SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1999 Commission File Number 0-24120
WESTERN OHIO FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 31-1403116
(State of jurisdiction of (I.R.S. Employer
incorporation or 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 November 12, 1999 there were 2,075,064 shares of the Registrant's common
stock issued and outstanding.
INDEX
WESTERN OHIO FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION PAGES
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 . . . . . . . . . .8-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . .16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . .17
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . .18
2
WESTERN OHIO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
September 30, December 31,
(Dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 7,140 $ 13,854
Securities available for sale, at fair value 9,016 15,402
Mortgage-backed securities available for sale, at fair value 43,143 50,044
Federal Home Loan Bank stock, at cost 7,322 6,948
Loans receivable, net 252,148 234,812
Premises and equipment, net 3,292 3,241
Real estate owned -- 56
Other assets 4,897 3,371
- ----------------------------------------------------------------------------------------------------
Total Assets $ 326,958 $ 327,728
====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 200,949 $ 192,966
Advances from the Federal Home Loan Bank of Cincinnati 79,568 85,252
Other liabilities 2,523 1,916
- ----------------------------------------------------------------------------------------------------
Total Liabilities 283,040 280,134
- ----------------------------------------------------------------------------------------------------
Common stock 26 26
Additional paid-in-capital 40,446 40,452
Accumulated Other Comprehensive income (1,813) (120)
Unearned ESOP (1,131) (1,309)
Unearned MRP-Deferred (970) (1,092)
Treasury Stock; 569,936 and 476,317 shares at cost respectively (12,734) (10,714)
Retained earnings(substantially restricted) 20,094 20,351
- ----------------------------------------------------------------------------------------------------
Total Shareholders' equity 43,918 47,594
- ----------------------------------------------------------------------------------------------------
Total Liabilities And Shareholders' Equity $ 326,958 $ 327,728
====================================================================================================
- ------------------------------
See Notes to Consolidated Financial Statements.
3
WESTERN OHIO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Quarter Ended For the Nine Months Ended
September 30, September 30,
(Dollars in thousands except per share amounts) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Interest Income:
Interest and fees on loans $ 4,816 $ 4,871 $ 14,190 $ 15,514
Interest on mortgage-backed securities 713 230 2,199 923
Interest and dividends on investment securities 154 92 525 772
Interest on overnight and interest bearing deposits 36 998 215 2,018
Other interest and dividends 130 123 375 358
- ---------------------------------------------------------------------------------------------------------------------
Total Interest Income 5,849 6,314 17,504 19,585
- ---------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest expense on deposits 2,424 3,308 7,217 9,747
Interest on borrowings 969 721 2,941 2,410
- ---------------------------------------------------------------------------------------------------------------------
Total Interest Expense 3,393 4,029 10,158 12,157
- ---------------------------------------------------------------------------------------------------------------------
Net Interest Income 2,456 2,285 7,346 7,428
Provision for losses on loans 74 -- 182 (261)
Net interest income after provision for losses 2,382 2,285 7,164 7,689
Gain/(Loss) on sale of loans and other assets (14) 85 162 494
Other income 288 297 807 762
- ---------------------------------------------------------------------------------------------------------------------
Other expenses (2,048) (2,331) (6,176) (7,140)
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 608 336 1,957 1,805
- ---------------------------------------------------------------------------------------------------------------------
Income tax expense 229 150 727 714
- ---------------------------------------------------------------------------------------------------------------------
Net Income $ 379 $ 186 $ 1,230 $ 1,091
=====================================================================================================================
Earnings per share:
Basic $ 0.19 $ 0.09 $ 0.62 $ 0.49
Diluted $ 0.19 $ 0.08 $ 0.62 $ 0.48
=====================================================================================================================
- ------------------------------
See Notes to Consolidated Financial Statements.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
For the Quarter Ended For the Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------
Net income $ 379 $ 186 $ 1,230 $ 1,091
Other comprehensive income, net of tax:
Unrealized gains / (losses) arising during period (216) 62 (1,693) 82
