WESTERN OHIO FINANCIAL CORP - 10-Q Quarterly Report

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 September 30, 2003

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 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 by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Securities Exchange Act of 1934).

Yes No X

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


Class:		Outstanding at November 12 , 2003




Common stock, $.01 par value		common shares 1,764,473

TABLE OF CONTENTS


CONSOLIDATED BALANCE SHEETS
Item 1. Condensed Financial Statements
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
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
PART II — OTHER INFORMATION
SIGNATURES
EX-31.1 302 CEO Certification
EX-31.2 302 CFO Certification
EX-32.1 906 CEO Certification
EX-32.2 906 CFO Certification

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			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

WESTERN OHIO FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)

Item 1. Condensed Financial Statements

(Amounts in thousands, except share data)


				September 30,			December 31,
				2003			2002

ASSETS




	Cash and cash equivalents			$	5,358		$	19,312




	Securities available for sale				21,376			46,001




	Federal Home Loan Bank stock				9,242			8,971




	Loans, net				324,416			256,883




	Premises and equipment, net				4,183			4,352




	Other assets				11,743			11,276

			Total assets	$	376,318		$	346,795

LIABILITIES AND SHAREHOLDERS’ EQUITY




	Deposits			$	231,794		$	219,169




	Borrowed funds				98,748			81,243




	Other liabilities				2,284			3,178

		Total liabilities			332,826			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				40,659			40,642




	Accumulated other comprehensive income				127			472




	Unearned employee stock ownership plan shares				(179	)		(357	)




	Unearned management recognition plan shares				(60	)		(71	)




	Shares held by deferred compensation plan				(324	)		(260	)




	Treasury stock; 895,862 and 889,889 shares at cost, respectively				(18,196	)		(18,102	)




	Retained earnings				21,439			20,855

		Total shareholders’ equity			43,492			43,205

			Total liabilities and shareholders’ equity	$	376,318		$	346,795

See accompanying notes to condensed consolidated financial statements.

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

(Amounts in thousands, except per share data)


		Three Months Ended				Nine Months Ended
		September 30,				September 30,

		2003		2002		2003			2002

Interest and dividend income




	Loans, including fees	$	4,280	$	4,497	$	12,616		$	14,023




	Securities		33		671		866			1,981




	Interest-bearing deposits and overnight funds		2		17		18			45




	Other interest and dividend income		91		105		271			303

			4,406		5,290		13,771			16,352

Interest expense




	Deposits		1,250		1,770		3,875			5,703




	Borrowed funds		985		1,064		2,947			3,170

			2,235		2,834		6,822			8,873

Net interest income			2,171		2,456		6,949			7,479









Provision for loan losses			63		91		231			259

Net interest income after provision for loan losses			2,108		2,365		6,718			7,220

Noninterest income




	Service charges		745		581		1,931			1,641




	Net gain on sale of loans		106		152		295			346




	Net gain on sale of securities		—		—		71			28




	Other		193		21		354			33

			1,044		754		2,651			2,048




Noninterest expense




	Salaries and employee benefits		1,121		1,104		3,333			3,412




	Occupancy and equipment		210		253		687			741




	Federal deposit insurance		9		10		26			29




	State franchise taxes		146		133		433			406




	Professional services		173		171		448			444




	Advertising		22		56		112			209




	Data processing		196		208		587			618




	Other		375		295		1,109			881

			2,252		2,230		6,735			6,740

Income before income taxes			900		889		2,634			2,528




Income tax expense			252		298		750			856

Net income			648		591		1,884			1,672

Other comprehensive income			27		155		(345	)		585

Comprehensive income		$	675	$	746	$	1,539		$	2,257

Earnings per common share




	Basic	$	.37	$	.34	$	1.09		$	.97




	Diluted	$	.37	$	.34	$	1.07		$	.96




Dividends per common share		$	.25	$	.25	$	.75		$	.75

See accompanying notes to condensed consolidated financial statements.

WESTERN OHIO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(Amounts in thousands)


			Nine Months Ended
			September 30,

			2003			2002

Net cash from operating activities			$	1,770		$	2,032









Cash flows from investing activities




	Securities available for sale:




		Maturities and principal payments		23,998			8,153




		Purchases		(2,099	)		(27,843	)




		Sales		1,812			3,056




	Net (increase) decrease in loans			(367	)		21,167




	Purchases of loans			(67,458	)		(12,520	)




	Premises and equipment expenditures			(213	)		(109	)




	Proceeds from sale of real estate owned			234			—




	Proceeds from sale of premises and equipment			6			2

		Net cash from investing activities		(44,087	)		(8,094	)

Cash flows from financing activities




	Net change in deposits			12,625			(5,126	)




	Net decrease in advances from borrowers for taxes and insurance			(232	)		(324	)




	Purchase of treasury stock			(701	)		(443	)




	Cash dividends paid			(1,301	)		(1,312	)




	Proceeds from exercise of stock options			467			313




	Net increase (decrease) in short-term borrowings			(1,829	)		(11,130	)




	Proceeds from FHLB advances			19,827			21,693




	Repayments on FHLB advances			(493	)		(3,769	)

		Net cash from financing activities		28,363			(98	)

Net change in cash and cash equivalents				(13,954	)		(6,160	)




Cash and cash equivalents at beginning of period				19,312			16,915

Cash and cash equivalents at end of period			$	5,358		$	10,755

See accompanying notes to condensed consolidated financial statements.

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

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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)


				Three Months Ended				Nine Months Ended
				September 30,				September 30,

				2003		2002		2003		2002

Net income:




			As reported	$	648	$	591	$	1,884	$	1,672




			Pro forma		644		576	$	1,880	$	1,605




Earnings per share:




			As reported




			Basic		.37		.34		1.09		.97




			Diluted		.37		.34		1.07		.96




	Pro forma




		Basic			.37		.33		1.09		.93




		Diluted			.36		.33		1.07		.92

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


	2003			2002

Risk-free interest rate		3.27	%		—




Expected option life	5 Years				—




Expected stock price volatility		15.15	%		—




Dividend yield		3.68	%		—




Estimated fair value of options granted	$	2.85			—

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.

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 became effective in the quarter beginning July 1, 2003. These statements did not have a material effect on the Corporation’s financial position or results of operations.

Recently Adopted Accounting Standards: On January 1, 2003, the Company adopted Interpretation 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees. On July 1, 2003, the Company adopted 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. On October 1, 2003 the Company adopted Interpretation 46, Consolidation of Variable Interest Entities. Adoption of the new standards did not materially affect the Company’s operation results or financial condition.

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

NOTE 2 — SECURITIES

Securities available for sale were as follows:


(Amounts in thousands)				Gross		Gross
		Fair		Unrealized		Unrealized
		Value		Gains		Loss

September 30, 2003









	U.S. government agencies	$	3,180	$	61		—




	Municipal securities		6,820		45		—




	Mortgage-backed securities		11,376		169		(82	)

	Total	$	21,376	$	275	$	(82	)

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 nine-month period ending September 30, 2003 were $1,812,000, with gross gains of $71,000 included in earnings. Gross proceeds from sales of securities during the nine-month period ending September 30, 2002 were $3,056,000 with gross gains of $28,000 included in earnings. As of September 30, 2003 the Company had $6.0 million in pledged securities.

NOTE 3 — LOANS

Loans were as follows:


(Amounts in thousands)			September 30,		December 31,
			2003		2002

First mortgage loans secured by:




	One to four family residential		$	168,665	$	124,117




	Other properties			105,756		87,031




	Construction properties			2,919		4,644

				277,340		215,792




Consumer and other loans




	Consumer			790		848




	Commercial			25,941		21,977




	Home equity			23,234		21,587

				49,965		44,412

		Total loans		327,305		260,204

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


Less:




	Net deferred loan fees, premiums and discounts		339			(125	)




	Loans in process		(1,479	)		(1,390	)




	Allowance for loan losses		(1,749	)		(1,806	)

		$	324,416		$	256,883

NOTE 3 — LOANS (Continued)

Activity in the allowance for loan losses was as follows:


(Amount in thousands)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,

	2003			2002			2003			2002

Beginning balance	$	1,941		$	1,802		$	1,806		$	1,695




Provision for loan losses		63			91			231			259




Recoveries		14			6			17			299




Charge-offs		(269	)		(68	)		(305	)		(422	)

Ending balance	$	1,749		$	1,831		$	1,749		$	1,831

Nonperforming loans were $1,265,000 and $1,779,000 at September 30, 2003 and December 31, 2002.

Impaired loans were as follows:


	September 30,		December 31,
	2003		2002

Loans with no allocated allowance for loan losses	$	163		216




Loans with allocated allowance for loan losses		—		268

Total	$	163	$	484

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

NOTE 4 — DEPOSITS

Deposits were as follows:


(Amounts in thousands)		September 30,		December 31,
		2003		2002

Checking — Noninterest bearing		$	12,778	$	10,778




Checking — Interest bearing			16,791		18,596




Money market accounts			64,171		66,466




Passbook and savings accounts			12,371		11,502




Certificates of deposit:




	In denominations under $100,000		90,894		91,210

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


In denominations of $100,000 or more		34,789		20,617

	$	231,794	$	219,169

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)
		September 30, 2003					December 31, 2002

				Weighted					Weighted
		Balance		Average Rate			Balance		Average Rate

FHLB advances maturing in:




	One year or less	$	11,514		2.35	%	$	15,674		3.90	%




	Over 1 year to 3 years		23,332		3.03			11,978		5.25




	Over 3 years to 5 years		7,802		2.62			1,089		4.74




	Over 5 years		56,100		4.99			52,502		5.15

	Total	$	98,748		4.04	%	$	81,243		4.92	%

Advances with the Federal Home Loan Bank are collateralized by a blanket pledge with the Company’s mortgage portfolio and other assets.

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						Nine Months Ended
		September 30,						September 30,

		2003			2002			2003			2002

Basic earnings per common share




	Net income	$	648		$	591		$	1,884		$	1,672

	Weighted average common shares outstanding		1,748			1,755			1,751			1,760




	Less: Average unallocated ESOP shares		(15	)		(30	)		(19	)		(33	)




	Less: Average nonvested MRP shares		(2	)		(4	)		(3	)		(4	)

	Average shares		1,731			1,721			1,729			1,723

	Basic earnings per common share	$	.37		$	.34		$	1.09		$	.97

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	$	648	$	591	$	1,884	$	1,672

	Weighted average common shares outstanding for basic earnings per common share		1,731		1,721		1,729		1,723




	Add: Dilutive effects of average nonvested MRP shares		—		—		—		—




	Add: Dilutive effects of stock options		38		18		28		17

	Average shares and dilutive potential common shares		1,769		1,739		1,757		1,740

	Diluted earnings per common share	$	.37	$	.34	$	1.07	$	.96

Stock options covering 6,834 and 6,834 shares and 73,936 and 73,936 shares of common stock were not considered in computing diluted earnings per common share for the three and nine months ended September 30, 2003 and September 30, 2002 respectively, as they were antidilutive. In addition, nonvested MRP awards for 2,348 and 3,527 and 2,821 and 3,480 shares of common stock were not considered in computing diluted earnings per common share for the three and nine months ended September 30, 2003 and September 30, 2002 respectively, as they were antidilutive.

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 September 30, 2003 as compared to December 31, 2002, and the results of operations for the three and nine months ended September 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.

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 $376.3 million at September 30, 2003, an increase of $29.5 million from the December 31, 2002, total of $346.8 million. The increase in assets is a result of an increase of $67.5 million in loans and was partially offset by a decrease of $24.6 million in securities available for sale. This activity was funded by a decrease of $13.9 million in cash and cash equivalents and in increase of $17.5 million in FHLB advances and $12.6 million in deposits.

Net loans increased $67.5 million, or 26.3% from $256.9 million at December 31, 2002 to $324.4 million at September 30, 2003. Traditional one-to-four family residential mortgage loans increased $44.5 million to $168.7 at September 30, 2003 from $124.1 million at December 31, 2002, primarily due to the purchase of $67.5 million of servicing retained 15 year fixed rate residential real estate loans during the period. Because of concern in managing interest rate risk, management made the decision not to originate and hold 30 year fixed rate mortgages. For the period, other real estate mortgage loans increased $18.8 million to $105.8 million at September 30, 2003 from $87.0 million at December 31, 2002. These loans are primarily non-residential real estate loans originated within the greater central Ohio region. These changes continue Company’s effort to increase its portfolio of both one-to-four family residential loans and commercial 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 September 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 primarily the result of purchasing and originating loans.

Securities available for sale decreased $24.6 million from $46.0 million at December 31, 2002, to $21.4 million on September 30, 2003. The decrease was due to sales of securities of $1.8 million and principal repayments on existing mortgage-backed securities available for sale. The cash flows were reinvested in loans.

