##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2003o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from
__________ to __________Commission file number 0-24120
 WESTERN OHIO FINANCIAL CORPORATION  DELAWARE
    
    31-1403116(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)28 East Main StreetSpringfield, Ohio
    
    45501-0509(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (937) 325-4683 Securities Registered Pursuant to Section 12(b) of the Act:None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share
(Title of class) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES x. NO o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. x Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule
12b-2. YES o NO x. The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based upon the last reported sale price of the registrants Common
Stock on June 30, 2003 was $42.8 million. At March 1, 2004, there were issued and outstanding 1,779,823 shares of the
Registrants Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Parts II and IV of Form 10-K  Portions of the Annual Report to Shareholders
for the fiscal year ended December 31, 2003.
Part III of Form 10-K  Portions of the Proxy Statement for the registrants
2004 Annual Meeting of Shareholders. 1




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FORWARD-LOOKING STATEMENTS Western Ohio Financial Corporation and its wholly owned subsidiary, Cornerstone
Bank, may from time to time make written or oral forward-looking statements,
including statements contained in its filings with the Securities and Exchange
Commission. These forward-looking statements may be included in this Annual
Report on Form 10-K and the exhibits attached to it, in the Companys reports
to shareholders and in other communications, which are made in good faith by us
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements include statements about our beliefs, plans,
objectives, goals, expectations, anticipations, estimates and intentions, that
are subject to significant risks and uncertainties, and are subject to change
based on various factors, some of which are beyond our control. The words
may, could, should, would, believe, anticipate, estimate,
expect, intend, plan and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause
our financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in the forward-looking
statements:  
    
    the strength of the United States economy in general and the
strength of the local economies in which we conduct operations;  
    
    the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve
Board;  
    
    inflation, interest rate, market and monetary fluctuations;  
    
    the timely development and acceptance of our new products and
services and the perceived overall value of these products and services
by users, including the features, pricing and quality compared to
competitors products and services;  
    
    the willingness of users to substitute our products and services for products and services of our competitors;  
    
    our success in gaining regulatory approval of our products and services, when required;  
    
    the impact of changes in financial services laws and regulations
(including laws concerning taxes, banking, securities and insurance);  
    
    the impact of technological changes;  
    
    acquisitions;  
    
    changes in consumer spending and saving habits; and,  
    
    our success at managing the risks involved in the foregoing. The list of important factors stated above is not exclusive. We do not
undertake, and expressly disclaim any obligation, to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of Western Ohio Financial Corporation or Cornerstone Bank. 2




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREItem 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTItem 10A. CODE OF ETHICSITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-KSIGNATURESEX-13EX-21EX-23EX-31.1EX-31.2EX-32    Table of Contents  
 PART I 
 ITEM 1. BUSINESS General Western Ohio Financial Corporation (the Company), a Delaware corporation, was
organized in March 1994 for the purpose of becoming a savings and loan holding
company. Western Ohio Financial Corporation owns Cornerstone Bank (the Bank)
whose principal business has traditionally consisted of attracting deposits
from the general public, and making loans secured by residential real estate.
In October 1997, the Company formed another subsidiary, CornerstoneBanc
Financial Services, Incorporated (formerly West Central Mortgage Services,
Incorporated), (CFSI). This subsidiary originates and purchases mortgage
loans, which are outside of the normal lending area for Cornerstone Bank. The Company is subject to supervision by the Office of Thrift Supervision,
Department of Treasury (OTS) and the Bank is subject to comprehensive
regulation, examination and supervision by the OTS and by the Federal Deposit
Insurance Corporation (FDIC). The Bank is a member of the Federal Home Loan
Bank (FHLB) system and its deposits are backed by the full faith and credit
of the United States Government and are insured up to applicable limits by the
FDIC. The Company serves its customers through its main office in Springfield, Ohio
and six branch offices in Enon, New Carlisle, Springfield, Yellow Springs,
Beavercreek and Centerville. At December 31, 2003, the Company had total
assets of $399.5 million, deposits of $248.7 million and shareholders equity
of $44.4 million, or 11.1% of total assets. The Companys common stock is
traded on the Nasdaq National Market under the symbol WOFC. The Company has been, and intends to continue to be, a community-oriented
savings and loan holding company offering a variety of financial services to
meet the needs of the communities it serves. The principal business of the
Company consists of attracting retail deposits from the general public and
investing those funds primarily in one- to four family residential real estate,
commercial and multi-family real estate, construction loans and consumer and
commercial business loans, all primarily within the Companys market areas. The executive offices of the Company are located at 28 East Main Street,
Springfield, Ohio 45501-0509, and the telephone number at that address is (937)
325-4683. The Corporations primary market area consists of Clark, Greene, Franklin and
portions of Montgomery counties. Located in west-central Ohio, Clark and
Greene counties economic environment consists of a traditional industrial base
supplemented by the service and support industries, and its close proximity to
a major U.S. military installation, Wright Patterson Air Force Base. Since
September 11, 2001, the Air Force Base has increased some of its military
operations. Navistar Truck Manufacturer is the largest industrial employer in
Clark County. While Navistars Clark county operations have provided stable
employment for the area over the last several decades, in recent years Navistar
has shifted its operations to smaller truck production, which has led to
layoffs that could possibly affect the economic viability of the Corporations
market area. The Community Hospital, Clark State Community College, Mercy
Medical Center and Wittenberg University are also major employers in the area. While the Bank has no branches in Franklin County,
the Company does commercial and commercial real estate lending to business
customers in this market located in central Ohio. The Franklin County market,
which includes Columbus, Ohio, the state capital, Ohio State University, and a
relatively high concentration of insurance companies, is primarily a
service-oriented economy with a fairly stable economic environment. According to the estimated 2001 U.S. Census, Clark County had a population of
approximately 144,076, Greene county 148,426 and Montgomery county 554,232. In
comparison to the 1990 U.S. Census, Clark County decreased .5%, Greene County
increased .4% and Montgomery county decreased .9%. Unemployment for all four counties has improved during the past year with Clark
and Montgomery County unemployment rates moving fairly consistent with the
national average while Greene County has remained below the national rate of
unemployment. In 2002, Clark County had an unemployment rate of 6.4% as
compared to the State of Ohio at 5.0%. The unemployment rate in Clark County
decreased to 6.0% in 2003 as compared with 6.2% for the State of Ohio. For the
year ended 2003, Greene County had an unemployment rate of 4.6%, up from 3.9%
in 2002. Montgomery County had an unemployment rate of 5.3% in 2003 compared
to 4.7% in the year 2002. In addition, Franklin County had an unemployment
rate of 4.0% in 2003 compared to 3.9% in the year 2002. 3




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RISK FACTORS Like all regulated financial institutions, the Company is exposed to numerous
risks that could adversely impact profits, financial condition and cash flows,
and, ultimately, franchise value. In order to mitigate these risks somewhat,
the Company has various policies, personnel and committees that establish
limits for and monitor various aspects of its risk profile. There can be no
assurance that such policies, personnel and committees will be effective in
controlling these or other risks. Geographic Risks A significant majority of the Companys assets, deposits and fee income is
generated in Companys local lending area. As a result, deterioration of local
economic conditions in this area could expose the Company to losses associated
with higher loan default rates and lower asset collateral values, deposit
withdrawals and other factors that could adversely impact its financial
condition and results of operations. Fluctuations in Interest Rates (Market Risk) Significant increases in market interest rates, or the perception that an
increase may occur, could adversely impact the Companys ability to generate
new variable loans and cause the value of its fixed-rate assets to decline. An
increase in market interest rates may also adversely impact the ability of
adjustable rate borrowers to meet repayment obligations, thereby causing
nonperforming loans and loan charge-offs to increase. Significant decreases in
market interest rates could result in an acceleration of loan repayments
thereby mitigating the positive impact of declining interest rates on fixed

rate assets. Changes in market interest rates, including changes in the
relationship between short-term and long-term market interest rates or between
different rate indices, can impact interest rate spread. Competition Risk The Company faces significant competitive pressure from local, regional,
national and international banking institutions as well as thrifts, finance
companies, credit unions, brokerage and insurance companies and other financial
intermediaries. Many of the Companys competitors are larger and have greater
financial and other resources. The Company competes on the basis of its
reputation, localized decision-making, interest rates, convenient locations and
quality of customer service. Credit Risk The Company is exposed to credit risk on the loans and other credit instruments
it has in its portfolio. While the portfolio is closely monitored and an
on-going analysis and evaluation of this risk is performed, because of the
nature of the Companys business, unexpected credit losses may subsequently be
identified as a result of additional analysis performed by the Company or
comments received from regulatory examiners. In addition, collateral values may
deteriorate subsequent to the making of a loan so that a loss exposure
develops. Legislative and Regulatory Risk The Companys operations are subject to extensive regulation by federal banking
authorities and are also subject to various laws and judicial and
administrative decisions imposing requirements and restrictions on its
operations. Policies adopted and positions taken by these regulatory and
administrative entities can impact the Companys operations. In addition, these
authorities periodically conduct examinations of the Company and may impose
various requirements or sanctions. The regulatory environment may periodically
change significantly as new laws 4




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and regulations are promulgated. As a result of new laws and regulations, the
competitive environment may also change significantly. Dividend Limitation Risk The Company is a holding company and its operations are conducted primarily
through the Bank, its operating subsidiary. Thus, the Companys ability to pay
dividends to its shareholders and to service its debt is dependent primarily
upon the ability of the Bank to make dividend and other payments to the
Company. Certain laws and regulatory requirements restrict the ability of the
Bank to make such payments to the Company, and the Company to make payments to
shareholders. Liquidity Risk The Company closely monitors its liquidity position including its sources of
funding and commitments to fund assets or deposit withdrawals. The Company
maintains several credit facilities. The Company believes that it has
sufficient liquidity to fund its commitments. However, changes in the stability
of the economic, social or political environments culminating in large
withdrawals, or a deterioration in the publics confidence in the banking
system in general or the Company in particular, could have an adverse impact on
the Companys liquidity position. Operational Risk The Company relies on various information systems for operating significant
aspects of its business, including loan and deposit information, as well as
internal management systems. These systems and the Companys operations could
be adversely affected by, among other things, damage or interruption from
natural disasters, power loss, network failure, improper operations, security
breaches, computer viruses or sabotage. Controls and procedures have been
implemented to minimize these risks, but any disruption in the operation of the
Companys various information systems could adversely impact its operations,
which may affect its results of operations and financial condition. Reputation Risk The Company strives to operate in a professional manner and has implemented
various personnel policies and procedures, including an employee code of
conduct applicable to all employees, to help ensure the maintenance of
integrity and professionalism. Nevertheless, the Company or its employees may
fail to perform in accordance with these policies and procedures, or the
Company may find itself in a situation that is embarrassing from a public
relations perspective and, upon this information becoming public knowledge, may
suffer damage to its reputation. This damage could adversely impact customer
confidence and have an adverse impact on the Companys financial condition and
results of operations. Disintermediation In the banking and financial services businesses, disintermediation is the
process by which customers and potential customers bypass banks and other
traditional financial institutions thereby depleting anticipated revenue
streams. While the Company continues its efforts to make its products and
services an integral, valuable component of its customers financial
transactions, the possibility of disintermediation is an inherent risk in the
banking and traditional financial services business as customers may migrate to
other financial intermediaries. 5




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Lending Activities General The Company primarily focuses its lending activities on the origination of
loans secured by first mortgages on owner-occupied, one-to-four family real
estate, commercial and multi-family real estate and construction loans, home
equity and commercial business loans in its market area as well as other areas
beyond its normal lending territory. At December 31, 2003, the Companys net
loan portfolio, excluding loans in process and deferred loan fees, premiums and
discounts, totaled $334.5 million. At December 31, 2003, the Companys gross
loan portfolio totaled $337.3 million, of which $175.1 million, or 51.9%, was
comprised of permanent loans secured by one-to-four family real estate. The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Bank could have invested in any one real
estate project, is generally the greater of 15% of unimpaired capital and
surplus or $500,000. See Regulation  Federal Regulation of Savings
Institutions. At December 31, 2003, the maximum amount that the Bank could
have loaned to any one borrower and the borrowers related entities was $6.5
million. At December 31, 2003, the Bank did not have any loans outstanding in
excess of such limitation. The largest principal balance and commitment to
lend to any one borrower, or group of related borrowers, at the Bank was $5.3
million secured by multiple loans ranging in size from approximately $5,000 for
a motor vehicle to a letter of credit secured by real estate mortgage and a
limited guarantee from Community hospital. In addition, one borrower had a
tax-free bond purchased by Cornerstone secured by real estate on assisted
living quarters. The third was a participation loan with Bank One secured by
real estate. At December 31, 2003, each of these loans was performing in
accordance with its terms. Management always reserves the right to change its emphasis on the amount or
type of lending in which the Company engages to adjust to market or other
factors, including changes in the Companys asset/liability management
policies. 6




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Loan Portfolio Composition The following information reflects the composition of the Companys loan
portfolio in dollar amounts and in percentages (before deductions for loans in
process, deferred fees and discounts and allowance for losses) as of the dates
indicated. December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in Thousands)Real Estate Loans:One-to-four family
    
    $
    175,139
    
    
    
    51.91
    %
    
    $
    124,117
    
    
    
    47.70
    %
    
    $
    154,915
    
    
    
    56.82
    %
    
    $
    178,106
    
    
    
    61.85
    %
    
    $
    178,304
    
    
    
    68.01
    %Multi-family
    
    
    24,685
    
    
    
    7.32
    
    
    
    25,113
    
    
    
    9.65
    
    
    
    28,665
    
    
    
    10.51
    
    
    
    29,610
    
    
    
    10.28
    
    
    
    30,233
    
    
    
    11.53Commercial real estate
    
    
    88,787
    
    
    
    26.32
    
    
    
    61,918
    
    
    
    23.80
    
    
    
    40,176
    
    
    
    14.73
    
    
    
    38,309
    
    
    
    13.31
    
    
    
    22,339
    
    
    
    8.52Construction
    
    
    3,473
    
    
    
    1.03
    
    
    
    4,644
    
    
    
    1.78
    
    
    
    3,737
    
    
    
    1.37
    
    
    
    8,476
    
    
    
    2.94
    
    
    
    6,923
    
    
    
    2.64Total real estate loans
    
    
    292,084
    
    
    
    86.58
    
    
    
    215,792
    
    
    
    82.93
    
    
    
    227,493
    
    
    
    83.43
    
    
    
    254,501
    
    
    
    88.38
    
    
    
    237,799
    
    
    
    90.70Other Loans:Consumer Loans:Home equity
    
    
    24,426
    
    
    
    7.24
    
    
    
    21,587
    
    
    
    8.30
    
    
    
    19,468
    
    
    
    7.14
    
    
    
    17,766
    
    
    
    6.17
    
    
    
    15,369
    
    
    
    5.86Deposit account
    
    
    48
    
    
    
    
    
    
    
    29
    
    
    
    
    
    
    
    45
    
    
    
    .02
    
    
    
    85
    
    
    
    .03
    
    
    
    146
    
    
    
    .06Home improvement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other secured
    
    
    222
    
    
    
    .07
    
    
    
    302
    
    
    
    .12
    
    
    
    471
    
    
    
    .17
    
    
    
    957
    
    
    
    .33
    
    
    
    1,664
    
    
    
    .64Other
    
    
    479
    
    
    
    .14
    
    
    
    517
    
    
    
    .20
    
    
    
    773
    
    
    
    .28
    
    
    
    566
    
    
    
    .20
    
    
    
    1,679
    
    
    
    .64Total consumer loans
    
    
    25,175
    
    
    
    7.45
    
    
    
    22,435
    
    
    
    8.62
    
    
    
    20,757
    
    
    
    7.61
    
    
    
    19,374
    
    
    
    6.73
    
    
    
    18,858
    
    
    
    7.20Commercial business loans
    
    
    20,107
    
    
    
    5.96
    
    
    
    21,977
    
    
    
    8.45
    
    
    
    24,415
    
    
    
    8.96
    
    
    
    14,090
    
    
    
    4.89
    
    
    
    5,499
    
    
    
    2.10Total other loans
    
    
    45,282
    
    
    
    13.41
    
    
    
    44,412
    
    
    
    17.07
    
    
    
    45,172
    
    
    
    16.57
    
    
    
    33,464
    
    
    
    11.62
    
    
    
    24,357
    
    
    
    9.30Total loans
    
    
    337,366
    
    
    
    100.00
    %
    
    
    260,204
    
    
    
    100.00
    %
    
    
    272,665
    
    
    
    100.00
    %
    
    
    287,965
    
    
    
    100.00
    %
    
    
    262,156
    
    
    
    100.00
    %Less:Loans in process
    
    
    (1,313
    )
    
    
    
    
    
    
    (1,390
    )
    
    
    
    
    
    
    (1,553
    )
    
    
    
    
    
    
    (2,609
    )
    
    
    
    
    
    
    (4,659
    )Deferred fees and
discounts
    
    
    217
    
    
    
    
    
    
    
    (125
    )
    
    
    
    
    
    
    (117
    )
    
    
    
    
    
    
    (87
    )
    
    
    
    
    
    
    (62
    )Allowance for loan losses
    
    
    (1,801
    )
    
    
    
    
    
    
    (1,806
    )
    
    
    
    
    
    
    (1,695
    )
    
    
    
    
    
    
    (1,665
    )
    
    
    
    
    
    
    (2,781
    )Total loans , net
    
    $
    334,469
    
    
    
    
    
    
    $
    256,883
    
    
    
    
    
    
    $
    269,300
    
    
    
    
    
    
    $
    283,604
    
    
    
    
    
    
    $
    254,654
 7




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The following schedule shows the contractual maturity of the Companys gross
loan portfolio at December 31, 2003. The schedule does not include any
principal prepayment assumptions (dollars in thousands). One- to
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction andFour-family
    
    Nonresidential
    
    Commercial
    
    Development
    
    Consumer
    
    TotalDue DuringPeriods
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedEnding
    
    
    
    
    
    Average
    
    
    
    
    
    Average
    
    
    
    
    
    Average
    
    
    
    
    
    Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageDecember 31
    
    Amount
    
    Rate
    
    Amount
    
    Rate
    
    Amount
    
    Rate
    
    Amount
    
    Rate
    
    Amount
    
    Rate
    
    Amount
    
    Rate2004(1)(2)
    
    $
    5,051
    
    
    
    4.87
    %
    
    $
    15,180
    
    
    
    4.29
    %
    
    $
    8,991
    
    
    
    4.42
    %
    
    $
    3,145
    
    
    
    5.91
    %
    
    $
    60
    
    
    
    7.43
    %
    
    $
    32,427
    
    
    
    4.58
    %2005 to 2008
    
    
    4,516
    
    
    
    6.80
    
    
    
    18,629
    
    
    
    5.37
    
    
    
    5,346
    
    
    
    4.90
    
    
    
    
    
    
    
    
    
    
    
    5,881
    
    
    
    4.70
    
    
    
    34,372
    
    
    
    5.372009 and
following
    
    
    165,572
    
    
    
    5.69
    
    
    
    79,663
    
    
    
    5.86
    
    
    
    5,770
    
    
    
    6.57
    
    
    
    328
    
    
    
    7.38
    
    
    
    19,234
    
    
    
    4.09
    
    
    
    270,567
    
    
    
    5.65$
    175,139
    
    
    
    5.69
    %
    
    $
    113,472
    
    
    
    5.57
    %
    
    $
    20,107
    
    
    
    5.16
    %
    
    $
    3,473
    
    
    
    6.05
    %
    
    $
    25,175
    
    
    
    4.24
    %
    
    $
    337,366
    
    
    
    5.52
    %
  (1)
    
    Includes construction loans.(2)
    
    Includes demand loans and loans having no stated maturity. The following table sets forth at December 31, 2003, the dollar amount of gross
loans receivable contractually due after December 31, 2004, and whether such
loans have fixed interest rates or adjustable interest rates (dollars in
thousands). Due After December 31, 2004Fixed
    
    Adjustable
    
    TotalReal estate loans:One-to-four family
    
    $
    133,686
    
    
    $
    36,402
    
    
    $
    170,088Nonresidential
    
    
    11,260
    
    
    
    87,032
    
    
    
    98,292Construction
    
    
    328
    
    
    
    
    
    
    
    328Other loans:Consumer loans
    
    
    610
    
    
    
    24,505
    
    
    
    25,115Commercial business loans
    
    
    1,674
    
    
    
    9,442
    
    
    
    11,116Total
    
    $
    147,558
    
    
    $
    157,381
    
    
    $
    304,939
 8




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##### Table of Contents



One- to Four-Family Residential Mortgage and Construction Lending The Company focuses its lending efforts on the origination and purchase of
loans secured by first mortgages on owner-occupied, one-to-four family
residences. Residential loan originations of this type are generated by the
Companys marketing efforts, its present customers, walk-in customers and
referrals from real estate agents and builders. At December 31, 2003, the
Companys one-to-four family residential permanent mortgage loans totaled
$175.1 million, or 51.9% of the Companys total gross loan portfolio. At December 31, 2003, $134.6 million of the Companys one-to-four family
residential mortgage loans, or 39.9% of the Companys total gross loan
portfolio, had fixed interest rates. From time to time, the Company may
purchase loans secured by one-to-four family residences. The Company currently originates up to a maximum of 30-year, owner occupied
one-to-four family residential mortgage loans in amounts up to 97% of the
appraised value of the security property provided that private mortgage
insurance is obtained in an amount sufficient to reduce the Companys exposure
to at or below the 80% loan-to-value level. Interest rates charged on these
loans are priced on a regular basis according to market conditions.
Residential loans do not include prepayment penalties. The Company also
originates up to a maximum of 30-year one-to-four family residential loans to
nonowner-occupants, with loan-to-value ratios of up to 100% with private
mortgage insurance. In underwriting one-to-four family residential real estate loans, the Company
evaluates, among other things, both the borrowers ability to make monthly
payments and the value of the property securing the loan. Most properties
securing real estate loans made by the Company are appraised by independent
licensed fee appraisers approved by the Board of Directors. The Company
requires borrowers to obtain title, fire and property insurance (including
flood insurance, if necessary) in an amount not less than the amount of the
loan. In prior years, the Company has accepted title opinions. Real estate
loans originated by the Company generally contain a due on sale clause
allowing the Company to declare the unpaid principal balance due and payable
upon the sale or disposition of the secured property. The Company originates a limited number of loans to finance the construction of
one-to-four family residences. At December 31, 2003, the Company had loans to
finance the construction of one-to-four family residences totaling $3.5
million, or 1.0% of the Companys loan portfolio. Substantially all of these
loans are made to individuals who propose to occupy the premises upon
completion of construction. Construction loans are generally structured for up
to a 30-year term with a six-month construction phase, during which the
borrower pays interest only. Upon completion of the construction phase, these
loans continue as permanent loans of the Company. Loan proceeds are disbursed
in increments as construction progresses and as inspections warrant. Multi-Family and Commercial Real Estate Lending The Company also engages in commercial and multi-family real estate lending.
At December 31, 2003, the Company had $113.5 million of permanent commercial
and multi-family real estate loans, which represented 33.6% of the Companys
gross loan portfolio. The Companys commercial and multi-family real estate loan portfolio is secured
primarily by apartment buildings, office buildings, strip shopping centers,
motels, nursing homes, restaurants and churches located in the Companys market
areas. Multi-family and commercial real estate loans generally have terms that
do not exceed 15 years. Generally, the loans are made in amounts up to 75% of
the appraised value of the secured property. The Company analyzes the
financial condition of the borrower, the borrowers credit history, and the
reliability and predictability of the cash flow generated by the property
securing the loan. Currently, appraisals on properties securing multi-family
and commercial real estate loans originated by the Company are performed by
independent licensed fee appraisers. Construction loans on multi-family and
commercial real estate projects are structured to be converted to permanent
loans at the end of the construction phase, which generally runs up to 12
months. These construction loans have rates and terms that generally match any
permanent multi-family or commercial real estate loan then offered by the
Company, except that during the construction phase, the 9




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##### Table of Contents



borrower pays interest only. These loans generally provide for the payment of
interest and loan fees from loan proceeds. Construction and development loans are obtained principally through continued
business from developers and builders who have previously borrowed from the
Company, as well as referrals from existing customers and walk-in customers.
The application process includes a submission to the Company of accurate plans,
specifications and costs of the project to be constructed/developed. These
items are used as a basis to determine the appraised value of the subject
property. Loans are based on the lesser of current appraised value or the cost
of construction (land plus building). In addition, the Company from time to time has purchased loans secured by
commercial and multi-family real estate. The Company purchased approximately
$6.9 million of commercial and multi-family real estate participation loans in
fiscal 2003. Loans secured by commercial and multi-family real estate properties are
generally larger and involve a greater degree of credit risk than one-to-four
family residential mortgage loans. Because payments on loans secured by
commercial real estate properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject to adverse conditions in the real estate market or the economy. If the
cash flow from the project is reduced (for example, if leases are not obtained
or renewed), the borrowers ability to repay the loan may be impaired. The
largest single loan is $5.3 million and is secured by commercial real estate
and was performing in accordance with its terms as of December 31, 2003. Consumer Lending The Company offers secured and unsecured consumer loans, including home
improvement loans, home equity loans, loans secured by savings deposits and
equity securities, and retail mobile home loans. The Company currently
originates all of its consumer loans in its primary market areas. The Company
originates consumer loans on a direct basis by extending credit directly to the
borrower. At December 31, 2003, consumer loans excluding home equity loans were $749,000
or .2% of the Companys gross loan portfolio. Home equity loans were $24.4
million or 7.2% of the Companys gross loan portfolio as of December 31, 2003. Consumer loan terms vary according to the type and value of collateral, length
of contract and creditworthiness of the borrower. Loans secured by deposit
accounts at the Company are currently originated for up to 90% of the account
balance with a hold placed on the account restricting the withdrawal of the
account balance. The underwriting standards employed by the Company for consumer loans, other
than loans secured by deposits, include an application, a determination of the
applicants payment history on other debts and an assessment of ability to meet
existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is a primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount. Consumer loans may entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss, depreciation or fluctuation in value.
In addition, consumer loan collections are dependent on the borrowers
continuing financial stability, and thus are more likely to be affected by
adverse personal circumstances. Furthermore, the application of various
federal and state laws, including bankruptcy and insolvency laws, may limit the
amount which can be recovered on such loans. 10




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##### Table of Contents



Commercial Business Lending Commercial business loans have been added to the list of the Companys
products. The outstanding balance of unsecured commercial lines of credit was
$57,000 as of December 31, 2003. Commercial loans secured by other than
mortgage had outstanding balances of $20.0 million as of December 31, 2003.
The purpose of these loans will generally be for working capital or expansion
of existing businesses. These loans have been priced at prime plus a specified
spread, or at the one-year constant-maturity treasury index plus a specified
spread. Some of these loans are payable on demand. Unlike residential mortgage loans, which generally are made on the basis of the
borrowers ability to make repayment from his or her employment and other
income and which are secured by real property the value of which tends to be
more easily ascertainable, commercial business loans typically are made on the
basis of the borrowers ability to make repayment from the cash flow of the
borrowers business. As a result, the availability of funds for the repayment
of commercial business loans may be substantially dependent on the success of
the business itself (which, in turn, is likely to be dependent upon the general
economic environment). The Banks commercial business loans may be secured by
business assets. However, the collateral securing the loans may depreciate
over time, may be difficult to appraise and may fluctuate in value based on the
success of the business. Originations, Purchases and Sales of Loans While the Company offers fixed-rate and adjustable-rate loans, its ability to
originate loans is dependent upon the relative customer demand for loans in its
market areas, which is affected by the interest rate environment and other
factors. From time to time, the Company may purchase loans in order to
continue to leverage the Banks borrowing ability, provide more interest rate
sensitive assets, and supplement a slow down in the local mortgage market. The
Bank will continue to evaluate purchase opportunities. Non-Performing Assets and Classified Assets When a borrower fails to make a required payment on real estate secured loans
and consumer loans, a notice is sent 30 days after payment is due. At 60 days
after the payment is due, the Company generally initiates collection procedures
by written notice and/or telephone call. In most cases, delinquencies are
cured promptly. However, if a loan secured by real estate or other collateral
has been delinquent for more than 90 days, satisfactory payment arrangements
must be adhered to or the Company will initiate proceedings for foreclosure or
repossession. When a loan becomes delinquent 90 days or more or when the collection of
principal or interest becomes doubtful, the Company will place the loan on
non-accrual status and, as a result, previously accrued interest income on the
loan is taken out of current income. The loan will remain on non-accrual
status as long as the loan is 90 days or more delinquent. The following table sets forth information concerning delinquent loans at
December 31, 2003. The amounts presented represent the total remaining
principal balances of the related loans, rather than the actual payment amounts
which are overdue. Loans Delinquent for:Total60-89 Days
    
    90 Days and Over
    
    60 Days and Over(Dollars in Thousands)Real estateOne- to four-family
    
    $
    523
    
    
    $
    1,266
    
    
    $
    1,789Construction
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    80
    
    
    
    
    
    
    
    80Multi-family
    
    
    
    
    
    
    
    
    
    
    Consumer/commercial
    
    
    62
    
    
    
    153
    
    
    
    215Total
    
    $
    665
    
    
    $
    1,419
    
    
    $
    2,084
 11




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##### Table of Contents



The table below sets forth the amounts and categories of non-performing assets
in the Companys loan portfolio. For all periods presented, the Company has
had no troubled debt restructurings (which involve forgiving a portion of
interest or principal on any loans or making loans at a rate materially less
than that of market rates). Foreclosed assets include assets acquired in
settlement of loans. At December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Nonaccruing loansOne- to four-family
    
    $
    1,266
    
    
    $
    1,536
    
    
    $
    1,767
    
    
    $
    2,443
    
    
    $
    1,304Consumer
    
    
    149
    
    
    
    32
    
    
    
    11
    
    
    
    64
    
    
    
    20Commercial real estate/business loans
    
    
    4
    
    
    
    211
    
    
    
    1,040
    
    
    
    1,094
    
    
    
    1,431Total
    
    
    1,419
    
    
    
    1,779
    
    
    
    2,818
    
    
    
    3,601
    
    
    
    2,755Accruing loans delinquent more than 90 days
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Troubled debt restructurings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    $
    1,419
    
    
    $
    1,779
    
    
    $
    2,818
    
    
    $
    3,601
    
    
    $
    2,755Total as a percentage of total loans
    
    
    0.36
    %
    
    
    0.66
    %
    
    
    0.82
    %
    
    
    1.02
    %
    
    
    0.84
    %Total allowance for loan losses to
nonperforming loans
    
    
    126.92
    %
    
    
    101.52
    %
    
    
    60.15
    %
    
    
    46.24
    %
    
    
    100.94
    %
 For the year ended December 31, 2003, gross interest income that would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to approximately $16,000. As of December 31, 2003, the Company had no other interest bearing assets,
which would be required to be disclosed as non-performing if such assets were
loans. The Company had no foreign loans outstanding for any of the years presented.
Other than the categories noted on page 5, there is no concentration of loans
in any industry greater than 10% in the portfolio. 12




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##### Table of Contents



Classified Assets Federal regulations provide for the classification of loans and other assets
such as debt and equity securities considered by the OTS to be of lesser
quality, as substandard, doubtful or loss. An asset is considered
substandard if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
Substandard assets include those characterized by the distinct possibility
that the Bank will sustain some loss if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make collection or liquidation in full, on the basis of currently
existing facts, conditions, and values, highly questionable and improbable.
Assets classified as loss are those considered uncollectible and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets that do not currently expose
the Bank to sufficient risk to warrant classification in one of the
aforementioned categories but possess weaknesses are required to be designated
special mention by management. When a bank classifies problem assets as either substandard or doubtful, it may
establish general allowances for loan losses in an amount deemed prudent by
management. General allowances represent loss allowances that have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When a savings bank classifies problem assets as loss, it is
required either to establish a specific allowance for losses equal to 100% of
that portion of the asset so classified or to charge-off such amount. A
savings banks determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the savings banks
Regional Director at the regional OTS office, who may order the establishment
of additional general or specific loss allowances. In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Bank regularly reviews
the loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations. On the basis of
managements review of its assets, at December 31, 2003, the Bank had
classified a total of $1.6 million, or .4%, of its total assets as substandard
and $168,000 as doubtful. At December 31, 2002, total classified assets were
$1.9 million, or .5% of the Banks assets. Allowance for Loan Losses The allowance for loan losses is established through a provision for loan
losses based on managements evaluation of the risk in its loan portfolio and
changes in the nature and volume of its loan activity. Such evaluation, which
includes a review of loans for which full collectibility may not be reasonably
assured, considers among other matters, the estimated fair value of the
underlying collateral, economic conditions, historical loan loss experience and
other factors that warrant recognition in providing for an adequate loan loss
allowance. Real estate properties acquired through foreclosure are recorded at the lower
of cost or fair value. If fair value at the date of foreclosure is lower than
the balance of the related loan, the difference will be charged-off to the
allowance at the time of transfer. Valuations are periodically updated by
management and if the value declines, a specific provision for losses on such
property is established by a charge to operations. Although management believes that it uses the best information available to
determine the allowance for loan losses, unforeseen market conditions could
result in adjustments and net earnings could be significantly affected if
circumstances differ substantially from the assumptions used in making the
final determination. At December 31, 2003, the Company had a total allowance
for loan losses of $1.8 million, or .53%of total loans. See Note 3 of the Notes
to Consolidated Financial Statements in the Companys Annual Report to
Shareholders filed as Exhibit 13 hereto. 13




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##### Table of Contents



The following table sets forth an analysis of the Companys allowance for loan
losses. Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in Thousands)Balance at beginning of period
    
    $
    1,806
    
    
    $
    1,695
    
    
    $
    1,665
    
    
    $
    2,781
    
    
    $
    3,200Charge-offsOne- to four-family
    
    
    (34
    )
    
    
    (246
    )
    
    
    (57
    )
    
    
    (41
    )
    
    
    (215
    )Consumer
    
    
    (50
    )
    
    
    (20
    )
    
    
    (125
    )
    
    
    (103
    )
    
    
    (373
    )Commercial
    
    
    (269
    )
    
    
    (267
    )
    
    
    (231
    )
    
    
    (1,444
    )
    
    
    (148
    )(353
    )
    
    
    (533
    )
    
    
    (413
    )
    
    
    (1,588
    )
    
    
    (736
    )RecoveriesOne- to four-family
    
    
    14
    
    
    
    38
    
    
    
    27
    
    
    
    38
    
    
    
    20Consumer
    
    
    6
    
    
    
    16
    
    
    
    41
    
    
    
    66
    
    
    
    48Commercial
    
    
    42
    
    
    
    247
    
    
    
    17
    
    
    
    19
    
    
    
    362
    
    
    
    301
    
    
    
    85
    
    
    
    123
    
    
    
    71Net charge-offs
    
    
    (291
    )
    
    
    (232
    )
    
    
    (328
    )
    
    
    (1,465
    )
    
    
    (665
    )Additions charged to operations
    
    
    286
    
    
    
    343
    
    
    
    358
    
    
    
    349
    
    
    
    246Balance at end of period
    
    $
    1,801
    
    
    $
    1,806
    
    
    $
    1,695
    
    
    $
    1,665
    
    
    $
    2,781Ratio of net charge-offs to
average loans outstanding during the year
    
    
    0.10
    %
    
    
    0.09
    %
    
    
    0.12
    %
    
    
    0.54
    %
    
    
    0.27
    %
 The distribution of the Companys allowance for losses on loans at the dates
indicated is summarized as follows: December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999% of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    Total
    
    
    
    
    
    Total
    
    
    
    
    
    Total
    
    
    
    
    
    TotalAmount
    
    Loans
    
    Amount
    
    Loans
    
    Amount
    
    Loans
    
    Amount
    
    Loans
    
    Amount
    
    Loans(Dollars in Thousands)One- to four-family
    
    $
    377
    
    
    
    52.9
    %
    
    $
    609
    
    
    
    49.5
    %
    
    $
    636
    
    
    
    58.2
    %
    
    $
    686
    
    
    
    64.8
    %
    
    $
    477
    
    
    
    70.7
    %Commercial real estate
    
    
    344
    
    
    
    33.6
    
    
    
    268
    
    
    
    33.5
    
    
    
    168
    
    
    
    25.2
    
    
    
    156
    
    
    
    23.6
    
    
    
    898
    
    
    
    20.0Consumer/ Commercial business
    
    
    85
    
    
    
    13.5
    
    
    
    45
    
    
    
    17.0
    
    
    
    340
    
    
    
    16.6
    
    
    
    534
    
    
    
    11.6
    
    
    
    771
    
    
    
    9.3Unallocated
    
    
    995
    
    
    
    
    
    
    
    884
    
    
    
    
    
    
    
    551
    
    
    
    
    
    
    
    289
    
    
    
    
    
    
    
    635
    
    
    
    Total
    
    $
    1,801
    
    
    
    100.0
    %
    
    $
    1,806
    
    
    
    100.0
    %
    
    $
    1,695
    
    
    
    100.0
    %
    
    $
    1,665
    
    
    
    100.0
    %
    
    $
    2,781
    
    
    
    100.0
    %
 14




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##### Table of Contents



Investment Activities Liquidity may increase or decrease depending upon the availability of funds and
comparative yields on investments in relation to the return on loans.
Historically, the Bank has maintained its liquid assets above the minimum
requirements imposed by the OTS regulations and at a level believed adequate to
meet requirements of normal daily activities, repayment of maturing debt and
potential deposit outflows. As of December 31, 2003, Cornerstone considers its
available liquidity sufficient to meet its outstanding short and long-term
needs. Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, mortgage-backed securities (MBSs),
collateralized mortgage obligations (CMOs), certain certificates of deposit
of insured banks and savings institutions, certain bankers acceptances,
repurchase agreements and federal funds. Subject to various restrictions,
federally chartered savings institutions may also invest their assets in
commercial paper, investment grade corporate debt securities and mutual funds
whose assets conform to the investments that a federally chartered savings
institution is otherwise authorized to make directly. The investment policy of the Company is to invest funds among various
categories of investments and maturities based upon the need for liquidity, to
achieve balance between its desire to minimize risk and maximize yield, to
provide collateral for borrowings, and to fulfill the Companys asset/liability
management policies. At December 31, 2003, the Companys cash and interest-bearing deposits in other
financial institutions totaled $6.9 million, or 1.7% of total assets. The
Company also has a $9.3 million investment in the common stock of the FHLB of
Cincinnati in order to satisfy the requirement for membership therein. The Company periodically invests in MBSs and CMOs (collectively
mortgage-backed securities). At December 31, 2003 the Company had
investments in mortgage-backed securities of $21.8 million, or 5.5% of total
assets. The MBSs, which totaled $36.9 million at December 31, 2002, were all
insured or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. Accordingly,
management believes that the Companys mortgage-backed securities are generally
more resistant to credit problems than loans, which generally lack such
insurance or guarantees. Because these securities represent a pass through of
principal and interest from underlying individual 30-year mortgages, such
securities do present prepayment risk. The CMO securities held by the Company
also carry certain risks. The principal represented by such securities may be
repaid over a longer or shorter period than initially assumed and may hinder
certain aspects of the Companys asset/liability management strategy. As of
December 31, 2003, the Company held $4.6 million of CMO securities.
Mortgage-backed securities can serve as collateral for borrowings and, through
sales and repayments, as a source of liquidity. At December 31, 2003, the Company held $6.8 million in municipal securities, a
decrease of $122,000. These municipal securities are primarily Ohio municipal
debenture bonds with fixed rates. OTS regulations restrict investments in corporate debt and equity securities by
the Bank. These restrictions include prohibitions against investments in the
debt securities of any one issuer in excess of 15% of the Banks unimpaired
capital and unimpaired surplus as defined by federal regulations, plus an
additional 10% if the investments are fully secured by readily marketable
collateral. At December 31, 2003, the Bank was in compliance with this
regulation. See Regulation - Federal Regulation of Savings Institutions for
a discussion of additional restrictions on the Banks investment activities. 15




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##### Table of Contents



The following table sets forth the composition of the Companys investment
portfolio at the dates indicated. December 31,2003
    
    2002
    
    2001Amortized
    
    Fair
    
    Amortized
    
    Fair
    
    Amortized
    
    FairCost
    
    Value
    
    Cost
    
    Value
    
    Cost
    
    Value(Dollars in Thousands)Securities:U.S. government agencies
    
    $
    4,090
    
    
    $
    4,094
    
    
    $
    2,052
    
    
    $
    2,180
    
    
    $
    2,105
    
    
    $
    2,079Municipal securities
    
    
    6,774
    
    
    
    6,833
    
    
    
    6,932
    
    
    
    6,955
    
    
    
    1,634
    
    
    
    1,563Mortgage-backed securities
    
    
    21,894
    
    
    
    21,808
    
    
    
    36,301
    
    
    
    36,866
    
    
    
    35,814
    
    
    
    36,006FHLB stock
    
    
    9,335
    
    
    
    9,335
    
    
    
    8,971
    
    
    
    8,971
    
    
    
    8,568
    
    
    
    8,568Total securities and FHLB stock
    
    $
    42,093
    
    
    $
    42,070
    
    
    $
    54,256
    
    
    $
    54,972
    
    
    $
    48,121
    
    
    $
    48,216
 The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the investment securities
portfolio, excluding FHLB of Cincinnati stock, as of December 31, 2003. The
weighted average yield has been computed using the historical amortized cost
for securities available for sale. December 31, 2003Less Than
    
    1 to 5
    
    6 to 10
    
    Over 101 Year
    
    Years
    
    Years
    
    Years
    
    TotalCarrying
    
    Carrying
    
    Carrying
    
    Carrying
    
    CarryingValue
    
    Value
    
    Value
    
    Value
    
    Value(Dollars in Thousands)Securities:U.S. government agencies
    
    $
    
    
    
    $
    4,094
    
    
    $
    
    
    
    $
    
    
    
    $
    4,094Municipal securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,833
    
    
    
    6,833Mortgage-backed securities
    
    
    251
    
    
    
    4,352
    
    
    
    60
    
    
    
    17,145
    
    
    
    21,808Total securities
    
    $
    251
    
    
    $
    8,446
    
    
    $
    60
    
    
    $
    23,978
    
    
    $
    32,735Weighted average yield
    
    
    7.50
    %
    
    
    5.26
    %
    
    
    11.40
    %
    
    
    4.20
    %
    
    
    4.51
    %
 Excluding those holdings in the investment portfolio in the U.S. government
agencies, there were no investments in securities of any one issuer, which
exceeded 10% of the consolidated shareholders equity at December 31, 2003. Sources of Funds General The Companys primary sources of funds are deposits, borrowings, repayment of
loan principal, sales and repayments of mortgage-backed securities, and funds
provided from operations. Borrowings, consisting of FHLB advances, may be used
at times to compensate for seasonal reductions in deposits or deposit inflows
at less than projected levels, and may be used on a longer-term basis to
support expanded lending activities. Deposits The Company offers a variety of deposit accounts having a wide range of
interest rates and terms. The Companys deposits consist of passbook and
statement savings accounts, NOW, demand and money market fund accounts, and
certificate accounts ranging in terms from six months to ten years. The
Company solicits deposits 16




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from its market area and sometimes uses brokers to obtain deposits. The
Company relies primarily on competitive pricing policies, advertising and
customer service to attract and retain these deposits. The variety of deposit accounts offered by the Company has allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Company has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The Company endeavors to manage the pricing of its deposits in
keeping with its asset/liability management and profitability objectives. The
ability of the Company to attract and maintain certificates of deposit accounts
and the rates paid on these deposits has been and will continue to be
significantly affected by market conditions. The following table sets forth the average dollar amount of deposits in the
various types of deposit programs offered by the Company and the average rate
paid for those deposits for the periods indicated. Year Ended December 31,2003
    
    2002
    
    2001Average
    
    Average
    
    Average
    
    Average

    
    Average
    
    AverageAmount
    
    Rate
    
    Amount
    
    Rate
    
    Amount
    
    Rate(Dollars in Thousands)Demand and NOW accounts
    
    $
    29,064
    
    
    
    0.34
    %
    
    $
    24,382
    
    
    
    0.50
    %
    
    $
    19,148
    
    
    
    0.81
    %Savings and money market accounts
    
    
    76,356
    
    
    
    1.15
    
    
    
    71,728
    
    
    
    2.04
    
    
    
    60,117
    
    
    
    3.57Certificates of deposit
    
    
    119,122
    
    
    
    3.55
    
    
    
    121,156
    
    
    
    4.68
    
    
    
    133,226
    
    
    
    5.98Total deposits
    
    $
    224,542
    
    
    
    2.40
    %
    
    $
    217,266
    
    
    
    3.34
    %
    
    $
    212,491
    
    
    
    4.83
    %
 The following table indicates the amount of the Companys certificates of
deposit and other deposits by time remaining until maturity as of December 31,
2003. MaturityOver
    
    Over3 Months
    
    3 to 6
    
    6 to 12
    
    Overor Less
    
    Months
    
    Months
    
    12 Months
    
    Total(Dollars in Thousands)Certificates of deposit less than $100,000
    
    $
    2,409
    
    
    $
    2,365
    
    
    $
    4,739
    
    
    $
    41,260
    
    
    $
    50,773Certificates of deposit $100,000 or more
    
    
    8,553
    
    
    
    5,876
    
    
    
    24,199
    
    
    
    50,411
    
    
    
    89,039Total certificates of deposit
    
    $
    10,962
    
    
    $
    8,241
    
    
    $
    28,938
    
    
    $
    91,671
    
    
    $
    139,812
 Borrowings Another source of funds includes advances from the FHLB of Cincinnati. As a
member of the FHLB of Cincinnati, the Bank is required to own capital stock and
is authorized to apply for advances. Each FHLB credit program has its own
interest rate, which may be fixed or variable, and includes a range of
maturities. The FHLB of Cincinnati may prescribe the acceptable uses to which
these advances may be put, as well as limitations in the size of the advances
and repayment provisions. The FHLB advances are secured by the Banks blanket
agreement for advances and security agreement and are not tied to specific
investments or loans. 17




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The following table sets forth the maximum month-end balance and average
balance of FHLB advances for the periods indicated. Year Ended December 31,2003
    
    2002
    
    2001(Dollars in Thousands)Average balance outstanding during the year
    
    $
    88,466
    
    
    $
    83,599
    
    
    $
    88,898Maximum balance outstanding at any month-end
during the year
    
    $
    103,473
    
    
    $
    90,737
    
    
    $
    101,518Balance outstanding at end of period
    
    $
    103,473
    
    
    $
    81,243
    
    
    $
    76,655Weighted average interest rate during the year
    
    
    4.45
    %
    
    
    5.03
    %
    
    
    5.55
    %Weighted average interest rate at end of year
    
    
    4.03
    %
    
    
    4.92
    %
    
    
    5.45
    %
 Service Corporation Activities Federal savings institutions generally may invest a limited percentage of their
assets in service corporations. In addition, federal savings institutions may
invest up to 50% of their regulatory capital in conforming loans to their
service corporations. In addition to investments in service corporations,
federal savings institutions are permitted to invest an unlimited amount in
operating subsidiaries engaged solely in activities in which federal savings
institutions may engage directly. At December 31, 2003, the Bank had a book investment of $1.4 million in
CornerstoneBanc Financial Services, an operating subsidiary created to generate
mortgage lending in areas outside of the Banks normal lending area. Competition The Company faces strong competition, both in originating real estate and other
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from commercial banks, other savings institutions, credit
unions and mortgage bankers making loans secured by real estate located in the
Companys market area. The Company competes for real estate and other loans
principally based on interest rates charged, the quality of services it
provides to borrowers, loan fees it charges, and the types of loans it
originates. The Company attracts most of its deposits through its retail banking offices,
primarily from the communities in which those retail banking offices are
located; therefore, competition for those deposits is principally from
commercial banks, other savings institutions, credit unions and brokerage firms
located in the same communities. Periodically, the Company will solicit
brokered deposits. The Company competes for these deposits by offering a
variety of deposit accounts at competitive rates, convenient business hours,
and convenient branch locations with interbranch deposit and withdrawal
privileges at each. On November 12, 1999, the Gramm-Leach-Bliley Act (the GLB Act) was enacted
into law. The GLB Act made sweeping changes in the financial services in which
various types of financial institutions may engage. The Glass-Steagall Act,
which had generally prevented banks from affiliation with securities and
insurance firms, was repealed. A new financial holding company, which owns
only well capitalized and well managed depository institutions, will be
permitted to engage in a variety of financial activities, including insurance
and securities underwriting and agency activities. The GLB Act permits unitary savings and loan holding companies in existence on
May 4, 1999, including the Company, to continue to engage in all activities
that they were permitted to engage in prior to the enactment of the Act. Such
activities are essentially unlimited, provided that the thrift subsidiary
remains a qualified thrift lender. Any thrift holding company formed after May
4, 1999 will be subject to the same restrictions as a multiple 18




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thrift holding company. In addition, a unitary thrift holding company in
existence at May 4, 1999 may be sold only to a financial holding company
engaged in activities permissible for multiple savings and loan holding
companies. The GLB Act is not expected to have a material effect on the activities in
which the Company is currently engaged, except to the extent that competition
with other types of financial institutions may increase as they engage in
activities not permitted prior to enactment of the GLB Act. REGULATION General The Bank is subject to regulation, examination and oversight by the OTS and the
FDIC. The Bank must file periodic reports with the OTS and FDIC concerning its
activities and financial condition. Examinations are conducted periodically by
federal regulators to determine whether the Bank complies with various
regulatory requirements and is operating in a safe and sound manner. The Bank
is a member of the FHLB of Cincinnati. USA Patriot Act of 2001.In October 2001, the USA Patriot Act of 2001 was
enacted in response to the terrorist attacks in New York, Pennsylvania and
Washington, D.C., which occurred on September 11, 2001. The Patriot Act is
intended to strengthen U.S. law enforcements and the intelligence communities
abilities to work cohesively to combat terrorism on a variety of fronts. The
potential impact of the Patriot Act on financial institutions of all kinds is
significant and wide ranging. The Patriot Act contains sweeping anti-money
laundering and financial transparency laws and imposes various regulations,
including standards for verifying client identification at account opening, and
rules to promote cooperation among financial institutions, regulators and law
enforcement entities in identifying parties that may be involved in terrorism
or money laundering. Sarbanes-Oxley Act of 2002.On July 30, 2002, President Bush signed into law
the Sarbanes-Oxley Act of 2002, or the SOA. The SOA is the most far-reaching
U.S. securities legislation enacted in many years, and includes many
substantive and disclosure-based requirements. The stated goals of the SOA are
to increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws. The SOA generally applies to all
companies, both U.S. and non-U.S., that file or are required to file periodic
reports with the Securities and Exchange Commission under the Securities
Exchange Act of 1934 (the Exchange Act). Given the extensive and continuing
SEC role in implementing rules relating to many of the SOAs new requirements,
the effects of these requirements remain to be determined, although it is
likely that the Companys costs will increase somewhat, at least in the short
term, as a result of SOA implementation. The Company is continuing to assess
the financial effects of the SOA on its operations. Office of Thrift Supervision General The OTS is an office in the Department of the Treasury and is responsible for
the regulation and supervision of all federally-chartered savings and loan
associations and all other savings and loan associations the deposits of which
are insured by the FDIC. The OTS issues regulations governing the operation of
savings and loan associations based on their asset size to cover the costs of
this supervision and examination. The OTS also may initiate enforcement
actions against savings and loan associations and certain persons affiliated
with them for violations of laws or regulations or for engaging in unsafe or
unsound practices. If the grounds provided by law exist, the OTS may appoint a
conservator or receiver for a savings and loan association. Savings associations are subject to regulatory oversight under various consumer
protection and fair lending laws. These laws govern, among other things,
truth-in-lending disclosures, equal credit opportunity, fair credit 19




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reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger. Community reinvestment
regulations evaluate how well and to what extent an institution lends and
invests in its designated service area, with particular emphasis on
low-to-moderate income communities and borrowers in that area. The Bank has
received a satisfactory examination rating under those regulations. Federal Regulation of Savings Institutions.The OTS has extensive authority
over the operations of federal savings institutions. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. When these
examinations are conducted by the OTS and the FDIC, the examiners may require
an institution to provide for higher general or specific loan-loss reserves.
All federal savings institutions are subject to a semi-annual assessment, based
upon the institutions total assets, to fund OTS operations. The Banks OTS
assessment for the fiscal year ended December 31, 2003 was $81,000. The OTS also has extensive enforcement authority over all federal savings
institutions and their holding companies, including the Company. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. Except under certain
circumstances, public disclosure of final enforcement actions by the OTS is
required. In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws and they are prohibited from engaging in any
activities not permitted by such laws. For instance, no federal savings
institution may invest in non-investment grade corporate debt-securities. In
addition, the permissible level of investment by federal institutions in loans
secured by non-residential real property may not exceed 400% of total capital,
except with approval of the OTS. Federal savings institutions are also
generally authorized to branch nationwide. The Bank complies with the noted
restrictions. The Banks general permissible lending limit for loans-to-one borrower is equal
to the greater of $500,000 or 15% of unimpaired capital and surplus (except for
loans fully secured by certain readily marketable collateral, in which case
this limit is increased to 25% of unimpaired capital and surplus). At December
31, 2003 the Banks lending limit under this restriction was $6.5 million. The
Bank complies with the loans-to-one borrower limitation. The OTS, as well as the other federal banking agencies, has adopted guidelines
establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution that fails to comply with these
standards must submit a compliance plan. Insurance of Accounts and Regulation by the FDIC The Banks deposits are insured by the Savings Association Insurance Fund
(SAIF), which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith
and credit of the United States Government. As insurer, the FDIC imposes
deposit insurance premiums and is authorized to conduct examinations of and to
require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the SAIF or the BIF. The FDIC
also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices, or is in an unsafe or unsound
condition. The FDICs deposit insurance premiums are assessed through a risk-based system
under which all insured depository institutions are placed into one of nine
categories and assessed insurance premiums based upon their 20




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level of capital and supervisory evaluation. Under the system, institutions
classified as well capitalized (i.e.,a core capital ratio of at least 5%, a
ratio of Tier 1 or core capital to risk-weighted assets (Tier 1 risk-based
capital) of at least 6% and a risk-based capital ratio of at least 10%) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less
than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern pay the highest premium. Risk classification
of all insured institutions is made by the FDIC for each semi-annual assessment
period. The Bank is classified as well capitalized. The FDIC is authorized to increase assessment rates, on a semiannual basis, if
it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC. Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However SAIF insured
institutions are required to pay a Financing Corporation (FICO) assessment,
in order to fund the interest on bonds issued to resolve thrift failures in the
1980s. The assessment was 1.7 basis points for the quarter ended December 31,
2003. These assessments, which may be revised based upon the level of BIF and
SAIF deposits, will continue until the bonds mature in the year 2017. Regulatory Capital Requirements Federally insured savings associations are required to maintain a minimum level
of regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement
and a risk-based capital requirement applicable to such savings associations.
These capital requirements must be generally as stringent as the comparable
capital requirements for national banks. The OTS is also authorized to impose
capital requirements in excess of these standards on individual associations on
a case-by-case basis. The capital regulations require tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation). Tangible capital generally includes
common shareholders equity and retained income, and certain noncumulative
perpetual preferred stock and related income. In addition, all intangible
assets, other than a limited amount of purchased mortgage-servicing rights,
must be deducted from tangible capital. The OTS regulations establish special capitalization requirements for savings

associations that own subsidiaries. In determining compliance with the capital
requirements, all subsidiaries engaged solely in activities permissible for
national banks or engaged in certain other activities solely as agent for its
customers are includable subsidiaries that are consolidated for capital
purposes in proportion to the associations level of ownership. For excludable
subsidiaries, the debt and equity investments in such subsidiaries are deducted
from assets and capital. The Banks subsidiaries are includable subsidiaries. At December 31, 2003, the Bank had tangible capital of $41.3 million, or 10.3%
of adjusted total assets, which is $35.3 million above the minimum requirement
of 1.5% of adjusted total assets in effect on that date. The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. At December 31, 2003, the Bank had no intangibles that were
subject to these tests. As a result of the prompt corrective action provisions
discussed below, however, a savings association must maintain a core capital
ratio of at least 4% to be considered adequately capitalized unless its
supervisory condition is such to allow it to maintain a 3% ratio. At December 31, 2003, the Bank had core capital equal to $41.3 million, or
10.3% of adjusted total assets, which is $25.3 million above the minimum
leverage ratio requirement of 4% in effect on that date. 21




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The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be
used to satisfy the risk-based requirement only to the extent of core capital.
The OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 2003, the Bank had
no capital instruments that qualify as supplementary capital and $1.8 million
of general loss reserves, which was less than 1.0% of risk-weighted assets. Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Bank had no such
exclusions from capital and assets at December 31, 2003. In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one-to-four family first lien mortgage loans not more than 90 days delinquent
and having a loan-to-value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the Fannie Mae or Freddie Mac. OTS regulations also require every savings association with more than normal
interest rate risk exposure to deduct from its total capital, for purposes of
determining compliance with such requirement, an amount equal to 50% of its
interest rate risk exposure multiplied by the present value of its assets.
This exposure is a measure of the potential decline in the net portfolio value
of a savings association, greater than 2% of the present value of its assets,
based upon a hypothetical 200 basis point increase or decrease in interest
rates (whichever results in a greater decline). Net portfolio value is the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts. The rule will not become effective until the OTS evaluates
the process by which savings associations may appeal an interest rate risk
deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings institution with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise. On December 31, 2003, the Bank had total capital (as defined above) of $43.1
million (including $41.3 million in core capital and $1.8 of general loss
reserves) and risk-weighted assets of $293.9 million. Total capital was 14.7%
of risk-weighted assets. This amount was $19.6 million above the 8.0%
requirement in effect on that date. The OTS and the FDIC are authorized and, under certain circumstances required,
to take certain actions against savings associations that fail to meet their
capital requirements. The OTS is generally required to take action to restrict
the activities of an undercapitalized association (generally defined to be
one with less than either a 4% core capital ratio, a 4% Tier 1 risked-based
capital ratio or an 8% risk-based capital ratio). Any such association must
submit a capital restoration plan and until such plan is approved by the OTS,
may not increase its assets, acquire another institution, establish a branch or
engage in any new activities, and generally may not make capital distributions.
The OTS is authorized to impose the additional restrictions that are
applicable to significantly undercapitalized associations. As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into
a limited capital maintenance guarantee with respect to the institutions
achievement of its capital requirements. Any savings association that fails to comply with its capital plan or is
significantly undercapitalized (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
critically 22




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undercapitalized (i.e., a tangible capital ratio of 2% or less) is subject to
further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the
OTS must appoint a receiver (or conservator with the concurrence of the FDIC)
for a savings association, with certain limited exceptions, within 90 days
after it becomes critically undercapitalized. Any undercapitalized association
is also subject to the general enforcement authority of the OTS and the FDIC,
including the appointment of a conservator or a receiver. The OTS is also generally authorized to reclassify an association into a lower
capital category and impose the restrictions applicable to such category if the
institution is engaged in unsafe or unsound practices or is in an unsafe or
unsound condition. The imposition by the OTS or the FDIC of any of these measures on the Bank may
have a substantial adverse effect on the Companys operations and
profitability. The Companys shareholders do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue
additional shares of Common Stock, such issuance may result in the dilution in
the percentage of ownership of the Company. Limitations on Capital Distributions.The OTS imposes various restrictions or
requirements on the ability of associations to make capital distributions,
according to ratings of associations based on their capital level and
supervisory condition. Capital distributions, for purposes of such regulation,
include, without limitation, payments of cash dividends, repurchases, and
certain other acquisitions by an association of its shares and payments to
stockholders of another association in an acquisition of such other
association. A savings and loan holding company must file a notice or an application with
the OTS before it can declare and pay a dividend. An application must be
submitted and approval from the OTS must be obtained (1) if the proposed
distribution would cause total distributions for that year to exceed net income
for that calendar year to date plus the savings associations retained net
income for the preceding two years; (2) if the savings association will not be
at least adequately capitalized following the capital distribution; (3) if the
proposed distribution would violate a prohibition contained in any applicable
statute, regulation or agreement between the savings association and the OTS
(or the FDIC), or a condition imposed on the savings association in an
OTS-approved application or notice; or, (4) if the savings association has not
received certain favorable examination ratings from the OTS. If a savings
association subsidiary of a holding company is not required to file an
application, it must file a notice with the OTS. In addition to certain federal income tax considerations, OTS regulations
impose limitations on the payment of dividends and other capital distributions
by savings association. Under OTS regulations applicable to converted savings
associations, the Bank is not permitted to pay a cash dividend on its common
shares if its regulatory capital would, as a result of payment of such
dividends, be reduced below the amount required for the Liquidation Account, or
below applicable regulatory capital requirements prescribed by the OTS. Liquidity.Office of Thrift Supervision (OTS) regulations presently require
the Bank to maintain sufficient liquidity to assure its safe and sound
operation. To that end, the 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 the Bank may rely, if necessary, to fund deposit withdrawals or
other short-term funding needs. At December 31, 2003 the Bank had commitments
to originate mortgage one-to-four family loans totaling $973,000 and
commitments to originate commercial and consumer loans of $6.2 million. In
addition, the Bank had $1.3 million in commitments to fund loans on residential
properties under construction as well as $1.5 million in commitments to fund
nonresidential loans. The Bank had no commitments to purchase or sell loans.
The Bank considers its liquidity and capital reserves sufficient to meet its
outstanding short and long-term needs. Qualified Thrift Lender Test.Savings associations must meet one of two
possible tests in order to be a qualified thrift lender (QTL). The first
test requires a savings association to maintain a specified level of
investments in assets that are designated as qualifying thrift investments
(QTI), which are generally related to domestic residential real estate and
manufactured housing and include credit card, student and small business loans
and 23




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stock issued by any FHLB, Federal Home Loan Mortgage Corporation (FHLMC) or
the Federal National Mortgage Association (FNMA). Under this test, 65% of an
institutions portfolio assets (total assets less goodwill and other
intangibles, property used to conduct business, and 20% of liquid assets) must
consist of QTI on a monthly average basis in nine out of every 12 months. The
second test permits a savings association to qualify as a QTL by meeting the
definition of domestic building and loan association under the Internal
Revenue Code of 1986, as amended (the Code). In order for an institution to
meet the definition of a domestic building and loan association under the
Code, at least 60% of such institutions assets must consist of specified types
of property, including cash, loans secured by residential real estate or
deposits, educational loans and certain governmental obligations. The OTS may
grant exceptions to the QTL test under certain circumstances. If a savings
association fails to meet the QTL test, the association and its holding company
become subject to certain operating and regulatory restrictions. At December
31, 2003 the Bank met the QTL test. Community Reinvestment Act.Under the Community Reinvestment Act (CRA),
every FDIC insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate-income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institutions discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection
with the examination of the Bank, to assess the institutions record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by the Bank. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS or to impose fines or corrective measures.
The Bank was examined for CRA compliance in 2003 and received a rating of
satisfactory. Transactions with Affiliates.Under federal law, all transactions between and
among Cornerstone and its affiliates, which include its holding company, are
subject to Sections 23A and 23B of the Federal Reserve Act and Regulation W
promulgated thereunder as interpreted by the OTS. Generally, these
requirements limit these transactions to a percentage of the banks capital and
require all of them to be on terms at least as favorable to the bank as
transactions with non-affiliates. In addition, a bank may not lend to any
affiliate engaged in non-banking activities not permissible for a bank holding
company or acquire shares of any affiliate that is not a subsidiary. The OTS
is authorized to impose additional restrictions on transactions with affiliates
if necessary to protect and ensure safety and soundness standards. The OTS
regulations also set forth various reporting requirements relating to
transactions with affiliates. Extensions of credit by Cornerstone to its executive officers, directors and
principal shareholders are subject to Section 22(h) of the Federal Reserve Act,
which among other things, generally prohibits loans to any such individual
where the aggregate amount exceeds an amount equal to 15% of an institutions
unimpaired capital and surplus plus an additional 10% of unimpaired capital and
surplus in the case of loans that are fully secured by readily marketable
collateral. Section 22(h) permits loans to directors, executive officers and principal
stockholders made pursuant to a benefit or compensation program that is widely
available to employees of Cornerstone provided that no preference is given to
any officer, director or principal stockholder, or related interest thereto,
over any other employee. In addition, the aggregate amount of extensions of
credit by a savings institution to all insiders cannot exceed the institutions
unimpaired capital and surplus. Furthermore, Section 22(g) places additional
restrictions on loans to executive officers. Holding Company Regulation.The Company is a unitary savings and loan company
subject to regulatory oversight by the OTS. As such, the Company is required
to register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over
the Company and its non-savings association subsidiaries which also permits the
OTS to restrict or prohibit activities that are determined to be a serious risk
to the subsidiary savings association. 24




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##### Table of Contents



As a unitary savings and loan company, the Company generally is not subject to
activity restrictions. If the Company acquires control of another savings
association as a separate subsidiary, it would become a multiple savings and
loan company, and the activities of the Company and any of its subsidiaries
(other than the Bank or any other SAIF insured savings association) would
become subject to such restrictions unless such other associations each qualify
as a QTL and were acquired in a supervisory acquisition. If the Bank fails the QTL test, the Company must obtain the approval of the OTS
prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan company. See Qualified
Thrift Lender Test. The Company must obtain approval from the OTS before acquiring control of any
other SAIF insured association. Such acquisitions are generally prohibited if
they result in a multiple savings and loan company controlling savings
associations in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings association. Federal Securities Law.The stock of the Company is registered with the SEC
under the Exchange Act. Accordingly, the Company is subject to the information,
proxy solicitation, insider trading restrictions and other requirements of the
SEC under the Exchange Act. Company stock held by persons who are affiliates (generally officers, directors
and principal shareholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public-information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period. FDIC.The FDIC is an independent federal agency that insures the deposits, up
to prescribed statutory limits, of federally-insured banks and thrifts and
safeguards the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the Bank Insurance Fund (the
BIF) for commercial banks and state savings banks and the SAIF for savings
associations. The FDIC is required to maintain designated levels of reserves
in each fund. The Banks deposit accounts are insured by the FDIC in the SAIF
up to the prescribed limits. The FDIC has examination authority over all
insured depository institutions, including the Bank, and has authority to
initiate enforcement actions if the FDIC does not believe the OTS has taken
appropriate action to safeguard safety and soundness and the deposit insurance
fund. The FDIC is required to maintain designated levels of reserves in each fund.
The FDIC may increase assessment rates for either fund if necessary to restore
the funds ratio of reserves to insured deposits to its target level within a
reasonable time and may decrease such rates if such target level has been met.
The FDIC has established a risk-based assessment system for both SAIF and BIF
members. Under this system, assessments vary based on the risk the institution
poses to its deposit insurance fund. The risk level is determined based on the
institutions capital level and the FDICs level of supervisory concern about
the institution. Since the Bank is considered a healthy institution under this
system, it has historically paid the lowest assessment rate. Federal Reserve System.The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW, and Super NOW
checking accounts). At December 31, 2003 the Bank complied with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board might be used to satisfy liquidity requirements
that may be imposed by the OTS. (See Liquidity.) Savings associations are authorized to borrow from the Federal Reserve Bank
discount window, but Federal Reserve Board regulations require associations
to exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank. 25




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##### Table of Contents



Federal Home Loan Banks.The FHLBs provide credit to their members in the form
of advances. See Deposits and Borrowings. The Bank is a member of the FHLB
of Cincinnati and must maintain an investment in the capital stock of the FHLB
of Cincinnati in an amount equal to the greater of 1% of the aggregate
outstanding principal amount of the Banks residential mortgage loans, home
purchase contracts, and similar obligations at the beginning of each year, or
5% of its advances from the FHLB. The Bank complies with this requirement with
an investment in stock of the FHLB of Cincinnati of $9.3 million at December
31, 2003. For the year ended December 31, 2003, dividends paid by the FHLB of Cincinnati
to the Bank totaled $364,000, which constituted a $39,000 decrease over the
amount of dividends received in 2002. Federal Taxation The Company and the Bank are each subject to the federal tax laws and
regulations that apply to corporations generally. In addition to the regular
income tax, the Company and the Bank may be subject to an alternative minimum
tax imposed at a minimum tax rate of 20% on alternative minimum taxable
income"(which is the sum of a corporations regular taxable income, with
certain adjustments, and tax preference items), less any available exemption.
Such tax preference items include interest on certain tax-exempt bonds issued
after August 7, 1986. In addition, 75% of the amount by which a corporations
adjusted current earnings exceeds its alternative minimum taxable income
computed without regard to this preference item and prior to reduction by net
operating losses, is included in alternative minimum taxable income. Net
operating losses can offset no more than 90% of alternative minimum taxable
income. The alternative minimum tax is imposed to the extent it exceeds the
corporations regular income tax. Payments of alternative minimum tax may be
used as credits against regular tax liabilities in future years. Prior to the enactment of the Small Business Jobs Protection Act (the Small
Business Act), which was signed into law on August 21, 1996, certain thrift
institutions were allowed deductions for bad debts under methods more favorable
than those granted to other taxpayers. Qualified thrift institutions could
compute deductions for bad debts using either the specific charge off method of
Section 166 of the Code, or one of the two reserve methods of Section 593 of
the Code. The reserve methods under Section 593 of the Code permitted a thrift
institution annually to elect to deduct bad debts under either (i) the
percentage of taxable income method applicable only to thrift institutions,
or (ii) the experience method that also was available to small banks. Under
the percentage of taxable income method, a thrift institution generally was
allowed a deduction for an addition to its bad debt reserve equal to 8% of its
taxable income (determined without regard to this deduction and with additional
adjustments). Under the experience method, a thrift institution was generally
allowed a deduction for an addition to its bad debt reserve equal to the
greater of (i) an amount based on its actual average experience for losses in
the current and five preceding taxable years, or (ii) an amount necessary to
restore the reserve to its balance as of the close of the base year. A thrift
institution could elect annually to compute its allowance addition to bad debt
reserves for qualifying loans under either the experience method or the
percentage of taxable income method. The Small Business Act eliminated the percentage of taxable-income reserve
method of accounting for bad debts by thrift institutions, effective for
taxable years beginning after 1995. Thrift institutions that would be treated
as small banks are allowed to use the experience method applicable to such
institutions, while thrift institutions that are treated as large banks are
required to use only the specific charge off method. The Company and the Bank
qualify as a small bank. A thrift institution required to change its method of computing reserves for
bad debts will treat such change as a change in the method of accounting,
initiated by the taxpayer, and having been made with the consent of the
Secretary of the Treasury. Section 481(a) of the Code requires certain amounts
to be recaptured with respect to such change. Generally, the amounts to be
recaptured will be determined solely with respect to the applicable excess
reserves of the taxpayer. The amount of the applicable excess reserves will
be taken into account ratably over a six-taxable year period, beginning with
the first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that becomes a
large bank, the amount of the institutions applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on 26




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qualifying real property loans (generally loans secured by improved real estate
and its reserve or losses on nonqualifying loans (all other types of loans) as
of the close of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (i.e., the pre-1988 reserves). In the case
of a thrift institution that becomes a small bank, the amount of the
institutions applicable excess reserves generally is the excess of (i) the
balances of its reserve for losses on qualifying real property loans and its
reserve for losses on nonqualifying loans as of the close of its last taxable
year beginning before January 1, 1996, over (ii) the greater of the balance of
(a) its pre-1988 reserves or (b) what the thrifts reserves would have been at
the close of its last year beginning before January 1, 1996, had the thrift
always used the experience method. For taxable years that began on or after January 1, 1996, and before January 1,
1998, if a thrift meets the residential loan requirement for a tax year, the
recapture of the applicable excess reserves otherwise required to be taken into
account as a Code Section 481(a) adjustment for the year will be suspended. A
thrift meets the residential loan requirement if, for the tax year, the
principal amount of residential loans made by the thrift during the year is not
less than its base amount. The base amount generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is
a loan as described in Section 7701(a)(C)(v) (generally a loan secured by
residential real and church property and certain mobile homes), but only to the
extent that the loan is made to the owner of the property. The balance of the pre-1988 reserves is subject to the provisions of Section
593(e) as modified by the Small Business Act, which require recapture in the
case of certain excessive distributions to shareholders. The pre-1988 reserves
may not be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first,
out of the institutions post-1951 accumulated earnings and profits; second,
out of the pre-1988 reserves; and third, out of such other accounts as may be
proper. To the extent a distribution by the Bank to the Company is deemed paid
out of its pre-1988 reserves under these rules, the pre-1988 reserves would be
reduced and the Banks gross income for tax purposes would be increased by the
amount which, when reduced by the income tax, if any, attributable to the
inclusion of such amount in its gross income, equals the amount deemed paid of
the pre-1988 reserves. The Bank has not been audited by the IRS recently with respect to federal
income tax returns. In the opinion of management, any examination of still open
returns would not result in a deficiency that could have a material adverse
effect on the financial condition of the Bank. Ohio Taxation The Company is subject to the Ohio Corporation franchise tax, which, as applied
to the Company, is a tax measured by both net earnings and net worth. The rate
of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable
income and 8.5% of computed Ohio taxable income in excess of $50,000 and (ii)
0.4% times taxable net worth. Under these alternative measures of computing
tax liability, the states to which a taxpayers adjusted total net income and
adjusted total net worth are apportioned or allocated are determined by complex
formulas. The minimum tax is $50 per year. A special litter tax is also applicable to all corporations, including the
Company, subject to the Ohio Corporation franchise tax other than financial
institutions. If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
..22% of computed Ohio taxable income in excess of $50,000. If the franchise
tax is paid on the net worth basis, the litter tax is equal to .014% times
taxable-net worth. Certain holding companies, such as the Company, will qualify for complete
exemption from the net worth tax if certain conditions are met. The Company
has in the past and will most likely in the future meet these conditions and
therefore, will calculate its Ohio franchise tax on the net income basis. 27




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The Bank is a financial institution for State of Ohio tax purposes. As such,
it is subject to the Ohio corporate franchise tax on financial institutions.
This annual tax was imposed at a rate of 1.3% for the 2003 tax year and
thereafter of the Banks apportioned book net worth, determined in accordance
with generally accepted accounting principles, less any statutory deduction.
As a financial institution, the Bank is not subject to any tax based upon net
income or net profits imposed by the State of Ohio. Delaware Taxation As a Delaware holding company, the Company is exempted from Delaware corporate
income tax but is required to file an annual report with and pay an annual fee
to the State of Delaware. The Company is also subject to an annual franchise
tax imposed by the State of Delaware. 28




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Executive Officers The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal by the Board of Directors. Each executive
officer of the Company is also an executive officer of the Bank. There are no
arrangements or understandings between the persons named and any other person
pursuant to which such officers were selected. Name
    
    Age
    
    Positions Held with the CompanyJohn W. Raisbeck
    
    
    64
    
    
    President and Chief Executive OfficerRobert A. Kuehl
    
    
    56
    
    
    Senior Vice President, Treasurer and Chief Financial OfficerWilliam E. Whitmoyer
    
    
    56
    
    
    Senior Vice PresidentRobert P. Brezing
    
    
    58
    
    
    Senior Vice President
 The business experience of each executive officer who is not also a Director of
the Company is set forth below. Robert Kuehl.Mr. Kuehl is Senior Vice President, Treasurer and Chief
Financial Officer of the Company and the Bank, a position he has held since
February 1, 2004. From January 2003 to October 2003, Mr. Kuehl served as Chief
Financial Officer of Superior Bank, Little Rock, Arkansas. From October 2000
to March 2002, Mr. Kuehl served as Executive Vice President and Chief Financial
Officer of Main Street Bank, Reading, Pennsylvania. Mr. Kuehl was Senior Vice
President and Controller for Wilmington Savings Fund Society, Wilmington,
Delaware, from December 1998 to October 2000. William E. Whitmoyer.Mr. Whitmoyer is Senior Vice President of Mortgage
lending. Mr. Whitmoyer has responsibility for all mortgage-banking functions
and all consumer loans. From 1995 to February 2001, Mr. Whitmoyer served as
Senior Vice President of Member Mortgage Services, a multi-state mortgage
banking operation providing services to credit unions in a five state area. Robert P. Brezing. Mr. Brezing is Senior Vice President of the Company and the
Bank, positions he has held since October 1997. He is manager of Business
Banking, responsible for all commercial loans and commercial real estate loans.
From 1988 to 1997, Mr. Brezing served as Vice President of Banc One
Corporation, Columbus, Ohio. Employees At December 31, 2003 the Company and its subsidiary had 87 employees, including
7 part-time employees. The Companys employees are not represented by any
collective bargaining group. Management considers its employee relations to be
good. 29




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##### Table of Contents



ITEM 2. PROPERTIES The Company conducts its business at its main office, which also serves as its
executive office, and the Banks six branch offices located in its market area.
The following table sets forth information relating to each of the Companys
offices as of December 31, 2003.  1.
    
    Main Office, 28 East Main Street, Springfield, Ohio2.
    
    Enon Branch, 7601 Dayton-Springfield Road, Enon, Ohio3.
    
    New Carlisle Branch, 210 North Main Street, New Carlisle, Ohio4.
    
    Springfield Branch, 1480 Upper Valley Pike, Springfield, Ohio5.
    
    Yellow Springs Branch, 50 Kahoe Lane, Yellow Springs, Ohio6.
    
    Beavercreek Branch, 3216 Seajay Drive, Beavercreek, Ohio7.
    
    Centerville Branch, 6291 Wilmington Pike, Dayton, Ohio The Company owns all of its offices. The total net book value of the
Companys premises and equipment (including land, building and leasehold
improvements and furniture, fixtures and equipment) at December 31, 2003 was
$4.2 million. The Company considers all properties to be in good operating
condition and suitable for the purpose for which they are used. The properties
are unencumbered by any mortgage or security interest and are, in managements
opinion, adequately insured. See Note 4 of the Notes to Consolidated Financial
Statements in the Annual Report to Shareholders filed as Exhibit 13 hereto. 
 ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiary are involved from time to time as plaintiff or
defendant in various legal actions arising in the normal course of their
business. While the ultimate outcome of pending proceedings cannot be
predicted with certainty, it is the opinion of management, after consultation
with counsel representing the Company, the Bank or its subsidiary in the
proceedings, that the resolution of these proceedings should not have a
material effect on the Companys consolidated financial position or results of
operations. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the quarter ended December 31, 2003. 30




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PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Page 5 of the Companys 2003 Annual Report to Shareholders is herein
incorporated by reference. 
 ITEM 6. SELECTED FINANCIAL DATA Pages 6 and 7 of the Companys 2003 Annual Report to Shareholders are herein
incorporated by reference. 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pages 8 through 18 of the Companys 2003 Annual Report to Shareholders are
herein incorporated by reference. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In an attempt to manage its exposure to changes in interest rates, management
monitors the Companys interest rate risk. The Board of Directors meets at
least quarterly to review the Companys interest rate risk position and
profitability. The Board of Directors also reviews the Companys portfolio,
formulates investment strategies and oversees the timing and implementation of
transactions to assure attainment of the Companys objectives in the most
effective manner. In addition, the Board anticipates reviewing on a quarterly
basis the Companys asset/liability position, including simulations of the
effect on the Companys capital of various interest rate scenarios. In managing its asset/liability mix, the Company, depending on the relationship
between long- and short-term interest rates, market conditions and consumer
preference, often places more emphasis on managing net interest margin than on
better matching the interest rate sensitivity of its assets and liabilities in
an effort to enhance net interest income. Management believes that the
increased net interest income resulting from a mismatch in the maturity of its
asset and liability portfolios can, during periods of declining or stable
interest rates, provide high enough returns to justify the increased exposure
to sudden and unexpected increases in interest rates. The primary objective of the Companys investment strategy is to provide
liquidity necessary to meet funding needs as well as to address daily, cyclical
and long-term changes in the asset/liability mix, while contributing to
profitability by providing a stable flow of dependable earnings. Investments
generally include interest-bearing deposits in other federally insured
financial institutions, FHLB stock and U.S. Government securities. Generally, the investment policy of the Company is to invest funds among
various categories of investments and maturities based upon the Companys need
for liquidity, to achieve the proper balance between its desire to minimize
risk and maximize yield, to provide collateral for borrowings, and to fulfill
the Companys asset/liability management policies. The Companys cost of funds responds to changes in interest rates due to the
relatively short-term nature of its deposit portfolio. Consequently, the
results of operations are heavily influenced by the levels of short-term
interest rates. The Company offers a range of maturities on its deposit
products at competitive rates and monitors the maturities on an ongoing basis.
For additional information regarding market risk, see pages 21 to 22 of the
Companys 2003 Annual Report to Shareholders. 31




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Pages 27 through 55 of the Companys 2003 Annual Report to Shareholders are
herein incorporated by reference. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 
 Item 9A. 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 evaluation of 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 13a-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 it 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 last fiscal quarter to which this report
relates that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting. 
 PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information in response to this item is incorporated herein by reference from
the sections Election of Directors-General and Meetings and Committees of
the Board of Directors from the Companys Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on April 22, 2004, (the Proxy
Statement). For information concerning executive officers of the Company who
are not also Directors, see Executive Officers in Part I of this Form 10-K. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Companys
directors and executive officers, and persons who beneficially own more than
10% of the Companys Common Stock (or any other equity securities, of which
there is none), to file with the Securities and Exchange Commission (the SEC)
initial reports of ownership and reports of changes in ownership of the
Companys Common Stock. Officers, directors and greater than 10% shareholders
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file. To the Companys knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended December 31, 2003, 32




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all Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with in the year 2003. 
 Item 10A. CODE OF ETHICS The Company has adopted a code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. The Company undertakes to
provide to any person without charge, upon written request to the Company
Secretary, a copy of such code of ethics. 
 ITEM 11. EXECUTIVE COMPENSATION Information in response to this item is incorporated herein by reference from
the sections Executive Compensation, Compensation of Directors, Employment
Agreements, Compensation Committee Report on Executive Compensation and
Stock Performance Presentation from the Companys Proxy Statement. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the sections Voting
Securities and Principal Holders Thereof and Election of Directors-General
from the Companys Proxy Statement. The following table provides information as of December 31, 2003 related to our
equity compensation plans in effect at that time. Equity Compensation Plan InformationNumber ofSecurities to be
    
    
    
    
    
    Number ofIssued Upon
    
    Weighted-average
    
    SecuritiesExercise of
    
    Exercise Price of
    
    Remaining AvailableOutstanding
    
    Outstanding
    
    for Future IssuanceOptions, Warrants
    
    Options, Warrants
    
    Under EquityPlan Category
    
    and Rights
    
    and Rights
    
    Compensation Plans(a)
    
    (b)
    
    (c)Equity Compensation
Plans Approved by
Security Holders
    
    
    160,814
    
    
    $
    19.02
    
    
    
    163,226Equity Compensation
Plans Not Approved
by Security Holders
    
    
    -0-
    
    
    $
    -0-
    
    
    
    -0-Total
    
    
    160,814
    
    
    $
    19.02
    
    
    
    163,226
 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions is
incorporated herein by reference from the section Certain Transactions from
the Companys Proxy Statement. 33




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##### Table of Contents



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit Fees
    
    $
    71,583.30Audit-Related Fees
    
    
    -0-Tax Fees
    
    
    20,520.00All Other Fees*
    
    
    11,905.28
  *
    
    All Other Fees primarily includes review of Bank Secrecy Act procedures
and professional fees associated with the Banks customer information file
and related profitability reporting. All of the above services were approved by the Audit Committee. The Company
currently has no formal Audit Committee pre-approval procedures in place that
permit management to engage the auditors with respect to pre-approved services.
It is the Companys policy that the Audit Committee approves in advance all
services to be provided by the auditors. 
 PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements: The following information appearing in the Companys Annual Report to
Shareholders for the year ended December 31, 2003, is incorporated herein by
reference in this Annual Report on Form 10-K as Exhibit 13. Pages inAnnualAnnual Report Section
    
    ReportReport of Independent Auditors
    
    26Consolidated Balance Sheets
    
    27Consolidated Statements of Income
    
    28Consolidated Statements of Comprehensive Income
    
    29Consolidated Statements of Shareholders Equity
    
    30Consolidated Statements of Cash Flows
    
    31-32Notes to Consolidated Financial Statements
    
    33-55
 (a) (2) Financial Statement Schedules: Financial statement schedules are omitted as they are not applicable or the
required information is contained in the financial statements or notes therein
found in the Companys 2003 Annual Report to Shareholders. 34




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(a) (3) Exhibits: Reference to PriorRegulation
    
    
    
    Filing or ExhibitS-K Exhibit
    
    
    
    Number AttachedNumber
    
    Document
    
    Hereto3 (i)
    
    Certificate of Incorporation
    
    
    *3 (ii)
    
    Amended and Restated Bylaws
    
    
    ****4
    
    Instruments defining the rights of security holders, including
indentures
    
    
    *10
    
    Material contracts:(a) 1995 Stock Option and Incentive Plan
    
    
    **(b) Management Recognition Plan
    
    
    **(c) Employment Agreement with John W. Raisbeck
    
    
    ****(d) Employment Agreement with Robert P. Brezing
    
    
    ****(e) Employment Agreement with Richard K. Smith
    
    
    10-(e)(f) Employment Agreement with John Clemmer
    
    
    10-(f)(g) Employment Agreement with William E. Whitmoyer
    
    
    *****(h) 1998 Omnibus Incentive Plan
    
    
    ***(i) Cornerstone Bank Deferred Compensation Plan, as
amended
    
    
    ****13
    
    Annual report to security holders
    
    
    1321
    
    Subsidiaries of the registrant
    
    
    2123
    
    Consent of Crowe Chizek and Company LLC
    
    
    2331.1
    
    Certification by the CEO pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
    
    
    31.131.2
    
    Certification by the CFO pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
    
    
    31.232+
    
    Certifications of the CEO and CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
    
    
    32
   +
    
    Furnished herewith.*
    
    Incorporated by reference to the Companys Registration Statement No.
33-76734.**
    
    Incorporated by reference from the Companys Annual Report on Form 10-K
for the year ended December 31, 1994. 35




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***
    
    Incorporated by reference from the Companys Annual Report on Form 10-K
for the year ended December 31, 1997.****
    
    Incorporated by reference from the Companys Annual Report on Form 10-K
for the year ended December 31, 1998.*****
    
    Incorporated by reference from the Companys Annual Report on Form 10-K
for the year ended December 31, 2001  (b) Reports on Form 8-K:The Company filed a current report on Form 8-K on October 17, 2003
regarding its quarterly earnings for the third quarter of 2003. 36




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. WESTERN OHIO FINANCIAL CORPORATIONDate: March 26, 2004
    By:
    /s/ John W. RaisbeckJohn W. Raisbeck, President and ChiefExecutive Officer(Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in their capacities and
on the dates indicated. By:
    
    /s/ John W. Raisbeck
    
    By:
    
    /s/ David L. DillahuntJohn W. Raisbeck, President and Chief
    
    
    
    David L. Dillahunt, Chairman of the BoardExecutive Officer(Principal Executive Officer)Date:
    
    March 26, 2004
    
    Date:
    
    March 26, 2004By:
    
    /s/ Howard V. Dodds
    
    By:
    
    /s/ John E. FieldHoward V. Dodds, Director
    
    
    
    John E. Field, DirectorDate:
    
    March 26, 2004
    
    Date:
    
    March 26, 2004By:
    
    /s/ Artistides G. Gianakopoulos
    
    By:
    
    /s/ William N. ScarffAristides G. Gianakopoulos, Director
    
    
    
    William N. Scarff, DirectorDate:
    
    March 26, 2004
    
    Date:
    
    March 26, 2004By:
    
    /s/ Jeffrey L. Levine
    
    By:
    
    /s/ Peter J. HackettJeffrey L. Levine, Director
    
    
    
    Peter J. Hackett, DirectorDate:
    
    March 26, 2004
    
    Date:
    
    March 26, 2004
 37




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##### Table of Contents



By:
    
    /s/ Robert A. KuehlRobert A. Kuehl, Senior Vice President,
  Treasurer and Chief Financial Officer(Principal Financial and Accounting Officer)Date:
    
    March 26, 2004
 38