SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period ended June 30, 2002
Commission File Number 0-24120
WESTERN OHIO FINANCIAL CORPORATION
| Delaware | 31-1403116 | |
|
|
||
| (State or
other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
| 28 East Main Street, Springfield, Ohio 45501-0509 |
| (Address of
principal executive offices) (Zip Code) |
| (937) 325-9990 |
| (Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
| Class: Common stock, $.01 par value |
Outstanding at August 12, 2002 common shares 1,755,961 |
WESTERN OHIO FINANCIAL CORPORATION
INDEX
| Page | ||
| PART I — FINANCIAL INFORMATION (UNAUDITED) | ||
| Item 1. Condensed Financial Statements | ||
| Consolidated Balance Sheets | 3 | |
| Consolidated Statements of Income and Comprehensive Income | 4 | |
| Consolidated Statements of Cash Flows | 5 | |
| Notes to Condensed Consolidated Financial Statements | 6 | |
| Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
11 | |
| Item 3. Quantitative and Qualitative Disclosure About Market Risk | 16 | |
| PART II — OTHER INFORMATION | ||
| Item 1. Legal Proceedings | 17 | |
| Item 2. Changes in Securities and Use of Proceeds | 17 | |
| Item 3. Defaults Upon Senior Securities | 17 | |
| Item 4. Submission of Matters to a Vote of Security Holders | 17 | |
| Item 5. Other Information | 17 | |
| Item 6. Exhibits and Reports on Form 8-K | 17 | |
| SIGNATURES | 18 | |
| CERTIFICATIONS |
2.
WESTERN OHIO FINANCIAL CORPORATION
Item 1. Condensed Financial Statements
(Amounts in thousands, except share data)
| June 30, | December 31, | ||||||||||
| 2002 | 2001 | ||||||||||
ASSETS |
|||||||||||
Cash and cash equivalents |
$ | 7,721 | $ | 16,915 | |||||||
Securities available for sale |
51,562 | 39,648 | |||||||||
Federal Home Loan Bank stock |
8,765 | 8,568 | |||||||||
Loans, net |
271,115 | 269,300 | |||||||||
Premises and equipment, net |
4,636 | 4,888 | |||||||||
Other assets |
2,944 | 2,392 | |||||||||
Total assets |
$ | 346,743 | $ | 341,711 | |||||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY |
|||||||||||
Deposits |
$ | 216,720 | $ | 220,287 | |||||||
Borrowed funds |
84,449 | 76,655 | |||||||||
Other liabilities |
2,878 | 2,824 | |||||||||
Total liabilities |
304,047 | 299,766 | |||||||||
Shareholders’ equity |
|||||||||||
Common stock, $.01 par value, 7,250,000 shares
authorized, 2,645,000 shares issued |
26 | 26 | |||||||||
Additional paid-in capital |
40,632 | 40,622 | |||||||||
Accumulated other comprehensive income |
493 | 63 | |||||||||
Unearned employee stock ownership plan shares |
(476 | ) | (595 | ) | |||||||
Unearned management recognition plan shares |
(72 | ) | (72 | ) | |||||||
Shares held by deferred compensation plan |
(260 | ) | (173 | ) | |||||||
Treasury stock; 889,039 and 889,499 shares at cost,
respectively |
(18,095 | ) | (18,157 | ) | |||||||
Retained earnings |
20,448 | 20,231 | |||||||||
Total shareholders’ equity |
42,696 | 41,945 | |||||||||
Total liabilities and shareholders’ equity |
$ | 346,743 | $ | 341,711 | |||||||
See accompanying notes to condensed consolidated financial statements.
3.