Deposits at September 30, 2003 totaled $231.8 million, an increase of $12.6.million, or 5.8% from $219.2 million at December 31, 2002. The increase occurred primarily in certificates of deposits, which increased $13.9 million, or 12.4%. This is due to the purchase of brokered deposits of $14.9 million, which were used to fund the increase in loans. Money market accounts decreased $2.3 million from $66.5 million in December 31, 2002 to $64.2 million at September 30, 2003.

FHLB advances at September 30, 2003 totaled $98.8 million, an increase of $17.6 million or 21.6% 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 $287,000 from $43.2 million at December 31, 2002, to $43.5 million at September 30, 2003. This increase is primarily due to net income for the period and stock options exercised, offset by dividend payments of $1.3 million and the Company repurchasing $701,000 of its common stock during the first nine months of 2003.

As of September 30, 2003, the Company had commitments to make $2.3 million of residential loans and $3.7 million of non-residential real estate loans. It is expected that these loans will be funded within 30-90 days. The Company also had $1.5 million in commitments to fund loans on residential properties under construction as well as commitments to disburse $2.6 million on other mortgage loans. These commitments are anticipated to be filled within three to six months. Unused commercial lines of credit were $8.6 million and unused home equity lines of credit were $16.8 million. Commitments to originate nonmortgage loans total $235,000.

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/losses on sale of assets, other income, noninterest expense and income taxes. The Company’s net income of $648,000 and $1,884,000 for the three and nine months ended September 30, 2003, represented an increase of $57,000, or 9.6%, for the three months and an increase of $212,000, or 12.7%, for the nine months ended

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

September 30, 2003. The returns on average assets for the three and nine months ended September 30, 2003 were 0.72% and 0.72%, respectively, compared to 0.68% and 0.64% for the same period in 2002. The returns on average shareholders’ equity for the three and nine months ended September 30, 2003 were 5.89% and 5.77%, respectively, compared to 5.43% and 5.23% for the same periods ended September 30, 2002. Basic earnings per share increased $.03 from $.34 per share for the three-month period ended September 30, 2002 to $.37 per share for the period ended September 30, 2003. Basic earnings per share for the nine-month period ended September 30, 2003 was $1.09 per share compared to $.97 per share for the same period ended September 30, 2002, an increase of $.12, or 12.4%.

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 $2,171,000 and $6,949,000 for the three and nine months ended September 30, 2003, compared to $2,456,000 and $7,479,000 for the same periods in 2002. The decreases of $285,000 and $530,000 for the three and nine month periods are due primarily to lower interest rates on interest earning assets. A further decline in interest rates will cause the balance sheet to become more asset sensitive, causing interest-earning assets to reprice more quickly than interest-bearing liabilities due to deposits reaching a practical 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 the Company’s deposits generally have shorter periods to repricing.

Interest and fees on loans totaled $4,280,000 and $12,616,000 for the three and nine months ended September 30, 2003 compared to $4,497,000 and $14,023,000 the three and nine months ended September 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 5.47% for the nine months ended September 30, 2003 from 6.40% for the same period in 2002.

Interest and dividends on securities totaled $33,000 and $866,000 for the three and nine months ended September 30, 2003, and $671,000 and $1,981,000 for the three and nine months ended September 30, 2002. The decrease for the three and nine months ended September 30, 2003 was primarily due to lower average outstanding balances and to a lesser extent lower interest rates on those outstanding balances. Additionally, the Company experienced large repayments in the third quarter on mortgage backed securities.

Interest on deposits totaled $1,250,000 and $3,875,000 for the three and nine months ended September 30, 2003 compared to $1,770,000 and $5,703,000 for the three and nine months ended September 30, 2002. The decreases were due to lower interest rates on all deposits, partially offset by larger average balances.

Interest on FHLB advances was $985,000 and $2,947,000 for the three and nine months ended September 30, 2003 compared to $1,064,000 and $3,170,000 for the three and nine months ended September 30, 2002. The decrease for the three and nine months ended September 30, 2003 is due to the lower cost of new advances that was 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

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

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 $63,000 and $231,000 for the three and nine months ended September 30, 2003, compared to $91,000 and $259,000 for the three and nine months ended September 30, 2002.

