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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________ TO ___________
COMMISSION FILE NUMBER 0-24120
WESTERN OHIO FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 31-1403116
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
28 East Main Street
Springfield, Ohio 45501-0719
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (937) 325-4683
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES X . NO ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the closing price of such stock on the
Nasdaq National Stock Market as of March 12, 1999, was approximately $37.8
million. (The exclusion from such amount of the market value of the shares owned
by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant.)
As of March 12, 1999, there were issued and outstanding 2,018,829 shares of
the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Portions of the Annual Report to Stockholders for
the fiscal year ended December 31, 1998.
Part III of Form 10-K - Portions of the Proxy Statement for Annual Meeting of
Stockholders.
PART I
--------
Item 1. Business
- -----------------
General
Western Ohio Financial Corporation (the "Company"), a Delaware corporation,
was organized in March 1994 for the purpose of becoming a savings and loan
holding company. During fiscal 1997, the Company owned all of the outstanding
stock of Springfield Federal Savings Bank ("Springfield"), Mayflower Federal
Savings Bank ("Mayflower") and Seven Hills Savings Association ("Seven Hills")
(collectively, the "Banks"). During fiscal 1997, the Company combined these
three institutions into one institution under the name "Cornerstone Bank" (the
"Bank"). Unless otherwise noted, reference during fiscal 1997 includes
Springfield, Mayflower and Seven Hills.
The Company is subject to supervision by the Office of Thrift Supervision ,
Department of Treasury ("OTS") and the Bank is subject to comprehensive
regulation, examination and supervision by the OTS and by the Federal Deposit
Insurance Corporation ("FDIC"). Cornerstone Bank is a member of the Federal Home
Loan Bank ("FHLB") System and its deposits are backed by the full faith and
credit of the United States Government and are insured up to applicable limits
by the FDIC.
The Company's primary market area covers Clark and Greene Counties, Ohio
and parts of contiguous counties, and is serviced through its main office in
Springfield, Ohio and five branch offices in Enon, New Carlisle, Springfield,
Yellow Springs and Beavercreek. At December 31, 1998, the Company had total
assets of $327.7 million, deposits of $193.0 million and stockholders' equity of
$47.6 million, or 14.5% of total assets. The Company's Common Stock is traded on
the Nasdaq National Market under the symbol "WOFC."
The Company has been, and intends to continue to be, a
community-oriented savings and loan holding company offering a variety of
financial services to meet the needs of the communities it serves. The principal
business of the Company consists of attracting retail deposits from the general
public and investing those funds primarily in one- to four-family residential
mortgage, construction and commercial and multi-family real estate loans and, to
a lesser extent, consumer and commercial business loans, all primarily within
the Company's market areas.
The executive offices of the Company are located at 28 East Main Street,
Springfield, Ohio 45501-0719, and the telephone number at that address is (937)
325-4683.
The Company's primary market area consists of Clark County and portions of
contiguous counties. Located in west-central Ohio, Clark County's economic
environment consists of a traditional industrial base supplemented by the
service and support industries, and its close proximity to a major U.S. military
installation, Wright Patterson Air Force Base. Navistar Truck Manufacturers is
the largest industrial employer in the county. Its Clark County operations have
provided stable employment for the area over the last several decades. The
Community Hospital and Clark State Community College are also two major
employers in the area. In 1997, Clark County had an unemployment rate of 4.6% as
compared to the State of Ohio at 4.5% and the United States at 5.1%. The
unemployment rate in Clark County decreased to 3.7% in 1998 as compared with
4.0% for the State of Ohio and 4.3% for the United States.
2
Clark County's population, the rate of increase of which lagged behind the
State of Ohio and national averages, nonetheless can be characterized as stable,
with a population of approximately 148,000 people. From 1990 to 1995, Clark
County's population grew .24%. For 1998, Clark County's median housing value was
approximately $59,900. In the event that real estate prices in Ohio
or the market area substantially weaken or economic conditions decline, the
Company may be adversely affected.
Lending Activities
General. While the Company primarily focuses its lending activities on the
origination of loans secured by first mortgages on owner-occupied, one-to-four
family residences, it also originates multi-family and commercial real estate
and construction loans and, to a lesser extent, consumer and commercial business
loans in its market area. At December 31, 1998, the Company's net loan
portfolio, including loans held for sale, totaled $234.8 million. At December
31, 1998, the Company's gross loan portfolio, including loans held for sale,
totaled $238.0 million, of which $181.0 million, or 76.1%, was comprised of
permanent loans secured by one-to-four family residences.
The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Bank could have invested in any one real estate
project, is generally the greater of 15% of unimpaired capital and surplus or
$500,000. See "Regulation - Federal Regulation of Savings Institutions." At
December 31, 1998, the maximum amount which the Bank could have loaned to any
one borrower and the borrower's related entities was $6.4 million. At December
31, 1998, the Bank did not have any loans outstanding in excess of such
limitation. The largest principal balance and commitment to lend to any one
borrower, or group of related borrowers, at the Bank was $5.5 million secured by
a first security interest covering all business assets including accounts
receivable, inventory, securities, contract rights, acquired real estate, stock
in direct and indirect subsidiaries of the borrower, intangibles, and equipment.
In addition, three borrowers had a combined principal and commitment outstanding
of $5.7 million at December 31, 1998. The first borrower's outstanding credit is
secured by land and speculation homes. The second borrower's outstanding credit
is secured by a first mortgage and multi-family properties. The third borrower's
outstanding credit is secured by one- to four-family dwellings and multi-family
properties. The security properties on all of these loans are located in the
Bank's market areas. All but one of these loans are performing in accordance
with their terms. The loan to the second largest borrower was over 90 days
delinquent as of December 31, 1998.
Management always reserves the right to change its emphasis on the amount
or type of lending in which the Company engages to adjust to market or other
factors, including changes in the Company's asset/liability management policies.
3
Loan Portfolio Composition. The following information concerning the
composition of the Company's loan portfolio, excluding loans held for sale, in
dollar amounts and in percentages (before deductions for loans in process,
deferred fees and discounts and allowance for losses) as of the dates indicated.
December 31,
-------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ------------------ ----------------- ----------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- ------- -------
(Dollars in Thousands)
Real Estate Loans:
- -----------------
One-to-four family ......... $177,109 74.87% $224,289 79.10% $242,600 82.21% $131,262 84.93% $ 89,184 83.37%
Multi-family ............... 12,422 5.25 11,247 3.97 12,476 4.23 4,502 2.91 4,194 3.92
Commercial real estate ..... 20,675 8.74 21,583 7.61 20,531 6.96 10,531 6.81 8,463 7.91
Construction ............... 3,908 1.65 7,275 2.57 10,965 3.71 5,405 3.50 3,252 3.04
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans . 214,114 90.51 264,394 93.25 286,572 97.11 151,700 98.15 105,093 98.24
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Other Loans:
- -----------
Consumer Loans:
Home equity............... 10,054 4.25 6,906 2.43 2,188 0.74 474 0.31 77 0.07
Deposit account........... 257 .11 485 .17 384 0.13 363 0.24 465 0.43
Home improvement.......... 15 --- 18 --- 31 0.01 --- --- 6 0.01
Other secured............. 3,173 1.34 5,374 1.90 3,689 1.25 942 0.61 788 0.74
Other..................... 2,034 .86 2,493 .88 --- --- 21 0.01 24 0.02
-------- ------ -------- ------ -------- ------ -------- ------- -------- ------
Total consumer loans...... 15,533 6.56 15,276 5.38 6,292 2.13 1,800 1.17 1,360 1.27
-------- ------ -------- ------ -------- ------ -------- ------- -------- ------
Commercial business loans... 6,914 2.93 3,886 1.37 2,244 0.76 1,056 0.68 525 0.49
-------- ------ -------- ------ -------- ------ --------- ------- -------- ------
Total other loans........ 22,447 9.49 19,162 6.75 8,536 2.89 2,856 1.85 1,885 1.76
-------- ------ -------- ------ -------- ------ -------- ------- -------- ------
Total loans.............. $236,561 100.00% $283,556 100.00% $295,108 100.00% $154,556 100.00% $106,978 100.00%
======== ====== ======== ====== ======== ====== ======== ======= ======== ======
Less:
- ----
Loans in process............ (2,364) (1,784) (5,651) (2,768) (954)
Deferred fees and discounts. (83) (119) (130) (538) (981)
Allowance for losses........ (3,200) (3,922) (1,716) (774) (774)
-------- --------- -------- -------- --------
Total loans receivable,
net $230,914 $277,731 $287,611 $150,476 $104,269
======== ======== ======== ======== ========
4
The following table shows the composition of the Company's loan portfolio
by fixed and adjustable rates at the dates indicated.
