Western Ohio Financial (WOFC) 10-Q 2001 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarterly Period ended September 30, 2001

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 incorporation or organization)	(IRS Employer Identification No.)

28 East Main Street, Springfield, Ohio 45501-0509
(Address of principal executive offices)
(Zip Code)

(937) 325-9990
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes           No    

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class:	Outstanding at November 9, 2001
Common stock, $.01 par value	1,773,168 common shares

TABLE OF CONTENTS

		CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
	Item 1. Condensed Financial Statements
		CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosure About Market Risk
PART II — OTHER INFORMATION
	Item 1 — Legal Proceedings
	Item 2 — Changes in Securities and Use of Proceeds
	Item 3 — Defaults Upon Senior Securities
	Item 4 — Submission of Matters to a Vote of Security Holders
	Item 5 — Other Information
	Item 6 — Exhibits and Reports on Form 8-K
SIGNATURES

WESTERN OHIO FINANCIAL CORPORATION

INDEX

		Page
PART I – FINANCIAL INFORMATION (UNAUDITED)
Item 1. Condensed Financial Statements
	Consolidated Statements of Financial Condition		3
	Consolidated Statements of Income		4
	Consolidated Statements of Comprehensive Income		5
	Consolidated Statements of Cash Flows		6
	Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosure About Market Risk			18
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			19
Item 2. Changes in Securities and Use of Proceeds			19
Item 3. Defaults Upon Senior Securities			19
Item 4. Submission of Matters to a Vote of Security Holders			19
Item 5. Other Information			19
Item 6. Exhibits and Reports on Form 8-K			19
SIGNATURES			20

2.

WESTERN OHIO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

Item 1. Condensed Financial Statements
(Amounts in thousands)

				September 30,			December 31,
				2001			2000
ASSETS
	Cash and cash equivalents				5,891			4,805
	Securities available for sale				42,005			48,653
	Federal Home Loan Bank stock				8,451			8,014
	Loans, net				272,563			283,604
	Premises and equipment, net				4,773			4,566
	Other assets				3,148			2,920
			Total assets	$	336,921		$	352,562
LIABILITIES AND SHAREHOLDERS’ EQUITY
	Deposits			$	210,325		$	208,332
	Borrowed funds				81,581			100,225
	Other liabilities				2,496			2,195
		Total liabilities			294,402			310,752
Shareholders’ equity
	Common stock, $.01 par value, 7,250,000 shares authorized, 2,645,000 shares issued				26			26
	Additional paid-in capital				40,613			40,617
	Accumulated other comprehensive income (loss)				425			(740	)
	Unearned employee stock ownership plan shares				(655	)		(833	)
	Unearned management recognition plan shares				(82	)		(102	)
	Shares held by deferred compensation plan				(173	)		(168	)
	Treasury stock; 871,499 and 829,166 shares at cost, respectively				(17,811	)		(17,055	)
	Retained earnings				20,176			20,065
		Total shareholders’ equity			42,519			41,810
			Total liabilities and shareholders’ equity	$	336,921		$	352,562

See accompanying notes to condensed consolidated financial statements.

3.

WESTERN OHIO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

			Three Months Ended				Nine Months Ended
(Amounts in thousands, except per share data)			September 30,				September 30,
			2001		2000		2001		2000
Interest income
		Loans, including fees	$	5,209	$	5,584	$	16,390	$	15,993
		Securities		631		809		2,075		2,464
		Interest-bearing deposits and overnight funds		50		14		91		71
		Other interest and dividend income		146		145		437		414
				6,036		6,552		18,993		18,942
Interest expense
		Deposits		2,556		2,698		7,984		7,742
		Borrowed funds		1,167		1,438		3,824		3,847
				3,723		4,136		11,808		11,589
Net interest income				2,313		2,416		7,185		7,353
Provision for loan losses				84		84		273		252
Net interest income after provision for loan losses				2,229		2,332		6,912		7,101
Noninterest income
		Service charges		377		193		1,079		785
		Gain on sale of loans		75		74		138		72
		Gain on sale of securities		—		—		3		—
		Other noninterest income		6		85		16		95
				458		352		1,236		952
Noninterest expense
	Salaries and employee benefits			992		981		3,033		3,013
	Occupancy and equipment			191		208		617		600
	FDIC insurance			10		11		30		34
	State franchise taxes			132		129		399		388
	Professional services			108		81		302		254
	Advertising			107		116		240		289
	Data processing			199		187		595		627
	Other noninterest expense			287		211		798		706
				2,026		1,924		6,014		5,911
Income before income tax				661		760		2,134		2,142
Income tax expense				226		271		745		764
Net income			$	435	$	489	$	1,389	$	1,378
			��
Earnings per common share
	Basic		$	.25	$	.27	$	.80	$	.75
	Diluted		$	.25	$	.27	$	.80	$	.74
Dividends per common share			$	.25	$	.25	$	.75	$	.75

See accompanying notes to condensed consolidated financial statements.

4.

WESTERN OHIO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

(Amounts in thousands)		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2001		2000		2001			2000
Net income		$	435	$	489	$	1,389		$	1,378
Other comprehensive income , net of tax:
	Unrealized gain on securities available for sale arising during the period		628		359		1,167			491
	Reclassification adjustment for amounts realized on securities sales included in net income		—		—		(2	)		—
	Total other comprehensive income		628		359		1,165			491
Comprehensive income		$	1,063	$	848	$	2,552		$	1,869

See accompanying notes to condensed consolidated financial statements.

5.

WESTERN OHIO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

					Nine Months Ended
(Amount in thousands)					September 30,
					2001			2000
Net cash from operating activities					$	1,740		$	1,572
Cash flows from investing activities
	Loans:
			Loan originations, net of payments received			12,478			(9,521	)
			Purchase of loans			(1,582	)		(11,928	)
	Securities available for sale:
			Maturities and principal payments			6,131			3,784
			Purchase of securities			(2,469	)		(1,118	)
			Sales of securities			4,623			—
	Premises and equipment expenditures					(691	)		(941	)
		Proceeds from sale of premises and equipment				20			29
				Net cash from investing activities		18,510			(19,695	)
Cash flows from financing activities
	Net change in deposits					1,993			4,832
	Net decrease in advances from borrowers for taxes and insurance					(303	)		(338	)
	Purchase of treasury stock					(853	)		(2,132	)
	Cash dividends paid					(1,316	)		(1,444	)
	Proceeds from exercise of stock options					49			—
	Net increase (decrease) in short-term borrowings					(16,075	)		12,516
	Proceeds from FHLB advances					2,500			960
	Repayments on FHLB advances					(5,069	)		(1,377	)
			Net cash from financing activities			(19,074	)		13,017
Net change in cash and cash equivalents						1,176			(5,106	)
Cash and cash equivalents at beginning of period						4,805			9,614
Cash and cash equivalents at end of period					$	5,981		$	4,508
Supplemental disclosures of cash flow information
	Cash paid during the period for:
			Interest		$	12,186		$	11,463
			Income taxes			646			640
	Noncash activities
			Transfer of loans held for sale to portfolio loans			—			217

See accompanying notes to condensed consolidated financial statements.

6.

WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Corporation’s annual report on Form 10-K for the year ended December 31, 2000. The financial data and results of operations for interim periods presented may not necessarily reflect the results to be anticipated for the entire year. Internal financial information is primarily reported and aggregated solely in the line of the banking business.

Consolidation Policy: The financial statements include Western Ohio Financial Corporation (“Western”) and its wholly-owned subsidiary Cornerstone Bank (“Cornerstone”), together referred to as the Company. The financial statements of Cornerstone include the accounts of its wholly-owned subsidiaries, CornerstoneBanc Financial Services, Inc. (“CFSI”) and West Central Financial Services, Inc. (“WCFS”). Intercompany transactions and balances are eliminated in consolidation.

Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, fair values of financial instruments and status of contingencies are particularly subject to change.

Income Taxes: Income tax expense is the total of the current-year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Income tax expense is based on the effective rate expected to be applicable for the entire year.

Earnings Per Common Share: Basic earnings per common share are based on net income divided by the weighted average number of common shares outstanding during the period. Employee Stock Ownership Plan (“ESOP”) shares are considered to be outstanding for the calculation unless unearned. Management Recognition Plan (“MRP”) shares are considered outstanding as they become vested. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options.

Accounting for Derivative Instruments and Hedging Activities: 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 flow. SFAS 133, does not allow hedging of a security that is classified as held to maturity, accordingly, upon adoption of SFAS 133, companies may reclassify any security from held to maturity to

7.

WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

available for sale if they wish to be able to hedge the security in the future. SFAS 133 became effective for the Company beginning January 1, 2001. The adoption of SFAS 133 did not have a significant impact on the Company’s financial statements since no derivatives are currently held.

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations.” SFAS 141 requires all business combinations within its scope to be accounted for using the purchase method, rather than the pooling-of-interests method. The provisions of the Statement apply to all business combinations initiated after June 30, 2001. The adoption of this statement will only impact the Company’s financial statements if it enters into a business combination.

Also, in June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets’, which addresses the accounting for such assets arising from prior and future business combinations. Upon the adoption of this Statement, goodwill arising from business combinations will no longer be amortized, but rather will be assessed regularly for impairment, with any such impairment recognized as a reduction to earnings in the period identified. Other identified intangible assets, such as core deposit intangible assets, will continue to be amortized over their estimated useful lives. The Company is required to adopt this Statement on January 1, 2002 and early adoption is not permitted. The adoption of this Statement will not materially impact the Company’s financial statements.

8.

WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 2 — SECURITIES

The amortized cost and fair values of securities available for sale were as follows:

(Amounts in thousands)					Gross		Gross
			Amortized		Unrealized		Unrealized			Fair
			Cost		Gains		Loss			Value
September 30, 2001
	U.S. government agencies		$	10,000	$	16	$	—		$	10,016
	Mortgage-backed securities			31,362		630		(3	)		31,989
	Total		$	41,362	$	646	$	(3	)	$	42,005
December 31, 2000
	U.S. government agencies		$	10,000	$	—	$	(566	)	$	9,434
	Mortgage-backed securities			39,774		39		(594	)		39,219
		Total	$	49,774	$	39	$	(1,160	)	$	48,653

Gross proceeds from sales of securities during the nine month period ending September 30, 2001 were $4,623,000, with gross gains of $3,000 included in earnings. There were no sales of securities during the nine months ended September 30, 2000.

NOTE 3 — LOANS

Loans were as follows:

(Amounts in thousands)			September 30,			December 31,
			2001			2000
First mortgage loans secured by:
	One- to four- family residential		$	163,456		$	178,106
	Other properties			66,219			67,919
	Construction properties			3,222			8,476
				232,897			254,501
Consumer and other loans
	Consumer			1,300			1,608
	Commercial			22,400			14,090
	Home equity			18,687			17,766
				42,387			33,464
		Total loans		275,284			287,965
Less:
	Net deferred loan fees, premiums and discounts			(97	)		(87	)
	Loans in process			(1,025	)		(2,609	)
	Allowance for loan losses			(1,599	)		(1,665	)
			$	272,563		$	283,604

9.

WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 3 – LOANS (Continued)

Activity in the allowance for loan losses was as follows:

(Amount in thousands)	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2001			2000			2001			2000
Beginning balance	$	1,611		$	1,497		$	1,665		$	2,781
Provision for loan losses		84			84			273			252
Recoveries		31			52			67			99
Charge-offs		(127	)		(76	)		(406	)		(1,575	)
Ending balance	$	1,599		$	1,557		$	1,599		$	1,557

Nonperforming loans were $3,090,000 and $3,601,000 at September 30, 2001 and December 31, 2000.

