.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period ended June 30, 2000
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 (IRS Employer
incorporation or organization) Identification No.)
28 East Main Street, Springfield, Ohio 45501-0509
-------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(937) 325-9990
--------------
(Registrant's telephone number, including area code)
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 filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class: Outstanding at August 8, 2000
Common stock, $.01 par value 1,912,064 common shares
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
INDEX
Page
PART I - FINANCIAL INFORMATION (UNAUDITED)
Item 1. Condensed Financial Statements
Consolidated Statements of Financial Condition................... 3
Consolidated Statements of Income................................ 4
Consolidated Statements of Comprehensive Income.................. 5
Consolidated Statements of Cash Flows............................ 6
Notes to Condensed Consolidated Financial Statements ............ 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk..... 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 17
Item 2. Changes in Securities and Use of Proceeds...................... 17
Item 3. Defaults Upon Senior Securities................................ 17
Item 4. Submission of Matters to a Vote of Security Holders............ 17
Item 5. Other Information.............................................. 17
Item 6. Exhibits and Reports on Form 8-K............................... 17
SIGNATURES ............................................................ 18
2
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
--------------------------------------------------------------------------------
(Amounts in thousands)
<TABLE>
June 30, December 31,
2000 1999
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 6,502 $ 9,614
Securities available for sale 48,097 50,366
Federal Home Loan Bank stock 7,720 7,451
Loans, net 279,446 254,654
Loans held for sale - 217
Premises and equipment, net 3,977 3,475
Other assets 4,230 3,908
------------ ------------
Total assets $ 349,972 $ 329,685
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 208,044 $ 202,331
Borrowed funds 98,303 82,183
Other liabilities 1,748 2,182
------------ ------------
Total liabilities 308,095 286,696
------------ ------------
Shareholders' equity
Common stock, $.01 par value, 7,250,000 shares authorized,
2,645,000 shares issued 26 26
Additional paid-in capital 40,449 40,452
Accumulated other comprehensive income (2,025) (2,157)
Unearned employee stock ownership plan shares (952) (1,071)
Unearned management recognition plan shares (151) (200)
Treasury stock; 773,166 and 649,166 shares at cost, respectively (15,486) (14,121)
Retained earnings 20,016 20,060
------------ ------------
Total shareholders' equity 41,877 42,989
------------ ------------
Total liabilities and shareholders' equity $ 349,972 $ 329,685
============ ============
</TABLE>
3
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See accompanying notes to condensed consolidated financial statements.
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
(Amounts in thousands, except per share data) Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Loans, including fees $ 5,435 $ 4,765 $ 10,409 $ 9,375
Securities 805 875 1,655 2,178
Interest-bearing deposits 24 58 57 179
Other interest and dividend income 138 123 269 243
----------- ----------- ----------- -----------
6,402 5,821 12,390 11,654
----------- ----------- ----------- -----------
Interest expense
Deposits 2,574 2,425 5,043 4,793
Borrowed funds 1,313 934 2,409 1,973
----------- ----------- ----------- -----------
3,897 3,359 7,457 6,766
----------- ----------- ----------- -----------
Net interest income 2,515 2,462 4,938 4,888
Provision for loan losses 84 75 168 107
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 2,431 2,387 4,770 4,781
----------- ----------- ----------- -----------
Noninterest income
Service charges 293 240 590 507
Other noninterest income 8 81 10 190
----------- ----------- ----------- -----------
301 321 600 697
Noninterest expense
Salaries and employee benefits 1,012 1,039 2,033 2,043
Occupancy and equipment 193 254 392 483
FDIC insurance 13 29 23 69
State Franchise taxes 130 156 259 313
Other noninterest expense 632 618 1,280 1,221
----------- ----------- ----------- -----------
1,980 2,096 3,987 4,129
Income before income tax 752 612 1,383 1,349
Income tax expense 267 212 493 498
----------- ----------- ----------- -----------
Net income $ 485 $ 400 $ 890 $ 851
=========== =========== =========== ===========
Earnings per common share
Basic $ .26 $ .20 $ .48 $ .43
Diluted $ .26 $ .19 $ .48 $ .42