WESTERN OHIO FINANCIAL CORPORATION
(Amounts in thousands, except per share data)
| Three Months Ended | Six Months Ended | ||||||||||||||||
| June 30, | June 30, | ||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | ||||||||||||||
Interest
and dividend income |
|||||||||||||||||
Loans, including fees |
$ | 4,781 | $ | 5,502 | $ | 9,526 | $ | 11,181 | |||||||||
Securities |
708 | 677 | 1,310 | 1,444 | |||||||||||||
Interest-bearing deposits and overnight funds |
1 | 31 | 28 | 41 | |||||||||||||
Other interest and dividend income |
103 | 148 | 198 | 291 | |||||||||||||
| 5,593 | 6,358 | 11,062 | 12,957 | ||||||||||||||
Interest
expense |
|||||||||||||||||
Deposits |
1,898 | 2,712 | 3,933 | 5,428 | |||||||||||||
Borrowed funds |
1,069 | 1,259 | 2,106 | 2,657 | |||||||||||||
| 2,967 | 3,971 | 6,039 | 8,085 | ||||||||||||||
Net
interest income |
2,626 | 2,387 | 5,023 | 4,872 | |||||||||||||
Provision for loan losses |
84 | 84 | 168 | 189 | |||||||||||||
Net
interest income after provision for loan losses |
2,542 | 2,303 | 4,855 | 4,683 | |||||||||||||
Noninterest
income |
|||||||||||||||||
Service charges |
552 | 327 | 1,060 | 702 | |||||||||||||
Net gain on sale of loans |
134 | 41 | 194 | 63 | |||||||||||||
Net gain on sale of securities |
28 | — | 28 | 3 | |||||||||||||
Other |
6 | 5 | 12 | 10 | |||||||||||||
| 720 | 373 | 1,294 | 778 | ||||||||||||||
Noninterest
expense |
|||||||||||||||||
Salaries and employee benefits |
1,180 | 1,026 | 2,308 | 2,041 | |||||||||||||
Occupancy and equipment |
261 | 215 | 488 | 426 | |||||||||||||
Federal deposit insurance |
10 | 10 | 19 | 20 | |||||||||||||
State franchise taxes |
139 | 132 | 273 | 267 | |||||||||||||
Professional services |
188 | 118 | 273 | 236 | |||||||||||||
Advertising |
70 | 63 | 153 | 133 | |||||||||||||
Data processing |
208 | 211 | 410 | 396 | |||||||||||||
Other |
246 | 243 | 586 | 469 | |||||||||||||
| 2,302 | 2,018 | 4,510 | 3,988 | ||||||||||||||
Income before income taxes |
960 | 658 | 1,639 | 1,473 | |||||||||||||
Income tax expense |
328 | 226 | 558 | 519 | |||||||||||||
Net
income |
632 | 432 | 1,081 | 954 | |||||||||||||
Other comprehensive income |
620 | 110 | 430 | 537 | |||||||||||||
Comprehensive income |
$ | 1,252 | $ | 542 | $ | 1,511 | $ | 1,491 | |||||||||
Earnings per common share |
|||||||||||||||||
Basic |
$ | .37 | $ | .25 | $ | .63 | $ | .55 | |||||||||
Diluted |
$ | .36 | $ | .25 | $ | .62 | $ | .55 | |||||||||
Dividends per common share |
$ | .25 | $ | .25 | $ | .50 | $ | .50 | |||||||||
See accompanying notes to condensed consolidated financial statements.
4.
WESTERN OHIO FINANCIAL CORPORATION
| Six Months Ended | ||||||||||
| (Amount in thousands) | June 30, | |||||||||
| 2002 | 2001 | |||||||||
Net
cash from operating activities |
$ | 1,454 | $ | 1,667 | ||||||
Cash
flows from investing activities |
||||||||||
Securities available for sale: |
||||||||||
Maturities and principal payments |
6,041 | 3,742 | ||||||||
Purchases |
(20,482 | ) | (1,459 | ) | ||||||
Sales |
3,056 | 4,585 | ||||||||
Net (increase) decrease in loans |
8,896 | 5,009 | ||||||||
Purchases of loans |
(10,857 | ) | (1,582 | ) | ||||||
Premises and equipment expenditures |
(88 | ) | (273 | ) | ||||||
Proceeds from sale of premises and equipment |
2 | 20 | ||||||||
Net cash from investing activities |
(13,432 | ) | 10,042 | |||||||
Cash
flows from financing activities |
||||||||||
Net change in deposits |
(3,567 | ) | 4,143 | |||||||
Net decrease in advances from borrowers for taxes and insurance |
(477 | ) | (220 | ) | ||||||
Purchase of treasury stock |
(342 | ) | (853 | ) | ||||||
Cash dividends paid |
(883 | ) | (873 | ) | ||||||
Proceeds from exercise of stock options |
259 | 35 | ||||||||
Net increase (decrease) in short-term borrowings |
(1,040 | ) | (14,650 | ) | ||||||
Proceeds from FHLB advances |
12,538 | 2,500 | ||||||||
Repayments on FHLB advances |
(3,704 | ) | (459 | ) | ||||||
Net cash from financing activities |
2,784 | (10,377 | ) | |||||||
Net change in cash and cash equivalents |
(9,194 | ) | 1,332 | |||||||
Cash and cash equivalents at beginning of period |
16,915 | 4,805 | ||||||||
Cash and cash equivalents at end of period |
$ | 7,721 | $ | 6,137 | ||||||
See accompanying notes to condensed consolidated financial statements.