Impaired loans were as follows:

	September 30,		December 31,
	2001		2000
Loans with no allocated allowance for loan losses	$	532		1,709
Loans with allocated allowance for loan losses		226		352
Total	$	758	$	2,061
Amount of the allowance for loan losses allocated	$	79	$	241

NOTE 4 — DEPOSITS

Deposits were as follows:

(Amounts in thousands)	September 30,		December 31,
	2001		2000
Checking – Noninterest bearing	$	7,154	$	8,112
Checking — Interest bearing		11,262		10,839
Money market accounts		54,214		44,859
Passbook and savings accounts		10,958		10,994
Certificates of deposit		126,737		133,528
	$	210,325	$	208,332

10.

WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 5 – EARNINGS PER COMMON SHARE

The factors used in the earnings per share computation were as follows:
(Amounts in thousands, except per share data)

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2001			2000			2001			2000
Basic earnings per common share
	Net income	$	435		$	489		$	1,389		$	1,378
	Weighted average common shares outstanding		1,773			1,922			1,784			1,958
	Less: Average unallocated ESOP shares		(45	)		(60	)		(48	)		(63	)
	Less: Average nonvested MRP shares		(4	)		(47	)		(5	)		(48	)
	Average shares		1,724			1,815			1,731			1,847
	Basic earnings per common share	$	.25		$	.27		$	.80		$	.75
Diluted earnings per common share
	Net income	$	435		$	489		$	1,389		$	1,378
	Weighted average common shares outstanding for basic earnings per common shares		1,724			1,815			1,731			1,847
	Add: Dilutive effects of average nonvested MRP shares		—			—			—			—
	Add: Dilutive effects of stock options		11			3			11			3
	Average shares and dilutive potential common shares		1,735			1,818			1,742			1,850
	Diluted earnings per common share	$	.25		$	.27		$	.80		$	.74

Stock options covering 105,808 shares of common stock were not considered in computing diluted earnings per common share for the three and nine months ended September 30, 2001 as they were antidilutive. In addition, nonvested MRP awards for 4,457 and 4,565 shares of common stock were not considered in computing diluted earnings per common share for the three and nine months ended September 30, 2001.

11.

WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 6 — STOCK OPTION PLANS

The following is a summary of activity in the stock option and incentive plan:

	Stock Options
	Options						Weighted Average
	Available			Options			Exercise
	for Grant			Outstanding			Price
December 31, 2000		161,532			241,346		$	18.56
Granted		(5,800	)		5,800			17.91
Forfeited		5,428			(5,428	)		18.31
Exercised		—			(3,667	)		13.86
September 30, 2001		161,160			238,051		$	18.63

12.

WESTERN OHIO FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2. Management’s Discussion and Analysis of Financial Condition
             and Results of Operations

The following discusses the financial condition of the Company as of September 30, 2001 as compared to December 31, 2000, and the results of operations for the three and nine months ended September 30, 2001, compared with the same periods in 2000. This discussion should be read in conjunction with the interim financial statements and footnotes included herein.

Forward-Looking Statements

When used in this filing and in future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “would be”, “will allow”, “intends to”, “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimate”, “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties, including but not limited to changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area and competition, all or some of which could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made and advises readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected.

The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

Analysis of Financial Condition

Consolidated assets of the Company totaled $336.9 million at September 30, 2001, a decrease of $15.7 million from the December 31, 2000, total of $352.6 million. The primary decrease in assets is a result of a decrease of $11.0 million in net loans receivable as well as a decrease of $6.6 million in securities available for sale. Funds from loans and securities were primarily used to retire Federal Home Loan Bank borrowings of $18.6 million.

Net loans decreased $11.0 million, or 3.9% during the nine months ended September 30, 2001, decreasing from $283.6 million in December 31, 2000 to $272.6 million on September 30, 2001. Traditional one-to-four family residential mortgage loans decreased $14.7 million to $163.4 million at September 30, 2001 from $178.1 million at December 31, 2000, primarily due to loan sales, amortization and payoffs exceeding new volume. For the period, this decrease was offset by commercial loan originations increasing $8.3 million to $22.4 million at September 30, 2001 from $14.1 million at December 31, 2000. These increases were the result of Cornerstone’s effort to diversify its portfolio into more commercial type loans.

13.

WESTERN OHIO FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cash and cash equivalents increased by $1.1 million to $5.9 million on September 30, 2001, from $4.8 million on December 31, 2000. Cash and cash equivalents consist of cash, checking deposits and federal funds deposited at other financial institutions. The increase was primarily the result of loan and security sales.

Securities available for sale decreased $6.6 million from $48.7 million at December 31, 2000, to $42.1 million on September 30, 2001. The decline was due to sales of securities of $4.6 million in addition to principal repayments on existing mortgage-backed securities available for sale. The fixed-rate lower coupon securities were sold to reduce interest rate sensitivity within the investment portfolio.

Deposits at September 30, 2001 totaled $210.3 million, an increase of $2.0 million from $208.3 million at December 31, 2000. The increase occurred primarily in money market accounts, which increased $9.3 million to $54.2 at September 30, 2001 from $44.9 million at December 31, 2000. Certificates of deposits decreased $6.8 million from $133.5 million at December 31, 2000 to $126.7 million at September 30, 2001.

FHLB advances at September 30, 2001 totaled $81.6 million, a decrease of $18.6 million or 18.6% from $100.2 million at December 31, 2000. With the liquidity generated by the loan and securities portfolios, the Bank reduced borrowings from the FHLB during the period. The majority of borrowed funds are invested in loans to leverage the Company’s excess capital and improve the Company’s return on equity over time.

Total shareholders’ equity increased $700,000 from $41.8 million at December 31, 2000, to $42.5 million at September 30, 2001. This increase is primarily due to an improvement of $1.2 million in accumulated other comprehensive income offset by the Company purchasing approximately $853,000, or 46,600 shares, of its common stock during the first nine months of 2001.

As of September 30, 2001, the Company had commitments to make $1.5 million of residential loans; $2.4 million in commitments to fund draws on nonresidential loans and $3.6 million in commitments to fund commercial loans. It is expected that these loans will be funded within 30-60 days. The Company also had $1.0 million in commitments to fund loans on residential properties under construction. These commitments are anticipated to be filled within three to six months. Unused commercial lines of credit were $8.1 million and unused home equity lines of credit were $11.4 million.

Results of Operations

Operating results of the Company are affected by general economic conditions, monetary and fiscal policies of federal agencies and policies of agencies regulating financial institutions. The Company’s cost of funds is influenced by interest rates on competing investments and general market rates of interest. Lending activities are influenced by demand for real estate and other types of loans, which, in turn, is affected by the interest rates at which such loans are made, general economic conditions and availability of funds for lending activities.

The Company’s net income is primarily dependent on its net interest income (the difference between interest income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities). Net income is also affected by provisions for loan losses, service charges, gains on sale of assets, other income, noninterest expense and income taxes. The Company’s net income of $435,000 and $1,389,000 for the three and nine months ended September 30, 2001, represented a decrease of $54,000 and an increase of $11,000 respectively when compared to the same periods in 2000. Basic earnings per share decreased $.02 for the three month period ended September 30, 2001 from $.27 per share for the

14.

WESTERN OHIO FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

period ended September 30, 2000 to $.25 per share for the period ended September 30, 2001. Earnings per share for the nine-month period ended September 30, 2001 was $.80 per share compared to $.75 per share for the same period ended September 30, 2000, an increase of $.05 or 6.6%.