December 31,
--------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ------------------ ----------------- ------------------ -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- ------- -------- -------- -------- ------- -------- ------- ------- --------
(Dollars in Thousands)
Fixed-Rate Loans:
- ----------------
Real estate:
One-to-four family........ $109,550 46.31% $126,375 44.57 $155,232 52.61 $111,117 71.89 $ 89,184 83.37%
Multi-family.............. 8,141 3.44 3,355 1.18 5,036 1.71 3,873 2.51 4,194 3.92
Commercial................ 12,759 5.39 8,533 3.01 9,276 3.14 9,307 6.02 8,463 7.91
Construction.............. 2,597 1.10 477 .17 7,649 2.59 5,105 3.30 3,252 3.04
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total fixed-rate
real estate loans.... 133,047 56.24 138,740 48.93 177,193 60.05 129,402 83.72 105,093 98.24
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial business........ 791 .33 804 .28 178 .06 401 0.26 --- ---
Consumer................... 4,536 1.92 7,161 2.53 3,642 1.23 1,326 0.86 1,282 1.20
--------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total fixed-rate loans. 138,374 58.49 146,705 51.74 181,013 61.34 131,129 84.84 106,375 99.44
--------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Adjustable-Rate Loans
- ---------------------
Real estate:
One-to-four family........ 67,559 28.56 97,969 34.55 87,368 29.61% 20,145 13.04% --- ---
Multi family.............. 4,281 1.81 7,892 2.78 7,440 2.52 629 0.41 --- ---
Commercial................ 7,916 3.35 13,049 4.60 11,255 3.81 1,224 0.79 --- ---
Construction.............. 1,311 .55 6,798 2.40 3,316 1.12 300 0.19 --- ---
-------- ------ -------- ------ -------- ------ -------- ------ -------- -----
Total adjustable-rate
real estate loans.... 81,067 34.27 125,708 44.33 109,379 37.06 22,298 14.43 --- ---
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial business........ 6,123 2.59 3,082 1.09 2,066 .70 655 0.42 525 0.49
Consumer................... 10,997 4.65 8,061 2.84 2,650 .90 474 0.31 77 0.07
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total adjustable-rate
loans................ 98,187 41.51 136,851 48.26 114,095 38.66 23,427 15.16 602 0.56
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans............ 236,561 100.00% 283,556 100.00% 295,108 100.00% 154,556 100.00% 106,978 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
- ----
Loans in process........... (2,364) (1,784) (5,651) (2,768) (954)
Deferred fees and
discounts................ (83) (119) (130) (538) (981)
Allowance for loan losses.. (3,200) (3,922) (1,716) (774) (774)
-------- -------- -------- -------- --------
Total loans receivable,
net.................. $230,914 $277,731 $287,611 $150,476 $104,269
======== ======== ======== ======== ========
5
The following schedule illustrates the maturities of the Company's loan
portfolio at December 31, 1998. Loans which have adjustable or renegotiable
interest rates are shown as maturing in the period during which the contract is
due. The schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses.
Real Estate(1)
----------------------------------------------
Multi-family Commercial business
One-to-four family and Commercial and Consumer Total
------------------------ -------------------- -------------------- ----------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------------ ------------- ------- ---------- --------- ----------- ----------- ----------
(Dollars in Thousands)
Periods Ending
December 31,
- ------------------
1999(2)............ $1,400 9.89% $390 9.55% $2,619 9.60% $ 4,409 9.69%
2000............... 159 8.46 2,850 7.37 2,781 8.28 5,790 7.84
2001............... 693 9.58 1,548 11.00 2,016 9.40 4,257 10.01
2002 and 2003...... 3,788 7.97 3,013 8.56 3,761 10.78 10,562 9.13
2004 to 2008....... 18,402 7.98 5,902 8.80 10,118 7.59 34,422 8.00
2009 to 2018....... 47,577 7.73 14,819 8.51 874 10.48 63,270 7.95
2019 and following. 107,808 7.64 5,765 8.61 278 9.18 113,851 7.69
- ----------------
(1) Includes construction loans.
(2) Includes demand loans and loans having no stated maturity.
At December 31, 1998, the total amount of loans due after December 31, 1999
which have predetermined interest rates is $134.9 million, while $97.2 million
loans due after such dates have floating or adjustable interest rates.
ONE-TO-FOUR FAMILY RESIDENTIAL MORTGAGE AND CONSTRUCTION LENDING. The
Company focuses its lending efforts on the origination of loans secured by first
mortgages on owner-occupied, one-to-four family residences. Residential loan
originations of this type are generated by the Company's marketing efforts, its
present customers, walk-in customers and referrals from real estate agents and
builders. At December 31, 1998, the Company's one-to-four family residential
permanent mortgage loans totaled $177.1 million, or 74.9% of the Company's total
gross loan portfolio.
At December 31, 1998, $109.6 million of the Company's one-to-four family
residential mortgage loans, or 46.3% of the Company's total gross loan
portfolio, had fixed interest rates. From time to time, the Company may purchase
loans secured by one-to-four family residences. See "Originations, Purchases and
Sales of Loans and Mortgage-Backed Securities."
The Company currently originates up to a maximum of 30-year, owner occupied
one-to-four family residential mortgage loans in amounts up to 97% of the
appraised value of the security property provided that private mortgage
insurance is obtained in an amount sufficient to reduce the Company's exposure
to at or below the 80% loan-to-value level. Interest rates charged on these
6
loans are priced on a regular basis according to market conditions. Residential
loans do not include prepayment penalties. The Company also originates up to a
maximum of 30-year one-to-four family residential loans to nonowner-occupants,
with loan-to-value ratios of up to 80%.
In underwriting one-to-four family residential real estate loans, the
Company evaluates, among other things, both the borrower's ability to make
monthly payments and the value of the property securing the loan. Most
properties securing real estate loans made by the Company are appraised by
independent licensed fee appraisers approved by the Board of Directors. The
Company requires borrowers to obtain title, fire and property insurance
(including flood insurance, if necessary) in an amount not less than the amount
of the loan. In prior years, the Company had accepted title opinions. Real
estate loans originated by the Company generally contain a "due on sale" clause
allowing the Company to declare the unpaid principal balance due and payable
upon the sale or disposition of the secured property.
The Company originates a limited number of loans to finance the
construction of one-to-four family residences. At December 31, 1998, the Company
had loans to finance the construction of one-to-four family residences totaling
$2.8 million, or 1.2% of the Company's loan portfolio. Substantially all of
these loans are made to individuals who propose to occupy the premises upon
completion of construction. Construction loans are generally structured for up
to a 30-year term with a six month construction phase, during which the borrower
pays interest only. Upon completion of the construction phase, these loans
continue as permanent loans of the Company. Loan proceeds are disbursed in
increments as construction progresses and as inspections warrant.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The Company has also
engaged in commercial and multi-family real estate lending. At December 31,
1998, the Company had $33.1 million of permanent commercial and multi-family
real estate loans, which represented 14.0% of the Company's gross loan
portfolio. The Company also has $1.1 million in construction loans secured by
multi-family and commercial real estate.
The Company's commercial and multi-family real estate loan portfolio is
secured primarily by apartment buildings, office buildings, strip shopping
centers, motels, nursing homes, restaurants and churches located in the
Company's market area. Multi-family and commercial real estate loans generally
have terms that do not exceed 15 years. Generally, the loans are made in amounts
up to 75% of the appraised value of the secured property. The Company analyzes
the financial condition of the borrower, the borrower's credit history, and the
reliability and predictability of the cash flow generated by the property
securing the loan. Currently, appraisals on properties securing multi-family and
commercial real estate loans originated by the Company are performed by
independent licensed fee appraisers.
Construction loans on multi-family and commercial real estate projects are
structured to be converted to permanent loans at the end of the construction
phase, which generally runs up to 12 months. These construction loans have rates
and terms which generally match any permanent multi-family or commercial real
estate loan then offered by the Company, except that during the construction
phase, the borrower pays interest only. These loans generally provide for the
payment of interest and loan fees from loan proceeds.
7
Construction and development loans are obtained principally through
continued business from developers and builders who have previously borrowed
from the Company, as well as referrals from existing customers and walk-in
customers. The application process includes a submission to the Company of
accurate plans, specifications and costs of the project to be
constructed/developed. These items are used as a basis to determine the
appraised value of the subject property. Loans are based on the lesser of
current appraised value or the cost of construction (land plus building).
In addition, the Company from time to time has purchased loans secured by
multi-family real estate. The Company made no such purchases of multi-family
real estate participation loans in fiscal 1998.
Loans secured by commercial and multi-family real estate properties are
generally larger and involve a greater degree of credit risk than one-to-four
family residential mortgage loans. Because payments on loans secured by
commercial real estate properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject to adverse conditions in the real estate market or the economy. If the
cash flow from the project is reduced (for example, if leases are not obtained
or renewed), the borrower's ability to repay the loan may be impaired. The two
largest loans are as follows: (1) $2.5 million secured by land and speculation
homes; and (2) $1.8 million secured by one- to four-family dwellings and
multi-family properties.
CONSUMER LENDING. The Company offers secured consumer loans, including home
improvement loans, home equity loans, loans secured by savings deposits and
equity securities, and retail mobile home loans. The Company has plans to expand
its consumer lending portfolio. The Company currently originates all of its
consumer loans in its primary market area. The Company originates consumer loans
on a direct basis by extending credit directly to the borrower.
At December 31, 1998, deposit loans were $257,000 or .11% of the Company's
gross loan portfolio. Home equity loans were $10.1 million or 4.3% of the
Company's gross loan portfolio as of that date.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. Loans secured by
deposit accounts at the Company are currently originated for up to 90% of the
account balance with a hold placed on the account restricting the withdrawal of
the account balance.
The underwriting standards employed by the Company for consumer loans,
other than loans secured by deposits, include an application, a determination of
the applicant's payment history on other debts and an assessment of ability to
meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is a primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount. The Company offers both secured and
unsecured loans.
Consumer loans may entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss, depreciation or fluctuation in value. In
8
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans. At December 31, 1998, $490,000 of the Company's
consumer loans were not performing in accordance with their terms. However,
there can be no assurance that further delinquencies will not occur in the
future.
COMMERCIAL BUSINESS LENDING. Commercial business loans have been added to
the list of the Company's products. The outstanding balance of unsecured
commercial lines of credit was $1.8 million as of December 31, 1998. Commercial
loans secured other than by mortgage had outstanding balances of $4.6 million as
of December 31, 1998. The purpose of these loans will generally be for working
capital or expansion of existing businesses. These loans have been priced at
prime plus a specified spread, or at the one year constant maturity treasury
index plus a specified spread. Some of these loans are payable on demand.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income and which are secured by real property the value of which tends to be
more easily ascertainable, commercial business loans typically are made on the
basis of the borrower's ability to make repayment from the cash flow of the
borrower's business. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself (which, in turn, is likely to be dependent upon the general
economic environment). The Bank's commercial business loans may be secured by
business assets. However, the collateral securing the loans may depreciate over
time, may be difficult to appraise and may fluctuate in value based on the
success of the business. The Bank's largest loan is a $5.5 million commercial
business loan secured by a first security interest covering all business assets
including accounts receivable, inventory, securities, contract rights, acquired
real estate, stock in direct and indirect subsidiaries of the borrower,
intangibles, and equipment.
ORIGINATIONS, PURCHASES AND SALES OF LOANS AND MORTGAGE-BACKED SECURITIES
Loan originations are developed from advertising, continuing business with
depositors and borrowers, soliciting realtors and builders, walk-in customers
and correspondent relationships in other markets. Loans are originated by
salaried loan officers, field originators compensated by salary and commission.
While the Company offers fixed-rate and adjustable-rate loans, its ability
to originate loans is dependent upon the relative customer demand for loans in
its market, which is affected by the interest rate environment and other
factors. In fiscal 1998, the Company originated $28.5 million in fixed-rate
loans and $23.6 million in adjustable-rate loans.
In periods of economic uncertainty, the ability of financial institutions,
including the Company, to originate large dollar volumes of real estate loans
may be substantially reduced or restricted, with a resultant decrease in related
loan origination fees, other fee income and operating earnings.
9
The following table shows the origination, purchase, sale and repayment
activities of the Company for the periods indicated.
Year Ended December 31,
------------------------------------------------
1998 1997 1996
-------------- --------------- --------------
(In Thousands)
ORIGINATIONS BY TYPE:
Adjustable-rate:
Construction.................................... $ 2,494 $11,521 $11,256
Real estate - one to four family................. 7,205 23,600 33,075
- multi-family.................................. 2,017 593 357
- commercial.................................... 1,060 3,276 2,567
Commercial business............................... 2,435 1,894 1,860
Consumer - home equity............................ 7,226 5,996 1,562
Other consumer.................................... 1,188 2,247 119
Fixed-rate:
Construction.................................... 526 280
Commercial business............................. 1,656 627 388
Consumer........................................ 895 7,213 3,422
Real estate - one-to-four family................ 24,100 4,263 28,029
- multi-family.................................. 11 --- 500
- commercial.................................... 1,269 141 60
-------- -------- --------
Total loans originated........................ 52,082 61,651 83,195
-------- -------- --------
PURCHASES:
Acquisitions:
Loans........................................... --- --- 66,433
MBS............................................. 40,179 3,710 20,729
One-to-four family................................ --- --- 45,236
--------- -------- --------
Total purchased............................... 40,179 3,710 132,398
--------- -------- --------
SALES AND REPAYMENTS:
Loans:
Loan sale....................................... --- 15,751 17,783
MBS sale........................................ 7,119 10,684 21,770
MBS payments.................................... 5,188 3,908 7,567
Loan payments................................... 95,260 57,604 37,730
--------- -------- --------
Total reductions.............................. 107,567 87,947 84,850
--------- -------- --------
Increase (decrease) in other items, net........... (3,900) (1,704) (2,484)
--------- -------- --------
Net increase (decrease)....................... $(19,206) $(24,290) $128,259
========= ======== ========
NON-PERFORMING ASSETS AND CLASSIFIED ASSETS
When a borrower fails to make a required payment on real estate secured
loans and consumer loans a notice is sent 30 days after payment is due. At 60
days after the payment is due, the Company generally institutes collection
procedures by notice and/or telephone. In most cases, delinquencies are cured
promptly; however, if a loan secured by real estate or other collateral has been
delinquent for more than 90 days, satisfactory payment arrangements must be
adhered to or the Company will initiate proceedings for foreclosure or
repossession.
10
When a loan becomes delinquent 90 days or more or when the collection of
principal or interest becomes doubtful, the Company will place the loan on a
non-accrual status and, as a result, previously accrued interest income on the
loan is taken out of current income. The loan will remain on a non-accrual
status as long as the loan is 90 days or more delinquent.
The following table sets forth information concerning delinquent loans at
December 31, 1998. The amounts presented represent the total remaining principal
balances of the related loans, rather than the actual payment amounts which are
overdue and are reflected as a percentage of the type of loan category.
Loans Delinquent For:
---------------------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and over
---------------------------- --------------------------------- ----------------------------------
Number Amount Percent Number Amount Percent Number Amount Percent
--------- --------- --------- ---------- --------- ---------- --------- --------- -----------
(Dollars in Thousands)
Real Estate:
One-to-four family(1).. 43 $1,955 1.08% 14 $847 .47% 25 $1,740 .96%
Non-residential(1)..... 4 390 1.14 4 155 .45 8 1,947 5.69
Consumer/Commercial. 6 54 .24 7 79 .35 18 855 3.81
- -------------------
(1) Includes construction loans.
The table below sets forth the amounts and categories of non-performing
assets in the Company's loan portfolio. For all periods presented, the Company
has had no troubled debt restructurings (which involve forgiving a portion of
interest or principal on any loans or making loans at a rate materially less
than that of market rates). Foreclosed assets include assets acquired in
settlement of loans.
At December 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
------- -------- -------- -------- ----------
(Dollars in Thousands)
Non-accruing loans:
One-to-four family......................... $1,740 $ 612 $ 674 $ 579 $ 75
Consumer................................... 373 213 10 --- ---
Commercial real estate/Business Loans...... 2,428 1,170 1,266 --- ---
----- ----- ------ ---- ------
Total................................... 4,541 1,995 1,950 579 75
----- ----- ------ ---- -----
Accruing loans delinquent more than 90 days.. --- --- 94 --- ---
Foreclosed assets............................ 56 56 55 --- ---
------ -------- ------- ---- ------
Total non-performing assets.................. $4,597 $2,051 $2,099 $579 $ 75
====== ====== ====== ==== =====
Total as a percentage of total assets........ 1.4% .55% .52% .25% .04%
====== ====== ====== ==== =====
For the year ended December 31, 1998, gross interest income that would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to approximately $423,000. The Company did not recognize
any interest income on such loans in 1998.
11
NON-PERFORMING ASSETS. Included in the table above in nonaccruing
one-to-four family loans at December 31, 1998, were 25 loans secured by
single-family residences located in the Company's primary market area. Also
included in non-performing assets are 12 consumer loans and 14 commercial real
estate loans.
OTHER LOANS OF CONCERN. Not categorized as non-performing assets at
December 31, 1998, were $1.5 million of potential problem loans. The potential
problem loans consisted of 18 single family residences, two commercial real
estate loans, one multi-family loan and zero commercial loans.
CLASSIFIED ASSETS. Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered by the OTS
to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the Bank will sustain "some loss" if the deficiencies are not corrected.
Assets classified as "doubtful" have all of the weaknesses inherent in those
classified "substandard," with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as "loss" are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets which do not currently expose the
Bank to sufficient risk to warrant classification in one of the aforementioned
categories, but possess weaknesses, are required to be designated "special
mention" by management.
When a bank classifies problem assets as either substandard or doubtful, it
may establish general allowances for loan losses in an amount deemed prudent by
management. General allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When a savings bank classifies problem assets as "loss," it is
required either to establish a specific allowance for losses equal to 100% of
that portion of the asset so classified or to charge-off such amount. A savings
bank's determination as to the classification of its assets and the amount of
its valuation allowances is subject to review by the savings bank's Regional
Director at the regional OTS office, who may order the establishment of
additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Bank regularly reviews
the loans in its portfolio to determine whether any loans require classification
in accordance with applicable regulations. On the basis of management's review
of its assets, at December 31, 1998, the Bank had classified a total of $4
million of its assets as substandard, $31,000 as doubtful and none as loss. At
December 31, 1998, total classified assets were $4.6 million, or 1.4% of the
Bank's assets.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
12
estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at fair
value. If fair value at the date of foreclosure is lower than the balance of the
related loan, the difference will be charged-off to the allowance at the time of
transfer. Valuations are periodically updated by management and if the value
declines, a specific provision for losses on such property is established by a
charge to operations.
Although management believes that it uses the best information available to
determine the allowances, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowances will be the result
of periodic loan, property and collateral reviews and thus cannot be predicted
in advance. In the fourth quarter of fiscal 1997, the Company provided an
allowance of $1.5 million for certain loans. These loans were primarily of a
commercial nature. A portion of this provision was reversed in 1998 due to a
favorable outcome in the settlement of some of the loans. At December 31, 1998,
the Company had a total allowance for loan losses of $3.2 million, or 1.4% of
loans receivable, net. See Note 4 of the Notes to Consolidated Financial
Statements in the Company's Annual Report to Stockholders filed as Exhibit 13
hereto.
The following table sets forth an analysis of the Company's allowance for
loan losses.
Year Ended December 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ----------- ------------- ------------ ------------
(Dollars in Thousands)
Balance at beginning of period............ $3,922 $1,716 $ 774 $774 $774
Beginning balance acquisition............. --- --- 577 --- ---
Charge-offs:
One-to-four family...................... 28 79 34 6 ---
Consumer................................ 228 --- --- ---
Commercial.............................. 122 --- --- --- ---
Recoveries................................ 19 --- --- --- ---
------ --------- -------- ------ ------
Net charge-offs........................... 359 79 34 6 ---
Additions charged to operations........... (363) 2,285 399 6 ---
------- -------- -------- ------ ------
Balance at end of period.................. $3,200 $3,922 $1,716 $774 $774
====== ======== ======== ====== ======
Ratio of net charge-offs during the period to
average loans outstanding during the period.. .14% --- .01% --- ---%
==== ======= ---- ======= ===
Ratio of net charge-offs during the period to 8.6% 3.81% 1.66% 2.99% ---%
average non- performing assets......... ==== ==== ==== ==== ===
13
The distribution of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
December 31,
-------------------------------------------------------------------------
1998 1997 1996
---------------------- ----------------------- ----------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
--------- ------------ ------------ ---------- ---------- ---------
(Dollars in Thousands)
One-to-four family........... $519 74.87% $ 669 79.10% $ 636 82.07%
Multi-family................. 55 5.25 190 3.97 197 4.23
Commercial real estate....... 828 8.74 1,338 7.61 504 6.96
Consumer..................... 510 6.56 548 5.38 81 2.27
Construction................. 3 1.65 72 2.57 46 3.71
Commercial................... 585 2.93 432 1.37 38 .76
Unallocated.................. 700 --- 673 --- 214 ---
------- -------- ------- -------- ------ -------
Total................... $3,200 100.00% $3,922 100.00% $1,716 100.00%
====== ====== ====== ====== ====== ======
INVESTMENT ACTIVITIES
The Bank must maintain minimum levels of investments that qualify as liquid
assets under OTS regulations. Liquidity may increase or decrease depending upon
the availability of funds and comparative yields on investments in relation to
the return on loans. Historically, the Bank has generally maintained its liquid
assets above the minimum requirements imposed by the OTS regulations and at a
level believed adequate to meet requirements of normal daily activities,
repayment of maturing debt and potential deposit outflows. As of December 31,
1998, the Bank's liquidity ratios (liquid assets as a percentage of net
withdrawable savings deposits and current borrowings) was in compliance with
applicable regulations. See "Regulation - Liquidity."
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Company is to invest funds among
various categories of investments and maturities based upon the Company's need
for liquidity, to achieve the proper balance between its desire to minimize risk
and maximize yield, to provide collateral for borrowings, and to fulfill the
Company's asset/liability management policies.
At December 31, 1998, the Company's cash and interest-bearing deposits in
other financial institutions totaled $13.9 million, or 4.2% of total assets. The
Company also has a $6.9 million investment in the common stock of the FHLB of
Cincinnati in order to satisfy the requirement for membership therein.
14
OTS regulations restrict investments in corporate debt and equity
securities by the Bank. These restrictions include prohibitions against
investments in the debt securities of any one issuer in excess of 15% of the
Bank's unimpaired capital and unimpaired surplus as defined by federal
regulations, plus an additional 10% if the investments are fully secured by
readily marketable collateral. At December 31, 1998, the Bank was in compliance
with this regulation. See "Regulation - Federal Regulation of Savings
Institutions" for a discussion of additional restrictions on the Bank's
investment activities.
The following table sets forth the composition of the Company's investment
portfolio at the dates indicated.
December 31,
-------------------------------------------------------------------------------------
1998 1997 1996
--------------------- ------------------------- ----------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
--------- ---------- ---------- ----------- ---------- ----------
(Dollars in Thousands)
Investment Securities:
U.S. Treasury securities.......... $ 502 1.56% $ 501 .88% $ 794 1.50%
Federal agency obligations........ 14,900 46.25 21,820 38.24 35,298 66.79
-------- ----- ------ ----- ------ ------
Subtotal....................... 15,402 47.81 22,321 39.12 36,092 68.29
-------- ----- ------ ----- ------ ------
FHLB stock.......................... 6,948 21.57 6,470 11.34 5,862 11.09
Freddie Mac stock................... --- --- 134 .23 3 ---
-------- ----- ------ ----- ------ ------
Total investment securities and
FHLB/Freddie Mac stock...... 22,350 69.38 28,925 50.69 41,957 79.38
-------- ----- ------ ----- ------ ------
Average remaining life of investment
securities....................... 12.88 years 7.51 years 4.78 years
Other Interest-Earning Assets:
Interest-bearing deposits with banks 4,550 14.12 22,022 38.60 2,747 5.20
Federal funds sold................ 5,317 16.50 6,110 10.71 8,148 15.42
------- ------ ------- ------ ------- ------
Total.......................... $32,217 100.00% $57,057 100.00 $52,852 100.00%
======= ====== ======= ======= ======= ======
Average remaining life or term to
repricing of investment securities and
other interest-earning assets, excluding
FHLB/Freddie Mac stock............. 7.88 years 3.32 years 3.77 years
The composition and maturities of the investment securities portfolio,
excluding FHLB of Cincinnati stock, are indicated in the following table.
December 31, 1998
------------------------------------------------------------------------------
Less Than 1 to 5 Over 5
1 Year Years Years Total Investment Securities
------------ ----------- ------------ --------------------------------
Book Value Book Value Book Value Book Value Market Value
------------- ------------ ------------ ----------- --------------
(Dollars in Thousands)
U.S. Treasury securities................... $502 $ --- $ --- $ 502 $502
Federal agency obligations................. --- --- 14,900 14,900 14,900
------ ----- ------ ------ ------
Total investment securities................ $502 $--- $14,900 $15,402 $15,402
==== ==== ======= ======= =======
Weighted average yield..................... 6.31% ---% 6.35% 6.35% 6.35%
MORTGAGE-BACKED SECURITIES. The Company had a $50.0 million portfolio of
mortgage- backed securities at December 31, 1998, all of which were insured or
guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac. Accordingly, management
believes that the Company's mortgage-backed securities are generally more
resistant to credit problems than loans, which generally lack such insurance or
guarantees. Because these securities represent a pass through of principal and
interest from underlying individual 30-year mortgages, such securities do
present prepayment risk. Any such individual security contains mortgages that
can be prepaid at any time over the life of the security. In a rising interest
rate environment the underlying mortgages are likely to extend their lives
versus a stable or declining rate environment. A declining rate environment can
result in rapid prepayment. There is no certainty as to the security life or
speed of prepayment. The geographic makeup and correlated economic conditions of
the underlying mortgages also play an important role in determining prepayment.
In addition to prepayment risk, interest rate risk is inherent in holding any
debt security. As interest rates rise the value of the security declines and
conversely as interest rates decline values rise. Adjustable-rate
mortgage-backed securities have the advantage of moving their interest rate
within limits with the contractual index used, subject to the risk of
prepayment. Interest rate adjustments to $2.0 million of the Company's
adjustable-rate mortgage-backed securities are tied to the One Year Constant
Maturity Treasury Index, $7.6 million are tied to the 11th District cost of
funds and $111,000 are tied to the six month treasury. At December 31, 1998,
19.5% of the Company's mortgage-backed securities consisted of adjustable-rate
mortgage-backed securities.
