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, 1999
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
incorporation or organization) Identification No.)
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.[X]
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 23, 1999, was approximately $28.6
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 23, 2000, there were issued and outstanding 1,972,364 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 Shareholders for
the fiscal year ended December 31, 1999.
Part III of Form 10-K - Portions of the Proxy Statement for Annual Meeting of
Shareholders.
<PAGE>
FORWARD-LOOKING STATEMENTS
Western Ohio Financial Corporation (the "Company"), and its
wholly-owned subsidiary, Cornerstone Bank, may from time to time make written or
oral "forward-looking statements," including statements contained in its filings
with the Securities and Exchange Commission. These forward-looking statements
may be included in this Annual Report on Form 10-K and the exhibits attached to
it, in the Company's reports to shareholders and in other communications, which
are made in good faith by us pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements about our beliefs,
plans, objectives, goals, expectations, anticipations, estimates and intentions,
that are subject to significant risks and uncertainties, and are subject to
change based on various factors, some of which are beyond our control. The words
"may", "could", "should", "would", "believe", "anticipate", "estimate",
"expect", "intend", "plan" and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause our
financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in the forward-looking
statements:
o the strength of the United States economy in general and the
strength of the local economies in which we conduct
operations;
o the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the
Federal Reserve Board;
o inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of our new products
and services and the perceived overall value of these products
and services by users, including the features, pricing and
quality compared to competitors' products and services;
o the willingness of users to substitute our products and
services for products and services of our competitors;
o our success in gaining regulatory approval of our products and
services, when required;
o the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking,
securities and insurance);
o the impact of technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and
o our success at managing the risks involved in the foregoing.
The list of important factors stated above is not exclusive. We do not
undertake to update any forward-looking statement, whether written or oral, that
may be made from time to time by or on behalf of the Company or Cornerstone
Bank.
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"). The 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 and Greene counties, Ohio and
parts of contiguous counties, and is serviced through its main office in
Springfield, Ohio and five branch offices in Enon, New Carlisle, Springfield,
Yellow Springs and Beavercreek. At December 31, 1999, the Company had total
assets of $329.7 million, deposits of $202.3 million and shareholders' equity of
$43.0 million, or 13.0% 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 real estate,
commercial and multi-family real estate, and construction 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 (937)
325-4683.
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 1998, Clark county had an unemployment rate of 3.7% as
compared to the State of Ohio at 4.0% and the United States at 5.1%. The
unemployment rate in Clark county increased to 3.9% in 1999 as compared with
3.8% for the State of Ohio and 4.1% for the United States.
The population of Clark county has maintained steady growth in recent years
with total population increasing to approximately 148,000 in 1999. From 1990 to
1995, Clark County's population grew .24%. For 1999, Clark County's median
housing value was approximately $59,900 in 1999. 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.
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 real estate, it also originates commercial and multi-family real estate
and construction loans and, to a lesser extent, consumer and commercial business
loans in its market area. At December 31, 1999, the Company's net loan
portfolio, including loans held for sale, totaled $254.9 million. At December
31, 1999, the Company's gross loan portfolio, including loans held for sale,
totaled $262.2 million, of which $178.3 million, or 68.01%, was comprised of
permanent loans secured by one-to-four family real estate.
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, 1999, the maximum amount which the Bank could have loaned to any
one borrower and the borrower's related entities was $6.2 million. At December
31, 1999, the Bank 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 $2.3 million secured by
a first security mortgage on multi-family properties. In addition, three
borrowers had a combined principal and commitment outstanding of $5.9 million at
December 31, 1999. The first borrower's outstanding credit is secured by land
and speculation homes. The second borrower's outstanding credit is secured by a
first mortgage on multi-family properties. The third borrower's outstanding
credit is secured by one- to four-family dwellings and multi-family properties.
The security properties on all of these loans are located in the Bank's market
areas. All of these loans are performing in accordance with their terms.
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.
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following information reflects the composition
of the Company's loan portfolio, excluding loans held for sale, in dollar
amounts and in percentage (before deductions for loans in process, deferred fees
and discounts and allowance for losses) as of the dates indicated.
<TABLE>
December 31,
------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
<CAPTION>
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
One-to-four family $178,304 68.01% $177,109 74.87% $224,289 79.10% $242,600 82.21% $131,262 84.93%
Multi-family 30,233 11.53 12,422 5.25 11,247 3.97 12,476 4.23 4,502 2.91
Commercial real estate 22,339 8.52 20,675 8.74 21,583 7.61 20,531 6.96 10,531 6.81
Construction 6,923 2.64 3,908 1.65 7,275 2.57 10,965 3.71 5,405 3.50
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 237,799 90.70 214,114 90.51 264,394 93.25 286,572 97.11 151,700 98.15
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
OTHER LOANS:
Consumer Loans:
Home equity 15,369 5.86 10,054 4.25 6,906 2.43 2,188 0.74 474 0.31
Deposit account 146 .06 257 .11 485 .17 384 0.13 363 0.24
Home improvement -- -- 15 -- 18 -- 31 0.01 -- --
Other secured 1,664 .64 3,173 1.34 5,374 1.90 3,689 1.25 942 0.61
Other 1,679 .64 2,034 .86 2,493 .88 -- -- 21 0.01
-------- ------ -------- ------ -------- ------ ------- ----- ------- ------
Total consumer loans 18,858 7.20 15,533 6.56 15,276 5.38 6,292 2.13 1,800 1.17
-------- ------ -------- ------ -------- ------ ------- ------ ------- ------
Commercial business loans 5,499 2.10 6,914 2.93 3,886 1.37 2,244 0.76 1,056 0.68
-------- ------ -------- ------ -------- ------ ------ ------ -------
Total other loans 24,357 9.30 22,447 9.49 19,162 6.75 8,536 2.89 2,856 1.85
-------- ------ -------- ------ -------- ------ ------- ------ -------- ------
Total loans 262,156 100.00% 236,561 100.00% 283,556 100.00% 295,108 100.00% 154,556 100.00%
====== ====== ====== ====== ======
LESS:
Loans in process (4,659) (2,364) (1,784) (5,651) (2,768)
Deferred fees and discounts (62) (83) (119) (130) (538)
Allowance for losses (2,781) (3,200) (3,922) (1,716) (774)
-------- -------- -------- -------- --------
Total loans receivable, net $254,654 $230,914 $277,731 $287,611 $150,476
======== ======== ======== ======== ========
</TABLE>
<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,
------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FIXED-RATE LOANS:
Real estate:
One-to-four family $127,966 48.81% $109,550 46.31% $126,375 44.57% $155,232 52.61% $111,117 71.89%
Multi-family 18,828 7.18 8,141 3.44 3,355 1.18 5,036 1.71 3,873 2.51
Commercial 8,450 3.22 12,759 5.39 8,533 3.01 9,276 3.14 9,307 6.02
Construction 5,538 2.11 2,597 1.10 477 .17 7,649 2.59 5,105 3.30
-------- ------ ----- ----- -------- ----- ------- ----- ------- ----
Total fixed-rate real
estate loans 160,782 61.32 133,047 56.24 138,740 48.93 177,193 60.05 129,402 83.72
Commercial business 768 .29 791 .33 804 .28 178 .06 401 0.26
Consumer 3,547 1.35 4,536 1.92 7,161 2.53 3,642 1.23 1,326 0.86
-------- ------ ---- ----- ------ ----- -------- ---- ------ -----
Total fixed-rate loans 165,097 62.96 138,374 58.49 146,705 51.74 181,013 61.34 131,129 84.84
------- ----- ------- ----- ------- ----- ------- -----
ADJUSTABLE-RATE LOANS
Real estate:
One-to-four family 50,338 19.20 67,559 28.56 97,969 34.55 87,368 29.61 20,145 13.04
Multi family 11,405 4.35 4,281 1.81 7,892 2.78 7,440 2.52 629 0.41
Commercial 13,889 5.30 7,916 3.35 13,049 4.60 11,255 3.81 1,224 0.79
Construction 1,385 .53 1,311 .55 6,798 2.40 3,316 1.12 300 0.19
----- ----- ----- --- ------- ----- ------ -----
Total adjustable-rate
real estate loans 77,017 29.38 81,067 34.27 125,708 44.33 109,379 37.06 22,298 14.43
Commercial business 4,731 1.81 6,123 2.59 3,082 1.09 2,066 .70 655 0.42
Consumer 15,311 5.84 10,997 4.65 8,061 2.84 2,650 .90 474 0.31
------ ----- ------ ---- ------- ----- ----- ----- ------ ------
Total adjustable-rate loans 97,059 37.03 98,187 41.51 136,851 48.26 114,095 38.66 23,427 15.16
------ ----- ------ ----- ------- ----- ------- ----- ------ -----
Total loans 262,156 100.00% 236,561 100.00% 283,556 100.00% 295,108 100.00% 154,556 100.00%
====== ====== ====== ====== ======
LESS:
Loans in process (4,659) (2,364) (1,784) (5,651) (2,768)
Deferred fees and discounts (62) (83) (119) (130) (538)
Allowance for loan losses (2,781) (3,200) (3,922) (1,716) (774)
------- ------ ------- ------- -----
Total loans receivable, net $254,654 $230,914 $277,731 $287,611 $150,476
======== ======== ======== ======== ========
</TABLE>
<PAGE>
The following schedule illustrates the maturities of the Company's loan
portfolio at December 31, 1999. 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>
------------------------------------ --------------------------------- --------------------------------------
Construction and
ONE-TO-FOUR FAMILY NON-RESIDENTIAL COMMERCIAL DEVELOPMENT CONSUMER TOTAL
------------------ ---------------- ----------------- ---------------- ---------------- -----------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ---- ------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due During (Dollars in Thousands)
Periods Ending
December 31
2000(1)(2) $ 383 7.81% $2,811 7.87% $2,721 9.04% $5,598 8.11% $1,312 11.60% $12,825 8.62%
2001 to 2004 5,143 7.72% 8,440 8.30% 1,535 8.35% 1,288 8.83% 2,551 10.70% 18,957 8.50%
2005 and following 172,778 7.59% 41,321 8.03% 1,243 8.67% 37 8.70% 14,995 8.60% 230,374 7.74%
$178,304 $52,572 $ 5,499 $6,923 $ 18,858 $262,156
</TABLE>
(1) Includes construction loans.
(2) Includes demand loans and loans having no stated maturity.
At December 31, 1999, the total amount of loans due after December 31, 2000
which have predetermined interest rates was $159.1 million, while $90.8 million
loans due after such dates have floating or adjustable interest rates.
<PAGE>
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, 1999, the Company's one-to-four family residential
permanent mortgage loans totaled $178.3 million, or 68.01% of the Company's
total gross loan portfolio.
At December 31, 1999, $128.0 million of the Company's one-to-four family
residential mortgage loans, or 48.81% 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 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, 1999, the Company
had loans to finance the construction of one-to-four family residences totaling
$6.9 million, or 2.6% 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 also engages
in commercial and multi-family real estate lending. At December 31, 1999, the
Company had $52.6 million of permanent commercial and multi-family real estate
loans, which represented 20.0% of the Company's gross loan portfolio.
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 areas. 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 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 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 approximately $6.3 million of
multi-family real estate participation loans in fiscal 1999.
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 one
largest loan is $2.3 million and is secured by multi-family properties.
CONSUMER LENDING. The Company offers secured and unsecured 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 areas. The Company originates
consumer loans on a direct basis by extending credit directly to the borrower.
At December 31, 1999, deposit loans were $146,000 or .06% of the Company's
gross loan portfolio. Home equity loans were $15.4 million or 5.9% of the
Company's gross loan portfolio as of December 31, 1999.
<PAGE>
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.
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.
COMMERCIAL BUSINESS LENDING. Commercial business loans have been added to
the list of the Company's products. The outstanding balance of unsecured
commercial lines of credit was $1.8 million as of December 31, 1999. Commercial
loans secured other than by mortgage had outstanding balances of $3.1 million as
of December 31, 1999. 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. The Bank's largest loan is a $2.3 million commercial
business loan secured by a first security mortgage and multi-family properties.
<PAGE>
ORIGINATIONS, PURCHASES AND SALES OF LOANS
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 and 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 areas, which is affected by the interest rate environment and other
factors. In fiscal 1999, the Company originated $45.9 million in fixed-rate
loans and $37.7 million in adjustable-rate loans.
In periods of economic uncertainty, the ability of financial institutions
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.
<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,
---------------------------------
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
(In Thousands)
ORIGINATIONS BY TYPE:
Adjustable-rate:
Construction $ 896 $ 2,494 $11,521
Real estate - one to four family 1,210 7,205 23,600
- multi-family 12,923 2,017 593
- commercial 3,833 1,060 3,276
Commercial business 7,806 2,435 1,894
Consumer - home equity 9,576 7,226 5,996
Other consumer 1,423 1,188 2,247
Fixed-rate:
Construction 3,806 526 280
Commercial business 11,886 1,656 627
Consumer 958 895 7,213
Real estate - one-to-four family 26,053 24,100 4,263
- multi-family 2,407 11 ---
- commercial 3,240 1,269 141
------- ------- ------
Total loans originated 86,017 52,082 61,651
PURCHASES:
One-to-four family 21,525 --- ---
Multi-Family 6,317 --- ---
------- ------- ------
Total purchased 27,842 --- ---
------- ------- ------
SALES AND REPAYMENTS:
Loan sale --- --- (15,751)
Loan payments (89,838) (95,260) (57,604)
-------- -------- --------
Total reductions (89,838) (95,260) (73,355)
Increase (decrease) in other
items, net 1,574 (3,639) (1,824)
-------- -------- --------
Net increase (decrease) $ 25,595 $(46,817) $ (9,880)
======== ======== ========
</TABLE>
<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 initiates collection
procedures by written 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
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 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, 1999. 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>
LOANS DELINQUENT FOR:
------------------------------------------------------------------------------------------
TOTAL LOANS DELINQUENT 60
60-89 DAYS 90 DAYS AND OVER DAYS AND OVER
------------------------ ------------------------ -----------------------------
PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN
NUMBER AMOUNT CATEGORY NUMBER AMOUNT CATEGORY NUMBER AMOUNT CATEGORY
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One-to-four family 7 $256 .14% 19 $1,274 .71% 26 $1,530 .94%
Construction --- --- --- 1 230 3.32 1 230 3.32
Commercial Real Estate 1 94 .42 5 959 4.29 6 1,053 7.37
Multi-Family --- --- --- 1 272 .90 1 272 1.00
Consumer/Commercial 7 9 .04 6 20 .08 13 29 1.59
--- ---- --- --- ------ ---- -- ------ -----
Total 15 $359 .60% 32 $2,755 9.30% 47 $3,114 9.90%
=== ==== === === ====== ==== == ====== =====
</TABLE>
<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,
----------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------ ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One-to-four family $1,504 $1,740 $ 612 $ 674 $ 579
Consumer 20 373 213 10 ---
Commercial real estate/Business Loans 1,231 2,428 1,170 1,266 ---
----- ----- ----- ----- ---
Total 2,755 4,541 1,995 1,950 579
----- ----- ----- ----- ---
Accruing loans delinquent more than 90 days --- --- --- 94 ---
Foreclosed assets --- 56 56 55 ---
----- ----- ----- ----- ---
Total non-performing assets $2,755 $4,597 $2,051 $2,099 $579
====== ====== ====== ====== ====
Total as a percentage of total assets .84% 1.4% .55% .52% .25%
==== === === === ===
</TABLE>
For the year ended December 31, 1999, gross interest income that would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to approximately $110,000.
NON-PERFORMING ASSETS. Included in the table above in nonaccruing
one-to-four family loans at December 31, 1999, were 20 loans secured by
single-family residences located in the Company's primary market area. Also
included in non-performing assets are 1 multi-family loan, 4 consumer loans, 2
commercial loans and 5 commercial real estate loans.
