WESTERN OHIO FINANCIAL CORP - 10-Q Quarterly Report

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Table of Contents

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Table of Contents

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Table of Contents

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

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


	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		12

Item 3. Quantitative and Qualitative Disclosure About Market Risk		17

Item 4. Controls and Procedures		18

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		19

Item 2. Changes in Securities and Use of Proceeds		19

Item 3. Defaults Upon Senior Securities		19

Item 4. Submission of Matters to a Vote of Security Holders		19

Item 5. Other Information		19

Item 6. Exhibits and Reports on Form 8-K		19

SIGNATURES		20


				June 30,			December 31,
				2003			2002

ASSETS
	Cash and cash equivalents			$	5,410		$	19,312
	Securities available for sale				34,785			46,001
	Federal Home Loan Bank stock				9,150			8,971
	Loans, net				291,172			256,883
	Real Estate Owned				344			494
	Premises and equipment, net				4,207			4,352
	Bank owned life insurance				8,915			8,683
	Other assets				2,399			2,099

			Total assets	$	356,382			346,795

LIABILITIES AND SHAREHOLDERS’ EQUITY
	Deposits			$	214,160		$	219,169
	Borrowed funds				96,472			81,243
	Other liabilities				2,508			3,178

		Total liabilities			313,140			303,590

Shareholders’ equity
	Common stock, $.01 par value, 7,250,000 shares authorized, 2,645,000 shares issued				26			26
	Additional paid-in capital				40,641			40,642
	Unearned employee stock ownership plan shares				(238	)		(357	)
	Unearned management recognition plan shares				(67	)		(71	)
	Shares held by deferred compensation plan				(308	)		(260	)
	Treasury stock; 893,922 and 889,889 shares at cost, respectively				(18,134	)		(18,102	)
	Accumulated other comprehensive income				100			472
	Retained earnings				21,222			20,855

		Total shareholders’ equity			43,242			43,205

			Total liabilities and shareholders’ equity	$	356,382		$	346,795

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


			Three Months Ended						Six Months Ended
			June 30,						June 30,
			2003			2002			2003			2002

Interest and dividend income
	Loans, including fees		$	4,193		$	4,781		$	8,336		$	9,526
	Securities			349			708			833			1,310
	Interest-bearing deposits and overnight funds			2			1			16			28
	Other interest and dividend income			90			103			179			198

				4,634			5,593			9,364			11,062

Interest expense
	Deposits			1,272			1,898			2,625			3,933
	Borrowed funds			978			1,069			1,962			2,106

				2,250			2,967			4,587			6,039

Net interest income				2,384			2,626			4,777			5,023

Provision for loan losses				84			84			168			168

Net interest income after provision for loan losses				2,300			2,542			4,609			4,855

Noninterest income
	Service charges			621			552			1,185			1,060
	Net gain on sale of loans			104			134			189			194
	Net gain on sale of securities			2			28			71			28
	Other			54			6			161			12

				781			720			1,606			1,294
Noninterest expense
		Salaries and employee benefits		1,108			1,180			2,213			2,308
		Occupancy and equipment		237			261			476			488
		Federal deposit insurance		9			10			18			19
		State franchise taxes		146			139			287			273
		Professional services		126			188			274			273
		Advertising		55			70			90			153
		Data processing		191			208			390			410
		Other		365			246			733			586

				2,237			2,302			4,481			4,510

Income before income taxes				844			960			1,734			1,639
Income tax expense				229			328			498			558

Net income				615			632			1,236			1,081

Other comprehensive income(loss) net of tax:
Unrealized gain (loss) on securities available for sale arising during this period				(167	)		639			(325	)		449
Reclassification adjustment for amounts realized on securities sales included in net income				(1	)		(19	)		(47	)		(19	)
Other comprehensive income				(168	)		620			(372	)		430

Comprehensive income			$	447		$	1,252		$	864		$	1,511

Earnings per common share
		Basic	$	.36		$	.37		$	.72		$	.63
		Diluted	$	.35		$	.36		$	.71		$	.62
Dividends per common share			$	.25		$	.25		$	.50		$	.50


			Six Months Ended
			2003			2002
(Amount in thousands)
Net cash from operating activities			$	954		$	1,454