Less: reclassification adjustment for accumulated
gains/losses included in net income -- -- -- (307)
- ---------------------------------------------------------------------------------------------------------------
Other comprehensive income (216) 62 (1,693) (225)
- ---------------------------------------------------------------------------------------------------------------
Comprehensive income/(Loss) $ 163 $ 248 $ (463) $ 866
===============================================================================================================
5
WESTERN OHIO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
September 30,
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------
Cash flows from operating activities $ 3,482 $ 1,672
- -----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Loans:
Originations (55,757) (34,660)
Purchases (39,694) --
Collections 75,349 68,011
Sales 1,344 --
Mortgage-backed securities:
Collections 5,113 3,765
Purchases -- (20,073)
Sales -- 7,119
Investment securities:
Maturities 5,500 1,701
Sales -- 15,193
Property and equipment:
Additions (812) (369)
Sale proceeds 524 --
Real Estate Owned
Purchases (248)
Sales 56
- -----------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (8,377) 40,439
- -----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in savings deposits 7,982 15,661
Net decrease in advances from borrowers for taxes and insurance (529) (435)
Treasury stock repurchase (2,172) (4,286)
Dividends paid (1,549) (1,629)
Stock options, net 132 --
Advances from Federal Home Loan Bank:
Net borrowings 64,375 45,690
Repayments (70,058) (36,266)
- -----------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (1,819) 18,735
- -----------------------------------------------------------------------------------------------------
Net Increase (decrease) in cash and cash equivalents (6,714) 60,846
Cash and cash equivalents:
Beginning 13,854 31,239
- -----------------------------------------------------------------------------------------------------
Ending $ 7,140 $ 92,085
=====================================================================================================
- ---------------------------------
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 Corporation ("CBFS") formerly
West Central Mortgage Services, Inc., and West Central Financial Services, Inc.
("WCFS").
BASIS OF PRESENTATION:
The accompanying unaudited condensed 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 condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1998. The
financial data and results of operations for periods presented may not
necessarily reflect the results to be anticipated for the entire year.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Basic earnings per share are computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share includes the dilutive effect of stock options
granted and unearned MRP shares using the treasury stock method. The basic
weighted average number of common shares outstanding during the three month and
nine month periods ended September 30, 1999 were 1,952,120 and 1,973,667,
respectively. The diluted weighted average number of common shares giving effect
to stock options and unearned MRP shares during the three month and nine month
periods ended September 30, 1999 were 1,970,373 and 1,998,462, respectively. The
basic weighted average number of common shares outstanding during the three
month and nine month periods ended September 30, 1998 were 2,153,351 and
2,210,308, respectively. The diluted weighted average number of common shares
giving effect to stock options and unearned MRP shares during the three month
and nine month periods ended September 30, 1998 were 2,193,673 and 2,264,011,
respectively.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
IMPACT OF THE YEAR 2000-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 that 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. All of the identified
computer systems affected by the Year 2000 issue have been renovated, validated
or implemented in the process of becoming Year 2000 compliant. Other than public
utilities, the various companies whose services are deemed critical to the
mission of the Company have been tested or assurances received that such
companies will be Year 2000 compliant.
The Company has completed testing of its critical systems to ensure they will
perform as expected in the Year 2000. However, if unexpected system operating
problems should occur, or if electrical power necessary to operate the Company's
8
systems is not available, contingency plans have been developed. 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.
Currently, the Company has spent approximately $60,000 to test or renovate
mission critical systems. An additional expense of $4,000 for Year 2000 testing
will be incurred in the fourth quarter of 1999 for ongoing monitoring.
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.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Western Ohio Financial Corporation ("the Company") is the holding company of
Cornerstone Bank. Consolidated assets of the Company totaled $327.0 million at
September 30, 1999, a decrease of $700,000 from the December 31, 1998 total of
$327.7 million.