POTENTIAL PROBLEM LOANS. Not categorized as non-performing assets at
December 31, 1999, were $946,000 million of potential problem loans. The
potential problem loans consisted of eleven single family residences, two
commercial real estate loans, one multi-family loan and seven consumer loans.
TROUBLED DEBT RESTRUCTURED LOANS. Not applicable.
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 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
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, 1999, the Bank had classified a total of $3.2
million of its assets as substandard, none as doubtful and none as loss. At
December 31, 1998, total classified assets were $4.0 million, or 1.2% of the
Bank's assets.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at fair
value. If fair value at the date of foreclosure is lower than the balance of the
related loan, the difference will be charged-off to the allowance at the time of
transfer. Valuations are periodically updated by management and if the value
declines, a specific provision for losses on such property is established by a
charge to operations.
Although management believes that it uses the best information available to
determine the allowances, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowances will be the result
of periodic loan, property and collateral reviews and thus cannot be predicted
in advance. At December 31, 1999, the Company had a total allowance for loan
losses of $2.8 million, or 1.1% of total loans receivable. See Note 4 of the
Notes to Consolidated Financial Statements in the Company's Annual Report to
Shareholders filed as Exhibit 13 hereto.
<PAGE>
The following table sets forth an analysis of the Company's allowance for
loan losses.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- --------- --------- ---------- ---------
(Dollars in Thousands)
Balance at beginning of period $3,200 $3,922 $1,716 $ 774 $774
Beginning balance acquisition --- --- --- 577 ---
Charge-offs:
One-to-four family (215) (28) (79) (34) (6)
Consumer (373) (228) --- --- ---
Commercial (148) (122) --- --- ---
Recoveries 71 19 --- --- ---
------ --------- ------- ------- --------
Net charge-offs (665) (359) (79) (34) (6)
Additions charged to operations 246 (363) 2,285 399 6
------ --------- -------- ------- --------
Balance at end of period $2,781 $3,200 $3,922 $1,716 $774
====== ========= ======== ======= ====
Ratio of net charge-offs during the period to .27% .14% --- .01% ---
====== ========= ======= ======= ========
average loans outstanding during the period
Ratio of net charge-offs during the period to 20.3% 8.6% 3.81% 1.66% 2.99%
average non- performing assets ====== ========= ==== ==== ====
<PAGE>
The distribution of the Company's allowance for losses on loans at
the dates indicated is summarized as follows:
December 31,
---------------------------------------------------------------------
1999 1998 1997
-------------- ---------------- -----------------
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 $474 68.01% $519 74.87% $ 669 79.10%
Multi-family 170 11.53 55 5.25 190 3.97
Commercial real estate 728 8.52 828 8.74 1,338 7.61
Construction 3 2.64 3 1.65 72 2.57
Consumer 173 7.20 510 6.56 548 5.38
Commercial Business 598 2.10 585 2.93 432 1.37
Unallocated 635 --- 700 --- 673
--- ----- ---- ---- ----- ------
---
Total $2,781 100.00% $3,200 100.00% $3,922 100.00%
======= ====== ====== ====== ====== ======
</TABLE>
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 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, 1999, 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.
The investment policy of the Company is to invest funds among various
categories of investments and maturities based upon the 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, 1999, the Company's cash and interest-bearing deposits in
other financial institutions totaled $9.6 million, or 2.9% of total assets. The
Company also has a $7.5 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, 1999, 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.
<PAGE>
The following table sets forth the composition of the Company's investment
portfolio at the dates indicated (excluding mortgage-backed securities).
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
1999 1998 1997
---------------- ------------------ ----------------
Book % of Book % of Book % of
VALUE TOTAL VALUE TOTAL VALUE TOTAL
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities:
U.S. Treasury $ --- ---% $ 502 1.56% $ 501 .88%
U.S. Government Agencies 8,775 45.27 14,900 46.25 21,820 38.24
------ ----- ------ ----- ------ -----
Subtotal 8,775 45.27 15,402 47.81 22,321 39.12
------ ----- ------ ----- ------ -----
FHLB stock 7,451 38.44 6,948 21.57 6,470 11.34
Freddie Mac stock --- --- --- --- 134 .23
-------- ------ -------- ------- ------ -----
Total securities and
FHLB/Freddie Mac stock 16,226 83.71 22,350 69.38 28,925 50.69
------- ------ ------- ------ ------ -----
Average remaining life of securities
13.84 years 12.88 years 7.51 years
Other Interest-Earning Assets:
Interest-bearing deposits with banks 3,159 16.29 4,550 14.12 22,022 38.60
Federal funds sold 5,317 16.50 6,110 10.71
------- ------ ------- ----- ------ -----
Total $19,385 100.00% $32,217 100.00% $57,057 100.00%
======= ====== ======= ====== ======= ======
Average remaining life or term to
repricing of investment securities and
other interest-earning assets, excluding
FHLB/Freddie Mac stock 6.26 years 7.88 years 3.32 years
</TABLE>
<PAGE>
The composition and maturities of the investment securities portfolio,
excluding FHLB of Cincinnati stock, are indicated in the following table.
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------------------------------------------
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. Treasury securities $--- $ --- $ --- $ --- $---
Federal agency obligations --- --- 8,775 8,775 8,775
--- ----- ------ ----- ----- -----
Total investment securities $--- $--- $8,775 $8,775 $8,775
==== ==== ====== ====== ======
Weighted average yield ---% ---% 6.15% 6.15% 6.15%
</TABLE>
MORTGAGE-BACKED SECURITIES. The Company had a $41.6 million portfolio of
mortgage-backed securities at December 31, 1999, all of which were insured or
guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac. 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 $1.4 million of the Company's
adjustable-rate mortgage-backed securities are tied to the One Year Constant
Maturity Treasury Index, $5.6 million are tied to the 11th District cost of
funds and $95,000 are tied to the six month treasury. At December 31, 1999,
17.4% 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 Shareholders 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 includes adjustable-rate
mortgage-backed securities to mitigate the consequences of an entirely
fixed-rate mortgage portfolio. The CMO 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 hinder certain aspects of the Company's asset/liability management strategy.
In addition, these securities have maximum interest rate caps. As market
interest rate levels approach these caps, the value of the underlying security
will decline. As of December 31, 1999, the Company held $8.3 million of CMO
securities.
<PAGE>
The following table sets forth the contractual maturities of the Company's
mortgage-backed securities at December 31, 1999.
<TABLE>
<CAPTION>
Due in Due in Due In Over December 31, 1999
1 TO 5 YEARS 6 TO 10 YEARS 10 YEARS BALANCE OUTSTANDING
---------------- ----------------- ---------------- ---------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Freddie Mac $ 28 $ 618 $3,594 $4,240
Fannie Mae --- --- 7,388 7,388
CMOs --- 484 7,782 8,266
Ginnie Mae 9 --- 21,688 21,697
---- --- ------ ------
Total mortgage-backed $37 $1,102 $40,452 $41,591
=== ====== ======= =======
securities
Weighted average yield 6.16% 7.24% 6.38% 6.40%
</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.
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,
--------------------------------------------------
1999 1998 1997
------- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance $192,966 $246,909 $233,203
Net deposits (withdrawals) (4,036) (70,114)(1) (4,220)
Interest credited 13,401 16,171 17,926
------- -------- ---------
Ending balance $202,331 $192,966 $246,909
======== ======== ========
Net increase (decrease) $9,365 $(53,943) $ 13,706
====== ========= ========
Percent increase (decrease) 4.9% 21.8% 5.8 %
=== ==== ====
</TABLE>
(1) Net deposit decrease is primarily due to the sale of $84,365 in deposits
related to the Cincinnati area branch sales in 1998.
<PAGE>
The following table sets forth the dollar amount of deposits in the various
types of deposit programs offered by the Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
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 savings accounts $12,065 5.96% $13,629 7.06% $22,115 8.96%
NOW accounts 13,529 6.69 12,708 6.59 12,186 4.94
Money market accounts 49,149 24.29 49,084 25.44 37,182 15.06
------- ----- ------- ----- ------ -----
Total Non-Certificates 74,743 36.94 75,421 39.09 71,483 28.96
------ ----- ------ ----- ------ -----
CERTIFICATES:
0.00 - 3.49% 353 .17 534 .28 785 .32
3.50 - 5.49% 45,756 22.62 28,353 14.69 27,688 11.21
5.50 - 7.49% 81,098 40.08 88,100 45.65 146,319 59.26
7.50 - 9.49% 381 .19 558 .29 634 .25
------ ----- ------ ----- ------- ------
Total Certificates 127,588 63.06 117,545 60.91 175,426 71.04
------- ----- ------- ----- ------- -----
Total Deposits $202,331 100.00% $192,966 100.00% $246,909 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
The following table shows rate and maturity information for the Company's
certificates of deposit as of December 31, 1999.
<TABLE>
<CAPTION>
0.00- 3.50- 5.50- 7.50- Percent
3.49% 5.49% 7.49% 9.49% TOTAL OF TOTAL
----- ----- ----- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Certificate accounts maturing in quarter ending:
March 31, 2000 $88 $7,586 $16,440 $0 $24,114 18.90%
June 30, 2000 23 9,238 17,338 0 26,599 20.85
September 30, 2000 31 8,031 5,386 0 13,448 10.54
December 31, 2000 0 6,260 2,752 27 9,039 7.08
March 31, 2001 18 3,473 1,216 0 4,707 3.69
June 30, 2001 76 2,344 4,801 29 7,250 5.68
September 30, 2001 7 890 10,007 0 10,904 8.55
December 31, 2001 3 2,414 6,749 165 9,331 7.31
March 31, 2002 2 2,677 2,439 0 5,118 4.02
June 30, 2002 3 1,684 136 0 1,823 1.43
September 30, 2002 16 72 5,992 72 6,152 4.82
December 31, 2002 0 2 3,782 44 3,828 3.00
Thereafter 86 1,085 4,060 44 5,275 4.13
-- ----- ----- -- -----
Total . $353 $45,756 $81,098 $381 $127,588
==== ======= ======= ==== ========
Percent of total .28% 35.86% 63.56% .30% 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,
1999.
<TABLE>
<CAPTION>
Maturity
-----------------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
OR LESS MONTHS 12 MONTHS TOTAL
------------ ---------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less
than $100,000 $21,476 $23,117 $20,589 $50,143 $115,325
Certificates of deposit of 2,638 3,482 1,898 4,245 12,263
------- ------- ------- ------- --------
$100,000 or more
Total certificates of deposit $24,114 $26,599 $22,487 $54,388 $127,588
======= ======= ======= ======= ========
</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.
<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 are secured by the Bank's
blanket agreement for advances and security agreement and are not tied to
specific investments or loans.
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,
------------------------------------------------------
1999 1998 1997
---------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances $90,247 $88,256 $113,112
Average Balance:
FHLB advances $76,449 $62,803 $ 97,414
</TABLE>
The following table sets forth certain information as to the Bank's FHLB
advances at the dates indicated.
December 31,
-----------------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in Thousands)
FHLB advances $82,183 $85,252 $68,339
Weighted average interest rate of
FHLB advances 5.41% 5.30% 5.85%
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, 1999, the Bank had a net negative book investment of
$155,382 in CornerstoneBanc Financial Services, an operating subsidiary created
to generate mortgage lending in areas outside of the Bank's normal lending area.
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 area. 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.
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act makes sweeping changes in the financial services
in which various types of financial institutions may engage. The Glass-Steagall
Act, which had generally prevented banks from affiliation with securities and
insurance firms, was repealed. A new "financial holding company", which owns
only well capitalized and well managed depository institutions, will be
permitted to engage in a variety of financial activities, including insurance
and securities underwriting and agency activities.
The GLB Act permits unitary savings and loan holding companies in
existence on May 4, 1999, including the Corporation to continue to engage in all
activities that they were permitted to engage in prior to the enactment of the
Act. Such activities are essentially unlimited, provided that the thrift
subsidiary remains a qualified thrift lender. Any thrift holding company formed
after May 4r, 1999 will be subject to the same restrictions as a multiple thrift
holding company. In addition, a unitary thrift holding company in existence at
May 4, 1999 may be sold only to a financial holding company engaged in
activities permissible for multiple savings and loan holding companies.
The GLB Act is not expected to have a material effect on the activities in
which the Corporation is currently engaged, except to the extent that
competition with other types of financial institutions may increase as they
engage in activities not permitted prior to enactment of the GLB Act.
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 Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
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
semi-annual assessment, based upon the institution's total assets, to fund OTS
operations. The Bank's OTS assessment for the fiscal year ended December 31,
1999 was $77,000.
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 Bank's general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
December 31, 1999, the Bank's lending limit under this restriction was $6.2
million. The Bank is in compliance with the loans-to-one-borrower limitation.
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.
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.
Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However SAIF-insured institutions
are required to pay a Financing Corporation ("FICO") assessment, in order to
fund the interest on bonds issued to resolve thrift failures in the 1980s, equal
to approximately 6.48 basis points for each $100 in domestic deposits, while BIF
insured institutions pay an assessment equal to approximately 1.52 basis points
for each $100 in domestic deposits. The assessment is expected to be reduced to
2.43 basis points no later than January 1, 2000, when BIF insured institutions
fully participate in the assessment.. These assessments, which may be revised
based upon the level of BIF and SAIF deposits will continue until the bonds
mature in the year 2017.
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 shareholders' 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, 1999, the Bank
had no intangible assets included in its financial statements.
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, 1999, the Bank had tangible capital of $40.0 million, or
12.1% of adjusted total assets, which is $35.1 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, 1999, 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.
At December 31, 1999, the Bank had core capital equal to $40.0 million, or
12.1% of adjusted total assets, which is $26.8 million above the minimum
leverage ratio requirement of 4% 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, 1999, the Bank had
no capital instruments that qualify as supplementary capital and $1.4 million of
general loss reserves, which was less than 1.0% 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, 1999.
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 Fannie Mae or Freddie Mac.
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, 1999, the Bank had total capital (as defined above) of
$41.4 million (including $40.0 million in core capital and $1.4 of general loss
reserves) and risk-weighted assets of $209.2 million; or total capital of 19.8%
of risk-weighted assets. This amount was $24.7 million above the 8.0%
requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (I.E., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (I.E., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized 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 Bank
may have a substantial adverse effect on the Company's operations and
profitability. The Company's shareholders 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.
<PAGE>
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.
The Bank may make a capital distribution without the approval of the
OTS provided the Bank notifies the OTS, 30 days before the declaration of the
capital distribution and the Bank meets the following requirements: (i) has a
regulatory rating in one of the two top examination categories, (ii) is not of
supervisory concern, and will remain adequately- or well-capitalized, as defined
in the OTS prompt corrective action regulations, following the proposed
distribution, and (iii) the distribution does not exceed the Bank's net income
for the calendar year-to-date plus retained net income for the previous two
calendar years (less any dividends previously paid). If the Bank does not meet
the above stated requirements, prior approval of the OTS is required before
declaring any proposed distributions.
LIQUIDITY
All savings associations are required to maintain an average daily balance
of liquid assets equal to a certain percentage of the average daily balance of
its liquidity base during the preceding calendar quarter or a percentage of the
amount of its liquidity base at the end of the preceding quarter. 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, 1999, the Bank was in compliance with its regulatory liquidity
ratio.
<PAGE>
QUALIFIED THRIFT LENDER TEST
All savings associations are required to meet a qualified thrift lender
("QTL") test to avoid certain restrictions on their operations. This test
requires a savings association to have at least 65% of its portfolio assets (as
defined by regulation) in qualified thrift investments on a monthly average for
nine out of every 12 months on a rolling basis. As an alternative, the savings
association may maintain 60% of its assets in those assets specified in Section
7701(a)(19) of the Internal Revenue Code. Under either test, such assets
primarily consist of residential housing related loans and investments. At
December 31, 1999, 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.
