-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I6l3WsIUNesDAW7lhBIKpfBT9gsMbhgDYf6dcvBTnHHKzhfud5CUjeCzv/vxT6H3 BmRbI2mAPYpOKARsbkV5CA== 0000927089-99-000136.txt : 19990402 0000927089-99-000136.hdr.sgml : 19990402 ACCESSION NUMBER: 0000927089-99-000136 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTERN OHIO FINANCIAL CORP CENTRAL INDEX KEY: 0000920769 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 311403116 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-71453 FILM NUMBER: 99580506 BUSINESS ADDRESS: STREET 1: 28 E MAIN ST CITY: SPRINGFIELD STATE: OH ZIP: 45501 BUSINESS PHONE: 9373254683 MAIL ADDRESS: STREET 1: 28 EAST MAIN ST STREET 2: P O BOX 719 CITY: SPRINGFIELD STATE: OH ZIP: 45501-0719 10-K 1 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM __________ TO ___________ COMMISSION FILE NUMBER 0-24120 WESTERN OHIO FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 31-1403116 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 28 East Main Street Springfield, Ohio 45501-0719 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (937) 325-4683 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES X . NO ___. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price of such stock on the Nasdaq National Stock Market as of March 12, 1999, was approximately $37.8 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 12, 1999, there were issued and outstanding 2,018,829 shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Parts II and IV of Form 10-K - Portions of the Annual Report to Stockholders for the fiscal year ended December 31, 1998. Part III of Form 10-K - Portions of the Proxy Statement for Annual Meeting of Stockholders. PART I -------- Item 1. Business - ----------------- General Western Ohio Financial Corporation (the "Company"), a Delaware corporation, was organized in March 1994 for the purpose of becoming a savings and loan holding company. During fiscal 1997, the Company owned all of the outstanding stock of Springfield Federal Savings Bank ("Springfield"), Mayflower Federal Savings Bank ("Mayflower") and Seven Hills Savings Association ("Seven Hills") (collectively, the "Banks"). During fiscal 1997, the Company combined these three institutions into one institution under the name "Cornerstone Bank" (the "Bank"). Unless otherwise noted, reference during fiscal 1997 includes Springfield, Mayflower and Seven Hills. The Company is subject to supervision by the Office of Thrift Supervision , Department of Treasury ("OTS") and the Bank is subject to comprehensive regulation, examination and supervision by the OTS and by the Federal Deposit Insurance Corporation ("FDIC"). Cornerstone Bank is a member of the Federal Home Loan Bank ("FHLB") System and its deposits are backed by the full faith and credit of the United States Government and are insured up to applicable limits by the FDIC. The Company's primary market area covers Clark 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, 1998, the Company had total assets of $327.7 million, deposits of $193.0 million and stockholders' equity of $47.6 million, or 14.5% of total assets. The Company's Common Stock is traded on the Nasdaq National Market under the symbol "WOFC." The Company has been, and intends to continue to be, a community-oriented savings and loan holding company offering a variety of financial services to meet the needs of the communities it serves. The principal business of the Company consists of attracting retail deposits from the general public and investing those funds primarily in one- to four-family residential mortgage, construction and commercial and multi-family real estate loans and, to a lesser extent, consumer and commercial business loans, all primarily within the Company's market areas. The executive offices of the Company are located at 28 East Main Street, Springfield, Ohio 45501-0719, and the telephone number at that address is (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 1997, Clark County had an unemployment rate of 4.6% as compared to the State of Ohio at 4.5% and the United States at 5.1%. The unemployment rate in Clark County decreased to 3.7% in 1998 as compared with 4.0% for the State of Ohio and 4.3% for the United States. 2 Clark County's population, the rate of increase of which lagged behind the State of Ohio and national averages, nonetheless can be characterized as stable, with a population of approximately 148,000 people. From 1990 to 1995, Clark County's population grew .24%. For 1998, Clark County's median housing value was approximately $59,900. In the event that real estate prices in Ohio or the market area substantially weaken or economic conditions decline, the Company may be adversely affected. Lending Activities General. While the Company primarily focuses its lending activities on the origination of loans secured by first mortgages on owner-occupied, one-to-four family residences, it also originates multi-family and commercial real estate and construction loans and, to a lesser extent, consumer and commercial business loans in its market area. At December 31, 1998, the Company's net loan portfolio, including loans held for sale, totaled $234.8 million. At December 31, 1998, the Company's gross loan portfolio, including loans held for sale, totaled $238.0 million, of which $181.0 million, or 76.1%, was comprised of permanent loans secured by one-to-four family residences. The aggregate amount of loans that the Bank is permitted to make under applicable federal regulations to any one borrower, including related entities, or the aggregate amount that the Bank could have invested in any one real estate project, is generally the greater of 15% of unimpaired capital and surplus or $500,000. See "Regulation - Federal Regulation of Savings Institutions." At December 31, 1998, the maximum amount which the Bank could have loaned to any one borrower and the borrower's related entities was $6.4 million. At December 31, 1998, 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 $5.5 million secured by a first security interest covering all business assets including accounts receivable, inventory, securities, contract rights, acquired real estate, stock in direct and indirect subsidiaries of the borrower, intangibles, and equipment. In addition, three borrowers had a combined principal and commitment outstanding of $5.7 million at December 31, 1998. 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 and 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 but one of these loans are performing in accordance with their terms. The loan to the second largest borrower was over 90 days delinquent as of December 31, 1998. 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. 3 Loan Portfolio Composition. The following information concerning the composition of the Company's loan portfolio, excluding loans held for sale, in dollar amounts and in percentages (before deductions for loans in process, deferred fees and discounts and allowance for losses) as of the dates indicated.
December 31, ------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------------- ------------------ ----------------- ----------------- ---------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent -------- ------- -------- ------- -------- ------- -------- ------- ------- ------- (Dollars in Thousands) Real Estate Loans: - ----------------- One-to-four family ......... $177,109 74.87% $224,289 79.10% $242,600 82.21% $131,262 84.93% $ 89,184 83.37% Multi-family ............... 12,422 5.25 11,247 3.97 12,476 4.23 4,502 2.91 4,194 3.92 Commercial real estate ..... 20,675 8.74 21,583 7.61 20,531 6.96 10,531 6.81 8,463 7.91 Construction ............... 3,908 1.65 7,275 2.57 10,965 3.71 5,405 3.50 3,252 3.04 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total real estate loans . 214,114 90.51 264,394 93.25 286,572 97.11 151,700 98.15 105,093 98.24 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Other Loans: - ----------- Consumer Loans: Home equity............... 10,054 4.25 6,906 2.43 2,188 0.74 474 0.31 77 0.07 Deposit account........... 257 .11 485 .17 384 0.13 363 0.24 465 0.43 Home improvement.......... 15 --- 18 --- 31 0.01 --- --- 6 0.01 Other secured............. 3,173 1.34 5,374 1.90 3,689 1.25 942 0.61 788 0.74 Other..................... 2,034 .86 2,493 .88 --- --- 21 0.01 24 0.02 -------- ------ -------- ------ -------- ------ -------- ------- -------- ------ Total consumer loans...... 15,533 6.56 15,276 5.38 6,292 2.13 1,800 1.17 1,360 1.27 -------- ------ -------- ------ -------- ------ -------- ------- -------- ------ Commercial business loans... 6,914 2.93 3,886 1.37 2,244 0.76 1,056 0.68 525 0.49 -------- ------ -------- ------ -------- ------ --------- ------- -------- ------ Total other loans........ 22,447 9.49 19,162 6.75 8,536 2.89 2,856 1.85 1,885 1.76 -------- ------ -------- ------ -------- ------ -------- ------- -------- ------ Total loans.............. $236,561 100.00% $283,556 100.00% $295,108 100.00% $154,556 100.00% $106,978 100.00% ======== ====== ======== ====== ======== ====== ======== ======= ======== ====== Less: - ---- Loans in process............ (2,364) (1,784) (5,651) (2,768) (954) Deferred fees and discounts. (83) (119) (130) (538) (981) Allowance for losses........ (3,200) (3,922) (1,716) (774) (774) -------- --------- -------- -------- -------- Total loans receivable, net $230,914 $277,731 $287,611 $150,476 $104,269 ======== ======== ======== ======== ========
4 The following table shows the composition of the Company's loan portfolio by fixed and adjustable rates at the dates indicated.
December 31, -------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------------- ------------------ ----------------- ------------------ ----------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------- ------- -------- -------- -------- ------- -------- ------- ------- -------- (Dollars in Thousands) Fixed-Rate Loans: - ---------------- Real estate: One-to-four family........ $109,550 46.31% $126,375 44.57 $155,232 52.61 $111,117 71.89 $ 89,184 83.37% Multi-family.............. 8,141 3.44 3,355 1.18 5,036 1.71 3,873 2.51 4,194 3.92 Commercial................ 12,759 5.39 8,533 3.01 9,276 3.14 9,307 6.02 8,463 7.91 Construction.............. 2,597 1.10 477 .17 7,649 2.59 5,105 3.30 3,252 3.04 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total fixed-rate real estate loans.... 133,047 56.24 138,740 48.93 177,193 60.05 129,402 83.72 105,093 98.24 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Commercial business........ 791 .33 804 .28 178 .06 401 0.26 --- --- Consumer................... 4,536 1.92 7,161 2.53 3,642 1.23 1,326 0.86 1,282 1.20 --------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total fixed-rate loans. 138,374 58.49 146,705 51.74 181,013 61.34 131,129 84.84 106,375 99.44 --------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Adjustable-Rate Loans - --------------------- Real estate: One-to-four family........ 67,559 28.56 97,969 34.55 87,368 29.61% 20,145 13.04% --- --- Multi family.............. 4,281 1.81 7,892 2.78 7,440 2.52 629 0.41 --- --- Commercial................ 7,916 3.35 13,049 4.60 11,255 3.81 1,224 0.79 --- --- Construction.............. 1,311 .55 6,798 2.40 3,316 1.12 300 0.19 --- --- -------- ------ -------- ------ -------- ------ -------- ------ -------- ----- Total adjustable-rate real estate loans.... 81,067 34.27 125,708 44.33 109,379 37.06 22,298 14.43 --- --- -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Commercial business........ 6,123 2.59 3,082 1.09 2,066 .70 655 0.42 525 0.49 Consumer................... 10,997 4.65 8,061 2.84 2,650 .90 474 0.31 77 0.07 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total adjustable-rate loans................ 98,187 41.51 136,851 48.26 114,095 38.66 23,427 15.16 602 0.56 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total loans............ 236,561 100.00% 283,556 100.00% 295,108 100.00% 154,556 100.00% 106,978 100.00% -------- ====== -------- ====== -------- ====== -------- ====== -------- ====== Less: - ---- Loans in process........... (2,364) (1,784) (5,651) (2,768) (954) Deferred fees and discounts................ (83) (119) (130) (538) (981) Allowance for loan losses.. (3,200) (3,922) (1,716) (774) (774) -------- -------- -------- -------- -------- Total loans receivable, net.................. $230,914 $277,731 $287,611 $150,476 $104,269 ======== ======== ======== ======== ========
5 The following schedule illustrates the maturities of the Company's loan portfolio at December 31, 1998. 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.
Real Estate(1) ---------------------------------------------- Multi-family Commercial business One-to-four family and Commercial and Consumer Total ------------------------ -------------------- -------------------- ---------------------- Weighted Weighted Weighted Weighted Average Average Average Average Amount Rate Amount Rate Amount Rate Amount Rate ------------ ------------- ------- ---------- --------- ----------- ----------- ---------- (Dollars in Thousands) Periods Ending December 31, - ------------------ 1999(2)............ $1,400 9.89% $390 9.55% $2,619 9.60% $ 4,409 9.69% 2000............... 159 8.46 2,850 7.37 2,781 8.28 5,790 7.84 2001............... 693 9.58 1,548 11.00 2,016 9.40 4,257 10.01 2002 and 2003...... 3,788 7.97 3,013 8.56 3,761 10.78 10,562 9.13 2004 to 2008....... 18,402 7.98 5,902 8.80 10,118 7.59 34,422 8.00 2009 to 2018....... 47,577 7.73 14,819 8.51 874 10.48 63,270 7.95 2019 and following. 107,808 7.64 5,765 8.61 278 9.18 113,851 7.69
- ---------------- (1) Includes construction loans. (2) Includes demand loans and loans having no stated maturity. At December 31, 1998, the total amount of loans due after December 31, 1999 which have predetermined interest rates is $134.9 million, while $97.2 million loans due after such dates have floating or adjustable interest rates. ONE-TO-FOUR FAMILY RESIDENTIAL MORTGAGE AND CONSTRUCTION LENDING. The Company focuses its lending efforts on the origination of loans secured by first mortgages on owner-occupied, one-to-four family residences. Residential loan originations of this type are generated by the Company's marketing efforts, its present customers, walk-in customers and referrals from real estate agents and builders. At December 31, 1998, the Company's one-to-four family residential permanent mortgage loans totaled $177.1 million, or 74.9% of the Company's total gross loan portfolio. At December 31, 1998, $109.6 million of the Company's one-to-four family residential mortgage loans, or 46.3% 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 6 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, 1998, the Company had loans to finance the construction of one-to-four family residences totaling $2.8 million, or 1.2% of the Company's loan portfolio. Substantially all of these loans are made to individuals who propose to occupy the premises upon completion of construction. Construction loans are generally structured for up to a 30-year term with a six month construction phase, during which the borrower pays interest only. Upon completion of the construction phase, these loans continue as permanent loans of the Company. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The Company has also engaged in commercial and multi-family real estate lending. At December 31, 1998, the Company had $33.1 million of permanent commercial and multi-family real estate loans, which represented 14.0% of the Company's gross loan portfolio. The Company also has $1.1 million in construction loans secured by multi-family and commercial real estate. The Company's commercial and multi-family real estate loan portfolio is secured primarily by apartment buildings, office buildings, strip shopping centers, motels, nursing homes, restaurants and churches located in the Company's market area. Multi-family and commercial real estate loans generally have terms that do not exceed 15 years. Generally, the loans are made in amounts up to 75% of the appraised value of the secured property. The Company analyzes the financial condition of the borrower, the borrower's credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. Currently, appraisals on properties securing multi-family and commercial real estate loans originated by the Company are performed by independent licensed fee appraisers. Construction loans on multi-family and commercial real estate projects are structured to be converted to permanent loans at the end of the construction phase, which generally runs up to 12 months. These construction loans have rates and terms which generally match any permanent multi-family or commercial real estate loan then offered by the Company, except that during the construction phase, the borrower pays interest only. These loans generally provide for the payment of interest and loan fees from loan proceeds. 7 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 made no such purchases of multi-family real estate participation loans in fiscal 1998. 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 two largest loans are as follows: (1) $2.5 million secured by land and speculation homes; and (2) $1.8 million secured by one- to four-family dwellings and multi-family properties. CONSUMER LENDING. The Company offers secured consumer loans, including home improvement loans, home equity loans, loans secured by savings deposits and equity securities, and retail mobile home loans. The Company has plans to expand its consumer lending portfolio. The Company currently originates all of its consumer loans in its primary market area. The Company originates consumer loans on a direct basis by extending credit directly to the borrower. At December 31, 1998, deposit loans were $257,000 or .11% of the Company's gross loan portfolio. Home equity loans were $10.1 million or 4.3% of the Company's gross loan portfolio as of that date. Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. Loans secured by deposit accounts at the Company are currently originated for up to 90% of the account balance with a hold placed on the account restricting the withdrawal of the account balance. The underwriting standards employed by the Company for consumer loans, other than loans secured by deposits, include an application, a determination of the applicant's payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount. The Company offers both secured and unsecured loans. 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 8 addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At December 31, 1998, $490,000 of the Company's consumer loans were not performing in accordance with their terms. However, there can be no assurance that further delinquencies will not occur in the future. COMMERCIAL BUSINESS LENDING. Commercial business loans have been added to the list of the Company's products. The outstanding balance of unsecured commercial lines of credit was $1.8 million as of December 31, 1998. Commercial loans secured other than by mortgage had outstanding balances of $4.6 million as of December 31, 1998. 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 $5.5 million commercial business loan secured by a first security interest covering all business assets including accounts receivable, inventory, securities, contract rights, acquired real estate, stock in direct and indirect subsidiaries of the borrower, intangibles, and equipment. ORIGINATIONS, PURCHASES AND SALES OF LOANS AND MORTGAGE-BACKED SECURITIES Loan originations are developed from advertising, continuing business with depositors and borrowers, soliciting realtors and builders, walk-in customers and correspondent relationships in other markets. Loans are originated by salaried loan officers, field originators compensated by salary and commission. While the Company offers fixed-rate and adjustable-rate loans, its ability to originate loans is dependent upon the relative customer demand for loans in its market, which is affected by the interest rate environment and other factors. In fiscal 1998, the Company originated $28.5 million in fixed-rate loans and $23.6 million in adjustable-rate loans. In periods of economic uncertainty, the ability of financial institutions, including the Company, to originate large dollar volumes of real estate loans may be substantially reduced or restricted, with a resultant decrease in related loan origination fees, other fee income and operating earnings. 9 The following table shows the origination, purchase, sale and repayment activities of the Company for the periods indicated.
Year Ended December 31, ------------------------------------------------ 1998 1997 1996 -------------- --------------- -------------- (In Thousands) ORIGINATIONS BY TYPE: Adjustable-rate: Construction.................................... $ 2,494 $11,521 $11,256 Real estate - one to four family................. 7,205 23,600 33,075 - multi-family.................................. 2,017 593 357 - commercial.................................... 1,060 3,276 2,567 Commercial business............................... 2,435 1,894 1,860 Consumer - home equity............................ 7,226 5,996 1,562 Other consumer.................................... 1,188 2,247 119 Fixed-rate: Construction.................................... 526 280 Commercial business............................. 1,656 627 388 Consumer........................................ 895 7,213 3,422 Real estate - one-to-four family................ 24,100 4,263 28,029 - multi-family.................................. 11 --- 500 - commercial.................................... 1,269 141 60 -------- -------- -------- Total loans originated........................ 52,082 61,651 83,195 -------- -------- -------- PURCHASES: Acquisitions: Loans........................................... --- --- 66,433 MBS............................................. 40,179 3,710 20,729 One-to-four family................................ --- --- 45,236 --------- -------- -------- Total purchased............................... 40,179 3,710 132,398 --------- -------- -------- SALES AND REPAYMENTS: Loans: Loan sale....................................... --- 15,751 17,783 MBS sale........................................ 7,119 10,684 21,770 MBS payments.................................... 5,188 3,908 7,567 Loan payments................................... 95,260 57,604 37,730 --------- -------- -------- Total reductions.............................. 107,567 87,947 84,850 --------- -------- -------- Increase (decrease) in other items, net........... (3,900) (1,704) (2,484) --------- -------- -------- Net increase (decrease)....................... $(19,206) $(24,290) $128,259 ========= ======== ========
NON-PERFORMING ASSETS AND CLASSIFIED ASSETS When a borrower fails to make a required payment on real estate secured loans and consumer loans a notice is sent 30 days after payment is due. At 60 days after the payment is due, the Company generally institutes collection procedures by notice and/or telephone. In most cases, delinquencies are cured promptly; however, if a loan secured by real estate or other collateral has been delinquent for more than 90 days, satisfactory payment arrangements must be adhered to or the Company will initiate proceedings for foreclosure or repossession. 10 When a loan becomes delinquent 90 days or more or when the collection of principal or interest becomes doubtful, the Company will place the loan on a non-accrual status and, as a result, previously accrued interest income on the loan is taken out of current income. The loan will remain on a non-accrual status as long as the loan is 90 days or more delinquent. The following table sets forth information concerning delinquent loans at December 31, 1998. 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.
Loans Delinquent For: --------------------------------------------------------------------------------------------------- 30-59 Days 60-89 Days 90 Days and over ---------------------------- --------------------------------- ---------------------------------- Number Amount Percent Number Amount Percent Number Amount Percent --------- --------- --------- ---------- --------- ---------- --------- --------- ----------- (Dollars in Thousands) Real Estate: One-to-four family(1).. 43 $1,955 1.08% 14 $847 .47% 25 $1,740 .96% Non-residential(1)..... 4 390 1.14 4 155 .45 8 1,947 5.69 Consumer/Commercial. 6 54 .24 7 79 .35 18 855 3.81
- ------------------- (1) Includes construction loans. 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.
At December 31, --------------------------------------------------------- 1998 1997 1996 1995 1994 ------- -------- -------- -------- ---------- (Dollars in Thousands) Non-accruing loans: One-to-four family......................... $1,740 $ 612 $ 674 $ 579 $ 75 Consumer................................... 373 213 10 --- --- Commercial real estate/Business Loans...... 2,428 1,170 1,266 --- --- ----- ----- ------ ---- ------ Total................................... 4,541 1,995 1,950 579 75 ----- ----- ------ ---- ----- Accruing loans delinquent more than 90 days.. --- --- 94 --- --- Foreclosed assets............................ 56 56 55 --- --- ------ -------- ------- ---- ------ Total non-performing assets.................. $4,597 $2,051 $2,099 $579 $ 75 ====== ====== ====== ==== ===== Total as a percentage of total assets........ 1.4% .55% .52% .25% .04% ====== ====== ====== ==== =====
For the year ended December 31, 1998, gross interest income that would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to approximately $423,000. The Company did not recognize any interest income on such loans in 1998. 11 NON-PERFORMING ASSETS. Included in the table above in nonaccruing one-to-four family loans at December 31, 1998, were 25 loans secured by single-family residences located in the Company's primary market area. Also included in non-performing assets are 12 consumer loans and 14 commercial real estate loans. OTHER LOANS OF CONCERN. Not categorized as non-performing assets at December 31, 1998, were $1.5 million of potential problem loans. The potential problem loans consisted of 18 single family residences, two commercial real estate loans, one multi-family loan and zero commercial loans. CLASSIFIED ASSETS. Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by the OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the 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, 1998, the Bank had classified a total of $4 million of its assets as substandard, $31,000 as doubtful and none as loss. At December 31, 1998, total classified assets were $4.6 million, or 1.4% 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 12 estimated fair value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an adequate loan loss allowance. Real estate properties acquired through foreclosure are recorded at fair value. If fair value at the date of foreclosure is lower than the balance of the related loan, the difference will be charged-off to the allowance at the time of transfer. Valuations are periodically updated by management and if the value declines, a specific provision for losses on such property is established by a charge to operations. Although management believes that it uses the best information available to determine the allowances, unforeseen market conditions could result in adjustments and net earnings could be significantly affected if circumstances differ substantially from the assumptions used in making the final determination. Future additions to the Company's allowances will be the result of periodic loan, property and collateral reviews and thus cannot be predicted in advance. In the fourth quarter of fiscal 1997, the Company provided an allowance of $1.5 million for certain loans. These loans were primarily of a commercial nature. A portion of this provision was reversed in 1998 due to a favorable outcome in the settlement of some of the loans. At December 31, 1998, the Company had a total allowance for loan losses of $3.2 million, or 1.4% of loans receivable, net. See Note 4 of the Notes to Consolidated Financial Statements in the Company's Annual Report to Stockholders filed as Exhibit 13 hereto. The following table sets forth an analysis of the Company's allowance for loan losses.