Loans receivable increased $17.3 million to $252.1 million on September 30, 1999
from $234.8 million on December 31, 1998. This increase is primarily the result
of the Company purchasing approximately $39.7 million of loans in addition to
its own production to offset the amortization and prepayment of its mortgage and
investment loan portfolio. These loans are one-to-four and multi-family
residential loans located in Ohio and the northeastern part of the United
States. Management purchases loans only after evaluating credit quality,
liquidity, and internal loan production, and will continue to evaluate future
purchases accordingly.
Cash and cash equivalents decreased by $6.8 million to $7.1 million on September
30, 1999, from $13.9 million on December 31, 1998. Cash and cash equivalents
consist of cash, checking deposits and federal funds deposited at other
financial institutions. The excess cash and cash equivalents were used to reduce
advances from the Federal Home Loan Bank.
Securities available for sale decreased $6.4 million or 41.5% from $15.4 million
at December 31, 1998, to $9.0 million on September 30, 1999. The decrease is
primarily the result of securities maturing during March 1999. The Company's
mortgage-backed securities available for sale decreased by $6.9 million or 10.4%
from $50.0 million on December 31, 1998, to $43.1 million on September 30, 1999.
This was due to principal repayments on existing mortgage-backed securities and
the decline in market value of those securities available for sale. A portion of
these securities is often referred to as derivatives. The derivative securities
are all adjustable rate in nature and were not "high risk" securities under the
criteria set forth by the Federal Financial Institutions Examination Council
("FFIEC"). Proceeds from maturing securities were invested in loans in an effort
to improve yields on earning assets.
The investment in the stock of the Federal Home Loan Bank of Cincinnati
increased by $374,000 from $6.9 million at December 31, 1998, to $7.3 million at
September 30, 1999. The increase is due to the stock dividends paid by the
Federal Home Loan Bank. This investment is dictated by an institution's
membership in the Federal Home Loan Bank and is a factor of the institution's
borrowings and total assets. Currently, dividends on such stock are paid
primarily in the form of additional shares of stock.
Other assets increased $1.5 million from $3.4 million on December 31, 1998
compared to $4.9 million in the nine months ended September 30, 1999. This was
primarily due to an increase in deferred taxes associated with the fair value
adjustment of securities available for sale as well as an increase in prepaid
franchise tax and interest receivable.
10
Deposits at September 30, 1999 totaled $200.9 million, an increase of $7.9
million from $193.0 million at December 31, 1998. This increase is generally due
to Cornerstone's aggressive attempt to increase deposits. Money fund accounts
increased $3.9 million from $49.1 million at December 31, 1998 to $53.0 million
at September 30, 1999. In addition, certificates of deposit increased $5.9
million or 5.0% from $117.5 million at December 31, 1998 to $123.4 million at
September 30, 1999.
Advances at September 30, 1999 totaled $79.6 million, a decrease of $5.7
million, or 6.7%, from $85.3 million at December 31, 1998. Advances were repaid
from excess cash and cash equivalents. The advances have fixed and variable
rates.
Other liabilities increased $607,000 from $1.9 million on December 31, 1998, to
$2.5 million on September 30, 1999. This increase is due to an increase in taxes
offset by a decrease in advance payments held in escrow due to real estate taxes
paid in the first and third quarter of 1999.
Total stockholders' equity decreased $3.7 million from $47.6 million at December
31, 1998, to $43.9 million at September 30, 1999. This decrease is primarily due
to the Company purchasing approximately $2.1 million of its own stock during the
first nine months of 1999 and a decrease in the market value of securities and
mortgage-backed securities held for sale.
As of September 30, 1999, the Company had commitments to make $1.3 million of
residential loans and no commitments to make nonresidential mortgage loans. It
is expected that these loans will be funded within 30 days. The Company also had
$3.4 million in commitments to fund loans on residential properties under
construction and $363,000 in commitments to fund other construction mortgage
loans. These commitments are anticipated to be filled within three to six
months. Unused commercial lines of credit were $1.1 million and unused home
equity lines of credit were $10.5 million.
11
CAPITAL RESOURCES AND LIQUIDITY OF CORNERSTONE BANK
Cornerstone Bank 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 guidelines that involve quantitative
measures of Cornerstone's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. At September 30,
1999, management believes Cornerstone is in compliance with all regulatory
capital requirements. Cornerstone is considered well capitalized under the
Federal Deposit Insurance Act at September 30, 1999. The following is a summary
of the Bank's approximate regulatory capital position and minimum required
levels to be adequately capitalized under prompt corrective action regulations
in dollars (thousands) and as a percentage of regulatory assets, at September
30, 1999.
ACTUAL REQUIRED EXCESS
------ -------- ------
Tangible Capital $42,539 12.99% $ 4,913 1.5% $37,626 11.49%
Core Capital $42,539 12.99% $13,103 4.0% $29,436 8.99%
Risk-Based Capital $43,918 21.43% $16,398 8.0% $27,520 13.43%
Federal regulations require the Bank to maintain an average daily balance of
liquid assets including mortgage-backed securities, 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 for the preceding calendar quarter.
Liquidity is measured by cash and certain investments that are not committed,
pledged, or required to liquidate specific liabilities. The following is a
summary of the Bank's regulatory liquidity ratio.
September 30, June 30, March 31, December 31,
1999 1999 1999 1998
------------- -------- --------- ------------
Liquid Assets 25.2% 29.2% 34.4% 36.3%
The above tables pertain only to Cornerstone. The resources of the Company are
not considered in meeting the above requirements.
12
RESULTS OF OPERATIONS
GENERAL
For the nine months ended September 30, 1999, net income was $1.2 million an
increase of $140,000 compared to $1.1 million for the nine months ended
September 30, 1998. The increase was due primarily to a decrease in non-interest
expense of $964,000 offset by the decrease in gains of the sale of assets and an
increase in the loan loss provision in 1999. Compensation and employee benefits,
goodwill, and other expenses were all reduced in the nine months ended September
30, 1999 due to the Company exiting the Cincinnati market. The gain on sale of
loans and other assets is down $332,000 primarily due to the sale last year of
the Federal Home Loan Mortgage Corporation stock and mortgage-backed security.
For the quarter ended September 30, 1999, net income was $379,000 an increase of
$193,000 compared to $186,000 for the same period ended September 30, 1998. An
increase in the net interest income of $172,000 in addition to the net decrease
in non-interest expense was the primary reason for the additional income in the
quarter.
INTEREST INCOME
For the nine months ended September 30, 1999, interest income of $17.5 million,
decreased by $2.1 million compared to the nine months September 30, 1998 of
$19.6 million. Interest and fees on loans for the nine months ended September
30, 1999 of $14.2 million decreased by $1.3 million from $15.5 million for the
nine months ended September 30, 1998. The lower volume of loans over comparable
periods is the result of selling fixed rate loans in the secondary market rather
than maintaining the loans in the portfolio. Interest and dividends on
investment securities decreased $247,000 during the nine months ended September
30, 1999, over the nine months ended September 30, 1998 due to principal
payments on securities available for sale. Interest on mortgage-backed
securities increased $1.3 million resulting from additional mortgage-backed
securities available for sale. Interest on overnight fed funds decreased $1.8
million or 89.3% due to a lower volume of fed funds after funding the Cincinnati
area deposit sale in the fourth quarter of 1998. Interest income of $5.8 million
for the three months ended September 30, 1999 was down $464,000 from $6.3
million for the same period ended September 30, 1998. The major causes of the
decline are the lower volume of overnight deposits and other securities, again
attributed to the sale of the Cincinnati branches.
INTEREST EXPENSE
Interest expense decreased by $2.0 million to $10.2 million for the nine months
ended September 30, 1999 from $12.2 million for the nine months ended September
30, 1998. The decrease was primarily due to the sale of deposits in the
Cincinnati area completed in the fourth quarter of 1998. The interest on
borrowings increased $531,000 from $2.4 million for the nine months ended
September 30, 1998, to approximately $2.9 million for the nine months ended
September 30, 1999. Interest expense decreased $636,000 or 15.8% for the three
months ended September 30, 1999 as compared to September 30, 1998. Interest on
deposits decreased $884,000 or 26.7% from $3.3 million for the three months
ended September 30, 1998 to $2.4 million for the three months ended September
30, 1999. The interest on borrowings increased $248,000 or 34.4% from $721,000
for the three months ended September 30, 1998 to $969,000 for the same period
ended September 30, 1999.
13
NET INTEREST INCOME
Net interest income decreased slightly by $82,000 to $7.3 million for the nine
months ended September 30, 1999 as compared to $7.4 million for the nine months
ended September 30, 1998. This decrease is due to the reduction in interest
expense from deposits being sold in the Cincinnati area offset by the decrease
in interest income from the reduction of loans, investment securities, and
overnight fed funds. Net interest income for the three months ended September
30, 1999 increased $171,000 or 7.5% from $2.3 million on September 30, 1998 to
$2.5 million for September 30, 1999. For the three months ending September 30,
1998, net interest income was reduced due to holding additional cash equivalents
for the sale of the Cincinnati branches.
PROVISION FOR LOSSES ON LOANS
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 $182,000 additional provision for loan losses during
the nine months ended September 30, 1999 compared to a recapture of the loan
loss reserve of $261,000 for the nine months ended September 30, 1998. The
reduction of the loan loss provision in 1998 was due to the decreasing overall
loan portfolio and the successful resolution of a major loan of concern. The
increase in 1999 was due to an increase in the loan portfolio. For the three
months ended September 30, 1999, $74,000 was added to the loan loss provision
compared to no additional provision added in the three months ended September
30, 1998.
GAIN/(LOSS)ON SALE OF LOANS AND SECURITIES
Gain on sale of loans, securities, and other assets was $162,000 for the nine
months ended September 30, 1999 compared to $494,000 for the same period in
1998. The decrease is primarily due to selling a Federal Home Loan Mortgage
Corporation stock certificate and investment security last year for a gain of
$307,000. For the three months ended September 30, 1999, gains decreased by
$99,000, or 116.4%, compared to the same period last year.
OTHER INCOME
Other income increased $45,000 for the nine months ended September 30, 1999, to
$807,000 from $762,000 for the nine months ended September 30, 1998 due to
increases in deposit service charges. For the three months ended September 30,
1999, other income of $288,000 decreased a modest $9,000 from $297,000 for the
three months ended September 30, 1998 due to lower loan fees.
OTHER EXPENSE
Total other expense decreased by $964,000, from $7.1 million for the nine months
ended September 30, 1998, to $6.2 million for the nine months ended September
30, 1999. For the three months ended September 30, 1999, other expenses
decreased $283,000 or 12.1% from $2.3 million on September 30, 1998 to $2.0
million on September 30, 1999. The reduction is primarily due to lower operating
expenses and the elimination of goodwill amortization resulting from exiting the
Cincinnati area market.
INCOME TAX EXPENSE
Income tax expense increased $13,000 to $727,000 for the nine months ended
September 30, 1999 from $714,000 for the nine months ended September 30, 1998.
Income tax expense increased $79,000 to $229,000 for the three months ended
September 30, 1999 from $150,000 for the three months ended September 30, 1998.
This was a result of the additional net income for the quarter and the nine
months ended September 30, 1999.
14
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 between December 31, 1998 and September 30, 1999 has increased due
to the rise in interest rates during the period. As of September 30, 1999, the
percentage change in NPV resulting from certain changes in interest rates remain
within the policy limits of the institution's Board of Directors.
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. However, 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.
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.
15
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits - Exhibit 3(ii) - Amended and Restated By-Laws
- Exhibit 27 - Financial Data Schedule
b) Reports on Form 8-K - None
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: NOVEMBER 12, 1999 /s/ John W. Raisbeck
---------------------------
John W. Raisbeck, President
and Chief Executive Officer
(DULY AUTHORIZED OFFICER)
Date: NOVEMBER 12, 1999 /s/ Craig F. Fortin
--------------------------------------------
Craig F. Fortin, Senior Vice President,
Treasurer and Chief Financial Officer
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)