<PAGE>
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 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.
<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 shareholders) 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, 1999, 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, 1999, the Bank had $7.5 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 7.10% and were 7.06% for 1999.
<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, 1999, dividends paid by the FHLB of
Cincinnati to the Bank totaled $505,000, which constituted a $27,000 increase
over the amount of dividends received in 1998.
FEDERAL AND STATE TAXATION
Savings associations such as the Bank, are 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.
Since 1987, the percentage of specially-computed taxable income that was
used to compute a savings association's bad debt reserve deduction under the
percentage of taxable income method (the "percentage bad debt deduction") was
8%. The percentage bad debt deduction thus computed was 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 permitted 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). Under changes in federal tax law enacted
in August 1996, the percentage bad debt deduction has been eliminated for tax
years beginning after December 31, 1995. Accordingly, this method will not be
available to the Bank for its tax years ending December 31, 1996 and thereafter.
The federal tax legislation enacted in August 1996 also imposes a
requirement to recapture into taxable income the portion of the qualifying and
non-qualifying loan reserves in excess of the "base-year" balances of such
reserves. For the Bank, the base-year reserves are the balances as of December
31, 1988. Recapture of the excess reserves will occur over a six-year period
which could begin for the Bank as early as the tax year ending December 31,
1996. Commencement of the recapture period may be delayed, however, for up to
two years provided the Bank meets certain residential lending requirements). The
Bank previously established, and will continue to maintain, a deferred tax
liability with respect to its federal tax bad debt reserves in excess of the
base-year balances; accordingly, the legislative changes will have no effect on
total income tax expense for financial reporting purposes.
<PAGE>
Also, under the August 1996 legislation, the Bank's base-year federal tax
bad debt reserves are "frozen" and subject to current recapture only in very
limited circumstances. Generally, recapture of all or a portion of the base-year
reserves will be required if the Bank pays a dividend in excess of the greater
of its current or accumulated earnings and profits, redeems any of its stock, or
is liquidated. The Bank has not established a deferred federal tax liability
under SFAS No. 109 for its base-year federal tax bad debt reserves, as it does
not anticipate engaging in any of the transactions that would cause such
reserves to be recaptured.
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
exemptions. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the 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.
The Bank files federal income tax returns on a calendar year basis using
the accrual method of accounting. The Company files federal income tax returns
separately from the Bank.
The Bank has not been audited by the IRS recently with respect to federal
income tax returns. In the opinion of management, any examination of still open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of the Bank.
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 1998.
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.
<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.
NAME AGE POSITIONS HELD WITH THE COMPANY
- ---------------- ------ ----------------------------------------
John W. Raisbeck 60 President and Chief Executive Officer
Craig F. Fortin 39 Senior Vice President, Treasurer and
Chief Financial Officer
John T. Heckman 48 Executive Vice President
Gary L. Hicks 48 Executive Vice President
Robert P. Brezing 55 Senior Vice President
The business experience of each executive officer who is not also a
Director of the Company is set forth below.
CRAIG F. FORTIN. Mr. Fortin is Senior Vice President, Treasurer and Chief
Financial Officer of the Company and the Bank, a position he has held since
February 1, 1999. From 1991 to January 1999, Mr. Fortin served as the Chief
Financial Officer of The Ohio Bank, Findlay, Ohio.
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.
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, 1999, the Company and its subsidiary had a total of 84
employees, including 11 part-time employees. The Company's employees are not
represented by any collective bargaining group. Management considers its
employee relations to be good.
<PAGE>
ITEM 2. PROPERTIES
The Company conducts its business at its main office, which also serves as
executive office and the Bank's five 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, 1999.
Total
Approximate Net Book
Date Square Value at
LOCATION ACQUIRED FOOTAGE DECEMBER 31, 1999
-------- -------- ------- -----------------
(In Thousands)
Main Office:
28 E. Main Street 1900 5,721 $ 1,019
Springfield, Ohio
Branch Offices:
7601 Dayton Springfield Road 1983 2,528 25
Enon, Ohio
210 N. Main Street 1987 2,369 339
New Carlisle, Ohio
1480 Upper Valley Pike 1950 3,777 416
Springfield, Ohio
50 Kahoe Lane 1993 2,369 359
Yellow Springs, Ohio
3216 Seajay Drive 1996 1,925 272
Beavercreek, Ohio
The Company owns all 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, 1999 was
$3.5 million. The Company considers all properties to be in good operating
condition and suitable for the purpose for which it is used. The property is
unencumbered by any mortgage or security interest and is, in management's
opinion, adequately insured. See Note 5 of the Notes to Consolidated Financial
Statements in the Annual Report to Shareholders 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, 1999 was approximately $714,000. In March 2000, the Company
converted its data processing operations to its own in-house system utilizing
software from Information Technology, Inc., Lincoln, Nebraska.
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,
1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
Page 7 of the Company's 1999 Annual Report to Shareholders is herein
incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
Pages 6 and 7 of the Company's 1999 Annual Report to Shareholders is herein
incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Pages 8 through 15 of the Company's 1999 Annual Report to Shareholders are
herein incorporated by reference.
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 13 to 14 of the
Company's Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 16 through 37 of the Company's 1999 Annual Report to Shareholders are
herein incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company filed a Current Report on Form 8-K on February 5, 1998,
to report a change of accountants, and an amendment on Form 8-K/A on February
23, 1998, to report the letter on the change of certifying accountants.
Management has had no disagreements with the independent accountants on matters
of accounting principals or financial statement disclosure required to be
reported under this item.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Directors of the Company is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders scheduled to be held on April 27, 2000 (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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of the
Company's Common Stock (or any other equity securities, of which there is none),
to file with the Securities and Exchange Commission (the "SEC") initial reports
of ownership and reports of changes in ownership of the Company's Common Stock.
Officers, directors and greater than 10% shareholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended December 31, 1999, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with except that Mr. Dillahunt
inadvertently failed to report one transaction on his timely filed Form 5 dated
February 10, 1999. Mr. Dillahunt reported the transaction on a Form 5 dated
February 9, 2000.
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 Shareholders scheduled to be held on April 27, 2000 (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 Shareholders scheduled to be held on
April 27, 2000 (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.
<PAGE>
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 Shareholders scheduled to be held on April 27, 2000
(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.
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
Shareholders for the year ended December 31, 1999, is incorporated by reference
in this Annual Report on Form 10-K as Exhibit 13.
Pages in
ANNUAL REPORT SECTION Annual
REPORT
Report of Independent Auditors 16
Consolidated Balance Sheets
17
Consolidated Statements of Income
18
Consolidated Statements of Comprehensive Income
19
Consolidated Statements of Shareholders' Equity
20
Consolidated Statements of Cash Flows 21-22
Notes to Consolidated Financial Statements 23-37
(A) (2) FINANCIAL STATEMENT SCHEDULES:
Financial statement schedules are omitted as they are not applicable or the
required information in the financial statements or notes therein found in the
Company's Annual Report to Shareholders.
<PAGE>
(A) (3) EXHIBITS:
Reference to Prior
Regulation Filing or Exhibit
S-K Exhibit Number Attached
NUMBER DOCUMENT HERETO
2 Plan of acquisition, reorganization,
arrangement, liquidation or succession None
3 (i) Certificate of Incorporation *
3 (ii) Amended and Restated 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 John T. Heckman ***
(d) Employment Agreement with John W. Raisbeck *****
(e) Employment Agreement with Gary L. Hicks ****
(f) Employment Agreement with Robert P. Brezing,
as amended *****
(g) Employment Agreement with Craig F. Fortin *****
(h) 1998 Omnibus Incentive Plan ****
(i) Cornerstone Bank Deferred Compensation Plan
as amended *****
11 Statement regarding computation of per share
earnings None
12 Statements regarding computation of ratios None
13 Annual report to security holders 13
16 Letter regarding change in certifying accountant None
18 Letter regarding change in accounting principles None
21 Subsidiaries of the registrant 21
22 Published report regarding matters submitted to
vote of security holders None
23 Consent of Crowe, Chizek and Company LLP 23.1
Consent of Clark, Schaefer, Hackett & Co. 23.2
24 Power of attorney None
27 Financial data schedule 27
99 Additional exhibits--report of predecessor
independent accountants 99
* 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.
**** Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
*****Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
(B) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
<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 30, 2000 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.
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 30, 2000 Date: MARCH 30, 2000
----------------------------- ---------------
By: /S/ HOWARD V. DODDS By: /S/ JOHN E. FIELD
--------------------------------------- ---------------------------------
Howard V. Dodds, Director John E. Field, Director
Date: MARCH 30, 2000 Date: MARCH 30, 2000
----------------------------- ---------------
By: /S/ ARISTIDES G. GIANAKOPOULOS By: /S/ WILLIAM N. SCARFF
-------------------------------------- -------------------------------
Aristides G. Gianakopoulos, Director William N. Scarff, Director
Date: MARCH 30, 2000 Date: MARCH 30, 2000
----------------------------- ---------------
By: /S/ JEFFREY L. LEVINE By: /S/ CRAIG F. FORTIN
------------------------------------ --------------------------------
Jeffrey L. Levine, Director Craig F. Fortin, Senior Vice
President, Treasurer and
Chief Financial Officer
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Date: MARCH 30, 2000 Date: MARCH 30, 2000
----------------------------- ---------------
[Front Cover]
Cornerstone2000.com
Western Ohoi Financial Corporation
1999 Annual Report
<PAGE>
[Inside Cover]
Table of Contents
Letter to Shareholders.........................................................3
Selected Consolidated Financial Information....................................6
Market Price of Western Ohio Financial Corporation's Common Shares and Related
Shareholder Matters..........................................................7
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General......................................................................8
Forward-Looking Statements...................................................8
Analysis of Financial Condition..............................................8
Comparison of Years Ended December 31, 1999 and December 31, 1998............9
Comparison of Years Ended December 31, 1998 and December 31, 1997...........10
Average Balances, Interest Rates and Yields.................................11
Rate/Volume Analysis........................................................12
Asset/Liability Management and Market Risk....................................13
Liquidity and Capital Resources.............................................14
Impact of New Accounting Standards..........................................15
Impact of Inflation and Changing Prices.....................................15
Year 2000 Issue.............................................................15
Report of Independent Auditors................................................16
Consolidated Financial Statements...........................................17
Board of Directors and Officers...............................................38
Western Ohio Financial Corporation and Subsidiary Shareholder Information.....38
Market Makers.................................................................39
2 Western Ohio Financial Corporation
<PAGE>
Dear Shareholders
1999 was a year of continued improvement and advancement for Western
Ohio Financial Corporation and Cornerstone Bank:
o..We have become a community bank with broader service capability while
maintaining the personal touch we know our customers want.
o..Our net income improved by 30% over 1998.
o..Our efforts to build business banking have been especially rewarding.
o..Our mortgage banking capabilities remain strong.
[Photograph of David L. Dillahunt, Chairman of the Board and John W. Raisbeck,
President and CEO]
Two and a half years ago, when John became President and CEO, his
conversations with many local business and community leaders indicated
that, although our company was under-recognized and under-performing, it
had a lot of potential. Saying it another way, WOFC and Cornerstone Bank
had been a well-kept secret.
Since that time, our planning and actions have focused on marketing
our bank and telling people who we are and what we can do for them as well
as strengthening our position for the future. Our company and its employees
have also been more involved with community affairs and support.
That first year, 1997, Cornerstone Bank made $183,000. In 1998 profits
increased to $1,295,000 and in the past year profits grew to nearly
$1,700,000, an increase of 30%. Fully diluted earnings per share increased
by nearly 47 percent. This improvement in core earnings performance was
achieved by reducing operating expenses and managing our balance sheet to
improve our net yield.
A major focus of ours continues to be on business banking. As a
result, we strengthened our bank lending team with highly qualified
commercial loan and commercial real estate lenders who have the experience
and know-how to assess the risks and underwrite such loans. Business
banking enables us to broaden our base of profitable relationships. The
focus is the same, however: providing all of our financial services through
bankers who believe in helping people meet their needs.
Cornerstone Bank remains in residential mortgage lending which has
long been its core business. Our mortgage lending remains strong and
competitive. We have modernized our service capacity in that area by adding
new, more advanced mortgage processing software and computer technology as
well as by more training of our staff.
Cornerstone Bank knows it will only succeed by building sincere client
relationships and providing banking service on a one-to-one,
person-to-person basis. This philosophy applies to all clients of
Cornerstone Bank. Because many large banks have lost the ability to provide
such personal attention and service, we have a great opportunity to win new
friends and customers by emphasizing this more personal approach.
Many business clients and prospects like to feel they are working with
people who are qualified and empowered to make lending and other decisions
locally. As evidence of Cornerstone Bank's commitment to business lending
and related services, we hired Phil Teusink in Springfield and Kemper
Allison in Columbus during 1999. Both have an established network of
business contacts and clients which is vitally important to Cornerstone
Bank's future growth. The
1999 Annual Report to Shareholders 3
<PAGE>
[PHOTOGRAPH OF JOHN W. RAISBACK, DIRECTOR, PRESIDENT, AND CHIEF EXECUTIVE
OFFICER, DAVID L. DILLAHUNT, CHAIRMAN, ARISTIDES G. GIANAKOPOULOS, DIRECTOR,
HOWARD V. DODDS, DIRECTOR, JOHN E. FIELD, DIRECTOR, JEFFREY L. LEVINE, DIRECTOR
WILLIAM N. SCARFF, DIRECTOR (LEFT TO RIGHT)]
Cornerstone Bank Business Banking team has nearly 100 years of combined lending
experience.
Kemper Allison, Regional Vice President, joined us in early 1999, after
serving for over 15 years as a commercial and commercial real estate lender for
a Columbus bank. He now directs our Columbus loan office.
Phil Teusink, Vice President, is a highly qualified and experienced senior
loan manager who has served as a commercial loan officer in the Springfield area
for 19 years with a large regional bank. As a Vice President with Cornerstone
Bank, Phil will continue serving the needs of our local business community.
By adding these two senior-level bankers, we are investing in highly
experienced, proven producers who can help us make significant contributions to
developing long-term profitable relationships.
As we look back again over the past two and a half years, it's clear we've
made progress toward our goals. We've built on the existing strengths of the
organization by training our people and upgrading the business systems they work
with. It's also clear that still more can be done to enhance the earnings of the
bank by improving interest margins as well as non-interest income such as loan
and deposit-related fees. In fact, we're seeing significant growth in fee income
from the business banking side.
Technology continues to work for us, too. We are currently launching a
major conversion of our data processing system. Soon we will have
state-of-the-art data processing capabilities with significant improvements in
operating efficiency for about the same cost as our previous system. With the
new system, we will have more control and greater ability to respond to changes
in the marketplace in terms of service as well as products.
We have the key people in place--not just at the upper levels, but
increasingly across the organization. As a result of our staff training and
development, we are now able to promote more from within and place people where
they can be more productive.
We continue to work on instilling a broader sense of ownership and personal
accountability throughout our
[PHOTOGRAPH OF JOHN W. RAISBECK, DIRECTOR, PRESIDENT, AND CHIEF EXECUTIVE
OFFICER, CRAIG E. FORTIN, SENIOR VICE PRESIDENT, TREASURER AND CHIEF FINANCIAL
OFFICER
(STANDING) GARY L. HICKS, EXECUTIVE VICE PRESIDENT, MORTGAGE BANKING JOHN T.
HECKMAN, EXECUTIVE VICE PRESIDENT, OPERATIONS AND ADMINISTRATION ROBERT P.
