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 the quarterly period ended March 31, 2000 Commission File Number 0-24120
WESTERN OHIO FINANCIAL CORPORATION
(exact name of registrant as specified in its charter)
DELAWARE 31-1403116
(State of other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number
28 EAST MAIN STREET, SPRINGFIELD, OHIO 45501-0509
(Address of principal executive offices) (Zip code)
(937) 325-9990
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
As of May 12, 2000, there were 1,967,364 shares of the Registrant's common stock
issued and outstanding.
INDEX
WESTERN OHIO FINANCIAL CORPORATION
Pages
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements of Financial Condition. . . . . . . 3
Condensed Consolidated Statements of Income . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Comprehensive Income . . . . . . 5
Condensed 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 . . . . . . . . . . . . 8-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . 13-14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . 15
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
WESTERN OHIO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
March 31, December 31,
(Dollars in thousands) 2000 1999
- ------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 6,292 $ 9,614
Securities available for sale 49,295 50,366
Federal Home Loan Bank stock 7,581 7,451
Loans, net 266,975 254,654
Loans held for sale - 217
Premises and equipment, net 3,877 3,475
Other assets 4,770 3,908
- ------------------------------------------------------------------------------------
Total Assets $ 338,790 $ 329,685
====================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 204,858 $ 202,331
Borrowed funds 90,116 82,183
Other liabilities 2,017 2,182
- ------------------------------------------------------------------------------------
Total Liabilities 296,991 286,696
- ------------------------------------------------------------------------------------
Common stock, $.01 par Value; 7,250,000 shares
authorized; 2,645,000 shares issued 26 26
Additional paid-in-capital 40,453 40,452
Accumulated other comprehensive income (2,220) (2,157)
Unearned employee stock ownership plan shares (930) (1,071)
Unearned management recognition plan shares (175) (200)
Treasury stock; 677,636 and 608,136 shares
at cost respectively (15,268) (14,121)
Retained earnings 19,913 20,060
- ------------------------------------------------------------------------------------
Total Shareholders' Equity 41,799 42,989
- ------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $338,790 $ 329,685
====================================================================================
See Notes to Consolidated Financial Statements.
-3-
WESTERN OHIO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Quarter Ended
March 31,
(Dollars in thousands except per share amounts) 2000 1999
- ----------------------------------------------------------------------------
Interest and dividend income:
Loans, including fees $ 5,599 $ 4,621
Securities 850 982
Interest-bearing deposits and overnight funds 33 121
Other interest and dividend income 129 120
- ----------------------------------------------------------------------------
Total Interest and Dividend Income 6,611 5,844
Interest Expense:
Deposits 2,469 2,369
Borrowed funds 1,720 1,038
- ----------------------------------------------------------------------------
Total Interest Expense 4,189 3,407
Net Interest Income 2,422 2,437
Provision for loan losses 84 32
Net interest income after provision for loan losses 2,338 2,405
Gain/(Loss) on sale of loans and other assets 1 79
Other noninterest income 298 278
Other noninterest expense (2,006) (2,052)
Income before income taxes 631 710
Income tax expense 226 259
- ----------------------------------------------------------------------------
Net Income $ 405 $ 451
============================================================================
Earnings per common share:
Basic $ 0.22 $ 0.22
Diluted $ 0.22 $ 0.22
Dividends per common share $ 0.25 $ 0.25
============================================================================
See Notes to Consolidated Financial Statements.
-4-
WESTERN OHIO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
For the Quarter Ended
March 31,
(Dollars in thousands) 2000 1999
- ------------------------------------------------------------------------------
Net income $ 405 $ 451
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities available
for sale arising during this period (63) (387)
Reclassification adjustment for amounts realized
on securities sales included in net income - -
- ------------------------------------------------------------------------------
Total other comprehensive income (loss) (63) (387)
- ------------------------------------------------------------------------------
Comprehensive income $ 342 $ 64
==============================================================================
See Notes to Consolidated Financial Statements.
-5-
WESTERN OHIO FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the quarter ended
March 31,
(Dollars in thousands) 2000 1999
- ------------------------------------------------------------------------------
Cash flows from operating activities $ (162) $ 1,398
- ------------------------------------------------------------------------------
Cash flows from investing activities:
Loans:
Net (increase) decrease in loans (12,188) 18,044
Purchases of loans - (21,101)
Proceeds from sale of loans - 1,344
Securities available for sale:
Maturities and principal payments 961 7,359
Premises and equipment expenditures (473) (16)
Proceeds from sale of premises and equipment 9 6
- ------------------------------------------------------------------------------
Net cash provided (used) by
investing activities (11,691) 5,636
- ------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposits 2,527 5,435
Net decrease in advances from borrowers for
taxes and insurance (313) (314)
Purchase of treasury stock (1,147) (1,200)
Cash dividends paid (469) (529)
Proceeds from exercise of stock options - 63
Proceeds from FHLB advances 23,135 7,100
Repayments on FHLB advances (15,202) (21,338)
- ------------------------------------------------------------------------------
Net cash provided (used) by
financing activities 8,531 (10,783)
- ------------------------------------------------------------------------------
Net change in cash and cash equivalents (3,322) (3,749)
Cash and cash equivalents at beginning of year 9,614 13,854
- ------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 6,292 $10,105
==============================================================================
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 4,072 $ 3,421
Income taxes - -
Noncash activities
Transfer of loans held for sale
to portfolio loans 217 -
See Notes to Consolidated Financial Statements.
-6-
WESTERN OHIO FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
Principles of consolidation:
- ---------------------------
The financial statements include Western Ohio Financial Corporation (the
"Company") and its wholly owned subsidiary Cornerstone Bank ("Cornerstone"). The
financial statements of Cornerstone include the accounts of its wholly owned
subsidiaries, CornerstoneBanc Financial Services, Inc. ("CFSI") and West Central
Financial Services, Inc. ("WCFS").
Basis of presentation:
- ---------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial reporting and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. These unaudited consolidated financial statements should be read
in conjunction with the financial statements and notes thereto included in the
Corporation's annual report on Form 10-K for the year ended December 31, 1999.
The financial data and results of operations for interim periods presented may
not necessarily reflect the results to be anticipated for the entire year.
Internal financial information is primarily reported and aggregated solely in
the line of the business banking.
To prepare financial statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the
financial statements and the disclosures provided, and future results could
differ. The allowance for loan losses, fair values of financial instruments and
status of contingencies are particularly subject to change.
Income 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 an 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. Income tax expense is based on the
effective rate expected to be applicable for the entire year.
Earnings per common and common equivalent share:
- -----------------------------------------------
Basic earnings per common share is based on net income divided by the weighted
average number of common shares outstanding during the period. Employee stock
option plan shares are considered outstanding for the calculation unless
unearned. Diluted earnings per common share includes the dilutive effect of
additional potential common shares issuable under stock options. Management
recognition plan shares are considered outstanding as they become vested. The
basic weighted average number of common shares outstanding during the three
month period ended March 31, 2000 and March 31, 1999 were 1,879,960 and
2,015,122 respectively. The diluted weighted average number of common shares
giving effect to stock options and MRP shares during the three month period
ended March 31, 2000 and March 31, 1999 were 1,881,269 and 2,039,263,
respectively.
-7-
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 March 31,
2000 as compared to December 31, 1999, and the results of operations for the
three months ended March 31, 2000, compared with the same period in 1999. This
discussion should be read in conjunction with the interim financial statements
and footnotes included herein.
FORWARD-LOOKING STATEMENTS-When used in this filing and in future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases or other public or shareholder communications, or in oral statements
made with the approval of an authorized executive officer, the words or phrases
"would be", "will allow", "intends to", "will likely result", "are expected to",
"will continue", "is anticipated", "estimate", "project" or similar expressions
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
risks and uncertainties, including but not limited to changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area and competition, all or some of which could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made and
advises readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
FINANCIAL CONDITION
- -------------------
Consolidated assets of the Company totaled $338.8 million at March 31, 2000, an
increase of $9.1 million from the December 31, 1999, total of $329.7 million.
The primary increase in assets is a result of an increase of $12.3 million in
net loans receivable. Funds for the loan growth were primarily obtained through
Federal Home Loan Bank borrowings and a reduction in cash and cash equivalents.
Net loans increased $12.3 million, or 4.8% during the three months ended March
31, 2000, increasing from $254.7 million in December 31, 1999 to $267.0 million
on March 31, 2000. This increase is the net result of the Company originating
and holding new mortgage and commercial loans of approximately $24.5 million
during the period.
Cash and cash equivalents decreased by $3.3 million to $6.3 million on March 31,
2000, from $9.6 million on December 31, 1999. Cash and cash equivalents consist
of cash, checking deposits and federal funds deposited at other financial
institutions. The decrease was primarily the result of reducing excess funds
maintained over year end as a year 2000 contingency.
Securities available for sale decreased $1.1 million from $50.4 million at
December 31, 1999, to $49.3 million on March 31, 2000. The decline was due to
principal repayments on existing mortgage-backed securities available for sale.
Deposits at March 31, 2000 totaled $204.9 million, an increase of $2.6 million,
or 1.3% from $202.3 million at December 31, 1999. This increase is basically due
to the Company's aggressive attempt to increase deposits, especially in the
checking accounts.
-8-
FHLB advances at March 31, 2000 totaled $90.1 million, an increase of $7.9
million or 9.6% from $82.2 million at December 31, 1999. The majority of
borrowed funds are invested in loans to leverage the Company's excess capital
and to provide liquidity for future loan growth. The increase from December 31,
1999 provided funding for the loan growth.
Total shareholders' equity decreased $1.2 million from $43.0 million at December
31, 1999, to $41.8 million at March 31, 1999. This decrease is primarily due to
the Company purchasing approximately $1.2 million of its common stock during the
first quarter of 2000.
As of March 31, 2000, the Company had commitments to make $3.1 million of
residential loans. It is expected that these loans will be funded within 30
days. The Company also had $5.5 million in commitments to fund loans on
residential properties under construction. These commitments are anticipated to
be filled within three to six months. Unused commercial lines of credit were
$2.6 million and unused home equity lines of credit were $11.2 million.
Commitments to originate nonmortgage loans total $0.3 million.
-9-
Capital Resources and liquidity
- -------------------------------
Office of Thrift Supervision ("OTS") regulations presently require Cornerstone
Bank to maintain an average daily balance of investments in U.S. Treasury,
federal agency obligations and other investments having maturities of five years
or less in an amount equal to 4% of the sum of the Bank's average daily balance
of net withdrawable deposit accounts and borrowings payable in one year or less.
The liquidity requirement, of which may be changed from time to tome by the OTS
to reflect changing economic conditions, is intended to provide a source of
relatively liquid funds on which the Bank may rely, if necessary, to fund
deposit withdrawals or other short term funding needs. At March 31, 2000, the
Bank's regulatory liquidity was 19.1%. At such date, the Bank had commitments to
originate fixed rate loans totaling $3.1 million. The Bank had no commitments to
purchase or sell loans. The Bank considers it is liquidity and capital reserves
sufficient to meet its outstanding short and long-term needs.
The Bank 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 the Bank, 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 the Bank, 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 the Bank's regulatory capital requirements and
actual capital at March 31, 2000.
Actual Required Excess
----------------- ------------------- --------------------
Tangible Capital $40.5 11.9% $5.1 1.5% $35.4 10.4%
Core Capital $40.5 11.9% $13.6 4.0% $26.9 7.9%
Risk-Based Capital $41.7 19.1% $17.5 8.0% $24.2 11.1%
-10-
Results of Operations
- ---------------------
Net Income
- ----------
For the three months ended March 31, 2000, net income was $405,000 a decrease of
$46,000 compared to $451,000 for the three months ended March 31, 1999. This was
due primarily to a decrease in gains on the sale of loans and an increase in the
loan loss provision.
Interest Income
- ---------------
For the three months ended March 31, 2000, interest income of $6.6 million,
increased by $767,000 compared to the three months ended March 31, 1999 of $5.8
million. Interest and fees on loans increased by $978,000 for the three months
ended March 31, 2000, compared to the three months ended March 31, 1999. This
increase was due to an overall increase in the interest rate environment and a
higher volume of loans over comparable periods. Interest and dividends on
securities available for sale decreased $132,000 during the three months ended
March 31, 2000, over the three months ended March 31, 1999 due to principal
payments on securities available for sale. Interest on overnight fed funds
decreased $88,000 due to a lower volume of fed funds.
Interest Expense
- ----------------
Interest expense increased by $782,000, from $3.4 million for the three months
ended March 31, 1999, compared to $4.2 million for the three months ended March
31, 2000. The increase was primarily due to an increase in FHLB advances to fund
loan growth. The interest on borrowings increased by $683,000 from $1.0 million
for the three months ended March 31, 1999, to $1.7 million for the three months
ended March 31, 2000. These borrowings are both fixed and adjustable rate in
nature.
Net Interest Income
- -------------------
Net interest income decreased by $15,000 to $2.4 million for the three months
ended March 31, 2000, as compared to $2.4 million for the three months ended
March 31, 1999. This decrease is due to interest expense increasing slightly
faster than the repricing of interest-earning assets and the resulting increase
in interest income.
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, any specific losses applied to
that allowance and changes in the volume and mix of the loan portfolio. There
was a $84,000 additional provision for loan losses during the three months ended
March 31, 2000 compared to $32,000 for the three months ended March 31, 1999.
Gain on sale of loans
- ---------------------
Gain on sale of loans was $1,000 for the three months ended March 31, 2000
compared to $79,000 for the same period in 1999. The decrease is primarily due
the rise in interest rates reducing the volume of loans originated for sale in
the secondary market.
-11-
Other Income
- ------------
Other income increased $20,000 for the three months ended March 31, 2000, to
$298,000 from $278,000 for the three months ended March 31, 1999. This increase
is due to service fees, overdraft fees, and ATM surcharge fees generated by the
increase in Cornerstone's checking account programs. Other income consists of
branch fees, loan fees and checking account fees.
Other Expense
- -------------
Total other expense decreased by $46,000, from $2.1 million for the three month
period ended March 31, 1999, compared to $2.0 million for the three month period
ended March 31, 2000. This is primarily due to a reduction in FDIC insurance
expense and state franchise taxes. These decreases were partially offset by
additional expenses incurred during the three month period ended March 31, 2000
associated with the Company's conversion to a new in-house data processing
system. Other expenses include compensation and benefits, occupancy, marketing,
office operations, and other professional services.
Income Tax Expense
- ------------------
The volatility of income tax expense is primarily attributable to the change in
net income before income taxes. Income tax expense decreased $33,000 from
$259,000 for the three months ended March 31, 1999 to $226,000 for the period
ended March 31, 2000, as a result of the lower income before taxes.
-12-
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk exposure is interest rate risk and, to a
lessor 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. Based on
internal analysis, management believes Cornerstone's interest rate risk
sensitivity did not materially change between December 31, 1999 and March 31,
2000; however, the increase in interest rates continues to increase the Bank's
overall interest rate sensitivity.
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 the Company has primarily fixed-rate loans in its loan
portfolio, the amount of interest the Company would receive on its loans would
increase relatively slowly as loans are slowly prepaid and new loans at higher
rates are made. Moreover, the interest the Company would pay on its deposits
would increase rapidly because the Company's deposits generally have shorter
periods to repricing.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to change in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making risk calculations.
-13-
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.
-14-
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The annual meeting of shareholders was held on April 27, 2000. Two
items were presented to shareholders for consideration and action:
1) The re-election of two directors John E. Field and William N.
Scarff of the Corporation for terms expiring in 2003. Both
directors were re-elected receiving 1,576,647 votes and receiving
1,575,109 votes for re-election. The remaining directors
continuing after the meeting are: David L. Dillahunt, John W.
Raisbeck, Howard V. Dodds, Aristides G. Gianakopoulos and Jeffrey
L. Levine.
2) The ratification of Crowe, Chizek and Company L.L.P. as auditors
for the Corporation for the fiscal year ending December 31, 2000.
The appointment of auditors was ratified with votes cast for
1,584,354 and 22,056 against.
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits-Exhibit 27-Financial Data Schedule
b) Reports on Form 8-K-None
-15-
SIGNATURES
Pursuant to the requirement 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: May 12, 2000 /s/ John W. Raisbeck
------------------------------------------
John W. Raisbeck, President
and Chief Executive Officer
(Duly Authorized Officer)
Date: May 12, 2000 /s/ Craig F. Fortin
-------------------------------------------
Craig F. Fortin, Senior Vice President,
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
-16-