Cash flows from investing activities
	Securities available for sale:
		Maturities and principal payments		8,715			6,041
		Purchases		—			(20,482	)
		Sales		1,742			3,056
	Net (increase) decrease in loans			6,388			8,896
	Purchases of loans			(40,864	)		(10,857	)
	Sales of Real estate owned			178			—
	Premises and equipment expenditures			(112	)		(88	)
	Proceeds from sale of premises and equipment			3			2

		Net cash from investing activities		(23,950	)		(13,432	)

Cash flows from financing activities
	Net change in deposits			(5,009	)		(3,567	)
	Net decrease in advances from borrowers for taxes and insurance			(128	)		(477	)
	Purchase of treasury stock			(540	)		(342	)
	Cash dividends paid			(870	)		(883	)
	Proceeds from exercise of stock options			412			259
	Net increase (decrease) in short-term borrowings			2,985			(1,040	)
	Proceeds from FHLB advances			12,672			12,538
	Repayments on FHLB advances			(428	)		(3,704	)

		Net cash from financing activities		9,094			2,784


Net change in cash and cash equivalents				(13,902	)		(9,194	)
Cash and cash equivalents at beginning of period				19,312			16,915

Cash and cash equivalents at end of period			$	5,410		$	7,721

WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Corporation’s annual report on Form 10-K for the year ended December 31, 2002. The financial data and results of operations for interim periods presented may not necessarily reflect the results to be anticipated for the entire year. Internal financial information is primarily reported and aggregated solely in the line of the banking business.

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

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

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

Earnings Per Common Share: Basic earnings per common share 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.

Stock Compensation: Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense were measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock –Based Compensation.

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

The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date.

New Accounting Standards: The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 143 “Asset Retirement Obligation.” The provisions of this standard apply to asset retirements beginning in 2003. The adoption of this standard did not have a material effect on the Corporation’s financial position or results of operations.

In June 2002, the FASB issued No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This Statement addresses the timing of recognition of a liability for exit and disposal cost at the time a liability is incurred, rather than at a planned commitment date, as previously required. Exit or disposal costs will be measured at fair value, and the recorded liability will be subsequently adjusted for changes in estimated cash flows. This Statement was effective for exit or disposal activities entered after December 31, 2002. This statement did not have a material effect on the Corporation’s financial position or results or operations.

Newly Issued But Not Yet Effective Accounting Standards: The Financial Accounting Standards Board (FASB) recently issued two new accounting standards, Statement 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, and Statement 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities, both of which generally become effective in the quarter beginning July 1, 2003. Because the Company does not have these instruments or is only nominally involved in these instruments, the new accounting standards will not materially affect the Company’s operating results or financial condition.

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


				Gross		Gross
		Fair		Unrealized		Unrealized
		Value		Gains		Loss
(Amounts in thousands)
June 30, 2003
	U.S. government agencies	$	1,105		84		—
	Municipal securities		7,009		77		—
	Mortgage-backed securities		26,671		227		(236	)

	Total	$	34,785		388	$	(236	)

December 31, 2002
	U.S. government agencies	$	2,180		128		—
	Municipal securities		6,955		23		—
	Mortgage-backed securities		36,866		595		(30	)

	Total	$	46,001		746	$	(30	)

Gross proceeds from sales of securities during the six-month period ending June 30, 2003 were $1,742,000, with gross gains of $71,000 included in earnings. 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.


		June 30,			December 31,
		2003			2002
(Amounts in thousands)
First mortgage loans secured by:
	One to four family residential	$	146,905		$	124,117
	Other properties		97,341			87,031
	Construction properties		3,878			4,644
Other loans
	Consumer		816			848
	Commercial		22,491			21,977
	Home equity		22,389			21,587
	Total loans		293,820			260,204
Less:
	Net deferred loan fees, premiums and discounts		385			(125	)
	Loans in process		(1,092	)		(1,390	)
	Allowance for loan losses		(1,941	)		(1,806	)

		$	291,172		$	256,883

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

Nonperforming loans were $1,312,000 and $1,779,000 at June 30, 2003 and December 31, 2002.