Mortgage-backed securities can serve as collateral for borrowings and,
through sales and repayments, as a source of liquidity. For information
regarding the carrying and market values of the Company's mortgage-backed
securities portfolio, see Note 3 of the Notes to Consolidated Financial
Statements in the Company's Annual Report to Stockholders filed as Exhibit 13
hereto. Under the OTS risk-based capital requirement, mortgage-backed securities
have a risk weight of 20% (or 0% in the case of Government National Mortgage
Association securities) in contrast to the 50% risk weight carried by
residential loans. See "Regulation." Management has purchased mortgage-backed
securities in order to supplement loan originations and includes adjustable-rate
mortgage-backed securities to mitigate the consequences of an entirely
fixed-rate mortgage portfolio. The CMO securities held by the Company carry
certain risks. The principal represented by such securities may be repaid over a
longer period than that assumed in management's initial purchase analysis which
may hamper certain aspects of the Company's asset/liability management strategy.
In addition, these securities have maximum interest rate caps. If and as market
interest rate levels approach these caps, the value of the underlying security
will decline. As of December 31, 1998, the Company held $10.1 million of CMO
securities.
15
The following table sets forth the contractual maturities of the Company's
mortgage-backed securities at December 31, 1998.
Due in Due in Due In Over December 31, 1998
1 to 5 years 6 to 10 years 10 Years Balance Outstanding
--------------- ------------------ ---------------- ---------------------------
(In Thousands)
Freddie Mac.............. $ 952 $681 $ 3,956 $ 5,589
Fannie Mae............... --- --- 9,048 9,048
CMOs..................... 4,855 490 4,780 10,125
Ginnie Mae............... 17 --- 25,265 25,282
------ ------ ------ --------
Total mortgage-backed
securities............ $5,824 $1,171 $43,049 $50,044
====== ====== ======= =======
Weighted average yield... 6.29 7.44 6.53 6.52
SOURCES OF FUNDS
GENERAL. The Company's primary sources of funds are deposits, borrowings,
repayment of loan principal, sales and repayments of mortgage-backed securities,
maturing investments in certificates of deposit, and funds provided from
operations. Borrowings, consisting of FHLB advances, may be used at times to
compensate for seasonal reductions in deposits or deposit inflows at less than
projected levels, and may be used on a longer-term basis to support expanded
lending activities.
DEPOSITS. The Company offers a variety of deposit accounts having a wide
range of interest rates and terms. The Company's deposits consist of passbook
and statement savings accounts, NOW, demand and money market fund accounts, and
certificate accounts ranging in terms from six months to ten years. The Company
only solicits deposits from its market area and does not currently use brokers
to obtain deposits. The Company relies primarily on competitive pricing
policies, advertising and customer service to attract and retain these deposits.
The variety of deposit accounts offered by the Company has allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Company has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The Company endeavors to manage the pricing of its deposits in
keeping with its asset/liability management and profitability objectives. The
ability of the Company to attract and maintain certificates of deposit accounts
and the rates paid on these deposits has been and will continue to be
significantly affected by market conditions.
16
The following table sets forth the savings flows at the Company during the
periods indicated. The flow of deposits is influenced significantly by general
economic conditions, changes in money market and prevailing interest rates, and
competition.
Year Ended December 31,
----------------------------------------------------------------
1998 1997 1996
---------------- ----------------- ----------------------
(Dollars in Thousands)
Opening balance.................................. $246,909 $233,203 $139,129
Net deposits (withdrawals)....................... (70,114)(1) (4,220) 80,678(2)
Interest credited................................ 16,171 17,926 13,396
---------- -------- ---------
Ending balance................................... $192,966 $246,909 $233,203
======== ======== ========
Net increase (decrease).......................... $(53,943) $ 13,706 $ 94,074
========= ======== ========
Percent increase (decrease)...................... 21.8% 5.8 % 67.6%
==== ==== ====
- ---------------
(1) Net deposit decrease is primarily due to the sale of $84,365 in deposits
related to the Cincinnati area branch sales in 1998.
(2) Net deposit increase is primarily due to the Company's acquisition of
Mayflower and Seven Hills during fiscal 1996.
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered by the Company for the periods
indicated.
Year Ended December 31,
---------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- -----------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
--------- -------- --------- ---------- ------- --------
(Dollars in Thousands)
TRANSACTIONS AND SAVINGS DEPOSITS:
Passbook and Savings Accounts...... $13,629 7.06% $22,115 8.96 $27,981 12.00%
NOW Accounts........................ 12,708 6.59 12,186 4.94 10,074 4.32
Money Market Accounts............... 49,084 25.44 37,182 15.06 19,664 8.43
------ ------ ------ ----- ------- ------
Total Non-Certificates.............. 75,421 39.09 71,483 28.96 57,719 24.75
------ ----- ------ ------ ------- ------
CERTIFICATES:
0.00 - 3.49%...................... 534 .28 785 .32 971 .42
3.50 - 5.49%...................... 28,353 14.69 27,688 11.21 45,927 19.70
5.50 - 7.49%...................... 88,100 45.65 146,319 59.26 121,281 52.00
7.50 - 9.49%...................... 558 .29 634 .25 7,305 3.13
------- ------- ---------- -------- -------- ------
Total Certificates.................. 117,545 60.91 175,426 71.04 175,484 75.25
------- ------ ------- ----- -------- ------
Total Deposits...................... $192,966 100.00 $246,909 100.00 $233,203 100.00%
======== ====== ======== ====== ======== ======
17
The following table shows rate and maturity information for the Company's
certificates of deposit as of December 31, 1998.
0.00- 3.50- 5.50- 7.50- Percent
3.49% 5.49% 7.49% 9.49% Total of Total
---------- ------------ ---------- ---------- --------- ---------------
(Dollars in Thousands)
Certificate accounts maturing in quarter ending:
- -------------------------------------------------
March 31, 1999.......................... $ 75 $2,676 $ 4,490 $ --- $ 7,241 6.16%
June 30, 1999........................... 163 3,981 12,773 141 17,058 14.51
September 30, 1999...................... 50 2,201 13,831 --- 16,082 13.68
December 31, 1999....................... 15 4,494 12,112 --- 16,621 14.14
March 31, 2000.......................... 33 1,223 16,229 --- 17,485 14.88
June 30, 2000........................... 6 3,734 10,963 --- 14,703 12.51
September 30, 2000...................... 2 4,006 2,331 55 6,394 5.44
December 31, 2000....................... 78 2,420 1,764 30 4,292 3.65
March 31, 2001.......................... 3 367 1,258 --- 1,628 1.39
June 30, 2001........................... 13 --- 3,188 27 3,228 2.75
September 30, 2001...................... 7 628 5,307 --- 5,942 5.05
December 31, 2001....................... 3 2,148 202 154 2,507 2.13
Thereafter.............................. 86 475 3,652 151 4,364 3.71
---- ------ -------- ---- ---------- -------
Total................................ $534 $28,353 $88,100 $558 $117,545 100.00%
==== ======= ======= ==== ======== ======
Percent of total..................... 0.46% 24.12% 74.95% 0.47% 100.00%
==== ===== ===== ==== ======
The following table indicates the amount of the Company's certificates of
deposit and other deposits by time remaining until maturity as of December 31,
1998.
Maturity
---------------------------------------------------------------------------------
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
------------- ----------- ------------ ------------- -----------------
(In Thousands)
Certificates of deposit less
than $100,000................... $6,343 $15,054 $28,352 $53,455 $103,204
Certificates of deposit of
$100,000 or more................ 898 2,004 4,351 7,088 14,341
------- --------- -------- -------- ---------
Total certificates of deposit.... $7,241 $17,058 $32,703 $60,543 $117,545
====== ======= ======= ======= ========
BORROWINGS. Another source of funds includes advances from the FHLB of
Cincinnati. As a member of the FHLB of Cincinnati, the Bank is required to own
capital stock and is authorized to apply for advances. Each FHLB credit program
has its own interest rate, which may be fixed or variable, and includes a range
of maturities. The FHLB of Cincinnati may prescribe the acceptable uses to which
these advances may be put, as well as limitations in the size of the advances
and repayment provisions.
Beginning in 1995, the Bank utilized a higher level and a wider variety of
FHLB advances than it had in the past. These advances were utilized for
increased investments and lending. The FHLB advances were secured by the Bank's
blanket agreement for advances and security agreement and are not tied to
specific investments or loans. Fixed rate advances of $20 million were taken to
18
fund the purchase of callable securities. The remainder of the borrowing were
variable-rate or fixed-rate in nature and was intended to fund mortgages.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances for the periods indicated.
Year Ended December 31,
----------------------------------------------------------
1998 1997 1996
--------------- ---------------- -----------------
(In Thousands)
Maximum Balance:
FHLB advances.................................... $88,256 $113,112 $102,602
Average Balance:
FHLB advances.................................... $62,802 $ 97,414 $ 79,665
The following table sets forth certain information as to the Bank's FHLB
advances at the dates indicated.
December 31,
---------------------------------------------------------------
1998 1997 1996
------------- ------------------ -------------------
(Dollars in Thousands)
FHLB advances...................................... $85,252 $68,339 $102,602
Weighted average interest rate of
FHLB advances..................................... 5.30% 5.85% 5.84%
SERVICE CORPORATION ACTIVITIES
Federal savings institutions generally may invest a limited percentage of
their assets in service corporations. In addition, federal savings institutions
may invest up to 50% of their regulatory capital in conforming loans to their
service corporations. In addition to investments in service corporations,
federal savings institutions are permitted to invest an unlimited amount in
operating subsidiaries engaged solely in activities in which federal savings
institutions may engage directly.
At December 31, 1998, the Bank had a net book value investment of $5,000 in
Springfield-Home Community Reinvestment Corporation ("Springfield-Home"), a
50%-owned service corporation, for low income housing lending.
At December 31, 1998, the Bank had a net book investment of $(200,000) in
West Central Financial Services, an operating subsidiary created to generate
consumer lending that does not overlap with the Company's current consumer
lending. In addition, the Bank had a net book investment of $(3,000) in West
Central Mortgage Services, an operating subsidiary created to generate mortgage
loans in areas outside of the Bank's normal lending area.
19
COMPETITION
The Company faces strong competition, both in originating real estate and
other loans and in attracting deposits. Competition in originating real estate
loans comes primarily from commercial banks, other savings institutions, credit
unions and mortgage bankers making loans secured by real estate located in the
Company's market area. The Company competes for real estate and other loans
principally on the basis of the quality of services it provides to borrowers,
and loan fees it charges, and the types of loans it originates.
The Company attracts all of its deposits through its retail banking
offices, primarily from the communities in which those retail banking offices
are located; therefore, competition for those deposits is principally from
commercial banks, other savings institutions, credit unions and brokerage firms
located in the same communities. The Company competes for these deposits by
offering a variety of deposit accounts at competitive rates, convenient business
hours, and convenient branch locations with interbranch deposit and withdrawal
privileges at each.
REGULATION
GENERAL
The Bank is a federally chartered savings bank. Accordingly, the Bank is
subject to broad federal regulation extending to all its operations. The Bank is
a member of the FHLB of Cincinnati and subject to certain limited regulation by
the Board of Governors of the Federal Reserve System ("Federal Reserve Board").
As a savings and loan holding company, the Company also is subject to federal
regulation and oversight. The purpose of the regulation of the Company and other
holding companies is to protect subsidiary savings associations. The Bank's
deposits are federally insured by the Savings Association Insurance Fund
("SAIF"), which together with the Bank Insurance Fund (the "BIF") are the two
deposit insurance funds administered by the FDIC, and their deposits are insured
by the FDIC. As a result, the FDIC has certain regulatory and examination
authority over the Banks.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
FEDERAL REGULATION OF SAVINGS INSTITUTIONS
The OTS has extensive authority over the operations of federal savings
institutions. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. When these examinations are conducted by the OTS and the FDIC, the
examiners may require an institution to provide for higher general or specific
loan loss reserves. All federal savings institutions are subject to a
semi-annual assessment, based upon the institution's total assets, to fund OTS
operations. The Bank's OTS assessment for the fiscal year ended December 31,
1998 was $93,000.
The OTS also has extensive enforcement authority over all federal savings
institutions and their holding companies, including the Company. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and
20
to initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws and they are prohibited from engaging in any
activities not permitted by such laws. For instance, no federal savings
institution may invest in non-investment grade corporate debt securities. In
addition, the permissible level of investment by federal institutions in loans
secured by non-residential real property may not exceed 400% of total capital,
except with approval of the OTS. Federal savings institutions are also generally
authorized to branch nationwide. The Bank is in compliance with the noted
restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
December 31, 1998, the Bank's lending limit under this restriction was $6.4
million. The Bank is in compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The Bank's deposits are insured by the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the SAIF or the BIF. The FDIC also has the authority to initiate enforcement
actions against savings associations, after giving the OTS an opportunity to
take such action, and may terminate the deposit insurance if it determines that
the institution has engaged in unsafe or unsound practices, or is in an unsafe
or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (I.E., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (I.E., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
21
The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However SAIF-insured institutions
are required to pay a Financing Corporation ("FICO") assessment, in order to
fund the interest on bonds issued to resolve thrift failures in the 1980s, equal
to approximately 6.48 basis points for each $100 in domestic deposits, while BIF
insured institutions pay an assessment equal to approximately 1.52 basis points
for each $100 in domestic deposits. The assessment is expected to be reduced to
2.43 basis points no later than January 1, 2000, when BIF insured institutions
fully participate in the assessment. These assessments, which may be revised
based upon the level of BIF and SAIF deposits will continue until the bonds
mature in the year 2017.
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings association are required to maintain a minimum
level of regulatory capital. The OTS has established capital standards,
including a tangible capital requirement, a leverage ratio (or core capital)
requirement and a risk-based capital requirement applicable to such savings
associations. These capital requirements must be generally as stringent as the
comparable capital requirements for national banks. The OTS is also authorized
to impose capital requirements in excess of these standards on individual
associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital. At December 31, 1998, the Bank
had an intangible asset of mortgage servicing rights of $28,000.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries, the debt and equity investments in such subsidiaries are deducted
from assets and capital. The Bank's subsidiaries are includable subsidiaries.
At December 31, 1998, the Bank had tangible capital of $41.1 million, or
.26% of adjusted total assets, which is $12.6 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date.
22
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. At December 31, 1998, the Bank had no intangibles which were
subject to these tests. As a result of the prompt corrective action provisions
discussed below, however, a savings association must maintain a core capital
ratio of at least 4% to be considered adequately capitalized unless its
supervisory condition is such to allow it to maintain a 3% ratio.
At December 31, 1998, the Bank had core capital equal to $41.1 million, or
12.6% of adjusted total assets, which is $28.0 million above the minimum
leverage ratio requirement of 4% as in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1998, the Bank had
no capital instruments that qualify as supplementary capital and $1.7 million of
general loss reserves, which was less than 1.0% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Bank had no such
exclusions from capital and assets at December 31, 1998.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one-to-four family first lien mortgage loans not more than 90 days delinquent
and having a loan-to-value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the Fannie Mae or Freddie Mac.
OTS regulations also require that every savings association with more than
normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings institution with less than $300 million in
23
assets and a total capital ratio in excess of 12% is exempt from this
requirement unless the OTS determines otherwise.
On December 31, 1998, the Bank had total capital (as defined above) of
$42.8 million (including $41.1 million in core capital and $1.7 of general loss
reserves) and risk-weighted assets of $177.4 million; or total capital of 24.2%
of risk-weighted assets. This amount was $28.7 million above the 8.0%
requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. ____ The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (I.E., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (I.E., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the Bank
may have a substantial adverse effect on the Company's operations and
profitability. The Company's stockholders do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Company.
24
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
OTS regulations impose various restrictions on savings associations with
respect to their ability to make distributions of capital which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
Generally, savings associations that before and after the proposed
distribution meet their capital requirements, may make capital distributions
during any calendar year equal to the greater of 100% of net income for the
year-to-date plus 50% of the amount by which the lesser of the association's
tangible, core or risk-based capital exceeds its capital requirement for such
capital component, as measured at the beginning of the calendar year, or 75% of
their net income for the most recent four quarter period. However, an
association deemed to be in need of more than normal supervision by the OTS may
have its dividend authority restricted by the OTS. The Bank may pay dividends in
accordance with this general authority.
Savings associations proposing to make any capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. Savings
associations that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain OTS
approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
Effective April 1, 1999, OTS regulations will permit savings associations
(not in a holding company) to declare and pay dividends upon prior notice to the
OTS, provided the dividend does not exceed the association's net earnings year
to date plus the prior two-year net earnings available for dividends, and the
association would remain adequately capitalized (as defined in the OTS prompt
corrective action regulations) following the proposed dividend.
LIQUIDITY
All savings associations are required to maintain an average daily balance
of liquid assets equal to a certain percentage of the average daily balance of
its liquidity base during the preceding calendar quarter or a percentage of the
amount of its liquidity base at the end of the preceding quarter. This liquid
asset ratio requirement may vary from time to time (between 4% and 10%)
depending upon economic conditions and savings flows of all savings
associations. At the present time, the minimum liquid asset ratio is 4%. At
December 31, 1998, the Bank was in compliance with its regulatory liquidity
ratio.
QUALIFIED THRIFT LENDER TEST
All savings associations are required to meet a qualified thrift lender
("QTL") test to avoid certain restrictions on their operations. This test
requires a savings association to have at least 65% of its portfolio assets (as
defined by regulation) in qualified thrift investments on a monthly average
25
for nine out of every 12 months on a rolling basis. As an alternative, the
savings association may maintain 60% of its assets in those assets specified in
Section 7701(a)(19) of the Internal Revenue Code. Under either test, such assets
primarily consist of residential housing related loans and investments. At
December 31, 1998, the Bank met the test and has always met the test since its
effective date.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
institution that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. (See "- Holding Company Regulation.")
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of the
Banks, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the Bank. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OTS.
The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years, the Bank may be required to devote additional funds for investment
and lending in its local community. The Bank was examined for CRA compliance in
1997 and received a rating of satisfactory.
TRANSACTIONS WITH AFFILIATES
Generally, transactions between a savings association or its subsidiaries
and its affiliates are required to be on terms as favorable to the association
as transactions with non-affiliates. In addition, certain of these transactions,
such as loans to an affiliate, are restricted to a percentage of the
association's capital. Affiliates of the Bank include the Company and any
company which is under common control with the Bank. In addition, a savings
association may not lend to any affiliate
26
engaged in activities not permissible for a bank holding company or acquire the
securities of most affiliates. Springfield-Home is not deemed an affiliate;
however, the OTS has the discretion to treat subsidiaries of savings
institutions as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
HOLDING COMPANY REGULATION
The Company is a unitary savings and loan Company subject to regulatory
oversight by the OTS. As such, the Company is required to register and file
reports with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over the Company and its non-savings
association subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association.
As a unitary savings and loan company, the Company generally is not subject
to activity restrictions. If the Company acquires control of another savings
association as a separate subsidiary, it would become a multiple savings and
loan company, and the activities of the Company and any of its subsidiaries
(other than the Bank or any other SAIF-insured savings association) would become
subject to such restrictions unless such other associations each qualify as a
QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of the
OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan company. See "- Qualified
Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control of
any other SAIF-insured association. Such acquisitions are generally prohibited
if they result in a multiple savings and loan company controlling savings
associations in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings association.
FEDERAL SECURITIES LAW
The stock of the Company is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Accordingly, the Company
is subject to the information, proxy solicitation, insider trading restrictions
and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance
27
with certain resale restrictions. If the Company meets specified current public
information requirements, each affiliate of the Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At December
31, 1998, the Bank was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements that may be imposed
by the OTS. (See "--Liquidity.")
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB of Cincinnati, which is one of 12 regional
FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (I.E., advances) in accordance with policies and procedures established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Cincinnati. At December 31, 1998, the Bank had $6.9 million in FHLB
stock, which was in compliance with this requirement. In past years, the Bank
had received substantial dividends on its FHLB stock. Over the past five
calendar years such dividends have averaged 6.78% and were 7.19% for 1998.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
For the year ended December 31, 1998, dividends paid by the FHLB of
Cincinnati to the Bank totaled $478,000, which constituted a $37,000 increase
over the amount of dividends received in 1997.
28
FEDERAL AND STATE TAXATION
Savings associations such as the Bank, are permitted to establish reserves
for bad debts and to make annual additions thereto which may, within specified
formula limits, be taken as a deduction in computing taxable income for federal
income tax purposes. The amount of the bad debt reserve deduction for
"non-qualifying loans" is computed under the experience method. The amount of
the bad debt reserve deduction for "qualifying real property loans" (generally
loans secured by improved real estate) may be computed under either the
experience method or the percentage of taxable income method (based on an annual
election).
Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.
Since 1987, the percentage of specially-computed taxable income that was
used to compute a savings association's bad debt reserve deduction under the
percentage of taxable income method (the "percentage bad debt deduction") was
8%. The percentage bad debt deduction thus computed was reduced by the amount
permitted as a deduction for non-qualifying loans under the experience method.
The availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction). Under changes in federal tax law enacted
in August 1996, the percentage bad debt deduction has been eliminated for tax
years beginning after December 31, 1995. Accordingly, this method will not be
available to the Bank for its tax years ending December 31, 1996 and thereafter.
The federal tax legislation enacted in August 1996 also imposes a
requirement to recapture into taxable income the portion of the qualifying and
non-qualifying loan reserves in excess of the "base-year" balances of such
reserves. For the Bank, the base-year reserves are the balances as of December
31, 1988. Recapture of the excess reserves will occur over a six-year period
which could begin for the Bank as early as the tax year ending December 31,
1996. Commencement of the recapture period may be delayed, however, for up to
two years provided the Bank meets certain residential lending requirements). The
Bank previously established, and will continue to maintain, a deferred tax
liability with respect to its federal tax bad debt reserves in excess of the
base-year balances; accordingly, the legislative changes will have no effect on
total income tax expense for financial reporting purposes.
Also, under the August 1996 legislation, the Bank's base-year federal tax
bad debt reserves are "frozen" and subject to current recapture only in very
limited circumstances. Generally, recapture of all or a portion of the base-year
reserves will be required if the Bank pays a dividend in excess of the greater
of its current or accumulated earnings and profits, redeems any of its stock, or
is liquidated. The Bank has not established a deferred federal tax liability
under SFAS No. 109 for its base-year federal tax bad debt reserves, as it does
not anticipate engaging in any of the transactions that would cause such
reserves to be recaptured.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a
29
corporation's regular taxable income (with certain adjustments) and tax
preference items, less any available exemptions. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax and net
operating losses can offset no more than 90% of alternative minimum taxable
income. For taxable years beginning after 1986 and before 1996, corporations,
including savings associations such as the Bank, are also subject to an
environmental tax equal to 0.12% of the excess of alternative minimum taxable
income for the taxable year (determined without regard to net operating losses
and the deduction for the environmental tax) over $2 million.
The Bank files federal income tax returns on a calendar year basis using
the accrual method of accounting. The Company files federal income tax returns
separately from the Bank.
The Bank has not been audited by the IRS recently with respect to federal
income tax returns. In the opinion of management, any examination of still open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of the Bank.
OHIO TAXATION. The Bank is subject to an Ohio franchise tax based on their
net worth plus certain reserve amounts. Total net worth for this purpose is
reduced by certain exempted assets. The resultant net taxable value of stock is
taxed at a rate of 1.5% for 1998.
Ohio companies in a consolidated group, including the Company, are subject
to an Ohio franchise tax based on the greater of the tax on net worth or the tax
on net income, subject to various adjustments and varying rates. Local taxes on
property and income will also be imposed in certain jurisdictions.
DELAWARE TAXATION. As a Delaware holding company, the Company is exempted
from Delaware corporate income tax but is required to file an annual report with
and pay an annual fee to the State of Delaware. The Company is also subject to
an annual franchise tax imposed by the State of Delaware.
30
EXECUTIVE OFFICERS
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal by the Board of Directors. Each executive officer
of the Company is also an executive officer of the Bank. There are no
arrangements or understandings between the persons named and any other person
pursuant to which such officers were selected.
Name Age Positions Held with the Company
- ---------------- ---------- -------------------------------------------
Craig F. Fortin 38 Senior Vice President, Treasurer and
Chief Financial Officer
John T. Heckman 47 Executive Vice President
Gary L. Hicks 47 Executive Vice President
Robert P. Brezing 54 Senior Vice President
The business experience of each executive officer who is not also a
Director of the Company is set forth below.
CRAIG F. FORTIN. Mr. Fortin is Senior Vice President, Treasurer and Chief
Financial Officer of the Company and the Bank, a position he has held since
February 1, 1999. From 1991 to January 1999, Mr. Fortin served as the Chief
Financial Officer of The Ohio Bank, Findlay, Ohio.
THOMAS A. ESTEP. Mr. Estep ceased his duties as Vice President, Treasurer
and Chief Financial Officer of the Company and the Bank on February 1, 1999.
JOHN T. HECKMAN. Mr. Heckman is Executive Vice President, Operations and
Administration of the Company and the Bank. Mr. Heckman has responsibility for
all operational areas of banking activity other than lending. From 1987 to April
1995, Mr. Heckman served as an Assistant Director at the Office of Thrift
Supervision.
GARY L. HICKS. Mr. Hicks is Executive Vice President of Mortgage lending.
Mr. Hicks has responsibility for all mortgage banking functions. Prior positions
he has held include Chief Executive Officer for a mortgage services company and
senior manager for a major Ohio Bank.
ROBERT P. BREZING. Mr. Brezing is Senor Vice President of the Company and
the Bank, positions he has held since October 1997. He is manager of Business
Banking responsible for all commercial loans, commercial real estate and all
consumer loans. From 1988 to 1997, Mr. Brezing served as Vice President of Banc
One Corporation, Columbus, Ohio.
EMPLOYEES
At December 31, 1998, the Company and its subsidiary had a total of 84
employees, including 11 part-time employees. The Company's employees are not
represented by any collective bargaining group. Management considers its
employee relations to be good.
31
ITEM 2. PROPERTIES
The Company conducts its business at its main office, which also serves as
executive office and the Bank's five branch offices located in its market area.
The following table sets forth information relating to each of the Company's
offices as of December 31, 1998.
Date Total Net Book
Acquired Approximate Value at
Location Footage Square December 31, 1998
- ---------------------------------- --------------- --------------- --------------------
(In Thousands)
Main Office:
28 E. Main Street 1900 5,721 $ 1,033
Springfield, Ohio
Branch Offices:
7601 Dayton Springfield Road 1983 2,528 26
Enon, Ohio
210 N. Main Street 1987 2,369 339
New Carlisle, Ohio
1480 Upper Valley Pike 1950 3,777 386
Springfield, Ohio
50 Kahoe Lane 1993 2,369 370
Yellow Springs, Ohio
3216 Seajay Drive 1996 1,925 282
Beavercreek, Ohio
The Company owns all of its offices. The total net book value of the
Company's premises and equipment (including land, building and leasehold
improvements and furniture, fixtures and equipment) at December 31, 1998 was
$3.2 million. See Note 5 of the Notes to Consolidated Financial Statements in
the Annual Report to Stockholders filed as Exhibit 13 hereto.
The Company conducts its data processing through a service bureau. The net
book value of the data processing and computer equipment utilized by the Company
at December 31, 1998 was approximately $206,000.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiary are involved from time to time as plaintiff
or defendant in various legal actions arising in the normal course of their
businesses. While the ultimate outcome of pending proceedings cannot be
predicted with certainty, it is the opinion of management, after consultation
with counsel representing the Company, the Bank or its subsidiary in the
proceedings, that the resolution of these proceedings should not have a material
effect on the Company's consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1998.
32
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
Page 7 of the Company's 1998 Annual Report to Stockholders is herein
incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
Pages 8 and 9 of the Company's 1998 Annual Report to Stockholders is herein
incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Pages 10 through 23 of the Company's 1998 Annual Report to Stockholders are
herein incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In an attempt to manage its exposure to changes in interest rates,
management monitors the Company's interest rate risk. The Board of Directors
meets at least quarterly to review the Company's interest rate risk position and
profitability. The Board of Directors also reviews the Company's portfolio,
formulates investment strategies and oversees the timing and implementation of
transactions to assure attainment of the Company's objectives in the most
effective manner. In addition, the Board anticipates reviewing on a quarterly
basis the Company's asset/liability position, including simulations of the
effect on the Company's capital of various interest rate scenarios.
In managing its asset/liability mix, the Company, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, often places more emphasis on managing net interest margin
than on better matching the interest rate sensitivity of its assets and
liabilities in an effort to enhance net interest income. Management believes
that the increased net interest income resulting from a mismatch in the maturity
of its asset and liability portfolios can, during periods of declining or stable
interest rates, provide high enough returns to justify the increased exposure to
sudden and unexpected increases in interest rates.
The primary objective of the Company's investment strategy is to provide
liquidity necessary to meet funding needs as well as to address daily, cyclical
and long-term changes in the asset/liability mix, while contributing to
profitability by providing a stable flow of dependable earnings. Investments
generally include interest-bearing deposits in other federally insured financial
institutions, FHLB stock and U.S. Government securities.
Generally, the investment policy of the Company is to invest funds among
various categories of investments and maturities based upon the Company's need
for liquidity, to achieve the proper balance between its desire to minimize risk
and maximize yield, to provide collateral for borrowings, and to fulfill the
Company's asset/liability management policies.
The Company's cost of funds responds to changes in interest rates due to
the relatively short-term nature of its deposit portfolio. Consequently, the
results of operations are heavily influenced by the levels of short-term
interest rates. The Company offers a range of maturities on its deposit products
at competitive rates and monitors the maturities on an ongoing basis. For
additional
33
information regarding market risk, see pages 18 to 19 of the Company's Annual
Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 24 through 57 of the Company's 1998 Annual Report to Stockholders are
herein incorporated by reference.
The independent auditors' report of Clark, Schaefer, Hackett & Co. dated
January 23, 1998, is included as Exhibit 99 to this Report and is herein
incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company filed a Current Report on Form 8-K on February 5, 1998, to
report a change of accountants, and an amendment on Form 8-K/A on February 23,
1998, to report the letter on the change of certifying accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Directors of the Company is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on April 29, 1999 (except for information
contained under the headings "Compensation Committee Report on Executive
Compensation" and "Stock Performance Presentation"), a copy of which will be
filed not later than 120 days after the close of the fiscal year. For
information concerning executive officers of the Company who are not also
Directors, see "Executive Officers" in Part I of this Annual Report on Form
10-K.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of the
Company's Common Stock (or any other equity securities, of which there is none),
to file with the Securities and Exchange Commission (the "SEC") initial reports
of ownership and reports of changes in ownership of the Company's Common Stock.
Officers, directors and greater than 10% shareholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended December 31, 1998, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with except that Mr. Dodds
inadvertently failed to file a Form 4 to report one transaction. Mr. Dodds
reported the transaction on a Form 5 dated February 10, 1999. Morever, due to
the failure of the Trustee of the Deferred
34
Compensation Plan to notify Mr. Raisbeck of shares purchased for Mr.
Raisbeck's account pursuant to such plan, Mr. Raisbeck inadvertently failed to
report one transaction on his timely filed Form 5. Mr. Raisbeck reported the
transaction on a Form 4 dated March 15, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on April 29, 1999 (except for information
contained under the headings "Compensation Committee Report on Executive
Compensation" and "Stock Performance Presentation"), a copy of which will be
filed not later than 120 days after the close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on
April 29, 1999 (except for information contained under the headings
"Compensation Committee Report on Executive Compensation" and "Stock Performance
Presentation"), a copy of which will be filed not later than 120 days after the
close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders scheduled to be held on April 29, 1999
(except for information contained under the headings "Compensation Committee
Report on Executive Compensation" and "Stock Performance Presentation"), a copy
of which will be filed not later than 120 days after the close of the fiscal
year.
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS:
The following information appearing in the Company's Annual Report to
Stockholders for the year ended December 31, 1998, is incorporated by reference
in this Annual Report on Form 10-K as Exhibit 13.
Pages in
Annual Report Section Annual
Report
Consolidated Balance Sheets at
December 31, 1998 and 1997...................................................... 25
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996................................................
26
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1998, 1997 and 1996..................................................
27
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996............................
28, 29
Consolidated Statements of Cash Flows for Years Ended
December 31, 1998, 1997 and 1996................................................
30, 31
Notes to Consolidated Financial Statements........................................ 32-57
Independent Auditors' Report...................................................... 24
(A) (2) FINANCIAL STATEMENT SCHEDULES:
All financial statement schedules have been omitted as the information is
not required under the related instructions or is inapplicable.
36
(A) (3) EXHIBITS:
Reference to Prior
Regulation Filing or Exhibit
S-K Exhibit Number Attached
Number Document Hereto
- ------------- ------------------------------------------------------------ -------------------------
2 Plan of acquisition, reorganization, None
arrangement, liquidation or
succession
3 (i) Certificate of Incorporation *
3 (ii) Amended and Restated Bylaws 3(ii)
4 Instruments defining the rights of *
security holders, including indentures
9 Voting trust agreement None
10 Material contracts:
(a) 1995 Stock Option and **
Incentive Plan
(b) Management Recognition Plan **
(c) Employment Agreement with ***
John T. Heckman
(d) Employment Agreement with 10(d)
John W. Raisbeck
(e) Employment Agreement with ****
Gary L. Hicks
(f) Employment Agreement with 10(f)
Robert P. Brezing, as amended
(g) Employment Agreement with 10(g)
Craig F. Fortin
(h) 1998 Omnibus Incentive Plan ****
(i) Cornerstone Bank Deferred 10(i)
Compensation Plan, as amended
11 Statement re computation of per None
share earnings
12 Statements re computation of ratios None
13 Annual report to security holders 13
16 Letter re change in certifying None
accountant
37
Reference to Prior
Regulation Filing or Exhibit
S-K Exhibit Number Attached
Number Document Hereto
- ------------- ------------------------------------------------------------ -------------------------
18 Letter re change in accounting None
principles
21 Subsidiaries of the registrant 21
22 Published report regarding matters None
submitted to vote of security holders
23 Consent of Crowe, Chizek and 23.1
Company LLP
Consent of Clark, Schaefer, Hackett 23.2
& Co.
24 Power of attorney None
27 Financial data schedule 27
99 Additional exhibits--report of 99
predecessor independent accountants
- ----------------------
* Incorporated by reference to the Company's Registration Statement No.
33-76734.
** ______ Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1994.
*** _____ Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1995.
**** ____ Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
(B) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WESTERN OHIO FINANCIAL CORPORATION
Date: March 31, 1999 By: /s/ John W. Raisbeck
-------------------------------- --------------------------------------
John W. Raisbeck, President and Chief
Executive Officer
(DULY AUTHORIZED REPRESENTATIVE)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: /s/ John W. Raisbeck By: /s/ David L. Dillahunt
-------------------------------- --------------------------------------
John W.Raisbeck, President and David L. Dillahunt, Chairman of
Chief Executive Officer the Board
(PRINCIPAL EXECUTIVE OFFICER)
Date: March 31, 1999 Date: March 31, 1999
-------------------------------- -----------------------------------
By: /s/ Howard V. Dodds By: /s/ John E. Field
--------------------------------- -------------------------------------
Howard V. Dodds, Director John E. Field, Director
Date: March 31, 1999 Date: March 31, 1999
-------------------------------- -----------------------------------
By: /s/ Aristides G. Gianakopoulos By: /s/ William N. Scarff
--------------------------------- -------------------------------------
Aristides G. Gianakopoulos, William N. Scarff, Director
Director
Date: March 31, 1999 Date: March 31, 1999
-------------------------------- -----------------------------------
By: /s/ Jeffrey L. Levine By: /s/ Craig F. Fortin
--------------------------------- -------------------------------------
Jeffrey L. Levine, Director Craig F. Fortin, Senior Vice
President,Treasurer and Chief
Financial Officer
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
Date: March 31, 1999 Date: March 31, 1999
-------------------------------- -----------------------------------