Year Ended December 31, ------------------------------------------------------------------------ 1998 1997 1996 1995 1994 ------------ ----------- ------------- ------------ ------------ (Dollars in Thousands) Balance at beginning of period............ $3,922 $1,716 $ 774 $774 $774 Beginning balance acquisition............. --- --- 577 --- --- Charge-offs: One-to-four family...................... 28 79 34 6 --- Consumer................................ 228 --- --- --- Commercial.............................. 122 --- --- --- --- Recoveries................................ 19 --- --- --- --- ------ --------- -------- ------ ------ Net charge-offs........................... 359 79 34 6 --- Additions charged to operations........... (363) 2,285 399 6 --- ------- -------- -------- ------ ------ Balance at end of period.................. $3,200 $3,922 $1,716 $774 $774 ====== ======== ======== ====== ====== Ratio of net charge-offs during the period to average loans outstanding during the period.. .14% --- .01% --- ---% ==== ======= ---- ======= === Ratio of net charge-offs during the period to 8.6% 3.81% 1.66% 2.99% ---% average non- performing assets......... ==== ==== ==== ==== ===
13 The distribution of the Company's allowance for losses on loans at the dates indicated is summarized as follows:
December 31, ------------------------------------------------------------------------- 1998 1997 1996 ---------------------- ----------------------- ---------------------- 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) One-to-four family........... $519 74.87% $ 669 79.10% $ 636 82.07% Multi-family................. 55 5.25 190 3.97 197 4.23 Commercial real estate....... 828 8.74 1,338 7.61 504 6.96 Consumer..................... 510 6.56 548 5.38 81 2.27 Construction................. 3 1.65 72 2.57 46 3.71 Commercial................... 585 2.93 432 1.37 38 .76 Unallocated.................. 700 --- 673 --- 214 --- ------- -------- ------- -------- ------ ------- Total................... $3,200 100.00% $3,922 100.00% $1,716 100.00% ====== ====== ====== ====== ====== ======
INVESTMENT ACTIVITIES The Bank must maintain minimum levels of investments that qualify as liquid assets under OTS regulations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, the Bank has generally maintained its liquid assets above the minimum requirements imposed by the OTS regulations and at a level believed adequate to meet requirements of normal daily activities, repayment of maturing debt and potential deposit outflows. As of December 31, 1998, the Bank's liquidity ratios (liquid assets as a percentage of net withdrawable savings deposits and current borrowings) was in compliance with applicable regulations. See "Regulation - Liquidity." Federally chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in commercial paper, investment grade corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. Generally, the investment policy of the Company is to invest funds among various categories of investments and maturities based upon the Company's need for liquidity, to achieve the proper balance between its desire to minimize risk and maximize yield, to provide collateral for borrowings, and to fulfill the Company's asset/liability management policies. At December 31, 1998, the Company's cash and interest-bearing deposits in other financial institutions totaled $13.9 million, or 4.2% of total assets. The Company also has a $6.9 million investment in the common stock of the FHLB of Cincinnati in order to satisfy the requirement for membership therein. 14 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, 1998, 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. The following table sets forth the composition of the Company's investment portfolio at the dates indicated.
December 31, ------------------------------------------------------------------------------------- 1998 1997 1996 --------------------- ------------------------- ---------------------- Book % of Book % of Book % of Value Total Value Total Value Total --------- ---------- ---------- ----------- ---------- ---------- (Dollars in Thousands) Investment Securities: U.S. Treasury securities.......... $ 502 1.56% $ 501 .88% $ 794 1.50% Federal agency obligations........ 14,900 46.25 21,820 38.24 35,298 66.79 -------- ----- ------ ----- ------ ------ Subtotal....................... 15,402 47.81 22,321 39.12 36,092 68.29 -------- ----- ------ ----- ------ ------ FHLB stock.......................... 6,948 21.57 6,470 11.34 5,862 11.09 Freddie Mac stock................... --- --- 134 .23 3 --- -------- ----- ------ ----- ------ ------ Total investment securities and FHLB/Freddie Mac stock...... 22,350 69.38 28,925 50.69 41,957 79.38 -------- ----- ------ ----- ------ ------ Average remaining life of investment securities....................... 12.88 years 7.51 years 4.78 years Other Interest-Earning Assets: Interest-bearing deposits with banks 4,550 14.12 22,022 38.60 2,747 5.20 Federal funds sold................ 5,317 16.50 6,110 10.71 8,148 15.42 ------- ------ ------- ------ ------- ------ Total.......................... $32,217 100.00% $57,057 100.00 $52,852 100.00% ======= ====== ======= ======= ======= ====== Average remaining life or term to repricing of investment securities and other interest-earning assets, excluding FHLB/Freddie Mac stock............. 7.88 years 3.32 years 3.77 years
The composition and maturities of the investment securities portfolio, excluding FHLB of Cincinnati stock, are indicated in the following table.
December 31, 1998 ------------------------------------------------------------------------------ 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) U.S. Treasury securities................... $502 $ --- $ --- $ 502 $502 Federal agency obligations................. --- --- 14,900 14,900 14,900 ------ ----- ------ ------ ------ Total investment securities................ $502 $--- $14,900 $15,402 $15,402 ==== ==== ======= ======= ======= Weighted average yield..................... 6.31% ---% 6.35% 6.35% 6.35%
MORTGAGE-BACKED SECURITIES. The Company had a $50.0 million portfolio of mortgage- backed securities at December 31, 1998, 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 $2.0 million of the Company's adjustable-rate mortgage-backed securities are tied to the One Year Constant Maturity Treasury Index, $7.6 million are tied to the 11th District cost of funds and $111,000 are tied to the six month treasury. At December 31, 1998, 19.5% of the Company's mortgage-backed securities consisted of adjustable-rate mortgage-backed securities. Mortgage-backed securities can serve as collateral for borrowings and, through sales and repayments, as a source of liquidity. For information regarding the carrying and market values of the Company's mortgage-backed securities portfolio, see Note 3 of the Notes to Consolidated Financial Statements in the Company's Annual Report to Stockholders filed as Exhibit 13 hereto. Under the OTS risk-based capital requirement, mortgage-backed securities have a risk weight of 20% (or 0% in the case of Government National Mortgage Association securities) in contrast to the 50% risk weight carried by residential loans. See "Regulation." Management has purchased mortgage-backed securities in order to supplement loan originations and 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 hamper certain aspects of the Company's asset/liability management strategy. In addition, these securities have maximum interest rate caps. If and as market interest rate levels approach these caps, the value of the underlying security will decline. As of December 31, 1998, the Company held $10.1 million of CMO securities. 15 The following table sets forth the contractual maturities of the Company's mortgage-backed securities at December 31, 1998.
Due in Due in Due In Over December 31, 1998 1 to 5 years 6 to 10 years 10 Years Balance Outstanding --------------- ------------------ ---------------- --------------------------- (In Thousands) Freddie Mac.............. $ 952 $681 $ 3,956 $ 5,589 Fannie Mae............... --- --- 9,048 9,048 CMOs..................... 4,855 490 4,780 10,125 Ginnie Mae............... 17 --- 25,265 25,282 ------ ------ ------ -------- Total mortgage-backed securities............ $5,824 $1,171 $43,049 $50,044 ====== ====== ======= ======= Weighted average yield... 6.29 7.44 6.53 6.52
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. 16 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.
Year Ended December 31, ---------------------------------------------------------------- 1998 1997 1996 ---------------- ----------------- ---------------------- (Dollars in Thousands) Opening balance.................................. $246,909 $233,203 $139,129 Net deposits (withdrawals)....................... (70,114)(1) (4,220) 80,678(2) Interest credited................................ 16,171 17,926 13,396 ---------- -------- --------- Ending balance................................... $192,966 $246,909 $233,203 ======== ======== ======== Net increase (decrease).......................... $(53,943) $ 13,706 $ 94,074 ========= ======== ======== Percent increase (decrease)...................... 21.8% 5.8 % 67.6% ==== ==== ====
- --------------- (1) Net deposit decrease is primarily due to the sale of $84,365 in deposits related to the Cincinnati area branch sales in 1998. (2) Net deposit increase is primarily due to the Company's acquisition of Mayflower and Seven Hills during fiscal 1996. The following table sets forth the dollar amount of savings deposits in the various types of deposit programs offered by the Company for the periods indicated.
Year Ended December 31, --------------------------------------------------------------- 1998 1997 1996 ---------------------- ---------------------- ----------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total --------- -------- --------- ---------- ------- -------- (Dollars in Thousands) TRANSACTIONS AND SAVINGS DEPOSITS: Passbook and Savings Accounts...... $13,629 7.06% $22,115 8.96 $27,981 12.00% NOW Accounts........................ 12,708 6.59 12,186 4.94 10,074 4.32 Money Market Accounts............... 49,084 25.44 37,182 15.06 19,664 8.43 ------ ------ ------ ----- ------- ------ Total Non-Certificates.............. 75,421 39.09 71,483 28.96 57,719 24.75 ------ ----- ------ ------ ------- ------ CERTIFICATES: 0.00 - 3.49%...................... 534 .28 785 .32 971 .42 3.50 - 5.49%...................... 28,353 14.69 27,688 11.21 45,927 19.70 5.50 - 7.49%...................... 88,100 45.65 146,319 59.26 121,281 52.00 7.50 - 9.49%...................... 558 .29 634 .25 7,305 3.13 ------- ------- ---------- -------- -------- ------ Total Certificates.................. 117,545 60.91 175,426 71.04 175,484 75.25 ------- ------ ------- ----- -------- ------ Total Deposits...................... $192,966 100.00 $246,909 100.00 $233,203 100.00% ======== ====== ======== ====== ======== ======
17 The following table shows rate and maturity information for the Company's certificates of deposit as of December 31, 1998.
0.00- 3.50- 5.50- 7.50- Percent 3.49% 5.49% 7.49% 9.49% Total of Total ---------- ------------ ---------- ---------- --------- --------------- (Dollars in Thousands) Certificate accounts maturing in quarter ending: - ------------------------------------------------- March 31, 1999.......................... $ 75 $2,676 $ 4,490 $ --- $ 7,241 6.16% June 30, 1999........................... 163 3,981 12,773 141 17,058 14.51 September 30, 1999...................... 50 2,201 13,831 --- 16,082 13.68 December 31, 1999....................... 15 4,494 12,112 --- 16,621 14.14 March 31, 2000.......................... 33 1,223 16,229 --- 17,485 14.88 June 30, 2000........................... 6 3,734 10,963 --- 14,703 12.51 September 30, 2000...................... 2 4,006 2,331 55 6,394 5.44 December 31, 2000....................... 78 2,420 1,764 30 4,292 3.65 March 31, 2001.......................... 3 367 1,258 --- 1,628 1.39 June 30, 2001........................... 13 --- 3,188 27 3,228 2.75 September 30, 2001...................... 7 628 5,307 --- 5,942 5.05 December 31, 2001....................... 3 2,148 202 154 2,507 2.13 Thereafter.............................. 86 475 3,652 151 4,364 3.71 ---- ------ -------- ---- ---------- ------- Total................................ $534 $28,353 $88,100 $558 $117,545 100.00% ==== ======= ======= ==== ======== ====== Percent of total..................... 0.46% 24.12% 74.95% 0.47% 100.00% ==== ===== ===== ==== ======
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, 1998.
Maturity --------------------------------------------------------------------------------- 3 Months 3 to 6 6 to 12 Over or Less Months Months 12 months Total ------------- ----------- ------------ ------------- ----------------- (In Thousands) Certificates of deposit less than $100,000................... $6,343 $15,054 $28,352 $53,455 $103,204 Certificates of deposit of $100,000 or more................ 898 2,004 4,351 7,088 14,341 ------- --------- -------- -------- --------- Total certificates of deposit.... $7,241 $17,058 $32,703 $60,543 $117,545 ====== ======= ======= ======= ========
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. Beginning in 1995, the Bank utilized a higher level and a wider variety of FHLB advances than it had in the past. These advances were utilized for increased investments and lending. The FHLB advances were secured by the Bank's blanket agreement for advances and security agreement and are not tied to specific investments or loans. Fixed rate advances of $20 million were taken to 18 fund the purchase of callable securities. The remainder of the borrowing were variable-rate or fixed-rate in nature and was intended to fund mortgages. The following table sets forth the maximum month-end balance and average balance of FHLB advances for the periods indicated.
Year Ended December 31, ---------------------------------------------------------- 1998 1997 1996 --------------- ---------------- ----------------- (In Thousands) Maximum Balance: FHLB advances.................................... $88,256 $113,112 $102,602 Average Balance: FHLB advances.................................... $62,802 $ 97,414 $ 79,665
The following table sets forth certain information as to the Bank's FHLB advances at the dates indicated.
December 31, --------------------------------------------------------------- 1998 1997 1996 ------------- ------------------ ------------------- (Dollars in Thousands) FHLB advances...................................... $85,252 $68,339 $102,602 Weighted average interest rate of FHLB advances..................................... 5.30% 5.85% 5.84%
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, 1998, the Bank had a net book value investment of $5,000 in Springfield-Home Community Reinvestment Corporation ("Springfield-Home"), a 50%-owned service corporation, for low income housing lending. At December 31, 1998, the Bank had a net book investment of $(200,000) in West Central Financial Services, an operating subsidiary created to generate consumer lending that does not overlap with the Company's current consumer lending. In addition, the Bank had a net book investment of $(3,000) in West Central Mortgage Services, an operating subsidiary created to generate mortgage loans in areas outside of the Bank's normal lending area. 19 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. REGULATION GENERAL The Bank is a federally chartered savings bank. Accordingly, the Bank is subject to broad federal regulation extending to all its operations. The Bank is a member of the FHLB of Cincinnati and subject to certain limited regulation by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). As a savings and loan holding company, the Company also is subject to federal regulation and oversight. The purpose of the regulation of the Company and other holding companies is to protect subsidiary savings associations. The Bank's deposits are federally insured by the Savings Association Insurance Fund ("SAIF"), which together with the Bank Insurance Fund (the "BIF") are the two deposit insurance funds administered by the FDIC, and their deposits are insured by the FDIC. As a result, the FDIC has certain regulatory and examination authority over the Banks. Certain of these regulatory requirements and restrictions are discussed below or elsewhere in this document. 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, 1998 was $93,000. 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 20 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, 1998, the Bank's lending limit under this restriction was $6.4 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. 21 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 stockholders' equity and retained income, and certain noncumulative perpetual preferred stock and related income. In addition, all intangible assets, other than a limited amount of purchased mortgage servicing rights, must be deducted from tangible capital. At December 31, 1998, the Bank had an intangible asset of mortgage servicing rights of $28,000. The OTS regulations establish special capitalization requirements for savings associations that own subsidiaries. In determining compliance with the capital requirements, all subsidiaries engaged solely in activities permissible for national banks or engaged in certain other activities solely as agent for its customers are "includable" subsidiaries that are consolidated for capital purposes in proportion to the association's level of ownership. For excludable subsidiaries, the debt and equity investments in such subsidiaries are deducted from assets and capital. The Bank's subsidiaries are includable subsidiaries. At December 31, 1998, the Bank had tangible capital of $41.1 million, or .26% of adjusted total assets, which is $12.6 million above the minimum requirement of 1.5% of adjusted total assets in effect on that date. 22 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, 1998, 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, 1998, the Bank had core capital equal to $41.1 million, or 12.6% of adjusted total assets, which is $28.0 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, 1998, the Bank had no capital instruments that qualify as supplementary capital and $1.7 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, 1998. 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 23 assets and a total capital ratio in excess of 12% is exempt from this requirement unless the OTS determines otherwise. On December 31, 1998, the Bank had total capital (as defined above) of $42.8 million (including $41.1 million in core capital and $1.7 of general loss reserves) and risk-weighted assets of $177.4 million; or total capital of 24.2% of risk-weighted assets. This amount was $28.7 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 stockholders do not have preemptive rights, and therefore, if the Company is directed by the OTS or the FDIC to issue additional shares of Common Stock, such issuance may result in the dilution in the percentage of ownership of the Company. 24 LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS OTS regulations impose various restrictions on savings associations with respect to their ability to make distributions of capital which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. OTS regulations also prohibit a savings association from declaring or paying any dividends or from repurchasing any of its stock if, as a result, the regulatory capital of the association would be reduced below the amount required to be maintained for the liquidation account established in connection with its mutual to stock conversion. Generally, savings associations that before and after the proposed distribution meet their capital requirements, may make capital distributions during any calendar year equal to the greater of 100% of net income for the year-to-date plus 50% of the amount by which the lesser of the association's tangible, core or risk-based capital exceeds its capital requirement for such capital component, as measured at the beginning of the calendar year, or 75% of their net income for the most recent four quarter period. However, an association deemed to be in need of more than normal supervision by the OTS may have its dividend authority restricted by the OTS. The Bank may pay dividends in accordance with this general authority. Savings associations proposing to make any capital distribution need only submit written notice to the OTS 30 days prior to such distribution. Savings associations that do not, or would not meet their current minimum capital requirements following a proposed capital distribution, however, must obtain OTS approval prior to making such distribution. The OTS may object to the distribution during that 30-day period notice based on safety and soundness concerns. See "- Regulatory Capital Requirements." Effective April 1, 1999, OTS regulations will permit savings associations (not in a holding company) to declare and pay dividends upon prior notice to the OTS, provided the dividend does not exceed the association's net earnings year to date plus the prior two-year net earnings available for dividends, and the association would remain adequately capitalized (as defined in the OTS prompt corrective action regulations) following the proposed dividend. 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, 1998, the Bank was in compliance with its regulatory liquidity ratio. QUALIFIED THRIFT LENDER TEST All savings associations are required to meet a qualified thrift lender ("QTL") test to avoid certain restrictions on their operations. This test requires a savings association to have at least 65% of its portfolio assets (as defined by regulation) in qualified thrift investments on a monthly average 25 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, 1998, the Bank met the test and has always met the test since its effective date. Any savings association that fails to meet the QTL test must convert to a national bank charter, unless it requalifies as a QTL and thereafter remains a QTL. If an association does not requalify and converts to a national bank charter, it must remain SAIF-insured until the FDIC permits it to transfer to the BIF. If such an association has not yet requalified or converted to a national bank, its new investments and activities are limited to those permissible for both a savings association and a national bank, and it is limited to national bank branching rights in its home state. In addition, the association is immediately ineligible to receive any new FHLB borrowings and is subject to national bank limits for payment of dividends. If such association has not requalified or converted to a national bank within three years after the failure, it must divest of all investments and cease all activities not permissible for a national bank. In addition, it must repay promptly any outstanding FHLB borrowings, which may result in prepayment penalties. If any institution that fails the QTL test is controlled by a holding company, then within one year after the failure, the holding company must register as a bank holding company and become subject to all restrictions on bank holding companies. (See "- Holding Company Regulation.") COMMUNITY REINVESTMENT ACT Under the Community Reinvestment Act ("CRA"), every FDIC insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with the examination of the Banks, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by the Bank. An unsatisfactory rating may be used as the basis for the denial of an application by the OTS. The federal banking agencies, including the OTS, have recently revised the CRA regulations and the methodology for determining an institution's compliance with the CRA. Due to the heightened attention being given to the CRA in the past few years, the Bank may be required to devote additional funds for investment and lending in its local community. The Bank was examined for CRA compliance in 1997 and received a rating of satisfactory. TRANSACTIONS WITH AFFILIATES Generally, transactions between a savings association or its subsidiaries and its affiliates are required to be on terms as favorable to the association as transactions with non-affiliates. In addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the association's capital. Affiliates of the Bank include the Company and any company which is under common control with the Bank. In addition, a savings association may not lend to any affiliate 26 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. FEDERAL SECURITIES LAW The stock of the Company is registered with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Accordingly, the Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Exchange Act. Company stock held by persons who are affiliates (generally officers, directors and principal stockholders) of the Company may not be resold without registration or unless sold in accordance 27 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, 1998, 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, 1998, the Bank had $6.9 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 6.78% and were 7.19% for 1998. 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, 1998, dividends paid by the FHLB of Cincinnati to the Bank totaled $478,000, which constituted a $37,000 increase over the amount of dividends received in 1997. 28 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. 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 29 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. 30 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 - ---------------- ---------- ------------------------------------------- Craig F. Fortin 38 Senior Vice President, Treasurer and Chief Financial Officer John T. Heckman 47 Executive Vice President Gary L. Hicks 47 Executive Vice President Robert P. Brezing 54 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. THOMAS A. ESTEP. Mr. Estep ceased his duties as Vice President, Treasurer and Chief Financial Officer of the Company and the Bank on February 1, 1999. 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, 1998, 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. 31 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, 1998.
Date Total Net Book Acquired Approximate Value at Location Footage Square December 31, 1998 - ---------------------------------- --------------- --------------- -------------------- (In Thousands) Main Office: 28 E. Main Street 1900 5,721 $ 1,033 Springfield, Ohio Branch Offices: 7601 Dayton Springfield Road 1983 2,528 26 Enon, Ohio 210 N. Main Street 1987 2,369 339 New Carlisle, Ohio 1480 Upper Valley Pike 1950 3,777 386 Springfield, Ohio 50 Kahoe Lane 1993 2,369 370 Yellow Springs, Ohio 3216 Seajay Drive 1996 1,925 282 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, 1998 was $3.2 million. See Note 5 of the Notes to Consolidated Financial Statements in the Annual Report to Stockholders filed as Exhibit 13 hereto. The Company conducts its data processing through a service bureau. The net book value of the data processing and computer equipment utilized by the Company at December 31, 1998 was approximately $206,000. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiary are involved from time to time as plaintiff or defendant in various legal actions arising in the normal course of their businesses. While the ultimate outcome of pending proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with counsel representing the Company, the Bank or its subsidiary in the proceedings, that the resolution of these proceedings should not have a material effect on the Company's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 1998. 32 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Page 7 of the Company's 1998 Annual Report to Stockholders is herein incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA Pages 8 and 9 of the Company's 1998 Annual Report to Stockholders is herein incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pages 10 through 23 of the Company's 1998 Annual Report to Stockholders 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 33 information regarding market risk, see pages 18 to 19 of the Company's Annual Report to Stockholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Pages 24 through 57 of the Company's 1998 Annual Report to Stockholders are herein incorporated by reference. The independent auditors' report of Clark, Schaefer, Hackett & Co. dated January 23, 1998, is included as Exhibit 99 to this Report and is 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. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning Directors of the Company is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on April 29, 1999 (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, 1998, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with except that Mr. Dodds inadvertently failed to file a Form 4 to report one transaction. Mr. Dodds reported the transaction on a Form 5 dated February 10, 1999. Morever, due to the failure of the Trustee of the Deferred 34 Compensation Plan to notify Mr. Raisbeck of shares purchased for Mr. Raisbeck's account pursuant to such plan, Mr. Raisbeck inadvertently failed to report one transaction on his timely filed Form 5. Mr. Raisbeck reported the transaction on a Form 4 dated March 15, 1999. ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on April 29, 1999 (except for information contained under the headings "Compensation Committee Report on Executive Compensation" and "Stock Performance Presentation"), a copy of which will be filed not later than 120 days after the close of the fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on April 29, 1999 (except for information contained under the headings "Compensation Committee Report on Executive Compensation" and "Stock Performance Presentation"), a copy of which will be filed not later than 120 days after the close of the fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and transactions is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on April 29, 1999 (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. 35 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) (1) FINANCIAL STATEMENTS: The following information appearing in the Company's Annual Report to Stockholders for the year ended December 31, 1998, is incorporated by reference in this Annual Report on Form 10-K as Exhibit 13.