Net charge-offs were $255,000 and $288,000 for the three and nine months ended September 30, 2003 compared to $62,000 and $123,000 for the same periods in 2002. The increase in charge offs in 2003 was due to one commercial loan being charged off in August of 2003 for a total of $269,000. This loan had previously been fully reserved. During the nine-month period, non performing loans decreased $514,000 or 28.9%. Due to 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 $1.7 million on total loans of $327.3 million at September 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 $1,044,000 and $2,651,000 for the three and nine months ended September 30, 2003 compared to $754,000 and $2,048,000 for the same periods in 2002. Service charges on loans and deposits increased $164,000 from $581,000 to $745,000 for the three-month period and $290,000 from $1,641,000 to $1,931,000 for the nine-month period. Service charges on deposits, including non-sufficient funds, increased $116,000 and $239,000 for the three and nine 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. There were no gains on the sale of investments for the three-month periods ending September 30, 2003 and September 30, 2002. The gains on the sale of investments for the nine month period ending September 30, 2003 was up $43,000 from $28,000 in September 30, 2002 to $71,000 in September 30, 2003. Other noninterest income increased $172,000 and $321,000 for the three and nine months ended September 30, 2003 compared to the same periods in September 30, 2002. This was due primarily to the cash surrender value of the Company’s bank owned life insurance policies.

Noninterest expense increased a modest $22,000 for the three months ended September 30, 2002 from $2,230,000 to $2,252,000 in September 30, 2003. For the nine-month period ending September 30, 2003, noninterest expense decreased $5,000 from the same period in September 30, 2002.

The change in income tax is primarily attributable to the change in income before income taxes. Income tax expense totaled $252,000 and $750,000, or an effective rate of 28.0% and 28.5% for the three and nine months ended September 30, 2003, compared to $298,000 and $856,000, or an effective rate of 33.5% and 33.9%, for the three and nine months ended September 30, 2002. The decrease is attributable to the tax-exempt income on the Company’s owned life insurance policies.

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 and utilizes brokered deposits when the pricing is advantageous. 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 September 30, 2003 Cornerstone had commitments to originate residential loans totaling $2.3 million and $3.7 million of non-residential real estate loans. In addition, Cornerstone had $1.5 million in commitments to fund loans on residential properties under construction as well as $2.6 million in commitments to fund other mortgage loans. Unused commercial lines of credit were $8.6 million and unused home equity lines of credit were $16.8 million. Commitments to originate nonmortgage loans total $235,000. Cornerstone considers its liquidity 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 the Company’s regulatory capital requirements and actual capital at September 30, 2003.


											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	$	41,490		11.0	%	$	5,641		1.5	%	$	35,849		9.5	%	$	376,059




Core capital		41,490		11.0			15,042		4.0			26,448		7.0			376,059




Risk-based capital		43,191		15.0			23,085		8.0			20,106		7.0			288,565

WESTERN OHIO FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK

Item 3. Quantitative 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.


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

	(Dollars in Thousands)

+200	$	(4,378	)		(10	)%		10.52	%	$	(5,756	)		(12	)%		11.72	%




+100		(2,526	)		(6	)		10.85			(2,103	)		(4	)		12.57




—		—			—			11.37			—			—			13.01




(100)		1,419			3			11.61			978			2			13.17




(200)		(1,207	)		(3	)		10.86			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 September 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 the Company’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
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK

Item 4. Controls and Procedures
Any control system, no matter how well designed and operated, can provide only reasonable (not absolute) assurance that its objectives will be met. Furthermore, no evaluations on controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13-a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that if files or submits under the Exchange Act.

Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

WESTERN OHIO FINANCIAL CORPORATION
PART II — OTHER INFORMATION


Item 1 -		Legal Proceedings




		None




Item 2 -		Changes in Securities and Use of Proceeds None




Item 3 -		Defaults Upon Senior Securities None




Item 4 -		Submission of Matters to a Vote of Security Holders None




Item 5 -		Other Information None




Item 6 -		Exhibits and Reports on Form 8-K


(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 furnished a report on Form 8-K, dated October 17, 2003, furnishing including a press release, dated October 16, 2003, announcing the Company’s results for its third quarter ended September 30, 2003.

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.


		WESTERN OHIO FINANCIAL CORPORATION (Registrant)

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

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

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents