.6 million, or 2.0% 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, 1997, the Company had $32.8 million of permanent commercial and
multi-family real estate loans, which represented 11.6% of the Company's gross
loan portfolio. The Company also has $1.7 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.
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
8
<PAGE>
construction phase, the borrower pays interest only. These loans generally
provide for the payment of interest and loan fees from loan proceeds.
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 purchased two multi-family real estate
participation loans in fiscal 1997.
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. The three
largest loans are as follows: (1) $1,105,500 secured by land; (2) $948,127
secured by a commercial building used for medical services, two fast food
restaurants and a $200,000 commercial line of credit; and (3) $747,776 secured
by warehouses.
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.
At December 31, 1997, deposit loans were $485,000 or .2% of the
Company's gross loan portfolio. Home equity loans were $6.9 million or 2.4% 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 underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount. The Company offers both secured and
unsecured loans.
9
<PAGE>
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, 1997, $322,000 of the
Company's consumer loans were not performing in accordance with their terms.
However, there can be no assurance that further 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 $2.3 million as of December 31, 1997. Commercial
loans secured other than by mortgage had outstanding balances of $1.6 million as
of December 31, 1997. 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. Some 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.
While the Company offers fixed-rate and 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 1997, the Company originated $49.1 million in
fixed-rate loans and $12.5 million in adjustable-rate loans. 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.
10
<PAGE>
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.
During fiscal 1996, the Company sold $17.8 million in fixed rate loans
and $21.8 million in CMO, REMIC and mortgage-backed securities, as well as
purchased $45.2 million in fixed and adjustable rate loans. The Company has sold
$15.7 million in fixed rate loans and purchased $3.7 fixed and adjustable rate
loans during 1997. The Company also sold $10.7 million in REMIC and
mortgage-backed securities during 1997.
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,
----------------------------------------------------
1997 1996 1995
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable-rate:
Construction............................................... $11,521 $11,256 $ 300
Real estate - one to four family............................ 23,600 33,075 11,380
- multi-family............................... 593 357 629
- commercial................................. 3,276 2,567 1,224
Commercial business.......................................... 1,894 1,860 130
Consumer - home equity....................................... 5,996 1,562 397
Other consumer............................................... 2,247 119 ---
Fixed-rate:
Construction............................................... 280
Commercial business........................................ 627 388 457
Consumer................................................... 7,213 3,422 430
Real estate - one-to-four family........................... 4,263 28,029 38,043
- multi-family............................... --- 500 584
------------
- commercial................................. 141 60 ---
---------- --------- ----------
Total loans originated.............................. 61,651 83,195 53,574
-------- -------- -------
Purchases:
Acquisitions:
Loans...................................................... --- 66,433 ---
MBS........................................................ 3,710 20,729 ---
One-to-four family........................................... --- 45,236 8,765
Mortgage derivative securities............................... --- --- 10,636
------------ ----------- -------
Total purchased....................................... 3,710 32,398 19,401
--------- -------- -------
Sales and Repayments:
Loans:
Loan sale.................................................. 15,751 17,783 ---
MBS sale................................................... 10,684 21,770 ---
MBS payments............................................... 3,908 7,567 ---
Loan payments.............................................. 57,604 37,730 ---
Principal repayments......................................... --- --- 22,638
Effect of classification to available-for-sale............... --- --- (975)
------------- ----------- -------
Total reductions...................................... 87,947 84,850 21,663
-------- -------- -------
Increase (decrease) in other items, net...................... (1,704) (2,484) 81
--------- --------- ---------
Net increase (decrease).............................. $24,290 $128,259 $51,393
======= ======== =======
</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, 1997. 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One-to-four family...... 45 $1,995 .86% 1 $523 .23% 16 $ 612 .26%
Non-residential......... 5 261 .80 2 489 1.49 4 1,061 3.23
Consumer/Commercial..... 50 354 1.85 14 103 .54 30 322 1.68
</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,
-------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One-to-four family.................................. $ 612 $ 674 $ 579 $ 75 $235
Consumer............................................ 213 10 --- --- ---
Commercial real estate.............................. 1,170 1,266 --- --- 294
----- ------ ------ ------ ----
Total............................................ 1,995 1,950 579 75 529
----- ------ ----- ----- ----
Accruing loans delinquent more than 90 days........... --- 94 --- --- ---
Foreclosed assets..................................... 56 55 --- --- ---
-------- ------- ------ ------ -----
Total non-performing assets........................... $2,051 $2,099 $579 $ 75 $529
====== ====== ==== ===== ====
Total as a percentage of total assets................. .55% .52% .25% .04% .36%
====== ====== ==== ===== ====
</TABLE>
For the year ended December 31, 1997, gross interest income that would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to approximately $178,000. The Company did not
include any interest income on such loans in 1997.
Non-Performing Assets. Included in the table above in nonaccruing
one-to-four family loans at December 31, 1997, were 16 loans secured by
single-family residences located in the Company's primary market area. Also
included in non-performing assets are 26 consumer loans and 8 commercial real
estate loans.
Other Loans of Concern. Not categorized as non-performing assets at
December 31, 1997, were $2.4 million of potential problem loans. The potential
problem loans consisted of 28 single family residences, three commercial real
estate loans, two multi-family loans and four 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. Assets which do not
currently expose the
14
<PAGE>
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 bank 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
Regional 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, 1997, the Bank had classified
a total of $3.0 million of its assets as substandard, $58,000 as doubtful and
none as loss. At December 31, 1997, total classified assets were $3.1 million,
or .8% 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. In the fourth quarter of fiscal 1997, the Company provided an
allowance of $1.9 million for certain loans. These loans were primarily of a
commercial nature. At December 31, 1997, the Company had a total allowance for
loan losses of $3.9 million, or 1.4% of loans receivable, net. See Note 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.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period..................... $1,716 $ 774 $774 $774 $ 37
Beginning balance acquisition...................... --- 577 --- --- ---
Charge-offs:
One-to-four family............................... 79 34 6 --- ---
Recoveries......................................... --- --- --- --- ---
------ ------- ------ ------ ------
Net charge-offs.................................... 79 34 6 --- ---
Additions charged to operations.................... 2,285 399 6 --- 737
------ ------- ------ ------ ----
Balance at end of period........................... $3,922 $1,716 $774 $774 $774
====== ====== ==== ==== ====
Ratio of net charge-offs during the period to
average loans outstanding during the period..... -- .01% -- ---% ---%
===== --- ===== === ===
Ratio of net charge-offs during the period to
average non-performing assets.................. 3.81% 1.66% 2.99% ---% ---%
==== ==== ==== === ===
</TABLE>
The distribution of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------
1997 1996 1995
----------------------- -------------------------- --------------------------
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.................. $ 669 79.10% $ 636 82.07% $287 84.93%
Multi-family........................ 190 3.97 197 4.23 59 2.91
Commercial real estate.............. 1,338 7.61 504 6.96 253 6.81
Consumer............................ 548 5.38 81 2.27 18 1.17
Construction........................ 72 2.57 46 3.71 22 3.50
Classified assets................... 673 --- 214 --- 108 ---
Commercial.......................... 432 1.37 38 .76 21 0.68
Unallocated......................... --- --- --- --- 6 ---
------ ------ ------ ------- ----- ------
Total.......................... $3,922 100.00% $1,716 100.00% $774 100.00%
====== ====== ====== ====== ==== ======
</TABLE>
16
<PAGE>
Investment Activities
The Bank 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, 1997, the Bank's 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, 1997, the Company's cash and interest-bearing deposits
in other financial institutions totaled $31.2 million, or 8.4% of total assets.
The Company also has a $6.5 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, 1997, the Bank was 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 3 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,
---------------------------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------------------------- ------------------------ ------------ ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. government securities................ $ 501 .88% $ 794 1.50$ --- ---%
Federal agency obligations................ 21,820 38.24 35,298 66.79 12,039 45.06
------ ----- -------- ------ ------ ------
Subtotal............................... 22,321 39.12 36,092 68.29 12,039 45.06
------ ----- ------ ------
FHLB stock.................................. 6,470 11.34 5,862 11.09 1,602 6.00
FHLMC stock................................. 134 .23 3 --- --- ---
------- -------- --------- ------- ------- -------
Total investment securities and
FHLB/FHLMC stock.................... 28,925 50.69 41,957 79.38 13,641 51.06
------ ----- -------- ------ ------ ------
Average remaining life of investment
securities............................... 7.51 years 4.78 years .24 years
Other Interest-Earning Assets:
Interest-bearing deposits with banks...... 22,022 38.60 2,747 5.20 2,000 7.49
Federal funds sold........................ 6,110 10.71 8,148 15.42 11,075 41.45
------- ------- -------- ------- ------- ------
Total.................................. $57,057 100.00% $52,852 100.00% $26,716 100.00%
======= ====== ======= ====== ======= ======
Average remaining life or term to
repricing of investment securities and
other interest-earning assets, excluding
FHLB/FHLMC stock........................... 3.32 years 3.77 years .12 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, 1997
-------------------------------------------------------------------------
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....................... $ --- $ 501 $ --- $ 501 $ 501
Federal agency obligations....................... 1,195 500 20,125 21,820 21,820
----- ------ ------ ------ --------
Total investment securities...................... $1,195 $1,001 $20,125 $22,321 $22,321
====== ====== ======= ======= =======
Weighted average yield........................... 5.14% 6.45% 6.69% 6.21% 6.21%
</TABLE>
18
<PAGE>
Mortgage-Backed Securities. The Company had a $22.4 million portfolio
of mortgage-backed securities at December 31, 1997, 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 are generally more resistant to credit
problems than loans, which generally lack such insurance or guarantees. Because
these securities represent a pass through 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 $7.7 million of the Company's
adjustable-rate mortgage-backed securities are tied to the One Year Constant
Maturity Treasury Index, $9.4 million are tied to the 11th District cost of
funds and $100,000 are tied to the six month treasury. At December 31, 1997, 78%
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, 1997, the Company held $500,000 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, 1997.
<TABLE>
<CAPTION>
Due in Due in Due In Over December 31, 1997
1 to 5 years 6 to 10 years 10 Years Balance Outstanding
---------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
FHLMC.......................... $237 $1,425 $10,790 $12,452
FNMA........................... --- 285 5,768 6,053
CMOs and REMICs................ --- 488 --- 488
GNMA........................... 25 --- 3,415 3,440
---- --------- -------- ---------
$262 $2,198 $19,973 $22,433
==== ====== ======= =======
</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, demand 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,
-------------------------------------------------------
1997 1996 1995
-------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance............................................ $233,203 $139,129 $117,529
Net deposits (withdrawals)................................. (4,220) 80,678(1) 15,359
Interest credited.......................................... 17,926 13,396 6,241
-------- --------- ---------
Ending balance............................................. $246,909 $233,203 $139,129
======== ======== ========
Net increase (decrease).................................... $ 13,706 $ 94,074 $ 21,600
======== ======== =========
Percent increase (decrease)................................ 5.8 % 67.6% 18.4%
==== ==== ====
</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,
--------------------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- ---------- ------- ---------- -------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Passbook and Savings Accounts.............. $22,115 8.96% $ 27,981 12.00% $24,437 17.56%
NOW Accounts................................ 12,186 4.94 10,074 4.32 4,269 3.07
Money Market Accounts....................... 37,182 15.06 19,664 8.43 7,046 5.07
------ ----- ------- ------ -------- ------
Total Non-Certificates...................... 71,483 28.96 57,719 24.75 35,752 25.70
------ ----- -------- ------ -------- ------
Certificates:
0.00 - 3.49%.............................. 785 .32 971 .42 465 .33
3.50 - 5.49%.............................. 27,688 11.21 45,927 19.70 27,171 19.53
5.50 - 7.49%.............................. 146,319 59.26 121,281 52.00 68,859 49.49
7.50 - 9.49%.............................. 634 .25 7,305 3.13 6,882 4.95
---------- -------- -------- ------ -------- ------
Total Certificates.......................... 175,426 71.04 175,484 75.25 103,377 74.30
------- ----- -------- ------ -------- ------
Total Deposits.............................. $246,909 100.00% $233,203 100.00% $139,129 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
21
<PAGE>
The following table shows rate and maturity information for the
Company's certificates of deposit as of December 31, 1997.
<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>
March 31, 1998................................... $223 $7,869 $14,228 $ --- $22,320 12.72 %
June 30, 1998.................................... 77 8,998 12,820 --- 21,895 12.48
September 30, 1998............................... 92 3,368 17,659 --- 21,119 12.04
December 31, 1998................................ 23 1,861 15,851 35 17,770 10.13
March 31, 1999................................... 69 1,991 9,930 --- 11,990 6.83
June 30, 1999.................................... 118 733 16,015 131 16,997 9.69
September 30, 1999............................... 15 386 14,987 --- 15,388 8.77
December 31, 1999................................ 34 1,326 14,743 --- 16,103 9.18
March 31, 2000................................... 33 602 19,604 --- 20,239 11.54
June 30, 2000.................................... 2 354 3,678 --- 4,034 2.30
September 30, 2000............................... 3 --- 1,699 51 1,753 1.00
December 31, 2000................................ 97 --- 1,965 39 2,101 1.20
Thereafter....................................... --- 200 3,139 378 3,717 2.12
------- ---------- ---------- ----- ------- --------
Total......................................... $786 $27,688 $146,318 $634 $175,426 100.00%
==== ======= ======== ==== ======== ======
Percent of total.............................. .45% 15.78% 83.41% .36% 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, 1997.
<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.......................... $20,012 $19,027 $35,757 $80,406 $155,202
Certificates of deposit of
$100,000 or more....................... 2,308 2,868 3,132 11,916 20,224
-------- ------- ------ ------- -------
Total certificates of deposit........... $22,320 $21,895 $38,889 $92,322 $175,426
======== ======= ======= ======= ========
</TABLE>
Borrowings. Another source of funds includes advances from the FHLB of
Cincinnati. As a member of the FHLB of Cincinnati, the Bank is required to own
capital stock and is 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.
22
<PAGE>
Beginning in 1995, the Bank 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.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ------------ -------------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances............................................... $113,112 $102,602 $31,528
Average Balance:
FHLB advances............................................... $ 86,929 $ 76,837 $12,985
</TABLE>
The following table sets forth certain information as to the Bank's
FHLB advances at the dates indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1997 1996 1995
------------- ----------- -------------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances................................................. $68,339 $102,602 $31,528
Weighted average interest rate of
FHLB advances................................................ 5.85% 5.84% 6.11%
</TABLE>
Service Corporation Activities
Federal 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, 1997, the Bank 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.
23
<PAGE>
Additionally, at December 31, 1997, the Bank had a net book investment
of $115,900 in West Central Financial Services, an operating subsidiary created
to generate consumer lending that does not overlap with the Company's current
consumer lending.
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 commercial banks, other 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
commercial banks, other savings institutions, 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
The Bank is a federally chartered savings bank. Accordingly, the Bank
is subject to broad federal regulation extending to all its operations. The Bank
is a member 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
Bank's deposits are federally insured by 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, the Bank is required to file periodic
reports with the OTS and is 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 federal savings institutions are subject to a quarterly
assessment, based upon the institution's total assets, to fund OTS operations.
The Bank's OTS assessment for the fiscal year ended December 31, 1997 was
$128,117.
The OTS also has extensive enforcement authority over all federal
savings institutions 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
Bank is prescribed by federal laws and they are prohibited from engaging in any
activities not permitted by such laws. For instance, no federal savings
institution may invest in non-investment grade corporate debt securities. In
addition, the permissible level of investment by federal institutions in loans
secured by non-residential real property may not exceed 400% of total capital,
except with approval of the OTS. Federal savings institutions are also generally
authorized to branch nationwide. The Bank is 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.
Regulatory Capital Requirements. The Bank 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 the Bank at
December 31, 1997, and the amount by which it exceeds the
25
<PAGE>
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, 1997
-------------------------------
Amount Percent
--------------- ------------
(In thousands)
Tangible capital....................... $41,897 11.4%
Requirement............................ 5,507 1.5
------- ----
Excess................................. 36,390 9.9
====== ====
Core capital........................... $41,897 11.4%
Requirement............................ 11,014 3.0
------ ----
Excess................................. 30,883 8.4
====== ====
Risk-based capital..................... $44,330 21.6%
Risk-based requirement................. 16,409 8.0
------ ----
Excess................................. 27,921 13.6
====== ====
Current capital requirements call for tangible capital of 1.5% of
adjusted total assets, core capital of 3.0% of adjusted total assets and
risk-based capital 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 adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement, a savings association would have to
measure the 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 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
26
<PAGE>
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. The Bank's capital at December 31, 1997, met the
standards for a well- capitalized institution.
Insurance of Accounts and Regulation by the FDIC
The Bank's deposits are insured by 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.
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.
On September 30, 1996, federal legislation was enacted that required
the SAIF to be recapitalized with a one-time assessment on virtually all
SAIF-insured institutions, such as the Bank, equal to 65.7 basis points on
SAIF-insured deposits maintained by those institutions as of March 31, 1995. The
SAIF special assessment, which was paid to the FDIC in November 1996, was
approximately $798,000 for Springfield and $271,000 for Mayflower. These amounts
were accrued by the Company at September 30, 1996 by a charge to earnings.
As a result of the SAIF recapitalization, the FDIC amended its
regulation concerning the insurance premiums payable by SAIF-insured
institutions. Effective January 1, 1997, the SAIF
27
<PAGE>
insurance premium range was 0 to 27 basis points per $100 of domestic deposits.
The Bank qualifies for the minimum SAIF assessment.
Additionally, the FDIC has imposed a Financing Corporation ("FICO")
obligation assessment on SAIF- assessable deposits for the first semi-annual
period of 1998 equal to 6.48 basis points per $100 of domestic deposits, as
compared to a FICO assessment on BIF-assessable deposits for that same period
equal to 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, 1997, the Bank
had intangible assets of mortgage servicing rights of $39,795 and goodwill of
$3,581,000.
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 Bank's subsidiaries are includable subsidiaries.
At December 31, 1997, the Bank had tangible capital of $41.9 million,
or 11.4% of adjusted total assets, which is $36.4 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date.
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, 1997, the Bank 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.
28
<PAGE>
At December 31, 1997, the Bank had core capital equal to $41.9 million,
or 11.4% of adjusted total assets, which is $30.9 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, 1997, the Bank had
no capital instruments that qualify as supplementary capital and $2.4 of general
loss reserves, which was less than 1.25% of risk-weighted assets.
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 Bank had no such
exclusions from capital and assets at December 31, 1997.
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 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, 1997, the Bank had total capital (as defined above) of
$44.3 million (including $41.9 million in core capital and $2.4 of general loss
reserves) and risk-weighted assets of $199.6 million; or total capital of 21.6%
of risk-weighted assets. This amount was $27.9 million above the 8% requirement
in effect on that date.
29
<PAGE>
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 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.
30
<PAGE>
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 Bank 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 CAMELS 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings 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 4%.
At December 31, 1997, the Bank was in compliance with its regulatory liquidity
ratio.
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
31
<PAGE>
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, 1997, the
Bank met the test and has 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, 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 Bank. 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. The Bank was examined for CRA
compliance in 1997 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 Bank include the Company and any
company which is
32
<PAGE>
under common control with the Bank. 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.
Holding Company Regulation
The Company is a unitary savings and loan 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.
As a unitary savings and loan company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan company, and the activities of the Company and any of its subsidiaries
(other than the Bank or any other SAIF-insured savings association) would become
subject to such restrictions unless such other associations each qualify as a
QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of
the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan company. See "- Qualified
Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan company controlling
savings associations 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 association.
33
<PAGE>
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 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, 1997, the Bank was 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 Bank is a member 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 Bank is required to purchase and maintain stock in the
FHLB of Cincinnati. At December 31, 1997, the Bank had $6.5 million in FHLB
stock, which was in compliance with this requirement. In past years, the Bank
had received substantial dividends on its FHLB stock. Over the past five
calendar years such dividends have averaged 5.37% and were 6.11% for 1997.
34
<PAGE>
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 Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
For the year ended December 31, 1997, dividends paid by the FHLB of
Cincinnati to the Bank totaled $395,289, which constituted a $136,572 increase
over the amount of dividends received in 1996.
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
35
<PAGE>
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, 1997, the 6% and 12% limitations
restricted the percentage bad debt deduction available to the Bank.
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 beginning after December 31, 1996,
provided the institution meets certain residential lending requirements.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, 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 1997, corporations, including savings associations such as
the Bank, 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, 1997, the Bank's excess for tax purposes totaled
approximately $8.7 million.
The Company files consolidated federal income tax returns with the Bank
and its subsidiaries. Savings institutions, such as the Bank, 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.
36
<PAGE>
Ohio Taxation. The Bank is 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 1997.
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 fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
37
<PAGE>
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 W. Raisbeck 58 President and Chief Executive Officer
Thomas A. Estep 47 Vice President, Treasurer and Chief
Financial Officer
John T. Heckman 46 Executive Vice President
Gary L. Hicks 46 Executive Vice President
Robert P. Brezing 53 Senior Vice President
</TABLE>
The business experience of each executive officer of the Company is
set forth below.
John W. Raisbeck. Mr. Raisbeck is President and Chief Executive
Officer of the Company and the Bank, a position he has held since May 7, 1997.
Mr. Raisbeck has been in the banking industry for over 30 years. Prior to
joining the Company, Mr. Raisbeck was associated with several financial
institutions, including: Manufacturers Hanover Trust Company, New York, New
York, where he was Assistant Vice President, National Division; United States
Trust Company, New York, New York, where he was Vice president and Manager of
the Southeastern Region for Corporation Banking; Charleston National Bank,
Charleston, West Virginia, where he was an Executive Vice President of the
Commercial and Retail Banking Group; Bank One, Youngstown, Ohio, where he was
Executive Vice President and Credit Policy Officer; and most recently Liberty
State Bank, Twinsburg, Ohio, where he served as President and Chief Executive
Officer.
Thomas A. Estep. Mr. Estep is Vice President, Treasurer and Chief
Financial Officer of the Company and the Bank. 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.
John T. Heckman. Mr. Heckman is Executive Vice President, Operations
and Administration of the Company and the Bank. Mr. Heckman has responsibility
for all operational areas of banking activity other than lending. From 1987 to
April 1995, Mr. Heckman served as an Assistant Director at the Office of Thrift
Supervision.
Gary L. Hicks. Mr. Hicks is Executive Vice President of Mortgage
lending. Mr. Hicks has responsibility for all mortgage banking functions. Prior
positions he has held include Chief Executive Officer for a mortgage services
company and senior manager for a major Ohio Bank.
38
<PAGE>
Robert P. Brezing. Mr. Brezing is Senor Vice President of the Company
and the Bank, positions he has held since October 1997. He is manager of
Business Banking responsible for all commercial loans, commercial real estate
and all consumer loans. From 1988 to 1997, Mr. Brezing served as Vice President
of Banc One Corporation, Columbus, Ohio.
Employees
At December 31, 1997, the Company and its subsidiary had a total of 99
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, which also serves
as executive office and the Bank's nine 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, 1997.
<TABLE>
<CAPTION>
Total Net Book
Date Approximate Value at
Location Acquired Square Footage December 31, 1997
- ----------------------------------------- ------------ -------------- -----------------
(In Thousands)
Main Office:
<S> <C> <C> <C>
28 E. Main Street 1900 5,721 $1,014
Springfield, Ohio
Branch Offices:
7601 Dayton Springfield Road 1983 2,528 41
Enon, Ohio
210 N. Main Street 1987 2,369 349
New Carlisle, Ohio
1480 Upper Valley Pike 1950 3,777 389
Springfield, Ohio
50 Kahoe Lane 1993 2,369 381
Yellow Springs, Ohio
3216 Seajay Drive 1996 1,925 283
Beavercreek, Ohio
8370 Colerain Avenue 1996 4,800 460
Cincinnati, Ohio
1440 Main Street 1996 3,800 330
Cincinnati, Ohio
4860 Hunt Road Leased 1,008 6
Cincinnati, Ohio
6570 Gracely Drive 1996 1,200 12
Cincinnati, Ohio
</TABLE>
39
<PAGE>
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, 1997 was
$3.7 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, 1997 was approximately $201,000.
Item 3. Legal Proceedings
The Company and its subsidiary 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,
1997.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
Page 7 of the Company's 1997 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Selected Financial Data
Pages 8 and 9 of the Company's 1997 Annual Report to Stockholders is
herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Pages 10 through 25 of the Company's 1997 Annual Report to Stockholders
are herein incorporated by reference.
40
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In an attempt to manage its exposure to changes in interest rates,
management monitors the Company's interest rate risk. The Board of Directors
meets at least [quarterly] to review the Company's interest rate risk position
and profitability. The Board of Directors also reviews the Company's portfolio,
formulates investment strategies and oversees the timing and implementation of
transactions to assure attainment of the Company's objectives in the most
effective manner. In addition, the Board anticipates reviewing on a [quarterly]
basis the Company's asset/liability position, including simulations of the
effect on the Company's capital of various interest rate scenarios.
In managing its asset/liability mix, the Company, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, often places more emphasis on managing net interest margin
than on better matching the interest rate sensitivity of its assets and
liabilities in an effort to enhance net interest income. Management believes
that the increased net interest income resulting from a mismatch in the maturity
of its asset and liability portfolios can, during periods of declining or stable
interest rates, provide high enough returns to justify the increased exposure to
sudden and unexpected increases in interest rates.
The primary objective of the Company's investment strategy is to
provide liquidity necessary to meet funding needs as well as to address daily,
cyclical and long-term changes in the asset/liability mix, while contributing to
profitability by providing a stable flow of dependable earnings. Investments
generally include interest-bearing deposits in other federally insured financial
institutions, FHLB stock and U.S. Government securities.
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.
The Company's cost of funds responds to changes in interest rates due
to the relatively short-term nature of its deposit portfolio. Consequently, the
results of operations are heavily influenced by the levels of short-term
interest rates. The Company offers a range of maturities on its deposit products
at competitive rates and monitors the maturities on an ongoing basis. For
additional information regarding market risk, see pages 8 to 20 of the Company's
Annual Report to Stockholders.
Item 8. Financial Statements and Supplementary Data
Pages 27 through 61 of the Company's 1997 Annual Report to Stockholders
are herein incorporated by reference.
41
<PAGE>
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
As of December 31, 1997, 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.
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 28, 1998 (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 28, 1998 (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 28, 1998 (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 28, 1998
(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.
42
<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, 1997, is incorporated by reference
in this Annual Report on Form 10-K as Exhibit 13.
Pages in
Annual
Annual Report Section Report
---------------------- ----------
Consolidated Balance Sheets at
December 31, 1997 and 1996......................................... 27
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995................................... 28-29
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995............... 30-31
Consolidated Statements of Cash Flows for Years Ended
December 31, 1997, 1996 and 1995................................... 32-33
Notes to Consolidated Financial Statements........................... 34-61
Independent Auditors' Report......................................... 26
(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.
43
<PAGE>
(a) (3) Exhibits:
<TABLE>
<CAPTION>
Reference to Prior
Regulation Filing-or-Exhibit
S-K Exhibit Number Attached
Number Document Hereto
- ---------------- -------- -------------------
<S> <C> <C>
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 **
Jerry R. Mills
(d) Employment Agreement with **
Thomas A. Estep
(e) Employment Agreement with ***
John T. Heckman
(f) Employment Agreement with 10(f)
John W. Raisbeck
(g) Employment Agreement with 10(g)
Gary L. Hicks
(h) Employment Agreement with 10(h)
Robert P. Brezing
(i) 1998 Omnibus Incentive Plan 10(i)
11 Statement re computation of per None
share earnings
12 Statements re computation of ratios None
13 Annual report to security holders 13
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Reference to Prior
Regulation Filing-or-Exhibit
S-K Exhibit Number Attached
Number Document Hereto
- ---------------- -------- -------------------
<S> <C> <C>
16 Letter re change in certifying 16
accountant
18 Letter re change in accounting None
principles
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
</TABLE>
* 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:
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
44
<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.
WESTERN OHIO FINANCIAL CORPORATION
Date: March 31, 1998 By: /s/John W. Raisbeck
----------------------------------------
John W. Raisbeck, 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.
<TABLE>
<CAPTION>
<S> <C> <C>
By: /s/John W. Raisbeck By: /s/David L. Dillahunt
-------------------------------------------------- -----------------------------------------------------
John W. Raisbeck, President and Chief David L. Dillahunt, Chairman of
Executive Officer the Board
(Principal Executive Officer)
Date: March 31, 1998 Date: March 31, 1998
By: /s/Howard V. Dodds By: /s/John E. Field
-------------------------------------------------- -----------------------------------------------------
Howard V. Dodds, Director John E. Field, Director
By: /s/Carl E. Mumma By: /s/William N. Scarff
-------------------------------------------------- -----------------------------------------------------
Carl E. Mumma, Director William N. Scarff, Director
Date: March 31, 1998 Date: March 31, 1998
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, 1998 Date: March 31, 1998
</TABLE>
<PAGE>
EXHIBIT 10(f)
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of the 7th
day of May, 1997, by and between SPRINGFIELD FEDERAL SAVINGS BANK, 28 East Main
Street, Springfield, Ohio 45502 (the "Bank"), and JOHN W. RAISBECK, 580
Wheatfield Drive, Aurora, Ohio 44202 (the "Employee").
WHEREAS, it is intended that the Employee will serve as President of
the Bank; and
WHEREAS, the Board of Directors of the Bank (the "Board") has approved
and authorized the execution of this Agreement with the Employee to take effect
as stated in Section 4 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. Employment. The Bank employs the Employee as its President. Employee
shall render administrative and management services as are customarily performed
by persons situated in similar executive capacities, and shall have other powers
and duties as may from time to time be prescribed by the Board. The Employee
shall devote his best efforts and substantially all his business time and
attention to the business and affairs of the Bank and its affiliated companies,
including, but not limited to, service as President of Western Ohio Financial
Corporation (the "Holding Company").
2. Compensation.
(a) Salary. Beginning on the Commencement Date (as defined in
Section 4 below), the Bank agrees to pay the Employee during the term of this
Agreement a salary of $151,000 per year. The Employee's salary shall be payable
not less frequently than monthly and not later than the tenth day following the
expiration of the month in question.
(b) Discretionary Bonuses. The Employee shall be entitled to
participate with all other executive officers of the Bank in discretionary
bonuses as authorized and declared by the Board to its executive employees.
(c) Expenses. The Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by him (in accordance with
the policies and procedures applicable to the senior executive officers of the
Bank) in performing services hereunder, provided that the Employee properly
accounts therefor in accordance with Bank policy.
<PAGE>
3. Benefits.
(a) Participation in Retirement and Employee Benefit Plans.
The Employee shall be entitled while employed hereunder to participate in, and
receive benefits under, all plans relating to pension, thrift, profit-sharing,
group life insurance, medical coverage, education, cash bonuses, and other
retirement or employee benefits or combinations thereof, that are maintained for
the benefit of the Bank's executive employees or for its employees generally.
(b) Fringe Benefits. The Employee shall be eligible while
employed hereunder to participate in, and receive benefits under, any other
fringe benefit plans which are or may become applicable to the Bank's executive
employees or to its employees generally.
4. Term. The term of employment under this Agreement shall be a period
of three years commencing as of the date hereof (the "Commencement Date"),
subject to earlier termination as provided herein.
5. Vacations. The Employee shall be entitled to an annual vacation in
accordance with policy set by the Board. The timing of vacations shall be
scheduled in a reasonable manner by the Employee.
6. Termination of Employment; Death.
(a) The Board may terminate the Employee's employment at any
time, but any termination by the Board other than termination for cause, shall
not prejudice the Employee's right to compensation or other benefits under this
Agreement. The Employee shall have no right to receive compensation or other
benefits for any period after termination for cause. If the employment of the
Employee is involuntarily terminated, other than for "cause" as provided in this
Section 6(a) or pursuant to any of Sections 6(d) through 6(g), or by reason of
death or disability as provided in Sections 6(c) or 7, the Employee shall be
entitled to (i) his then applicable salary for the then-remaining term of the
Agreement as calculated in accordance with Section 4 hereof, payable in such
manner and at such times as such salary would have been payable to the Employee
under Section 2 had he remained in the employ of the Bank, (ii) health insurance
benefits as maintained by the Bank for the benefit of its senior executive
employees or its employees generally over the then-remaining term of the
Agreement as calculated in accordance with Section 4 hereof, and (iii) an amount
in cash equal to the difference between (A) the fair market value of the shares
of Western Ohio Financial Corporation stock which would have been allocated to
the Employee's account in the Bank's Employee Stock Ownership Plan (the "ESOP")
on the Date of Termination if the Employee had become an eligible participant in
the ESOP on July 1, 1997, less (B) the fair market value of the shares of
Western Ohio Financial Corporation stock which have been allocated to the
Employee's account in the ESOP on the Date of Termination and in which the
Employee has a vested interest on the Date of Termination.
The terms "termination" or "involuntarily terminated" in this Agreement
shall refer to the termination of the employment of Employee without his express
written consent.
<PAGE>
In case of termination of the Employee's employment for cause, the Bank
shall pay the Employee his salary through the date of termination, and the Bank
shall have no further obligation to the Employee under this Agreement. For
purposes of this Agreement, termination for "cause" shall include termination
for personal dishonesty, incompetence, willful misconduct, breach of fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, or regulation (other than traffic violations
or similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement.
(b) The Employee's employment may be voluntarily terminated by
the Employee at any time upon 90 days' written notice to the Bank or upon such
shorter period as may be agreed upon between the Employee and the Board. In the
event of such voluntary termination, the Bank shall be obligated to continue to
pay the Employee his salary and benefits only through the date of termination,
at the time such payments are due, and the Bank shall have no further obligation
to the Employee under this Agreement.
(c) In the event of the death of the Employee during the term
of employment under this Agreement and prior to any termination hereunder, the
Employee's estate, or such person as the Employee may have previously designated
in writing, shall be entitled to receive from the Bank the salary of the
Employee through the last day of the calendar month in which his death shall
have occurred, and the term of employment under this Agreement shall end on such
last day of the month.
(d) If the Employee is suspended and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA"), 12
U.S.C. (0) 1818(e)(3) and (g)(1), the Bank's obligations under this Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may, in its
discretion, (i) pay the Employee all or part of the compensation withheld while
its obligations under this Agreement were suspended and (ii) reinstate in whole
or in part any of its obligations which were suspended.
(e) If the Employee is removed and/or permanently prohibited
from participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. (0) 1818(e)(4) and (g)(1), all
obligations of the Bank under this Agreement shall terminate as of the effective
date of the order, but vested rights of the contracting parties shall not be
affected.
(f) If the Bank is in default (as defined in Section 3(x)(1)
of the FDIA), all obligations under this Agreement shall terminate as of the
date of default, but this provision shall not affect any vested rights of the
contracting parties.
(g) All obligations under this Agreement shall be terminated,
except to the extent determined that continuation of this Agreement is necessary
for the continued operation of the Bank: (i) by the Director of the Office of
Thrift Supervision (the "Director") or his or her designee, at the time the
Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust
Corporation ("RTC") enters into an agreement to provide assistance to or on
behalf of the Bank under the authority contained in Section 13(c) of the FDIA;
or (ii) by the Director or his or her designee, at the time the Director or his
or her designee approves a supervisory merger to resolve problems related
<PAGE>
to operation of the Bank or when the Bank is determined by the Director to be in
an unsafe or unsound condition. Any rights of the parties that have already
vested, however, shall not be affected by any such action.
7. Disability. If the Employee shall become disabled as defined in the
Bank's then current disability plan or if the Employee shall be otherwise unable
to serve as President, the Employee shall be entitled to receive group and other
disability income benefits of the type then provided by the Bank for other
executive employees.
8. Change in Control.
(a) Involuntary Termination. If the Employee's employment is
involuntarily terminated (other than for cause or pursuant to any of Sections
6(c) through 6(g) or Section 7 of this Agreement) in connection with or within
12 months after a change in control which occurs at any time during the term of
employment under this Agreement, the Bank shall pay to the Employee in a lump
sum in cash within 25 business days after the Date of Termination (as
hereinafter defined) of employment an amount equal to the greater of one (1)
year's salary under Section 2(a) of this Agreement, or his then applicable
salary for the remaining term of this Agreement.
(b) Definitions. For purposes of Sections 6 and 8 of this
Agreement, "Date of Termination" means the earlier of (i) the date upon which
the Bank gives notice to the Employee of the termination of his employment with
the Bank or (ii) the date upon which the Employee ceases to serve as an Employee
of the Bank, and "change in control" is defined solely as any acquisition of
control, as defined in 12 C.F.R. (0) 574.4, or any successor regulation, of the
Bank which would require the filing of an application for acquisition of control
or notice of change in control in a manner as set forth in 12 C.F.R. (0) 574.3,
or any successor regulation.
9. Miscellaneous. This Agreement shall inure to the benefit of and be
enforceable by the personal and legal representatives, executors,
administrators, successors, assigns, heirs, distributees, devisees and legatees
of the parties.
10. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid. All notices to the Bank shall
be sent to its home office, directed to the attention of the Board of Directors
of the Bank, with a copy to the Secretary of the Bank. All notices to the
Employee shall be sent to the home or other address he has most recently
provided in writing to the Bank.
11. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
12. Paragraph Headings. The paragraph headings used in this Agreement
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
13. Severability. The provisions of this Agreement shall be deemed
severable and the
<PAGE>
invalidity or unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof.
14. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Ohio.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
SPRINGFIELD FEDERAL SAVINGS BANK
/s/ David L. Dillahunt
------------------------------------
David L. Dillahunt
Chairman of the Board of Directors
EMPLOYEE
/s/ John W. Raisbeck
------------------------------------
John W. Raisbeck
<PAGE>
EXHIBIT 10(g)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 24th day of September, 1997, by and among Cornerstone Bank (hereinafter
referred to as the "Bank"), West Central Mortgage Services, Inc. ("West
Central") and Gary L. Hicks (the "Employee").
WHEREAS, the board of directors of the Bank (the "Board of Directors")
recognizes that, as is the case with publicly held corporations generally, the
possibility of a change in control of Western Ohio Financial Corporation (the
"Holding Company") and/or the Bank may exist and that such possibility, and the
uncertainty and questions which it may raise among management, may result in the
departure or distraction of key management personnel to the detriment of the
Bank, the Holding Company and their respective stockholders; and
WHEREAS, the Board of Directors believes it is in the best interests of
the Bank to enter into this Agreement with the Employee in order to assure
continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to the Employee's assigned
duties without distraction in the face of potentially disruptive circumstances
arising from the possibility of a change in control of the Holding Company or
the Bank, although no such change is now contemplated; and
WHEREAS, the Board of Directors has approved and authorized the
execution of this Agreement with the Employee to take effect as stated in
Section 2 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
(a) The term "Change in Control" means an acquisition of
control, as defined in 12 C.F.R. ss. 574.4, or any successor regulation, of the
Bank which would require the filing of an application for acquisition of control
or notice of change in control in a manner as set forth in 12 C.F.R. ss. 574.3,
or any successor regulation.
(b) The term "Commencement Date" means September 24, 1997.
(c) The term "Date of Termination" means the earlier of (1)
the date upon which the Bank gives notice to the Employee of the termination of
the Employee's employment with the Bank or (2) the date upon which the Employee
ceases to serve as an employee of the Bank.
(d) The term "Involuntary Termination" means termination of
the employment of Employee without the Employee's express written consent. The
term "Involuntary Termination" does not include Termination for Cause or
termination of employment due to retirement, death, disability or suspension or
temporary or permanent prohibition from participation in the conduct of the
Bank's affairs under Section 8 of the Federal Deposit Insurance Act ("FDIA").
1
<PAGE>
(e) The terms "Termination for Cause" and "Terminated for
Cause" mean termination of the employment of the Employee because of the
Employee's personal dishonesty, incompetence, willful misconduct, breach of a
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement.
2. Term. The term of this Agreement shall be a period of two years
commencing on the Commencement Date, subject to earlier termination as provided
herein.
3. Employment. The Employee is employed as Executive Vice President for
Lending of the Bank. As such, the Employee shall render administrative and
management services as are customarily performed by persons situated in similar
executive capacities, and shall have such other powers and duties of an officer
of the Bank as the Board of Directors may prescribe from time to time. The
parties acknowledge that the Employee also employed as Executive Vice President
of the Bank's affiliate, West Central, and that the Employee hereunder shall
receive his compensation from the Bank. The Bank and West Central shall agree on
a method by which West Central shall reimburse the Bank for an appropriate
portion of the cost of the Employee's compensation.
4. Compensation.
(a) Salary. The Bank agrees to pay the Employee while employed
under this Agreement, a salary of $75,000 per year. The amount of the Employee's
salary shall be reviewed annually by the Board of Directors. Adjustments in
salary or other compensation shall not limit or reduce any other obligation of
the Bank under this Agreement. The Employee's salary in effect from time to time
during the term of this Agreement shall not thereafter be reduced.
(b) Bonuses. (1) First and Second Tier Bonuses. The Employee
shall be entitled to bonuses as established by the Board of Directors and as set
forth in Exhibit A hereto.
(2) Deferral of Bonus Payments. The Bank and
the Employee shall agree on the terms of a deferred compensation arrangement
under which the Employee shall have the right to elect that the payment of all
or a portion of the amounts payable to him (if any) pursuant to Section 4(b)(1)
above shall be deferred and shall be invested for his benefit in accordance with
such arrangement.
(c) Expenses. The Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Employee in performing
services under this Agreement in accordance with the policies and procedures
applicable to the executive officers of the Bank, provided that the Employee
accounts for such expenses as required under such policies and procedures.
2
<PAGE>
5. Benefits.
(a) Participation in Retirement and Employee Benefit Plans.
The Employee shall be entitled to participate in all plans relating to pension,
thrift, profit-sharing, group life insurance, medical and dental coverage,
education, and other retirement or employee benefits or combinations thereof, in
which the Bank's employees generally participate.
(b) Fringe Benefits. The Employee shall be eligible to
participate in, and receive benefits under, any fringe benefit plans which are
or may become applicable to the Bank's executive officers.
6. Vacations; Leave. The Employee shall be entitled to annual paid
vacation in accordance with the policies established by the Bank's Board of
Directors for executive officers and to voluntary leave of absence, with or
without pay, from time to time at such times and upon such conditions as the
Board of Directors may determine in its discretion.
7. Termination of Employment.
(a) Involuntary Termination. The Board of Directors may
terminate the Employee's employment at any time, but, except in the case of
Termination for Cause, termination of employment shall not prejudice the
Employee's right to compensation or other benefits under this Agreement. In the
event of Involuntary Termination other than in connection with or within 12
months after a Change in Control, (1) the Bank shall pay to the Employee during
the remaining term of this Agreement the Employee's salary at the rate in effect
immediately prior to the Date of Termination, in such manner and at such times
as such salary would have been payable to the Employee under Section 4(a) if the
Employee had continued to be employed by the Bank, and (2) the Bank shall
provide to the Employee during the remaining term of this Agreement health
benefits as maintained by the Bank for the benefit of its senior executive
employees or its employees generally from time to time during the remaining term
of the Agreement.
(b) Termination for Cause. In the event of Termination for
Cause, the Bank shall pay the Employee the Employee's salary through the date on
which the Employee ceases to serve as an employee of the Bank, and the Bank
shall have no further obligation to the Employee under this Agreement.
(c) Voluntary Termination. The Employee's employment may be
voluntarily terminated by the Employee at any time upon 90 days' written notice
to the Bank or such shorter period as may be agreed upon between the Employee
and the Board of Directors. In the event of such voluntary termination, the Bank
shall be obligated to continue to pay to the Employee the Employee's salary and
benefits only through the date on which the Employee ceases to serve as ane
employee of the Bank, at the time such payments are due, and the Bank shall have
no further obligation to the Employee under this Agreement.
(d) Change in Control. In the event of Involuntary Termination
in connection with or within 12 months after a Change in Control which occurs at
any time while the Employee is employed under this Agreement, the Bank shall,
subject to Section 8 of this Agreement, pay to the
3
<PAGE>
Employee in a lump sum in cash within 25 business days after the date on which
the Employee ceases to serve as an employee of the Bank an amount equal to the
greater of one year's salary under Section 4(a) of this Agreement or the
aggregate amount of his salary (at the rate then in effect) that would be for
the remaining term of this Agreement if he had continued to be employed during
such remaining term.
(e) Death; Disability. In the event of the death of the
Employee while employed under this Agreement and prior to any termination of
employment, the Employee's estate, or such person as the Employee may have
previously designated in writing, shall be entitled to receive from the Bank the
salary of the Employee through the last day of the calendar month in which the
Employee died. If the Employee becomes disabled as defined in the Bank's then
current disability plan, if any, or if the Employee is otherwise unable to serve
as Executive Vice President for Lending, the Employee shall be entitled to
receive group and other disability income benefits of the type, if any, then
provided by the Bank for executive officers.
(f) Temporary Suspension or Prohibition. If the Employee is
suspended and/or temporarily prohibited from participating in the conduct of the
Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA,
12 U.S.C. ss. 1818(e)(3) and (g)(1), the Bank's obligations under this Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Employee all or part of the compensation withheld while
its obligations under this Agreement were suspended and (ii) reinstate in whole
or in part any of its obligations which were suspended.
(g) Permanent Suspension or Prohibition. If the Employee is
removed and/or permanently prohibited from participating in the conduct of the
Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA,
12 U.S.C. ss. 1818(e)(4) and (g)(1), all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(h) Default of the Bank. If the Bank is in default (as defined
in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the contracting parties.
(i) Termination by Regulators. All obligations under this
Agreement shall be terminated, except to the extent determined that continuation
of this Agreement is necessary for the continued operation of the Bank: (1) by
the Director of the Office of Thrift Supervision (the "Director") or his or her
designee, at the time the Federal Deposit Insurance Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) of the FDIA; or (2) by the Director or his or her
designee, at the time the Director or his or her designee approves a supervisory
merger to resolve problems related to operation of the Bank or when the Bank is
determined by the Director to be in an unsafe or unsound condition. Any rights
of the parties that have already vested, however, shall not be affected by any
such action.
8. Certain Reduction of Payments by the Bank.
4
<PAGE>
(a) Notwithstanding any other provision of this Agreement, if
the value and amounts of benefits under this Agreement, together with any other
amounts and the value of benefits received or to be received by the Employee in
connection with a Change in Control would cause any amount to be nondeductible
by the Bank or the Holding Company for federal income tax purposes pursuant to
Section 280G of the Internal Revenue Code of 1986, as amended, then amounts and
benefits under this Agreement shall be reduced (not less than zero) to the
extent necessary so as to maximize amounts and the value of benefits to the
Employee without causing any amount to become nondeductible by the Bank or the
Holding Company pursuant to or by reason of such Section 280G. The Employee
shall determine the allocation of such reduction among payments and benefits to
the Employee.
(b) Any payments made to the Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. 1828(k) and any regulations promulgated thereunder.
9. Non-competition and Non-Disclosure
(a) Non-solicitation of Employees and Customers. While
employed by the Bank and for a period of two years (the "Covenant Period") after
the Employee ceases to be employed by the Bank for any reason the Employee shall
not, for himself, or as the agent of, on behalf of, or in conjunction with, any
person or entity (other than the Bank), solicit or attempt to solicit, whether
directly or indirectly: (i) any employee of the Bank to terminate such
employee's employment relationship with the Bank; or (ii) any savings and loan,
banking, mortgage lending or similar business from any person or entity that is
or was a client, employee, or customer of the Bank and had dealt with the
Employee or any other employee of the Bank under the supervision of the
Employee.
(b) No Relationship with Certain Competitors. The Employee
shall not, directly or indirectly, own, manage, operate or control, or
participate in the ownership, management, operation or control of, or be
employed (as a director, employee or independent contractor or employee of any
independent contractor) by or connected in any manner with, any business entity
engaged in lending or in activities engaged in by West Central while the
Employee is employed by the Bank, or with any such entity conducting business in
the State of Ohio as of the date on which the Employee ceases to be an employee
of the Bank:
(i) during the Covenant Period in the event that
the Employee resigns voluntarily from
employment by the Bank or his employment by
the Bank is terminated for cause, or
(ii) during the period in which the Bank provides
compensation to the Employee pursuant to
Section 7(a) in the event of Involuntary
Termination of his employment other than in
connection with or within 12 months after a
Change In Control.
(c) Investment Not Prohibited. The provisions of Section 9(a)
and Section 9(b) shall not prevent the Employee from purchasing, solely for
investment, not more than five percent (5%) of any entity's stock or other
securities which are traded on any national or regional securities
5
<PAGE>
exchange or are actively traded in the over-the-counter market and registered
under Section 12(g) of the Securities Exchange Act of 1934.
(d) Confidential Information. The Employee acknowledges that
in the course of his employment by the Bank, he will have access to and become
informed of confidential and secret information which is a competitive asset of
the Bank ("Confidential Information"), including, without limitation, (i) the
terms of agreements between the Bank and its employees, customers or suppliers,
(ii) pricing strategy, (iii) merchandising and marketing methods, (iv) product
development ideas and strategies, (v) personnel training and development
programs, (vi) financial results, (vii) strategic plans and demographic
analyses, (viii) proprietary computer and systems software, and (ix) non-public
information concerning the Bank, its employees, suppliers or customers. The
Employee agrees that he shall keep all Confidential Information in strict
confidence and will not intentionally make known, divulge, reveal, furnish, make
available, or use any Confidential Information that could materially affect the
Bank's operations, profitability or reputation, except in the course of his
regular authorized duties on behalf of the Bank. The Employee may disclose
information as required by law after giving the Bank notice and an opportunity
to contest such requirement.
Except in the ordinary course of the Bank's business, the
Employee shall not at any time make or cause to be made, any copies, pictures,
duplicates, facsimiles or other reproductions or recordings or any abstracts or
summaries including or reflecting Confidential Information. All such documents
and other property furnished to the Employee by the Bank or otherwise acquired
or developed by the Bank shall at all times be the property of the Bank. Upon
termination of the Employee's employment by the Bank, the Employee shall return
to the Bank any such documents or other property of the Bank which are in the
possession, custody or control of the Employee.
(e) Bank Subsidiaries and Affiliates. For purposes of this
Section 9, the term "Bank" shall include all subsidiaries and affiliates of the
Bank and the phrase "savings and loan, banking, mortgage lending or similar
business" as used in Section 9(a) above shall include without limitation the
business activities engaged in by West Central.
(f) General Legal Obligations; Survival of Section 9. The
Employee's obligations under this Section 9 are in addition to, and not in
limitation of or preemption of, all other obligations of loyalty and
confidentiality which the Employee may have to the Bank under general legal or
equitable principles. The provisions of this Section 9 shall survive the
cessation of the employment of the Employee and the expiration of the term of
this Agreement.
10. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Bank at its home office,
to the attention of the Board of Directors with a copy to the Secretary of the
Bank, or, if to the Employee, to such home or other address as the Employee has
most recently provided in writing to the Bank.
11. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
6
<PAGE>
12. Headings. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
13. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
14. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Ohio.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
CORNERSTONE BANK
By: /s/ John W. Raisbeck
---------------------------------
Name: John W. Raisbeck
Its: President and CEO
WEST CENTRAL MORTGAGE SERVICES, INC.
By: /s/ John W. Raisbeck
---------------------------------
Name: John W. Raisbeck
Its: President and CEO
Employee
/s/ Gary L. Hicks
--------------------------------------
Gary L. Hicks
7
<PAGE>
EXHIBIT 10(h)
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of the 22nd
day of October, 1997, by and between CORNERSTONE BANK, 28 East Main Street,
Springfield, Ohio 45502 (the "Bank"), and ROBERT P. BREZING, 6005 Springburn,
Dublin, Ohio 43017 (the "Employee").
WHEREAS, it is intended that the Employee will serve as Senior Vice
President of the Bank; and
WHEREAS, the Board of Directors of the Bank (the "Board") has approved
and authorized the execution of this Agreement with the Employee to take effect
as stated in Section 4 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. Employment. The Bank employs the Employee as its Senior Vice
President. Employee shall render administrative and management services as are
customarily performed by persons situated in similar executive capacities, and
shall have other powers and duties as may from time to time be prescribed by the
Board. The Employee shall devote his best efforts and substantially all his
business time and attention to the business and affairs of the Bank and its
affiliated companies, including, but not limited to, service as Senior Vice
President of Western Ohio Financial Corporation (the "Holding Company").
2. Compensation.
(a) Salary. Beginning on the Commencement Date (as defined in
Section 4 below), the Bank agrees to pay the Employee during the term of this
Agreement a salary of $107,000 per year. The Employee's salary shall be payable
not less frequently than monthly and not later than the tenth day following the
expiration of the month in question.
(b) Performance Bonuses. The Employee shall be entitled to
participate with other executive officers of the Bank in performance bonuses as
authorized and declared by the Board to its executive employees.
(c) Expenses. The Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by him (in accordance with
the policies and procedures applicable to the senior executive officers of the
Bank) in performing services hereunder, provided that the Employee properly
accounts therefor in accordance with Bank policy.
<PAGE>
3. Benefits.
(a) Participation in Retirement and Employee Benefit Plans.
The Employee shall be entitled while employed hereunder to participate in, and
receive benefits under, all plans relating to pension, thrift, profit-sharing,
group life insurance, medical coverage, education, cash bonuses, and other
retirement or employee benefits or combinations thereof, that are maintained for
the benefit of the Bank's executive employees or for its employees generally.
(b) Fringe Benefits. The Employee shall be eligible while
employed hereunder to participate in, and receive benefits under, any other
fringe benefit plans which are or may become applicable to the Bank's executive
employees or to its employees generally.
4. Term. The term of employment under this Agreement shall be a period
of two years commencing as of the date hereof (the "Commencement Date"), subject
to earlier termination as provided herein.
5. Vacations. The Employee shall be entitled to an annual vacation in
accordance with policy set by the Board. The timing of vacations shall be
scheduled in a reasonable manner by the Employee.
6. Termination of Employment; Death.
(a) The Board may terminate the Employee's employment at any
time, but any termination by the Board other than termination for cause, shall
not prejudice the Employee's right to compensation or other benefits under this
Agreement. The Employee shall have no right to receive compensation or other
benefits for any period after termination for cause. If the employment of the
Employee is involuntarily terminated, other than for "cause" as provided in this
Section 6(a) or pursuant to any of Sections 6(d) through 6(g), or by reason of
death or disability as provided in Sections 6(c) or 7, the Employee shall be
entitled to (i) his then applicable salary for the then-remaining term of the
Agreement as calculated in accordance with Section 4 hereof, payable in such
manner and at such times as such salary would have been payable to the Employee
under Section 2 had he remained in the employ of the Bank, (ii) and health
insurance benefits as maintained by the Bank for the benefit of its senior
executive employees or its employees generally over the then-remaining term of
the Agreement as calculated in accordance with Section 4 hereof.