Pages in Annual Report Section Annual Report Consolidated Balance Sheets at December 31, 1998 and 1997...................................................... 25 Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996................................................ 26 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1998, 1997 and 1996.................................................. 27 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996............................ 28, 29 Consolidated Statements of Cash Flows for Years Ended December 31, 1998, 1997 and 1996................................................ 30, 31 Notes to Consolidated Financial Statements........................................ 32-57 Independent Auditors' Report...................................................... 24
(A) (2) FINANCIAL STATEMENT SCHEDULES: All financial statement schedules have been omitted as the information is not required under the related instructions or is inapplicable. 36 (A) (3) EXHIBITS:
Reference to Prior Regulation Filing or Exhibit S-K Exhibit Number Attached Number Document Hereto - ------------- ------------------------------------------------------------ ------------------------- 2 Plan of acquisition, reorganization, None arrangement, liquidation or succession 3 (i) Certificate of Incorporation * 3 (ii) Amended and Restated Bylaws 3(ii) 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 10(d) John W. Raisbeck (e) Employment Agreement with **** Gary L. Hicks (f) Employment Agreement with 10(f) Robert P. Brezing, as amended (g) Employment Agreement with 10(g) Craig F. Fortin (h) 1998 Omnibus Incentive Plan **** (i) Cornerstone Bank Deferred 10(i) Compensation Plan, as amended 11 Statement re computation of per None share earnings 12 Statements re computation of ratios None 13 Annual report to security holders 13 16 Letter re change in certifying None accountant
37
Reference to Prior Regulation Filing or Exhibit S-K Exhibit Number Attached Number Document Hereto - ------------- ------------------------------------------------------------ ------------------------- 18 Letter re change in accounting None principles 21 Subsidiaries of the registrant 21 22 Published report regarding matters None submitted to vote of security holders 23 Consent of Crowe, Chizek and 23.1 Company LLP Consent of Clark, Schaefer, Hackett 23.2 & Co. 24 Power of attorney None 27 Financial data schedule 27 99 Additional exhibits--report of 99 predecessor independent accountants
- ---------------------- * 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. (B) REPORTS ON FORM 8-K: No reports on Form 8-K were filed during the quarter ended December 31, 1998. 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WESTERN OHIO FINANCIAL CORPORATION Date: March 31, 1999 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. Date: /s/ John W. Raisbeck By: /s/ David L. Dillahunt -------------------------------- -------------------------------------- John W.Raisbeck, President and David L. Dillahunt, Chairman of Chief Executive Officer the Board (PRINCIPAL EXECUTIVE OFFICER) Date: March 31, 1999 Date: March 31, 1999 -------------------------------- ----------------------------------- By: /s/ Howard V. Dodds By: /s/ John E. Field --------------------------------- ------------------------------------- Howard V. Dodds, Director John E. Field, Director Date: March 31, 1999 Date: March 31, 1999 -------------------------------- ----------------------------------- By: /s/ Aristides G. Gianakopoulos By: /s/ William N. Scarff --------------------------------- ------------------------------------- Aristides G. Gianakopoulos, William N. Scarff, Director Director Date: March 31, 1999 Date: March 31, 1999 -------------------------------- ----------------------------------- 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 31, 1999 Date: March 31, 1999 -------------------------------- ----------------------------------- EX-3.(II) 2 AMENDED AND RESTATED BY-LAWS Exhibit 3(ii) WESTERN OHIO FINANCIAL CORPORATION AMENDED AND RESTATED BY-LAWS ARTICLE I STOCKHOLDERS Section 1. Annual Meeting. An annual meeting of the stockholders, for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place, on such date, and at such time as the Board of Directors shall each year fix, which date shall be within thirteen (13) months subsequent to the later of the date of incorporation or the last annual meeting of stockholders. Section 2. Special Meetings. Subject to the rights of the holders of any class or series of preferred stock of the Corporation, special meetings of stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution adopted by a majority of the total number of directors which the Corporation would have if there were no vacancies on the Board of Directors (hereinafter the "Whole Board"). Section 3. Notice of Meetings. Written notice of the place, date, and time of all meetings of the stockholders shall be given, not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time, by the Delaware General Corporation Law or the Certificate of Incorporation of the Corporation). When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. 1 Section 4. Quorum. At any meeting of the stockholders, the holders of at least one-third of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present constituting a quorum, then except as otherwise required by law, those present at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting. Section 5. Organization. Such person as the Board of Directors may have designated or, in the absence of such a person, the Chairman of the Board of the Corporation or, in his or her absence, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the Secretary of the Corporation, the secretary of the meeting shall be such person as the chairman appoints. Section 6. Conduct of Business. (a) The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order. The polls for each matter upon which the stockholders will vote at the meeting will be opened and closed in accordance with law. (b) At any annual meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation who is entitled to vote with respect thereto and who complies with the notice procedures set forth in this Section 6(b). For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered or mailed to and received at the principal executive offices of the Corporation not less than sixty (60) days prior to the anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than twenty (20) days, or delayed by more than fifty (50) days from such anniversary date, notice by the stockholder to be timely must be so delivered not later than the close of business on the later of the sixtieth day prior to such annual meeting or the tenth day following the day on which notice of the date of the annual meeting was mailed or public announcement of the date of such meeting is first made. A stockholder's notice to the Secretary shall set forth as to each matter such stockholder proposes to 2 bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the Corporation's books, of the stockholder who proposed such business, (iii) the class and number of shares of the Corporation's capital stock that are beneficially owned by such stockholder and (iv) any material interest of such stockholder in such business. Notwithstanding anything in these By-laws to the contrary, no business shall be brought before or conducted at an annual meeting except in accordance with the provisions of this Section 6(b). The officer of the Corporation or other person presiding over the annual meeting shall, if the facts so warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 6(b) and, if he should so determine, he shall so declare to the meeting and any such business so determined to be not properly brought before the meeting shall not be transacted. At any special meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting by or at the direction of the Board of Directors. (c) Only persons who are nominated in accordance with the procedures set forth in these By-laws shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders at which directors are to be elected only (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 6(c). Such nominations, other than those made by or at the direction of the Board of Directors, shall be made by timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered or mailed to and received at the principal executive offices of the Corporation not less than thirty (30) days prior to the date of the meeting; provided, however, that in the event that less than forty (40) days' notice or prior disclosure of the date of the meeting is given or made to stockholders, to be timely, notice by the stockholder must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (i) as to each person whom such stockholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (ii) as to the stockholder giving the notice, (x) the name and address, as they appear on the Corporation's books, of such stockholder, and (y) the class and number of shares of the Corporation's capital stock that are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the provisions of this Section 6(c). The officer of the Corporation or other person presiding at the meeting shall, if the facts so warrant, determine that a nomination was not made in accordance with such provisions and, if he or she should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. 3 Section 7. Proxies and Voting. At all meetings of stockholders, every stockholder entitled to vote may vote in person or by proxy executed in writing (or as otherwise permitted under applicable law) by the stockholder or his duly authorized attorney-in-fact in accordance with the procedures established for the meeting. Proxies solicited on behalf of the management shall be voted as directed by the stockholder or, in the absence of such direction, as determined by a majority of the Board of Directors. No proxy shall be valid after eleven months from the date of its execution except for a proxy coupled with an interest. Each stockholder shall have one (1) vote for every share of stock entitled to vote which is registered in his or her name on the record date for the meeting, except as otherwise provided herein or in the Certificate of Incorporation of the Corporation or as required by law. All voting, including the election of directors but excepting where otherwise required by law, may be by a voice vote; provided, however, that the Board of Directors, in its discretion, or the officer of the Corporation presiding at the meeting of stockholders, in his discretion, may require that any votes cast at such meeting shall be cast pursuant to a roll call. Every vote taken by ballot shall be counted by an inspector or inspectors appointed by the Board of Directors in advance of the meeting of stockholders and such inspector or inspectors shall act at the meeting or any adjournment thereof and make a written report thereof, in accordance with law. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law or as provided in the Certificate of Incorporation, all other matters shall be determined by a majority of the votes cast. Section 8. Stock List. The officer who has charge of the stock transfer books of the Corporation shall prepare and make, in the time and manner required by applicable law, a list of stockholders entitled to vote and shall make such list available for such purposes, at such places, at such times and to such persons as required by law. The stock transfer books shall be the only evidence as to the identity of the stockholders entitled to examine the stock transfer books or to vote in person or by proxy at any meeting of stockholders. Section 9. Consent of Stockholders in Lieu of Meeting. Subject to the rights of the holders of any class or series of preferred stock of the Corporation, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. 4 Section 10. Inspectors of Election. The Board of Directors shall, in advance of any meeting of stockholders, appoint one or more persons as inspectors of election to act at the meeting or any adjournment thereof and make a written report thereof in accordance with law. ARTICLE II BOARD OF DIRECTORS Section 1. General Powers, Number and Term of Office. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. The number of directors shall be set as provided for in the Certificate of Incorporation. The number of directors who shall constitute the Whole Board shall be such number as the Board of Directors shall from time to time have designated except that in the absence of any such designation, such number shall be seven (7). The Board of Directors shall annually elect a Chairman of the Board and a President from among its members and shall designate, when present, either the Chairman of the Board or the President to preside at its meetings. The directors, other than those who may be elected by the holders of any class or series of preferred stock, shall be divided into three classes, as nearly equal in number as reasonably possible, with the term of office of the first class to expire at the conclusion of the first annual meeting of stockholders, the term of office of the second class to expire at the conclusion of the annual meeting of stockholders one year thereafter and the term of office of the third class to expire at the conclusion of the annual meeting of stockholders two years thereafter, with each director to hold office until his or her successor shall have been duly elected and qualified. At each annual meeting of stockholders, commencing with the first annual meeting, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the conclusion of the third succeeding annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and qualified. Section 2. Vacancies and Newly Created Directorships. Subject to the rights of the holders of any class or series of preferred stock then outstanding, and unless the Board of Directors otherwise determines, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the directors then in office, though less than a quorum, and each director so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which he or she has been elected expires, and until such director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Board shall shorten the term of any incumbent director. 5 Section 3. Regular Meetings. Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all directors. A notice of each regular meeting shall not be required. Section 4. Special Meetings. Special meetings of the Board of Directors may be called by one-third (1/3) of the directors then in office (rounded up to the nearest whole number) or by the Chairman of the Board and shall be held at such place, on such date, and at such time as they or he or she shall fix. Notice of the place, date, and time of each such special meeting shall be given to each director by whom it is not waived by mailing written notice not less than five (5) days before the meeting or by telegraphing or telexing or by facsimile transmission of the same not less than twenty-four (24) hours before the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. Section 5. Quorum. At any meeting of the Board of Directors, a majority of the authorized number of directors then constituting the Board shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof. Notwithstanding the above, at any adjourned meeting of the Board of Directors, at least one-third of the authorized number of directors then constituting the Board shall constitute a quorum for all purposes. Section 6. Participation in Meetings By Conference Telephone. Members of the Board of Directors, or of any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. Section 7. Conduct of Business. At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board may from time to time determine, and all matters shall be determined by the vote of a majority of the directors present, except as otherwise provided herein or required by law. Action may be taken by the Board of Directors without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors. Section 8. Powers. The Board of Directors may, except as otherwise required by law, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, including, without 6 limiting the generality of the foregoing, the unqualified power: (1) To declare dividends from time to time in accordance with law; (2) To purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine; (3) To authorize the creation, making and issuance, in such form as it may determine, of written obligations of every kind, negotiable or non-negotiable, secured or unsecured, and to do all things necessary in connection therewith; (4) To remove any officer of the Corporation with or without cause, and from time to time to devolve the powers and duties of any officer upon any other person for the time being; (5) To confer upon any officer of the Corporation the power to appoint, remove and suspend subordinate officers, employees and agents; (6) To adopt from time to time such stock, option, stock purchase, bonus or other compensation plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; (7) To adopt from time to time such insurance, retirement, and other benefit plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; and, (8) To adopt from time to time regulations, not inconsistent with these By-laws, for the management of the Corporation's business and affairs. Section 9. Compensation of Directors. Directors, as such, may receive, pursuant to resolution of the Board of Directors, fixed fees and other compensation for their services as directors, including, without limitation, their services as members of committees of the Board of Directors. Section 10. Qualifications. Any member of the Board of directors shall, in order to qualify as such, be domiciled in or have his or her primary place of business located in any county, a portion of which is within a FIFTY mile radius of any office of any financial institution subsidiary of the Company. 7 ARTICLE III COMMITTEES Section 1. Committees of the Board of Directors. The Board of Directors, by a vote of a majority of the Whole Board of Directors, may from time to time designate committees of the Board, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board and shall, for those committees and any others provided for herein, elect a director or directors to serve as the member or members, designating, if it desires, other directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. Any committee so designated may exercise the power and authority of the Board of Directors to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to Section 253 of the Delaware General Corporation Law if the resolution which designated the committee or a supplemental resolution of the Board of Directors shall so provide. In the absence or disqualification of any member of any committee and any alternate member in his or her place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. Section 2. Conduct of Business. Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings; one-third (1/3) of the members shall constitute a quorum unless the committee shall consist of one (1) or two (2) members, in which event one (1) member shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing and the writing or writings are filed with the minutes of the proceedings of such committee. Section 3. Nominating Committee. The Board of Directors shall appoint a Nominating Committee of the Board, consisting of not less than three (3) members, one of which shall be the Chairman of the Board. The Nominating Committee shall have authority (a) to review any nominations for election to the Board of Directors made by a stockholder of the Corporation pursuant to Section 6(c)(ii) of Article I of these By-laws in order to determine compliance with such By-law, and (b) to recommend to the Whole Board nominees for election to the Board of Directors to replace those directors whose terms expire at the annual meeting of stockholders next ensuing. 8 ARTICLE IV OFFICERS Section 1. Generally. (a) As soon as may be practicable after the annual meeting of stockholders, the Board of Directors shall choose a Chairman of the Board, a President, one or more Vice Presidents, a Secretary and a Chief Financial Officer and from time to time may choose such other officers as it may deem proper. The Chairman of the Board and the President shall be chosen from among the directors. Any number of offices may be held by the same person. (b) The term of office of all officers shall be until the next annual election of officers and until their respective successors are chosen, but any officer may be removed from office at any time by the affirmative vote of a majority of the authorized number of directors then constituting the Board of Directors. (c) All officers chosen by the Board of Directors shall each have such powers and duties as generally pertain to their respective offices, subject to the specific provisions of this Article IV. Such officers shall also have such powers and duties as from time to time may be conferred by the Board of Directors or by any committee thereof. Section 2. Chairman of the Board of Directors. The Chairman of the Board of Directors of the Corporation shall have general responsibility for the conduct of meetings of the Board of Directors, subject to the direction of the Board of Directors, Section 3 herein and to Article I, Section 6. Section 3. President. The President shall be the chief executive officer and, subject to the control of the Board of Directors, shall have general power over the management and oversight of the administration and operation of the Corporation's business and general supervisory power and authority over its policies and affairs. He shall see that all orders and resolutions of the Board of Directors and of any committee thereof are carried into effect. Each meeting of the stockholders and of the Board of Directors shall be presided over by the Chairman of the Board, or, in his absence, the President, or, in his absence, by such officer as has been designated by the Board of Directors or, in his absence, by such officer or other person as is chosen at the meeting. The Secretary or, in his absence, the General Counsel of the Corporation or such officer as has been designated by the Board of Directors or, in his absence, such officer or other person as is chosen by the person presiding, shall act as secretary of each such meeting. 9 Section 4. Vice President. The Vice President or Vice Presidents, if any, shall perform the duties of the President in his absence or during his disability to act. In addition, the Vice Presidents shall perform the duties and exercise the powers usually incident to their respective offices and/or such other duties and powers as may be properly assigned to them from time to time by the Board of Directors, the Chairman of the Board or the President. Section 5. Secretary. The Secretary or an Assistant Secretary shall issue notices of meetings, shall keep their minutes, shall have charge of the seal and the corporate books, shall perform such other duties and exercise such other powers as are usually incident to such offices and/or such other duties and powers as are properly assigned thereto by the Board of Directors, the Chairman of the Board or the President. Section 6. Chief Financial Officer. The Chief Financial Officer shall have charge of all monies and securities of the Corporation, other than monies and securities of any division of the Corporation which has a treasurer or financial officer appointed by the Board of Directors, and shall keep regular books of account. The funds of the Corporation shall be deposited in the name of the Corporation by the Chief Financial Officer with such banks or trust companies as the Board of Directors from time to time shall designate. He or she shall sign or countersign such instruments as require his or her signature, shall perform all such duties and have all such powers as are usually incident to such office and/or such other duties and powers as are properly assigned to him or her by the Board of Directors, the Chairman of the Board or the President, and may be required to give bond for the faithful performance of his or her duties in such sum and with such surety as may be required by the Board of Directors. Section 7. Assistant Secretaries and Other Officers. The Board of Directors may appoint one or more assistant secretaries and one or more assistants to the Chief Financial Officer, or one appointee to both such positions, which officers shall have such powers and shall perform such duties as are provided in these By-laws or as may be assigned to them by the Board of Directors, the Chairman of the Board or the President. Section 8. Action with Respect to Securities of Other Corporations. Unless otherwise directed by the Board of Directors, the President or any officer of the Corporation authorized by the President shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation. 10 ARTICLE V STOCK Section 1. Certificates of Stock. Each stockholder shall be entitled to a certificate signed by, or in the name of the Corporation by, the President or a Vice President, and by the Secretary or an Assistant Secretary, or the Chief Financial Officer or an assistant to the Chief Financial Officer, certifying the number of shares owned by him or her. Any or all of the signatures on the certificate may be by facsimile. Section 2. Transfers of Stock. Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation or by transfer agents designated to transfer shares of the stock of the Corporation. Except where a certificate is issued in accordance with Section 4 of Article V of these By-laws, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefor. Section 3. Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders, or to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of any meeting of stockholders, nor more than sixty (60) days prior to the time for such other action as hereinbefore described; provided, however, that if no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held, and, for determining stockholders entitled to receive payment of any dividend or other distribution or allotment of rights or to exercise any rights of change, conversion or exchange of stock or for any other purpose, the record date shall be at the close of business on the day on which the Board of Directors adopts a resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 4. Lost, Stolen or Destroyed Certificates. In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the Board of Directors may establish concerning proof 11 of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. Section 5. Regulations. The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish. ARTICLE VI NOTICES Section 1. Notices. Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, director, officer, employee or agent shall be in writing and may in every instance be given effectively by hand delivery to the recipient thereof, by depositing such notice in the mail, postage paid, by sending such notice by prepaid telegram or mailgram or by sending such notice by facsimile machine or other electronic transmission. Any such notice shall be addressed to such stockholder, director, officer, employee or agent at his or her last known address as the same appears on the books of the Corporation. The time when such notice is received, if hand delivered, or dispatched, if delivered through the mail, by telegram or mailgram or by facsimile machine or other electronic transmission, shall be the time of the giving of the notice. Section 2. Waivers. A written waiver of any notice, signed by a stockholder, director, officer, employee or agent, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, director, officer, employee or agent. Neither the business nor the purpose of any meeting need be specified in such a waiver. ARTICLE VII MISCELLANEOUS Section 1. Facsimile Signatures. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these By-laws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. 12 Section 2. Corporate Seal. The Board of Directors may provide a suitable seal, containing the name of the Corporation, which seal shall be in the charge of the Secretary. If and when so directed by the Board of Directors or a committee thereof, duplicates of the seal may be kept and used by the Chief Financial Officer or by an Assistant Secretary or an assistant to the Chief Financial Officer. Section 3. Reliance upon Books, Reports and Records. Each director, each member of any committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or committees of the Board of Directors so designated, or by any other person as to matters which such director or committee member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. Section 4. Fiscal Year. The fiscal year of the Corporation shall begin on January 1 of each year. Section 5. Time Periods. In applying any provision of these By-laws which requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded and the day of the event shall be included. ARTICLE VIII AMENDMENTS The By-laws of the Corporation may be adopted, amended or repealed as provided in Article SEVENTH of the Certificate of Incorporatin of the Corporation. 13 EX-10.(D) 3 EMPLOYMENT AGREEMENT OF JOHN W. RAISBECK Exhibit 10(d) EMPLOYMENT AGREEMENT THIS AGREEMENT (the "Agreement") is made and entered into as of this 16th day of March, 1999, by and between Western Ohio Financial Corp. (the "Company") and John W. Raisbeck (the "Employee"). WHEREAS, the Employee serves as the President and Chief Executive Officer of the Company and of its wholly owned subsidiary, Cornerstone Bank (the "Bank"), and WHEREAS, the Employee and the Bank entered into an employment agreement dated May 7, 1997 (the "Prior Employment Agreement"), which the Employee is willing to terminate, with no obligation to him thereunder, in consideration of the Company's entering into this Agreement; and WHEREAS, the board of directors of the Company (the "Board of Directors") believes it is in the best interests of the Company and its subsidiaries for the Company to enter into this Agreement with the Employee in order to assure continuity of management of the Company and its subsidiaries; and WHEREAS, the Board of Directors has approved and authorized the execution of this Agreement with the Employee; NOW THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein, it is AGREED as follows: 1. Definitions. (a) The term "Change in Control" means (1) an event that requires the filing of a notice or application under the Change in Bank Control Act, 12 U.S.C. ss.1817(j) (or any successor statute), concerning an acquisition of control of the Company or the Bank or an acquisition of control, ownership or power to vote 10% or more of an outstanding class of voting securities of the Company or the Bank (except for a rebuttal filing which is accepted by the appropriate agency); (2) an event that would be required to be reported in response to Item 1 of the current report on Form 8-K, as in effect on the Effective Date, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); (3) any person (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Company or the Bank representing 25% or more of the combined voting power of the Company's or the Bank's outstanding securities; (4) individuals who are members of the Board of Directors of the Company as of the date of this Agreement (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequently whose election was approved by a vote of at least three-quarters of the directors then comprising the Incumbent Board, or whose nomination for election by the Company's stockholders was approved by the nominating committee serving under such an Incumbent Board, shall be considered a member of the Incumbent Board; (5) consummation of a plan of reorganization, merger, consolidation, sale of all or substantially all of 1 the assets of the Company or a similar transaction in which the Company is not the resulting entity; or (6) consummation of a transaction in which the Company is the resulting entity and at the completion of which the stockholders of the Company immediately before consummation of the transaction become upon consummation of the transaction the holders of securities representing 40% or less of the voting power of the Company; provided that the term "change in control" shall not include an acquisition of securities by an employee benefit plan of the Bank or the Company. (b) The term "Consolidated Subsidiaries" means any subsidiary or subsidiaries of the Company (or its successors) that are part of the consolidated group of the Company (or its successors) for federal income tax reporting. (c) The term "Date of Termination" means the date upon which the Employee's employment with the Company or the Bank or both ceases, as specified in a notice of termination pursuant to Section 8 of this Agreement, (d) The term "Effective Date" means January 1, 1999. (e) The term "Involuntary Termination" means the termination of the employment of Employee (i) by either the Company or the Bank or both without his express written consent; or (ii) by the Employee by reason of a material diminution of or interference with his duties, responsibilities or benefits, including (without limitation) any of the following actions unless consented to in writing, or implemented unilaterally, by the Employee, as the case may be: (1) a requirement that the Employee be based at any place other than Springfield, Ohio or at a location that is within a commuting distance of 40 miles or less from the Employee's residence, except for reasonable travel on Company or Bank business; (2) a material demotion of the Employee; (3) a material reduction in the number or seniority of personnel reporting to the Employee or a material reduction in the frequency with which, or in the nature of the matters with respect to which such personnel are to report to the Employee, other than as part of a Bank and Company-wide reduction in staff; (4) a reduction in the Employee's salary or a material adverse change in the Employee's perquisites, benefits, contingent benefits or vacation, other than as part of an overall program applied uniformly and with equitable effect to all members of the senior management of the Bank and the Company; (5) a material permanent increase in the required hours of work or the workload of the Employee, unrelated to the condition of the Bank or the Company, or both; or (6) the failure of the Board of Directors (or a board of directors of a successor of the Company) to elect Employee as President and Chief Executive Officer of the Company (or a successor of the Company) or any action by the Board of Directors (or a board of directors of a successor of the Company) removing him from such office; provided, however, that "Involuntary Termination" does not include Termination for Cause, termination of employment due to death or permanent disability, retirement or temporary or permanent suspension or prohibition from participation in the conduct of the Bank's affairs under Section 8 of the Federal Deposit Insurance Act. (f) The terms "Termination for Cause" and "Terminated For Cause" mean termination of the employment of the Employee with either the Company or the Bank, as the case may be, because of the Employee's willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation 2 (other than traffic violations or similar offenses) or final cease-and-desist or other supervisory order, or (except as provided below) material breach of any provision of this Agreement. No act or failure to act by the Employee shall be considered willful unless the Employee acted or failed to act in bad faith and without a reasonable belief that his action or failure to act was in the best interest of the Company or the Bank. The Employee shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to the Employee a copy of a resolution, duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Directors at a meeting of the Board duly called and held for such purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with the Employee's counsel, to be heard before the Board), stating that in the good faith opinion of the Board of Directors the Employee has engaged in conduct described in the preceding sentence and specifying the particulars thereof in detail. (g) The term "Voluntary Termination" shall mean termination of employment by the Employee voluntarily as set forth in Section 7(e) of this Agreement. 2. Term; Termination of Prior Employment Agreement. The term of this Agreement shall be a period of four years commencing on the Effective Date, subject to earlier termination as provided herein. On the first anniversary of the Effective Date, and on each anniversary thereafter, the term of this Agreement shall be extended for a period of one year in addition to the then-remaining term, provided that the Company has not given 90 days prior written notice to the Employee that the extensions will cease. At the time this Agreement becomes effective, the Prior Employment Agreement shall terminate with no obligation to the Employee thereunder on the part of the Bank or the Company. 3. Employment. The Employee is employed as the President and Chief Executive Officer of the Company and of the Bank. As such, the Employee shall have supervision and control over strategic planning and daily operations of the Company and the Bank, shall render administrative and management services as are customarily performed by persons situated in similar executive capacities, and shall have such other powers and duties as the Board of Directors or the board of directors of the Bank may prescribe from time to time consistent with services performed by similarly situated executives and consistent with the terms of this Agreement. The Employee shall also render services to any subsidiary or subsidiaries of the Company or the Bank as requested by the Company or the Bank from time to time consistent with his executive position and with the terms of this Agreement. The Employee shall devote his best efforts and reasonable time and attention to the business and affairs of the Company and the Bank to the extent necessary to discharge his responsibilities hereunder. The Employee may (i) serve on charitable boards or committees at the Employee's discretion without consent of either the Board of Directors or the board of directors of the Bank and, in addition, on such corporate boards as are approved in a resolution adopted by a majority of the Board of Directors, and (ii) manage personal investments, so long as such activities do not interfere materially with performance of his responsibilities hereunder. 3 4. Cash Compensation. (a) Salary. The Company agrees to pay the Employee during the term of this Agreement a base salary (the "Company Salary") the annualized amount of which shall be not less than $200,500. The Company Salary shall be paid in regular increments consistent with the Company's practices for payment of officers' salaries and shall be subject to customary tax withholding. The amount of the Employee's Company Salary shall be increased (but not decreased except as part of an overall program applied uniformly and with equitable effect to all members of the senior management of the Bank and the Company) when and as approved from time to time by the Board of Directors after the Effective Date. If and to the extent that any of the Consolidated Subsidiaries pay salary to the Employee, or pay other amounts or provide benefits to the Employee that the Company is obligated to pay or to provide to the Employee under this Agreement, the Company's obligations to the Employee shall be reduced accordingly. (b) Bonuses. The Employee shall be entitled to participate in an equitable manner with all other executive officers of the Company and the Bank in such performance-based and discretionary bonuses, if any, as are authorized and declared from time to time by the Board of Directors for executive officers of the Company and by the board of directors of the Bank for executive officers of the Bank. (c) Expenses. The Employee shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Employee in performing services under this Agreement in accordance with the policies and procedures applicable to the executive officers of the Company and the Bank, provided that the Employee accounts for such expenses as required under such policies and procedures. 5 . Benefits. (a) Participation in Benefit Plans. The Employee shall be entitled to participate, to the same extent as executive officers of the Company and the Bank generally, in all plans of the Company and the Bank relating to pension, retirement, thrift, profit-sharing, savings, group or other life insurance, hospitalization, medical and dental coverage, travel and accident insurance, education, cash bonuses, retirement or employee benefits or combination thereof. In addition, the Employee shall be entitled to be considered for benefits under all of the stock and stock option related plans in which the Company's or the Bank's executive officers are eligible or become eligible to participate. (b) Fringe Benefits. The Employee shall be eligible to participate in, and receive benefits under, any other fringe benefit plans or perquisites which are or may become generally available to the Company's or the Bank's executive officers from time to time. 6. Vacations; Leave. The Employee shall be entitled (i) to annual paid vacation in accordance with the policies established by the Board of Directors and the board of directors of the Bank for executive officers, and (ii) to voluntary leaves of absence, with or without pay, from time to time at such times and upon such conditions as the Board of Directors may determine in its sole 4 discretion. The Employee shall schedule his vacations in a reasonable manner consistent with the needs of the Company. 7. Termination of Employment. (a) Involuntary Termination. If the Employee experiences an Involuntary Termination, such termination of employment shall be subject to the Company's obligations under this Section 7. In the event of the Involuntary Termination of the Employee, if the Employee has offered to continue to provide services as contemplated by this Agreement and such offer has been declined, then, subject to Section 7(b) of this Agreement, the Company shall, as agreed upon liquidated damages as the sole and exclusive remedy of the Employee under this Agreement, during the shorter of the remaining term of this Agreement or the period of three years following the Date of Termination (i) pay to the Employee monthly one-twelfth of the Company Salary at the annual rate in effect immediately prior to the Date of Termination and one-twelfth of the average annual amount of cash bonus and cash incentive compensation of the Employee, based on the average amounts of such compensation earned by the Employee for the two full fiscal years preceding the Date of Termination; and (ii) provide health insurance benefits as maintained for the benefit of executive officers of the Company and the Bank on the same terms as if the Employee had continued to be employed hereunder. (b) Mitigation of the Company's Obligations Under Section 7(a). (1) In the event that the Employee becomes entitled to liquidated damages pursuant to Section 7(a) due to Involuntary Termination in connection with or within 12 months after a Change in Control, (i) the Company's obligation under clause (i) of Section 7(a) with respect to cash damages shall be reduced by the amount of the Employee's cash income, if any, earned from providing services other than to the Company (or any successor) or the Consolidated Subsidiaries during the remaining term of this Agreement, and (ii) the Company's obligation to provide health insurance benefits under clause (ii) of Section 7(a) shall be reduced to the extent, if any, that the Employee receives from another employer during such period substantially the same benefits, on substantially as favorable terms, including amounts of coverage and deductibles and other costs to him. For purposes of this Section 7(b), the term "cash income" shall include amounts of salary, wages, bonuses, incentive compensation and fees paid to the Employee in cash but shall not include shares of stock, stock options, stock appreciation rights or other earned income not paid to the Employee in cash. (2) The Employee agrees that in the event he becomes entitled to liquidated damages pursuant to Section 7(a) due to Involuntary Termination in connection with or within 12 months after a Change in Control, throughout the period during which he is so entitled, he shall promptly inform the Company of the nature and amounts of cash income and health insurance benefits which he earns from providing services other than to the Company (or any successor) or the Consolidated Subsidiaries, and shall provide such documentation of such cash income and health insurance benefits as the Company may reasonably request. In the event of changes to such cash income and health insurance benefits from time to time, the Employee shall inform the Company of such 5 changes, in each case within 15 days after the change occurs, and shall provide such documentation concerning the change as the Company may reasonably request. (c) Golden Parachute Tax. Notwithstanding any other provision of this Agreement, if the payments and the value of benefits received or to be received by the Employee under this Agreement, together with any other amounts and the value of benefits received or to be received by the Employee in connection with a Change in Control would cause any amount to be nondeductible by the Company for federal income tax purposes pursuant to or by reason of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") then payments and benefits under this Agreement shall be reduced (not less than zero) to the extent necessary so as to maximize amounts and the value of benefits to be received by the Employee without causing any amount to become nondeductible by the Company pursuant to or by reason of Section 280G of the Code. The Employee shall determine the allocation of such reduction among payments and benefits to the Employee. (d) Termination for Cause. In the event of Termination for Cause, the Company shall have no further obligation to the Employee under this Agreement after the Date of Termination. (e) Voluntary Termination. The Employee may terminate his employment voluntarily at any time by a notice pursuant to Section 8 of this Agreement. In the event that the Employee voluntarily terminates his employment other than by reason of any of the actions that constitute Involuntary Termination under Section 7(b) of this Agreement ("Voluntary Termination"), the Company shall be obligated to the Employee for the amount of his Company Salary and benefits only through the Date of Termination, at the time such payments are due, and the Company shall have no further obligation to the Employee under this Agreement. (f) Death. In the event of the death of Employee during the term of this Agreement and prior to any termination of employment, the Company shall pay to the Employee's estate, or such person as the Employee may have previously designated in writing, the Company Salary which was not previously paid to the Employee and which he would have earned if he had continued to be employed under this Agreement through the last day of the calendar month in which the Employee died. (g) Disability. If the Employee becomes entitled to benefits under the terms of the then-current disability plan, if any, of the Company or the Bank (a "Disability Plan"), he shall be entitled to receive such group and other disability benefits, if any, as are then provided by the Company or the Bank for executive employees. In the event of such disability, or disability as determined by the Board of Directors, this Agreement shall not be suspended, except that the Company's obligation to pay the Company Salary to the Employee shall be reduced in accordance with the amount of disability income benefits received by the Employee pursuant to this Section 7(g), if any, and from Social Security such that, on an after-tax basis, the Employee shall realize from the sum of such disability income benefits and Company Salary the same amount as he would realize on an after-tax basis from Company Salary if the Company's obligation to pay salary were not reduced pursuant to this Section 7(g). 6 (h) Regulatory Action. Notwithstanding any other provisions of this Agreement, if the Employee is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. ss. 1818(e)(4) and (g)(1), all obligations of the Company under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. 8. Notice of Termination. Subject to the provisions of Section 1(f) of this Agreement, in the event that the Company or the Bank, or both, desire to terminate the employment of the Employee during the term of this Agreement, the Company or the Bank, or both, shall deliver to the Employee a written notice of termination, stating whether such termination constitutes Termination for Cause or Involuntary Termination, setting forth in reasonable detail the facts and circumstances that are the basis for the termination, and specifying the date upon which employment shall terminate, which date shall be at least 30 days after the date upon which the notice is delivered, except in the case of Termination for Cause. In the event that the Employee determines in good faith that he has experienced an Involuntary Termination of his employment, he shall send a written notice to the Company stating the circumstances that constitute such Involuntary Termination and the date upon which his employment shall have ceased due to such Involuntary Termination. In the event that the Employee desires to effect a Voluntary Termination, he shall deliver a written notice to the Company, stating the date upon which employment shall terminate, which date shall be at least 90 days after the date upon which the notice is delivered, unless the parties agree to a date sooner. 9. Attorneys' Fees. The Company shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) incurred by the Employee as a result of the Employee's seeking to obtain or enforce any right or benefit provided by this Agreement or by any other plan or arrangement maintained by the Company (or any successor) or the Consolidated Subsidiaries under which the Employee is or may be entitled to receive benefits; provided that the Company's obligation to pay such fees and expenses is subject to the Employee's prevailing with respect to the matters in dispute in any proceeding initiated by the Employee or the Employee's having been determined to have acted reasonably and in good faith with respect to any proceeding initiated by the Company or the Consolidated Subsidiaries. 10. No Assignments. (a) This Agreement is personal to each of the parties hereto, and neither may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other party; provided, however, that the Company shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) by an assumption agreement in form and substance satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Failure of the Company to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Employee to compensation and benefits from the Company in the same amount and on the same terms as the compensation pursuant to Section 7(a) and Section 7(c) hereof. For purposes of implementing the provisions of this Section 7 10, the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement and all rights of the Employee hereunder shall inure to the benefit of and be enforceable by the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 11. Notice. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, to the Company at its home office, to the attention of the Board of Directors with a copy to the Secretary of the Company, or, if to the Employee, to such home or other address as the Employee has most recently provided in writing to the Company. 12. Amendments. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties. 13. Headings. The headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 14. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provisions shall not affect the validity or enforceability of the other provisions hereof. 15. Governing Law. This Agreement shall be governed by the laws of the State of Ohio. 16. Successors to Code Sections. All provisions of this Agreement referring to sections of the U.S.C. (United State Code), the Internal Revenue Code or the C.F.R. (Code of Federal Regulations) shall be deemed to refer to successor code sections in the event of renumbering of code sections. 8 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. WESTERN OHIO FINANCIAL CORP. /s/ David L. Dillahunt --------------------------------------- By: David L. Dillahunt Its: Chairman of the Board of Directors EMPLOYEE: /s/ John W. Raisbeck --------------------------------------- John W. Raisbeck 9 EX-10.(F) 4 AMENDED EMPLOYMENT AGREEMENT OF ROBERT P. BREZING Exhibit 10(f) AMENDMENT TO EMPLOYMENT AGREEMENT This is an Amendment to a certain Employment Agreement (the "Agreement") dated October 22, 1997, between Cornerstone Bank (the "Bank"), and Robert P. Brezing (the "Employee"). By agreement between the parties and by the authority of the Board of Directors of the Bank, Section 2.(a) of the Agreement is hereby amended to increase the Employee's base salary from $107,000 per year to $113,000 per year, effective October 22, 1998. By further agreement between the parties and by the authority of the Board of Directors, the term of the Agreement as originally set forth in Section 4 thereof is extended for an additional two (2) year period from October 22, 1999 to October 22, 2001. By further agreement between the parties and by the authority of the Board of Directors, the language of Section 8.(a) of the Agreement is hereby amended to read as follows: "(a) Involuntary Termination. If the Employee's employment is involuntarily terminated (other than for cause or pursuant to any of Sections 6(c) through 6(g) or Section 7 of this Agreement) in connection with or within 12 months after a change in control which occurs at any time during the term of employment under this Agreement, the Bank shall pay to the Employee in a lump sum in cash within 25 business days after the Date of Termination (as hereinafter defined) of employment an amount equal to the greater of two (2) years' salary under Section 2(a) of this Agreement, or his then applicable salary for the remaining term of this Agreement. For purposes of this paragraph 8(a), an involuntary termination shall, at the Employee's option, be deemed to be (i) a reduction in the Employee's then-applicable salary, or (ii) a diminution of the Employee's duties, which shall be defined as a material reduction or adverse change in the salary, perquisites, benefits, contingent benefits, or vacation time which had previously been provided to the Employee, or a material reduction or adverse change in the Employee's previous position or job description, or (iii) a relocation of the Employee to a new work location more than sixty (60) miles from his previous work location." The remaining terms and conditions of the Agreement shall remain in full force and effect, provided, however, that in the event of any inconsistency or conflict between the terms of the Agreement and this Amendment, the terms of this Amendment shall be controlling. Signed at Springfield, Ohio, this 26th day of January, 1999. CORNERSTONE BANK By: /s/ John W. Raisbeck ------------------------------------ John W. Raisbeck President and Chief Executive Officer EMPLOYEE /s/ Robert P. Brezing ------------------------------------ Robert P. Brezing EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into as of the 22nd day of October, 1997, by and between CORNERSTONE BANK, 28 East Main Street, Springfield, Ohio 45502 (the "Bank"), and ROBERT P. BREZING, 6005 Springburn, Dublin, Ohio 43017 (the "Employee"). WHEREAS, it is intended that the Employee will serve as Senior Vice President of the Bank; and WHEREAS, the Board of Directors of the Bank (the "Board") has approved and authorized the execution of this Agreement with the Employee to take effect as stated in Section 4 hereof; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein contained, it is AGREED as follows: 1. Employment. The Bank employs the Employee as its Senior Vice President. Employee shall render administrative and management services as are customarily performed by persons situated in similar executive capacities, and shall have other powers and duties as may from time to time be prescribed by the Board. The Employee shall devote his best efforts and substantially all his business time and attention to the business and affairs of the Bank and its affiliated companies, including, but not limited to, service as Senior Vice President of Western Ohio Financial Corporation (the "Holding Company"). 2. Compensation. (a) Salary. Beginning on the Commencement Date (as defined in Section 4 below), the Bank agrees to pay the Employee during the term of this Agreement a salary of $107,000 per year. The Employee's salary shall be payable not less frequently than monthly and not later than the tenth day following the expiration of the month in question. (b) Performance Bonuses. The Employee shall be entitled to participate with other executive officers of the Bank in performance bonuses as authorized and declared by the Board to its executive employees. (c) Expenses. The Employee shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by him (in accordance with the policies and procedures applicable to the senior executive officers of the Bank) in performing services hereunder, provided that the Employee properly accounts therefor in accordance with Bank policy. 3. Benefits. (a) Participation in Retirement and Employee Benefit Plans. The Employee shall be entitled while employed hereunder to participate in, and receive benefits under, all plans relating to pension, thrift, profit-sharing, group life insurance, medical coverage, education, cash bonuses, and other retirement or employee benefits or combinations thereof, that are maintained for the benefit of the Bank's executive employees or for its employees generally. (b) Fringe Benefits. The Employee shall be eligible while employed hereunder to participate in, and receive benefits under, any other fringe benefit plans which are or may become applicable to the Bank's executive employees or to its employees generally. 4. Term. The term of employment under this Agreement shall be a period of two years commencing as of the date hereof (the "Commencement Date"), subject to earlier termination as provided herein. 5. Vacations. The Employee shall be entitled to an annual vacation in accordance with policy set by the Board. The timing of vacations shall be scheduled in a reasonable manner by the Employee. 6. Termination of Employment; Death. (a) The Board may terminate the Employee's employment at any time, but any termination by the Board other than termination for cause, shall not prejudice the Employee's right to compensation or other benefits under this Agreement. The Employee shall have no right to receive compensation or other benefits for any period after termination for cause. If the employment of the Employee is involuntarily terminated, other than for "cause" as provided in this Section 6(a) or pursuant to any of Sections 6(d) through 6(g), or by reason of death or disability as provided in Sections 6(c) or 7, the Employee shall be entitled to (i) his then applicable salary for the then-remaining term of the Agreement as calculated in accordance with Section 4 hereof, payable in such manner and at such times as such salary would have been payable to the Employee under Section 2 had he remained in the employ of the Bank, (ii) and health insurance benefits as maintained by the Bank for the benefit of its senior executive employees or its employees generally over the then-remaining term of the Agreement as calculated in accordance with Section 4 hereof. The terms "termination" or "involuntarily terminated" in this Agreement shall refer to the termination of the employment of Employee without his express written consent. In case of termination of the Employee's employment for cause, the Bank shall pay the Employee his salary through the date of termination, and the Bank shall have no further obligation to the Employee under this Agreement. For purposes of this Agreement, termination for "cause" shall include termination for personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. (b) The Employee's employment may be voluntarily terminated by the Employee at any time upon 90 days' written notice to the Bank or upon such shorter period as may be agreed upon between the Employee and the Board. In the event of such voluntary termination, the Bank shall be obligated to continue to pay the Employee his salary and benefits only through the date of termination, at the time such payments are due, and the Bank shall have no further obligation to the Employee under this Agreement. (c) In the event of the death of the Employee during the term of employment under this Agreement and prior to any termination hereunder, the Employee's estate, or such person as the Employee may have previously designated in writing, shall be entitled to receive from the Bank the salary of the Employee through the last day of the calendar month in which his death shall have occurred, and the term of employment under this Agreement shall end on such last day of the month. (d) If the Employee is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA"), 12 U.S.C. (0) 1818(e)(3) and (g)(1), the Bank's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may, in its discretion, (i) pay the Employee all or part of the compensation withheld while its obligations under this Agreement were suspended and (ii) reinstate in whole or in part any of its obligations which were suspended. (e) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. (0) 1818(e)(4) and (g)(1), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (f) If the Bank is in default (as defined in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall terminate as of the date of default, but this provision shall not affect any vested rights of the contracting parties. (g) All obligations under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Bank: (i) by the Director of the Office of Thrift Supervision (the "Director") or his or her designee, at the time the Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust Corporation ("RTC") enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the FDIA; or (ii) by the Director or his or her designee, at the time the Director or his or her designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by any such action. 7. Disability. If the Employee shall become disabled as defined in the Bank's then current disability plan or if the Employee shall be otherwise unable to serve as Senior Vice President, the Employee shall be entitled to receive group and other disability income benefits of the type then provided by the Bank for other executive employees. 8. Change in Control. (a) Involuntary Termination. If the Employee's employment is involuntarily terminated (other than for cause or pursuant to any of Sections 6(c) through 6(g) or Section 7 of this Agreement) in connection with or within 12 months after a change in control which occurs at any time during the term of employment under this Agreement, the Bank shall pay to the Employee in a lump sum in cash within 25 business days after the Date of Termination (as hereinafter defined) of employment an amount equal to the greater of one (1) year's salary under Section 2(a) of this Agreement, or his then applicable salary for the remaining term of this Agreement. (b) Definitions. For purposes of Sections 6 and 8 of this Agreement, "Date of Termination" means the earlier of (i) the date upon which the Bank gives notice to the Employee of the termination of his employment with the Bank or (ii) the date upon which the Employee ceases to serve as an Employee of the Bank, and "change in control" is defined solely as any acquisition of control, as defined in 12 C.F.R. (0) 574.4, or any successor regulation, of the Bank which would require the filing of an application for acquisition of control or notice of change in control in a manner as set forth in 12 C.F.R. (0) 574.3, or any successor regulation. 9. Miscellaneous. This Agreement shall inure to the benefit of and be enforceable by the personal and legal representatives, executors, administrators, successors, assigns, heirs, distributees, devisees and legatees of the parties. 10. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid. All notices to the Bank shall be sent to its home office, directed to the attention of the Board of Directors of the Bank, with a copy to the Secretary of the Bank. All notices to the Employee shall be sent to the home or other address he has most recently provided in writing to the Bank. 11. Amendments. This Agreement is subject to the terms of a letter agreement between the parties dated September 15, 1997, reference to which is hereby made. Otherwise, no amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided. The parties hereto agree to amend this Agreement to comply with any required provisions of 12 C.F.R. (0) 563.39(b), as the same may be amended. 12. Paragraph Headings. The paragraph headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 13. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 14. Governing Law. This Agreement shall be governed by the laws of the United States to the extent applicable and otherwise by the laws of the State of Ohio. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. CORNERSTONE BANK By:/s/ John W. Raisbeck ------------------------------------ John W. Raisbeck, President EMPLOYEE /s/ Robert P. Brezing ------------------------------------ Robert P. Brezing EX-10.(G) 5 EMPLOYMENT AGREEMENT WITH CRAIG F. FORTIN Exhibit 10(g) EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into as of the 15th day of January, 1999, by and between CORNERSTONE BANK, 28 East Main Street, Springfield, Ohio 45502 (the "Bank"), and CRAIG F. FORTIN, 1913 Greendale Avenue, Findlay, Ohio 45840 (the "Employee"). WHEREAS, it is intended that the Employee will serve as Senior Vice President and Chief Financial Officer of the Bank; and WHEREAS, the Board of Directors of the Bank (the "Board") has approved and authorized the execution of this Agreement with the Employee to take effect as stated in Section 4 hereof; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein contained, it is AGREED as follows: 1. Employment. The Bank employs the Employee as its Senior Vice President and Chief Financial Officer. Employee shall render administrative and management services as are customarily performed by persons situated in similar executive capacities, as determined by the Bank, and shall have other or different powers and duties as may from time to time be prescribed by the Board. The Employee shall devote his best efforts and substantially all his business time and attention to the business and affairs of the Bank and its affiliated companies, including, but not limited to, service as Senior Vice President and Chief Financial Officer of Western Ohio Financial Corporation (the "Holding Company"). 2. Compensation. (a) Salary. Beginning on the Commencement Date (as defined in Section 4 below), the Bank agrees to pay the Employee during the term of this Agreement a salary of $95,000.00 per year. The Employee's salary shall be payable not less frequently than monthly and not later than the tenth day following the expiration of the month in question. (b) Performance Bonuses. The Employee shall be entitled to participate with other executive officers of the Bank in performance bonuses as authorized and declared by the Board to its executive employees. (c) Expenses. The Employee shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by him (in accordance with the policies and procedures applicable to the senior executive officers of the Bank) in performing services hereunder, provided that the Employee properly accounts therefor in accordance with Bank policy. 3. Benefits. (a) Participation in Retirement and Employee Benefit Plans. The Employee shall be entitled while employed hereunder to participate in, and receive benefits under, all plans relating to pension, thrift, profit-sharing, group life insurance, medical coverage, education, cash bonuses, and other retirement or employee benefits or combinations thereof, that are maintained for the benefit of the Bank's executive employees or for its employees generally. (b) Fringe Benefits. The Employee shall be eligible while employed hereunder to participate in, and receive benefits under, any other fringe benefit plans which are or may become applicable to the Bank's executive employees or to its employees generally. 4. Term. The term of employment under this Agreement shall be a period of two (2) years commencing February 1, 1999 (the "Commencement Date"), subject to earlier termination as provided herein. 5. Vacations. The Employee shall be entitled to an annual vacation in accordance with policy set by the Board. The timing of vacations shall be scheduled in a reasonable manner by the Employee. 6. Termination of Employment; Death. (a) The Board may terminate the Employee's employment at any time, but any termination by the Board other than termination for cause, shall not prejudice the Employee's right to compensation or other benefits under this Agreement. The Employee shall have no right to receive compensation or other benefits for any period after termination for cause. If the employment of the Employee is involuntarily terminated, other than for "cause" as provided in this Section 6(a) or pursuant to any of Sections 6(d) through 6(g), or by reason of death or disability as provided in Sections 6(c) or 7, the Employee shall be entitled to (i) his then applicable salary for the then-remaining term of the Agreement as calculated in accordance with Section 4 hereof, payable in such manner and at such times as such salary would have been payable to the Employee under Section 2 had he remained in the employ of the Bank, (ii) and health insurance benefits as maintained by the Bank for the benefit of its senior executive employees or its employees generally over the then-remaining term of the Agreement as calculated in accordance with Section 4 hereof. The terms "termination" or "involuntarily terminated" in this Agreement shall refer to the termination of the employment of Employee without his express written consent. In case of termination of the Employee's employment for cause, the Bank shall pay the Employee his salary through the date of termination, and the Bank shall have no further obligation to the Employee under this Agreement. For purposes of this Agreement, termination for "cause" shall include termination for personal dishonesty, incompetence, poor performance review by the Bank, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. - 2 - (b) The Employee's employment may be voluntarily terminated by the Employee at any time upon 90 days' written notice to the Bank or upon such shorter period as may be agreed upon between the Employee and the Board. In the event of such voluntary termination, the Bank shall be obligated to continue to pay the Employee his salary and benefits only through the date of termination, at the time such payments are due, and the Bank shall have no further obligation to the Employee under this Agreement. (c) In the event of the death of the Employee during the term of employment under this Agreement and prior to any termination hereunder, the Employee's estate, or such person as the Employee may have previously designated in writing, shall be entitled to receive from the Bank the salary of the Employee through the last day of the calendar month in which his death shall have occurred, and the term of employment under this Agreement shall end on such last day of the month. (d) If the Employee is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA"), 12 U.S.C. ss. 1818(e)(3) and (g)(1), the Bank's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may, in its discretion, (i) pay the Employee all or part of the compensation withheld while its obligations under this Agreement were suspended and (ii) reinstate in whole or in part any of its obligations which were suspended. (e) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. ss. 1818(e)(4) and (g)(1), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (f) If the Bank is in default (as defined in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall terminate as of the date of default, but this provision shall not affect any vested rights of the contracting parties. (g) All obligations under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Bank: (i) by the Director of the Office of Thrift Supervision (the "Director") or his or her designee, at the time the Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust Corporation ("RTC") enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the FDIA; or (ii) by the Director or his or her designee, at the time the Director or his or her designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by any such action. 7. Disability. If the Employee shall become disabled as defined in the Bank's then current disability plan or if the Employee shall be otherwise unable to serve as Senior Vice President and Chief Financial Officer, the Employee shall be entitled to receive group and other disability income benefits of the type then provided by the Bank for other executive employees. - 3 - 8. Change in Control. (a) Involuntary Termination. If the Employee's employment is involuntarily terminated (other than for cause or pursuant to any of Sections 6(c) through 6(g) or Section 7 of this Agreement) in connection with or within 12 months after a change in control which occurs at any time during the term of employment under this Agreement, the Bank shall pay to the Employee in a lump sum in cash within 25 business days after the Date of Termination (as hereinafter defined) of employment an amount equal to the greater of two (2) years' salary under Section 2(a) of this Agreement, or his then applicable salary for the remaining term of this Agreement. For purposes of this paragraph 8(a), an involuntary termination shall, at the employee's option, be deemed to be (i) a reduction in the Employee's then-applicable salary, or (ii) a diminution of the Employee's duties, which shall be defined as a material reduction or adverse change in the salary, perquisites, benefits, contingent benefits, or vacation time which had previously been provided to the Employee, or a material reduction or adverse change in the Employee's previous position or job description, or (iii) a relocation of the Employee to a new work location more than sixty (60) miles from his previous work location. (b) Definitions. For purposes of Sections 6 and 8 of this Agreement, "Date of Termination" means the earlier of (i) the date upon which the Bank gives notice to the Employee of the termination of his employment with the Bank or (ii) the date upon which the Employee ceases to serve as an Employee of the Bank, and "change in control" is defined solely as any acquisition of control, as defined in 12 C.F.R. ss. 574.4, or any successor regulation, of the Bank which would require the filing of an application for acquisition of control or notice of change in control in a manner as set forth in 12 C.F.R. ss. 574.3, or any successor regulation. 9. Miscellaneous. This Agreement shall inure to the benefit of and be enforceable by the personal and legal representatives, executors, administrators, successors, assigns, heirs, distributees, devisees and legatees of the parties. 10. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid. All notices to the Bank shall be sent to its home office, directed to the attention of the Board of Directors of the Bank, with a copy to the Secretary of the Bank. All notices to the Employee shall be sent to the home or other address he has most recently provided in writing to the Bank. 11. Amendments. This Agreement is subject to the terms of a letter agreement between the parties dated January 15, 1999, reference to which is hereby made. Otherwise, no amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided. The parties hereto agree to amend this Agreement to comply with any required provisions of 12 C.F.R. ss. 563.39(b), as the same may be amended. 12. Paragraph Headings. The paragraph headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. - 4 - 13. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 14. Governing Law. This Agreement shall be governed by the laws of the United States to the extent applicable and otherwise by the laws of the State of Ohio. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. CORNERSTONE BANK By: /s/ John W. Raisbeck ----------------------------------- John W. Raisbeck, President EMPLOYEE /s/ Craig F. Fortin ----------------------------------- Craig F. Fortin - 5 - EX-10.(I) 6 DEFERRED COMPENSATION PLAN Exhibit 10(i) AMENDMENT NO. 1 TO THE CORNERSTONE BANK DEFERRED COMPENSATION PLAN WHEREAS, Cornerstone Bank (the "Employer") has previously established the Cornerstone Bank Deferred Compensation Plan (the "Plan") for the benefit of certain select management and highly compensated employees and certain Directors; and WHEREAS, pursuant to Section 11 of the Plan, the Employer has reserved the right to amend the Plan from time to time; and WHEREAS, the Employer desires to amend the Plan in certain respects; NOW, THEREFORE, the Plan is hereby amended, effective September 1, 1998, as follows: 1. Section 4.D. shall be deleted in its entirety and the following shall be substituted therefor: "D. Adjustment of Account Balances. (i) Participant Election. At the time that a Participant submits a Deferral Notice, he shall elect the percentage of Employer Contributions to be allocated to his Cash Account (to be adjusted pursuant to Paragraph (ii) of this Section 4.D.) and his Stock Account (to be adjusted pursuant to Paragraph (iii) of this Section 4.D.). In addition, at the time that cash dividends, if any, are to be credited with respect to a Participant's Stock Account, such Participant shall elect the percentage of such dividends to be allocated to his Cash Account and/or his Stock Account. Any election made pursuant to this Paragraph (i) shall be irrevocable with respect to the affected Employer Contributions and/or cash dividends. (ii) As of each Adjustment Date, the Plan Administrator shall credit the balance in the Participant's Cash Account with Additions which shall mirror the quarterly appreciation or depreciation experienced by the investment funds selected by the Participant in accordance with the provisions of this Section 4.D.(ii). A Participant shall designate on such form or forms as may be satisfactory to the Plan Administrator, the portion of his Cash Account to be treated as credited to each of the investment funds that may be offered by the Board in its discretion. Such desig nations shall specify, in ten percent (10%) increments, the percentages to be treated as credited to each investment fund offered. Such designations shall remain in effect until changed by an express designation by the Participant. Such designations may be changed by the Participant as of the first day of any prospective calendar quarter, provided that reasonable notice of the change is given to the Plan Administrator. The crediting or debiting of Additions shall occur so long as there is a balance in the 1 Participant's Cash Account regardless of whether the Participant has terminated service with the Employer or has died. The Plan Administrator may prescribe any reasonable method or procedure for the accounting of Additions. (iii) As of each Adjustment Date, the amount credited to the Stock Account of each Participant shall be divided by the then Fair Market Value of the Common Shares. Upon completion of this calculation, each Stock Account shall be credited with the resulting number of whole Common Shares and any remaining amounts shall continue to be credited to the Stock Account until converted to whole Common Shares at a future Adjustment Date. The Stock Account of each Participant shall be credited with cash dividends on the Common Shares on and after the date credited to the Stock Account. Pursuant to Paragraph (i) hereof, a Participant shall elect the portion of such cash dividends to be allocated to his Cash Account and/or to his Stock Account. At the following Adjustment Date, the amount of cash dividends credited to each Stock Account pursuant to the Participant's election (and any other amounts then credited to such account) shall be divided by the then Fair Market Value of the Common Shares; and the Stock Account of each Participant shall be credited with the resulting number of whole Common Shares and any remaining amounts shall continue to be credited to the Stock Account until converted to whole Common Shares at a future Adjustment Date. The Plan Administrator may prescribe any reasonable method or procedure for the accounting of Additions." 2. Section 5.B. shall be deleted in its entirety and the following shall be substituted therefor: "B. Method of Distribution. A Participant's Deferred Compensation Account shall be distributed to the Participant in either (i) a single lump sum payment; or (ii) equal annual installments over a period not to exceed ten (10) years. A Participant shall elect the form of distribution in the Deferral Notice. In the event that a distribution is made in annual installment payments, the Participant's Deferred Compensation Account shall continue, during such payment period, to be adjusted in accordance with the applicable provisions of Section 4.D. Cash Accounts shall be distributed in cash and Stock Accounts shall be distributed in Common Shares." IN WITNESS WHEREOF, the undersigned, as an authorized officer of the Employer, hereby executes this Amendment No. 1 to be effective as of the date first above written. CORNERSTONE BANK By: /s/ John Raisbeck ------------------------------------ Title: President and CEO 2 CORNERSTONE BANK DEFERRED COMPENSATION PLAN Section 1. PURPOSE - The purpose of this Plan is to enhance the career remuneration of selected management and highly-compensated employees and certain Directors through the payment of deferred compensation benefits. These benefits are to be provided from the Plan on an unfunded basis and it is intended that the Plan be exempt from the funding, participation, vesting and fiduciary provisions of Title I of ERISA. Section 2. CERTAIN DEFINITIONS - The following terms will have the meanings provided below. "Additions" means the credits or debits applied to Deferred Compensation Accounts as provided in Section 4.A. hereof. "Adjustment Date" means the last business day of each calendar quarter. "Annual Retainer" means, with respect to any calendar year or other period, the fixed retainer which, absent an election to defer hereunder, would be payable to a Director for services rendered to the Board or its committees during those pay periods beginning in the given calendar year or other period. "Beneficiary" means the person or persons designated in writing as such and filed with the Employer at any time by a Participant. Any such designation may be withdrawn or changed in writing (without the consent of the Beneficiary), but only the last designation on file with the Employer shall be effective. "Board" means the Board of Directors of the Employer. "Change in Control" means the occurrence of (a) a merger between the Employer and any other unaffiliated corporation wherein the Employer shall not be the surviving corporation; (b) a sale of all, or substantially all, of the assets of the Employer; (c) a sale of controlling interest in the Employer (51% or more of the voting common shares of the Employer) to parties other than the shareholders as of the Effective Date; or (d) a merger or consolidation of the Employer following which fewer than one-half of the members of the board of directors of the merged organization were members of the Board immediately preceding the merger or consolidation. "Code" means the Internal Revenue Code of 1986, as may be amended from time to time. "Common Shares" means the common shares of Western Ohio Financial Corporation. "Compensation" means, with respect to each Participant, (a) his base salary payable by the Employer; (b) his bonus or bonuses, based upon the Employer's financial performance; (c) any 1 MRP's which are to become vested during the relevant Plan Year; and (d) , in the case of a Director, his Annual Retainer and all Meeting Fees. For purposes of this Plan, a Participant's base salary shall be deemed paid at the times determined pursuant to the Employer's regular payroll practices; and bonuses, Annual Retainers and Meeting Fees will be allocated to the Plan Year in which they are earned. "Deferred Compensation Account" means the separate Deferred Compensation Account established for each Participant pursuant to Section 4 of the Plan. "Director" means any director of the Employer who receives compensation from the Employer for his services as a director. "Effective Date" means June 1, 1998. "Employee" means an individual employed as a common law employee of the Employer. "Employer" means Cornerstone Bank and any successor thereto. "ERISA" means the Employee Retirement Income Security Act of 1974, as may be amended from time to time. "Fair Market Value" of the Common Shares means the price established for such Common Shares on the relevant date by the Plan Administrator in its discretion. "Meeting Fees" means, with respect to any calendar year or other period, the fees for attendance at meetings of the Board or its committees (exclusive of expenses) which, absent an election to defer hereunder, would be payable to a Participant during those pay periods beginning in the given calendar year or other period. "Participant" has the meaning specified in Section 3 of the Plan. "Plan" means the Cornerstone Bank Deferred Compensation Plan, as reflected in this document, as the same may be amended from time to time after the Effective Date. "Plan Administrator" means the Employer. "Plan Year" means the calendar year. Section 3. PARTICIPANTS From time to time, in its sole discretion, the Board may designate one or more Employees or Directors as eligible for participation in the Plan. An Employee or Director so designated shall immediately become a "Participant" in the Plan. A Participant shall continue to participate in the Plan until his status as a Participant is terminated by either a complete distribution of his Deferred 2 Compensation Account pursuant to the terms of the Plan or by written directive of the Board. Section 4. DEFERRED COMPENSATION ACCOUNTS A. Establishment of Deferred Compensation Accounts. The Employer will establish a Deferred Compensation Account for each Participant. A Participant's Deferred Compensation Account shall have two subaccounts; a Cash Account to record amounts allocated under Section 4.D.(ii) and a Stock Account to record amounts allocated under Section 4.D.(iii). Such Deferred Compensation Account shall be a bookkeeping account only, maintained as part of the books and records of the Employer. B. Election of Participant. With respect to each Plan Year, a Participant may elect to have a percentage (up to 100%) or a flat dollar amount of his Compensation which is to be paid or awarded to him by the Employer for the Plan Year in question allocated to his Deferred Compensation Account and paid on a deferred basis pursuant to the terms of the Plan. Each election made pursuant to this Section 4.B. may specify a separate deferral percentage or dollar amount for each component of the Participant's Compensation (e.g. base salary, bonus, MRP, Annual Retainer or Meeting Fees). To exercise an election under this Section for any Plan Year, within 30 days prior to the commencement of the Plan Year, the Participant must advise the Employer of his election, in writing, on a form prescribed by the Employer (each, a "Deferral Notice"). Notwithstanding the preceding sentence, in the first year of the Plan, a Participant may complete a Deferral Notice at any time within thirty (30) days following the Effective Date. Such Deferral Notice shall apply only to Compensation payable to, or earned by, the Participant after the date on which the Deferral Notice is received by the Employer. C. Employer Contributions. Each time a Deferral Notice is submitted to the Employer in accordance with Section 4.B. above, during the next Plan Year, the Employer will allocate to the Participant's Deferred Compensation Account the percentage or dollar amount of Compensation, specified in the Deferral Notice. Any amounts so allocated by the Employer are called "Employer Contributions." D. Adjustment of Account Balances. (i) Participant Election. At the time that a Participant submits a Deferral Notice, he shall elect the percentage of Employer Contributions to be allocated to his Cash Account (to be adjusted pursuant to Paragraph (ii) of this Section 4.D.) and his Stock Account (to be adjusted pursuant to Paragraph (iii) of this Section 4.D.). Any election made pursuant to this Paragraph (i) shall be irrevocable with respect to the affected Employer Contributions. (ii) As of each Adjustment Date, the Plan Administrator shall credit the balance in the Participant's Cash Account with Additions which shall mirror the quarterly appreciation or depreciation experienced by the investment funds selected by the Participant in accordance with the provisions of this Section 4.D.(ii). A Participant shall designate on such form or forms as may be satisfactory to the Plan Administrator, the portion of his Cash Account to be treated as credited to 3 each of the investment funds that may be offered by the Board in its discretion. Such designations shall specify, in ten percent (10%) increments, the percentages to be treated as credited to each investment fund offered. Such designations shall remain in effect until changed by an express designation by the Participant. Such designations may be changed by the Participant as of the first day of any prospective calendar quarter, provided that reasonable notice of the change is given to the Plan Administrator. The crediting or debiting of Additions shall occur so long as there is a balance in the Participant's Cash Account regardless of whether the Participant has terminated service with the Employer or has died. The Plan Administrator may prescribe any reasonable method or procedure for the accounting of Additions. (iii) As of each Adjustment Date, the amount credited to the Stock Account of each Participant shall be divided by the then Fair Market Value of the Common Shares. Upon completion of this calculation, each Stock Account shall be credited with the resulting number of whole Common Shares and any remaining amounts shall continue to be credited to the Stock Account until converted to whole Common Shares at a future Adjustment Date. The Stock Account of each Participant shall be credited with cash dividends on the Common Shares on and after the date credited to the Stock Account. At the following Adjustment Date, the amount of cash dividends credited to each Stock Account (and any other amounts then credited to such account) shall be divided by the then Fair Market Value of the Common Shares; and the Stock Account of each Participant shall be credited with the resulting number of whole Common Shares and any remaining amounts shall continue to be credited to the Stock Account until converted to whole Common Shares at a future Adjustment Date. The Plan Administrator may prescribe any reasonable method or procedure for the accounting of Additions. E. Stock Adjustments. The number of Common Shares in the Stock Account of each Participant shall be adjusted from time to time to reflect stock splits, stock dividends or other changes in the Common Shares resulting from a change in capital structure. F. Participant's Rights in Accounts. A Participant's only right with respect to his Deferred Compensation Account (and amounts allocated thereto) will be to receive payments in accordance with the provisions of Section 5 of the Plan. Section 5. DEFERRED BENEFITS A. Time of Payment. Distribution of a Participant's Deferred Compensation Account shall be made within thirty (30) days of the earlier of (i) the date specified by the Participant in the Deferral Notice delivered to the Plan Administrator at the time the deferral election is made; or (ii) the date of the Participant's termination of service as an Employee or Director due to retirement, death, disability (as determined by the Plan Administrator) or otherwise. Notwithstanding the previous provisions of this Section 5.A., (i) within one (1) year of the date on which distribution would otherwise commence to be made to a Participant, such Participant may, with the written approval of the Plan Administrator, elect to change the date such distribution will commence; and (ii) in the sole discretion of the Plan Administrator, the time for commencement of payments to be made to a Participant hereunder may be accelerated. 4 B. Method of Distribution. A Participant's Deferred Compensation Account shall be distributed to the Participant in either (i) a single lump sum payment; or (ii) equal annual installments over a period not to exceed ten (10) years. A Participant shall elect the form of distribution in the Deferral Notice. In the event that a distribution is made in annual installment payments, the Participant's Deferred Compensation Account shall continue, during such payment period, to be adjusted in accordance with the applicable provisions of Section 4.D. Cash Accounts shall be distributed in cash. Stock Accounts shall be distributed either in Common Shares or in cash at the election of the Plan Administrator. In the event that a distribution of a Participant's Stock Account is made in cash, the Plan Administrator shall determine the amount of such distribution by using the Fair Market Value of the Common Shares as of either the date of distribution specified by the Participant in his Deferral Notice or the date on which the Participant's service as an Employee or Director terminated, whichever may be applicable. C. Hardship Distributions. Prior to the time a Participant's Deferred Compensation Account becomes payable, the Plan Administrator, in its sole discretion, may elect to distribute all or a portion of such account in the event such Participant requests a distribution due to severe financial hardship. For purposes of this Plan, severe financial hardship shall be deemed to exist in the event the Plan Administrator determines that a Participant needs a distribution to meet immediate and heavy financial needs resulting from a sudden or unexpected illness or accident of the Participant or a member of the Participant's family, loss of the Participant's property due to casualty or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. A distribution based on financial hardship shall not exceed the amount required to meet the immediate financial need created by the hardship and shall be made in a single lump sum cash payment. With respect to a Participant's Stock Account, any hardship distribution shall be made in cash, based upon the Fair Market Value of the Common Shares as of the date of distribution. D. Payment Upon Change in Control. Notwithstanding any provisions contained elsewhere in this Plan, a Participant's Deferred Compensation Account shall be distributed to him, in a single lump sum payment, within five (5) business days following his termination of service with the Employer after the occurrence of a Change in Control. In addition, to the extent that a Participant's Deferred Compensation Account is distributed pursuant to the preceding sentence, the Employer shall make an additional payment to the Participant, within five (5) business days following his termination of service; in an amount sufficient to allow such Participant to pay all federal, state and local income and/or excise taxes applicable to the distribution of his Deferred Compensation Account. Such additional payment shall be determined by the Employer's independent auditors. In the event that, pursuant to Section 10, the Employer establishes a trust to pay benefits under the Plan, within ten (10) days following a Change in Control, the Employer must make contributions to that trust in an amount that will allow the trust to fully satisfy all benefit obligations under the Plan. Each Plan Year thereafter the Employer shall be required to make additional contributions to the trust in amounts that will allow the trust to continue to fully satisfy all benefit obligations under the Plan. If, upon a Change in Control, the Employer had not established a trust to pay benefits under the Plan, within five (5) days following such Change in Control, the Employer shall establish such a trust and make all contributions (upon the Change in Control and for future years) as required under the previous provisions of this Section 5.D. 5 E. Payment of Benefits Upon Death of Participant. In the event of the death of a Participant, either before or after benefit payments have commenced under Section 5.A. above, benefit payments called for under this Section 5 will thereafter be made to the Participant's Beneficiary or, if there is no Beneficiary, to the Participant's estate. If a Participant dies before benefit payments have commenced under Section 5.A., any distribution under this Section 5.E. shall be made in a single lump sum payment equal to the Participant's Deferred Compensation Account at the time of his death. If a Participant dies while benefit payments are being made pursuant to Section 5.A. in annual installments, in the discretion of the Plan Administrator, distribution under this Section 5.E. may be made either (i) in a single lump sum payment equal to the Participant's undistributed portion of his Deferred Compensation Account at the time of his death; or (ii) by continuation of the remaining installment payments to the Participant's Beneficiary. F. Taxes. In the event any taxes are required by law to be withheld or paid from any payments made pursuant to the Plan, the Plan Administrator shall deduct such amounts from such payments and shall transmit the withheld amounts to the appropriate taxing authority. Section 6. NO FIDUCIARY RELATIONSHIP- Nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall create or be construed to create any fiduciary relationship between the Employer and any Participant, Beneficiary or any other person. Section 7. ASSIGNMENT OR ALIENATION - The right of a Participant, Beneficiary or any other person to the payment of a benefit under this Plan may not be assigned, transferred, pledged or encumbered except by Will or by the laws of descent and distribution. Section 8. PLAN ADMINISTRATION - The Plan Administrator will have the right to interpret and construe the Plan and to determine all questions of eligibility and of status, rights and benefits of Participants and all other persons claiming benefits under the Plan. In all such interpretations and constructions, the Plan Administrator's determination will be based upon uniform rules and practices applied in a nondiscriminatory manner and will be binding upon all persons affected thereby. Subject to the provisions of Section 9 below, any decision by the Plan Administrator with respect to any such matters will be final and binding on all parties. The Plan Administrator will have absolute discretion in carrying out its responsibilities under this Section 8. Section 9. CLAIMS PROCEDURE A. Filing Claims - Any Participant or Beneficiary entitled to benefits under the Plan may file a claim request with the Plan Administrator. B. Notification to Claimant - If a claim request is wholly or partially denied, the Plan Administrator will furnish to the claimant a notice of the decision within ninety (90) days in writing and in a manner calculated to be understood by the claimant, which notice will contain the following information: 6 (i) the specific reason or reasons for the denial; (ii) specific reference to pertinent Plan provisions upon which the denial is based; (iii) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (iv) an explanation of the Plan's claims review procedure describing the steps to be taken by a claimant who wishes to submit his claims for review. C. Review Procedure - A claimant or his authorized representative may, with respect to any denied claim: (i) request a review upon a written application filed within sixty (60) days after receipt by the claimant of written notice of the denial of his claim; (ii) review pertinent documents; and (iii) submit issues and comments in writing. Any request or submission will be in writing and will be directed to the Plan Administrator (or its designee). The Plan Administrator (or its designee) will have the sole responsibility for the review of any denied claim and will take all steps appropriate in the light of its findings. D. Decision on Review - The Plan Administrator (or its designee) will render a decision upon review. If special circumstances (such as the need to hold a hearing on any matter pertaining to the denied claim) warrant additional time, the decision will be rendered as soon as possible, but not later than one hundred twenty (120) days after receipt of the request for review. Written notice of any such extension will be furnished to the claimant prior to the commencement of the extension. The decision on review will be in writing and will include specific reasons for the decision, written in a manner calculated to be understood by the claimant, as well as specific references to the pertinent provisions of the Plan on which the decision is based. If the decision on review is not furnished to the claimant within the time limits prescribed above, the claim will be deemed denied on review. Section 10. UNSECURED AND UNFUNDED OBLIGATION - There shall be no contributions required or permitted to be made by any Participant in the Plan. All payments of benefits shall be made directly from the general assets of the Employer, and the right of a Participant or Beneficiary to any payment of such benefits shall be solely that of an unsecured general creditor of the Employer. No assets of the Employer shall be set aside, earmarked, placed in trust or escrow or represented as being specifically set aside to provide for Plan benefits. Notwithstanding any provision of this Section 10, the Employer may, in its discretion, establish a trust to pay all or a portion of the benefits payable under this Plan, provided that the assets of such trust shall remain, at all times, the assets of the Employer subject to the claims of its creditors. 7 Section 11. AMENDMENT AND TERMINATION OF THE PLAN - The Employer reserves the right, by a resolution of the Board, to amend the Plan at any time, and from time to time, in any manner which it deems desirable, provided that no amendment will adversely affect the accrued benefits of any Participant under the Plan. The Employer also reserves the right, by a resolution of the Board, to terminate this Plan at any time without providing any advance notice to any Participant; and in the event of any Plan termination, the Employer reserves the right to then distribute all amounts allocated to Participants' Deferred Compensation Accounts. Section 12. NO GUARANTEE OF PLAN PERMANENCY - This Plan does not contain any guarantee of provisions for continued service to any Employee, Director or Participant nor is it guaranteed by the Employer to be a permanent plan. Section 13. GENDER - Any reference in the Plan made in the masculine pronoun shall apply to both men and women. Section 14. GOVERNING LAW - This Plan shall be construed in accordance with and governed by the laws of the State of Ohio. IN WITNESS WHEREOF, the Employer has caused this Plan to be executed by a duly authorized officer as of the Effective Date. CORNERSTONE BANK By: /s/ John Raisbeck ---------------------------- Title: President and CEO 8 EX-13 7 ANNUAL REPORT TO SECURITY HOLDERS MARKET PRICE OF WESTERN OHIO FINANCIAL CORPORATION'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS There were 2,029,204 common shares of WOFC outstanding, excluding unearned employee benefit plan shares, on December 31, 1998, held of record by approximately 722 registered shareholders and 1,700 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.
Fiscal Year 1998 Fiscal Year 1997 Low High Dividend Low High Dividend ----- --------- -------- ----- --------- --------- First quarter $25.00 $27.75 $ .25 $21.00 $22.75 $ .25 Second quarter 24.75 27.00 .25 21.00 22.25 .25 Third quarter 19.75 25.25 .25 21.25 27.13 .25 Fourth quarter 19.75 23.38 .25 24.25 30.63 .25
The Company has repurchased shares and intends to continue to repurchase shares in order to enhance shareholder value. During 1998, the Company repurchased 277,500 shares and 16,500 in 1997. 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.
SELECTED CONSOLIDATED FINANCIAL INFORMATION December 31, ---------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- -------- --------- (In Thousands) Selected Financial Condition Data: Total assets $ 327,728 $ 371,988 $ 392,765 $ 231,387 $ 185,670 Loans and loans held for sale, net 234,812 277,731 287,611 150,476 104,269 Cash and cash equivalents 13,854 31,239 15,611 17,605 19,951 Mortgage-backed securities 50,044 22,433 36,843 45,719 40,533 Securities 15,402 22,455 35,729 12,039 16,889 Deposits 192,966 246,909 233,203 139,129 117,529 Borrowed funds 85,252 68,339 102,602 31,528 3,689 Total stockholders' equity 47,594 54,600 54,048 59,668 63,358 Selected Operations Data: Total interest income $ 25,856 $ 29,039 $ 24,160 $ 14,809 $ 12,445 Total interest expense 15,992 17,934 13,783 7,034 5,178 --------- --------- -------- -------- -------- Net interest income 9,864 11,105 10,377 7,775 7,267 Provision for loan losses (363) 2,285 399 6 --- --------- --------- -------- -------- -------- Net interest income after pro- vision for loan losses 10,227 8,820 9,978 7,769 7,267 Non-interest income: Loan fees and service charges 1,005 650 156 60 53 Gain on sales of loans, mortgage-backed securities and securities 652 311 340 1,207 2 Gain on sale of branches 2,054 --- --- --- --- Other non-interest income (22) 31 54 713 17 --------- -------- -------- ------- -------- Total non-interest income 3,689 992 550 1,980 72 Total non-interest expense 9,757 9,471 8,759 5,349 3,346 Income before income taxes and cumulative effect of accounting changes 4,159 341 1,769 4,400 3,993 Income tax expense 2,864 158 707 1,507 1,366 --------- -------- ------- ------- -------- Net income $ 1,295 $ 183 $ 1,062 $ 2,893 $ 2,627 ========= ======== ====== ======== ========
SELECTED CONSOLIDATED FINANCIAL INFORMATION December 31, ----------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Selected Financial Ratios and Other Data: Performance Ratios: Return on assets (ratio of net income to average total assets) 0.36% 0.05% 0.33% 1.42% 1.53% Interest rate spread information: Average during year 2.40 2.42 2.42 2.65 3.62 End of year 2.55 2.31 2.23 2.05 3.27 Net interest margin 2.91 2.95 3.26 4.01 4.40 Ratio of operating expense to average total assets 2.69 2.39 2.72 2.63 1.95 Return on retained earnings (ratio of net income to average equity) 2.42 0.34 2.00 4.72 7.92 Quality Ratios: Non-performing assets to total assets at end of year 1.39 0.54 0.52 0.01 0.04 Allowance for loan losses to non-performing loans 70.47 196.59 83.95 255.45 1,032.00 Allowance for loan losses to total loans, net 1.39 1.41 0.60 0.51 0.74 Allowance for loan losses to classified assets 68.89 130.08 73.74 87.66 110.73 Capital Ratios: Total equity to total assets at end of year 14.52 14.67 13.76 25.79 34.13 Average equity to average assets 14.80 13.44 16.50 30.07 19.31 Ratio of average interest-earning assets to average interest-bearing liabilities 1.11x 1.11x 1.19x 1.37x 1.25x Per Share Data: Earnings per share-Basic 0.60 0.08 0.47 1.18 0.42 Earnings per share-Diluted 0.58 0.08 0.46 1.15 0.42 Dividend payout ratio 1.67 12.50 2.13 0.85 0.30 Book value per share 23.45 22.91 23.48 25.27 25.32 Number of full service offices 6 10 10 5 5
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, West Central Mortgage Services, Incorporated, ("West Central"). The primary business of West Central 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 initiated efforts to solicit commercial loans. Management and the Board of Directors of the Company have sought to enhance shareholder value by repurchasing outstanding shares. FORWARD-LOOKING STATEMENTS When used in 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 interest 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 decreased $44.3 million in the year ending December 31, 1998, from $372.0 million in 1997 to $327.7 million in 1998. This decrease of 11.9% was reflective of reductions in cash and cash equivalents, securities and loans receivable. Cash and cash equivalents decreased $17.4 million from $31.2 million at December 31, 1997, to $13.8 million at December 31, 1998. Securities decreased $7.1 million from $22.5 million at December 31, 1997, to $15.4 million at December 31, 1998. The primary reason for the reduction in cash, cash equivalents and securities was to fund the sale of the branch deposits related to management's decision to exit the Cincinnati market and dispose of all four branch locations in the Cincinnati area. Net loans and loans held for sale decreased from $277.7 million at December 31, 1997, to $234.8 million at December 31, 1998, a decrease of $42.9 million, or 15.5%. The decrease was primarily the result of customers refinancing loans due to lower rates, and the Company selling new fixed-rate mortgage loans to the secondary market. Partly offsetting the decrease in net loans, the Company increased its investment in mortgage-backed securities $27.6 million to $50.0 million at December 31, 1998, from $22.4 million at December 31, 1997. Liabilities decreased from $317.4 million at December 31, 1997, to $280.1 million at December 31, 1998, a decrease of $37.3 million, or 11.7%. The primary reason for the reduction in total liabilities was the sale of approximately $84.4 million of deposits associated with the four branches in the Cincinnati area. Despite the sale of deposits, deposits increased during 1998 by $30.4 million as a result of continued aggressive advertising and competitive pricing. For the year, deposits decreased $53.9 million, or 21.8%, to $193.0 million at December 31, 1998, from $246.9 million at December 31, 1997. Offsetting the deposit decrease, the Company increased advances from the Federal Home Loan Bank of Cincinnati ("FHLB") $16.9 million, or 24.7%, from $68.3 million at December 31, 1997, to $85.2 million at December 31, 1998. Rates on advances drawn during the year ranged from 4.52% to 5.52%. The nature of these advances was to replace a portion of the deposits sold in the Cincinnati area. At December 31, 1998, all advances were fixed-rate. The above mentioned advances are secured by a blanket pledge of mortgages to the FHLB and are not tied to specific securities or mortgages. Total equity decreased $7.0 million, or 12.8%, primarily due to the $6.6 million net repurchase of shares during 1998. Earnings of $1.3 million less dividends of $2.1 million decreased retained earnings by $0.8 million in 1998. The Company is no longer subject to regulatory limitations on stock repurchases and intends to continue modest repurchases of stock. COMPARISON OF RESULTS OF OPERATIONS COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997 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, 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 decrease 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 $9.8 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 estimated a $363,000 reduction in the loan loss provision was reasonable. Management believes that the total allowance of $3.2 million on total assets of $328 million and total loans of $231 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. 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 OTS and the Federal Deposit Insurance Corporation ("FDIC"), which can order the establishment of additional or specific allowances. NON-INTEREST INCOME. Non-interest income increased from $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. 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. In 1999, it is anticipated the Company's effective tax rate will approach the U.S. federal income tax rate of 34%. COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996 GENERAL. Net income for the year ended December 31, 1997, was $183,000, a decrease of $879,000 compared to the year ended December 31, 1996. The decrease was primarily the result of an increase in the provision for loan losses. The provision for the year ended December 31, 1997, was $2.3 million, an increase of $1.9 million compared to the year ended December 31, 1996, which was $399,000. Net interest income increased by $728,000 from $10.4 million to $11.1 million, or 7.0%, primarily as a result of a combination of higher rates on average interest-earning assets and lower rates on interest-bearing liabilities. Non-interest income increased substantially as the result of increased fees earned on savings and checking accounts. For the year ended December 31, 1996, non-interest income also included a $234,000 gain from the sale of securities. Non-interest expense increased $712,000, from $8.8 million at December 31, 1996, to $9.5 million at December 31, 1997, primarily due to an approximate $610,000 in charges relating to the combination of the two previously separate Cincinnati subsidiaries into Cornerstone. The increase in non-interest expense also reflects a full year of costs of operating the Cincinnati offices. Income taxes decreased by $549,000 from $707,000 at December 31, 1996, to $158,000 at December 31, 1997, primarily as a result of lower income. INTEREST INCOME. Total interest income increased $4.9 million or 20.2% for the year ended December 31, 1997, compared to the prior year. This increase is chiefly due to the higher volume of interest earning assets. This higher volume is due mostly to a higher volume of loans receivable which reflects the full year addition of the Cincinnati subsidiaries, Mayflower and Seven Hills. Interest from investment securities and other sources rose by $511,000 primarily due to the full year earnings on the increased average investment resulting from the acquisitions. Interest income from the available for sale mortgage-backed securities declined $1.0 million due largely to the sale of $10.7 million of mortgage backed securities during 1997. INTEREST EXPENSE. Total interest expense increased $4.2 million or 30.1% for the year ended December 31, 1997, compared to the prior year. The increase was due primarily to a higher volume of both deposits and borrowings. Interest on deposits increased $3.0 million or 31.9% for the year ended December 31, 1997, compared to the prior year. Interest on borrowings increased $1.2 million or 26.4% over the prior year. PROVISION FOR LOAN LOSSES. The provision for loan losses is a result of management's periodic analysis of the adequacy of the allowance for loan losses and any specific losses applied to that allowance. There was a $2.3 million additional provision for loan losses during the year ended December 31, 1997. This is an increase of $1.9 million from a $399,000 provision during the prior year. Management identified losses and increased its provision for several problem loans during the fourth quarter of 1997. These loans were primarily of a commercial nature. Management believes that the total allowance of $3.9 million is adequate given the area economic conditions and its loan portfolio composition. At December 31, 1997, 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 $550,000 in 1996 to $992,000 in 1997. This increase is due primarily to an increase of $494,000 in fees and other charges. Management has actively sought to increase the fee income resulting from deposit activity. NON-INTEREST EXPENSE. Total non-interest expense increased from $8.8 million in 1996 to $9.5 million in 1997, an increase of 8.1%. The increase is the result of a combination of increased spending due to the name change to Cornerstone Bank and combination of the subsidiary institutions and increased spending for the full year operation of the acquired institutions. INCOME TAX EXPENSE. Income tax expense was $158,000 for the year ended December 31, 1997, a decrease of $549,000, or 77.7%, from the same period the prior year. Income taxes decreased primarily as a result of decreased earnings before income taxes. 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.
Year Ended December 31, -------------------------------------------------------------------------------------------------- 1998 1997 1996 -------------------------------- ------------------------------- ------------------------------ Average Interest Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned Yield/ Balance Paid Rate Balance Paid Rate Balance Paid Rate ----------- ------- ------ ----------- -------- ------ ----------- -------- ----- (Dollars in Thousands) Interest-earning assets: Loans receivable $252,232 $20,411 8.09% $298,111 $23,815 7.99% $235,936 $18,437 7.81% Mortgage-backed securities 27,626 1,608 5.85 28,994 1,843 6.39 43,243 2,854 6.64 Securities 14,781 980 6.65 33,083 2,143 6.40 27,190 2,069 7.45 Interest-bearing deposits 37,399 2,379 6.36 9,585 797 8.32 8,293 506 6.10 FHLB stock 6,649 478 7.19 6,102 441 7.23 3,914 294 7.51 ------- -------- --------- -------- ------- -------- Total interest-earning assets $338,687 $25,856 7.63 $375,875 $29,039 7.73 $318,576 $24,160 7.58 ======== ======= ======== ======= ======== ======= Non-earning assets 23,508 20,124 3,242 -------- -------- ------- Total assets $362,195 $395,999 $321,818 ========= ========= ======== Interest-bearing liabilities: Time deposits $164,302 $ 9,641 5.87 $175,163 $10,447 5.96 $144,140 $ 8,188 5.68 Demand and NOW deposits 12,990 180 1.39 11,998 129 1.08 13,640 146 1.07 Savings deposits 65,709 2,614 3.98 53,305 1,642 3.08 29,344 926 3.16 Borrowings 62,802 3,557 5.66 97,414 5,716 5.87 79,665 4,523 5.68 --------- -------- -------- ------- -------- ----- Total interest-bearing liabilities $305,803 $15,992 5.23 $337,880 $17,934 5.31 $266,789 $13,783 5.17 ========= ------- ======== ------- ======== ------- Non-earning liabilities 2,775 4,908 1,929 --------- --------- -------- Total liabilities $308,578 $342,788 $268,718 Equity 53,617 $ 53,211 $ 53,100 Total liabilities/equity $362,195 $395,999 $321,818 ========= ========= ======== Net interest income $ 9,864 $11,105 $10,377 ========= ======== ======= Net interest rate spread 2.40% 2.42% 2.42% ==== ===== ===== Net earning assets $ 32,884 $ 37,995 $ 51,787 ========= ========= ======== Net yield on average interest- earning assets 2.91% 2.95% 3.26% ===== ===== ===== Average interest-earning average interest-bearing liabilities 1.11x 1.11x 1.19x ===== ===== =====
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.
Year Ended December 31, Year Ended December 31, -------------------------------- ----------------------------------------- 1997 vs. 1998 1996 vs. 1997 -------------------------------- ----------------------------------------- Increase Increase (Decrease) (Decrease) Due To Total Due to Total ----------------- Increase ----------------- Increase Volume Rate (Decrease) Volume Rate (Decrease) ------ ----- ---------- ------- ------ ---------- (Dollars in Thousands) Interest-earning assets: Loans receivable $(3,709) $ 305 $(3,404) $4,957 $ 421 $ 5,378 Mortgage-backed securities (84) (151) (235) (909) (102) (1,011) Securities (1,237) 74 (1,163) 379 (305) 74 Other 1,875 (256) 1,619 287 151 438 ------- ----- ------- -------- ------ ------- Total interest-earning assets $(3,155) $ (28) $(3,183) $4,714 $ 165 $4,879 ======= ===== ======= ======= ====== ======= Interest-bearing liabilities: Time deposits $ (643) $ (163) $ (806) $2,412 $(153) $2,259 Demand and NOW deposits 12 39 51 (9) (8) (17) Savings deposits 431 541 972 772 (56) 716 Borrowings (1,952) (207) (2,159) 1,329 (136) 1,193 ------- ------- ------- ------- ------ ------- Total interest-bearing liabilities $(2,152) $ 210 $(1,942) $4,504 $(353) $4,151 ======= ===== ======= ======= ====== ======= Net interest income $(1,241) $ 728 ======= ======
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 are referred to as asset/liability management. One method used to analyze the Company's sensitivity to changes in interest rates is the "net portfolio value" ("NPV") methodology used by the OTS as part of its capital regulations. NPV is generally considered to be the present value of the difference between expected incoming cash flows on interest-earning and other assets and expected outgoing cash flows on interest-bearing and other liabilities. The application attempts to quantify interest rate risk as the change in the NPV which would result from a theoretical 200 basis point (1 basis point equals .01%) change in market interest rates. Both a 200 basis point increase in market interest rates and a 200 basis point decrease in market interest rates are considered. Presented on page 19 is an analysis of Cornerstone's interest rate risk as of December 31, 1998, and December 31, 1997, as measured by changes in NPV for instantaneous and sustained parallel shifts of 100 basis points in market interest rates. The tables also contain the policy limits set by the Board of Directors as the maximum change in NPV the Board of Directors deems advisable in the event of various changes in interest rates. Such limits have been established with consideration to the impact on the NPV capital position of various rate changes and the institution's strong capital position. As illustrated in the tables, 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.