5.
WESTERN OHIO FINANCIAL CORPORATION
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance accounting principles generally accepted in the United States for interim financial reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Corporation’s annual report on Form 10-K for the year ended December 31, 2001. The financial data and results of operations for interim periods presented may not necessarily reflect the results to be anticipated for the entire year. Internal financial information is primarily reported and aggregated solely in the line of the banking business.
Consolidation Policy: The financial statements include Western Ohio Financial Corporation (“Company”) and its wholly-owned subsidiary Cornerstone Bank (“Cornerstone”), together referred to as the Corporation. The financial statements of Cornerstone include the accounts of its wholly-owned subsidiaries, CornerstoneBanc Financial Services, Inc. (“CFSI”) and West Central Financial Services, Inc. (“WCFS”). Intercompany transactions and balances are eliminated in consolidation.
Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, fair values of financial instruments and status of contingencies are particularly subject to change.
Income Taxes: Income tax expense is the total of the current-year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Income tax expense is based on the effective rate expected to be applicable for the entire year.
Earnings Per Common Share: Basic earnings per common share is based on net income divided by the weighted average number of common shares outstanding during the period. Employee Stock Ownership Plan (“ESOP”) shares are considered to be outstanding for the calculation unless unearned. Management Recognition Plan (“MRP”) shares are considered outstanding as they become vested. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options.
New Accounting Standards: A new accounting standard dealing with asset retirement obligations will apply for 2003. The Corporation does not believe this standard will have a material affect on its financial condition or results of operations.
Effective January 1, 2002, the Corporation adopted a new accounting standard issued by the Financial Accounting Standards Board on impairment and disposal of long-lived assets. The effect of this standard on the financial position and results of operations of the Corporation was not material.
6.
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 — SECURITIES
The amortized cost and fair values of securities available for sale were as follows:
| (Amounts in thousands) | Gross | Gross | ||||||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||||||
| Cost | Gains | Loss | Value | |||||||||||||||||
June 30,
2002 |
||||||||||||||||||||
U.S. government agencies |
$ | 4,156 | $ | 60 | $ | — | $ | 4,216 | ||||||||||||
Municipal securities |
1,633 | — | (16 | ) | 1,617 | |||||||||||||||
Mortgage-backed securities |
45,026 | 704 | (1 | ) | 45,729 | |||||||||||||||
Total |
$ | 50,815 | $ | 764 | $ | (17 | ) | $ | 51,562 | |||||||||||
December 31,
2001 |
||||||||||||||||||||
U.S. government agencies |
$ | 2,105 | $ | 4 | $ | (30 | ) | $ | 2,079 | |||||||||||
Municipal securities |
1,634 | — | (71 | ) | 1,563 | |||||||||||||||
Mortgage-backed securities |
35,814 | 254 | (62 | ) | 36,006 | |||||||||||||||
Total |
$ | 39,553 | $ | 258 | $ | (163 | ) | $ | 39,648 | |||||||||||
Gross proceeds from sales of securities during the six-month period ending June 30, 2002 were $3,056,000, with gross gains of $28,000 included in earnings. Gross proceeds from sales of securities during the six-month period ending June 30, 2001 were $4,585,000, with gross gains of $3,000 included in earnings.
NOTE 3 — LOANS
Loans were as follows:
| (Amounts in thousands) | June 30, | December 31, | ||||||||
| 2002 | 2001 | |||||||||
First mortgage loans secured by: |
||||||||||
One to four family residential |
$ | 139,908 | $ | 154,915 | ||||||
Other properties |
84,280 | 68,841 | ||||||||
Construction properties |
5,885 | 3,737 | ||||||||
| 230,073 | 227,493 | |||||||||
Consumer and other loans |
||||||||||
Consumer |
1,114 | 1,289 | ||||||||
Commercial |
23,456 | 24,415 | ||||||||
Home equity |
20,965 | 19,468 | ||||||||
| 45,535 | 45,172 | |||||||||
Total loans |
275,608 | 272,665 | ||||||||
Less: |
||||||||||
Net deferred loan fees, premiums and discounts |
(178 | ) | (117 | ) | ||||||
Loans in process |
(2,513 | ) | (1,553 | ) | ||||||
Allowance for loan losses |
(1,802 | ) | (1,695 | ) | ||||||
| $ | 271,115 | $ | 269,300 | |||||||
7.