BREZING, SENIOR VICE PRESIDENT, BUSINESS BANKING]
company. More of our employees can and are taking the initiative to address
whatever problems they might encounter. This means better service to our
customers.
A large number of smaller and mid-sized banks and thrifts have experienced
significant deflation of their stock prices in recent months. WOFC is no
exception. These stocks continue to lag behind the performance of the overall
equity market. The outlook has been clouded by concerns of rising interest
rates, year 2000 issues (which have now proved insignificant) and slowing merger
activity. This is an industry-wide phenomenon. When you look at the capital
strength, the asset quality and the earnings trends, many feel these stocks are
undervalued. WOFC continues its program to repurchase its capital stock.
Our plan is to continue our present path toward adding value to our
franchise. The actions we have taken and the trends are encouraging to us. We
believe 2000 will be another year of improvement.
Summing it up, we're heading in the right direction. We are a community
bank with quality people and the capital to support our efforts. We believe
these are essential ingredients for improved long-term performance in our
marketplace.
With the continuing support of our shareholders and Board of Directors, our
valued customers and staff, we expect another successful year.
John W. Raisbeck
President and Chief Executive Officer
David L. Dillahunt
Chairman of the Board
1999 Annual Report to Shareholders 5
<PAGE>
Selected Consolidated Financial Information
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $329,685 $327,728 $371,988 $392,765 $231,387
Loans and loans held for sale, net 254,871 234,812 277,731 287,611 150,476
Cash and cash equivalents 9,614 13,854 31,239 15,611 17,605
Mortgage-backed securities 41,591 50,044 22,433 36,843 45,719
Securities 8,775 15,402 22,455 35,729 12,039
Deposits 202,331 192,966 246,909 233,203 139,129
Borrowed funds 82,183 85,252 68,339 102,602 31,528
Total shareholders' equity 42,989 47,594 54,600 54,048 59,668
Selected Operations Data:
Total interest income $ 23,415 $ 25,856 $ 29,039 $ 24,160 $14,809
Total interest expense 13,632 15,992 17,934 13,783 7,034
-------- -------- -------- -------- --------
Net interest income 9,783 9,864 11,105 10,377 7,775
Provision for loan losses 246 (363) 2,285 399 6
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 9,537 10,227 8,820 9,978 7,769
Non-interest income:
Loan fees and service charges 1,085 1,005 650 156 60
Gain on sales of loans,
mortgage-backed securities
and securities 111 652 311 340 1,207
Gain on sale of branches - 2,054 - - -
Other non-interest income 65 (22) 31 54 713
-------- -------- -------- -------- --------
Total non-interest income 1,261 3,689 992 550 1,980
Total non-interest expense 8,127 9,757 9,471 8,759 5,349
Income before income taxes 2,671 4,159 341 1,769 4,400
Income tax expense 988 2,864 158 707 1,507
-------- -------- -------- -------- --------
Net income $ 1,683 $1,295 $ 183 $1,062 $2,893
======== ======== ======== ======== ========
</TABLE>
6 Western Ohio Financial Corporation
<PAGE>
Selected Consolidated Financial Information
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- --------- -------- ------- --------
<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) 0.52% 0.36% 0.05% 0.33% 1.42%
Interest rate spread information:
Average during year 2.57 2.40 2.42 2.42 2.65
End of year 2.37 2.55 2.31 2.23 2.05
Net interest margin 3.13 2.91 2.95 3.26 4.01
Ratio of operating expense to
average total assets 2.51 2.69 2.39 2.72 2.63
Return on equity (ratio of net income
to average equity) 3.75 2.42 0.34 2.00 4.72
Quality Ratios:
Non-performing assets to total
assets at end of year 0.83 1.39 0.54 0.52 0.01
Allowance for loan losses to
non-performing loans 100.94 70.47 196.59 83.95 255.45
Allowance for loan losses to total
loans, net 1.09 1.39 1.41 0.60 0.51
Allowance for loan losses to
classified assets 75.14 68.89 130.08 73.74 87.66
Capital Ratios:
Total equity to total assets at end
of year 13.04 14.52 14.67 13.76 25.79
Average equity to average assets 13.87 14.80 13.44 16.50 30.07
Ratio of average interest-earning
assets to average interest-bearing
liabilities 1.13 x 1.11 x 1.11 x 1.19 x 1.37 x
Per Share Data:
Earnings per common share-Basic $ 0.86 $ 0.60 $ 0.08 $ 0.47 $ 1.18
Earnings per common share-Diluted 0.85 0.58 0.08 0.46 1.15
Dividend payout ratio 1.18 x 1.67 x 12.50 x 2.13 x 0.85 x
Book value per share $ 21.82 $23.45 $22.91 $23.48 $25.27
Number of full service offices 6 6 10 10 5
</TABLE>
<PAGE>
Market Price of Western Ohio Financial Corporation's Common Shares and Related
Shareholder Matters
There were 1,969,912 common shares of WOFC outstanding, excluding unearned
employee benefit plan shares, on December 31, 1999, held of record by
approximately 696 registered shareholders and 1,350 beneficial holders behind
brokers, banks, and depositories. Price information with respect to WOFC's
common shares is quoted on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") National Market System. The Wall Street
Journal publishes daily trading information for our stock under the abbreviation
"WstrnOHFnl" in the National Market Listing.
<TABLE>
<CAPTION>
Fiscal Year 1999 Fiscal Year 1998
Low High Dividend Low High Dividend
------------------------ -------------------------
<S> <C> <C> <C> <C> <C> <C>
First quarter $ 21.75$ 23.00 $ .25 $25.00 $ 27.00 $ .25
Second quarter 21.75 29.00 .25 24.75 27.00 .25
Third quarter 17.50 26.00 .25 19.75 25.25 .25
Fourth quarter 16.38 19.25 .25 19.75 23.38 .25
</TABLE>
The Company has repurchased shares and intends to continue to repurchase shares
in order to enhance shareholder value. During 1999, the Company repurchased
135,200 shares and 277,500 in 1998. The Company is no longer subject to
quantitative regulatory limitations imposed by the Office of Thrift Supervision
("OTS") on stock repurchases and intends to continue repurchases of stock.
<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"), 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, CornerstoneBanc Financial Services,
Incorporated (formerly West Central Mortgage Services, Incorporated) ("CFSI").
The primary business of CFSI is to engage in mortgage banking activities.
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.
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 and has increased efforts to solicit commercial loans.
Management and the Board of Directors of the Company have sought to enhance
shareholder value by using excess capital to repurchase outstanding shares when
business and market conditions warrant.
Forward-Looking Statements
When used throughout this document, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimated," "projected,"
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 certain risks and uncertainties including changes in
economic conditions in the Bank's market area, changes in policies by regulatory
agencies, fluctuations in interes rates, demand for loans in the Bank's market
area and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. Factors listed
above could affect the Company's financial performance and could cause actual
results for future periods to differ materially from any statements expressed
with respect to future periods.
The Company does not undertake, and specifically disclaims any obligation, to
publicly revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
Analysis of Financial Condition
Total assets of the Company increased $2.0 million, from $327.7 million in 1998
to $329.7 million in 1999. This increase was a result of increases in loans
receivable offset by reductions in cash and cash equivalents and securities.
Cash and cash equiva lents decreased $4.2 million from $13.8 million at December
31, 1998 to $9.6 million at December 31, 1999. Securities decreased $15.0
million from $65.4 million at December 31, 1998, to $50.4 million at December
31, 1999. The primary reason for the reductions in cash, cash equivalents and
securities was to fund the net increase in loans.
Net loans and loans held for sale increased from $234.8 million at December 31,
1998, to $254.9 million at December 31, 1999, an increase of $20.1 million, or
8.5%. The increase was primarily the result of purchasing participations and
originating multi-family mortgage loans, and originating new consumer home
equity loans.
Liabilities increased from $280.1 million at December 31, 1998, to $286.7
million at December 31, 1999, an increase of $6.6 million, or 2.4%. The primary
reason for the increase in total liabilities was an increase in deposits.
Deposits increased during 1999 by $9.3 million as a result of continued
aggressive advertising and competitive pricing. For the year, deposits increased
4.9% to $202.3 million at December 31, 1999, from $193.0 million at December 31,
1998. Offsetting the deposit increase, the Company decreased advances from the
Federal Home Loan Bank of Cincinnati ("FHLB") $3.1 million, or 3.6%, from $85.3
million at December 31, 1998, to $82.2 million at December 31, 1999. Rates on
advances drawn during the year ranged from 3.50% to 6.99%. At December 31, 1999,
$66.8 million of the $82.2 million total advances were fixed-rate. The
above-mentioned advances are
8 Western Ohio Financial Corporation
secured by a blanket pledge of mortgages to the FHLB and are not tied to
specific securities or mortgages.
Total equity decreased $4.6 million, or 9.7%, primarily due to the $2.7 million
net repurchase of shares during 1999 and the net unrealized loss on securities
available for sale of $2.0 million. Earnings of $1.7 million less dividends of
$2.0 million decreased retained earnings by $0.3 million in 1999. The Company is
no longer subject to regulatory limitations on stock repurchases and intends to
continue modest repurchases of its own stock.
Comparison of Results of Operations
Comparison of Years Ended December 31, 1999 and December 31, 1998
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, 1999, was $1.7 million, an
increase of $388,000 compared to the year ended December 31, 1998. The increase
was primarily the result of lower operating expenses and income tax expense due
to exiting the Cincinnati market in 1998. During 1998, management determined the
branch investment in the Cincinnati area was not in line with the Company's
long-term goals. As a result, the Company sold the Cincinnati area deposits and
closed or sold four branches. The net gain on the sale of deposits and branches
was $2.1 million before taxes.
Net interest income decreased $81,000 from $9.9 million to $9.8 million, or less
than 1.0%, primarily as a result of a combination of lower rates and volumes of
average interest-earning assets partially offset by lower rates and volumes of
average interest-bearing liabilities. The provision for loan losses for the year
ended December 31, 1999, was $246,000, an increase of $609,000 compared to the
year ended December 31, 1998, which was a recapture of $363,000. Non-interest
income decreased $2.4 million as a result of the net gain before taxes on sale
of the Cincinnati area deposits. Non-interest expense decreased $1.6 million,
from $9.7 million at December 31, 1998, to $8.1 million at December 31, 1999,
primarily due to lower expenses of approximately $1.3 million related to exiting
the Cincinnati area. Income taxes decreased $1.9 million from $2.9 million at
December 31, 1998, to $1.0 million at December 31, 1999, as a result of the tax
effect of intangible asset disposition associated with the Cincinnati area
branch closing.
Interest Income. Total interest income decreased $2.4 million, or 9.4% for the
year ended December 31, 1999, compared to the prior year. This decrease is due
to a combination of lower rates and lower average volume of interest earning
assets. This lower volume is due mostly to lower short-term funds held by the
Company which had been accumulated in 1998 in anticipation of the Cincinnati
area deposit sale. The lower rates were primarily due to lower rates on new
loans originated than previously held. Interest income from loans decreased
$590,000 and $725,000 as a result of the decreased volume and rates,
respectively. Interest from securities and other sources fell by $1.1 million
primarily due to reducing volumes generated to fund the deposit sale.
Interest Expense. Total interest expense decreased $2.4 million or 14.8% for the
year ended December 31, 1999, compared to the prior year. The decrease was due
primarily to a lower average volume of time deposits as a result of the
Cincinnati area branch sale. Interest on deposits decreased $2.8 million or
22.3% for the year ended December 31, 1999, compared to the prior year. Interest
on borrowings increased $408,000 or 11.5% over the prior year due to average
higher volumes.
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. During the year ended
December 31, 1999, the provision for loan loss was $246,000. This is a change of
$609,000 from a $363,000 recapture of the provision during the prior year. The
reduction of the loan loss provision in 1998 was due to the decreasing overall
loan portfolio and the successful resolution of a major loan concern. The
increase in 1999 was due to an increase in the loan portfolio. Management
believes that the total allowance of $2.8 million on total loans of $262 million
at December 31, 1999, is adequate given the area economic conditions, the level
of impaired and nonperforming loans, and the composition of the loan portfolio.
At December 31, 1999, 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 asset quality conditions dictate. Although
the Company maintains its allowance for loan losses at a level that it considers
to be adequate to provide for probable 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 allowances.
Western Ohio Financial Corporation 9
Non-interest Income. Non-interest income decreased from $3.7 million in 1998 to
$1.3 million in 1999. This decrease is due primarily to 1998 including the net
gain before taxes on sale of the Cincinnati area branches of $2.1 million. Gain
on sales of securities decreased due to selling a Federal Home Loan Mortgage
Corporation ("FHLMC") certificate and a FHLMC investment security in 1998 for a
total gain of $307,000. Additionally, gains on sales of loans declined $234,000
due to lower mortgage loan originations and sales compared to the prior year.
Non-interest Expense. Total non-interest expense decreased 16.7% in 1999, from
$9.8 million in 1998 to $8.1 million. The decrease is primarily the result of
reducing costs by approximately $1.3 million associated with the divestiture of
the Cincinnati area branches. Additionally, the Company reduced outside
consultant expenses and Ohio franchise taxes for Cornerstone.
Income Tax Expense. Income tax expense was $1.0 million for the year ended
December 31, 1999, a decrease of $1.9 million from the same period the prior
year. Income taxes decreased primarily as a result of prior year's tax effect of
the intangible asset disposition associated with the Cincinnati area branch
sale. The 1998 write-off of the $1.4 million intangible asset originally
associated with the Cincinnati area acquisition is not deductible for tax
purposes, and is a permanent tax difference for computing the Company's tax
expense. As a result, the Company's effective tax rate for 1998 was 68.9%
compared to 37.0% in 1999.
Comparison of Years Ended December 31, 1998 and December 31, 1997
General. Net income for the year ended December 31, 1998, was $1.3 million, an
increase of $1.1 million compared to the year ended December 31, 1997. The
increase was primarily the result of a decrease in the provision for loan
losses, an increase in non-interest income due to a net gain on sale of
branches, and increases in service fees offset in part by a decrease in net
interest income and an increase in provision for income taxes primarily due to
the gain on sale. The provision for the year ended December 31, 1998, was a
reversal of $363,000, a change of $2.6 million compared to the year ended
December 31, 1997, which reflected a provision of $2.3 million. Net interest
income decreased $1.2 million from $11.1 million to $9.9 million, or 11.2%,
primarily as a result of a combination of lower volumes of average
interest-earning assets partially offset by lower volumes of interest-bearing
liabilities. Non-interest income increased $2.7 million as a result of increased
deposit account service fees and net gain before taxes on sale of the Cincinnati
area deposits. For the year ended December 31, 1998, non-interest income also
included a $307,000 gain from the sale of securities. Non-interest expense
increased $286,000, from $9.5 million at December 31, 1997, to $9.7 million at
December 31, 1998, primarily due to additional expenses of $301,000 related to
exiting the Cincinnati area. Income taxes increased $2.7 million from $158,000
at December 31, 1997, to $2.9 million at December 31, 1998, as a result of
higher income and the tax effect of intangible asset disposition associated with
the Cincinnati area branch closing.
Interest Income. Total interest income decreased $3.2 million or 11.0% for the
year ended December 31, 1998, compared to the prior year. This decrease is
chiefly due to the lower volume of interest earning assets. This lower volume is
due mostly to customer refinancing of loans during the year due to lower
mortgage rates. Interest income from loans decreased $3.4 million as a result of
the decreased volume. Interest from securities and other sources rose by
$221,000 primarily due to additional volumes generated to fund the deposit sale.
Interest Expense. Total interest expense decreased $1.9 million or 10.8% for the
year ended December 31, 1998, compared to the prior year. The decrease was due
primarily to a lower average volume of borrowings. Interest on deposits
increased $217,000 or 1.8% for the year ended December 31, 1998, compared to the
prior year. Interest on borrowings decreased $2.2 million or 37.8% over the
prior year due primarily to lower volumes.
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. During the year ended
December 31, 1998, the provision for loan loss was $(363,000). This is a change
of $2.6 million from a $2.3 million provision during the prior year. In 1997,
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. Based on satisfactory resolution of one of the problem loan
situations, actual problem loan activity, net charge-offs of $359,000 and
continued review, management recaptured $363,000 of the loan loss provision in
1998. Management believes that the total allowance of $3.2 million on total
loans of $237 million at December 31, 1998, is adequate given the area economic
conditions and its loan portfolio composition. At December 31, 1998, the Company
was aware of no regulatory directives or suggestions that the Company make
additional provisions for losses on loans.
Non-interest Income. Non-interest income increased from $992,000 in 1997 to $3.7
million in 1998. This increase is due primarily to additional deposit account
service fees and net gain before taxes on sale of the Cincinnati area branches.
Deposit account service fees increased $355,000 as management continues to
actively increase fee income resulting from deposit activity.
During 1998, management determined the branch investment in the Cincinnati area
was not in line with the Company's long-term goals. As a result, the Company
sold the Cincinnati area deposits and closed or sold four branches. The net gain
on the sale of deposits and branches was $2.1 million before taxes.
10 Western Ohio Financial Corporation
Non-interest Expense. Total non-interest expense increased 3.0% in 1998, from
$9.5 million in 1997 to $9.8 million. The increase is primarily the result of
additional personnel costs of approximately $169,000 associated with closing of
the Cincinnati area branches.
Income Tax Expense. Income tax expense was $2.9 million for the year ended
December 31, 1998, an increase of $2.7 million from the same period the prior
year. Income taxes increased primarily as a result of increased earnings before
income taxes, and the tax effect of the intangible asset disposition associated
with the Cincinnati area branch sale. The write-off of the $1.4 million
intangible asset originally associated with the Cincinnati area acquisition is
not deductible for tax purposes, and is a permanent tax difference for computing
the Company's tax expense. As a result, the Company's effective tax rate for
1998 was 68.9% compared to 46.3% in 1997.
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. The average balance of mortgage-backed securities and
securities available for sale includes unrealized gains and losses while yield
is based on amortized cost.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets:
Loans receivable $244,824 $19,096 7.80% $252,232 $20,411 8.09% $298,111 $23,815 7.99%
Mortgage-backed securities 45,683 2,888 6.34 27,626 1,608 5.85 28,994 1,843 6.39
Securities 10,274 679 6.64 14,781 980 6.65 33,083 2,143 6.40
Interest-bearing deposits 4,163 247 5.93 37,399 2,379 6.36 9,585 797 8.32
FHLB stock 7,135 505 7.06 6,649 478 7.19 6,102 441 7.23
-------- -------- ----- ---------- -------- ------ ---------- -------- ------
Total interest-earning
assets 312,079 23,415 7.50 338,687 25,856 7.63 375,875 29,039 7.73
-------- -------- ----- ---------- -------- ------ ---------- -------- ------
Non-earning assets 12,071 23,508 20,124
-------- ---------- ----------
Total assets $324,150 $362,195 $395,999
======== ========== ==========
Interest-bearing liabilities:
Time deposits $122,992 6,987 5.68 $164,302 $ 9,641 5.87 175,163 10,447 5.96
Demand and NOW deposits 12,767 145 1.14 12,990 180 1.39 11,998 129 1.08
Savings deposits 64,387 2,535 3.94 65,709 2,614 3.98 53,305 1,642 3.08
Borrowings 76,449 3,965 5.19 62,802 3,557 5.66 97,414 5,716 5.87
-------- ------ ------- --------- ------- ------
Total interest-bearing
liabilities 276,595 13,632 4.93 305,803 15,992 5.23 337,880 17,934 5.31
------ ------ ------
Non-earning liabilities 2,643 2,775 4,908
-------- ------- --------
Total liabilities 279,238 308,578 342,788
Equity 44,912 53,617 53,211
-------- ------- --------
Total liabilities/equity $324,150 $362,195 $395,999
======== ======== ========
Net interest income $9,783 $9,864 $11,105
====== ====== =======
Net interest rate spread 2.57% 2.40% 2.42%
===== ===== ======
Net earning asset $35,484 $32,884 $37,995
======== ======== =======
Net yield on average
interest-earning assets 3.13% 2.91% 2.95%
===== ===== ======
Average interest-earning
assets to average
interest-bearing
liabilities 1.13 x 1.11 1.11 x
====== ===== =====
</TABLE>
Western Ohio Financial Corporation 11
<PAGE>
Rate/Volume Analysis. The following schedule presents the dollar amount of
changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes
between the increase or decrease related to changes in average outstanding
balances and that due to the volatility of interest rates. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (i.e., changes in
volume multiplied by new rate) and (ii) changes in rate (i.e., changes in rate
multiplied by old volume). For purposes of this table, changes attributable to
both rate and volume which cannot be segregated have been allocated
proportionately to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
--------------------------------------------------------------
1998 vs. 1999 1997 vs. 1998
--------------------------------------------------------------
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
-------------------- --------------
Volume Rate (Decrease) Volume Rate (Decrease)
---------- ------- ---------- ------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ (590) $(725) $(1,315) $(3,709) $305 $(3,404)
Mortgage-backed securitie 1,131 149 1,280 (84) (151) (235)
Securities (298) (3) (301) (1,237) 74 (1,163)
Other (1,947) (158) (2,105) 1,875 (256) 1,619
------- ------ -------- ------- ----- --------
Total interest-earninng
assets (1,705) (736) (2,441) $(3,155) (28) (3,183)
------- ------ -------- ------- ----- --------
------- ------ -------- ------- ----- --------
terest-bearing liabilities:
Time deposits $(2,337) $(316) (2,653) $ (643) $(163) (806)
Demand and NOW deposits (3) (33) (36) 12 39 51
Savings deposits (52) (27) (79) 431 541 972
Borrowings 726 (318 408 (1,952) (207) (2,159)
------- ------ ------- -------- ------ --------
Total interest-bearing
liabilitie $(1,666) $(694) (2,360) $(2,152) $ 210 (1,942)
======== ====== ======= ======== ====== ========
Net interest income $ (81) $(1,241)
======= ========
</TABLE>
12 Western Ohio Financial Corporation
<PAGE>
Asset/Liability Management and Market Risk
The Company's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. Interest rate risk is the risk that the Company's
financial condition will be adversely affected due to movements in interest
rates. The income of financial institutions is primarily derived from the excess
of interest earned on interest-earning assets over the interest paid on
interest-bearing liabilities. Accordingly, the Company places great importance
on monitoring and controlling interest-rate risk. The measurement and analysis
of the exposure of the Company's primary operating subsidiary, Cornerstone Bank,
to changes in the interest rate environment is 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 is an analysis of Cornerstone's interest rate risk as of
December 31, 1999, and December 31, 1998, as measured by changes in NPV for
instantaneous and sustained parallel shifts of 100 basis points in market
interest rates. The table also contains the policy limits set by the Board of
Directors. The policy limits use minimum NPV ratios where the NPV ratio is the
NPV divided by the present value of expected incoming cash flows on
interest-earning and other assets. The Board of Directors deem these minimum
limits advisable after considering the impact of various changes in interest
rates on NPV and the institution's strong capital position.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
Change in Board limit --------------------------- ---------------------------
Interest Rate Minimum $ Change % Change NPV $ Change % Change NPV
(Basis Points) NPV Ratio in NPV in NPV Ratio in NPV in NPV Ratio
- ------------- ----------- -------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
+300 6.00% ($17,132) (42)% 7.72% $(13,580) (29)% 10.43%
+200 6.75 (11,389) (28) 9.35 (8,505) (18) 11.84
+100 7.25 (5,565) (14) 10.92 (3,731) (8) 13.01
- 8.00 - - 12.33 - - 13.84
(100) 9.00 4,439 11 13.38 1,551 3 14.07
(200) 9.00 7,262 18 13.98 2,519 5 14.14
(300) 9.00 9,341 23 14.37 3,951 9 14.32
</TABLE>
As illustrated in the table, the 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 Cornerstone has primarily
fixed-rate loans in its loan portfolio, the amount of interest Cornerstone 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
Cornerstone would pay on its deposits would increase rapidly because
Cornerstone's deposits generally have shorter periods to repricing. Assumptions
used in calculating the amounts in these tables correspond with OTS assumptions.
As of December 31, 1999, the NPV ratios resulting from certain changes in
interest rates were within the policy limits of the institution's Board of
Directors. It should be noted that the table below only pertains to Cornerstone
Bank and does not apply to the holding company. The holding company's assets are
all of a short term or short term to repricing nature and therefore are not
subject to significant interest rate risk.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making risk calculations.
In the event that interest rates continue to rise, 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
Western Ohio Financial Corporation 13
<PAGE>
due to diminished loan demand. As part of its interest rate risk strategy,
Cornerstone has attempted to utilize adjustable-rate and short-term-duration
loans and investments.
Cornerstone intends to limit the addition of fixed-rate long-duration loans and
securities to its portfolio. The Company continues to offer consumer products
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.
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, 1999,
1998 and 1997.
Year Ended December 31,
-------------------------------------
1999 1998 1997
--------- --------- --------
(Dollars in thousands)
Net income $ 1,683 $ 1,295 $ 183
Adjustments to reconcile
net income to net cash
from operating activities 5,135 (2,173) 669
------- -------- ------
Net cash from operating
activities 6,818 (878) 852
Net cash from investment
activities (12,606) 23,025 35,999
Net cash from financing
activities 1,548 (39,532) (21,223)
------- -------- -------
Net change in cash and
cash equivalents (4,240) (17,385) 15,628
Cash and cash equivalents
at beginning of period 13,854 31,239 15,611
------- -------- -------
Cash and cash equivalents
at end of period $9,614 $13,854 $31,239
======= ======== =======
At December 31, 1999, 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, 1999, was 21.7%.
The Company's primary sources of funds consist of deposits and repayments of
loans and interest earned on securities. The Company maintains a higher ratio of
loans to deposits in comparison with other similarly sized savings institutions.
Historically, this has not had a material effect on the Company's liquidity as
it has utilized other potential sources of funds including borrowings from the
FHLB to maintain liquidity and to meet operating expenses. Management believes
that loan repayments and other sources of funds will be adequate to meet the
Company's foreseeable liquidity needs.
The Company's primary financing source during 1999 was borrowings from the FHLB
of $81.2 million. Also a major financing source was the net increase in savings
deposits of $9.4 million. The Company paid $2.0 million in dividends and
acquired treasury stock for $2.8 million in 1999. 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.
The Company anticipates that it will have sufficient funds avail-able to meet
current loan commitments. At December 31, 1999, the Company had outstanding
commitments to extend credit that amounted to $15.0 million.
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 shareholders' equity (including retained earnings). OTS prompt
corrective action regulations require core capital to be maintained at 3% of
total institution assets. The following table indicates the requirement for core
capital is 4% because that is the level tha the OTS prompt corrective action
regulations require to be considered adequately capitalized.
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 $1.4 million as
of December 31, 1999.
14 Western Ohio Financial Corporation
<PAGE>
The following table summarizes Cornerstone's regulatory capital requirements and
actual capital at December 31, 1999.
<TABLE>
<CAPTION>
Excess of Actual
Capital Over Current
Actual Capital Current Requirement Requirement
--------------------- -------------------- -------------------
Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Tangible capital $40,041 12.08% $4,972 1.50% $35,069 10.58%
Core capital 40,041 12.08 13,258 4.00 26,783 8.08
Risk-Based capital 41,435 19.80 16,735 8.00 24,700 11.80
</TABLE>
Impact of New Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The key criterion for hedge accounting is that
the hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. SFAS 133 does not allow hedging of a
security which is classified as held to maturity, accordingly, upon adoption of
SFAS 133, companies may reclassify any security from held to maturity to
available for sale if they wish to be able to hedge the security in the future.
SFAS 133 is effective for fiscal years beginning after June 15, 2000, with early
adoption encouraged for any fiscal quarter beginning July 1, 1998, or later,
with no retroactive application. Management does not expect the adoption of SFAS
133 to have a significant impact on the Company's financial statements.
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.
Year 2000 Issue
The Company is unaware of any material adverse effects related to the Year 2000.
The Company's operating systems, facilities and infrastructure continue to
operate as expected. In addition, the Company is unaware of any material adverse
effects on any of the Company's customers or vendors. Although the Company
continues to not anticipate any material adverse effects on its operations as a
result of the Year 2000 issue, the Company cannot guarantee that Year 2000
issues will not affect its operations negatively, and continues to monitor its
operations.
The Company spent approximately $65,000 to test and renovate mission critical
systems.
Western Ohio Financial Corporation 15
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Western Ohio Financial Corporation
Springfield, Ohio
We have audited the accompanying consolidated balance sheets of Western Ohio
Financial Corporation as of December 31, 1999 and 1998, and the related
consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The 1997 consolidated financial statements of Western Ohio Financial
Corporation were audited by other auditors whose report dated January 23, 1998
expressed an unqualified opinion on those statements.
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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall 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 as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Crowe, Chizek and Company LLP
February 10, 2000
Columbus, Ohio
16 Western Ohio Financial Corporation
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
Consolidated Balance Sheets
December 31, 1999 and 1998
(Dollars in thousands, except share data)
Assets
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Cash and due from financial institutions $ 6,455 $ 3,987
Overnight deposits in other financial institutions 3,159 4,550
Interest-bearing deposits in other financial institutions --- 5,317
--------- ---------
Total cash and cash equivalents 9,614 13,854
Securities available for sale 50,366 65,446
Federal Home Loan Bank stock 7,451 6,948
Loans, net 254,654 230,914
Loans held for sale 217 3,898
Premises and equipment, net 3,475 3,241
Accrued interest receivable 1,806 1,897
Other assets 2,102 1,530
--------- ---------
Total assets $329,685 $327,728
========= =========
Liabilities
Deposits $202,331 $192,966
Borrowed funds 82,183 85,252
Advance payments from borrowers for taxes and insurance 864 881
Other liabilities 1,318 1,035
--------- ---------
Total liabilities 286,695 280,134
Shareholders' Equity
Common stock, $.01 par value; 7,250,000 shares authorized;
2,645,000 shares issued 26 26
Additional paid-in capital 40,452 40,452
Retained earnings 20,060 20,351
Unearned employee stock ownership plan shares (1,071) (1,309)
Unearned management recognition plan shares (200) (372)
Treasury stock; 608,136 and 476,317 shares, at cost (14,121) (11,434)
Accumulated other comprehensive income (2,157) (120)
--------- ---------
Total shareholders' equity 42,989 47,594
--------- ---------
Total liabilities and shareholders' $329,685 $327,728
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
1999 Annual Report to Shareholders 17
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
Consolidated Statements of Income
Years Ended December 31, 1999, 1998, and 1997
(Dollars in thousands except earnings per common share data)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Interest and dividend income
Loans, including fees $19,096 $20,411 $23,815
Securities 3,567 2,588 3,986
Interest-bearing deposits and overnight funds 247 2,379 797
Other interest and dividend income 505 478 441
------- ------- -------
Total interest income $23,415 25,856 29,039
Interest expense
Deposits 9,667 12,435 12,218
Borrowed funds 3,965 3,557 5,716
------- ------- -------
Total interest expense 13,632 15,992 17,934
------- ------- -------
Net interest income 9,783 9,864 11,105
Provision for loan losses 246 (363) 2,285
------- ------- -------
Net interest income after provision for loan losses 9,537 10,227 8,820
Noninterest income
Service charges 1,085 1,005 650
Net gain (loss) on sale of securities - 307 (5)
Net gain on sale of portfolio loans - - 228
Net gain on sale of loans held for sale 111 345 -
Net gain (loss) on disposal of premises and equipment - (82) 88
Net gain on sale of branches - 2,054 -
Other 65 60 31
------- ------- -------
Total noninterest income 1,261 3,689 992
Noninterest expense
Salaries and employee benefits 3,958 4,494 4,410
Occupancy and equipment 945 965 950
Federal deposit insurance 128 148 128
State franchise taxes 620 748 732
Professional services 454 703 405
Advertising 340 436 354
Amortization of goodwill - 295 425
Data processing 502 455 643
Other 1,180 1,513 1,424
------- ------- -------
Total noninterest expense 8,127 9,757 9,471
------- ------- -------
Income before income taxes 2,671 4,159 341
Income tax expense 988 2,864 158
------- ------- -------
Net income $1,683 $ 1,295 $ 183
======= ======= =======
Earnings per common share:
Basic $ 0.86 $ 0.60 $ 0.08
======= ======= =======
Diluted $ 0.85 $ 0.58 $ 0.08
======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
18 Western Ohio Financial Corporation
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION Consolidated Statements of Comprehensive
Income Years ended December 31, 1999, 1998, and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net income $1,683 $1,295 $ 183
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on available for sale
securities arising during the period (2,037) (226) 548
Reclassification adjustment for amounts realized on
securities sales included in net income - (203) 3
------- ------- -------
Total other comprehensive income (loss) (2,037) (429) 551
------- ------- -------
Comprehensive income (loss) $ (354) $ 866 $ 734
======== ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
1999 Annual Report to Shareholders 19
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION Consolidated Statements of Shareholders'
Equity Years Ended December 31, 1999, 1998, and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Unearned Accumulated
Additional Employee Other
Common Paid-In Retained Benefit Treasury Comprehensive
Stock Capital Earnings Plan Shares Stock Income Total
-------- --------- -------- ----------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $26 $41,158 $23,234 $(2,549) $(7,579) $(242) $54,048
Net income - - 183 - - - 183
Cash dividends - $1.00 per share - - (2,219) - - - (2,219)
Purchase of treasury shares - - - - (370) - (370)
Commitment to release employee stock
ownership plan shares - 141 - 238 - - 379
Shares awarded under management recognition plan - 19 - (76) 57 - -
Shares earned under management recognition plan,
including tax benefit realized on vesting of
plan shares - (279) - 444 - - 165
Stock options exercised, including tax benefit - (581) - - 2,444 - 1,863
Change in net unrealized gain(loss) on securities
available for sale, net of reclassification and
tax effects - - - - - 551 551
---- ------- ------ ------- ----- ------ -------
Balance at December 31, 1997 26 40,458 21,198 (1,943) (5,448) 309 54,600
Net income - - 1,295 - - - 1,295
Cash dividends - $1.00 per share - - (2,142) - - - (2,142)
Purchase of treasury shares - - - - (6,611) - (6,611)
Commitment to release employee stock
ownership plan shares - 120 - 238 - - 358
Reclassification of management recognition plan
shares - - - (148) 148 - -
Shares earned under management recognition plan,
including tax benefit realized on vesting of
plan shares - - - 172 - - 172
Stock options exercised, including tax benefit - (126) - - 477 - 351
Change in net unrealized gain(loss) on securities
available for sale, net of reclassification and
tax effects - - - - (429) (429)
---- ------- ------ ----- ------- ----- ------
Balance at December 31, 1998 26 40,452 20,351 (1,681) (11,434) (120) 47,594
Net income - - 1,683 - - - 1,683
Cash dividends - $1.00 per share - - (1,974) - - - (1,974)
Purchase of treasury shares - - - - (2,826) - (2,826)
Commitment to release employee stock
ownership plan shares - 83 - 238 - - 321
Shares earned under management recognition plan,
including tax benefit realized on vesting of
plan shares - - - 159 - - 159
Management recognition plan shares awarded,
net of forfeitures - - - 13 (13) - 159
Stock options exercised, including tax benefit - (83) - - 152 - 69
Change in net unrealized gain(loss) on securities
available for sale, net of reclassification
and tax effects - - - - - (2,037) (2,037)
---- -------- ------- -------- -------- ------- -------
Balance at December 31, 1999 $26 $40,452 $20,060 $(1,271) $(14,121) $(2,157) $42,989
==== ======== ======= ======== ======== ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
20 Western Ohio Financial Corporation
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION Consolidated Statements of Cash Flows Years
Ended December 31, 1999, 1998, and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,683 $ 1,295 $ 183
Adjustments to reconcile net income to net cash
from operating activities
Net amortization (accretion) on securities 137 78 (239)
Compensation expense on ESOP shares 321 358 379
Compensation expense on MRP share 159 172 165
Depreciation and amortization 313 711 678
FHLB stock dividends (503) (478) (441)
Deferred loan fee income (21) (16) (119)
Deferred income taxes 342 (71) (177)
Provision for loan losses 246 (363) 2,285
Net gain on sale of branches - (2,054) -
Net realized (gain) loss on sales of securities - 5 (307)
Net gain on sale of loans (111) - (228)
Net (gain) loss on sale or disposal of premises
and equipment 6 82 (88)
Net loss on sale of real estate owned 1 32 -
Net change in:
Loans held for sale 3,792 (1,131) -
Other assets and other liabilities 262 (83) (780)
Accrued interest receivable 91 463 (190)
Taxes payable 100 434 (581)
------- ------- -------
Net cash from operating activities $ 6,818 $ (878) $ 852
Cash flows from investing activities
Securities available for sale:
Purchases - (50,179) (2,001)
Maturities and principal payments 11,857 6,888 19,808
Sales - 22,312 10,684
Purchases of FHLB stock - - (167)
Purchases of loans (27,842) - (3,710)
Proceeds from sale of portfolio loans - - 15,751
Net (increase) decrease in loans 3,877 44,406 (4,047)
Premises and equipment expenditures (1,076) (397) (483)
Proceeds from sale of premises and equipment 523 27 164
Purchase of real estate - (249) -
Proceeds from sale of real estate owned 55 217 -
-------- ------- -------
Net cash from investing activities $(12,606) $23,025 $35,999
(continued)
</TABLE>
1999 Annual Report to Shareholders 21
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 1999, 1998, and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities
Cash paid for sale of branches - (78,453) -
Net change in deposits 9,365 30,422 13,706
Net change in advance payments from borrowers
for taxes and insurance (17) (12) 60
Proceeds from FHLB advances 81,175 76,190 93,640
Repayments on FHLB advances (84,244) (59,277) (127,903)
Cash dividends paid (1,974) (2,142) (2,219)
Proceeds from exercise of stock options 69 351 1,863
Purchase of treasury stock (2,826) (6,611) (370)
-------- ---------- --------
Net cash from financing activities 1,548 (39,532 (21,223)
Net change in cash and cash equivalents (4,240) (17,385) 15,628
Cash and cash equivalents at beginning of year 13,854 31,239 15,611
------- ---------- -------
Cash and cash equivalents at end of year $9,614 $ 13,854 $31,239
======= ========== =======
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $13,401 $ 16,171 $17,926
Income taxes 540 2,425 1,010
Noncash activities
Transfer of portfolio loans to loans held
for sale - 2,767 -
See accompanying notes to consolidated
financial statements.
</TABLE>
22 Western Ohio Financial Corporation
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997 (Dollars in thousands, except per share data)
1. Summary of Significant Accounting Policies
Principals of Consolidation: The consolidated financial statements include the
accounts of Western Ohio Financial Corporation (Western) and its wholly owned
subsidiary, Cornerstone Bank (Bank), together referred to as the Corporation.
The financial statements of the Bank include the accounts of its wholly-owned
subsidiaries, CornerstoneBanc Financial Services, Inc. (formerly known as West
Central Mortgage Services, Inc.) (CFSI) and West Central Financial Services,
Inc. (WCFS). Intercompany transactions and balances are eliminated in
consolidation.
Nature of Operations: The Corporation's revenues, operating income and assets
are primarily from the banking industry. The Corporation operates six offices in
west central Ohio. Loan customers include a wide range of individuals,
businesses and other organizations. Major portions of loans are secured by
various forms of collateral including real estate, business assets, consumer
property and other items. The Corporation's primary funding source is deposits
from customers in its market area. The Corporation also purchases investments
and engages in mortgage banking operations.
Use of Estimates: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions based
on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future
results could differ. The allowance for loan losses, fair values of financial
instruments and status of contingencies are particularly subject to change.
Cash Flow Reporting: Cash and cash equivalents include cash on hand, amounts due
from depository institutions, federal funds sold and interest bearing deposits
in other financial institutions with original maturities of 90 days or less. Net
cash flows are reported for customer loan and deposit transactions.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value
with unrealized holding gains and losses reported in other comprehensive income.
Securities are classified as trading when held for short-term periods in
anticipation of market gains and are carried at fair value. Other securities
such as Federal Home Loan Bank stock are carried at cost.
Interest income includes amortization of purchase premiums and discounts. Gains
and losses on sales are based on the amortized cost of the specific security
sold. Securities are written down to fair value when a decline in fair value is
not temporary.
Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of deferred loan fees and costs and an allowance for
loan losses. Loans held for sale are reported at the lower of cost or market, on
an aggregate basis.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term. Interest income is not
reported when full loan repayment is in doubt, typically when the loan is
impaired or payments are past due over 90 days. Payments received on such loans
are reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions and other factors. Allocations
of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be charged-off.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral.
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are
initially recorded at fair value when acquired, establishing a new cost basis.
If fair value declines, a valuation allowance is recorded through expense. Costs
after acquisition are expensed.
Premises and Equipment: Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation. Depreciation is computed over the
assets' useful lives using straight-line and accelerated methods. These assets
are reviewed for impairment when events indicate the carrying amount may not be
recoverable. Maintenance and repairs are expensed and major improvements are
capitalized.
1999 Annual Report to Shareholders 23
Servicing Rights: Servicing rights are recognized as assets for purchased rights
and for the allocated value of retained servicing rights on loans sold.
Servicing rights are expensed in proportion to, and over the period of,
estimated net servicing revenues. Impairment is evaluated based on the fair
value of the rights, using groupings of the underlying loans as to interest
rates and then, secondarily, as to geographic and prepayment characteristics.
Fair value is determined using prices for similar assets with similar
characteristics when available, or based upon discounted cash flows using
market-based assumptions. Any impairment of a grouping is reported as a
valuation allowance. In 1999 the Corporation sold its servicing rights in loans
previously sold. Loan servicing rights totaled $28 at year-end 1998.
Intangibles: Purchased intangibles, primarily goodwill and core deposit value,
are recorded at cost and amortized over the estimated life. Goodwill
amortization was straight-line over twenty years and core deposit amortization
was accelerated over ten years. These intangibles were eliminated in connection
with the sale of branch offices as more fully disclosed in note 2. Goodwill
amortization expense totaled $295 and $425 in 1998 and 1997.
Income Taxes: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
Financial Instruments: Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and standby letters of credit
issued to meet customer financing needs. The face amount for these items
represent the exposure to loss, before considering customer collateral or
ability to repay. Such financial instruments are recorded when they are funded.
Stock Compensation: Employee compensation expense under stock option plans is
reported if options are granted below market price at grant date. Pro forma
disclosures of net income and earnings per share are shown using the fair value
method of SFAS No. 123 to measure expense for options granted after 1994, using
an option pricing model to estimate fair value.
Employee Stock Ownership Plan: The cost of shares issued to the employee stock
ownership plan ("ESOP"), but not yet allocated to participants, is shown as a
reduction of shareholders' equity. Compensation expense is based on the market
price of shares as they are committed to be released to participant accounts.
Dividends on allocated ESOP shares reduce retained earnings; dividends on
unearned ESOP shares reduce debt and accrued interest.
Management Recognition Plan: The cost of unearned shares held by the management
recognition plan ("MRP") is shown as a reduction of shareholders' equity. The
cost of shares awarded to participants is amortized to expense as the shares are
earned over the vesting periods of the awards on a straight-line method.
Earnings Per Common Share: Basic earnings per common share is based on net
income divided by the weighted average number of common shares outstanding
during the period. ESOP shares are considered outstanding for the calculation
unless unearned. Diluted earnings per common share includes the dilutive effect
of additional potential common shares issuable under stock options. MRP shares
are considered outstanding as they become vested.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale, which are also recognized as a separate
component of shareholders' equity.
New Accounting Pronouncements: Beginning January 1, 2001, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect but the effect will depend on derivative holdings when
this standard applies.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statement.
Restrictions of Cash: The Corporation was required to have $251 and $236 of cash
on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve
and clearing requirements at year end 1999 and 1998. These balances do not earn
interest.
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates.
24 Western Ohio Financial Corporation
Dividend Restriction: Banking regulations require the maintenance of certain
capital levels and may limit the amount of dividends paid by the Bank to Western
or Western to shareholders.
Business Segment: Internal financial information is primarily reported and
aggregated solely in the line of the business of banking.
Reclassifications: Some items in prior financial statements have been
reclassified to conform with the current presentation.
2. Sale of Branch Offices
In 1998, the Corporation sold its Cincinnati, Ohio, area branch offices. Details
of the assets and liabilities sold with the branch offices are as follows:
<TABLE>
<CAPTION>
<S> <C>
Assets
Cash and cash equivalent $78,453
Loans 23
Premises and equipment 586
-------
$79,602
=======
Liabilities
Deposits $84,365
=======
The net gain realized in connection with the sale was determined as follows:
Premium on deposit sold $ 5,426
Write-off of intangible assets (3,255)
Loss on premises and equipmen (117)
--------
Net gain on sale of branch offices 2,054
========
</TABLE>
3. Securities
<TABLE>
<CAPTION>
Year-end securities available for sale were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
1999
U.S. government agencies $10,000 $ - $ (1,225) $ 8,775
Mortgage-backed securities 43,635 28 (2,072) 41,591
--------- ---------- ----------- ---------
Total $53,635 $ 28 $ (3,297) $50,366
======= ========== =========== =========
1998
U.S. Treasury $ 499 $ 3 $ - $ 502
U.S. government agencies 15,000 16 (116) 14,900
Mortgage-backed securities 50,128 106 (190) 50,044
-------- --------- ----------- ---------
Total $ 65,627 $ 125 $ (306) $65,446
======== ======= =========== =========
</TABLE>
1999 Annual Report to Shareholders 25
At year-end 1999 and 1998, there were no holdings of securities of any one
issuer, other than the U.S. government and its agencies, in an amount greater
than 10% of shareholders' equity.
Contractual maturities of debt securities at year-end 1999 were as follows.
Securities not due at a single maturity date, primarily mortgage-backed
securities, are shown separately.
Amortized Fair
Cost Value
-------- --------
Due in one year or less $ - $ -
Due after one year through five years - -
Due after five years through ten years - -
Due after ten years 10,000 8,775
Mortgage-backed securities 43,635 41,591
-------- --------
$53,635 $0,366
======== ========
Sales of securities available for sale and the gross realized gains and losses
were as follows:
1999 1998 1997
--------- ----------- ----------
Securities
Proceeds $ - $22,312 $10,684
Gross gains - 312 -
Gross losses - 5 5
Securities with an approximate par value of $14,336 at December 31, 1999, were
pledged to secure public deposits, borrowings, and for other purposes as
required or permitted by law. No securities were pledged at December 31, 1998.
4. Loans
Year-end loans were as follows:
1999 1998
--------- -----------
First mortgage loans secured by:
One-to-four family residences $178,304 $177,109
Other properties 52,572 33,097
Construction properties 6,923 3,908
Consumer and other loans:
Consumer 3,332 5,194
Commercial 5,499 6,914
Home equity 15,369 10,054
Other 157 285
---------- -----------
Total loans 262,156 236,561
Less:
Net deferred loan fees,
premiums and discounts (62) (83)
Loans in process (4,659) (2,364)
Allowance for loan losses (2,781) (3,200)
---------- -----------
Net loans $254,654 $230,914
========== ===========
Activity in the allowance for loan losses was as follows:
1999 1998 1997
----------- ------------- -------------
Beginning balance $3,200 $3,922 $1,716
Provision for loan losses 246 (363) 2,285
Loans charged of (736) (396) (79)
Recoveries of previous
charge-offs 71 37 -
----------- ------------- -------------
Balance at end of year $2,781 $3,200 $3,922
Impaired loans were as follows:
1999 1998
----------- -------------
Year-end loans with no
allocated allowance
for loan losses $ 479 $ 361
Year-end loans with
allocated allowance
for loan losses 1,909 2,431
----------- -------------
Total $2,388 $ 2,792
=========== =============
Amount of the allowance
for loan losses allocated $1,159 $ 1,287
Average of impaired loans
during the year 2,409 2,799
Interest income recognized
during impairment 110 47
Cash-basis interest income
recognized during impairment 110 47
Non-performing loans were as follows:
1999 1998
---------- --------------
Loans past due over 90 days
still on accrual $ - $ -
Nonaccrual loans 2,755 4,541
Non-performing loans includes all impaired loans and smaller balance homogeneous
loans, such as residential mortgage and consumer loans, that are collectively
evaluated for impairment.
Certain directors and executive officers and their related interests were loan
customers of the Corporation. A summary of activity on related party loans is as
follows:
1999 1998
---------- --------------
Beginning balance $ 1,255 $ 711
New loans 766 1,104
Repayments (527) (535)
Other changes - (25)
Ending balance $ 1,494 $ 1,255
Other changes represent loans reportable at the end of one period that are
excludable from the other period due to changes in borrowers and other
circumstances.
5. Premises and Equipment
Year-end premises and equipment were as follows:
1999 1998
---------- --------------
Land $ 815 $ 862
Buildings and improvements 3,102 3,416
Furniture, fixtures and
equipment 2,648 2,009
----------- --------------
6,565 6,287
Accumulated depreciation (3,090) (3,046)
$3,475 $ 3,241
========== =============
Certain facilities and equipment are leased under various noncancelable
operating leases, which expire at various dates through 2001. Rental expense on
lease commitments amounted to $197 and $165 in 1999 and 1998. Future minimum
lease payments on lease obligations are as follows:
2000 $ 80
2001 27
2002 7
2003 4
-------
$ 118
=======
6. Deposits
Year-end deposits were as follows:
NOW accounts, including
noninterest-bearing deposits
of $5,578 and $1,857 $13,529 $ 12,708
Money market accounts 49,149 49,084
Passbook savings accounts 12,065 13,629
Certificates of deposit:
In denominations
under $100,000 115,325 103,204
In denominations of
$100,000 or more 12,263 14,341
$202,331 $192,966
At year-end 1999, scheduled maturities of certificates of deposit were as
follows:
2000 $73,199
2001 32,192
2002 16,922
2003 2,160
2004 2,293
Thereafter 822
--------
$127,588
========
7. Borrowed Funds
Borrowed funds at year-end 1999 and 1998 consisted of advances from the Federal
Home Loan Bank of Cincinnati ("FHLB") and were as follows:
1999 1998
---------- --------------
Fixed rate maturities March 1999
through October 2008 at rates
from 4.52% to 8.65%,
averaging 5.29 $ - $ 74,752
Fixed rate maturities March 2000
through October 2019 at rates
from 3.50% to 8.65%,
averaging 5.29% 66,783 -
Variable rate maturity due
February 1999 at rate of 5.52 % - 10,500
Variable rate maturities February
2000 through September 2008
at rates from 5.40% to 6.12%,
averaging 5.97% 15,400 -
$82,183 $ 85,252
1999 Annual Report to Shareholders 27
<PAGE>
The maximum month-end balance of FHLB advances outstanding was $90,247 and
$88,256 in 1999 and 1998. Average balances of borrowings outstanding during 1999
and 1998 were $76,449 and $62,802. Mortgage loans and all shares at FHLB stock
owned by the Bank totalling $123,275 and $7,451 at December 31, 1999, and
$127,878 and $6,948 at December 31, 1998, were pledged as collateral for the
FHLB advances.
At year-end 1999, required annual principal payments were as follows:
2000 $11,425
2001 5,367
2002 729
2003 234
2004 5,075
Thereafter 59,353
-------
$82,183
=======
8. Employee Benefit Plans
Employee stock ownership plan: The Corporation offers an ESOP for the benefit of
all salaried employees who meet age and service requirements. The ESOP borrowed
funds from the Corporation with which to acquire common shares of the
Corporation. The loan is secured by the shares purchased with the loan proceeds
and will be repaid by the ESOP with funds from the Corporation's discretionary
contributions to the ESOP and earnings on ESOP assets. The shares are being
allocated to eligible employees' accounts over a ten year period which started
in 1994. Expense for shares committed to be allocated during 1999, 1998 and 1997
was $321, $358 and $379.
The ESOP shares at year-end 1999 and 1998 were as follows:
1999 1998
---------- -------------
Allocated shares 66,951 52,073
Shares committed to be
released for allocation 14,878 14,878
Unreleased shares 66,952 81,830
---------- -------------
Total ESOP shares 148,781 148,781
========== =============
Fair value of unreleased shares $ 1,105 $ 1,780
========== =============
Management recognition plan: The Corporation maintains an MRP for the benefit of
directors and certain key employees of the Corporation. The MRP is used to
provide such individuals ownership interest in the Corporation in a manner
designed to compensate such directors and key employees for services to the
Corporation. As of December 31, 1999, 64,770 shares of the initial 105,800
shares reserved for grants have been awarded. One-fifth of such shares will be
earned and nonforfeitable on each of the first five anniversaries of the dates
of the awards. Grantees have all the benefits of shareholders, including the
right to receive dividends, except for certain restrictions on the
transferability of the shares. Compensation expense, which is based upon the
cost of the shares, was $159, $172 and $444 for 1999, 1998 and 1997.
Deferred compensation plans: In 1996, the Corporation adopted a non-qualified
deferred compensation plan for two officers. Under the plan, those covered
agreed to defer a portion of their current compensation in exchange for future
payments. The liability for the future payments is secured by single-premium
life insurance policies on each of the individuals covered.
In 1998, the Corporation established a non-qualified deferred compensation plan
for the benefit of certain officers and directors. Eligible employees may
allocate up to 100% of compensation (base salary, bonus, MRP, annual retainer or
meeting fees) to their deferred compensation accounts.
401(k) profit sharing plan: The Corporation offers a 401(k) profit sharing plan
covering substantially all employees. The annual expense of the plan is based on
a partial matching of voluntary employee contributions of up to 6% of individual
compensation. The matching percentage was 50% for 1999, 1998 and 1997. Employee
contributions are vested at all times and the Corporation's matching
contributions become fully vested after an individual has completed 5 years of
service. The cash contribution expense included in salaries and employee
benefits was $46, $45 and $35 for 1999, 1998 and 1997.
Stock option and incentive plans: In January 1995, 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. The
options fully vest and become exercisable in five equal annual installments
commencing one year after the date of the grant.
In 1996, the Corporation acquired Seven Hills Savings Association (Seven Hills)
and subsequently merged Seven Hills into Cornerstone as retail branch offices.
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.
28 Western Ohio Financial Corporation
In April 1998, shareholders approved an Omnibus Incentive Plan. Under the
provisions of the plan, 235,224 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. The options are fully vested and exercisable on
the date of the grant.
The following is a summary of activity in the stock option and incentive plan:
Stock Options
-----------------------------------
Weighted-
Options Average
Available Options Exercise
for Grant Outstanding Price
--------- --------- ---------
January 1, 1997 34,229 227,271 $17.75
Plan adopted
(Acquisition) 43,057 - -
Granted (77,057) 77,057 16.76
Forfeited 6,000 (6,000) 17.50
Exercised - (107,958) 16.25
December 31, 1997 6,229 190,370 18.17
Plan adopted 235,224 - -
Granted (32,936) 32,936 23.00
Forfeited 1,690 (1,690) 15.23
Exercised - (19,882) 18.39
December 31, 1998 210,207 201,734 19.22
Granted (6,000) 6,000 21.89
Forfeited 4,630 (4,630) 17.50
Exercised - (9,063) 13.77
December 31, 1999 208,837 194,041 $19.60
The following table summarizes information about stock options outstanding at
year-end 1999:
Weighted Average
Exercise Remaining Number
Price Contractual Life Outstanding Exercisable
------- ------------ ------------- -----------
$ 11.47 7.29 years 7,151 7,151
17.50 5.08 76,282 58,538
18.50 5.38 28,172 23,636
19.75 5.39 5,000 4,000
20.50 5.55 5,000 4,000
21.75 7.37 1,000 400
22.00 7.48 25,000 10,000
22.13 9.13 4,000 4,000
22.19 9.15 500 500
22.50 9.42 1,000 1,000
23.00 8.86 32,936 32,936
26.63 7.81 8,000 3,200
------------ -----------
194,041 149,361
============ ===========
No stock appreciation rights or restricted stock awards have been granted.
The fair value of options granted in 1999 was estimated using the Black-Scholes
option pricing model using the following weighted average assumptions: risk-free
interest rate of 5.1%, expected life of 5 years, expected volatility of stock
price of 13.32% and expected dividend rate of 4.60%. Based on these assumptions,
the estimated fair value of options granted in 1999 was $2.22 per option.
The fair value of options granted in 1998 was estimated using the Black-Scholes
option pricing model using the following assumptions: risk-free interest rate of
4.81%, expected life of 5 years, expected volatility of stock price of 18.48%
and expected dividend rate of 4.44%. Based on these assumptions, the estimated
fair value of options granted in 1998 was $3.16 per option.
The fair value of options granted prior to 1998 were also estimated using the
Black-Scholes option pricing model using the following assumptions: risk-free
interest rate of 6.12% to 7.24%, expected life of 10 years; expected volatility
of stock price of .05% to .17% and an expected annual dividend rate of $1.00 per
share.
SFAS No. 123, "Accounting for Stock Based Compensation," requires pro forma
disclosures for companies not adopting its fair value accounting method for
stock-based employee compensation. Accordingly, the following pro forma
information presents net income and earnings per share for 1999, 1998 and 1997
had the Standard's fair value method been used to measure compensation cost for
1999 Annual Report to Shareholders 29
<PAGE>
stock option plans. No compensation expense related to stock options was
actually recognized.
1999 1998 1997
---------- ----------- ------------
Net income:
As reported $1,683 $1,295 183
Pro forma 1,526 1,132 5
Earnings per share:
As reported
Basic .86 .60 .08
Diluted .85 .58 .08
Pro forma
Basic .78 .52 -
Diluted .77 .51 -
<PAGE>
9. Commitments, Off-Balance Sheet Risk
and Contingencies
Commitments to Extend Credit: Some financial instruments are used in the normal
course of business to meet financing needs of customers. These financial
instruments include commitments to extend credit, standby letters of credit and
financial guarantees. These involve, to varying degrees, credit risk in excess
of the amount reported in the financial statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit, standby letters of
credit and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans. The amount of
collateral obtained, if deemed necessary, on extension of credit is based on
management's credit evaluation and generally consists of residential or
commercial real estate. Lines of credit are primarily home equity lines
collateralized by second mortgages on one-to-four family residential real estate
and commercial lines of credit collateralized by business assets.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being used, the total commitments do not necessarily represent
future cash requirements.
At year-end 1999 and 1998, the Corporation had commitments to originate loans
and amounts available on approved lines of credit as follows:
Fixed Variable
Rate Rate Total
----- -------- ------
1999
First mortgage loans $ 488 $ 1,619 $2,107
Consumer and other loans - 1,903 1,903
Commercial loans - - -
Home equity lines of credit - 9,267 9,267
Commercial lines of credit - 1,716 1,716
Stand-by letters of credit - - -
------ ------- -------
$ 488 $14,505 $14,993
====== ======= =======
1998
First mortgage loans $1,573 $ 515 $ 2,088
Consumer and other loans - 1,506 1,506
Commercial loans - 868 868
Home equity lines of credit - 7,304 7,304
Commercial lines of credit 2,640 2,640
Stand-by letters of credit 35 - 35
------ -------- --------
$1,608 $12,833 $14,441
====== ======== ========
The interest rates on fixed-rate loan commitments ranged from 7.63% to 8.25% at
year-end 1999.
Employment Agreements: The Corporation has employment agreements with certain
officers of the Corporation and Cornerstone. The agreements provide for a term
of employment for up to four years and a salary and performance review not less
often than annually, as well as inclusion of the employee in any formally
established employee benefit plan for which such personnel are eligible. The
employment agreements also contain provisions with respect to payment should a
change in control occur.
Liquidation Account: In conjunction with its conversion to a stock institution
in 1994, the Corporation established a liquidation account of $21,664, which was
equal to its total net worth as of the date of the latest statement of financial
condition appearing in the final conversion prospectus. The liquidation account
is maintained for the benefit of eligible depositors who continue to maintain
their accounts with the Corporation after the conversion. The liquidation
account is reduced annually to the extent that eligible depositors have reduced
their qualifying deposits. Subsequent increases do not restore an eligible
account holder's interest in the liquidation account. In the event of a complete
liquidation, each eligible depositor will be entitled to receive a distribution
from the liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held.
30 Western Ohio Financial Corporation
<PAGE>
10. Disclosures About Fair Values of Financial Instruments
The carrying values and estimated fair values of financial instruments at
year-end were as follows:
1999 1998
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ------ ------ ------
Financial assets:
Cash and cash equivalents $ 9,614 $9,614 $13,854 $ 13,854
Securities available for sale 50,366 50,366 65,446 65,446
FHLB stock 7,451 7,451 6,948 6,948
Loans, net 254,654 247,421 230,914 233,942
Loans held for sale 217 - 3,898 3,898
Accrued interest receivable 1,806 1,806 1,897 1,897
Financial liabilities:
Deposits (202,331) (201,617) (192,966) (194,072)
Borrowed funds (82,183) (79,655) (85,252) (82,754)
Advance payments by borrowers
for taxes and insurance (864) (864) (881) (881)
Accrued interest payable (717) (717) (486) (486)
The estimated fair value approximates carrying amount for all items except those
described below. Estimated fair value for securities is based on quoted market
values for the individual securities or for equivalent securities. Estimated
fair values of fixed-rate loans and loans that reprice less frequently than each
year, are based on the rates charged at year-end for new loans with similar
maturities, applied until the loan is assumed to reprice or be paid. Estimated
fair values for certificates of deposit and long-term debt are based on the
rates paid at year-end for new deposits or borrowings applied until maturity.
Estimated fair values for other financial instruments and off-balance-sheet loan
commitments are considered nominal.
While these estimates of fair value are based on management's judgment of
appropriate factors, there is no assurance that, were the Corporation to have
disposed of such items at year-end 1999 and 1998, 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 year-end
1999 and 1998 should not necessarily be considered to apply at subsequent dates.
In addition, other assets, such as property and equipment, and liabilities of
the Corporation that are not defined as financial instruments are not included
in the above disclosures. Also, nonfinancial instruments typically not
recognized in financial statements nevertheless may have value but are not
included in the above disclosures. These include, among other items, the
estimated earning power of core deposit accounts, the trained work force,
customer goodwill and similar items.
11. Income Taxes
Income tax expense consisted of the following:
1999 1998 1997
-------- ---------- -----------
Current $ 646 $ 2,935 $ 630
Deferred 342 (71) (472)
-------- ---------- -----------
$ 988 $ 2,864 $ 158
======== ========== ===========
The sources of year-end gross deferred income tax assets and liabilities were as
follows:
1999 1998
-------- --------
Deferred tax assets
Deferred compensation and
management recognition plan $ 88 $ 61
Allowance for loans losses 875 1,034
Unrealized loss on securities
available for sale 1,111 62
Other 21 59
----- -------
2,095 1,216
Deferred tax liabilities
FHLB stock dividends 924 752
_____ _______
$1,171 $ 464
====== =======
1999 Annual Report to Shareholders 31
<PAGE>
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34% to income before income taxes as a result of the
following:
1999 1998 1997
----- ----- -------
Income tax computed at
the statutory tax rate $ 908 $1,414 $ 116
Tax effect of:
Dividend exclusion - - (17)
Intangible assets 9 1,372 145
Other 71 78 (86)
----- ------ -------
$ 988 $2,864 $ 158
===== ====== =======
Effective tax rate 37.0% 68.9% 46.3%
===== ====== =======
As a result of legislation that changed the method used by many thrifts to
calculate their bad debt reserve for federal income tax purposes, the
Corporation must recapture that portion of the reserve that exceeds the amount
that could have been taken under the experience method for tax years beginning
after December 31, 1987. 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 is occurring over
a six-year period. The commencement of the recapture by the Corporation was
delayed until 1998 as the Corporation met certain residential lending
requirements. In 1999 and 1998, the Corporation recaptured $52 in bad debt
reserves. At December 31, 1999, the Corporation had $208 in bad debt reserves
remaining to be recaptured for federal income tax purposes over the next four
years. The deferred tax liability related to the recapture has been previously
established.
Retained earnings at December 31, 1999 and 1998, includes $8,709 for which no
provision for federal income taxes has been made. This amount represents the
qualifying and non-qualifying tax bad debt reserve as of December 31, 1987,
which is the Corporati on's base year for purposes of calculating the bad debt
deduction for tax purposes. The related amount of unrecognized deferred tax
liability was $2,961 at December 31, 1999 and 1998. If this portion of retained
earnings is used in the future for any purpose other than to absorb bad debts,
it will be added to future taxable income.
12. Regulatory Capital Requirements
Cornerstone is subject to various regulatory capital requirements administered
by the federal regulatory agencies. Failure to meet minimum capital requirements
can initiate certain mandatory actions that, if undertaken, could have a direct
material effect on Cornerstone's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action,
Cornerstone must meet specific capital guidelines that involve quantitative
measures of Cornerstone's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. Cornerstone's capital
amounts and classifications are also subject to qualitative judgments by the
regulators about Cornerstone's components, risk weightings and other factors. At
year-end 1999 and 1998, management believes Cornerstone is in compliance with
all regulatory capital requirements. Cornerstone is considered well capitalized
under the Federal Deposit Insurance Act at year-end 1999 and 1998. Management is
not aware of any matters subsequent to December 31, 1999 that would cause
Cornerstone's capital category to change.
The following is a reconciliation of capital under generally accepted accounting
principles, as shown on the accompanying consolidated balance sheets, to
Cornerstone's regulatory capital at year-end 1999 and 1998:
1999 1998
--------- -----------
Total shareholders' equity
per financial statements $42,989 $ 47,594
Nonallowable items:
Parent company equity (5,105) (6,605)
Intangible assets - (31)
Unrealized (gain) loss on
securities available for sale 2,157 120
--------- -----------
Tier I (core) and tangible capital 40,041 41,078
Additional capital items:
General valuation
allowances (limited) 1,394 1,769
-------- -----------
Total risk-based capital $ 41,435 $ 42,847
======== ===========
32 Western Ohio Financial Corporation
<PAGE>
At year-end 1999 and 1998, Cornerstone's actual capital level and minimum
required levels were as follows:
<TABLE>
<CAPTION>
Minimum Required
Minimum to be Well Capitalized
Required Under Prompt
for Capital Corrective Action
Actual Adequacy Purpose Regulations
--------------- -------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
1999
Total capital (to risk-weighted assets) $ 41,435 19.8% $16,735 8.0% $20,918 10.0%
Tier 1 (core) capital (to risk-weighted assets) 40,041 19.1 8,367 4.0 12,551 6.0
Tier 1 (core) capital (to adjusted total assets) 40,041 12.1 13,258 4.0 16,572 5.0
Tangible capital (to adjusted total assets) 40,041 12.1 4,972 1.5 N/A
1998
Total capital (to risk-weighted assets) $ 42,847 24.2% $14,188 8.0% $17,736 10.0
% Tier 1 (core) capital (to risk-weighted assets) 41,078 23.2 7,094 4.0 10,641 6.0
Tier 1 (core) capital (to adjusted total assets) 41,078 12.6 13,082 4.0 16,353 5.0
Tangible capital (to adjusted total assets) 41,078 12.6 4,906 1.5 N/A
</TABLE>
Cornerstone may make a capital distribution without the approval of the OTS
provided it notifies the OTS 30 days before it declares the capital distribution
and it meets the following requirements: (i) has a regulatory rating in one of
the two top examination categories, (ii) is not of supervisory concern, and will
remain adequately- or well-capitalized, as defined in the OTS prompt corrective
action regulations, following the proposed distribution, and (iii) the
distribution does not exceed its net income for the calendar year-to-date plus
retained net income for the previous two calendar years (less any dividends
previously paid). If Cornerstone does not meet the above stated requirements, it
must obtain the prior approval of the OTS before declaring any proposed
distributions.
1999 Annual Report to Stockholders 33
<PAGE>
13. Parent Company Only Condensed Financial Statement
Condensed financial information of Western Ohio Financial Corporation is as
follows:
Condensed Balance Sheets
December 31, 1999 and 1998
1999 1998
-------- --------
Assets
Cash and cash equivalents $ 4,059 $ 5,626
Investment in bank subsidiary 37,884 40,989
Intercompany receivables 1,070 904
Other assets 185 300
-------- -------
Total assets $43,198 $47,819
======== =======
Liabilities and shareholders' equity
Other liabilities $ 209 $ 225
Shareholders' equity 42,989 47,594
------- -------
Total liabilities and shareholders' equity $43,198 47,819
======= =======
Condensed Statements of Income
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
------- ------- -------
Interest and dividend income
Dividends from subsidiaries $3,000 $6,000 $5,002
Loan to ESOP 90 128 123
Other 47 53 75
------- ------- -------
Total interest and dividend income 3,137 6,181 5,200
Other income - - 22
Operating expenses (516) (608) (728)
------- ------- -------
Income before income taxes and distributions
in excess of earnings of subsidiary 2,621 5,573 4,494
Income tax benefit 129 145 157
------- ------- -------
Income before distributions in excess of
earnings of subsidiary 2,750 5,718 4,651
Distributions in excess of earnings of
subsidiary (1,067) (4,423) (4,468)
------- ------- -------
Net Income $1,683 $1,295 $ 183
======= ======= =======
34 Western Ohio Financial Corporation
<PAGE>
Condensed Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
------- ------- -------
Cash flows from operating activities:
Net income $1,683 $1,295 $ 183
Adjustments to reconcile net income
to cash provided by operations:
Distributions in excess of earnings
of subsidiary 1,067 4,423 4,468
Compensation expense on ESOP and
MRP shares 480 530 544
Changes in:
Other assets 116 (43) (172)
Other liabilities (16) 101 (968)
------ ------ ------
Net cash from operating activitie 3,330 6,306 4,055
Cash flows from investing activities
Investment in subsidiaries - - (37)
Intercompany advance (166) - (5,489)
Proceeds from repayments of intercompany
advances - 4,960 -
------ ------ ------
Net cash from investing activitie (166) 4,960 (5,526)
Cash flows from financing activities
Cash dividends paid (1,974) (2,142) (2,219)
Proceeds from stock options exercised 69 351 1,863
Purchase of treasury stock (2,826) (6,611) (370)
------ ------- -------
Net cash from financing activities (4,731) (8,402) (726)
------ ------- -------
Net change in cash and cash equivalents (1,567) 2,864 (2,197)
Cash and cash equivalents at beginning of
year 5,626 2,762 4,959
------ ------ ------
Cash and cash equivalents at end of year $4,059 $5,626 $2,762
====== ====== ======
1999 Annual Report to Shareholders 35
<PAGE>
14. Earnings Per Common Share
The factors used in the earnings per share computation follow:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ------------
<S> <C> <C> <C>
Basic
Net income $ 1,683 $ 1,295 $ 183
========== ========== ============
Weighted average common shares outstanding 2,092,738 2,323,256 2,406,732
Less: Average unallocated ESOP shares (72,496) (87,374) (102,252)
Less: Average nonvested MRP shares (53,367) (62,742) (72,190)
---------- ----------- -----------
Average shares 1,966,875 2,173,140 2,232,290
========== ========== ===========
Basic earnings per common share $ 0.86 $ 0.60 $ 0.08
=========== ========== ===========
Diluted
Net income $ 1,683 $ 1,295 $ 183
=========== ========== ===========
Weighted average common shares outstanding for basic
earnings per common share 1,966,875 2,173,140 2,232,290
Add: Dilutive effects of stock options 15,874 32,509 46,993
Add: Dilutive effects of average nonvested
MRP shares - 13,263 -
----------- ----------- ---------
Average shares and dilutive potential common
shares 1,982,749 2,218,912 2,279,283
=========== =========== ===========
Diluted earnings per common share $ 0.85 $ 0.58 $ 0.08
=========== =========== ===========
</TABLE>
Stock options for 72,436 and 8,000 shares of common stock were not considered in
computing diluted earnings per common share for 1999 and 1998 because they were
antidilutive.
36 Western Ohio Financial Corporation
<PAGE>
15. Selected Quarterly Financial Data (Unaudited)
The following tables summarize selected quarterly results of operations for 1999
and 1998.
<TABLE>
<CAPTION>
Three months ended
------------------
1999 March 31 June 30 September 30 December 31
--------- ------- ---------- ----------
(In thousands except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income $5,834 $5,821 $5,849 $5,911
Interest expense 3,407 3,359 3,393 3,473
------ ------ ------ ------
Net interest income 2,427 2,462 2,456 2,438
Provision for loan losses 33 75 75 63
------ ------ ------ ------
Net interest income after
provision for loan losses 2,394 2,387 2,381 2,375
Non-interest income 374 321 275 291
Non-interest expense (2,031) (2,096) (2,048) (1,952)
------ ------ ------ ------
Income before income tax 737 612 608 714
Income tax expense 286 212 229 261
------ ------ ------ ------
Net income $ 451 $ 400 $ 379 $ 453
====== ====== ====== ======
Earnings per common share
Basic $ 0.22 $ 0.20 $ 0.19 $ 0.23
====== ====== ====== ======
Diluted $ 0.22 $ 0.19 $ 0.19 $ 0.23
====== ====== ====== ======
Dividends declared per share $ 0.25 $ 0.25 $ 0.25 $ 0.25
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Three months ended
------------------
1998 March 31 June 30 September 30 December 31
--------- ------- ---------- ----------
(In thousands except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income $6,740 $6,551 $6,314 $6,251
Interest expense 4,155 3,993 4,029 3,815
------ ------ ------ ------
Net interest income 2,585 2,558 2,285 2,436
Provision for loan losses - (261) - (102)
------ ------ ------ ------
Net interest income after
provision for loan losses 2,585 2,819 2,285 2,538
Non-interest income 393 477 382 2,437
Non-interest expense (2,262) (2,544) (2,331) (2,620)
------ ------ ------ ------
Income before income tax 716 752 336 2,355
Income tax expense 281 282 150 2,151
------ ------ ------ ------
Net income $ 435 $ 470 $ 186 $ 204
====== ====== ====== ======
Earnings per common share
Basic $ 0.19 $ 0.21 $ 0.09 $ 0.11
====== ====== ====== ======
Diluted $ 0.19 $ 0.21 $ 0.08 $ 0.10
====== ====== ====== ======
Dividends declared per share $ 0.25 $ 0.25 $ 0.25 $ 0.25
====== ====== ====== ======
</TABLE>
1999 Annual Report to Shareholders 37
<PAGE>
Board of Directors of Western Ohio Financial Corporation and Cornerstone Bank
David L. Dillahunt
Senior Vice President, Advest, Inc.
John W. Raisbeck
President and Chief Executive Officer, Cornerstone Bank
Howard V. Dodds
President, Howard's Foods, Inc.
John E. Field
Vice Chairman of the Board, Wallace & Turner, Inc.
Jeffrey L. Levine
President, Larry Stein Realty and Levine Realty Co.
William N. Scarff
President, Scarff's Nursery, Inc. and Scarff's Land Co.
Aristides G. Gianakopoulos
President, The Champion Company
Officers of Western Ohio Financial Corporation
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
Craig F. Fortin
Senior 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
Craig F. Fortin
Senior Vice President, Treasurer and Chief Financial Officer
Suzanne E. Moeller
Corporate Secretary
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)327-1106
Annual Meeting
The Annual Meeting of Shareholders of Western Ohio Financial Corporation will be
held at 9:00 AM on Thursday, April 27, 2000, at the Springfield Inn, 100 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.
12039 W. Alameda Parkway, Suite Z-2
Lakewood CO 80228
38 Western Ohio Financial Corporation
<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
ABN AMRO, Inc.
208 La Salle Street
Chicago, IL 60604
(315)855-7600
Advest, Inc.
One Commercial Plaza
280 Trumbull Street
Hartford, CT 06103
(203)525-1421
Everen Securities, Inc.
77 West Wacker Dr.
Chicago, IL 60601
(312)574-6000
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
89th Floor
New York, NY 10048
(212)323-8300
McDonald Investments, Inc.
800 Superior Ave.
Cleveland, OH 44114-2603
(216) 443-2300
Sandler O'Neill & Partners, L.P.
2 World Trade Center
104th Floor
New York, NY 10048
(212)466-7744
(Cornerstone Bank branch listing and information omitted)
1999 Annual Report to Shareholdes 39
[BACK]
Western Ohio Financial Corporation
28 East Main Street
Springfield, OH 45502
1-800-600-1884
(C) Copyright 2000 Western Ohio Financial Corporation, All Rights Reserved.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
PARENT SUBSIDIARY OWNERSHIP ORGANIZATION
- ----------------------------------- -------------------------- ------------------------- ---------------------
<S> <C> <C> <C>
Western Ohio Financial Corporation Cornerstone Bank 100% Federal
Cornerstone Bank CornerstoneBanc Financial Services Inc. 100% Delaware
</TABLE>
The financial statements of the Registrant are consolidated with those of
its subsidiaries.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Registration Nos. 33-97586, 33-97588 and 333-71453) of
our report dated February 10, 2000, relating to the consolidated balance sheets
of Western Ohio Financial Corporation as of December 31, 1999 and 1998 and the
related consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows for the years then ended.
/s/ Crowe, Chizek and Company LLP
Columbus, Ohio
March 30, 2000
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
on Form S-8 (Registration Nos. 33-97586, 33-97588 and 333-71453) of Western Ohio
Financial Corporation of our report dated January 23, 1998, appearing in this
Annual Report on Form 10-K of Western Ohio Financial Corporation for the year
ended December 31, 1999.
/s/ Clark, Schaefer, Hackett & Co.
Springfield, Ohio
March 29, 2000
<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, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
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<TOTAL-ASSETS> 329,685
<DEPOSITS> 202,331
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<LONG-TERM> 66,783
0
0
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</TABLE>