December 31, 1998 December 31, 1997 ------------------ ------------------ Change in Interest Rate Board limit $ change % change $ change % change (Basis Points) % change in NPV in NPV in NPV in NPV - -------------- ----------- -------- --------- -------- --------- (Dollars in thousands) +300 (60) (13,580) (29) (15,912) (31) +200 (40) (8,505) (18) (9,984) (19) +100 (20) (3,731) (8) (4,537) (9) --- --- --- --- --- --- -100 (20) 1,551 3 3,113 6 -200 (40) 2,519 5 4,633 9 300 (60) 3,951 9 6,248 12
As of December 31, 1998, the percentage change in NPV 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 above table 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 rise from the recent historically low levels, Cornerstone's net interest income could be expected to be negatively affected. Moreover, rising interest rates could negatively affect Cornerstone's earnings and thereby the Company's earnings due to diminished loan demand. As part of its interest rate risk strategy, Cornerstone has attempted to utilize adjustable-rate and short-term-duration loans and investments. Cornerstone fully intends to limit the addition of fixed-rate long-duration loans and securities to its portfolio. In addition to this restructuring, it has also begun to offer consumer products 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, 1998, 1997 and 1996.
Year Ended December 31, ------------------------------ 1998 1997 1996 --------- --------- --------- (Dollars in Thousands) Net income $ 1,295 $ 183 $ 1,062 Adjustments to reconcile net income to net cash from operating activities (2,173) 668 (324) -------- -------- -------- Net cash from operating activities (878) 851 738 Net cash from investment activities 23,025 35,999 (82,460) Net cash from financing activities (39,532) (21,222) 79,728 -------- -------- -------- Net change in cash and cash equivalents (17,385) 15,628 (1,994) Cash and cash equivalents at beginning of period 31,239 15,611 17,605 -------- -------- -------- Cash and cash equivalents at end of period $ 13,854 $ 31,239 $ 15,611 ======== ======== ========
At December 31, 1998, the Company had $1.1 million in 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, 1998, was 36.3%. 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 of Cincinnati to maintain liquidity and to meet operating expenses. Management believes that loan repayments and other sources of funds will be adequate to meet the Company's foreseeable liquidity needs. The Company's primary financing source during 1998 was borrowings from the FHLB of $76.2 million. Also a major financing source was the net increase in savings deposits of $30.4 million. The Company paid $2.1 million in dividends and acquired treasury stock for $6.6 million in 1998. Liquidity management is a daily and long-term responsibility of management. The Company adjusts its investments in liquid assets based upon assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-bearing deposits and (iv) the objectives of its asset/liability management program. Excess liquidity is invested generally in interest-bearing overnight deposits and other short-term government and agency obligations. If the Company requires additional funds beyond its internal ability to generate, it has additional borrowing capacity with the FHLB of Cincinnati. The Company anticipates that it will have sufficient funds available to meet current loan commitments. At December 31, 1998, the Company had outstanding commitments to extend credit that amounted to $14.4 million. Under The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), the capital requirements applicable to all savings institutions, including Cornerstone, were substantially increased. However, Cornerstone is in compliance with all applicable capital requirements and expects to remain so. OTS regulations require that institutions maintain "tangible capital" of not less than 1.5% of the institution's adjusted total assets. Tangible capital is defined as "core capital" less any intangible assets. Core capital is comprised of common 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 that 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 $1.8 million as of December 31, 1998. The following table summarizes Cornerstone's regulatory capital requirements and actual capital at December 31, 1998.
Excess of Actual Capital Over Current Actual Capital Current Requirement Requirement -------------------- --- ------------------- ----------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT -------- ------- --------- -------- -------- --------- (Dollars in thousands) Tangible capital $41,078 12.56% $ 4,906 1.50% $36,172 11.06% Core capital 41,078 12.56 13,082 4.00 27,996 8.56 Risk-Based capital 42,847 24.16 14,188 8.00 28,659 16.16
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, 1999, 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. SFAS No. 134, "Accounting for Mortgage-backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," changes the way companies involved in mortgage banking account for certain securities and other interests they retain after securitizing mortgage loans that were held for sale. SFAS 134 allows any retained mortgage-backed securities after a securitization of mortgage loans held for sale to be classified based on holding intent in accordance with SFAS 115, except in cases where the retained mortgage-backed security is committed to be sold before or during the securitization process in which case it must be classified as trading. Previously, all retained mortgage-backed securities were required to be classified as trading. SFAS 134 will be effective on January 1, 1999, and is not expected 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's lending and deposit activities are almost entirely dependent upon computer systems which process and record transactions, although the Company can effectively operate with manual systems for brief periods when its electronic systems malfunction or cannot be accessed. The Company utilizes the services of a nationally recognized data processing service bureau that specializes in data processing for financial institutions. In addition to its basic operating activities, the Company's facilities and infrastructure, such as security systems and communications equipment, are dependent, to varying degrees, upon computer systems. The Company is aware of the potential Year 2000 related problems that may affect the computers which control or operate the Company's operating systems, facilities and infrastructure. In 1997, the Company began a process of identifying any Year 2000 related problems that may be experienced by its computer-operated or computer-dependent systems. The Company has contacted the companies that supply or service the Company's computer-operated or computer-dependent systems to obtain confirmation that each system that is material to the operations of the Company is either currently Year 2000 compliant or is expected to be Year 2000 compliant. With respect to systems that cannot presently be confirmed as Year 2000 compliant, the Company will continue to work with the appropriate supplier or servicer to ensure insofar as possible that all such systems will be rendered compliant in a timely manner, with minimal expense or disruption of the Company's operations. All of the identified computer systems affected by the Year 2000 issue are currently in the renovation, validation or implementation phase of the process of becoming Year 2000 compliant. As a contingency plan, the Company has determined that if such service providers were to have their systems fail, the Company would implement manual systems until such systems could be re-established. The Company does not anticipate that such short-term manual systems would have a material adverse effect on the Company's operations. The expense of any change in suppliers or servicers is not expected to be material to the Company. The Company has examined its computer hardware and software and determined it will cost approximately $128,000 to make such systems Year 2000 compliant. Of that amount, the Company has already spent $47,000. At this time, however, any additional expense that may be incurred by the Company in connection with Year 2000 issues cannot be determined. In addition to the possible expense related to its own systems, the Company could incur losses if loan payments are delayed due to Year 2000 problems affecting any of the Company's significant borrowers or impairing the payroll systems of large employers in the Company's primary market area. Because the Company's loan portfolio is highly diversified with regard to individual borrowers and types of businesses and the Company's primary market area is not significantly dependent on one employer or industry, the Company does not expect any significant or prolonged Year 2000 related difficulties will affect net earnings or cash flow. Although the company does 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. REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Western Ohio Financial Corporation We have audited the accompanying consolidated balance sheet of Western Ohio Financial Corporation as of December 31, 1998, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for the year 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 and 1996 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 1998 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Western Ohio Financial Corporation as of December 31, 1998, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ Crowe, Chizek and Company LLP February 12, 1999 Columbus, Ohio WESTERN OHIO FINANCIAL CORPORATION
WESTERN OHIO FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 (Dollars in thousands, except share data) 1998 1997 ----- ----- ASSETS Cash and cash equivalents $ 3,987 $ 4,006 Overnight deposits in other financial institutions 4,550 22,350 Interest-bearing deposits in other financial institutions 5,317 4,883 ------- -------- Total cash and cash equivalents 13,854 31,239 Securities available for sale 15,402 22,455 Mortgage-backed securities available for sale 50,044 22,433 Federal Home Loan Bank stock 6,948 6,470 Loans, net 230,914 277,731 Loans held for sale 3,898 - Premises and equipment, net 3,241 3,924 Accrued interest receivable 1,897 2,360 Goodwill - 3,581 Other assets 1,530 1,795 -------- -------- Total assets $327,728 $371,988 ======== ======== LIABILITIES Deposits $192,966 $246,909 Borrowed funds 85,252 68,339 Advance payments from borrowers for taxes and insurance 881 893 Other liabilities 1,035 1,247 -------- -------- Total liabilities 280,134 317,388 -------- -------- 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 40,458 Retained earnings 20,351 21,198 Unearned employee stock ownership plan shares (1,309) (1,547) Unearned management recognition plan shares (1,092) (396) Treasury stock; 476,317 and 261,565 shares, at cost (10,714) (5,448) Accumulated other comprehensive income (120) 309 -------- -------- Total shareholders' equity 47,594 54,600 -------- -------- Total liabilities and shareholders' equity $327,728 $371,988 ======== ========
See accomanying notes to financial statements. WESTERN OHIO FINANCIAL CORPORATION WESTERN OHIO FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands, except per share data)
1998 1997 1996 -------- -------- -------- Interest and dividend income Loans, including fees $20,411 $23,815 $18,437 Mortgage-backed securities 1,608 1,843 2,854 Other securities 980 2,143 2,069 Interest-bearing deposits and overnight funds 2,379 797 506 Other interest and dividend income 478 441 294 ------- ------- ------- Total interest income 25,856 29,039 24,160 ------- ------- ------- Interest expense Deposits 12,435 12,218 9,260 Borrowed funds 3,557 5,716 4,523 ------- ------- ------- Total interest expense 15,992 17,934 13,783 ------- ------- ------- Net interest income 9,864 11,105 10,377 Provision for loan losses (363) 2,285 399 ------- ------- ------- Net interest income after provision for loan losses 10,227 8,820 9,978 ------- ------ ------- Noninterest income Service fees and other charges 1,005 650 156 Net gain (loss) on sale of securities 307 (5) 234 Net gain on sale of portfolio loans - 228 83 Net gain on sale of loans held for sale 345 - - Net gain (loss) on sale or disposal of premises and equipment (82) 88 23 Net gain on sale of branches 2,054 - - Other income 60 31 54 ------ ------- ------- Total noninterest income 3,689 992 550 ------ ------- ------- Noninterest expense Salaries and employee benefits 4,494 4,410 3,731 Occupancy and equipment 965 950 773 Deposit insurance premiums 148 128 1,465 State franchise taxes 748 732 898 Professional fees 703 405 360 Advertising 436 354 265 Amortization of goodwill 295 425 246 Data processing services 455 643 283 Other expenses 1,513 1,424 738 ------ ------ ------- Total noninterest expense 9,757 9,471 8,759 ------ ------ ------- Income before income taxes 4,159 341 1,769 Provision for income taxes 2,864 158 707 ----- ------ ------- Net income $1,295 $ 183 $ 1,062 ====== ====== ======= Earnings per share - Basic $ .60 $ .08 $ .47 ====== ====== ======= Earnings per share - Diluted $ .58 $ .08 $ .46 ====== ====== =======
See notes to accompanying financial statements. WESTERN OHIO FINANCIAL CORPORATION WESTERN OHIO FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended December 31, 1998, 1997, and 1996 (Dollars in thousands)
1998 1997 1996 ------ ------ ------ Net income $1,295 $ 183 $1,062 Other comprehensive income, net of tax Unrealized gain (loss) on available for sale securities arising during the period (226) 548 (719) Reclassification adjustment for amounts realize on securities sales included in net income (203) 3 (154) ----- ----- ------ Total other comprehensive income (429) 551 (873) ------ ----- ------ Comprehensive income $ 866 $ 734 $ 189 ====== ===== ======
See notes to accompanying financial statements. WESTERN OHIO FINANCIAL CORPORATION WESTERN OHIO FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years Ended December 31, 1998, 1997, and 1996 (Dollars in thousands, except per share data)
Unearned Accumulated Additional Employee Other Common Paid-In Retained Benefit Treasury Comprehensive Stock Capital Earnings Plan Shares Stock INCOME TOTAL ----- ---------- -------- ----------- -------- ------------- ------- Balance, January 1, 1996 $ 26 $41,048 $24,447 $(3,034) $ (3,450) $ 631 $59,668 Net income --- --- 1,062 --- --- --- 1,062 Cash dividends - $1.00 per share --- --- (2,275) --- --- --- (2,275) Purchase of treasury shares --- --- --- --- (4,187) --- (4,187) Commitment to release employee stock ownership plan shares --- 86 --- 238 --- --- 324 Shares earned under management recognition plan, including related tax benefit realized on vesting of plan shares --- 31 --- 247 --- --- 278 Stock options exercised, including tax benefit --- (7) --- --- 58 --- 51 Change in fair value of securities available for sale --- --- --- --- --- (873) (873) ---- ------- ------- ------- -------- ----- ------- Balance, December 31, 1996 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 fair value of securities available for sale --- --- --- --- --- 551 551 ---- ------- ------- ------- -------- ----- ------- Balance, 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 --- --- --- (868) 868 --- --- 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 fair value of securities available for sale --- --- --- --- --- (429) (429) ---- ------- ------- ------- -------- ----- ------- Balance, December 31, 1998 $ 26 $40,452 $20,351 $(2,401) $(10,714) $(120) $47,594 ==== ======= ======= ======= ======== ===== =======
See notes to accompanying financial statements.
WESTERN OHIO FINANCIAL CORPORATION WESTERN OHIO FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1998, 1997, and 1996 (Dollars in thousands) 1998 1997 1996 ---- ---- ---- Cash flows from operating activities Net income $ 1,295 $ 183 $ 1,062 Adjustments to reconcile net income to net cash from operating activities Compensation expense on ESOP shares 358 379 324 Compensation expense on MRP shares, net of tax benefit 172 165 278 Depreciation and amortization 711 678 491 Federal Home Loan Bank stock dividends (478) (441) (294) Deferred loan origination fees (16) (119) (345) Amortization of premiums, accretion of discounts, net 78 (239) (58) Deferred income taxes (71) (177) 21 Provision for loan losses (363) 2,285 399 Net gain on sale of branches (2,054) --- --- Net (gain) loss on sale of securities (307) 5 (234) Net gain on sale of portfolio loans --- (228) (83) Net (gain) loss on sale or disposal of premises and equipment 82 (88) (23) Net loss on sale of real estate owned 32 --- --- Changes in: Loans held for sale (1,131) --- --- Other asset and other liabilities (83) (780) 429 Accrued interest receivable 463 (190) (999) Taxes payable 434 (581) (230) -------- ------- -------- Net cash from operating activities (878) 852 738 -------- ------- -------- Cash flows from investing activities Securities available for sale: Purchases (10,000) (2,001) (23,000) Proceeds from maturities 1,700 15,900 2,321 Proceeds from sales 15,193 --- 51 Mortgage-backed securities available for sale: Purchases (40,179) --- --- Proceeds from principal payments 5,188 3,908 7,567 Proceeds from sales 7,119 10,684 21,770 Purchases of Federal Home Loan Bank stock --- (167) (3,141) Purchases of loans --- (3,710) (45,236) Proceeds from sale of portfolio loans --- 15,751 17,783 Net (increase) decrease in loans 44,406 (4,047) (45,465) Premises and equipment expenditures (397) (483) (699) Proceeds from sale of premises and equipment 27 164 13 Purchase of real estate (249) --- --- Proceeds from sale of real estate owned 217 --- --- Acquisition of subsidiaries, net of cash received --- --- (14,424) -------- ------- -------- Net cash from investing activities 23,025 35,999 (82,460) -------- ------- --------
See accomanying notes to financial statements. (Continued)
WESTERN OHIO FINANCIAL CORPORATION WESTERN OHIO FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years Ended December 31, 1998, 1997, and 1996 (Dollars in thousands) 1998 1997 1996 ------- ------ ----- Cash flows from financing activities Cash paid for sale of branches (78,453) --- --- Net increase in deposits 30,422 13,706 17,284 Net change in advance payments by borrowers for taxes and insurance (12) 60 463 Proceeds from Federal Home Loan Bank advances 76,190 93,640 87,963 Repayments of Federal Home Loan Bank advances (59,277) (127,903) (19,571) Cash dividends paid (2,142) (2,219) (2,275) Proceeds from stock options exercised 351 1,863 51 Purchase of treasury stock (6,611) (370) (4,187) -------- --------- -------- Net cash from financing activities (39,532) (21,223) 79,728 -------- --------- -------- Net change in cash and cash equivalents (17,385) 15,628 (1,994) Cash and cash equivalents at beginning of year 31,239 15,611 17,605 -------- --------- -------- Cash and cash equivalents at end of year $ 13,854 $ 31,239 $ 15,611 ======== ========= ======== Supplemental disclosures of cash flow information Cash paid during the year for Interest $ 16,171 $ 17,926 $ 13,396 Income taxes 2,425 1,010 861 Noncash activities Transfer of portfolio loans to loans held for sale 2,767 --- ---
See notes to accompanying financial statements. WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share data) WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997, and 1996 (Dollars in thousands, except per share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPALS OF CONSOLIDATION: The accompanying consolidated financial statements include the accounts of Western Ohio Financial Corporation and its wholly owned subsidiary, Cornerstone Bank, together referred to as "the Corporation." The financial statements of Cornerstone Bank ("Cornerstone") include the accounts of its wholly-owned subsidiaries, West Central Mortgage Services, Inc. ("WCMS") 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. Cash flows are reported net 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 separately 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 ("FHLB") stock are carried at cost. Securities are written down to fair value when a decline in fair value is not considered temporary. Gains and losses on sales are determined using the amortized cost of the specific security sold. Interest income includes amortization of purchase premiums and discounts. LOANS AND LOANS HELD FOR SALE: Loans are reported at the principal balance outstanding, net of unearned interest, 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. (Continued) WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation allowance for probable credit losses, increased by the provision for loan losses and decreased by charge-offs net of recoveries. Management estimates the allowance balance required using past loan loss experience, known and inherent risks in 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: Asset cost is reported net of accumulated depreciation. Depreciation expense is calculated using straight-line and accelerated methods based on the estimated useful lives of the assets. These assets are reviewed for impairment when events indicate the carrying amount may not be recoverable. Maintenance and repairs are charged to expense as incurred and improvements are capitalized. 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. Any impairment of a grouping is reported as a valuation allowance. Loan servicing rights totaled $28 and $40 at year-end 1998 and 1997. INTANGIBLES: Purchased intangibles, primarily goodwill and core deposit value, are recorded at cost and amortized over the estimated life. Goodwill amortization is straight-line over twenty years and core deposit amortization is accelerated over ten years. LONG-TERM ASSETS: These assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at discounted amounts. 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. 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 unawarded and 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. 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. DIVIDEND RESTRICTION: Banking regulations require the maintenance of certain capital levels which may limit the amount of dividends which may be paid. Regulatory capital requirements and dividend restrictions are more fully disclosed in a separate note. COMPREHENSIVE INCOME: Under a new accounting standard adopted on January 1, 1998, comprehensive income is reported for all periods. Comprehensive income includes both net income and other comprehensive income, which includes the change in unrealized gains and losses on securities available for sale. EARNINGS PER SHARE: Earnings per share is computed in accordance with SFAS No. 128, which requires dual presentation of basic and diluted earnings per share ("EPS") for entities with complex capital structures. Basic EPS is based on net income divided by the weighted average number of shares outstanding during the period. Diluted EPS includes the dilutive effect of stock options granted and unearned MRP shares using the treasury stock method. Unreleased ESOP shares are not considered to be outstanding shares for the purpose of determining the weighted-average number of shares used in the earnings per common share calculation. Earnings per common share is computed by dividing net income by the weighted-average number of shares outstanding for the year. The weighted-average number of common shares outstanding for basic and diluted earnings per share computations were as follows:
1998 1997 1996 ---------- --------- ---------- Weighted-average shares outstanding - Basic $2,173,140 $2,232,290 $2,254,598 Effect of stock options 32,509 46,993 41,991 Effect of unearned MRP shares 13,263 --- --- ---------- ---------- ---------- Weighted-average shares outstanding - Diluted $2,218,912 $2,279,283 $2,296,589 ========== ========== ==========
INDUSTRY SEGMENT: Internal financial information is primarily reported and aggregated solely in the line of business of banking. RECLASSIFICATIONS: Some items in prior financial statements have been reclassified to conform with the current presentation. (CONTINUED) WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 2 - ACQUISITION OF SUBSIDIARIES AND SALE OF BRANCH OFFICES In 1996, the Corporation acquired Mayflower Federal Savings Bank and Seven Hills Savings Association. Both institutions were located in Cincinnati, Ohio and operated in southwestern Ohio and northern Kentucky. The acquisitions were treated as purchases for accounting purposes. In 1997, these institutions were merged into Cornerstone as retail branch offices. In 1998, the Corporation sold its Cincinnati, Ohio area branch offices which consisted solely of the former Mayflower Federal Savings Bank and Seven Hills Savings Association branch offices. Details of these transactions are as follows: The acquisition costs were as follows:
MAYFLOWER SEVEN HILLS --------- ----------- Purchase price and related expenses $10,149 $10,652 ======= ======= Amount assigned to specific assets and liabilities $ 6,755 $ 9,794 Amount assigned to goodwill: Core deposits 945 858 Other 2,449 --- ------- ------- $10,149 $10,652 ======= =======
The goodwill assigned to core deposits was amortized over ten years by the sum-of-the-years method; other goodwill was amortized over twenty years by the straight-line method. Goodwill amortization expense totaled $295, $425 and $246 in 1998, 1997 and 1996. Results of operations of the subsidiaries acquired during 1996 are included in the statement of income of the Corporation since the dates of acquisition. Pro forma (unaudited) results of operations of the Corporation for 1996 as if the acquisition had taken place at January 1, 1996, are shown in the following schedule:
Pro Forma As Repported (Unaudited) ----------- ----------- Interest income $24,160 $27,830 Interest expense 13,783 16,370 ------- ------- Net interest income 10,377 11,460 Provision for loan losses (399) (565) ------- ------- Net interest income after provision for loan losses $ 9,978 $10,895 ======= ======= Net income $ 1,062 $ 380 ======= =======
Details of the assets and liabilities sold with the branch offices in 1998 are as follows:
Assets Cash and cash equivalents $78,453 Loans 23 Premises and equipment 586 ------- $79,602 ======= Liabilities Deposits $84,365 =======
The net gain realized in connection with the sale in 1998 was determined as follows:
Cash and cash equivalents $78,453 Premium on deposits sold 5,426 Write-off of intangible assets (3,255) Loss on premises and equipment (117) ------- Net gain on sale of branch offices $ 2,054 =======
(CONTINUED) WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share data) NOTE 3 - SECURITIES Year-end securities available for sale were as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- 1998 Securities U.S. Treasury $ 499 $ 3 $ --- $ 502 U.S. government agencies and corporations 15,000 16 (116) 14,900 ------- ---- ----- ------- Total securities $15,499 $ 19 $(116) $15,402 ======= ==== ===== ======= Mortgage-backed securities Mortgage pass-through certificates $50,128 $106 $(190) $50,044 ======= ==== ===== ======= 1997 Securities U.S. government agencies and corporations $22,196 $129 $ (4) $22,321 Equity 3 131 --- 134 ------- ---- ----- ------- Total securities $22,199 $260 $ (4) $22,455 ======= ==== ===== ======= Mortgage-backed securities Mortgage pass-through certificates $22,220 $375 $(162) $22,433 ======= ==== ====== =======
At year-end 1998 and 1997, 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 available for sale at year-end 1998 were as follows. Securities not due at a single maturity, primarily mortgage-backed securities, are shown separately.
Estimated Amortized Fair Cost Value --------- --------- Due in one year or less $ 499 $ 502 Due after five year through ten years 5,000 5,016 Due after ten years 10,000 9,884 Mortgage-backed securities 50,128 50,044 -------- ------- $ 65,627 $65,446 ======= =======
(Continued)
WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share data) Sales of available for sale securities were as follows: 1998 1997 1996 -------- ------- ------- Securities Proceeds $ 15,193 $ --- $ 51 Gross gains 190 --- 26 Gross losses --- --- --- Mortgage-backed securities Proceeds 7,119 10,684 21,770 Gross gains 122 --- 208 Gross losses 5 5 --- NOTE 4 - LOANS Year-end loans were as follows: 1998 1997 -------- -------- First mortgage loans secured by: One-to-four family residences $177,109 $224,289 Other properties 33,097 32,830 Construction properties 3,908 7,275 Consumer and other loans: Consumer 5,194 7,851 Commercial 6,914 3,886 Loans on savings deposits 257 485 Home improvement loans 15 18 Home equity 10,054 6,906 Other 13 16 -------- -------- Total loans 236,561 283,556 Less: Net deferred loan fees, premiums and discounts (83) (119) Loans in process (2,364) (1,784) Allowance for loan losses (3,200) (3,922) ------- -------- Net loans $230,914 $277,731
Activity in the allowance for loan losses is summarized as follows for the years ended December 31:
1998 1997 1996 ------ ------- ------- Beginning balance $3,922 $1,716 $ 774 Provision for loan losses (363) 2,285 399 Acquisitions --- --- 577 Loans charged-off (396) (79) (34) Recoveries of previous charge-offs 37 --- --- ------ ------ ------ Balance at end of year $3,200 $3,922 $1,716 ====== ====== ======
(Continued) WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share data) Impaired loans totaled $2,792 at year-end 1998. A portion of the allowance for loan losses was allocated to each of the impaired loans. The total amount of the allowance for loan losses allocated to impaired loans was $1,287 at year-end 1998. The average recorded investment in impaired loans was $2,799 during 1998. Interest income recognized on impaired loans in 1998 totaled $47, all of which was recognized on a cash basis. At year-end 1997, the Corporation had four loans totaling $3,433 which were considered impaired. A specific allowance of $1,256 of the outstanding balance was applied to those loans. 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:
1998 1997 ------- ------- Beginning balance $ 711 $1,445 New loans 1,104 41 Repayments (535) (357) Other changes (25) (418) ------ ------ Ending balance $1,255 $ 711 ====== ======
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. NOTE 5 - PREMISES AND EQUIPMENT Year-end premises and equipment were as follows:
1998 1997 ------- ------- Land $ 862 $ 1,099 Buildings and improvements 3,416 3,845 Furniture, fixtures and equipment 2,009 2,040 ------ ------- 6,287 6,984 Accumulated depreciation (3,046) (3,060) ------ ------- $3,241 $ 3,924 ====== =======
(Continued) WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share data) Certain facilities and equipment are leased under various non-cancelable operating leases, which expire at various dates through 2001. Rental expense on lease commitments amounted to $165 and $135 in 1998 and 1997. Future minimum lease payments on lease obligations are as follows: 1999 $ 153 2000 135 2001 17 -------- $ 305 ======== NOTE 6 - ACCRUED INTEREST RECEIVABLE Accrued interest receivable consisted of the following at year-end:
1998 1997 ------- ------- Securities $ 226 $ 486 Mortgage-backed securities 311 182 Loans and loans held for sale 1,360 1,692 -------- ------ $ 1,897 $2,360 ======= ======
NOTE 7 - DEPOSITS Year-end deposits were as follows:
1998 1997 ------- ------- NOW accounts, including noninterest-bearing deposits of $1,857 and $1,317 $ 12,708 $ 12,186 Money market accounts 49,084 37,182 Passbook savings accounts 13,629 22,115 Certificates of deposit: In denominations under $100,000 103,204 152,492 In denominations of $100,000 or more 14,341 22,934 -------- -------- $192,966 $246,909 ======== ========
At year-end 1998, scheduled maturities of certificates of deposit were as follows:
1999 $ 57,002 2000 42,874 2001 13,305 2002 1,477 2003 1,799 Thereafter 1,088 ------- $117,545 ========
(Continued) WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share data) NOTE 8- BORROWED FUNDS Borrowed funds at year-end 1998 and 1997 consisted of advances from the Federal Home Loan Bank of Cincinnati ("FHLB") and were as follows:
Current Weighted-Average Interest Rate 1998 1997 ---------------- ----- ----- Fixed rate advances with monthly interest payments, principal due in: 1998 5.93% $ --- $43,540 1999 5.62 30,500 20,000 2000 6.45 1,000 1,000 2001 8.35 340 340 2008 4.94 50,000 --- ------- ------- 5.23 $81,840 $64,880 ------- ------- Fixed rate advances with monthly principal and interest payments, final principal due in: 2003 5.89% 415 421 2004 7.01 2,692 2,730 2005 7.17 305 308 ------- ------- 6.89 3,412 3,459 ------- ------- 5.30 $85,252 $68,339 ======= =======
The maximum month-end balance of FHLB advances outstanding was $88,256 and $113,112 in 1998 and 1997. Average balances of borrowings outstanding during 1998 and 1997 were $62,803 and $86,929. Advances under the borrowing agreements are collateralized by a blanket pledge of the Corporation's residential mortgage loan portfolio and FHLB stock. At year-end 1998, required annual principal payments were as follows:
1999 $ 30,551 2000 1,055 2001 399 2002 63 2003 439 Thereafter 52,745 -------- $ 85,252 ========
(Continued) WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share data) NOTE 9 - 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 1998, 1997 and 1996 was $358, $379 and $324. The ESOP shares at year-end 1998 and 1997 were as follows:
1998 1997 ------ ------- Allocated shares 52,073 37,195 Shares committed to be released for allocation 14,878 14,878 Unreleased shares 81,830 96,708 -------- ------- Total ESOP shares 148,781 148,781 ======== ======= Fair value of unreleased shares $ 1,780 $ 2,599 ======== =======
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, 1998, 65,505 shares of the initial 105,800 shares have been awarded. One-fifth of such shares will be earned and non-forfeitable 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 $172, $444 and $247 for 1998, 1997 and 1996. 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 1998, 1997 and 1996. 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 $45, $35 and $16 for 1998, 1997 and 1996. (Continued) WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share data) 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 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. 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, 1996 28,229 236,271 $17.74 Forfeited 6,000 (6,000) 17.50 Exercised --- (3,000) 17.50 -------- --------- December 31, 1996 34,229 227,271 17.75 Plan amended (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 ======== =========
(Continued) WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share data) The following table summarizes information about stock options outstanding at year-end 1998:
Weighted Average Remaining Number Exercise Price Contractual Life Outstanding Exercisable -------------- ---------------- ----------- ----------- $ 11.47 8.30 years 12,751 12,751 17.50 6.09 84,375 39,638 18.50 6.30 27,672 18,602 19.75 6.39 5,000 3,000 20.50 6.55 5,000 3,000 21.75 8.38 1,000 200 22.00 8.49 25,000 5,000 23.00 9.87 32,936 32,936 26.63 8.81 8,000 1,600 ------- ------- 201,734 116,727 ======= =======
No stock appreciation rights or restricted stock awards have been granted. 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 1998, 1997 and 1996 had the Standard's fair value method been used to measure compensation cost for stock option plans. No compensation expense related to stock options was actually recognized.
1998 1997 1996 ---- ---- ---- Net income: As reported $ 1,295 $ 183 $ 1,062 Pro forma 1,132 5 974 Earnings per share: As reported Basic $ .60 $ .08 $ .47 Diluted .58 .08 .46 Pro forma Basic .52 --- .43 Diluted .51 --- .42
(Continued) WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share data) NOTE 10 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES LITIGATION: Various contingent liabilities are not reflected in the financial statements, including claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on financial condition or results of operations. 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 1998 and 1997, the Corporation had commitments to originate loans and amounts available on approved lines of credit as follows:
Fixed Variable Rate Rate Total -------- --------- -------- 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 ======= ======== ======= 1997 First mortgage loans $ 32 $ 1,230 $ 1,262 Consumer and other loans --- 1,057 1,057 Home equity lines of credit --- 3,413 3,413 Commercial lines of credit --- 2,596 2,596 -------- -------- ------- $ 32 $ 8,296 $ 8,328 ======= ======== =======
The interest rates on fixed-rate loan commitments ranged from 5.50% to 7.38 % at year-end 1998. (Continued) WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share data) 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 three 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. NOTE 11 - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying values and estimated fair values of financial instruments at year-end were as follows:
1998 1997 -------------------- ------------------ Carrying Fair Carrying Fair Amount Value Amount Value --------- -------- --------- -------- Financial assets: Cash and cash equivalents $ 13,854 $ 13,854 $ 31,239 $ 31,239 Securities available for sale 15,402 15,402 22,455 22,455 Mortgage-backed securities available for sale 50,044 50,044 22,433 22,433 FHLB stock 6,948 6,948 6,470 6,470 Loans, net 230,914 233,942 277,731 283,349 Loans held for sale 3,898 3,898 --- --- Accrued interest receivable 1,897 1,897 2,360 2,360 Financial liabilities: Deposits (192,966) (194,072) (246,909) (247,504) Borrowed funds (85,252) (82,754) (68,339) (68,337) Advance payments by borrowers for taxes and insurance (881) (881) (893) (893) Accrued interest payable (486) (486) (665) (665)
(Continued) WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share data) The estimated fair value approximates carrying amount for all items except those described below. Estimated fair value for securities and mortgage-backed 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 1998 and 1997, 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 1998 and 1997 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, non-financial 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. NOTE 12 - SAVINGS ASSOCIATION INSURANCE FUND RECAPITALIZATION Included in deposit insurance premium expense in the accompanying consolidated statement of income for the year ended December 31, 1996, is $1,064 for a special assessment resulting from legislation passed and enacted into law on September 30, 1996, to recapitalize the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation. Thrifts such as the Corporation paid a one-time assessment in November, 1996, of $0.657 for each $100 in deposits as of March 31, 1995. Because of the recapitalization, the Corporation began paying lower deposit insurance premiums in January, 1997. NOTE 13 - INCOME TAXES Income tax expense consisted of the following:
1998 1997 1996 ------ ------ ------- Current $ 2,935 $ 630 $ 686 Deferred (71) (472) 21 ------- ------- ------- $ 2,864 $ 158 $ 707 ======= ======= =======
(Continued) WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share data) The sources of year-end gross deferred income tax assets and liabilities were as follows:
1998 1997 ------ ------ Deferred tax assets Deferred compensation and management recognition plan $ 61 $ 144 Allowance for loans losses 1,034 1,094 Unrealized loss on securities available for sale 62 --- Other 59 --- -------- ------- 1,216 1,238 Deferred tax liabilities FHLB stock dividends 752 699 Depreciation --- 57 Adjustment for former use of cash basis accounting method for income tax reporting --- 99 Unrealized gain on securities available for sale --- 159 Other --- 52 -------- ------- 752 1,066 $ 464 $ 172 ======== =======
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:
1998 1997 1996 ------- ------- ------ Income tax computed at the statutory tax rate $ 1,414 $ 116 $ 601 Tax effect of: Dividend exclusion --- (17) (1) Intangible assets 1,372 145 81 Other 78 (86) 26 ------- ------ ------ $ 2,864 $ 158 $ 707 ======= ====== ====== Effective tax rate 68.9% 46.3% 40.0% ==== ==== ====
Prior to the enactment of legislation discussed below, thrifts which met certain tests relating to the composition of assets had been permitted to establish reserves for bad debts and to make annual additions thereto which could, 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" was computed under the experience method. The amount of the bad debt reserve deduction for "qualifying real property loans" could be computed under either the experience method or the percentage of taxable income method, based on an annual election. In August 1996, legislation was enacted that repealed the percentage of taxable income method of accounting used by many thrifts to calculate their bad debt reserve for federal income tax purposes. As a result, small thrifts such as 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 will occur 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 1998, the Corporation recaptured $52 in bad debt reserves. At December 31, 1998, the Corporation had $260 in bad debt reserves remaining to be recaptured for federal income tax purposes over the next five years. The deferred tax liability related to the recapture has been previously established. Retained earnings at December 31, 1998 and 1997, 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 Corporation'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, 1998 and 1997. 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. NOTE 14 - 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 1998 and 1997, 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 1998 and 1997. Management is not aware of any matters subsequent to December 31, 1998, 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 1998 and 1997:
1998 1997 ------- -------- Total shareholders' equity per financial statements $47,594 $54,600 Nonallowable items: Parent company equity (6,605) (8,797) Intangible assets (31) (3,597) Unrealized (gain) loss on securities available for sale 120 (309) ------ ------ Tier I (core) and tangible capital 41,078 41,897 Additional capital items: General valuation allowances (limited) 1,769 2,433 ------- ------- Total risk-based capital $42,847 $44,330 ======= =======
(Continued) WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share data) At year-end 1998 and 1997, Cornerstone's actual capital level and minimum required levels under prompt corrective action regulations were as follows:
Minimum Minimum Required Required To Be Adequately To Be Well Actual Capitalized Capitalized ------------- ----------------- -------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- -------- ------ ------- ------ 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 1997 Total capital (to risk-weighted assets) $44,330 21.6% $16,409 8.0% $20,511 10.0% Tier 1 (core) capital (to risk-weighted assets) 41,897 20.4 8,204 4.0 12,307 6.0 Tier 1 (core) capital (to adjusted total assets) 41,897 11.4 11,014 3.0 18,360 5.0 Tangible capital (to adjusted total assets) 41,897 11.4 5,507 1.5 N/A
In addition to certain federal income tax considerations, the Office of Thrift Supervision ("OTS") regulations impose limitations on the payment of dividends and other capital distributions by savings associations. Under OTS regulations applicable to converted savings banks, Cornerstone is not permitted to pay a cash dividend on its common shares if its regulatory capital would, as a result of payment of such dividends, be reduced below the amount required for the Liquidation Account, or below applicable regulatory capital requirements prescribed by the OTS. Under recently adopted OTS regulations, savings banks paying dividends in excess of the current year and preceding two years net retained income must first file an application with the OTS. Therefore, Cornerstone Bank will be required to submit an application to the OTS prior to paying dividends to the Corporation. Cornerstone currently meets all of its capital requirements and, unless the OTS determines that Cornerstone is an institution requiring more than normal supervision, Cornerstone may pay dividends in accordance with the foregoing provisions of OTS regulations. (Continued) WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share data) NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS Condensed financial information of Western Ohio Financial Corporation is as follows: CONDENSED BALANCE SHEETS DECEMBER 31, 1998 AND 1997
1998 1997 -------- -------- Assets Cash and cash equivalents $ 5,626 $ 2,762 Investment in bank subsidiary 40,989 45,804 Investment in non-bank subsidiary --- 37 Intercompany receivables 904 5,864 Other assets 300 257 -------- ------- Total assets $ 47,819 $54,724 ======== ======= Liabilities and shareholders' equity Other liabilities $ 225 $ 124 Shareholders' equity 47,594 54,600 -------- ------- Total liabilities and shareholders' equity $ 47,819 $54,724 ======== =======
(Continued) WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share data) NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 --------- -------- -------- INTEREST AND DIVIDEND INCOME Dividends from subsidiaries $ 6,000 $ 5,002 $ 15,500 Loan to ESOP 128 123 143 Other 53 75 357 -------- ------- -------- Total interest and dividend income 6,181 5,200 16,000 Other income --- 22 78 Operating expenses (608) (728) (805) -------- ------- -------- Income before income taxes and distributions in excess of earnings of subsidiary 5,573 4,494 15,273 Income tax benefit 145 157 76 ------- ------- -------- Income before distributions in excess of earnings of subsidiary 5,718 4,651 15,349 Distributions in excess of earnings of subsidiary (4,423) (4,468) (14,287) ------- ------- -------- Net income $ 1,295 $ 183 $ 1,062 ======== ======= ========
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 -------- -------- --------- Net Income $ 1,295 $ 183 $ 1,062 Other comprehensive income, net of tax Unrealized gain (loss) on available for sale securities arising during the period (429) 551 (837) Reclassification adjustment for amount realized on securities sales included in net income --- --- (36) -------- ------- -------- Total other comprehensive income (429) 551 (873) -------- ------- -------- Comprehensive income $ 866 $ 734 $ 189 ======== ======= ========
(Continued) WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share data) NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 --------- -------- --------- Cash flows from operating activities: Net income $ 1,295 $ 183 $ 1,062 Adjustments to reconcile net income to cash provided by operations: Gain on sale of securities available for sale --- --- (54) Distributions in excess of earnings of subsidiary 4,423 4,468 14,287 Compensation expense on ESOP and MRP shares 530 544 566 Changes in: Other assets (43) (172) 63 Other liabilities 101 (968) 927 -------- ------- -------- Net cash from operating activities 6,306 4,055 16,851 Cash flows from investing activities Investment in subsidiaries --- (37) (19,488) Proceeds from sale of investments --- --- 2,915 Intercompany advance --- (5,489) (152) Proceeds from repayments of intercompany advances 4,960 --- --- -------- ------- -------- Net cash from investing activities 4,960 (5,526) (16,725) Cash flows from financing activities Cash dividends paid (2,142) (2,219) (2,275) Proceeds from stock options exercised 351 1,863 --- Purchase of treasury stock (6,611) (370) (4,129) -------- ------- -------- Net cash from financing activities (8,402) (726) (6,404) -------- ------- -------- Net change in cash and cash equivalents 2,864 (2,197) (6,278) Cash and cash equivalents at beginning of year 2,762 4,959 11,237 -------- ------- -------- Cash and cash equivalents at end of year $ 5,626 $ 2,762 $ 4,959 ======== ======= ========
(Continued) WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share data) NOTE 16 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following tables summarize selected quarterly results of operations for 1998 and 1997.
Three months ended ------------------- December 31, 1998 March 31, June 30, September 30, December 31, --------- -------- ------------- ------------ (In thousands except per share data) 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 share Basic $ .19 $ .21 $ .09 $ .11 ======= ======== ======= ======= Diluted $ .19 $ .21 $ .08 $ .10 ======= ======== ======= ======= Dividends declared per share $ .25 $ .25 $ .25 $ .25 ======= ==== === ======= =======
Three months ended ----------------------------------------------- December 31, 1997 March 31, June 30, September 30, December 31, --------- -------- ------------- ------------ (In thousands except per share data) Interest and dividend income $ 7,114 $ 7,414 $ 7,450 $ 7,061 Interest expense 4,431 4,548 4,591 4,364 ------- ------- -------- -------- Net interest income 2,683 2,866 2,859 2,697 Provision for loan losses 67 43 246 1,929 ------- ------- -------- -------- Net interest income after provision for loan losses 2,616 2,823 2,613 768 Non-interest income 267 132 207 386 Non-interest expense (2,323) (2,226) (2,688) (2,234) ------- ------- -------- ------- Income before income tax 560 729 132 (1,080) Income tax expense (benefit) 228 277 72 (419) ------- ------- -------- ------- Net income $ 332 $ 452 $ 60 $ (661) ======= ======= ======== ======= Earnings per share Basic $ .15 $ .21 $ .03 $ (.31) ======= ======= ======= ======== Diluted $ .15 $ .20 $ .03 $ (.30) ======= ======= ======= ======== Dividends declared per share $ .25 $ .25 $ .25 $ .25 ======= ======= ======= ========
WESTERN OHIO FINANCIAL CORPORATION Springfield, Ohio 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 Company William N. Scarff President, Scarff's Nursery, Inc. and Scarff's Land Company Aristides G. Gianakopoulos President, The Champion Company Officers of Western Ohio Financial Company John W. Raisbeck President and Chief Executive Officer John T. Heckman Executive Vice President Gary L. Hicks Executive Vice President Robert P. Brezing Senior Vice President 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)325-9990. Annual Meeting The Annual Meeting of Shareholders of Western Ohio Financial Corporation will be held at 9:00 AM on Thursday, April 29, 1999 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., Suite 101, 938 Quail Street, Lakewood, CO 80215-5513. Legal Counsel Local Counsel Martin Browne Hull & Harper 1 South Limestone Street Springfield, OH 45502 Special Counsel Silver, Freedman & Taff, L.L.P. 1100 New York Avenue N.W. Washington D.C. 20005 Market Makers The Chicago Corporation 208 La Salle Street Chicago, IL 60604 (315)855-7600 S.J. Wolfe & Co. 32 North Main Street Suite 647 Dayton, OH 45402 (937)223-1626 Everen Securities, Inc. 77 West Wacker Dr. Chicago, IL 60601 (312)574-6000 Sandler O'Neill & Partners, L.P. 2 World Trade Center 104th Floor New York, NY 10048 (212)466-7744 Advest, Inc. One Commercial Plaza 280 Trumbull Street Hartford, CT 06103 (203)525-1421 Friedman Billings Ramsey & Co. Potomac Tower 18th Floor 1001 19th Street North Arlington, VA 22209 (703)312-9600 Keefe, Bruyette & Woods, Inc. 2 World Trade Center 85th Floor New York, NY 10048 (212)323-8300 To learn more about Cornerstone Bank's services, call 1-800-600-1884 We invite you to call on Cornerstone Bank for your personal and business banking needs. For more information about our various banking and financial services, call or visit any Cornerstone Bank branch, or call 1-800-600-1884. EX-21 8 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
Parent Subsidiary Ownership Organization - -------------------------- --------------------------------------- ----------------- -------------------- Western Ohio Financial Cornerstone Bank 100% Federal Corporation Cornerstone Bank West Central Mortgage Services, Inc. 100% Delaware Cornerstone Bank Springfield-Home Community 50% Ohio Reinvestment Corporation Cornerstone Bank West Central Financial Services, Inc. 100% Ohio
The financial statements of the Registrant are consolidated with those of its subsidiaries. EX-23.1 9 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 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 (the "Company") of our report dated February 12, 1999, on the 1998 consolidated financial statements of the Company, which report is included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. /s/ Crowe, Chizek and Company LLP Columbus, Ohio March 26, 1999 EX-23.2 10 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.2 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, 1998. /s/ Clark, Schaefer, Hackett & Co. Springfield, Ohio March 26, 1999 EX-27 11 FINANCIAL DATA SCHEDULE
9 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 DEC-31-1998 3,987 5,317 4,550 0 15,402 15,402 15,402 230,914 (3,200) 327,728 192,966 30,500 1,916 54,752 0 0 26 47,568 327,728 20,411 4,967 478 25,856 12,435 3,557 9,864 (363) 307 9,757 4,159 4,159 0 0 1,295 0.60 0.58 2.91 4,597 4,541 0 1,206 (3,922) 396 (37) (3,200) (3,200) 0 0
EX-99 12 INDEPENDENT AUDITORS' REPORT Exhibit 99 INDEPENDENT AUDITORS' REPORT Board of Directors Western Ohio Financial Corporation We have audited the accompanying consolidated statements of financial condition of Western Ohio Financial Corporation and its wholly-owned subsidiaries, West Central Mortgage Services, Inc. and Cornerstone Bank (formerly Springfield Federal Savings Bank, Mayflower Federal Savings Bank and Seven Hill Savings Association) and Cornerstone's subsidiary, West Central Financial Services, Inc., as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Western Ohio Financial Corporation and its subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Clark, Schaefer, Hackett & Co. ----------------------------------- Clark, Schaefer, Hackett & Co. January 23, 1998 Springfield, Ohio -----END PRIVACY-ENHANCED MESSAGE-----