The terms "termination" or "involuntarily terminated" in this Agreement
shall refer to the termination of the employment of Employee without his express
written consent.
In case of termination of the Employee's employment for cause, the Bank
shall pay the Employee his salary through the date of termination, and the Bank
shall have no further obligation to the Employee under this Agreement. For
purposes of this Agreement, termination for "cause" shall include termination
for personal dishonesty, incompetence, willful misconduct, breach of fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, or regulation (other than traffic violations
or similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement.
<PAGE>
(b) The Employee's employment may be voluntarily terminated by
the Employee at any time upon 90 days' written notice to the Bank or upon such
shorter period as may be agreed upon between the Employee and the Board. In the
event of such voluntary termination, the Bank shall be obligated to continue to
pay the Employee his salary and benefits only through the date of termination,
at the time such payments are due, and the Bank shall have no further obligation
to the Employee under this Agreement.
(c) In the event of the death of the Employee during the term
of employment under this Agreement and prior to any termination hereunder, the
Employee's estate, or such person as the Employee may have previously designated
in writing, shall be entitled to receive from the Bank the salary of the
Employee through the last day of the calendar month in which his death shall
have occurred, and the term of employment under this Agreement shall end on such
last day of the month.
(d) If the Employee is suspended and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA"), 12
U.S.C. (0) 1818(e)(3) and (g)(1), the Bank's obligations under this Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may, in its
discretion, (i) pay the Employee all or part of the compensation withheld while
its obligations under this Agreement were suspended and (ii) reinstate in whole
or in part any of its obligations which were suspended.
(e) If the Employee is removed and/or permanently prohibited
from participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. (0) 1818(e)(4) and (g)(1), all
obligations of the Bank under this Agreement shall terminate as of the effective
date of the order, but vested rights of the contracting parties shall not be
affected.
(f) If the Bank is in default (as defined in Section 3(x)(1)
of the FDIA), all obligations under this Agreement shall terminate as of the
date of default, but this provision shall not affect any vested rights of the
contracting parties.
(g) All obligations under this Agreement shall be terminated,
except to the extent determined that continuation of this Agreement is necessary
for the continued operation of the Bank: (i) by the Director of the Office of
Thrift Supervision (the "Director") or his or her designee, at the time the
Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust
Corporation ("RTC") enters into an agreement to provide assistance to or on
behalf of the Bank under the authority contained in Section 13(c) of the FDIA;
or (ii) by the Director or his or her designee, at the time the Director or his
or her designee approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by the Director to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by any such action.
7. Disability. If the Employee shall become disabled as defined in the
Bank's then current disability plan or if the Employee shall be otherwise unable
to serve as Senior Vice President, the Employee shall be entitled to receive
group and other disability income benefits of the type then provided by the Bank
for other executive employees.
<PAGE>
8. Change in Control.
(a) Involuntary Termination. If the Employee's employment is
involuntarily terminated (other than for cause or pursuant to any of Sections
6(c) through 6(g) or Section 7 of this Agreement) in connection with or within
12 months after a change in control which occurs at any time during the term of
employment under this Agreement, the Bank shall pay to the Employee in a lump
sum in cash within 25 business days after the Date of Termination (as
hereinafter defined) of employment an amount equal to the greater of one (1)
year's salary under Section 2(a) of this Agreement, or his then applicable
salary for the remaining term of this Agreement.
(b) Definitions. For purposes of Sections 6 and 8 of this
Agreement, "Date of Termination" means the earlier of (i) the date upon which
the Bank gives notice to the Employee of the termination of his employment with
the Bank or (ii) the date upon which the Employee ceases to serve as an Employee
of the Bank, and "change in control" is defined solely as any acquisition of
control, as defined in 12 C.F.R. (0) 574.4, or any successor regulation, of the
Bank which would require the filing of an application for acquisition of control
or notice of change in control in a manner as set forth in 12 C.F.R. (0) 574.3,
or any successor regulation.
9. Miscellaneous. This Agreement shall inure to the benefit of and be
enforceable by the personal and legal representatives, executors,
administrators, successors, assigns, heirs, distributees, devisees and legatees
of the parties.
10. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid. All notices to the Bank shall
be sent to its home office, directed to the attention of the Board of Directors
of the Bank, with a copy to the Secretary of the Bank. All notices to the
Employee shall be sent to the home or other address he has most recently
provided in writing to the Bank.
11. Amendments. This Agreement is subject to the terms of a letter
agreement between the parties dated September 15, 1997, reference to which is
hereby made. Otherwise, no amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided. The parties hereto agree to amend this Agreement to comply with any
required provisions of 12 C.F.R. (0) 563.39(b), as the same may be amended.
12. Paragraph Headings. The paragraph headings used in this Agreement
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
13. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
14. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Ohio.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
CORNERSTONE BANK
By:/s/ John W. Raisbeck
---------------------------------
John W. Raisbeck, President
EMPLOYEE
/s/ Robert P. Brezing
------------------------------------
Robert P. Brezing
<PAGE>
EXHIBIT 10(i)
WESTERN OHIO FINANCIAL CORPORATION
1998 OMNIBUS INCENTIVE PLAN
1. Plan Purpose. The purpose of the Plan is to promote the long-term
interests of the Company and its stockholders by providing a means for
attracting and retaining directors, advisory directors, officers and employees
of the Company and its Affiliates.
2. Definitions. The following definitions are applicable to the Plan:
"Affiliate" -- means any "parent corporation" or "subsidiary
corporation" of the Company as such terms are defined in Section 425(e) and (f),
respectively, of the Code.
"Award" -- means the grant by the Committee under this Plan of
an Incentive Stock Option, a NonQualified Stock Option, a Stock Appreciation
Right, Restricted Stock or a Performance Award, or any combination thereof, as
provided in the Plan.
"Award Agreement" -- means the agreement evidencing the grant
of an Award made under the Plan.
"Cause" -- means termination of service by reason of personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties or gross
negligence.
"Code" -- means the Internal Revenue Code of 1986, as amended.
"Committee" -- means the Committee referred to in Section 3
hereof.
"Company" -- means Western Ohio Financial Corporation and any
successor thereto.
"Continuous Service" -- means the absence of any interruption
or termination of service as a director, advisory director, officer or employee
of the Company or an Affiliate, except that when used with respect to a person
granted an Incentive Stock Option means the absence of any interruption or
termination of service as an employee of the Company or an Affiliate. Service
shall not be considered interrupted in the case of sick leave, military leave or
any other leave of absence approved by the Company or in the case of transfers
between payroll locations of the Company or between the Company, its parent, its
subsidiaries or its successor.
"Early Retirement" -- means retirement from employment with or
as a director or advisory director of the Company prior to the Participant
either (i) having reached the age of 55 or (ii) having maintained Continuous
Service for at least three years.
"ERISA" -- means the Employee Retirement Income Security Act
of 1974, as amended.
"Incentive Stock Option" -- means an option to purchase Shares
granted by the Committee which is intended to qualify as an Incentive Stock
Option under Section 422 of the Code. Unless otherwise set forth in the Award
Agreement, any Option which does not qualify as an Incentive Stock Option for
any reason shall be deemed a Non-Qualified Stock Option.
"Market Value" -- means the closing high bid with respect to a
Share on the date in question on the Nasdaq Stock Market, or any similar system
then in use, or, if the Shares are not then traded on the Nasdaq Stock Market or
any similar system, the closing sales price on such date (or, if there is no
reported sale on such date, on the last preceding date on which any reported
sale occurred) of a Share on the Composite Tape for New York Stock
Exchange-Listed Stocks, or, if on such date the Shares are not quoted on the
Composite Tape, on the New York Stock Exchange, or if the Shares are not listed
or admitted to trading on such Exchange, on the principal United States
<PAGE>
securities exchange registered under the Securities Exchange Act of 1934 (the
"Exchange Act") on which the Shares are listed or admitted to trading, or, if
the Shares are not listed or admitted to trading on any such exchange, the fair
market value on such date of a Share as the Committee shall determine.
"Non-Qualified Stock Option" -- means an option to purchase
Shares granted by the Committee which does not qualify, for any reason, as an
Incentive Stock Option under Section 422 of the Code.
"Normal Retirement" -- means retirement from employment with
or as a director or advisory director of the Company after the Participant has
(i) reached the age of 65 and (ii) maintained Continuous Service for at least
three years.
"Option" -- means an Incentive Stock Option or a Non-Qualified
Stock Option awarded to a Participant pursuant to Section 5(a) hereof.
"Participant" -- means any director, advisory director,
officer or employee of the Company or any Affiliate who is selected by the
Committee to receive an Award.
"Plan" -- means this 1998 Omnibus Incentive Plan of the
Company.
"Performance Award" -- means an Award granted pursuant to
Section 5(d) herein.
"Related" -- means (i) in the case of a Stock Appreciation
Right, a Stock Appreciation Right which is granted in connection with, and to
the extent exercisable, in whole or in part, in lieu of, an Option or another
Stock Appreciation Right and (ii) in the case of an Option, an Option with
respect to which and to the extent a Stock Appreciation Right is exercisable, in
whole or in part, in lieu thereof.
"Restricted Stock" -- means Shares awarded to a Participant
pursuant to Section 5(c) hereof.
"Shares" -- means the shares of common stock of the Company.
"Stock Appreciation Right" -- means a stock appreciation right
with respect to Shares granted by the Committee pursuant to the Plan.
"Ten Percent Holder" -- means any individual who owns stock
possessing more than ten percent of the total combined voting power of all
classes of stock of the Company and any Affiliate.
3. Administration. The Plan shall be administered by a Committee
consisting of two or more members of the Board of Directors of the Company, each
of whom (i) shall be an outside director as defined under Section 162(m) of the
Code and the regulations thereunder and (ii) shall be a Non-Employee Director as
defined under Rule 16(b) of the Securities Exchange Act of 1934 or any similar
or successor provision. The members of the Committee shall be appointed by the
Board of Directors of the Company. Except as limited by the express provisions
of the Plan or by resolutions adopted by the Board of Directors of the Company,
the Committee shall have sole and complete authority and discretion to (i)
select Participants and grant Awards; (ii) determine the number of Shares to be
subject to types of Awards generally, as well as to individual Awards granted
under the Plan; (iii) determine the terms and conditions upon which Awards shall
be granted under the Plan; (iv) prescribe the form and terms of instruments
evidencing such grants; and (v) establish from time to time regulations for the
administration of the Plan, interpret the Plan, and make all determinations
deemed necessary or advisable for the administration of the Plan.
A majority of the Committee shall constitute a quorum, and the acts of
a majority of the members present at any meeting at which a quorum is present,
or acts approved in writing by a majority of the Committee without a meeting,
shall be acts of the Committee.
4. Shares Subject to Plan.
(a) Subject to adjustment by the operation of Section 7, the
maximum number of Shares with respect to which Awards may be made under the Plan
is 235,224 Shares. The Shares with respect to which Awards may be made under the
Plan may be either authorized and unissued shares or previously issued shares
reacquired and
<PAGE>
held as treasury shares. Shares which are subject to Related Stock Appreciation
Rights and Related Options shall be counted only once in determining whether the
maximum number of Shares with respect to which Awards may be granted under the
Plan has been exceeded. An Award shall not be considered to have been made under
the Plan with respect to any Option or Stock Appreciation Right which terminates
or with respect to Restricted Stock which is forfeited, and new Awards may be
granted under the Plan with respect to the number of Shares as to which such
termination or forfeiture has occurred.
(b) During any calendar year, no Participant may be granted
Awards under the Plan of more than 50,000 Shares, subject to adjustment as
provided in Section 7.
5. Awards.
(a) Options. The Committee is hereby authorized to grant
Options to Participants with the following terms and conditions and with such
additional terms and conditions not inconsistent with the provisions of the Plan
as the Committee shall determine, including the granting of Options in tandem
with other Awards under the Plan:
(i) Exercise Price. The exercise price per Share for
an Option shall be determined by the Committee; provided that,
in the case of an Incentive Stock Option, the exercise price
thereof shall not be less than 100% of the Market Value of a
Share on the date of grant of such Option; provided further
that, in the case of an Incentive Stock Option granted to a
Ten Percent Holder, the exercise price thereof shall not be
less than 110% of the Market Value of a Share on the date of
grant of such Option.
(ii) Option Term. The term of each Option shall be
fixed by the Committee, but shall be no greater than 15 years;
provided that, in the case of an Incentive Stock Option, the
term of such Option shall not exceed ten years; provided
further that, in the case of an Incentive Stock Option granted
to a Ten Percent Holder, the term of such option shall not
exceed five years.
(iii) Time and Method of Exercise. Except as provided
in paragraph (a) of Section 6, no Option granted hereunder may
be exercised unless at the time the Participant exercises such
Option, such Participant has maintained Continuous Service
since the date of grant of such Option. To exercise an Option
under the Plan, the Participant to whom such Option was
granted shall give written notice to the Company in form
satisfactory to the Committee (and, if partial exercises have
been permitted by the Committee, by specifying the number of
Shares with respect to which such Participant elects to
exercise such Option) together with full payment of the
exercise price, if any and to the extent notice is received by
the Company. Payment, if any is required, shall be made either
(i) in cash (including check, bank draft or money order) or
(ii) by delivering (A) Shares already owned by the Participant
and having a fair market value equal to the applicable
exercise price, such fair market value to be determined in
such appropriate manner as may be provided by the Committee or
as may be required in order to comply with or to conform to
requirements of any applicable laws or regulations, or (B) a
combination of cash and such Shares.
(iv) Option Agreements. At the time of an Award of an
Option, the Participant shall enter into an Award Agreement
with the Company in a form specified by the Committee,
agreeing to the terms and conditions of the Award and such
other matters as the Committee shall in its sole discretion
determine.
(v) Limitations on Value of Exercisable Incentive
Stock Options. The aggregate Market Value of the Shares with
respect to which Incentive Stock Options are exercisable for
the first time by a Participant in any calendar year shall not
exceed $100,000.
(vi) Eligible Recipients of Incentive Stock Options.
Incentive Stock Options may be granted by the Committee only
to officers or employees of the Company or its Affiliates.
<PAGE>
(b) Stock Appreciation Rights. The Committee is hereby
authorized to grant Stock Appreciation Rights to Participants with the following
terms and conditions and with such additional terms and conditions not
inconsistent with the provisions of the Plan as the Committee shall determine:
(i) General. A Stock Appreciation Right shall, upon
its exercise, entitle the Participant to whom such Stock
Appreciation Right was granted to receive a number of Shares
or cash or combination thereof, as the Committee in its
discretion shall determine, the aggregate value of which
(i.e., the sum of the amount of cash and/or Market Value of
such Shares on date of exercise) shall equal (as nearly as
possible, it being understood that the Company shall not issue
any fractional shares) the amount by which the Market Value
per Share on the date of such exercise shall exceed the
exercise price of such Stock Appreciation Right, multiplied by
the number of Shares with respect to which such Stock
Appreciation Right shall have been exercised.
(ii) Related Options. A Stock Appreciation Right may
be Related to an Option or may be granted independently of any
Option as the Committee shall from time to time in each case
determine. In the case of a Related Option, such Related
Option shall cease to be exercisable to the extent of the
Shares with respect to which the Related Stock Appreciation
Right was exercised. Upon the exercise or termination of a
Related Option, any Related Stock Appreciation Right shall
terminate to the extent of the Shares with respect to which
the Related Option was exercised or terminated. If the Related
Option is an Incentive Stock Option, the Related Option shall
satisfy all restrictions and the limitations imposed on
Incentive Stock Options under paragraph (a) of this Section 5
(including, without limitation, restrictions on exercise price
and term).
(iii) Exercise Price and Term. The exercise price and
term of each Stock Appreciation Right shall be fixed by the
Committee; provided that, that the term of a Stock
Appreciation Right shall not exceed 15 years.
(iv) Stock Appreciation Right Agreements. At the time
of an Award of a Stock Appreciation Right, the Participant
shall enter into an Award Agreement with the Company in a form
specified by the Committee, agreeing to the terms and
conditions of the Award and such other matters as the
Committee shall in its sole discretion determine.
(v) Time and Method of Exercise. Except as provided
in paragraph (a) of Section 6, no Stock Appreciation Right may
be exercised unless at the time the Participant exercises such
Stock Appreciation Right, such Participant has maintained
Continuous Service since the date of grant of such Stock
Appreciation Right. To exercise a Stock Appreciation Right
under the Plan, the Participant to whom such Stock
Appreciation Right was granted shall give written notice to
the Company in form satisfactory to the Committee (and, if
partial exercises have been permitted by the Committee, by
specifying the number of Shares with respect to which such
Participant elects to exercise such Stock Appreciation Right)
together with full payment of the exercise price, if any and
to the extent required. The date of exercise shall be the date
on which such notice is received by the Company. Payment, if
any is required, shall be made either (i) in cash (including
check, bank draft or money order) or (ii) by delivering (A)
Shares already owned by the Participant and having a fair
market value equal to the applicable exercise price, such fair
market value to be determined in such appropriate manner as
may be provided by the Committee or as may be required in
order to comply with or to conform to requirements of any
applicable laws or regulations, or (B) a combination of cash
and such Shares.
<PAGE>
(c) Restricted Stock. The Committee is hereby authorized to
grant Awards of Restricted Stock to Participants with the following terms and
conditions and with such additional terms and conditions not inconsistent with
the provisions of the Plan as the Committee shall determine:
(i) Restrictions. Shares of Restricted Stock shall be
subject to such restrictions as the Committee may impose
(including, without limitation, any limitation on the right to
vote a Share of Restricted Stock or the right to receive any
dividend or other right or property with respect thereto),
which restrictions may lapse separately or in combination at
such time or times, in such installments or otherwise as the
Committee may deem appropriate. During the period of time in
which the Shares awarded as Restricted Stock are subject to
the restrictions contemplated herein (a "Restricted Period"),
unless otherwise permitted by the Plan or by the Committee as
provided in the applicable Award Agreement, such Shares may
not be sold, assigned, transferred, pledged or otherwise
encumbered by the Participant. Except for the restrictions
which may be imposed on Restricted Stock, a Participant to
whom Shares of Restricted Stock have been awarded shall have
all the rights of a stockholder, including but not limited to
the right to receive all dividends paid on such Shares and the
right to vote such Shares.
(ii) Restricted Stock Agreements. At the time of an
Award of Shares of Restricted Stock, the Participant shall
enter into an Award Agreement with the Company in a form
specified by the Committee, agreeing to the terms and
conditions of the Award and such other matters as the
Committee shall in its sole discretion determine.
(iii) Stock Certificates. Any Restricted Stock
granted under the Plan shall be evidenced by issuance of a
stock certificate or certificates, which certificate or
certificates shall be held by the Company. Such certificate or
certificates shall be registered in the name of the
Participant and shall bear the following (or similar) legend:
"The transferability of this certificate and the
shares of stock represented hereby are subject to the
terms and conditions (including forfeiture) contained
in the Company's 1998 Omnibus Incentive Plan and an
Agreement entered into between the registered owner
and the Company. Copies of such Plan and Agreement
are on file in the offices of the Secretary of the
Company, 28 East Main Street, Springfield, Ohio
45501-0719."
(iv) Removal of Restrictions. Shares representing
Restricted Stock that are no longer subject to restrictions
shall be delivered to the holder thereof promptly after the
applicable restrictions lapse or are waived.
(d) Performance Awards. The Committee is hereby authorized to
grant Performance Awards to Participants subject to the terms of the Plan and
the applicable Award Agreement. At the time of grant of a Performance Award, the
Participant shall enter into an Award Agreement with the Company in a form
specified by the Committee, agreeing to the terms and conditions of the
Performance Award and such other matters as the Committee shall in its sole
discretion determine. A Performance Award granted under the Plan (i) may be
denominated or payable in cash, Shares (including, without limitation,
Restricted Stock), other securities, other Awards or other property and (ii)
shall confer on the holder thereof the right to receive payments, in whole or in
part, upon the achievement of such performance goals during such performance
periods as the Committee shall establish. Subject to the terms of the Plan, the
performance goals to be achieved during any performance period, the length of
any performance period, the amount of any Performance Award granted and the
amount of any payment or transfer to be made pursuant to any Performance Award
shall be determined by the Committee as provided in the applicable Award
Agreement. The term of a Performance Award shall not exceed 15 years.
<PAGE>
6. Termination of Service.
(a) Options and Stock Appreciation Rights.
(i) If a Participant to whom an Option or Stock
Appreciation Right was granted shall cease to maintain
Continuous Service for any reason (including total and partial
disability and Early Retirement, but excluding Normal
Retirement, death and termination of employment by the Company
or any Affiliate for Cause), such Participant may, but only
within the period of three months, in the case of an Incentive
Stock Option, or one year, in the case of a Non-Qualified
Stock Option or Stock Appreciation Right, immediately
succeeding such cessation of Continuous Service and in no
event after the expiration date of such Option or Stock
Appreciation Right, exercise such Option or Stock Appreciation
Right to the extent that such Participant was entitled to
exercise such Option or Stock Appreciation Right at the date
of such cessation of Continuous Service. If the Continuous
Service of a Participant to whom an Option or Stock
Appreciation Right was granted by the Company is terminated
for Cause, all rights under any Option or Stock Appreciation
Right of such Participant shall expire immediately upon the
giving to the Participant of notice of such termination.
(ii) If a Participant to whom an Option or Stock
Appreciation Right was granted shall cease to maintain
Continuous Service due to Normal Retirement, such Participant
may, but only within the period of three months, in the case
of an Incentive Stock Option, or two years, in the case of a
Non-Qualified Stock Option or Stock Appreciation Right,
immediately succeeding such cessation of Continuous Service
and in no event after the expiration date of such Option or
Stock Appreciation Right, exercise such Option or Stock
Appreciation Right to the extent that such Participant was
entitled to exercise such Option or Stock Appreciation Right
at the date of such cessation of Continuous Service.
(iii) In the event of the death of a Participant
while in the Continuous Service of the Company or an Affiliate
or within the periods referred to in paragraphs (a)(i) and
(a)(ii) of this Section 6, the person to whom any Option or
Stock Appreciation Right held by the Participant at the time
of his or her death is transferred by will or the laws of
descent and distribution or in the case of an Award other than
an Incentive Stock Option, pursuant to a qualified domestic
relations order, as defined in the Code or Title I of ERISA or
the rules thereunder, or as otherwise permitted to be
transferred under Section 10 of the Plan may, but only within
the period of two years immediately succeeding the date of
death of such Participant, and in no event after the
expiration date of such Option or Stock Appreciation Right,
exercise such Option or Stock Appreciation Right to the extent
that such Participant was entitled to exercise such Option or
Stock Appreciation Right immediately prior to his death.
Following the death of any Participant to whom an Option was
granted under the Plan, irrespective of whether any Related
Stock Appreciation Right shall have theretofore been granted
to the Participant or whether the person entitled to exercise
such Related Stock Appreciation Right desires to do so, the
Committee may, as an alternative means of settlement of such
Option, elect to pay to the person to whom such Option is
transferred as permitted by Section 10 of this Plan, the
amount by which the Market Value per Share on the date of
exercise of such Option shall exceed the exercise price of
such Option, multiplied by the number of Shares with respect
to which such Option is properly exercised. Any such
settlement of an Option shall be considered an exercise of
such Option for all purposes of the Plan.
(iv) Notwithstanding the provisions of subparagraphs
(i) through (iii) above, the Committee may, in its sole
discretion, establish different terms and conditions
pertaining to the effect of termination to the extent
permitted by applicable federal and state law.
(b) Restricted Stock. Except as otherwise provided in this
Plan, if a Participant ceases to maintain Continuous Services for any reason
(other than death, total or partial disability or Normal or Early Retirement)
unless the Committee, in its sole discretion, shall otherwise determine, all
shares of Restricted Stock theretofore awarded to such Participant and which at
the time of such termination of Continuous Service are subject to the
restrictions imposed by paragraph (c)(i) of Section 5 shall upon such
termination of Continuous Service be forfeited and returned to the Company.
Unless the Committee, in its sole discretion, shall otherwise determine, if a
<PAGE>
Participant ceases to maintain Continuous Service by reason of death, total or
partial disability or Normal or Early Retirement, all shares of Restricted Stock
theretofore awarded to such Participant and which at the time of such
termination of Continuous Service are subject to the restrictions imposed by
paragraph (c)(i) of Section 5 shall upon such termination of Continuous Service
be free of restrictions and shall not be forfeited.
(c) Performance Awards. In the event that a Participant to
whom a Performance Award has been granted shall cease to maintain Continuous
Service for any reason, the rights of such Participant or any person to whom the
Award may have been transferred as permitted by Section 10 shall be governed by
the terms of the Plan and the applicable Award Agreement.
7. Adjustments Upon Changes in Capitalization. In the event of any
change in the outstanding Shares subsequent to the effective date of the Plan by
reason of any reorganization, recapitalization, stock split, stock dividend,
combination or exchange of shares, merger, consolidation or any change in the
corporate structure or Shares of the Company, the maximum aggregate number and
class of shares and exercise price of the Award, if any, as to which Awards may
be granted under the Plan and the number and class of shares and exercise price
of the Award, if any, with respect to which Awards have been granted under the
Plan shall be appropriately adjusted by the Committee, whose determination shall
be conclusive. Any Award which is adjusted as a result of this Section 7 shall
be subject to the same restrictions as the original Award.
8. Effect of Merger on Options and Stock Appreciation Rights. In the
case of any merger, consolidation or combination of the Company (other than a
merger, consolidation or combination in which the Company is the continuing
corporation and which does not result in the outstanding Shares being converted
into or exchanged for different securities, cash or other property, or any
combination thereof), any Participant to whom an Option or Stock Appreciation
Right has been granted shall have the additional right (subject to the
provisions of the Plan and any limitation applicable to such Option or Stock
Appreciation Right), thereafter and during the term of each such Option or Stock
Appreciation Right, to receive upon exercise of any such Option or Stock
Appreciation Right an amount equal to the excess of the fair market value on the
date of such exercise of the securities, cash or other property, or combination
thereof, receivable upon such merger, consolidation or combination in respect of
a Share over the exercise price of such Stock Appreciation Right or Option,
multiplied by the number of Shares with respect to which such Option or Stock
Appreciation Right shall have been exercised. Such amount may be payable fully
in cash, fully in one or more of the kind or kinds of property payable in such
merger, consolidation or combination, or partly in cash and partly in one or
more of such kind or kinds of property, all in the discretion of the
Participant.
9. Effect of Change in Control. Each of the events specified in the
following clauses (i) through (iii) of this Section 9 shall be deemed a "change
of control": (i) any third person, including a "group" as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended, shall become the
beneficial owner of shares of the Company with respect to which 25% or more of
the total number of votes for the election of the Board of Directors of the
Company may be cast, (ii) as a result of, or in connection with, any cash tender
offer, merger or other business combination, sale of assets or contested
election, or combination of the foregoing, the persons who were directors of the
Company shall cease to constitute a majority of the Board of Directors of the
Company, or (iii) the stockholders of the Company shall approve an agreement
providing either for a transaction in which the Company will cease to be an
independent publicly-owned corporation or for a sale or other disposition of all
or substantially all the assets of the Company. Upon a change in control, unless
the Committee shall have otherwise provided in the applicable Award Agreement,
any restrictions or vesting period with respect to any outstanding Awards shall
lapse and all such Awards shall become fully vested in the Participant to whom
such Awards were awarded; provided, however, that no Award which has previously
been exercised or otherwise terminated shall become exercisable.
10. Assignments and Transfers. No Award granted under the Plan shall
be transferable otherwise than by will or the laws of descent and distribution,
except that an Award other than an Incentive Stock Option may be transferred
pursuant to a qualified domestic relations order or by gift to any member of the
Participant's immediate family or to a trust for the benefit of one or more of
such immediate family members. During the lifetime of an Award recipient, an
Award shall be exercisable only by the Award recipient unless it has been
transferred as permitted hereby, in which case it shall be exercisable only by
such transferee. For the purpose of this Section 10, a Participant's "immediate
family" shall mean the Participant's spouse, children and grandchildren.
11. Employee Rights Under the Plan. No person shall have a right to be
selected as a Participant nor, having been so selected, to be selected again as
a Participant and no officer, employee or other person shall have any
<PAGE>
claim or right to be granted an Award under the Plan or under any other
incentive or similar plan of the Company or any Affiliate. Neither the Plan nor
any action taken thereunder shall be construed as giving any employee any right
to be retained in the employ of or serve as a director or advisory director of
the Company or any Affiliate.
12. Delivery and Registration of Stock. The Company's obligation to
deliver Shares with respect to an Award shall, if the Committee so requests, be
conditioned upon the receipt of a representation as to the investment intention
of the Participant to whom such Shares are to be delivered, in such form as the
Committee shall determine to be necessary or advisable to comply with the
provisions of the Securities Act of 1933, as amended, or any other federal,
state or local securities legislation. It may be provided that any
representation requirement shall become inoperative upon a registration of the
Shares or other action eliminating the necessity of such representation under
such Securities Act or other securities legislation. The Company shall not be
required to deliver any Shares under the Plan prior to (i) the admission of such
Shares to listing on any stock exchange on which Shares may then be listed, and
(ii) the completion of such registration or other qualification of such Shares
under any state or federal law, rule or regulation, as the committee shall
determine to be necessary or advisable.
13. Withholding Tax. Upon the termination of the restricted period with
respect to any shares of Restricted Stock (or at any such earlier time, if any,
that an election is made by the Participant under Section 83(b) of the Code, or
any successor provision thereto, to include the value of such shares in taxable
income), the Company shall have the right to require the Participant or other
person receiving such shares to pay the Company the amount of any taxes which
the Company is required to withhold with respect to such shares, or, in lieu
thereof, to retain or sell without notice, a sufficient number of shares held by
it to cover the amount required to be withheld. The Company shall have the right
to deduct from all dividends paid with respect to shares of Restricted Stock the
amount of any taxes which the Company is required to withhold with respect to
such dividend payments.
The Company shall have the right to deduct from all amounts paid in
cash with respect to the exercise of a Stock Appreciation Right under the Plan
any taxes required by law to be withheld with respect to such cash payments.
Where a Participant or other person is entitled to receive Shares pursuant to
the exercise of an Option or Stock Appreciation Right pursuant to the Plan, the
Company shall have the right to require the Participant or such other person to
pay the Company the amount of any taxes which the Company is required to
withhold with respect to such Shares, or, in lieu thereof, to retain, or sell
without notice, a number of such Shares sufficient to cover the amount required
to be withheld.
All withholding decisions pursuant to this Section 13 shall be at the
sole discretion of the Committee or the Company.
14. Amendment or Termination.
(a) Subject to paragraph (b) of this Section 14, the Board of
Directors of the Company may amend, alter, suspend, discontinue, or terminate
the Plan without the consent of shareholders or Participants, except that any
such action will be subject to the approval of the Company's shareholders if,
when and to the extent such shareholder approval is necessary or required for
purposes of any applicable federal or state law or regulation or the rules of
any stock exchange or automated quotation system on which the Shares may then be
listed or quoted, or if the Board of Directors of the Company, in its
discretion, determines to seek such shareholder approval.
(b) Except as otherwise provided herein, the Committee may
waive any conditions of or rights of the Company or modify or amend the terms of
any outstanding Award. The Committee may not, however, amend, alter, suspend,
discontinue or terminate any outstanding Award without the consent of the
Participant or holder thereof, except as otherwise herein provided.
15. Effective Date and Term of Plan. The Plan shall become effective
upon its adoption by the Board of Directors of the Company, subject to the
approval of the Plan by the shareholders of the Company. It shall continue in
effect for a term of 15 years unless sooner terminated under Section 14 hereof.
<PAGE>
Market Price of Western Ohio Financial Corporation's
Common Shares and Related Shareholder Matters
There were 2,383,435 common shares of WOFC outstanding, excluding Management
Recognition Plan shares that have not been awarded, on December 31, 1997, held
of record by approximately 774 registered shareholders and 1,329 beneficial
holders behind brokers, banks, and depositories. Price information with respect
to Western Ohio Financial Corporation's common shares is quoted on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") National
Market System using common stock symbol "WOFC". The Wall Street Journal
publishes daily trading information for our stock under the abbreviation
"WstrnOHFnl" in the National Market Listing.
Fiscal Year 1997 Fiscal Year 1996
Low High Dividend Low High Dividend
----------------------- -----------------------
First quarter 21.00 22.75 0.25 21.25 24.00 0.25
Second quarter 21.00 22.25 0.25 22.25 23.75 0.25
Third quarter 21.25 27.125 0.25 19.50 23.00 0.25
Fourth quarter 24.25 30.625 0.25 19.50 21.75 0.25
The Company has repurchased shares and intends to continue to repurchase shares
in order to enhance shareholder value. On July 22, 1996, the Company
announced its intention to repurchase an additional 112,633 shares. Shares
totaling 77,000 of the planned 112,633 were acquired through July 22, 1997.
The Company is no longer subject to regulatory limitations on stock
repurchases. The Company did repurchase an additional 7,000 shares on
August 15, 1997, and intends to continue modest repurchases of stock.
7
<PAGE>
Selected Consolidated Financial Information
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $ 371,988 $ 392,765 $ 231,387 $ 185,670 $ 148,575
Loans receivable, net 277,731 287,611 150,476 104,269 98,100
Cash and cash equivalents 31,239 15,611 17,605 19,951 10,915
Mortgage-backed securities 22,433 36,843 45,719 40,533 25,948
Investment securities 22,455 35,729 12,039 16,889 11,409
Deposits 246,909 233,203 139,129 117,529 125,620
Total borrowings 68,339 102,602 31,528 3,689 446
Total stockholders' equity 54,600 54,048 59,668 63,358 21,664
December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Selected Operations Data:
Total interest income $ 29,039 $ 24,160 $ 14,809 $ 12,445 $ 12,607
Total interest expense 17,934 13,783 7,034 5,178 5,301
---------- ---------- ---------- ---------- ----------
Net interest income 11,105 10,377 7,775 7,267 7,306
Provision for loan losses 2,285 399 6 --- 737
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 8,820 9,978 7,769 7,267 6,569
Non-interest income:
Loan fees and service charges 650 156 60 53 43
Gain on sales of loans,
mortgage-backed securities
and investment securities 311 340 1,207 2 324
Other non-interest income 31 54 713 17 32
---------- ---------- ---------- ---------- ----------
Total non-interest income 992 550 1,980 72 399
Total non-interest expense 9,471 8,759 5,349 3,346 2,664
Income before income taxes and
cumulative effect of accounting
changes 341 1,769 4,400 3,993 4,304
Income tax expense 158 707 1,507 1,366 1,446
---------- ---------- ---------- ---------- ----------
Income before cumulative effect
of accounting changes 183 1,062 2,893 2,627 2,858
Cumulative effect of accounting
changes --- --- --- --- 209
---------- ---------- ---------- ---------- ----------
Net income $ 183 $ 1,062 $ 2,893 $ 2,627 $ 2,649
========== ========== ========== ========== ==========
</TABLE>
8
<PAGE>
Selected Consolidated Financial Information
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net
income to average total assets) 0.05% 0.33% 1.42% 1.53% 1.79%
Interest rate spread information:
Average during year 2.42 2.08 2.65 3.62 4.66
End of year 2.31 2.23 2.05 3.27 3.77
Net interest margin 2.95 3.26 4.01 4.40 5.14
Ratio of operating expense to
average total assets 2.40 2.75 2.63 1.95 1.80
Return on retained earnings (ratio
of net income to average equity) 0.34 2.00 4.72 7.92 12.95
Quality Ratios:
Non-performing assets to total
assets at end of year 0.54 0.52 0.01 0.04 0.36
Allowance for loan losses to
non-performing loans 196.59 83.95 255.45 1,032.00 146.31
Allowance for loan losses
to total loans, net 1.41 0.60 0.51 0.74 0.79
Allowance for loan losses
to classified assets 130.08 73.74 87.66 110.73 44.69
Capital Ratios:
Total equity to total assets
at end of year 14.67 13.76 25.79 34.13 14.58
Average equity to average assets 13.63 16.66 30.07 19.31 13.86
Ratio of average interest-earning
assets to average
interest-bearing liabilities 1.11x 1.27x 1.37x 1.25x 1.13x
Per Share Data:
Earnings per share 0.08 0.47 1.18 0.42 n/a
Dividend payout ratio 12.50 2.13 0.85 0.30 n/a
Book value per share 22.91 23.48 25.27 25.32 n/a
Number of full service offices 10 10 5 5 4
</TABLE>
9
<PAGE>
Management's Discussion and Analysis
Of Financial Condition And Results of Operations
General
As a unitary savings and loan association holding company, Western Ohio
Financial Corporation ("the Company" or "WOFC"), holds Cornerstone Bank
("Cornerstone"), a combination of the former Springfield Federal Savings Bank,
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. Cornerstone's profitability and consequently
the Company's profitability is primarily dependent upon its 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. Cornerstone's 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. In October, 1997, the Company
incorporated another subsidiary, West Central Mortgage Services, Incorporated,
("West Central"). The primary business of West Central will be to process
mortgage loans for community banks.
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 operations
that provide new market opportunities. In August, 1997, the Company merged the
former Springfield Federal Savings Bank, Mayflower Federal Savings Bank and
Seven Hills Savings Association in an effort to improve marketing and operating
efficiency. The Company simultaneously changed the name of the combined
institutions to a more easily identified name and logo. 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.
10
<PAGE>
Analysis Of Financial Condition
Total assets of the Company decreased $20.8 million in the year ending
December 31, 1997, from $392.8 million in 1996 to $372.0 million in 1997. This
decrease of 5.3% was reflective of reductions in investment securities, mortgage
backed securities and loans receivable.
Liabilities decreased from $338.7 million at December 31, 1996, to $317.4
million at December 31, 1997, a decrease of $21.3 million, or 6.3%. The primary
reason for the reduction in total liabilities was the repayment of advances from
the Federal Home Loan Bank ("FHLB") of Cincinnati. Advances from the FHLB
decreased from $102.6 million at December 31, 1996, to $68.3 million at December
31, 1997, a decrease of $34.3 million. Offsetting the repayment of advances was
an increase in deposits from $233.2 million at December 31, 1996, to $246.9
million at December 31, 1997, an increase of $13.7 million, or 5.9%. Deposits
grew in response to the Company's continued aggressive advertising and
competitive rates during 1997.
The Company's subsidiaries made repayments of advances from the FHLB of
Cincinnati of $34.3 million in 1997. Rates on advances drawn during the year
ranged from 5.90% to 6.15%. The nature of these advances was to replace
previously borrowed funds for which the purpose varied from the intended purpose
of obtaining the funds. At December 31, 1997, all advances were fixed-rate. 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 decreased $63.0 million from $128.4
million in 1996 to $65.4 million in 1997. The lower level of mortgage loan
originations in 1997 was the result of a less active mortgage market. Net loans
receivable decreased by $9.9 million from 1996 to 1997, primarily as the result
of a loan sale in December 1997.
Total equity increased $552,000 due largely to the increase of unrealized
gain on securities available for sale, net of income taxes. During 1997, 16,500
shares were repurchased with a total buyback expenditure of $370,000. Earnings
of $183,000 less dividends of $2.2 million decreased retained earnings by $2.0
million in 1997 compared to a decrease of $1.2 million in 1996.
11
<PAGE>
Comparison of Results Of Operations
Comparison of Years Ended December 31, 1997 and December 31, 1996
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, 1997, was $183,000, a decrease of
$879,000 compared to the year ended December 31, 1996. The decrease was
primarily the result of an increase in the provision for loan losses. The
provision for the year ended December 31, 1997, was $2.3 million, an increase of
$1.9 million compared to the year ended December 31, 1996, which was $399,000.
Net interest income increased by $728,000 from $10.4 million to $11.1 million,
or 7.0%, primarily as a result of a combination of higher rates on average
interest-earning assets and lower rates on interest-bearing liabilities.
Non-interest income increased substantially as the result of increased fees
earned on savings and checking accounts. For the year ended December 31, 1996,
non-interest income also included a $234,000 gain from the sale of securities.
Non-interest expense increased $712,000, from $8.8 million at December 31, 1996,
to $9.5 million at December 31, 1997, primarily due to an approximate $610,000
in charges relating to the combination of the three institutions into
Cornerstone. The increase in non-interest expense also reflects a full year of
costs of operating the Cincinnati offices. Income taxes decreased by $549,000
from $707,000 at December 31, 1996, to $158,000 at December 31, 1997, primarily
as a result of lower income.
Interest Income
Total interest income increased $4.9 million or 20.2% for the year ended
December 31, 1997, 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 full year addition of
Mayflower and Seven Hills. Interest from investment securities and other sources
rose by $511,000 primarily due to the full year earnings on the increased
average investment resulting from the acquisitions. Interest income from the
available for sale mortgage-backed securities declined $1.0 million due largely
to the sale of $10.7 million of mortgage-backed securities during 1997.
Interest Expense
Total interest expense increased $4.2 million or 30.1% for the year ended
December 31, 1997, compared to the prior year. The increase was due primarily to
a higher average of both deposits and borrowings. Interest on deposits increased
$3.0 million or 31.9% for the year ended December 31, 1997, compared to the
prior year. Interest on borrowings increased $1.2 million or 26.4% over the
prior year.
12
<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 and any specific losses applied to
that allowance. There was a $2.3 million additional provision for loan losses
during the year ended December 31, 1997. This is an increase of $1.9 million
from a $399,000 provision during the prior year. Management identified losses
and increased its provision for several problem loans during the fourth quarter
of 1997. These loans were primarily of a commercial nature. Management believes
that the total allowance of $3.9 million is adequate given the area economic
conditions and its loan portfolio composition. The $3.9 million allowance
includes an allowance of $1.5 million considered to be a loss. At December 31,
1997, 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 Office of Thrift Supervision ("OTS") and the Federal
Deposit Insurance Corporation ("FDIC"), which can order the establishment of
additional or specific allowances.
Non-interest Income
Non-interest income increased from $550,000 in 1996 to $992,000 in 1997. This
increase is due primarily to an increase of $494,000 in fees and other charges.
Management has actively sought to increase the fee income resulting from deposit
activity.
Non-interest Expense
Total non-interest expense increased from $8.8 million in 1996 to $9.5
million in 1997, an increase of 8.1%. The increase is the result of a
combination of increased spending due to the name change and combination of the
institutions and increased spending for the full year operation of the acquired
institutions.
Income Tax Expense
Income tax expense was $158,000 for the year ended December 31, 1997, a
decrease of $549,000, or 77.7%, from the prior year. Income taxes decreased
primarily as a result of decreased earnings before income taxes.
13
<PAGE>
Comparison of Years Ended December 31, 1996 and December 31, 1995
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 higher 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 the
Savings Association Insurance Fund ("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.
14
<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 decreased primarily as a result of decreased earnings before income taxes.
15
<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. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ----------------------------
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 $ 298,111 $ 23,815 7.99% $ 235,936 $ 18,436 7.81% $ 121,373 $ 9,942 8.19%
Mortgage-backed securities 28,994 1,843 6.36 43,243 2,854 6.60 42,606 2,876 6.75
Investment securities 33,083 2,143 6.48 27,190 2,043 7.51 12,045 833 6.92
Interest-bearing deposits 9,585 765 7.98 8,293 536 6.46 16,655 1,067 6.41
FHLB stock 6,102 473 7.75 3,914 291 7.43 1,381 91 6.59
-------- ------- -------- ------- -------- -------
Total interest-earning
assets $ 375,875 29,039 7.73 $ 318,576 24,160 7.58 $ 194,060 14,809 7.63
======== ------- ======== ------- ======== -------
Interest-bearing liabilities:
Time deposits $ 175,163 10,447 5.96 $ 134,757 8,188 6.08 $ 90,805 5,277 5.81
Demand and NOW deposits 11,998 129 1.08 12,851 146 1.14 11,932 277 2.32
Savings deposits 53,305 1,642 3.08 28,334 926 3.27 25,175 687 2.73
Borrowings 97,414 5,716 5.87 74,832 4,523 6.04 13,374 793 5.93
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities $ 337,880 17,934 5.31 $ 250,774 13,783 5.50 $ 141,286 7,034 4.98
======== ------- ======== ------- ======== -------
Net interest income $ 11,105 $ 10,377 $ 7,775
======= ======= =======
Net interest rate spread 2.42% 2.08% 2.65%
===== ===== ====
Net earning assets $ 37,995 $ 67,802 $ 52,774
======== ======== ========
Net yield on average
interest-earning assets 2.95% 3.26% 4.01%
===== ===== ====
Average interest-earning assets to
average interest-bearing liabilities 1.11X 1.27X 1.37X
===== ===== =====
</TABLE>
16
<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 is 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,
------------------------------- -------------------------------
1996 vs. 1997 1995 vs. 1996
------------------------------- -------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
------------------- Increase ------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------- ------- ---------- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets: (Dollars in thousands)
Loans receivable $ 4,958 $ 421 $ 5,379 $ 8,972 $ (478) $ 8,494
Mortgage-backed securities (909) (102) (1,011) 43 (65) (22)
Investments securities 405 (305) 100 1,132 78 1,210
Other 260 151 411 (353) 22 (331)
------- ------- ------- ------- ------- -------
Total interest-earning assets $ 4,714 $ 165 $ 4,879 $ 9,794 $ (443) $ 9,351
======= ======= ======= ======= ======= =======
Interest-bearing liabilities:
Time deposits $ 2,412 $ (153) $ 2,259 $ 2,661 $ 250 $ 2,911
Demand and NOW deposits (9) (8) (17) 20 (151) (131)
Savings deposits 772 (56) 716 93 146 239
Borrowings 1,329 (136) 1,193 3,714 16 3,730
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities $ 4,504 $ (353) $ 4,151 $ 6,488 $ 261 $ 6,749
======= ======= ======= ======= ======= =======
Net interest income $ 728 $ 2,602
======= =======
</TABLE>
17
<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.
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, 1997 and December 31, 1996, is an
analysis of Cornerstone'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's Subsidiary
has primarily fixed-rate loans in its loan portfolio, the amount of interest the
Company's Subsidiary 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's Subsidiary would pay on its deposits would increase
rapidly because the deposits of the Company's Subsidiary generally have shorter
periods to repricing. Assumptions used in calculating the amounts in these
tables are OTS assumptions.
<PAGE>
18
<TABLE>
<CAPTION>
Cornerstone Bank
September 30, 1997 December 31, 1996
---------------------------- ----------------------------
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) (24,355) (43) (23,078) (67)
+200 (40) (15,645) (27) (15,345) (44)
+100 (20) (7,289) (13) (7,521) (22)
-- -- -- -- -- --
(100) (20) 5,132 9 6,397 18
(200) (40) 8,079 14 10,329 30
(300) (60) 10,879 19 13,333 39
Mayflower Savings Bank
December 31, 1996
----------------------------
Change in Interest Rate Board limit $ change % change
(Basis Points) % change in NPV in NPV
---------------------- ---------- -------- --------
(Dollars in thousands)
+300 (60) (2,559) (35)
+200 (40) (1,534) (21)
+100 (20) (673) (9)
-- -- -- --
(100) (20) 450 6
(200) (40) 708 10
(300) (60) 939 13
Seven Hills Savings Association
December 31, 1996
----------------------------
Change in Interest Rate Board limit $ change % change
(Basis Points) % change in NPV in NPV
---------------------- ---------- -------- --------
(Dollars in thousands)
+300 (60) (2,468) (28)
+200 (40) (1,582) (18)
+100 (20) (733) (8)
-- -- -- --
(100) (20) 546 6
(200) (40) 867 10
(300) (60) 1,053 12
</TABLE>
As of September 30, 1997, the percentage change in NPV resulting from certain
changes in interest rates were within the policy limits of Cornerstone'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.
19
<PAGE>
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 rise from the recent historically low
levels, Cornerstone's net interest income could be expected to be negatively
affected. Moreover, rising interest rates could negatively affect Cornerstone's
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.
20
<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, 1997,
1996 and 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1997 1996 1995
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Net income $ 183 $ 1,062 $ 2,893
Adjustments to reconcile net income to
net cash from operating activities 668 (324) (1,825)
------- ------- -------
Net cash from operating activities 851 738 1,068
Net cash from investment activities 35,999 (82,460) (45,838)
Net cash from financing activities (21,222) 79,728 42,424
------- ------- -------
Net change in cash and cash equivalents 15,628 (1,994) (2,346)
Cash and cash equivalents at
beginning of period 15,611 17,605 19,951
------- ------- -------
Cash and cash equivalents at
end of period $ 31,239 $ 15,611 $ 17,605
======= ======= =======
</TABLE>
At December 31, 1997, the Company had no outstanding commitments to sell
loans or securities.
The OTS requires minimum levels of liquid assets. OTS regulations presently
require Cornerstone to maintain an average daily balance of liquid assets
(United States Treasury and federal agency obligations, of any maturity) equal
to at least 4% 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 Cornerstone may rely, if necessary, to fund deposit withdrawals and
other short-term funding needs. Cornerstone's average regulatory liquidity at
December 31, 1997, was 22.96%.
The Company's primary sources of funds consist of deposits and repayments of
loans and interest earned on securities. The Company's subsidiary 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.
21
<PAGE>
The Company's primary financing source during 1997 was borrowings from the
FHLB of $93.6 million. Also a major financing source was the net increase in
savings deposits of $13.7 million. The Company paid $2.2 million in dividends
and acquired treasury stock for $370,000 in 1997.
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/liability
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, 1997, the Company had outstanding
commitments to extend credit that amounted to $8.3 million.
Under The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), the capital requirements applicable to all savings institutions,
including the Company's subsidiary, were substantially increased. However,
Cornerstone is 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. Cornerstone's adjustment
to core capital included the portion of the loan and lease loss allowance over
the amount required for loans classified as loss. This adjustment is $2.4
million as of December 31, 1997.
The following table summarizes Cornerstone's regulatory capital requirements
and actual capital at December 31, 1997.
22
<PAGE>
Cornerstone 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 $ 41,897 11.41 % $ 5,507 1.50 % $ 36,390 9.91 %
Core Capital 41,897 11.41 11,014 3.00 30,883 8.41
Risk-Based Capital 44,330 21.60 16,409 8.00 27,921 13.60
</TABLE>
Impact of New Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
was adopted by the Company in 1997. SFAS No. 125 revises the accounting for
transfers of financial assets such as loans and securities, and for
distinguishing between sales and secured borrowings. The adoption of the
portions of SFAS No. 125 relating to securities lending, repurchase agreements
and other similar transactions are not required to be adopted until 1998.
SFAS No. 125 did not have a material impact on the Bank's financial
statements, nor are the portions to be adopted in 1998 expected to materially
impact the financial statements.
SFAS No. 128, Earnings Per Share, became effective for the Company in 1997.
SFAS No. 128 requires dual presentation of basic and diluted earnings per share
("EPS") for entities with complex capital structures. Basic EPS includes no
dilution and is computed by dividing income available to common shareholders by
weighted average common shares outstanding for the period. Diluted EPS reflects
the potential dilution of securities that could share in earnings such as stock
options, warrants or other similar items.
SFAS No. 129, Disclosures of Information about Capital Structure,
consolidated existing accounting guidance relating to disclosure about a
company's capital structure. Public companies generally have always been
required to make disclosures now required by SFAS No. 129 and, therefore,
SFAS No. 129 did not impact the Company's disclosures.
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS No. 130 is effective for the Company in 1998. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, changes the way public business enterprises report information
23
<PAGE>
about operating segments in annual financial statements and requires those
enterprises to report selected information about reportable segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 becomes effective for the Company in 1998.
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.
Forward-Looking Statements
When used in this filing and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be,"
"will allow," "intends to," "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
risks and uncertainties, including but not limited to changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area and competition, all or some of which could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and advises
readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
24
<PAGE>
Impact of the Year 2000
The Company has conducted a comprehensive review of its computer systems to
identify applications that could be affected by the "Year 2000" issue, and has
developed an implementation plan to address the issue. The Company's data
processing is performed primarily by a third-party service bureau with part of
its processing being performed in-house; however software and hardware utilized
are under maintenance agreements with third-party vendors, consequently the
Company is very dependent on those vendors to conduct its business. The Company
has already contacted each vendor to request time tables for year 2000
compliance and expected costs, if any, to be passed along to the Company. To
date, the Company has been informed that its primary service providers
anticipate that all reprogramming efforts will be completed by December 31,
1998, allowing the Company adequate time for testing. Certain other vendors have
not yet responded, however. The Company will pursue other options if it appears
that these vendors will be unable to comply. Management does not expect these
costs to have a significant impact on its financial position or results of
operations. However, there can be no assurance that the vendors systems will be
2000 compliant. Consequently the Company could incur incremental costs to
convert to another vendor. The Company has identified certain of its hardware
and software equipment that will not be Year 2000 compliant and intends to
purchase new equipment and software prior to December 31, 1998. These capital
expenditures are expected to total approximately $185,000.
25
<PAGE>
LETTERHEAD HERE
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, West Central Mortgage Services, Inc. and Cornerstone Bank
(formerly Springfield Federal Savings Bank, Mayflower Federal Savings Bank and
Seven Hills Savings Association) and Cornerstone's subsidiary, West Central
Financial Services, Inc., as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/S/ Clark, Schaefer, Hackett & Co.
- ----------------------------------
Clark, Schaefer, Hackett & Co.
January 23, 1998
Springfield, Ohio
26
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
Consolidated Statements of Financial Condition
(Dollars in thousands)
December 31, 1997 and 1996
Assets
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Cash and cash equivalents $ 31,239 15,611
Securities available for sale, at fair value 22,455 35,729
Mortgage-backed securities available for sale, at fair value 22,433 36,843
Loans receivable, net 277,731 287,611
Accrued interest receivable 2,360 2,170
Premises and equipment, net 3,924 3,954
Federal Home Loan Bank stock, at cost 6,470 5,862
Investment in joint venture 20 20
Prepaid federal income taxes 903 322
Deferred federal income taxes 172 --
Prepaid expenses and other assets 700 637
Goodwill 3,581 4,006
--------- ---------
Total assets $ 371,988 392,765
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 246,909 233,203
Advances from the Federal Home Loan Bank 68,339 102,602
Deferred federal income taxes -- 5
Advance payments from borrowers for taxes and insurance 893 833
Accrued expenses and other liabilities 1,228 1,054
Amount due on acquisitions 19 1,020
--------- ---------
Total liabilities 317,388 338,717
--------- ---------
Stockholders' equity:
Common stock; $.01 par value; 7,250,000 shares authorized;
2,645,000 shares issued; 2,383,435 and 2,301,974 shares outstanding 26 26
Additional paid-in capital 40,458 41,158
Unrealized gain (loss) on securities available for sale,
net of income taxes 309 (242)
Unallocated shares held by employee stock ownership plan (1,547) (1,785)
Deferred management recognition plan expense (396) (764)
Treasury stock; 261,565 and 343,026 shares, at cost (5,448) (7,579)
Retained earnings, substantially restricted 21,198 23,234
--------- ---------
Total stockholders' equity 54,600 54,048
--------- ---------
Total liabilities and stockholders' equity $ 371,988 392,765
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
Consolidated Statements of Income
(Dollars in thousands except earnings per share data)
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest Income:
Loans receivable:
First mortgage loans $ 22,469 18,074 9,763
Other loans 1,346 363 179
Securities available for sale 2,909 2,305 833
Mortgage-backed securities available for sale 1,843 2,854 740
Mortgage-backed securities at amortized cost -- -- 2,136
Other 472 564 1,158
-------- -------- --------
Total interest income 29,039 24,160 14,809
-------- -------- --------
Interest Expense:
Deposits 12,218 9,260 6,241
Federal Home Loan Bank advances 5,716 4,523 793
-------- -------- --------
Total interest expense 17,934 13,783 7,034
-------- -------- --------
Net interest income 11,105 10,377 7,775
Provision for loan losses 2,285 399 6
-------- -------- --------
Net interest income after provision for loan losses 8,820 9,978 7,769
-------- -------- --------
Non-interest income:
Gain on sales of securities -- 234 1,207
Gain from termination of benefit plans -- -- 681
Fees and other charges 650 156 60
Gain on sale of assets 311 106 --
Other 31 54 32
-------- -------- --------
Total non-interest income 992 550 1,980
-------- -------- --------
Non-interest expense:
Compensation and benefits 4,410 3,731 2,848
Occupancy and equipment 950 773 579
SAIF deposit insurance premium 128 1,465 277
Franchise taxes 732 898 797
Legal, accounting and examinations 405 360 175
Advertising 354 265 203
Amortization of goodwill 425 246 --
Data processing services 643 283 160
Other 1,424 738 310
-------- -------- --------
Total non-interest expense 9,471 8,759 5,349
-------- -------- --------
</TABLE>
(Continued)
28
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
Consolidated Statements of Income
(Dollars in thousands except earnings per share data)
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income before income taxes $ 341 1,769 4,400
Provision for income taxes 158 707 1,507
-------- -------- --------
Net income $ 183 1,062 2,893
======== ======== ========
Earnings per share:
Basic $ 0.08 0.47 1.18
======== ======== ========
Diluted $ 0.08 0.46 1.15
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31, 1997, 1996, and 1995
Unrealized
Gain (Loss) on Shares Held
Additional Securities By Employee
Common Paid-In Available Stock Owner-
Stock Capital For Sale ship Plan
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
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)
Net income for year ended December 31, 1997 -- -- -- --
Dividends paid ($1.00 per share) -- -- -- --
Net change for year, net of deferred taxes -- -- 551 --
Treasury shares acquired -- 19 -- --
Shares awarded under management recognition plan -- -- -- --
Management Recognition Plan expense
and related tax benefit -- (279) -- --
Employee stock options exercised -- (581) -- --
Employee Stock Ownership Plan shares committed
to be allocated, at average market price -- 141 -- 238
------- ------- ------- ------
Balance, December 31, 1997 $ 26 40,458 309 (1,547)
======= ======= ======= ======
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
(RESTUBBED TABLE FROM ABOVE)
Unallocated
Deferred
Management
Recognition Treasury Retained
Plan Expense Stock Earnings Total
------------ --------- --------- --------
<S> <C> <C> <C> <C>
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
Net income for year ended December 31, 1997 -- -- 183 183
Dividends paid ($1.00 per share) -- -- (2,219) (2,219)
Net change for year, net of deferred taxes -- -- -- 551
Treasury shares acquired -- (370) -- (370)
Shares awarded under management recognition plan (76) 57 -- --
Management Recognition Plan expense
and related tax benefit 444 -- -- 165
Employee stock options exercised -- 2,444 -- 1,863
Employee Stock Ownership Plan shares committed
to be allocated, at average market price -- -- -- 379
------- ------- ------- -------
Balance, December 31, 1997 $ (396) (5,448) 21,198 54,600
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
31
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 183 1,062 2,893
Adjustments to reconcile net income to net
cash provided by operating activities:
ESOP expense 488 324 301
Management Recognition Plan expense 165 247 220
Depreciation and amortization of
premises and equipment 253 245 220
Amortization of goodwill 425 246 --
Stock dividends, Federal Home Loan Bank (441) (294) (92)
Deferred loan origination fees (119) (345) (155)
Premiums and discounts on loans,
mortgage-backed securities and investments (239) (58) (334)
Deferred income taxes (177) 21 129
Provision for loan losses 2,285 399 6
Net gain on sales of:
Mortgage-backed securities 5 (208) --
Other securities -- (26) (1,207)
Loans (228) (83) --
Premises and equipment (88) (23) --
Changes in:
Prepaid expenses and other assets (63) 469 (299)
Accrued expenses and other liabilities (827) (9) (420)
Accrued interest receivable (190) (999) (282)
Federal income taxes accrued or refundable (581) (230) 88
-------- -------- --------
Net cash provided by operating activities 851 738 1,068
-------- -------- --------
Cash flows from investing activities:
Federal Home Loan Bank stock:
Purchases (167) (3,141) (217)
Investment securities:
Available for sale:
Purchases (2,001) (23,000) (12,000)
Sales -- 51 1,287
Maturities 15,900 2,321 16,335
Mortgage-backed securities:
Available for sale:
Purchases -- -- (10,636)
Collections 3,908 7,567 186
Sales 10,684 21,770 --
</TABLE>
(continued)
32
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from investing activities: (Continued)
At amortized cost:
Purchases $ -- -- --
Sales -- -- --
Collections -- -- 6,171
Loans:
Originations (61,651) (83,195) (53,574)
Purchases (3,710) (45,236) (8,765)
Collections 57,604 37,730 16,281
Sales 15,751 17,783 --
Premises and equipment:
Additions (483) (699) (725)
Sales proceeds 164 13 --
Acquisition of subsidiaries, net of cash received -- (14,424) (181)
-------- -------- --------
Net cash used by investing activities 35,999 (82,460) (45,838)
-------- -------- --------
Cash flows from financing activities
Net increase (decrease) in deposits 13,706 17,284 21,600
Net increase in advances from borrowers for taxes and insurance 60 463 212
Advances from Federal Home Loan Bank:
Borrowings 93,640 87,963 32,876
Repayments (127,903) (19,571) (5,037)
Dividends paid (2,219) (2,275) (2,458)
Stock options exercised, net 1,864 51 --
Treasury stock acquired (370) (4,187) (4,769)
-------- -------- --------
Net cash provided by financing activities (21,222) 79,728 42,424
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 15,628 (1,994) (2,346)
Cash and cash equivalents:
Beginning 15,611 17,605 19,951
-------- -------- --------
Ending $ 31,239 15,611 17,605
======== ======== ========
Supplemental information:
Interest paid $ 17,926 13,396 6,875
======== ======== ========
Income taxes paid $ 1,010 861 1,290
======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
33
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars 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, West Central Mortgage Services, Inc. and Cornerstone
Bank, and Cornerstone's subsidiary, West Central Financial Services, Inc.
Cornerstone Bank (formerly Springfield Federal Savings Bank) 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. The operations of
these three institutions were merged in August 1997. West Central Mortgage
Services, Inc. began operations in December, 1997. All significant intercompany
transactions have been eliminated.
Cornerstone Bank 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 a member of the FHLB system, the 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.
34
<PAGE>
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 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, 1997.
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.
35
<PAGE>
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.
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,
36
<PAGE>
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.
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.
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
37
<PAGE>
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.
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.
Stock-Based Compensation
The Company currently accounts for its stock-based compensation plans using
the accounting method prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. Since the Company is not required to
adopt the fair value based recognition provisions prescribed under SFAS No. 123,
Accounting for Stock-Based Compensation, it has elected only to comply with the
disclosure requirements set forth in the Statement, which include disclosing pro
forma net income as if the fair value based method of accounting had been
applied.
38
<PAGE>
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. 80.8% of loans are secured by one-to-four family residences.
Earnings per share
Earnings per share are computed under the requirements of SFAS No. 128,
Earnings Per Share, which is effective December 15, 1997. Basic earnings per
share are computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflect the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. Earnings per share data of all prior periods have been
restated.
Reclassifications
Certain amounts appearing in the 1996 and 1995 consolidated financial
statements and notes to consolidated financial statements have been reclassified
to conform to the 1997 presentation.
39
<PAGE>
2. Securities:
Securities available for sale
The Company had investment securities available for sale carried at market
value, at December 31, 1997 and 1996, as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------ ------ ------- ---------
December 31, 1997:
Obligations of U.S.
government agencies $ 22,196 129 (4) 22,321
FHLMC Stock 3 131 --- 134
------ ---- ---- ----------
$ 22,199 260 (4) 22,455
====== ==== ==== =========
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
====== ==== ==== =========
The amortized cost and estimated market values of obligations of U.S.
government agencies available for sale at December 31, 1997, 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 1998.
Estimated
Amortized Fair
Cost Value
------- -------
Due in one year or less $ 1,199 1,195
Due after one year through five years 997 1,001
Due after five years through ten years 20,000 20,125
------- -------
$22,196 22,321
======= =======
At December 31, 1997, the Company recorded an unrealized gain of $256, net of
$87 in deferred taxes, to increase investment securities available for sale to
market value. The net unrealized gain of $169 is included as a component of
stockholders' equity.
40
<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, 1997 and 1996, as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- ---------- --------
<S> <C> <C> <C> <C>
December 31, 1997:
Collateralized mortgage
obligations $ 490 --- (2) 488
Mortgage pass-through
certificates 21,730 375 (160) 21,945
--------- -------- -------- --------
$ 22,220 375 (162) 22,433
========= ======== ======== ========
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
========= ======== ======== ========
</TABLE>
The amortized cost and estimated market values of mortgage-backed securities
available for sale at December 31, 1997, 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
Amortize Fair
Cost Value
--------- ---------
Due in one year or less $ 229 228
Due after one year through five years 33 33
Due after five years through ten years 2,142 2,198
Due after ten years 19,816 19,974
--------- ---------
$ 22,220 22,433
========= =========
At December 31, 1997, the Company recorded an unrealized gain of $213 to
increase mortgage-backed securities available for sale to market value. The net
unrealized gain, net of deferred taxes, 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, 1997, were as
follows:
Gross Gross Gross Net Realized
Proceeds Gains Losses Loss
--------- --------- --------- ------------
$ 10,684 --- (5) (5)
========= ========= ========= ============
41
<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, 1997.
4. Loans Receivable:
Loans receivable at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Principal balances of first mortgage loans secured by:
One-to-four family residences $ 224,289 242,185
Other properties 32,830 33,007
Construction loans 7,275 10,965
-------- --------
264,394 286,157
-------- --------
Adjustments for:
Undisbursed portion of construction loans (1,784) (5,651)
Net deferred loan fees, premiums and discounts (119) (45)
Allowance for loan losses (3,317) (1,716)
-------- --------
(5,220) (7,412)
-------- --------
Total first mortgage loans 259,174 278,745
-------- --------
Principal balances of consumer and other loans:
Consumer 7,851 3,668
Commercial 3,886 2,244
Loans on savings deposits 485 384
Home improvement loans 18 31
Home equity 6,906 2,603
Other 16 21
-------- --------
19,162 8,951
Less:
Allowance for loan losses (605) ---
Unearned discounts --- (85)
-------- --------
Total consumer and other loans 18,557 8,866
-------- --------
$ 277,731 287,611
======== ========
Activity in the allowance for loan losses is summarized as follows for the
years ended December 31:
1997 1996 1995
-------- -------- --------
Balance at beginning of year $ 1,716 774 774
Beginning balance acquisitions --- 577 ---
Provision charged to income 2,285 399 6
Charge-offs, net of recoveries (79) (34) (6)
-------- -------- --------
Balance at end of year $ 3,922 1,716 774
======== ======== ========
</TABLE>
42
<PAGE>
At December 31, 1997, the Company had four loans that were considered
impaired under SFAS No. 114 totaling $3,433. A specific allowance of $1,256 of
the outstanding balance has been applied to these loans.
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 $711 and $1,445 at December 31, 1997 and 1996, respectively. Activity
with respect to such aggregate loans for the two years ended December 31, 1997,
consists of the following:
Balance, December 31, 1995 $ 350
1996 acquisitions 338
New loans 949
Repayments (192)
-------
Balance, December 31, 1996 1,445
No longer officers (418)
New loans 41
Repayments (357)
-------
Balance, December 31, 1997 $ 711
=======
5. Accrued Interest Receivable:
Accrued interest receivable at December 31 is summarized as follows:
1997 1996
-------- --------
Investment securities $ 486 728
Mortgage-backed securities 182 227
Loans receivable 1,692 1,215
------ ------
$2,360 2,170
====== ======
6. Premises and Equipment:
Premises and equipment at December 31 are summarized as follows:
1997 1996
------- -------
Land $ 1,099 1,099
Buildings and improvements 3,845 3,789
Furniture, fixtures and equipment 2,022 1,873
Auto 18 --
------- -------
6,984 6,761
Accumulated depreciation (3,060) (2,807)
------- -------
$ 3,924 3,954
======= =======
43
<PAGE>
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, 1997, the Company had invested $20 in the Corporation and
is accounting for the investment under the cost method. Any additional funding
of the Corporation will be based on the relative total assets of the
stockholders. The Corporation had a $9 loss for the year ended December 31, 1997
and a $4 loss for the year ended December 31, 1996.
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 institutions are located in Cincinnati,
Ohio and operate in southwestern Ohio and northern Kentucky. The acquisitions
have been treated for accounting purposes as purchases. These institutions were
merged into Cornerstone Bank in August, 1997.
Details of the acquisition costs are as follows:
Mayflower Seven Hills
---------- -----------
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
========== ===========
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 1997 totalled $425.
44
<PAGE>
The approximate scheduled amortization of goodwill is as follows:
1998 $ 395
1999 362
2000 330
2001 298
2002 267
2003 and years thereafter 1,929
-------
$ 3,581
=======
Results of operations of the subsidiaries acquired during 1996 are included
in the statement of income of the Company since the dates of acquisition. Pro
forma (unaudited) results of operations of the Company for 1996 as if the
acquisition had taken place at January 1, 1996, are shown in the following
schedule:
Pro Forma
As Reported (Unaudited)
----------- -----------
Interest income $ 24,160 27,830
Interest expense 13,783 16,370
----------- -----------
Net interest income 10,377 11,460
Provision for loan losses (399) (565)
----------- -----------
Net interest income after
provision for loan losses $ 9,978 10,895
=========== ===========
Net income $ 1,062 380
=========== ===========
45
<PAGE>
9. Deposits:
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
Weighted Average Rate 1997 1996
At December 31, -------------- ----------------
1997 Amount Percent Amount Percent
--------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Demand and NOW accounts 1.64 $ 12,186 4.94 10,074 5.11
Money market accounts 4.70 37,182 15.06 19,664 8.36
Passbook savings accounts 2.46 22,115 8.96 27,981 11.90
------ ------- ------ -------
71,483 28.96 57,719 25.37
------ ------- ------ -------
Certificates of deposit:
0-11 months 5.07 14,750 5.97 18,076 7.69
12-17 months 5.67 37,025 15.00 41,019 17.44
18-23 months 5.79 19,361 7.84 17,162 7.30
24-35 months 6.01 73,163 29.63 56,268 23.93
36-47 months 6.12 19,339 7.83 28,299 12.03
48-59 months 5.88 2,995 1.21 6,210 2.64
60 months and greater 6.33 8,793 3.56 8,450 3.59
------ ------- ------ -------
175,426 71.04 175,484 74.63
------ ------- ------ -------
$ 246,909 100.00 233,203 100.00
======= ======= ======= =======
</TABLE>
At December 31, 1997, scheduled maturities of certificates of deposit are as
follows:
Within 1 year $ 83,104
1 to 3 years 88,605
3 to 5 years 3,218
Over 5 years 499
---------
$ 175,426
=========
Certificates of deposit with balances of one hundred thousand dollars or more
totaled $22,934 and $11,424 at December 31, 1997 and 1996, respectively.
Interest expense on deposits for the years ended December 31 is summarized as
follows:
1997 1996 1995
------ ------ ------
Money market accounts 1,224 361 202
Passbook savings accounts 638 653 687
Demand and NOW accounts 256 63 75
Certificates of deposit 10,100 8,183 5,277
------ ------ ------
$ 12,218 9,260 6,241
====== ====== ======
46
<PAGE>
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:
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.
47
<PAGE>
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.
The estimated fair values of the Company's instruments at December 31 are as
follows:
<TABLE>
<CAPTION>
1997 1996
--------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and interest bearing deposits $ 31,239 31,239 15,611 15,611
Investment and mortgage-backed
securities 44,888 44,888 72,572 72,572
Loans receivable 277,731 283,349 287,611 287,827
Accrued interest receivable 2,360 2,360 2,170 2,170
Investment in FHLB stock 6,470 6,470 5,862 5,862
Financial liabilities:
Deposits 246,909 247,504 233,203 234,629
Advances from FHLB 68,339 68,337 102,602 102,332
Unrecognized financial instruments:
Commitments to originate loans 8,328 8,328 5,357 5,357
</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, 1997 and 1996, 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, 1997 and 1996 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.
48
<PAGE>
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.
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.
During 1995, the Board of Directors terminated the plan and beneficiaries
received a cash payment for their vested benefits as of the termination date.
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 1997, 1996 and 1995 was
$379, $324, and $301, respectively. The status of ESOP shares at December 31,
1997 is as follows:
Shares
-------
Allocated (including shares withdrawn) 37,195
Committed to be allocated 14,878
Unearned 96,708
-------
Total 148,781
=======
The market value of unearned shares at December 31, 1997 was $2,599.
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. $35 was expensed under the plan in 1997; $16 was
expensed in 1996.
49
<PAGE>
Non-qualified deferred compensation plan
On October 19, 1995, the Board of Directors 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.
No expense was incurred for 1997. There were no participants at December 31,
1997.
Stock option and incentive plan
On January 31, 1995, the shareholders approved an Incentive Stock Option
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.
In April, 1997, shareholders approved conversion of Seven Hills stock options
to Western Ohio Financial Corporation options. Accordingly, 43,057 options to
purchase stock in Western Ohio Financial Corporation at a price of $11.47 per
share were issued.
Activity regarding stock options is summarized as follows:
Number of Shares
------------------------
1997 1996
------- -------
Options Granted:
Beginning of year 236,271 236,271
Additional granted 77,057 ---
------- -------
End of year 313,328 236,271
======= =======
Options Exercised or Expiring:
Beginning of year 9,000 ---
Additional exercised 107,961 3,000
Expired 6,000 6,000
------- -------
End of year 122,961 9,000
======= =======
Options Outstanding at End of Year 190,367 227,271
======= =======
Exercisable in 1998 102,099
=======
Option Price per Share $11.47-21.25
============
Shares available for future grants
at December 31, 1997 6,229
=======
50
<PAGE>
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 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:
1997 1996 1995
------ ------- ------
Net income:
As reported $ 183 1,062 2,893
Additional compensation cost 178 88 88
------ ------- ------
Pro forma $ 5 974 2,805
====== ======= ======
Earnings per share:
As reported:
Basic $0.08 0.47 1.18
Diluted 0.08 0.46 1.15
Pro forma
Basic --- 0.43 1.14
Diluted --- 0.42 1.12
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 6.12% to 7.24%
Expected life Life of the options which is ten years
Expected volatility 0.05% to 0.17% based on the 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, 1997,
57,849 shares have been awarded under the plan at a total cost of $1,307. 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. $444 and $247 were amortized to expense in 1997 and 1996,
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
51
<PAGE>
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.
12. Advances From the Federal Home Loan Bank:
Advances from the Federal Home Loan Bank consist of the following:
Current
Weighted Average
Interest Rate 1997 1996
-------------- ------ ------
Fixed rate advances, with monthly
interest payments, principal due in:
1997 5.90% $ --- 37,254
1998 5.93% 43,540 25,500
1999 5.50% 20,000 20,000
2000 6.45% 1,000 ---
2001 8.35% 340 340
------- --------
64,880 83,094
------- --------
Variable rate advances, with monthly
interest payments, principal due in:
1997 5.85% --- 11,007
1998 6.80% --- 4,000
2000 6.10% --- 1,000
------- --------
--- 16,007
------- --------
Fixedrate advances, with monthly
principal and interest payments, final
principal due in:
2003 5.89% 421 428
2004 7.01% 2,730 2,761
2005 7.17% 308 312
------- --------
3,459 3,501
------- --------
$ 68,339 102,602
======== ========
Principal payments due in the five
years from December 31, 1997
are detailed as follows:
1998 $ 43,588
1999 20,050
2000 1,055
2001 398
2002 64
Thereafter 3,184
-------
$ 68,339
=======
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, 1997,
1996, and 1995 was $5,716, $4,523, and $793, respectively.
52
<PAGE>
13. Income Taxes:
Income tax expense for the years ended December 31 is summarized as follows:
1997 1996 1995
------ ------ ------
Current $ 630 686 1,378
Deferred (472) 21 129
------ ------ ------
$ 158 707 1,507
====== ====== ======
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:
1997 1996 1995
------ ------ ------
Expected income tax expense at
federal tax rate $ 116 601 1,496
Dividend exclusion (17) (1) (2)
Amortization of intangible assets 145 81 ---
Other permanent differences (86) 26 13
------ ------ ------
$ 158 707 1,507
====== ====== ======
Temporary differences that gave rise to deferred income tax assets and
liabilities at December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liability Assets Liability
----------- ---------- -------- ----------
<S> <C> <C> <C> <C>
FHLB stock dividends not taxable $ --- 699 --- 453
Basis adjustments for investments
and mortgage-backed securities
available for sale --- 159 136 ---
Basis difference for intangible assets --- 17 2 105
Amortization of discounts on loans
acquired in reciprocal loan sale --- 15 --- 16
Loan loss reserve not currently deductible 1,094 --- 416 ---
Adjustment for former use of cash basis
accounting method for income tax
reporting --- 99 --- 100
Deferred loan fees previously included
in taxable income --- 20 3 ---
Depreciation differences for income tax reporting --- 57 --- 19
Director deferred compensation and
management recognition plan
expense not currently deductible 144 --- 131 ---
---------- ---------- -------- ----------
$ 1,238 1,066 688 693
========== ========== ========= ==========
</TABLE>
53
<PAGE>
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, 1997 and 1996, include approximately
$8,709, 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, 1997 and 1996.
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
54
<PAGE>
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 1997 and 1996, the Company reacquired 16,500 and 188,112 shares of its
common stock, respectively. Management intends to use the reacquired shares to
fund the Management Recognition Plan and Stock Option Plan.
15. Earnings Per Share:
Reconciliation of shares used in calculating earnings per share data is as
follows:
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
1997
----
Basic earnings per share:
Net income $ 183 2,232,290 0.08
Effect of dilutive securities:
Options --- 46,993 0.00
----- --------- ------
Diluted earnings per share:
Net income plus assumed
conversions $ 183 2,279,283 0.08
===== ========= ======
1996
----
Basic earnings per share:
Net income $ 1,062 2,254,598 0.47
Effect of dilutive securities:
Options --- 41,991 (0.01)
----- --------- ------
Diluted earnings per share:
Net income plus assumed
conversions $ 1,062 2,296,589 0.46
===== ========= ======
1995
----
Basic earnings per share:
Net income $ 2,893 2,452,495 1.18
Effect of dilutive securities:
Options --- 56,949 (0.03)
----- --------- ------
Diluted earnings per share:
Net income plus assumed
conversions $ 2,893 2,509,444 1.15
===== ========= ======
</TABLE>
55
<PAGE>
16. 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, 1997 and 1996 and the
condensed statements of operations and cash flows for the years ended December
31, 1997 and 1996 should be read in conjunction with the consolidated financial
statements and notes thereto.
Western Ohio Financial Corporation
Statements of Financial Condition
1997 1996
---------- ---------
Assets:
Cash and cash equivalents $ 2,762 4,959
Investment in Banking Subsidiaries 45,804 49,721
Investment in West Central Mortgage
Services, Inc. 37 --
Deferred federal income taxes -- 75
Prepaid expenses and other assets 67 10
Prepaid taxes 190 --
Intercompany receivables 5,864 375
---------- ---------
Total Assets $ 54,724 55,140
========== =========
Liabilities:
Federal income taxes payable $ -- 64
Accrued expenses and other liabilities 124 1,028
---------- ---------
124 1,092
---------- ---------
Stockholders' equity:
Common stock $.01 par value, 7,250,000
shares authorized and 2,645,000
shares issued 26 26
Additional paid in capital 40,458 41,158
Unrealized gain (loss) on available for
sale securities (net of income taxes) 309 (242)
Unallocated shares held by employee stock
ownership plan (1,547) (1,785)
Deferred MRP expense (396) (764)
Retained earnings 21,198 23,234
---------- ---------
60,048 61,627
Treasury stock (5,448) (7,579)
---------- ---------
54,600 54,048
---------- ---------
Total Liabilities and Stockholders' Equity $ 54,724 55,140
========== =========
56
<PAGE>
Statements of Income
1997 1996
---------- ---------
Interest income:
Interest from loan to subsidiary for funding of
employee stock ownership plan $ 123 143
Other 75 357
---------- ---------
198 500
Non-interest income 22 78
Dividends from subsidiaries 5,002 15,500
---------- ---------
5,222 16,078
Non-interest expenses (728) (805)
---------- ---------
Income before income taxes 4,494 15,273
Provision for income tax benefit 157 76
---------- ---------
Net Income before equity in
subsidiary earnings 4,651 15,349
Excess of dividends over net income of subsidiaries (4,468) (14,287)
---------- ---------
Net Income $ 183 1,062
========== =========
Statements of Cash Flows
1997 1996
---------- ---------
Cash flows from operating activities:
Net income $ 183 1,062
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of investments --- (54)
Excess of dividends over equity
in subsidiary earnings 4,468 14,287
ESOP and MRP expense not
requiring cash 544 566
Change in:
Other assets (172) 63
Other liabilities (968) 927
---------- ---------
Net cash provided by operating
activities 4,055 16,851
---------- ---------
Cash flows from investing activities:
Investment in subsidiaries (37) (19,488)
Proceeds from sale of investments --- 2,915
Intercompany advance (5,489) (152)
---------- ---------
Net cash provided (used) by
investing activities (5,526) (16,725)
---------- ---------
Cash flows from financing activities:
Dividends paid (2,219) (2,275)
Treasury shares acquired (370) (4,129)
Stock options exercised 1,863 ---
---------- ---------
Net cash used by financing
activities (726) (6,404)
---------- ---------
Net decrease in cash and cash equivalents (2,197) (6,278)
Cash and cash equivalents:
Beginning 4,959 11,237
---------- ---------
Ending $ 2,762 4,959
========== =========
Supplemental information:
Income taxes paid $ --- ---
========== =========
57
<PAGE>
17. Regulatory Capital Requirements:
In connection with the insurance of its deposits by the Federal Deposit
Insurance Corporation, the Bank is required to maintain certain minimum
capital requirements. If the Bank fails to meet its 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
Bank and its depositors and investors. Such action may include various
regulatory actions to limit the Bank's operations.
The following is a summary of the Bank's consolidated regulatory capital and
ratios at December 31, 1997:
Amount %
--------- -----
Tangible capital:
Banks' $ 41,897 11.4
Requirement 5,507 1.5
--------- -----
Excess $ 36,390 9.9
========= =====
Core capital:
Banks' $ 41,897 11.4
Requirement 11,014 3.0
--------- -----
Excess $ 30,883 8.4
========= =====
Risk-based capital:
Banks' $ 44,330 21.6
Requirement 16,409 8.0
--------- -----
Excess $ 27,921 13.6
========= =====
A reconciliation of the Bank's consolidated capital in accordance with
generally accepted accounting principles (GAAP) and regulatory capital is as
follows at December 31, 1997:
Stockholders' equity per financial statements $ 54,600
--------
Parent company's equity not available for regulatory purposes:
Equity of parent company (49,027)
Less investment in subsidiaries 40,230
--------
(8,797)
Unamortized mortgage servicing rights (40)
Acquisition goodwill (3,557)
Unrealized loss on securities available for sale (309)
--------
Total tangible and core capital 41,897
Allowance for loan losses as defined 2,433
--------
Total risk based capital $ 44,330
========
58
<PAGE>
18. 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, 1997, the Company had outstanding firm commitments to
originate loans and extend credit as follows:
Fixed Variable
Rate Rate Total
------- -------- --------
First mortgage loans $ 32 1,230 1,262
Consumer and other loans 1,057 --- 1,057
Commitments to extend credit:
Home equity --- 3,413 3,413
Commercial --- 2,596 2,596
------- -------- --------
$ 1,089 7,239 8,328
======= ======== ========
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 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.
59
<PAGE>
19. Selected Quarterly Financial Data (Unaudited):
Selected quarterly financial data are presented below for the quarters ending
December 31, 1997 and 1996. Year-end reclassifications have not been
reflected.
<TABLE>
<CAPTION>
1997
-------------------------------------------------
March 31 June 30 September 30 December 31
--------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total interest income $ 7,114 7,414 7,450 7,061
Total interest expense 4,431 4,548 4,591 4,364
--------- ------- ------------ -----------
Net interest income 2,683 2,866 2,859 2,697
Provision for losses 67 43 246 1,929
--------- ------- ------------ -----------
Net interest income after
provision for losses 2,616 2,823 2,613 768
Total non-interest income 267 132 207 386
Total non-interest expenses (2,323) (2,226) (2,688) (2,234)
--------- ------- ------------ -----------
Income before income tax expense 560 729 132 (1,080)
Income tax expense (benefit) 228 277 72 (419)
--------- ------- ------------ -----------
Net income (loss) $ 332 452 60 (661)
========= ======= ============ ===========
Earnings (loss) per share:
Basic $ 0.15 0.21 0.03 (0.31)
Diluted 0.15 0.20 0.03 (0.28)
Market range:
High bid $ 22 3/4 22 1/4 27 1/8 30 5/8
Low bid $ 21 21 21 1/4 24 1/4
</TABLE>
60
<PAGE>
<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 (loss) $ 280 352 (167) 597
========= ======= ============ ===========
Earnings per share:
Basic $ 0.12 0.15 (0.07) 0.27
Diluted 0.12 0.15 (0.07) 0.26
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.
61
<PAGE>
<TABLE>
<CAPTION>
Board of Directors of Western Ohio Financial Corporation and Cornerstone Bank
<S> <C>
David L. Dillahunt Senior Vice President, Advest, Inc.
John W. Raisbeck President and Chief Executive Officer, Cornerstone Bank
Carl E. Mumma Senior Member, Mumma and Mumma Realty
Howard V. Dodds President, Howard's Foods, Inc.
John E. Field President, Wallace & Turner, Inc.
Jeffrey L. Levine President, Larry Stein Realty and Levine Realty Company
William N. Scarff President, Scarff's Nursery, Inc. and Scarff's Land Company
Officers of Western Ohio Financial Company
John W. Raisbeck President and Chief Executive Officer
John T. Heckman Executive Vice President
Gary L. Hicks Executive Vice President
Robert P. Brezing Senior Vice President
Thomas A. Estep Vice President, Treasurer and Chief Financial Officer
Suzanne E. Moeller Corporate Secretary
Officers of Cornerstone Bank
John W. Raisbeck President and Chief Executive Officer
John T. Heckman Executive Vice President, Operations and Administration
Gary L. Hicks Executive Vice President, Mortgage Lending
Robert P. Brezing Senior Vice President, Business Banking
Thomas A. Estep Vice President, Treasurer and Chief Financial Officer
Suzanne E. Moeller Corporate SecretaryAnnual Report on Form 10-K
</TABLE>
Annual Report on Form 10-K
A copy of the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission will be available without charge upon request to:
Investor Relations, Western Ohio Financial Corporation, 28 East Main Street,
P.O. Box 509, Springfield, Ohio 45501-0509, (937)325-9994.
Annual Meeting
The Annual Meeting of Shareholders of Western Ohio Financial Corporation will
be held at 9:00 AM on Tuesday, April 28, 1998 at the Clark State Performing
Arts Center, Turner Studio, 300 South Fountain Avenue, Springfield, Ohio
45502.
Transfer Agent
American Securities Transfer and Trust, Inc. serves as the transfer agent for
Western Ohio Financial Corporation's shares. Communications regarding change
of address, transfer of shares, and lost certificates should be sent to:
American Securities Transfer & Trust, Inc., Suite 101, 938 Quail Street,
Lakewood, CO 80215-5513.
62
<PAGE>
Legal Counsel
Local Counsel
Martin Browne Hull & Harper
1 South Limestone Street
Springfield, OH 45502
Special Counsel
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue N.W.
Washington D.C. 20005
Market Makers
The Chicago Corporation
208 La Salle Street
Chicago, IL 60604
(315)855-7600
S.J. Wolfe & Co.
32 North Main Street
Suite 647
Dayton, OH 45402
(937)223-1626
Everen Securities, Inc.
77 West Wacker Dr.
Chicago, IL 60601
(312)574-6000
Sandler O'Neill & Partners, L.P.
2 World Trade Center
104th Floor
New York, NY 10048
(212)466-7744
Advest, Inc.
One Commercial Plaza
280 Trumbull Street
Hartford, CT 06103
(203)525-1421
Friedman Billings Ramsey & Co.
Potomac Tower
18th Floor
1001 19th Street North
Arlington, VA 22209
(703)312-9600
Keefe, Bruyette & Woods, Inc.
2 World Trade Center
85th Floor
New York, NY 10048
(212)323-8300
To learn more about Cornerstone Bank's services, call 1-800-600-1884
We invite you to call on Cornerstone Bank for your personal and business
banking needs. For more information about our various banking and financial
services, call or visit any Cornerstone Bank branch, or call 1-800-600-1884.
63
<PAGE>
Exhibit 16
[Clark, Schaefer, Hackett & Co. Letterhead]
February 10, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
RE: Western Ohio Financial Corporation
file number 0-24120
To whom it may concern:
We have read the statements of Western Ohio Financial Corporation contained in
form 8-K dated January 29, 1998, a copy of which is attached, and agree with
such statements.
Very truly yours,
/s/ Clark, Schaefer, Hackett & Co.
CLARK, SCHAEFER, HACKETT & CO.
Enclosure
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Parent Subsidiary Ownership Organization
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Western Ohio Financial Cornerstone Bank 100% Federal
Corporation
Western Ohio Financial West Central Mortgage Services, 100% Delaware
Corporation Inc.
Cornerstone Bank Springfield-Home Community 50% Ohio
Reinvestment Corporation
Cornerstone Bank West Central Financial Services, 100% Ohio
Inc.
</TABLE>
The financial statements of the Registrant are consolidated with those
of its subsidiaries.
<PAGE>
Exhibit 23
[CLARK, SCHAEFER, HACKETT & CO. LETTERHEAD]
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 23, 1998, on the 1997
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, 1997.
/s/ Clark, Schaefer, Hackett & Co.
Springfield, Ohio
March 26, 1998
<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, 1997
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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,107
<INT-BEARING-DEPOSITS> 22,022
<FED-FUNDS-SOLD> 6,110
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,455
<INVESTMENTS-CARRYING> 22,455
<INVESTMENTS-MARKET> 22,455
<LOANS> 277,731
<ALLOWANCE> (3,922)
<TOTAL-ASSETS> 371,988
<DEPOSITS> 246,909
<SHORT-TERM> 44,540
<LIABILITIES-OTHER> 2,140
<LONG-TERM> 23,799
0
0
<COMMON> 26
<OTHER-SE> 54,574
<TOTAL-LIABILITIES-AND-EQUITY> 371,988
<INTEREST-LOAN> 23,815
<INTEREST-INVEST> 4,752
<INTEREST-OTHER> 472
<INTEREST-TOTAL> 29,039
<INTEREST-DEPOSIT> 12,218
<INTEREST-EXPENSE> 5,716
<INTEREST-INCOME-NET> 11,105
<LOAN-LOSSES> 2,285
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,471
<INCOME-PRETAX> 341
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 183
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
<YIELD-ACTUAL> 2.95
<LOANS-NON> 2,051
<LOANS-PAST> 1,995
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,416
<ALLOWANCE-OPEN> (1,716)
<CHARGE-OFFS> 79
<RECOVERIES> 0
<ALLOWANCE-CLOSE> (3,922)
<ALLOWANCE-DOMESTIC> (3,922)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