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 — LOANS (Continued)
Activity in the allowance for loan losses was as follows:
| (Amount in thousands) | ||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||
Beginning balance |
$ | 1,752 | $ | 1,740 | $ | 1,695 | $ | 1,665 | ||||||||
Provision for loan losses |
84 | 84 | 168 | 189 | ||||||||||||
Recoveries |
42 | 16 | 293 | 36 | ||||||||||||
Charge-offs |
(76 | ) | (229 | ) | (354 | ) | (279 | ) | ||||||||
Ending balance |
$ | 1,802 | $ | 1,611 | $ | 1,802 | $ | 1,611 | ||||||||
Nonperforming loans were $2,010,270 and $2,818,000 at June 30, 2002 and December 31, 2001.
Impaired loans were as follows:
| June 30, | December 31, | |||||||
| 2002 | 2001 | |||||||
Loans with no allocated allowance for loan losses |
$ | 203 | 829 | |||||
Loans with allocated allowance for loan losses |
— | 208 | ||||||
Total |
$ | 203 | $ | 1,037 | ||||
Amount of the allowance for loan losses allocated |
$ | — | $ | 86 | ||||
NOTE 4 — DEPOSITS
Deposits were as follows:
| (Amounts in thousands) | June 30, | December 31, | |||||||
| 2002 | 2001 | ||||||||
Checking — Noninterest bearing |
$ | 9,909 | $ | 8,637 | |||||
Checking — Interest bearing |
14,377 | 13,094 | |||||||
Money market accounts |
58,538 | 57,500 | |||||||
Passbook and savings accounts |
11,467 | 11,465 | |||||||
Certificates of deposit: |
|||||||||
In denominations under $100,000 |
100,883 | 107,843 | |||||||
In denominations of $100,000 or more |
21,546 | 21,748 | |||||||
| $ | 216,720 | $ | 220,287 | ||||||
8.
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 — BORROWED FUNDS
Borrowed funds consisted of advances from the Federal Home Loan Bank of Cincinnati (“FHLB”) and are summarized by contractual maturity as follows:
| (Amount in thousands) | |||||||||||||||||
| June 30, 2002 | December 31, 2001 | ||||||||||||||||
| Weighted | Weighted | ||||||||||||||||
| Balance | Average Rate | Balance | Average Rate | ||||||||||||||
FHLB advances maturing in: |
|||||||||||||||||
One year or less |
$ | 13,015 | 4.93 | % | $ | 14,325 | 5.75 | % | |||||||||
Over 1 year to 3 years |
17,409 | 4.64 | 9,335 | 6.58 | |||||||||||||
Over 3 years to 5 years |
1,305 | 4.65 | 730 | 6.60 | |||||||||||||
Over 5 years |
52,720 | 5.15 | 52,265 | 5.15 | |||||||||||||
Total |
$ | 84,449 | 5.00 | % | $ | 76,655 | 5.45 | % | |||||||||
NOTE 6 — EARNINGS PER COMMON SHARE
The factors used in the earnings per share computation were as follows:
(Amounts in thousands, except per share data)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | ||||||||||||||||||||||||||||||||
Basic earnings per common share |
|||||||||||||||||||||||||||||||||||
Net income |
$ | 632 | $ | 432 | $ | 1,081 | $ | 954 | |||||||||||||||||||||||||||
Weighted average common shares
outstanding |
1,765 | 1,774 | 1,762 | 1,789 | |||||||||||||||||||||||||||||||
Less: Average unallocated ESOP
shares |
(34 | ) | (48 | ) | (35 | ) | (50 | ) | |||||||||||||||||||||||||||
Less: Average nonvested MRP shares |
(3 | ) | (4 | ) | (3 | ) | (4 | ) | |||||||||||||||||||||||||||
Average shares |
1,728 | 1,722 | 1,724 | 1,735 | |||||||||||||||||||||||||||||||
Basic earnings per common share |
$ | .37 | $ | .25 | $ | .63 | $ | .55 | |||||||||||||||||||||||||||
9.
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 — EARNINGS PER COMMON SHARE (Continued)
Diluted
earnings per common share |
|||||||||||||||||||||||||||||||||
Net income |
$ | 632 | $ | 432 | $ | 1,081 | $ | 954 | |||||||||||||||||||||||||
Weighted average common shares
outstanding for basic earnings per
common share |
1,728 | 1,722 | 1,724 | 1,735 | |||||||||||||||||||||||||||||
Add: Dilutive effects of average
nonvested MRP shares |
— | — | — | — | |||||||||||||||||||||||||||||
Add: Dilutive effects of stock options |
19 | 11 | 17 | 11 | |||||||||||||||||||||||||||||
Average shares and dilutive potential
common shares |
1,747 | 1,733 | 1,741 | 1,746 | |||||||||||||||||||||||||||||
Diluted earnings per common share |
$ | .36 | $ | .25 | $ | .62 | $ | .55 | |||||||||||||||||||||||||
Stock options covering 74,136 and 79,136 shares of common stock were not considered in computing diluted earnings per common share for the three and six months ended June 30, 2002, as they were antidilutive. In addition, nonvested MRP awards for 3,402 and 3,457 shares of common stock and 4,531 and 4,029 were not considered in computing diluted earnings per common share for the three and six months ended June 30, 2002 and June 30, 2001 respectively.
10.
WESTERN OHIO FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discusses the financial condition of the Company as of June 30, 2002 as compared to December 31, 2001, and the results of operations for the three and six months ended June 30, 2002, compared with the same periods in 2001. This discussion should be read in conjunction with the interim financial statements and footnotes included herein.
Forward-Looking Statements
When used in this filing and in future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “would be”, “will allow”, “intends to”, “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimate”, “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties, including but not limited to changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area and competition, all or some of which could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made and advises readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.
Analysis of Financial Condition
Consolidated assets of the Company totaled $346.7 million at June 30, 2002, an increase of $5.0 million from the December 31, 2001, total of $341.7 million. The increase in assets is a result of an increase of $11.9 million in securities available for sale and $1.8 million in loans and a decrease in deposits of $3.6 million. This activity was funded by a decrease of $9.2 million in cash and cash equivalents and an increase in FHLB advances of $7.8 million.
Net loans increased $1.8 million, or .7%, from $269.3 million at December 31, 2001 to $271.1 million at June 30, 2002. Traditional one-to-four family residential mortgage loans decreased $15.0 million to $139.9 at June 30, 2002 from $154.9 million at December 31, 2001, primarily due to the sale of $11.7 million of new originations during the period. For the period, this decrease was offset by other real estate mortgage loans increasing $15.5 million to $84.3 million at June 30, 2002 from $68.8 million at December 31, 2001. These loans are non-residential participation loans originated within the Columbus, OH area and secured by real estate. These changes continue Cornerstone’s effort to diversify its portfolio into more commercial and other real estate mortgage type loans.
11.
WESTERN OHIO FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cash and cash equivalents decreased by $9.2 million to $7.7 million on June 30, 2002, from $16.9 million on December 31, 2001. Cash and cash equivalents consist of cash, checking deposits and federal funds deposited at other financial institutions. The decrease was primarily the result of purchasing securities and loans.
Securities available for sale increased $12.0 million from $39.6 million at December 31, 2001, to $51.6 million on June 30, 2002. The increase was due to purchases of securities of $20.1 million offset by a $3.0 million mortgage-backed security sale and principal repayments on existing mortgage-backed securities available for sale. The new purchases of mortgage-backed securities are fixed rate and have a weighted average remaining term of 61 months.
Deposits at June 30, 2002 totaled $216.7 million, a decrease of $3.6 million, or 1.6% from $220.3 million at December 31, 2001. The decrease occurred primarily in certificates of deposits, which decreased $7.2 million, or 5.6%, as deposits moved to shorter-term more liquid accounts. Deposits in checking accounts increased $2.6 million to $24.3 million at June 30, 2002 from $21.7 million at December 31, 2001. Money market accounts increased $1.0 million to $58.5 million at June 30, 2002 compared to $57.5 million on December 31, 2001.
FHLB advances at June 30, 2002 totaled $84.4 million, an increase of $7.7 million or 10.0% from $76.7 million at December 31, 2001. The Bank increased its advances from the FHLB during the period to fund security purchases. The majority of borrowed funds are invested in loans to leverage the Company’s excess capital and improve the Company’s return on equity over time.
Total shareholders’ equity increased $751,000 from $41.9 million at December 31, 2001, to $42.7 million at June 30, 2002. This increase is primarily due to net income for the period, an improvement of $430,000 in accumulated other comprehensive income and stock options exercised. This is offset by dividend payments of $883,000 and the Company purchasing $342,000, or 17,100 shares, of its common stock during the first six months of 2002.
As of June 30, 2002, the Company had commitments to make $2.4 million of residential loans and $7.5 million of non-residential real estate loans. It is expected that these loans will be funded within 30-90 days. The Company also had $2.5 million in commitments to fund loans on residential properties under construction as well as commitments to disburse $1.1 million on other mortgage loans. These commitments are anticipated to be filled within three to six months. Unused commercial lines of credit were $6.7 million and unused home equity lines of credit were $15.4 million. Commitments to originate nonmortgage loans total $499,400.
Results of Operations
Operating results of the Company are affected by general economic conditions, monetary and fiscal policies of federal agencies and policies of agencies regulating financial institutions. The Company’s cost of funds is influenced by interest rates on competing investments and general market rates of interest. Lending activities are influenced by demand for real estate and other types of loans, which, in turn, is affected by the interest rates at which such loans are made, general economic conditions and the availability of funds for lending activities.
The Company’s net income is primarily dependent on its net interest income (the difference between interest income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities). Net income is also affected by provisions for loan losses, service charges, gains on sale of
12.
WESTERN OHIO FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
assets, other income, noninterest expense and income taxes. The Company’s net income of $632,000 and $1,081,000 for the three and six months ended June 30, 2002, represented an increase of $200,000, or 46.3%, for the three months and an increase of $127,000, or 13.3%, for the six months ended June 30, 2002. The returns on average assets for the three and six months ended June 30, 2002 were 0.72% and 0.62%, respectively, compared to 0.50% and 0.54% for the same period in 2001. The returns on average shareholders’ equity for the three and six months ended June 30, 2002 were 5.92% and 5.08%, respectively, compared to 4.15% and 4.58% for the same periods ended June 30, 2001. Basic earnings per share increased $.12 from $.25 per share for the three month period ended June 30, 2001 to $.37 per share for the period ended June 30, 2002. Basic earnings per share for the six-month period ended June 30, 2002 was $.63 per share compared to $.55 per share for the same period ended June 30, 2001, an increase of $.08, or 14.5%.
Net interest income is the largest component of the Company’s income and is affected by the interest rate environment and volume and composition of interest-earning assets and interest-bearing liabilities. Net interest income totaled $2,626,000 and $5,023,000 for the three and six months ended June 30, 2002, compared to $2,387,000 and $4,872,000 for the same periods in 2001. The increases of $239,000 and $151,000 for the three and six month periods are due to lower interest rates on interest bearing liabilities and the transfer of certificate of deposits to money market and checking accounts. The Company remains liability sensitive whereby its interest-bearing liabilities will generally reprice more quickly than its interest-earning assets. Therefore, the Company’s net interest margin will generally increase in periods of falling interest rates in the market and will decrease in periods of rising interest rates. Cornerstone is more sensitive to rising rates than declining rates. In a rising interest rate environment, because Cornerstone has primarily fixed-rate loans in its loan portfolio, the amount of interest Cornerstone would receive on its loans would increase relatively slowly as loans are slowly prepaid and new loans at higher rates are made. Moreover, the interest Cornerstone would pay on its deposits would increase relatively rapidly because Cornerstone’s deposits generally have shorter periods to repricing.
Interest and fees on loans totaled $4,781,000 and $9,526,000 for the three and six months ended June 30, 2002 compared to $5,502,000 and $11,181,000 the three and six months ended June 30, 2001. The decreases were due primarily to a decrease in loan rates from the same period in 2001.
Interest and dividends on securities totaled $708,000 and $1,310,000 for the three and six months ended June 30, 2002, and $677,000 and $1,444,000 for the three and six months ended June 30, 2001. The increase for the three months was due to an increase in securities outstanding while the decrease for the six-month period was due to lower interest rates partially offset by an increase in average securities held for sale.
Interest on deposits totaled $1,898,000 and $3,933,000 for the three and six months ended June 30, 2002 compared to $2,712,000 and $5,428,000 for the three and six months ended June 30, 2001. The decreases were due to lower interest rates on all deposits and the change from certificate of deposits to checking and money market accounts.
Interest on FHLB advances was $1,069,000 and $2,106,000 for the three and six months ended June 30, 2002 compared to $1,259,000 and $2,657,000 for the three and six months ended June 30, 2001. The decrease for the three and six months ended June 30, 2002 is due to a decrease in average outstanding borrowings from the FHLB of approximately $11.5 million during the period and the lower cost of new advances.
The Company maintains an allowance for loan losses in an amount, which, in management’s judgment, is adequate to absorb probable losses in the loan portfolio. While management utilizes its best judgment and information available, ultimate adequacy of the allowance is dependent on a variety of factors,
13.
WESTERN OHIO FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
including performance of the Company’s loan portfolio, the economy, changes in real estate values and interest rates and the view of the regulatory authorities toward loan classifications. The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level considered adequate to absorb probable losses in the loan portfolio. The amount of the provision is based on management’s regular review of the loan portfolio and consideration of such factors as historical loss experience, changes in size and composition of the loan portfolio and specific borrower considerations, including ability of the borrower to repay the loan and the estimated value of the underlying collateral. The provision for loan losses totaled $84,000 and $168,000 for the three and six months ended June 30, 2002, compared to $84,000 and $189,000 for the three and six months ended June 30, 2001.
Net charge-offs were $34,000 and $61,000 for the three and six months ended June 30, 2002 compared to $213,000 and $243,000 for the same periods in 2001. Due to the decrease in net charge-offs, the collateral supporting non-performing loans, area economic conditions, and the level of impaired and non-performing loans, management believes that the total allowance of $1.8 million on total loans of $275 million at June 30, 2002 is adequate. The Corporation will continue to review its allowance for loan losses and make further provisions as economic and asset quality conditions dictate.
Noninterest income totaled $719,000 and $1,294,000 for the three and six months ended June 30, 2002 compared to $373,000 and $778,000 for the same periods in 2001. Service charges on loans and deposits increased $225,000 from $327,000 to $552,000 for the three month period and $358,000 from $702,000 to $1.1 million for the six month period. Service charges on deposits, including non-sufficient funds, increased $192,000 and $289,000 for the three and six month period respectively. In November 2001, the Company initiated the overdraft honor program, which provides to most customers the courtesy of honoring checks drawn on insufficient balances, up to limits established by management. Standard non-sufficient fund fees and overdraft fees still apply. This program is the primary reason for the increase in service charges on deposits. Loan service and prepayment fees increased $33,000 and $69,000 from the period June 30, 2001 to June 30, 2002. Additionally, the Company recognized loan sale gains of $134,000 on loan sales of $8.0 million for the three months ended June 30, 2002 compared to $41,000 on loan sales of $2.6 million for the same period in 2001. For the six months ended June 30, 2002, gains totaled $194,000 on loan sales of $11.7 million compared to $63,000 on loan sales of $3.8 million for the same period last year.
Noninterest expense increased $284,000 and $522,000 for the three and six months ended June 30, 2002 to $2.3 million and $4.5 million from $2.0 million and $4.0 million in 2001. The increases are primarily due to increases in salaries and benefits of $154,000 and $267,000 for the three and six month periods respectively. Other noninterest expense increased $39,000 and $117,000 for the three and six month periods ending June 30, 2002. Other noninterest expense consists of items such as telephone, printing and supplies, and loan expenses. Additionally, included in the total for the three and six months ended June 30, 2002 is approximately $96,000 and $219,000 of expenses related to the Company’s Centerville, Ohio branch opened in September 2001. It is anticipated the new branch will continue to have an impact on noninterest expense for the comparison periods in 2002.
The change in income tax is primarily attributable to the change in income before income taxes. Income tax expense totaled $327,000 and $558,000, or an effective rate of 34.1% and 34.0%, for the three and six months ended June 30, 2002, compared to $226,000 and $519,000, or an effective rate of 34.4% and 35.2%, for the three and six months ended June 30, 2001.
14.
WESTERN OHIO FINANCIAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity
Office of Thrift Supervision (“OTS”) regulations presently require Cornerstone Bank to maintain sufficient liquidity to assure its safe and sound operation. To that end, Cornerstone Bank maintains investments having maturities of 5 years or less, sells loans into the secondary market and borrows funds from the FHLB. These activities are intended to provide a source of relatively liquid funds on which Cornerstone may rely, if necessary, to fund deposit withdrawals or other short-term funding needs. At June 30, 2002 Cornerstone had commitments to originate residential loans totaling $2.4 million and $7.5 million of non-residential real estate loans. In addition, Cornerstone had $2.5 million in commitments to fund loans on residential properties under construction as well as $1.1 million in commitments to fund other mortgage loans. Unused commercial lines of credit were $6.7 million and unused home equity lines of credit were $15.4 million. Commitments to originate nonmortgage loans total $499,400. Cornerstone considers its liquidity and capital reserves sufficient to meet its outstanding short and long-term needs.
Capital Resources
Cornerstone is required by regulations to meet certain minimum capital requirements, which must be generally as stringent as standards established for commercial banks. Current capital requirements call for tangible capital of 1.5% of adjusted total assets, core capital (which, for Cornerstone, consists solely of tangible capital) of 4.0% of adjusted total assets, except for institutions with the highest examination rating and acceptable levels of risk, and risk-based capital (which, for Cornerstone, consists of core capital and general valuation allowances) of 8.0% of risk-weighted assets (assets are weighted at percentage levels ranging from 0% to 100% depending on their relative risk).
The following table summarizes Cornerstone’s regulatory capital requirements and actual capital at June 30, 2002.
| Excess of actual | ||||||||||||||||||||||||||||
| capital over current | ||||||||||||||||||||||||||||
| Actual capital | Current requirement | requirement | ||||||||||||||||||||||||||
| Applicable | ||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Percent | Amount | Percent | Amount | Percent | Asset Total | |||||||||||||||||||||
Tangible capital |
$ | 41,207 | 11.9 | % | $ | 5,188 | 1.5 | % | $ | 36,019 | 10.4 | % | $ | 345,896 | ||||||||||||||
Core capital |
41,207 | 11.9 | 13,866 | 4.0 | 26,369 | 7.9 | 345,896 | |||||||||||||||||||||
Risk-based capital |
42,981 | 17.5 | 19,650 | 8.0 | 23,331 | 9.5 | 245,626 | |||||||||||||||||||||
15.
WESTERN OHIO FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
Item 3. Quantitative and Qualitative Disclosure About Market Risk
There have been no material changes in the quantitative and qualitative disclosures about market risk as of June 30, 2002, from that presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
16.
WESTERN OHIO FINANCIAL CORPORATION
Item 1 — Legal Proceedings
None
Item 2 — Changes in Securities and Use of Proceeds
None
Item 3 — Defaults Upon Senior Securities
None
Item 4 — Submission of Matters to a Vote of Security Holders
| The annual meeting of shareholders was held on April 25, 2000. Two items were presented to shareholders for consideration and action: |
| 1) | The re-election of two directors Aristides G. Gianakopoulos and Jeffrey L. Levine for terms expiring in 2005. Both directors were re-elected receiving 1,398,514 and 1,400,014 votes respectively. The remaining directors continuing after the meeting are: David L. Dillahunt, John W. Raisbeck, Howard V. Dodds, William N. Scarff, and John E. Field. | |
| 2) | The ratification of Crowe, Chizek and Company LLP as auditors for the Company for the fiscal year ending December 31, 2002. The appointment of auditors was ratified with votes cast for 1,411,283 and 9,802 against. |
Item 5 — Other Information
None
Item 6 — Exhibits and Reports on Form 8-K
| (a) | Exhibits | |
| (b) | No current reports on Form 8-K were filed by the Registrant during the quarter ended June 30, 2002. |
17.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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WESTERN OHIO FINANCIAL CORPORATION (Registrant) |
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| Date: August 12, 2002 | /s/ John W. Raisbeck | |
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John W. Raisbeck President and Chief Executive Officer (Principal Executive Officer) |
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| Date: August 12, 2002 | /s/ Craig F. Fortin | |
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Craig F. Fortin Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
18.