Dividends per common share $ .25 $ .25 $ .50 $ .50
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
--------------------------------------------------------------------------------
(Amounts in thousands)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 485 $ 400 $ 890 $ 851
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities available
for sale arising during the period 195 (1,090) 132 (1,477)
Reclassification adjustment for amounts
realized on securities sales included
in net income - - - _-
----------- ----------- ----------- -----------
Total other comprehensive income (loss) 195 (1,090) 132 (1,477)
----------- ----------- ----------- -----------
Comprehensive income $ 680 $ (690) $ 1,022 $ (626)
=========== =========== =========== ===========
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
Six Months Ended
(Amount in thousands) June 30,
2000 1999
<S> <C> <C>
Net cash from operating activities $ 513 $ 2,526
Cash flows from investing activities Loans:
Loan originations, net of payments received (12,791) 15,256
Purchase of loans (11,928) (30,701)
Proceeds from sale of loans - 1,344
Securities available for sale:
Maturities and principal payments 2,418 9,224
Premises and equipment expenditures (724) (37)
Proceeds from sale of premises and equipment 16 6
----------- -----------
Net cash from investing activities (23,009) (4,908)
------------ ------------
Cash flows from financing activities
Net change in deposits 5,713 9,686
Net decrease in advances from borrowers for taxes and insurance (118) (442)
Purchase of treasury stock (1,365) (2,172)
Cash dividends paid (967) (1,039)
Proceeds from exercise of stock options - 111
Proceeds from FHLB advances 41,045 38,300
Repayments on FHLB advances (24,924) (46,578)
------------ ------------
Net cash from financing activities 19,384 (2,134)
----------- ------------
Net change in cash and cash equivalents (3,112) (4,516)
Cash and cash equivalents at beginning of period 9,614 13,854
----------- -----------
Cash and cash equivalents at end of period $ 6,502 $ 9,338
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 7,437 $ 7,165
Income taxes 535 260
Noncash activities
Transfer of loans held for sale to portfolio loans 217 -
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial reporting and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. These unaudited consolidated financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Corporation's annual report on Form 10-K for the year
ended December 31, 1999. The financial data and results of operations for
interim periods presented may not necessarily reflect the results to be
anticipated for the entire year. Internal financial information is primarily
reported and aggregated solely in the line of the banking business.
Consolidation Policy: The financial statements include Western Ohio Financial
Corporation (the "Company") and its wholly owned subsidiary Cornerstone Bank
("Cornerstone"). The financial statements of Cornerstone include the accounts of
its wholly owned subsidiaries, CornerstoneBanc Financial Services, Inc. ("CFSI")
and West Central Financial Services, Inc. ("WCFS").
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.
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 the carrying amounts and tax basis 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. Income tax
expense is based on the effective rate expected to be applicable for the entire
year.
Earnings Per Common Share: Basic earnings per common share are based on net
income divided by the weighted average number of common shares outstanding
during the period. Employee Stock Ownership Plan ("ESOP") shares are considered
to be outstanding for the calculation unless unearned. Management Recognition
Plan ("MRP") shares are considered outstanding as they become vested. Diluted
earnings per common share include the dilutive effect of additional potential
common shares issuable under stock options.
--------------------------------------------------------------------------------
7
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - SECURITIES
The amortized cost and fair values of securities available for sale were as
follows:
<TABLE>
(Amounts in thousands) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
<S> <C> <C> <C> <C>
June 30, 2000
U.S. government agencies $ 10,000 $ - $ (1,184) $ 8,816
Mortgage-backed securities 41,164 25 (1,908) 39,281
--------------- -------------- -------------- ---------------
Total $ 51,164 $ 25 $ (3,092) $ 48,097
=============== ============== ============== ===============
December 31, 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
=============== ============== ============== ===============
</TABLE>
There were no sales of securities during the three and six months ended June 30,
2000 or 1999.
NOTE 3 - LOANS
Loans were as follows:
<TABLE>
(Amounts in thousands) June 30, December 31,
2000 1999
<S> <C> <C>
First mortgage loans secured by:
One- to four- family residential $ 183,081 $ 178,304
Other properties 60,586 52,572
Construction properties 11,377 6,923
--------------- ----------------
255,044 237,799
Consumer and other loans
Consumer 2,919 3,332
Commercial 11,320 5,499
Home equity 16,585 15,369
Other - 157
--------------- ----------------
30,824 24,357
Total loans 285,868 262,156
Less:
Net deferred loan fees, premiums and discounts (36) (62)
Loans in process (4,889) (4,659)
Allowance for loan losses (1,497) (2,781)
--------------- ----------------
$ 279,446 $ 254,654
=============== ================
</TABLE>
--------------------------------------------------------------------------------
8
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
Activity in the allowance for loan losses was as follows:
<TABLE>
(Amount in thousands) Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Beginning balance $ 2,830 $ 3,160 $ 2,781 $ 3,200
Provision for loan losses 84 75 168 107
Recoveries 23 12 47 27
Charge-offs (1,440) (442) (1,499) (529)
------------- ------------- ------------- --------------
Ending balance $ 1,497 $ 2,805 $ 1,497 $ 2,805
============= ============= ============= ==============
</TABLE>
Nonperforming loans were $2,082,000 and $2,755,000 at June 30, 2000 and
December 31, 1999.
NOTE 4 - EARNINGS PER COMMON SHARE
The factors used in the earnings per share computation were as follows:
(Amounts in thousands, except per share data)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings per common share
Net income $ 485 $ 400 $ 890 $ 851
============= ============== ============== ==============
Weighted average common shares
outstanding 1,916 2,043 1,935 2,076
Less: Average unallocated ESOP
shares (63) (74) (64) (76)
Less: Average nonvested RRP shares (6) (14) (7) (15)
------------- -------------- -------------- --------------
Average shares 1,847 1,955 1,864 1,985
============= ============== ============== ==============
Basic earnings per common share $ .26 $ .20 $ .48 $ .43
============= ============= ============== =============
</TABLE>
--------------------------------------------------------------------------------
9
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4 - EARNINGS PER COMMON SHARE (Continued)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Diluted earnings per common share
Net income $ 485 $ 400 $ 890 $ 851
============= ============== ============== ==============
Weighted average common shares
outstanding for basic earnings per
common shares 1,847 1,955 1,864 1,985
Add: Dilutive effects of average
nonvested RRP shares - 7 - 6
Add: Dilutive effects of stock options 3 22 4 16
------------- -------------- -------------- --------------
Average shares and dilutive potential
common shares 1,850 1,984 1,868 2,007
============= ============== ============== ==============
Diluted earnings per common share $ .26 $ .19 $ .48 $ .42
============= ============= ============== ==============
</TABLE>
Stock options for 181,590 shares of common stock were not considered in
computing diluted earnings per common share for the three and six months ended
June 30, 2000 as they were antidilutive.
NOTE 5 - STOCK OPTION PLANS
The following is a summary of activity in the stock option and incentive plan:
<TABLE>
Stock Options
--------------------------------------------------
Options Weighted Average
Available Options Exercise
for Grant Outstanding Price
--------- ----------- ----------------
<S> <C> <C> <C>
December 31, 1999 208,837 194,041 $ 19.60
Granted (52,605) 52,605 14.75
Forfeited 5,300 (5,300) 18.50
Exercised - - -
------------- ------------- --------------
June 30, 2000 161,532 241,346 $ 18.56
============= ============= =============
</TABLE>
--------------------------------------------------------------------------------
10
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discusses the financial condition of the Company as of June 30,
2000 as compared to December 31, 1999, and the results of operations for the
three and six months ended June 30, 2000, compared with the same periods in
1999. This discussion should be read in conjunction with the interim financial
statements and footnotes included herein.
Forward-Looking Statements
When used in this filing and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
risks and uncertainties, including but not limited to changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area and competition, all or some of which could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made and
advises readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
Analysis of Financial Condition
Consolidated assets of the Company totaled $350.0 million at June 30, 2000, an
increase of $20.3 million from the December 31, 1999, total of $329.7 million.
The primary increase in assets is a result of an increase of $24.8 million in
net loans receivable. Funds for the loan growth were primarily obtained through
additional Federal Home Loan Bank borrowings of $16.1 million and a deposit
increase of $5.7 million.
Net loans increased $24.7 million, or 9.7% during the six months ended June 30,
2000, increasing from $254.7 million in December 31, 1999 to $279.4 million on
June 30, 2000. For the period, commercial loans increased $5.8 million to $11.3
million at June 30, 2000. Other real estate properties also increased $8.0
million from $52.6 million at December 31, 1999 to $60.6 million at June 30,
2000. These increases were the result of Cornerstone's effort to diversify its
portfolio into more commercial type loans. Traditional one-to-four family
residential mortgage loans increased $4.8 million to $183.1 at June 30, 2000
from $178.3 million at December 30, 1999. This increase includes the purchase of
approximately $11.9 million adjustable rate mortgage loans.
--------------------------------------------------------------------------------
11
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Cash and cash equivalents decreased by $3.1 million to $6.5 million on June 30,
2000, from $9.6 million on December 31, 1999. Cash and cash equivalents consist
of cash, checking deposits and federal funds deposited at other financial
institutions. The decrease was primarily the result of reducing excess funds
maintained over year-end as a year 2000 contingency.
Securities available for sale decreased $2.3 million from $50.4 million at
December 31, 1999, to $48.1 million on June 30, 2000. The decline was due to
principal repayments on existing mortgage-backed securities available for sale
being used to fund loan growth.
Deposits at June 30, 2000 totaled $208.0 million, an increase of $5.7 million,
or 2.8% from $202.3 million at December 31, 1999. The majority of the increase
occurred in demand and NOW accounts where Cornerstone is attempting to grow its
retail and commercial checking account relationships.
FHLB advances at June 30, 2000 totaled $98.3 million, an increase of $16.1
million or 19.6% from $82.2 million at December 31, 1999. The majority of
borrowed funds are invested in loans to leverage the Company's excess capital
and improve the Company's return on equity over time. Additionally, the Company
used advances to better match estimated maturities of larger loan originations
and purchases during the period. The new advances are both fixed and variable in
nature.
Total shareholders' equity decreased $1.1 million from $43.0 million at December
31, 1999, to $41.9 million at June 30, 2000. This decrease is primarily due to
the Company purchasing approximately $1.4 million of its common stock during the
first half of 2000.
As of March 31, 2000, the Company had commitments to make $3.1 million of
residential loans. It is expected that these loans will be funded within 30
days. The Company also had $5.5 million in commitments to fund loans on
residential properties under construction. These commitments are anticipated to
be filled within three to six months. Unused commercial lines of credit were
$2.6 million and unused home equity lines of credit were $11.2 million.
Commitments to originate nonmortgage loans total $0.3 million.
Results of Operations
Operating results of the Company are affected by general economic conditions,
monetary and fiscal policies of federal agencies and policies of agencies
regulating 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 demand for real estate and other types of
loans which, in turn, is affected by the interest rates at which such loans are
made, general economic conditions and availability of funds for lending
activities.
The Company's net income is primarily dependent on its net interest income (the
difference between interest income generated on interest-earning assets and
interest expense incurred on interest-bearing liabilities). Net income is also
affected by provisions for loan losses, service charges, gains on sale of
assets, other income, noninterest expense and income taxes. The Company's net
income of $485,000 and $890,000 for the three and six months ended June 30,
2000, represented increases of $85,000 and $39,000 when compared to the same
periods in 1999. Basic earnings per share increased $.06 and $.05 per share from
$.20 and $.43 per for 1999 to $.26 and $.48 per share for 2000.
--------------------------------------------------------------------------------
12
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Net interest income is the largest component of the Company's income and is
affected by the interest rate environment and volume and composition of
interest-earning assets and interest-bearing liabilities. Net interest income
totaled $2,515,000 and $4,938,000 for the three and six months ended June 30,
2000, compared to $2,462,000 and $4,888,000 for the same periods in 1999. The
Company remains liability sensitive whereby its interest-bearing liabilities
will generally reprice more quickly than its interest-earning assets. Therefore,
the Company's net interest margin will generally increase in periods of falling
interest rates in the market and will decrease in periods of rising interest
rates as is currently being experienced. Accordingly, in a rising interest rate
environment, the Company may need to increase rates to attract and retain
deposits. Due to this negative gap position, the rise in interest rates may not
have such an immediate impact on interest-earning assets. This lag could
negatively affect net interest income in future periods
Interest and fees on loans totaled $5,435,000 and $10,409,000 for the three and
six months ended June 30, 2000 compared to $4,765,000 and $9,375,000 the three
and six months ended June 30, 1999. The increases were due to the overall
increase in the interest rate environment, higher average loan balances, and
increased origination of commercial and commercial real estate loans.
Interest and dividends on securities totaled $805,000 and $1,655,000 for the
three and six months ended June 30, 2000, and $875,000 and $2,178,000 for the
three and six months ended June 30, 1999. The decrease was due to principal
payments on securities and reinvestment of funds in higher yielding loans.
Interest on deposits totaled $2,579,000 and $5,048,000 for the three and six
months ended June 30, 2000 and $2,425,000 and $4,793,000 for the three and six
months ended June 30, 1999. This increase was due to the overall increase in
interest rates resulting in a higher cost to attract and retain both
certificates of deposit and money market accounts.
Interest on FHLB advances was $1,313,000 and $2,409,000 for the three and six
months ended June 30, 2000 compared to $934,000 and $1,973,000 for the three and
six months ended June 30, 1999. The increase is due an increase borrowing from
the FHLB to fund loan growth and higher rates on advances due to the overall
increase in rates.
The Company maintains an allowance for loan losses in an amount which, in
management's judgement, is adequate to absorb probable losses in the loan
portfolio. While management utilizes its best judgement and information
available, ultimate adequacy of the allowance is dependent on a variety of
factors, including performance of the Company's loan portfolio, the economy,
changes in real estate values and interest rates and the view of the regulatory
authorities toward loan classifications. The provision for loan losses is
determined by management as the amount to be added to the allowance for loan
losses after net charge-offs have been deducted to bring the allowance to a
level considered adequate to absorb probable losses in the loan portfolio. The
amount of the provision is based on management's regular review of the loan
portfolio and consideration of such factors as historical loss experience,
changes in size and composition of the loan portfolio and specific borrower
considerations, including ability of the borrower to repay the loan and the
estimated value of the underlying collateral. The provision for loan losses
totaled $84,000 and $168,000 for the three and six months ended June 30, 2000,
compared to $75,000 and $107,000 for the three and six months ended June 30,
1999.
Loan charge-offs were $1,440,000 and $1,499,000 for the three and six months
ended June 30, 2000 compared to $442,000 and $529,000 for the same periods in
1999. During the three months ended June 30, 2000, the Company resolved two
large problem loans and charged-off portions of two other problem loan
--------------------------------------------------------------------------------
13
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
relationships. These loans were previously identified and reported as impaired
and specific loan loss reserves had been established for them. The two resolved
loans included principal repayments of $366,000 and principal losses of $233,000
against which $209,000 of specific reserves had been established. Based on a
lack of current progress in resolving the other two problem loans as well as
improved reporting capabilities of the new data processing system installed in
March 2000, management charged-off approximately $1,115,000 of loan principal
against the allowance. Specific reserves of approximately the same amount had
previously been established. The Company continues to actively pursue collection
of these two relationships.
Noninterest income totaled $301,000 and $600,000 for the three and six months
ended June 30, 2000 compared to $321,000 and $697,000 for the same periods in
1999. The decrease is primarily due to the rise in interest rates which reduced
the volume of loans originated for sale in the secondary market and a gain last
year on the sale of loan servicing.
Noninterest expense totaled $1,980,000 and $3,987,000 for the three and six
months ended June 30, 2000 compared to $2,096,000 and $4,129,000 for the same
periods in 1999. Noninterest expense is comprised of employee compensation and
benefits, occupancy, deposit insurance premiums, state franchise taxes and
miscellaneous other expenses. No individual component had a significant change
from the same period in 1999.
The change in income tax is primarily attributable to the change in income
before income taxes. Income tax expense totaled $267,000 and $493,000, or an
effective rate of 35.6%, for the three and six months ended June 30, 2000,
compared to $212,000 and $498,000, or an effective rate of 34.6% and 36.9%, for
the three and six months ended June 30, 1999.
Liquidity
Office of Thrift Supervision ("OTS") regulations presently require Cornerstone
Bank to maintain an average daily balance of investments in U.S. Treasury,
federal agency obligations and other investments having maturities of five years
or less in an amount equal to 4% of the sum of Cornerstone's average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. The liquidity requirement, which may be changed from time to time by
the OTS to reflect changing economic conditions, is intended to provide a source
of relatively liquid funds on which Cornerstone may rely, if necessary, to fund
deposit withdrawals or other short-term funding needs. At June 30, 2000
Cornerstone's regulatory liquidity was 17.31%. At such date, Cornerstone had
commitments to originate fixed rate loans totaling $3.1 million. In addition,
Cornerstone had $5.5 million in commitments to fund loans on residential
properties under construction. Unused commercial lines of credit were $2.6
million and unused home equity lines of credit were $11.2 million. Cornerstone
had no commitments to purchase or sell loans. Cornerstone considers it's
liquidity and capital reserves sufficient to meet its outstanding short and
long-term needs.
Capital Resources
Cornerstone is required by regulations to meet certain minimum capital
requirements, which must be generally as stringent as standards established for
commercial banks. Current capital requirements call for tangible capital of 1.5%
of adjusted total assets, core capital (which for Cornerstone, consists solely
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14
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
of tangible capital) of 4.0% of adjusted total assets, except for institutions
with the highest examination rating and acceptable levels of risk, and
risk-based capital (which for Cornerstone, consists of core capital and general
valuation allowances) of 8.0% of risk-weighted assets (assets are weighted at
percentage levels ranging from 0% to 100% depending on their relative risk).
The following table summarizes Cornerstone's regulatory capital requirements and
actual capital at June 30, 2000.
<TABLE>
Excess of actual
capital over current
Actual capital Current requirement requirement Applicable
---------------------- ------------------- ---------------------
(Dollars in thousands) Amount Percent Amount Percent Amount Percent Asset Total
------ ------- ------ ------- ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible capital $ 41,033 11.65% $ 5,283 1.5% $35,750 10.15% $352,190
Core capital 41,033 11.65 14,088 3.0 26,945 8.65 350,190
Risk-based capital 42,290 18.33 18,454 8.0 23,836 10.33 230,669
</TABLE>
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15
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
--------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
There have been no material changes in the quantitative and qualitative
disclosures about market risk as of June 30, 2000, from that presented in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
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16
<PAGE>
WESTERN OHIO FINANCIAL CORPORATION
PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
Item 1 - Legal Proceedings
-----------------
None
Item 2 - Changes in Securities and Use of Proceeds
-----------------------------------------
None
Item 3 - Defaults Upon Senior Securities
-------------------------------
None
Item 4 - Submission of Matters to a Vote of Security Holders
--------------------------------------------------
The annual meeting of shareholders was held on April 27, 2000.
Two items were presented to shareholders for consideration and
action:
1) The re-election of two directors John E. Field and William N.
Scarff of the Corporation for terms expiring in 2003. Both
directors were re-elected receiving 1,576,647 votes and
receiving 1,575,109 votes for re-election. The remaining
directors continuing after the meeting are: David L. Dillahunt,
John W. Raisbeck, Howard V. Dodds, Aristides G.
Gianakopoulos and Jeffrey L. Levine.
2) The ratification of Crowe, Chizek and Company L.L.P. as
auditors for the Corporation for the fiscal year ending
December 31, 2000. The appointment of auditors was ratified
with votes cast for 1,584,354 and 22,056 against.
Item 5 - Other Information
------------------
None
Item 6 - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit Number Description
-------------- -----------
27.0 Financial Data Schedule
(b) No current reports on Form 8-K were filed by the Registrant
during the quarter ended June 30, 2000.
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17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTERN OHIO FINANCIAL CORPORATION
----------------------------------
(Registrant)
Date: /s/
------------------- ------------------------------------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: /s/
------------------- --------------------------------------------------
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
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18