Net interest income is the largest component of the Company’s income and is affected by the interest rate environment and volume and composition of interest-earning assets and interest-bearing liabilities. Net interest income totaled $2,313,000 and $7,185,000 for the three and nine months ended September 30, 2001, compared to $2,416,000 and $7,353,000 for the same periods in 2000. The Company remains liability sensitive whereby its interest-bearing liabilities will generally reprice more quickly than its interest-earning assets. Therefore, the Company’s net interest margin will generally increase in periods of falling interest rates in the market and will decrease in periods of rising interest rates. Accordingly, in a rising interest rate environment, the Company may need to increase rates to attract and retain deposits. Since the Company’s loans generally mature or reprice over longer time periods than its deposits, the rise in interest rates may not have such an immediate impact on interest-earning assets. This lag could negatively affect net interest income in future periods

Interest and fees on loans totaled $5,209,000 and $16,390,000 for the three and nine months ended September 30, 2001 compared to $5,584,000 and $15,993,000 the three and nine months ended September 30, 2000. The decrease for the three-month period ending September 30, 2001 is due to the decrease in the interest rate market during the period. The increase for the nine-month period was due primarily to the increased origination of commercial loans.

Interest and dividends on securities totaled $631,000 and $2,075,000 for the three and nine months ended September 30, 2001, and $809,000 and $2,464,000 for the three and nine months ended September 30, 2000. The decrease was due to sales of securities and principal payments on securities available for sale.

Interest on deposits totaled $2,556,000 and $7,984,000 for the three and nine months ended September 30, 2001 and $2,698,000 and $7,742,000 for the three and nine months ended September 30, 2000. The decrease in the three month period ended September 30, 2001 is the result of the Federal Reserve Board reducing interest rates which immediately affected short term money market rates. The increase in the nine-month period is due to the rate on certificate of deposits lagging the market due to timing of maturities.

Interest on FHLB advances was $1,168,000 and $3,824,000 for the three and nine months ended September 30, 2001 compared to $1,438,000 and $3,847,000 for the three and nine months ended September 30, 2000. The decrease is due to the repayment of borrowings to the FHLB as well as to a decrease in average rates on those advances.

The Company maintains an allowance for loan losses in an amount, which, in management’s judgement, is adequate to absorb probable losses in the loan portfolio. While management utilizes its best judgement and information available, ultimate adequacy of the allowance is dependent on a variety of factors, including performance of the Company’s loan portfolio, the economy, changes in real estate values and interest rates and the view of the regulatory authorities toward loan classifications. The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level considered adequate to absorb probable losses in the loan portfolio. The amount of the provision is based on management’s regular review of the loan portfolio and consideration of such factors as historical loss experience, changes in size and composition of the loan portfolio and specific borrower considerations, including ability of the borrower to repay the loan and the estimated value of the underlying collateral. The provision for loan

15.

WESTERN OHIO FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

losses totaled $84,000 and $273,000 for the three and nine months ended September 30, 2001, compared to $84,000 and $252,000 for the three and nine months ended September 30, 2000.

Loan charge-offs were $127,000 and $407,000 for the three and nine months ended September 30, 2001 compared to $76,000 and $1,575,000 for the same periods in 2000. The decrease for the nine months is primarily due to the Company resolving two large problem loans and charging-off portions of two others last year.

Noninterest income totaled $458,000 and $1,236,000 for the three and nine months ended September 30, 2001 compared to $352,000 and $952,000 for the same periods in 2000. The increase is primarily due to an increase in loan service and prepayment fees as well as increases in checking and savings charges. In addition there were $141,000 in gains on sale of loans for the nine months ended September 30, 2001 compared to $72,000 for the period ended September 30, 2000.

Noninterest expense totaled $2,026,000 and $6,014,000 for the three and nine months ended September 30, 2001 compared to $1,924,000 and $5,911,000 for the same periods in 2000. Noninterest expense is comprised of employee compensation and benefits, occupancy, deposit insurance premiums, state franchise taxes and miscellaneous other expenses. No individual component had a significant change from the same period in 2000.

The Company opened a new full service branch office located in Centerville, Ohio. The branch opening will contribute to an increase in operating expenses beginning in the fourth quarter from additional depreciation of premises and equipment and additional staffing.

The change in income tax is primarily attributable to the change in income before income taxes. Income tax expense totaled $226,000 and $745,000, or an effective rate of 34.2%, for the three months ended September 30, 2001 and 34.9% for the nine months ended September 30, 2001, compared to $271,000 and $764,000, or an effective rate of 35.7% for the three and nine months ended September 30, 2000.

16.

WESTERN OHIO FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity

Office of Thrift Supervision (“OTS”) regulations presently requires Cornerstone Bank to maintain sufficient liquidity to assure its safe and sound operation. To that end, Cornerstone Bank maintains investments having maturities of 5 years or less, sells loans into the secondary market and borrows funds from the FHLB. These activities are intended to provide a source of relatively liquid funds on which Cornerstone may rely, if necessary, to fund deposit withdrawals or other short-term funding needs. At September 30, 2001 Cornerstone had commitments to originated fixed rate loans totaling $1.5 million and commitments to originate $3.6 million in commercial loans. In addition, Cornerstone had $1.0 million in commitments to fund loans on residential properties under construction as well as $2.4 million in commitments to fund nonresidential loans. Unused commercial lines of credit were $8.1 million and unused home equity lines of credit were $11.4 million. Cornerstone had no commitments to purchase or sell loans. Cornerstone considers its liquidity and capital reserves sufficient to meet its outstanding short and long-term needs.

Capital Resources

Cornerstone is required by regulations to meet certain minimum capital requirements, which must be generally as stringent as standards established for commercial banks. Current capital requirements call for tangible capital of 1.5% of adjusted total assets, core capital (which, for Cornerstone, consists solely of tangible capital) of 4.0% of adjusted total assets, except for institutions with the highest examination rating and acceptable levels of risk, and risk-based capital (which, for Cornerstone, consists of core capital and general valuation allowances) of 8.0% of risk-weighted assets (assets are weighted at percentage levels ranging from 0% to 100% depending on their relative risk).

The following table summarizes Cornerstone’s regulatory capital requirements and actual capital at September 30, 2001.

											Excess of actual
											capital over current
	Actual capital					Current requirement					requirement
																Applicable
(Dollars in thousands)	Amount		Percent			Amount		Percent			Amount		Percent			Asset Total
Tangible capital	$	40,655		12.10	%	$	5,039		1.5	%	$	35,616		10.60	%	$	335,916
Core capital		40,655		12.10			13,437		4.0			27,218		8.10			335,916
Risk-based capital		42,157		18.38			18,351		8.0			23,710		10.38			229,388

17.

WESTERN OHIO FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK

Item 3. Quantitative and Qualitative Disclosure About Market Risk

The Bank monitors its interest risk using both an internal model and the OTS model. The Bank’s internal model indicates a decrease in net portfolio value (“NPV”) should rates increase, which is consistent with prior disclosures. However, the Bank model also indicates potential decreases in NPV in rate shocks down from today’s already historically low interest rate levels. Increased mortgage loan prepayments and refinancing, the timing of both certificates of deposit and FHLB advance maturities, and a zero interest rate floor on other deposit products could adversely affect net portfolio value.

Other than the above exception, there have been no material changes in the quantitative and qualitative disclosures about market risk as of September 30, 2001, from that presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000.

18.

WESTERN OHIO FINANCIAL CORPORATION
PART II — OTHER INFORMATION

Item 1 — Legal Proceedings

                  None

Item 2 — Changes in Securities and Use of Proceeds

                  None

Item 3 — Defaults Upon Senior Securities

                  None

Item 4 — Submission of Matters to a Vote of Security Holders

                  None

Item 5 — Other Information

                  None

Item 6 — Exhibits and Reports on Form 8-K

                  (a) Exhibits

                  (b) No current reports on Form 8-K were filed by the Registrant during the quarter ended September 30, 2001.

19.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		WESTERN OHIO FINANCIAL CORPORATION (Registrant)
Date:	November 9, 2001	/s/ John W. Raisbeck
		President and Chief Executive Officer (Principal Executive Officer)
Date:	November 9, 2001	/s/ Craig F. Fortin
		Senior Vice President and Chief Financial Officer (Principal Financial Officer)

20.