		June 30,		December 31,
		2003		2002
(Amounts in thousands)
Checking – Noninterest bearing		$	11,679	$	10,778
Checking — Interest bearing			17,283		18,596
Money market accounts			62,290		66,466
Passbook and savings accounts			12,166		11,502
Certificates of deposit:
	In denominations under $100,000		90,077		91,210
	In denominations of $100,000 or more		20,665		20,617

		$	214,160	$	219,169

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

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, 2003					December 31, 2002

				Weighted					Weighted
		Balance		Average Rate			Balance		Average Rate

FHLB advances maturing in:
	One year or less	$	20,202		2.36	%	$	15,674		3.90	%
	Over 1 year to 3 years		17,142		3.95			11,978		5.25
	Over 3 years to 5 years		6,000		2.64			1,089		4.74
	Over 5 years		53,128		5.10			52,502		5.15

	Total	$	96,472		4.17	%	$	81,243		4.92	%


(Amounts in thousands, except per share data)

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2003			2002			2003			2002

Basic earnings per common share
	Net income	$	615		$	632		$	1,236		$	1,081

	Weighted average common shares outstanding		1,745			1,765			1,751			1,762
	Less: Average unallocated ESOP shares		(18	)		(34	)		(20	)		(35	)
	Less: Average nonvested MRP shares		(3	)		(3	)		(3	)		(3	)

	Average shares		1,724			1,728			1,728			1,724

	Basic earnings per common share	$	.36		$	.37		$	.72		$	.63

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


Diluted earnings per common share
	Net income	$	615	$	632	$	1,236	$	1,081

	Weighted average common shares outstanding for basic earnings per common share		1,724		1,728		1,728		1,724
	Add: Dilutive effects of average nonvested MRP shares		—		—		—		—
	Add: Dilutive effects of stock options		30		19		24		17

	Average shares and dilutive potential common shares		1,754		1,747		1,752		1,741

	Diluted earnings per common share	$	.35	$	.36	$	.71	$	.62

Stock options covering 4,000 and 31,536 shares of common stock and 74,136 and 79,136 were not considered in computing diluted earnings per common share for the three and six months ended June 30, 2003 and June 30, 2002 respectively, as they were antidilutive. In addition, nonvested MRP awards for 2,764 and 3,402 shares of common stock and 3,063 and 4,531 were not considered in computing diluted earnings per common share for the three months ended June 30, 2003 and June 30, 2002 respectively.

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, 2003 as compared to December 31, 2002, and the results of operations for the three months and six months ended June 30, 2003, compared with the same periods in 2002. This discussion should be read in conjunction with the interim financial statements and footnotes included herein.

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.

Consolidated assets of the Company totaled $356.4 million at June 30, 2003, an increase of $9.6 million from the December 31, 2002 total of $346.8 million. The increase in assets is a result of an increase of $34.3 million in loans and was partially offset by decrease of $11.2 million in securities available for sales. This activity was funded by a decrease of $13.9 million in cash and cash equivalents and an increase in FHLB advances of $15.2 million.

Net loans increased $34.3 million, or 13.4%, from $256.9 million at December 31, 2002 to $291.2 million at June 30, 2003. Traditional one-to-four family residential mortgage loans increased $22.8 million to $146.9 at June 30, 2003 from $124.1 million at December 31, 2002, primarily due to the purchase of $40.9 million of servicing retained residential real estate loans during the period. For the period, other real estate mortgage loans increased $10.3 million to $97.3 million at June 30, 2003 from $87.0 million at December 31, 2002. These loans are primarily non-residential participation loans originated within the Columbus, OH area and secured by real estate. These changes continue Cornerstone’s effort to increase its portfolio of commercial and retail real estate mortgage type loans.

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

Cash and cash equivalents decreased by $13.9 million to $5.4 million on June 30, 2003, from $19.3 million on December 31, 2002. Cash and cash equivalents consist of cash, checking deposits and federal funds deposited at other financial institutions. The decrease was the result of originating and purchasing loans.

Securities available for sale decreased $11.2 million from $46.0 million at December 31, 2002, to $34.8 million on June 30, 2003. The decrease was due to sale of securities of $1.7 million and principal repayments on existing mortgage-backed securities available for sale. The cash flows were reinvested in loans.

Deposits at June 30, 2003 totaled $214.2 million, a decrease of $5.0 million, or 2.3% from $219.2 million at December 31, 2002. The decrease occurred principally in money market accounts, which decreased $4.2 million, or 6.3%. Certificates of Deposit accounts decreased $1.1 million to $110.7 million at June 30, 2003 compared to $111.8 million on December 31, 2002.

FHLB advances at June 30, 2003 totaled $96.5 million, an increase of $15.3 million or 18.7% from $81.2 million at December 31, 2002. The Bank increased its advances from the FHLB during the period to fund loan originations and 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 $37,000 or .09% to $43.2 million at June 30, 2003. This increase is chiefly due to net income for the period and stock options exercised; partially offset by a decrease in accumulated other comprehensive income of $372,000, dividend payments of $870,000 and purchase of treasury stock of $540,000.

As of June 30, 2003, the Company had commitments to make $7.4 million of residential loans, $5.6 million of non-residential real estate loans, and $5.4 million of multifamily loans. It is expected that these loans will be funded within 30-90 days. The Company also had $1.1 million in commitments to fund loans on residential properties under construction as well as commitments to disburse $3.9 million on other mortgage loans. These commitments are anticipated to be filled within three to six months. Unused commercial lines of credit were $9.3 million and unused home equity lines of credit were $15.6 million. Commitments to originate nonmortgage loans total $1.1 million

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 assets, other income, noninterest expense and income taxes. The Company’s net income of $615,000 and $1,236,000 for the three and six months ended June 30, 2003, represented a decrease of $17,000, or 2.7%, for the three months and an increase of $155,000, or 14.34%, for the six months ended June 30, 2003. The returns on average assets for the three and six months ended June 30, 2003 were 0.71% and 0.72%, respectively, compared to 0.72% and 0.62% for the same period in 2002. The returns on average

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

shareholders’ equity for the three and six months ended June 30, 2003 were 5.65% and 5.67%, respectively, compared to 5.92% and 5.08% for the same periods ended June 30, 2002. Basic earnings per share decreased $.01 from $.37 per share for the three-month period ended June 30, 2002 to $.36 per share for the period ended June 30, 2003. Basic earnings per share for the six-month period ended June 30, 2003 was $.72 per share compared to $.63 per share for the same period ended June 30, 2002, an increase of $.09, or 14.3%.

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 $2,384,000 and $4,777,000 for the three and six months ended June 30, 2003, compared to $2,626,000 and $5,023,000 for the same periods in 2002. The decreases of $242,000 and $246,000 for the three and six month periods are due to lower interest rates on interest earning assets. A further decline in interest rates will cause the balance sheet to become asset sensitive whereby a further decline in rates will cause its interest-earning assets to reprice more quickly than its interest-bearing liabilities due to deposits reaching the rate floor. If interest rates rise, the Company’s net interest margin will generally decrease due to deposits repricing faster. 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 originated. 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 $4,193,000 and $8,336,000 for the three and six months ended June 30, 2003 compared to $4,781,000 and $9,526,000 the three and six months ended June 30, 2002. The decreases were due primarily to a decrease in loan rates from the same period in 2002. The average yield earned on the portfolio on an annualized basis, decreased to 5.69% for the six months ended June 30, 2003 from 6.53% for the same period in 2002.

Interest and dividends on securities totaled $349,000 and $833,000 for the three and six months ended June 30, 2003, and $708,000 and $1,310,000 for the three and six months ended June 30, 2002. The decrease for the three and six months was due to lower average outstanding balances as well as lower interest rates on those outstanding balances.

Interest on deposits totaled $1,272,000 and $2,625,000 for the three and six months ended June 30, 2003 compared to $1,898,000 and $3,933,000 for the three and six months ended June 30, 2002. The decreases were due to lower interest rates on all deposits.

Interest on FHLB advances was $978,000 and $1,962,000 for the three and six months ended June 30, 2003 compared to $1,069,000 and $2,106,000 for the three and six months ended June 30, 2002. The decrease for the three and six months ended June 30, 2003 is due to the lower cost of new advances that were partially offset by an increase in average outstanding borrowings from the FHLB.

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, 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

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

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, 2003, compared to $84,000 and $168,000 for the three and six months ended June 30, 2002.

Net charge-offs were $28,000 and $33,000 for the three and six months ended June 30, 2003 compared to $34,000 and $61,000 for the same periods in 2002. 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 $1.9 million on total loans of $291 million at June 30, 2003 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 $781,000 and $1,606,000 for the three and six months ended June 30, 2003 compared to $720,000 and $1,294,000 for the same periods in 2002. Service charges on loans and deposits increased $69,000 from $552,000 to $621,000 for the three-month period and $125,000 from $1,060,000 to $1,185,000 for the six-month period. Service charges on deposits, including non-sufficient funds, increased $68,000 and $123,000 for the three and six month period respectively. The Company’s overdraft honor program, which provides to most customers the courtesy of honoring checks drawn on insufficient balances, up to limits established by management, continues to be the primary reason for the increase in service charges on deposits. Gains on the sale of investments were $2,000 and $71,000 for the three and six month period ending June 30, 2003 compared to $28,000 and $28,000 for the same period ending June 30, 2002. Other noninterest income increased $48,000 and $149,000 for the three and six months ended June 30, 2003 compared to the same periods in June 30, 2002. This was due primarily to the cash surrender value of the Company’s bank owned life insurance policies offset by the $80,000 decline in the market value of the mortgage servicing rights.

Noninterest expense decreased $65,000 and $29,000 for the three and six months ended June 30, 2003 to $2.2 million and $4.5 million from $2.3 million and $4.5 million in 2002. The decreases are due to decreases in items such as telephone, printing and supplies, insurance, employee benefits and marketing, offset by the increase in other noninterest expenses related to real estate owned and education.

Income tax expense decreased $99,000 and $60,000 for the three and six month period ending June 30, 2003 to $229,000 and $498,000 from $328,000 and $558,000 for the period ending June 30, 2002. The decrease is due primarily to the decrease in the effective tax rate from 34.2% and 34.0% for the three and six months ended June 30, 2002 to 27.1% and 28.7% in June 30, 2003. This is attributable to the tax-exempt income on the Company’s owned life insurance policies.

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, 2003 Cornerstone had commitments to originate residential loans totaling $7.4 million, $5.4 million of multifamily loans, and $5.6 million of non-residential real estate loans. In addition, Cornerstone had $1.1 million in commitments to fund loans on residential properties under construction as well as $3.9 million in commitments to fund other mortgage loans. Unused commercial lines of credit were $9.3 million and unused home equity lines of credit were $15.8 million. Commitments to originate

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

nonmortgage loans total $1.1 million. Cornerstone considers its liquidity sufficient to meet its outstanding short and long-term needs.

Cornerstone is required by regulations to meet certain minimum capital requirements, which must be generally as stringent as standards established for commercial banks. Current minimum 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 minimum regulatory capital requirements and actual capital at June 30, 2003.


											Excess of actual
						Minimum					capital over current
	Actual capital					Current requirement					requirement					Applicable
(Dollars in thousands)	Amount		Percent			Amount		Percent			Amount		Percent			Asset Total

Tangible capital	$	40,671		11.4	%	$	5,342		1.5	%	$	35,329		9.9	%	$	356,160
Core capital		40,671		11.4			14,246		4.0			26,425		7.4			356,160
Risk-based capital		42,335		15.7			21,638		8.0			20,697		7.70			270,469

Cornerstone also exceeded the minimum requirements to be considered well capitalized under the prompt corrective action provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991.

WESTERN OHIO FINANCIAL CORPORATION
QUATITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK

The Company’s primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. Interest rate risk is the risk that the Company’s financial condition will be adversely affected due to movements in interest rates. The income of financial institutions is primarily derived from the excess of interest earned on interest-earning assets over the interest paid on interest-bearing liabilities. One method used to analyze the Company’s sensitivity to changes in interest rates is the “net portfolio value” (“NPV”) methodology. NPV is generally considered to be the present value of the difference between expected incoming cash flows on interest-earning and other assets and expected outgoing cash flows on interest-bearing and other liabilities.

The following tables present an analysis of the potential sensitivity of the Bank’s net present value of its financial instruments to sudden and sustained changes in the prevailing interest rates.


Change in	June 30, 2003			December 31, 2002
Interest Rate	$ Change	% Change	NPV	$ Change			% Change			NPV
(Basis Points)	In NPV	In NPV	Ratio	In NPV			In NPV			Ratio

	(Dollars in Thousands)
+200	$(3,864)	(8)%	11.82%	$	(5,756	)		(12	)%		11.72	%
+100	(167)	0	12.65		(2,103	)		(4	)		12.57
—	—	—	12.53		—			—			13.01
(100)	(1,742)	(4)	11.93		978			2			13.17
(200)	(4,176)	(9)	11.20		2,234			5			13.40

Since December 31, 2002 interest rates have declined to historically low levels. As a result, many of the Bank’s deposits are within 200 basis points of a zero interest rate floor. As the June 30, 2003 table suggests, should overall rates and loan yields continue to decline, the Bank’s inability to reduce rates below the zero floor could negatively impact Cornerstone’s NPV and future earnings. The decline in NPV from prior periods is due to the increase in prepayments in our loan portfolio and extended duration of our Federal Home Loan Bank advances.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the NPV approach. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and mortgage-backed securities and early withdrawal levels from certificates of deposit would likely deviate significantly from those assumed in making risk calculations.

WESTERN OHIO FINANCIAL CORPORATION
QUATITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK

With the participation and under the supervision of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, and as of the end of the period covered by this quarterly report, the Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d- 15(e) and, based on their evaluation, have concluded that the disclosure controls and procedures are effective.

The annual meeting of shareholders was held on April 24, 2003. Two items were presented to shareholders for consideration and action:


		(a)		Exhibits
				31.1* Certification by the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

				31.2* Certification by the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

				32.1** Certification by the CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

				32.2** Certification by the CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

				*Filed herewith.
				**Furnished herewith.

		(b)		Western Ohio Financial Corporation filed a report on Form 8-K, dated July 22, 2003, furnishing under Item 9 a press release, dated July 17, 2003, announcing the Company’s results for its second quarter ended June 30, 2003.

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.


Item 1. Condensed Financial Statements
	WESTERN OHIO FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited)
	WESTERN OHIO FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
	WESTERN OHIO FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
	WESTERN OHIO FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and procedures
WESTERN OHIO FINANCIAL CORPORATION
PART II- OTHER INFORMATION
Item 1 — Legal Proceedings
Item 2 — Changes in Securities and Use of Proceeds
Item 3 — Defaults Upon Senior Securities
Item 4 — Submission of Matters to a Vote of Security Holders
Item 5 — Other Information
Item 6 — Exhibits and Reports on Form 8-K
SIGNATURES
EX-31.1 302 CEO Cert
EX-31.2 302 CFO Cert
EX-32.1 906 CEO Cert
EX-32.2 906 CFO Cert


Delaware		31-1403116
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)


Class:		Outstanding at August 14, 2003
Common stock, $.01 par value		common shares 1,748,578


	2003		2002

Risk-free interest rate	- -		4.48	%
Expected option life	- -		5 Years
Expected stock price volatility	- -		22.73
Dividend yield	- -		4.76	%
Estimated fair value of options granted	- -	$	3.23


	June 30,		December 31,
	2003		2002

Loans with no allocated allowance for loan losses	$	366		216
Loans with allocated allowance for loan losses		267		268

Total	$	633	$	484

Amount of the allowance for loan losses allocated	$	267	$	129

The re-election of two directors John E. Field and William N. Scarff for terms expiring in 2006. Both directors were re-elected receiving 1,447,385 and 1,443,854 votes respectively. The remaining directors continuing after the meeting are: David L. Dillahunt, John W. Raisbeck, Howard V. Dodds, Aristides G. Gianakopoulos, and Jeffrey L. Levine.

The ratification of Crowe Chizek and Company LLC as auditors for the Corporation for the fiscal year ending December 31, 2003. The appointment of auditors was ratified with votes cast for 1,438,592 and 9,740 against.


		WESTERN OHIO FINANCIAL CORPORATION (Registrant)


Date: August 14, 2003		/s/John W. Raisbeck
		John W. Raisbeck
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: August 14, 2003		/s/Richard K. Smith
		Richard K. Smith
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer)