<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended June 30, 1997
Commission File Number: 0-20144
-------
TOWNE FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Ohio 31-1334563
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4811 Cooper Road, Blue Ash, Ohio 45242
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (513) 791-1870
--------------
Securities registered pursuant to Section 12(b)
of the Exchange Act:
None
-------------------------------------------------
Securities registered pursuant to Section 12(g)
of the Exchange Act:
Common Shares, par value $1.00 per share
-------------------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10- KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for the year ended June 30, 1997 were $7,404,000.
The aggregate market value of the voting shares held by non-affiliates
of the issuer as of September 9, 1997, computed by reference to the price at
which common shares last traded, was $3,495,000. (The exclusion from such amount
of the market value of the shares owned by any person shall not be deemed an
admission by the issuer that such person is an affiliate of the issuer.)
208,500 of the issuer's common shares were issued and outstanding on
September 9, 1997.
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
The following sections of the Towne Financial Corporation Annual Report
to Shareholders for the year ended June 30, 1997 are incorporated by reference
into Part II of this Form 10-KSB:
1. Market for Towne Financial's Common Shares and Related
Security Holder Matters;
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations; and
3. Consolidated Financial Statements.
The following sections of the definitive Proxy Statement for the 1997
Annual Meeting of Shareholders of Towne Financial Corporation are incorporated
by reference into Part III of this
Form 10-KSB:
1. Election of Directors;
2. Executive Officers Who Are Not Directors;
3. Executive Compensation;
4. Voting Securities;
5. Certain Transactions; and
6. Compliance With Section 16(a) of the Securities Exchange Act
of 1934.
Transitional Small Business Disclosure Format: Yes No X
--- ---
2
<PAGE> 3
Special Cautionary Notice Regarding Forward-Looking Statements
--------------------------------------------------------------
Certain of the matters discussed under the caption "Description of
Business" may constitute forward-looking statements for purposes of the
Securities Act of 1933 and the Securities Exchange Act of 1934, as amended, and
as such may involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the
Corporation, as defined herein, to be materially different from future results,
performance or achievements expressed or implied by such forward-looking
statements. Important factors that could cause the actual results, performance
or achievement of the Corporation to differ materially from the Corporation's
expectations are disclosed in this document including, without limitation, those
statements made in conjunction with any forward-looking statements under
"Description of Business". All written or oral forward-looking statements
attributable to the Corporation are expressly qualified in their entirety by
such factors.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Towne Financial Corporation ("Towne Financial", or the "Corporation"),
an Ohio corporation incorporated under the laws of the State of Ohio on August
20, 1991, is a unitary savings and loan holding company which owns all of the
issued and outstanding common shares of The Blue Ash Building and Loan Company
("Blue Ash", or the "Company"), a savings and loan association incorporated
under the laws of the State of Ohio. On May 1, 1992, Towne Financial acquired
all of the common shares issued by Blue Ash upon its conversion from a mutual
savings and loan association to a stock savings and loan association (the
"Conversion"). In connection with the Conversion, the Corporation issued and
sold 207,000 shares of its common stock, par value $1.00 per share ("Common
Shares"), at a price of $10.00 per share. At June 30, 1997, on an unconsolidated
basis, Towne Financial had no significant assets other than the capital stock of
Blue Ash and had no significant liabilities. Future references to the
Corporation or the Company are utilized herein as the context requires.
Serving the Cincinnati, Ohio, area since 1908, Blue Ash conducts
business from its main office at 4811 Cooper Road in Blue Ash, Ohio, and from
three full-service branch offices located in Mason, Amelia and Cherry Grove.
Specifically, Blue Ash's primary market areas are considered to be the
northeastern and eastern areas of Cincinnati, Ohio. At June 30, 1997, Blue Ash
had total assets of $102.6 million, deposits of $81.8 million and shareholders'
equity of $7.6 million.
3
<PAGE> 4
Blue Ash's overall operating philosophy has evolved from the
fundamental goal of providing affordable home ownership for the communities it
serves and providing a safe, competitive return for its depositors. As a
community-oriented association, Blue Ash offers a wide range of retail banking
services to residents of the greater Cincinnati area through all of its offices.
Blue Ash provides ATM drive-up services through the Jeanie network at its main
office in Blue Ash and branch offices in Cherry Grove and Mason. Blue Ash also
provides its customers with "checkless" debit card services as an alternative to
writing checks for day-to-day purchases of goods and services. During fiscal
1997, Blue Ash introduced a new "free checking" account program for its Mason
office in order to attract new customers and to lower cost of funds on new
deposits. The ability of Blue Ash to attract and retain deposits depends on its
ability to provide an investment opportunity that satisfies the requirements of
investors as to rate of return, liquidity, risk and other factors. Blue Ash
competes for these deposits by offering a variety of deposit accounts at
competitive rates, convenient business hours, convenient branch locations with
inter-branch deposit and withdrawal privileges and 24-hour ATM drive-up
services.
Blue Ash is principally engaged in the business of attracting deposits
from the general public and using such deposits, together with borrowings and
other funds, to originate first mortgage loans secured by one-to-four family
residential real estate located in Blue Ash's lending area. Blue Ash also
originates loans for the construction of one-to-four family residential real
estate, loans secured by multi-family (over four units) real estate,
nonresidential real estate, land, home equity line of credit loans secured by
residential real estate, passbook and secured consumer loans. Blue Ash also
invests in U.S. government and agency obligations, corporate debt securities,
municipal obligations, interest-bearing deposits and certificates of deposits in
other financial institutions, federal funds sold, government guaranteed
mortgage-backed and related securities and other investments permitted by
applicable law. Funds for lending and other investment activities are obtained
primarily from savings deposits, borrowings and loan and mortgage-backed
securities repayments. Blue Ash's revenues are primarily derived from interest
income on real estate loans, interest income on mortgage-backed and related
securities, gain on sale of loans in the secondary market, and, to a lesser
extent, interest income on investments and interest-bearing deposits, servicing
fee income on loans sold, fees from lending and deposit activities and gain on
sale of real estate acquired through foreclosure and other assets. Blue Ash's
most significant expenses are interest on deposits and borrowings and
administrative expenses related to personnel, occupancy and equipment, federal
deposit insurance premiums, data processing services, franchise taxes,
advertising and federal income taxes.
4
<PAGE> 5
As an Ohio corporation, Towne Financial is authorized to engage in any
activity permitted by Ohio General Corporation Law. As a savings and loan
holding company, Towne Financial is subject to regulation, supervision and
examination by the Office of Thrift Supervision of the United States Department
of the Treasury (the "OTS"). As a "unitary" savings and loan holding company
(i.e., one that has only one savings association subsidiary), the Corporation is
generally not restricted under existing law in the types of business activities
in which it or its subsidiary, other than Blue Ash, may engage provided that
Blue Ash maintains a specific amount of its assets in housing-related and
certain other investments. See "Regulation -- Holding Company Regulation."
As a savings and loan association incorporated under the laws of the
State of Ohio, Blue Ash is subject to comprehensive regulation, supervision and
examination by the OTS, the Federal Deposit Insurance Corporation (the "FDIC")
and the Ohio Department of Commerce, Division of Savings and Loan Associations
(the "Division"). Deposits in Blue Ash are insured up to the applicable limits
by the Savings Association Insurance Fund (the "SAIF") of the FDIC. Blue Ash is
also a member of the Federal Home Loan Bank of Cincinnati (the "FHLB"), which is
one of the 12 regional banks comprising the FHLB system. Blue Ash is further
subject to certain regulations of the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") governing reserves required to be
maintained against certain deposits and other matters. The business and
regulation of Blue Ash are also subject to legislative changes from time to
time. See "Regulation."
The United States Congress is considering legislation to eliminate the
separate federal regulation of savings and loan associations, and the Department
of the Treasury is preparing a report for Congress on the development of a
common charter for all financial institutions. As a result, Towne Financial
might become subject to a different form of holding company regulation, which
may limit the activities in which it may engage and subject it to other
additional regulatory requirements, including separate capital requirements. In
addition, Congress may eliminate the OTS, and Blue Ash may be regulated under
federal law as a bank or may be required to change its charter. Such change in
regulation or charter would likely change the range of activities in which Blue
Ash may engage and would probably subject Blue Ash to more regulation by the
FDIC. Towne Financial and Blue Ash cannot predict when or whether Congress may
actually pass such legislation or whether such legislation will actually change
the regulation and permissible activities of Towne Financial and Blue Ash.
Although such legislation may change the activities in which both Towne
Financial and Blue Ash may engage, it is not anticipated that their current
activities will be materially affected by those activity limits.
5
<PAGE> 6
Towne Financial's activities have been limited primarily to holding the
common shares of Blue Ash since acquiring such common shares in connection with
the Conversion. Consequently, the following discussion focuses primarily on the
business of Blue Ash.
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following tables set forth certain information concerning the
consolidated financial condition, earnings and other data regarding Towne
Financial at the dates and for the years indicated. The consolidated financial
information should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere herein. For additional
information about the Corporation, reference is also made to "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
At June 30,
Selected consolidated financial ---------------------------------------------------
condition and other data: 1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total Amount of:
Assets $102,558 $92,214 $79,484 $69,405 $75,508
Interest-bearing deposits(1) 1,613 2,756 2,477 1,367 9,381
Investment securities
designated as held for sale -
at lower of amortized cost or
market(2) --- --- --- --- 5,027
Investment securities held to
maturity - at amortized cost(2) 1,399 1,300 500 1,228 ---
Mortgage-backed securities
designated as held for
sale - at lower of amortized
cost or market(2) --- --- --- --- 23,974
Mortgage-backed securities
designated as available
for sale - at market(2) 15,269 15,680 11,803 8,959 ---
Mortgage-backed securities
held to maturity - at
amortized cost(2) 11,463 11,948 13,173 14,607 ---
Loans receivable - net(3) 66,817 55,071 45,783 38,771 31,633
Deposits 81,794 75,618 59,784 52,031 58,790
Advances from the Federal
Home Loan Bank 12,000 8,424 8,318 10,000 10,000
Obligations for securities
sold under agreements to
repurchase --- --- 3,504 --- ---
Shareholders' equity - net,
restricted(4) 7,638 7,157 6,883 6,357 5,771
Number of:
Real estate loans outstanding(5)(6) 960 853 749 644 596
Deposit accounts 7,521 7,609 6,772 6,239 6,789
Full-service offices 4 4 4 3 3
</TABLE>
- -------------------------
Footnotes on page 8.
6
<PAGE> 7
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------------------
Summary of earnings: 1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest income $7,192 $6,410 $5,090 $4,564 $4,257
Interest expense 4,461 4,063 2,859 2,593 2,532
------ ------ ------ ------ ------
Net interest income 2,731 2,347 2,231 1,971 1,725
Provision for losses on loans 18 11 --- 30 59
------ ------ ------ ------ ------
Net interest income after
provision for losses on loans 2,713 2,336 2,231 1,941 1,666
Other income 212 470 262 207 628
General, administrative and
other expense 2,359 2,001 1,873 1,673 1,289
------ ------ ------ ------ -----
Earnings before federal income
taxes and cumulative effect of
changes in accounting methods 566 805 620 475 1,005
Federal income taxes 201 284 229 142 301
------ ------ ------ ------ ------
Earnings before cumulative
effect of changes in accounting
methods 365 521 391 333 704
Cumulative effect of changes in
accounting methods(7) --- --- --- 299 ---
------ ------ ------ ------ ------
Net earnings $ 365 $ 521 $ 391 $ 632 $ 704
====== ====== ====== ====== ======
Earnings per common and common
equivalent share:
Earnings before cumulative
effect of changes in
accounting methods $ 1.70 $ 2.51 $ 1.89 $ 1.61 $ 3.40
Cumulative effect of changes
in accounting methods --- --- --- 1.44 ---
------ ------ ------ ------ ------
Net earnings $ 1.70 $ 2.51 $ 1.89 $ 3.05 $ 3.40
====== ====== ====== ====== ======
Earnings per share - assuming
full dilution:
Earnings before cumulative
effect of changes in
accounting methods $ 1.66 $ 2.51 $ 1.89 $ 1.61 $ 3.40
Cumulative effect of changes
in accounting methods --- --- --- $ 1.44 ---
------ ------ ------ ------ ------
Net earnings $ 1.66 $ 2.51 $ 1.89 $ 3.05 $ 3.40
====== ====== ====== ====== ======
</TABLE>
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Footnotes on page 8.
7
<PAGE> 8
(1) Includes federal funds sold, interest-bearing deposits in other
financial institutions, certificates of deposit in other financial
institutions and Federal Home Loan Bank stock.
(2) The Corporation adopted Statement of Financial Accounting Standards
("SFAS") No. 115 as of June 30, 1994. In connection therewith, the
Corporation reclassified all of its investment securities and
mortgage-backed securities from held for sale to either an available
for sale or held to maturity classification. For additional
information, see Notes A-2 and B of Notes to Consolidated Financial
Statements.
(3) Includes loans held for sale, which are recorded at the lower of cost
or market value.
(4) See Notes I and K of Notes to Consolidated Financial Statements
regarding restrictions on equity.
(5) Includes home equity line of credit loans.
(6) Whole mortgage loans serviced by Blue Ash and sold in the secondary
market are not included.
(7) Includes cumulative effect of changes in accounting for income taxes
(SFAS No. 109) and investments in certain debt and equity securities
(SFAS No. 115).
8
<PAGE> 9
<TABLE>
<CAPTION>
At or for the Year ended June 30,
------------------------------------------
Selected Financial Ratios(1): 1997 1996 1995 1994 1993
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Interest rate spread(2):
Average during year 2.80% 2.66% 3.16% 2.72% 2.66%
End of year 2.75 2.52 2.73 2.91 2.99
Net yield on average
interest-earning assets 2.99 2.86 3.30 2.85 2.93
Average interest-earning assets
as a percentage of average
interest-bearing liabilities 103.86 104.04 103.21 103.58 106.29
Return on equity (net earnings
divided by average equity)(3) 4.99 7.28 6.02 10.42 13.02
Return on assets (net earnings
divided by average total
assets)(3) 0.38 0.60 0.54 0.85 1.14
Equity-to-assets ratio (average
equity divided by average
total assets) 7.57 8.19 8.89 8.18 8.77
Allowance for loan losses as a
percentage of non-performing
loans at end of year 60.55 34.22 72.85 36.85 69.09
Allowance for loan losses as a
percentage of total loans at
end of year 0.37 0.42 0.48 0.57 0.60
Non-performing loans as a
percentage of total loans
at end of year(4) 0.60 1.23 0.66 1.54 0.87
Non-performing assets as a
percentage of total assets
at end of year(4) 0.39 0.73 0.38 1.10 0.98
General, administrative and other
expense as a percentage of
average total assets(3) 2.44 2.29 2.56 2.26 2.09
- -------------------------
<FN>
(1) With the exception of end of year ratios, all ratios are based on
average monthly balances during the years presented.
(2) Interest rate spread represents the difference between the weighted
average yield earned on interest-earning assets and the weighted
average rate paid on interest-bearing liabilities.
(3) Before consideration of the non-recurring charge incurred in fiscal
1997 for the SAIF recapitalization assessment and the subsequent
benefits resulting from reduced premiums, the ratios set forth below
would have been as follows:
Return on equity 7.64%
Return on assets 0.58%
General, administrative and other
expense as a percentage of
average total assets 2.14%
(4) Non-performing loans consist of nonaccrual loans and accruing loans
that are contractually past due 90 days or more, and non-performing
assets consist of non-performing loans and real estate acquired by
foreclosure or deed-in-lieu thereof.
</TABLE>
9
<PAGE> 10
LENDING ACTIVITIES
GENERAL. The primary source of revenue to Blue Ash is interest and fee
income derived from its lending activities. Blue Ash's primary lending activity
is the origination, for the portfolio, of conventional first mortgage loans for
the purchase or refinancing of residential real property secured by one-to-four
family homes located in Blue Ash's lending area. Depending on certain interest
rate risk considerations and the level of interest rates, in general, and
whether the rates on these loans are fixed-rate, Blue Ash may sell such loans in
the secondary market. Loans for the construction of one-to-four family homes,
mortgage loans on multi-family properties containing five units or more,
nonresidential properties, and secured home equity line of credit loans, are
also offered by Blue Ash. Blue Ash has not originated for its portfolio any
loans insured by the Federal Housing Authority or loans guaranteed by the
Veterans Administration; however, Blue Ash is a correspondent lender of Federal
Housing Administration loans. Blue Ash originates and processes loans insured by
the Federal Housing Administration for a local mortgage company, which, in turn,
underwrites, closes and services the loans. From time to time, Blue Ash has also
acted as a correspondent lender of nonconforming loans. Blue Ash originates and
processes loans that are not in conformity with its current lending and
underwriting standards for a local mortgage company, which, in turn,
underwrites, closes and services the loans. In addition to mortgage lending,
Blue Ash makes a limited amount of consumer loans, including loans secured by
deposit accounts and automobile loans to its employees. To a lesser extent, to
diversify its portfolio, Blue Ash from time to time purchases residential and
other loans from other lending institutions.
Federal regulations permit Blue Ash to invest without limitation in
residential mortgage loans and up to four times its capital in loans secured by
nonresidential or commercial real estate. Blue Ash is also permitted to invest
in secured and nonsecured consumer loans in an amount not exceeding 35% of its
total assets; however, such 35% limit may be exceeded for certain types of
consumer loans, such as home equity, property improvement and education loans.
In addition, Blue Ash is permitted to invest up to 10% of its total assets in
secured (by other than real estate) and unsecured loans for commercial,
corporate, business or agricultural purposes.
10
<PAGE> 11
LOAN PORTFOLIO COMPOSITION. The following table presents certain
information with respect to the composition of Blue Ash's loan portfolio,
including loans held for sale, in dollar amounts and in percentages, by type of
loan and by type of security, as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------
1997 1996 1995
---------------- ----------------- ----------------
Percent Percent Percent
of total of total of total
Amount loans Amount loans Amount loans
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of loan:
Residential real estate:
Construction $ 2,277 3.4% $ 2,512 4.6% $ 2,619 5.7%
1-4 family and multi-family(1) 55,257 82.7 42,739 77.6 33,722 73.7
Nonresidential real estate(2) 10,437 15.6 11,561 21.0 10,710 23.4
Land 631 1.0 884 1.6 410 0.9
Deposit account(3) 250 0.4 96 0.2 121 0.3
Consumer and other 3 -- 8 -- 9 --
------- ----- ------- ----- ------- -----
Total loans (before net items) 68,855 103.1 57,800 105.0 47,591 104.0
Less:
Undisbursed portion of
loans in process (1,632) (2.5) (2,341) (4.3) (1,415) (3.1)
Deferred loan origination
fees (162) (0.2) (157) (0.3) (173) (0.4)
Allowance for loan losses (244) (0.4) (231) (0.4) (220) (0.5)
------- ----- ------- ----- ------- -----
Total loans - net(4) $66,817 100.0% $55,071 100.0% $45,783 100.0%
======= ===== ======= ===== ======= =====
Type of security:
Residential real estate
1-4 family $54,525 81.6% $42,318 76.9% $34,146 74.6%
Other dwelling units 3,009 4.5 2,933 5.3 2,195 4.8
Nonresidential real estate 10,437 15.6 11,561 21.0 10,710 23.4
Land 631 1.0 884 1.6 410 0.9
Deposit account 250 0.4 96 0.2 121 0.3
Other 3 -- 8 -- 9 --
------- ----- ------- ----- ------- -----
Total loans (before net items) 68,855 103.1 57,800 105.0 47,591 104.0
Less:
Undisbursed portion of
loans in process (1,632) (2.5) (2,341) (4.3) (1,415) (3.1)
Deferred loan origination
fees (162) (0.2) (157) (0.3) (173) (0.4)
Allowance for loan losses (244) (0.4) (231) (0.4) (220) (0.5)
------- ----- ------- ----- ------- -----
Total loans - net(4) $66,817 100.0% $55,071 100.0% $45,783 100.0%
======= ===== ======= ===== ======= =====
- -----------------------------
<FN>
(1) Includes home equity line of credit loans underwritten on the same
basis as first mortgage loans and second mortgage loans.
(2) Includes second mortgage loans.
(3) Loans have interest rates that adjust in accordance with the rates paid
on Blue Ash's deposit accounts.
(4) Includes loans held for sale of $1.9 million and $566,000 at June 30,
1996 and 1995, respectively, which are recorded at the lower of cost or
market value.
</TABLE>
11
<PAGE> 12
LOANS. The following table sets forth certain information as of June
30, 1997, regarding the dollar amount of loans maturing in Blue Ash's portfolio,
including loans held for sale, based on their contractual terms to maturity.
Demand loans, loans having no stated schedule of repayments and no stated
maturity and overdraft loans are reported as due in one year or less. The table
as presented takes into account normal amortization of Blue Ash's loan portfolio
and does not reflect the effects of possible prepayments or enforcement of
due-on-sale clauses.
<TABLE>
<CAPTION>
Due 3-5 Due 5-10 Due 10-20 Due 20 or
Due during the year ending years years years more years
June 30, after after after after
1998 1999 2000 6/30/97 6/30/97 6/30/97 6/30/97 Total
------ ---- ---- ------- ------- ------- ------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans(1)(2):
One-to-four family
residential(3)(4):
Adjustable $ 397 $ 739 $ 770 $1,754 $ 4,185 $11,833 $ 8,056 $27,734
Fixed 481 519 561 1,181 3,475 8,487 10,386 25,090
Multi-family
residential:
Adjustable 52 55 58 137 465 1,645 223 2,635
Fixed 107 62 18 40 17 -- -- 244
Nonresidential:
Adjustable 520 273 266 623 1,926 6,320 166 10,094
Fixed 10 9 8 18 60 46 -- 151
Land:
Adjustable 172 187 174 83 -- -- -- 616
Nonmortgage loans:
Deposit account loans 250 -- -- -- -- -- -- 250
Consumer and other 2 1 -- -- -- -- -- 3
------ ------ ------ ------ ------- ------- ------- -------
Total loans-net $1,991 $1,845 $1,855 $3,836 $10,128 $28,331 $18,831 $66,817
====== ====== ====== ====== ======= ======= ======= =======
- ---------------------------
<FN>
(1) Amounts shown are net of unaccreted discounts on loans transferred to
held for investment of $25,000, undisbursed portion of loans in process
of $1,632,000, deferred loan origination fees of $162,000 and allowance
for loan losses of $244,000.
(2) Includes construction loans and second mortgage loans.
(3) Includes home equity line of credit loans underwritten on the same
basis as first mortgage loans.
(4) Includes loans held for sale, which are recorded at the lower of cost
or market value.
</TABLE>
The following table sets forth the dollar amount of all loans, after
net items, due after one year from June 30, 1997, which have predetermined
interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Predetermined adjustable
rates rates
------------- ----------
(In thousands)
<S> <C> <C>
Mortgage loans(1)(2):
One-to-four family residential $24,609 $27,337
Multi-family residential 137 2,583
Nonresidential 141 9,574
Land -- 444
Nonmortgage loans:
Consumer and other -- 1
------- -------
Total loans-net $24,887 $39,939
======= =======
- ------------------------------
<FN>
(1) Includes construction loans, second mortgage loans and home equity line
of credit loans.
(2) Includes loans held for sale, which are recorded at the lower of cost
or market value.
</TABLE>
12
<PAGE> 13
REAL ESTATE LENDING STANDARDS. Effective in fiscal 1993, all financial
institutions were required to adopt and maintain comprehensive written real
estate lending policies that are consistent with safe and sound banking
practices. These lending policies must reflect consideration of the Interagency
Guidelines for Real Estate Lending Policies adopted by the federal banking
agencies in December 1992 ("Guidelines"). The Guidelines set forth uniform
regulations prescribing standards for real estate lending. Real estate lending
is defined as an extension of credit secured by liens on interests in real
estate or made for the purpose of financing the construction of a building or
other improvements to real estate, regardless of whether a lien has been taken
on the property.
The policies must address certain lending considerations set forth in
the Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements. These policies must also be
appropriate to the size of the institution and the nature and scope of its
operations, and must be reviewed and approved by the institution's board of
directors at least annually. The LTV ratio framework, with a LTV ratio being the
total amount of credit to be extended divided by the appraised value of the
property at the time the credit is originated, must be established for each
category of real estate loans. If not a first lien, the lender must combine all
senior liens when calculating this ratio. The Guidelines, among other things,
establish the following supervisory LTV limits: raw land (65%); land development
(75%); construction (commercial, multi-family and nonresidential) (80%);
improved property (85%) and one-to-four family residential (owner-occupied) (no
maximum ratio; however, any LTV ratio in excess of 90% should require
appropriate insurance or readily marketable collateral). Blue Ash's loan policy
complies with such Guidelines.
LOAN CONCENTRATIONS. Blue Ash's primary lending activity is the
origination of first mortgage loans to enable borrowers to purchase or refinance
residential real property in its lending area. Blue Ash's lending area is
defined as Hamilton, Clermont, Butler, Warren and Brown Counties in Southwestern
Ohio; Dearborn County in Southeastern Indiana; and Kenton, Campbell and Boone
Counties in Northern Kentucky. Blue Ash's lending efforts have historically
focused on one-to-four family residential and multi-family residential real
estate loans, which comprised approximately $55.7 million, or 83%, of the total
loan portfolio, including loans held for sale, at June 30, 1997 and $43.7
million, or 79%, of the total loan portfolio, including loans held for sale, at
June 30, 1996. Generally, such loans have been underwritten on the basis of no
more than an 80% loan-to-value ratio, which has provided Blue Ash with more than
adequate collateral coverage in the event of default. Nevertheless, Blue Ash, as
with any lending institution, is subject to the risk that residential real
estate values could deteriorate in its lending area, thereby impairing
collateral values. However, management is of the belief that residential real
estate values in Blue Ash's lending area are presently stable. At
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June 30, 1997, virtually all of Blue Ash's residential real estate loans
consisted of "conventional" loans, which means that they are not insured by the
Federal Housing Administration or guaranteed by the Department of Veteran
Affairs.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LOANS. The primary lending
activity of Blue Ash has been the origination of permanent conventional loans
secured by one-to-four family residences, primarily single-family residences,
located within Blue Ash's primary lending area of Southwestern Ohio. In
addition, Blue Ash makes second mortgage loans, as well as home equity line of
credit loans underwritten on the same basis as first mortgage loans. Blue Ash
also has a small percentage of loans secured by property located outside its
primary lending area of Southwestern Ohio including a small percentage secured
by real estate located in Indiana and Kentucky. Each of such loans is secured by
a mortgage on the underlying real estate and improvements thereon, if any.
When originating one-to-four family residential mortgage loans, Blue
Ash evaluates both the borrower's ability to make principal and interest
payments and the value of the property that will secure the loan. All property
securing one-to-four family real estate loans made by Blue Ash is appraised by
independent appraisers selected by Blue Ash and subject to review by the
management of Blue Ash. Blue Ash requires evidence of marketable title and lien
position, as well as title insurance in certain circumstances, on all loans
secured by real property and requires fire and extended coverage casualty
insurance in amounts at least equal to the principal amount of the loan or the
value of improvements on the property, depending on the type of loan. Blue Ash
may also require flood insurance to protect the property securing its interest.
OTS regulations limit the amount which Blue Ash may lend in
relationship to the appraised value of the real estate and improvements at the
time of loan origination. In accordance with such regulations, Blue Ash is
permitted to lend up to 100% of the appraised value of the real property
securing a loan (the ratio of the principal amount of the loan to the appraised
value of the property securing the loan is referred to as the "loan-to-value
ratio" or "LTV"). However, as a matter of policy, Blue Ash generally does not
make conventional loans with loan-to-value ratios exceeding 80% and makes loans
with a loan-to-value ratio in excess of 80% only when secured by first liens on
owner-occupied one-unit residences. On loans with loan-to-value ratios in excess
of 80%, Blue Ash generally requires that private mortgage insurance ("PMI") be
obtained, with coverage of 25%-33% of the appraisal value of the property. In
rare cases where the LTV is over 80% but less than 90%, the PMI requirement can
be waived if the borrower is strong financially, the credit history is
exceptional and the property securing the mortgage loan is in excellent
condition. Loans with loan-to-value ratios in excess of 80% are generally
required to have a mortgage escrow account from which disbursements are made for
real estate taxes, hazard and flood insurance, and PMI. Additionally, Blue Ash
originates under very specific
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guidelines, fixed-rate second mortgage loans and home equity line of credit
loans with LTVs over 80% but less than 90% on owner-occupied single-family
residences without the requirement of PMI. The loan amount on these loans are
limited to $25,000 and the properties securing these loans must be in very good
condition, the borrowers' credit history must be perfect over the past two
years, the borrowers must have good job stability and the borrowers must have an
established savings pattern.
Adjustable-rate mortgage loans ("ARMs") are offered by Blue Ash for
terms of up to 30 years for one-to-four family owner-occupied and
nonowner-occupied properties. During fiscal 1996, Blue Ash increased its term to
maturity from 25 years to 30 years on loans secured by nonowner-occupied
one-to-four family properties. The interest rate adjustment periods on the ARMs
are either one-year, two-year, three-year, or one-year following an initial rate
set for three-years or five-years. The interest rate adjustments on all the ARMs
presently originated by Blue Ash are tied to changes in the weekly average yield
on U.S. Treasury securities, adjusted to a constant maturity of one-year as made
available by the Board of Governors of the Federal Reserve System (the "Index").
The interest rate for the ARM period is increased or decreased by the amount of
change in the Index between the date the interest rate was set and the date of
the ARM adjustment rounded to the nearest one-eighth of one percent. Rate
adjustments are computed by adding a stated margin (between 2.75% and 3.50% at
June 30, 1997 for single-family owner-occupied property and between 3.25% -
4.00% on nonowner-occupied one-to-four family property at June 30, 1997) to the
Index. The maximum allowable adjustment at each adjustment date is usually 2%
with a maximum adjustment of 6% over the term of the loan. Blue Ash also offers
a "convertible" one-year ARM loan which is secured by either one or two-family
owner-occupied property. This convertible ARM is similar to the standard
one-year ARM in all features, except that the borrower under the one-year
"convertible" ARM has the option to convert it to a fixed-rate mortgage loan any
time after the first payment is made up to five years after the origination
date. The stated margin on the "convertible" one-year ARM is 3.25% at June 30,
1997, which differs from the stated margin of 2.75% on the standard one-year ARM
at June 30, 1997.
Blue Ash offers ARMs with initial rates lower than the sum of the Index
plus the margin ("introductory" rates), determined by Blue Ash based on various
factors, including market conditions and competitive rates for loans having
similar features offered by other lenders for such initial periods. The initial
rate is also dependent, in part, on how often the rate can be adjusted. The
initial interest rates on Blue Ash's one or two-family owner-occupied ARMs
ranged from 6.38% to 8.13% per annum at June 30, 1997. The initial interest rate
on Blue Ash's nonowner-occupied one-to-four family investment ARMs ranged from
8.00% to 9.00% per annum at June 30, 1997. Further, the initial interest rate
offered on the one-year "convertible" ARM was 6.25% per annum at June 30, 1997.
Such ARM loans are subject to increased risk of delinquency or default due to
increasing monthly payments as the interest rates
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on such loans increase to the fully-indexed level, although such increase is
considered in Blue Ash's underwriting of such loans. At June 30, 1997, Blue Ash
offered initial interest rates on the ARMs it originates that were 0.63% to
2.00% below the rate that would be indicated by reference to the repricing
formula. On the "convertible" one-year ARM, the introductory rate was 2.63%
below the fully-indexed rate at June 30, 1997. Blue Ash's delinquency experience
on its ARMs has generally been satisfactory to date. In addition, the loans in
Blue Ash's portfolio generally contain a due on sale clause, and Blue Ash does
not generally permit ARMs to be assumed by borrowers. Blue Ash does not offer
ARMs with negative amortization and the terms and conditions of the ARMs offered
by Blue Ash, including the index for interest rates, may vary from time to time.
Blue Ash has in the past issued ARMs tied to different indexes. One
such index was the three-year constant maturity U.S. Treasury Index. Another
index was the monthly average cost of savings, borrowings and advances of
members of the FHLB of San Francisco ("the Eleventh District Cost of Funds
Index"). Interest rates on ARMs tied to the Eleventh District Cost of Funds
Index are adjusted periodically to a rate typically equal to 225-325 basis
points (100 basis points equals 1%) over this index.
Blue Ash originates ARMs secured by junior mortgages on residential
properties of single-family units with maturities of up to 10 years. The ARMs
are adjusted monthly to a rate typically equal to either zero, 100, 200 or 250
basis points above the "bank prime loan" rate as reported in THE WALL STREET
JOURNAL. The maximum total loan-to-value ratio, taking into account all liens on
the security property, for second mortgage adjustable-rate loans secured by
owner-occupied residential properties of single-family units is generally 80%,
although Blue Ash may lend up to 95% under certain circumstances. Blue Ash
originated approximately $1.9 million in adjustable-rate second mortgage loans
during the year ended June 30, 1997, and such loans of $2.1 million represented
3.1% of total loans, including loans held for sale, at June 30, 1997.
Blue Ash's total adjustable-rate one-to-four family residential real
estate loan portfolio was approximately $27.7 million at June 30, 1997, and
represented 52.5% of the one-to-four family residential real estate loan
portfolio at such date. In addition, Blue Ash had outstanding commitments to
fund $400,000 in one-to-four family ARMs at interest rates of 9.50% at June 30,
1997.
Historically, Blue Ash originated for retention in its own portfolio
fixed-rate loans secured by one-to-four family residential real estate. In the
early 1980s, in order to reduce its exposure to changes in interest rates, Blue
Ash began to emphasize the origination of ARMs. In late 1989, however, in
response to decreasing interest rates, Blue Ash began to increase the amount of
fixed-rate mortgage loans it originated. Throughout 1990 and 1991, the demand
for fixed-rate mortgage loans continued
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to increase as interest rates declined. In response to the increasing volume of
fixed-rate loan originations, in 1991 Blue Ash began selling to the Federal Home
Loan Mortgage Corporation (the "FHLMC") virtually all of its conforming
fixed-rate mortgage loans originated. Such strategy was employed by management
in order to reduce Blue Ash's interest rate risk exposure of generally holding
fixed-rate loans in the portfolio during low interest rate environments.
In reviewing its asset and liability mix as well as the interest rate
sensitivity to such assets and liabilities during fiscal 1996, Blue Ash changed
its strategy from that initially adopted in 1991 with respect to fixed-rate
mortgage loans. Instead of originating for sale all residential fixed-rate
loans, management elected to portfolio fixed-rate loans subject to certain
interest rate risk limitations. Such a strategy adopted by Blue Ash was
predicated upon its positive gap position in fiscal 1996 and its primary
objective of maximizing net interest income rather than strictly matching the
interest rate sensitivity of its assets and liabilities, so as to increase its
interest rate spread and core earnings. Management chose to sell fewer loans
because the interest rate environment made holding loans in Blue Ash's portfolio
and funding lending activities through net deposit inflows more beneficial. It
was management's belief that Blue Ash could retain a greater percentage of
fixed-rate loans in the portfolio without subjecting Blue Ash to an inordinate
amount of interest rate risk exposure attendant with holding fixed-rate loans in
the portfolio. As a result of this change in strategy and absent a declining
interest rate environment, secondary market activities were limited in fiscal
1997. This strategy change in originating fixed-rate mortgage loans during
fiscal 1996 was carried over into fiscal 1997 and was consistent with Blue Ash's
long-term goals and objectives of continued growth and increased profitability.
In addition, this change in strategy gives Blue Ash the added flexibility of
originating loans for sale or retaining them in the portfolio depending upon
interest rate and market conditions and asset and liability management goals.
Fixed-rate mortgage loans were offered by Blue Ash with terms to
maturity of 30 years at interest rates of 8.00% - 8.38%, 20 years at interest
rates of 7.88% - 8.25% and 15 years at interest rates of 7.75% - 8.13% at June
30, 1997. Substantially all of the fixed-rate mortgage loans in Blue Ash's loan
portfolio contain a due-on-sale clause providing that Blue Ash may declare the
unpaid amount due and payable upon the sale of or transfer of any interest in
the property securing the loan. Blue Ash enforces these due-on-sale clauses to
the extent permitted by law. Fixed-rate loans secured by one-to-four family
residential real estate loans, amounting to $25.1 million, constituted 47.5% of
Blue Ash's loan portfolio for these types of loans at June 30, 1997. Blue Ash
had outstanding commitments of $1.2 million to fund fixed-rate mortgage loans at
rates ranging from 7.63% to 9.50% at June 30, 1997, which were subsequently
disbursed in July of 1997 and designated by management for the portfolio.
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Blue Ash's one-to-four family residential real estate loan portfolio,
which includes loans held for sale, construction loans and home equity line of
credit loans, was approximately $52.8 million at June 30, 1997, and represented
79.1% of total loans at such date. At such date, loans secured by one-to-four
family residential real estate with outstanding balances of $1.2 million, or
2.2% of the total one-to-four family residential real estate loan balance, were
delinquent 30 days or more. See "Delinquent Loans, Non-performing Assets and
Classified Assets."
MULTI-FAMILY RESIDENTIAL REAL ESTATE LOANS. In addition to loans on
one-to-four family properties, Blue Ash makes loans secured by multi-family
properties (generally apartment buildings) containing over four units.
Multi-family loans were generally made with terms to maturity of up to 20 years.
During fiscal 1997, however, Blue Ash changed its terms on originating
multi-family loans by offering them with terms to maturity of up to 25 years and
a 30-year amortization period. Such loans are currently made with adjustable
interest rates and are limited to a 75% loan-to-value ratio. The interest rate
adjustment periods offered on these multi-family unit loans are generally
one-year or three-year, and are tied to the one-year and three-year Treasury
Securities' rates, respectively. Blue Ash also offers a ten-year/one-year
adjustable-rate loan that adjusts every year following an initial rate set for
ten years. This ARM is initially tied to the ten-year U.S. Treasury index and
then the one-year U.S. Treasury index at each adjustment date thereafter. Rate
adjustments are computed by adding a stated margin, typically 3.50%, to the
Index. The periodic interest rate cap (the maximum amount by which the interest
rate may be increased or decreased in a given period) on Blue Ash's ARMs for
multi-family mortgages is generally 2.0%, with no lifetime interest rate cap.
The ten-year/one-year ARM has no periodic interest rate cap and a lifetime
interest rate cap of 6.0%.
Multi-family lending is generally viewed as exposing the lender to a
greater risk than one-to-four family residential lending. Such loans typically
involve higher loan principal amounts and repayment of the loan generally is
dependent, in large part, on sufficient income generated by the project to cover
operating expenses and loan repayments. Market values may vary as a result of
economic events or governmental regulations outside the control of the borrower
or lender, such as rent control laws, which impact the future cash flow of the
affected properties. Corresponding to the greater lending risk is a generally
higher interest rate applicable to multi-family residential lending. Blue Ash
believes that its experience in making multi-family residential loans and its
loan underwriting criteria are factors in reducing Blue Ash's exposure to such
credit risk. Blue Ash generally requires that the property securing the loan
generate a positive cash flow after giving effect to debt service and other
expenses. Blue Ash's underwriting criteria include: an evaluation of the
reputation of the borrower; the amount of the borrower's equity in the project;
sales and leasing information and projections; and cash flow projections. Blue
Ash also attempts to reduce the risk
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associated with multi-family lending by obtaining personal guarantees on loans
made to corporations and partnerships, and where deemed necessary, Blue Ash
obtains additional collateral. In addition, Blue Ash currently requires that
borrowers agree to submit financial statements annually to enable Blue Ash to
monitor the loan more effectively.
At June 30, 1997, Blue Ash had $2.9 million in outstanding multi-family
residential real estate loans representing 4.3% of total loans at that date. Of
the multi-family real estate portfolio, there were two loans totaling $1.2
million at June 30, 1997 which had balances of $500,000 or more. Blue Ash's
multi-family real estate consist primarily of loans secured by apartment
buildings which are primarily located in its lending area. Generally, these
apartment buildings are small with an average of 6 to 12 units. However,
occasionally, the loans are secured by larger developments. Blue Ash's largest
multi-family real estate loan, which is a participation loan that is serviced by
another financial institution, amounted to $679,000 at June 30, 1997 and was
secured by a 49-unit apartment complex. Blue Ash's second largest multi-family
real estate loan amounted to $541,000 at June 30, 1997 and was secured by a
39-unit apartment building. The secured property on both of these loans are
located in Blue Ash's lending area and both were performing according to their
original loan terms at June 30, 1997. The real estate securing all multi-family
loans is located in Blue Ash's primary lending area of Southwestern Ohio. At
such date, there were no loans secured by multi-family residential real estate
that were delinquent 30 days or more. See "Delinquent Loans, Non-Performing
Assets and Classified Assets."
CONSTRUCTION LOANS. Blue Ash makes construction loans on residential
and nonresidential real estate properties. Specifically, Blue Ash originates
construction loans to individuals for the construction of their residences as
well as to builders and, to a lesser extent, developers, for the construction of
one-to-four family residences and condominiums, the development of one-to-four
family lots and the development of multi-family and nonresidential property in
Blue Ash's lending area.
Construction loans to individuals for their residences are typically
structured to be converted to permanent loans at the end of the construction
phase, which normally runs six months. These construction loans have rates and
terms which match any one-to-four family loans offered by Blue Ash, except that
during the construction phase the borrower pays interest only. Loan origination
fees of 1% are typically charged. Residential construction loans are generally
underwritten pursuant to the same guidelines used for originating permanent
residential loans. The majority of the construction loans originated by Blue Ash
are made to owner-occupants for construction of single-family homes. At June 30,
1997, Blue Ash had $295,000 of construction loans to borrowers intending to live
in the properties upon completion of construction. Of these construction loans
to individual borrowers, there were no loans delinquent 30 days or more at June
30, 1997.
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See "Delinquent Loans, Non-Performing Assets and Classified Assets".
Construction loans to builders of one-to-four family residences require
the payment of interest only and typically have terms to maturity of 12 to 24
months. These loans may provide for the payment of interest and loan fees from
loan proceeds and carry interest rates which float with changes in the specific
prime rate. At June 30, 1997, such loans were being offered at an interest rate
of 1% over the composite prime rate of 75% of the thirty largest U.S. banks, as
reported by THE WALL STREET JOURNAL. Loan origination fees of 1% are typically
charged. At June 30, 1997, Blue Ash had $462,000 in construction loans to
builders of one-to-four family residences with no loans over $332,000. Of these
residential loans to builders, $1,000 were delinquent 30 days or more at June
30, 1997. See "Delinquent Loans, Non-Performing Assets and Classified Assets."
Blue Ash also makes loans to builders for the purpose of developing
one-to-four family lots. These loans typically have terms of up to five years,
with an amortization period of ten years and a maximum LTV of 75%. These loans
are adjustable and the interest rates are based on 2% over the specific prime
rate. Loan origination fees of 2% are typically charged. The principal on these
loans is typically paid down as lots are sold. At June 30, 1997, Blue Ash had no
loans classified as development loans. Finally, Blue Ash, from time to time,
makes loans to individuals and builders for multi-family and nonresidential
construction. At June 30, 1997, Blue Ash had one multi-family construction loan
that was purchased from another financial institution with a net balance of
$96,000, which was secured by a multi-building condominium project.
Construction loans for nonowner-occupied properties generally involve
greater underwriting and default risks than do loans secured by mortgages on
existing properties due to the concentration of principal in a limited number of
loans and borrowers and the effects of general economic conditions on real
estate developments, developers, managers and builders. In addition,
construction loans in general are more difficult to evaluate and monitor. Loan
funds are advanced upon the security of the project under construction, which is
more difficult to value before the completion of construction. Moreover, because
of the uncertainties inherent in estimating construction costs, it is relatively
difficult to evaluate accurately the LTVs and the total loan funds required to
complete a project. In the event a default on a construction loan occurs and
foreclosure follows, Blue Ash would have to take control of the project and
attempt either to arrange for completion of construction or dispose of the
unfinished project. Blue Ash attempts to mitigate this risk by, among other
things, making its construction loans to developers and builders with whom it is
familiar and who, in the opinion of management, have established a record of
successful development or construction for sale. Blue Ash's construction loans
generally are secured by property located in its lending area, and the economy
of such lending area has been relatively stable. Blue Ash generally
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requires that construction loans be made with recourse to the borrower.
NONRESIDENTIAL REAL ESTATE LOANS. In order to enhance portfolio yield
and decrease the average term to repricing of its assets, Blue Ash also makes
loans secured by nonresidential real estate consisting primarily of retail
properties, warehouses, churches, office buildings and loans secured by a few
special-purpose buildings. Such nonresidential loans are made only with
adjustable rates of interest and have terms to maturity of up to 25 years and a
maximum LTV of 75%. During fiscal 1997, Blue Ash changed its terms regarding the
origination of nonresidential real estate loans. Instead of originating such
loans with terms to maturity of 20 years, Blue Ash extended the term to maturity
to 25 years with a 30-year amortization period. The interest rate adjustment
periods offered on nonresidential loans are one-year, three-year and ten-year,
and are tied to the one-year, three-year and ten-year Treasury Securities'
rates, respectively. Rate adjustments are computed by adding a stated margin,
typically 3.5%, to the Index. The periodic interest rate cap on Blue Ash's ARMs
for nonresidential mortgages is generally 2.0%, with no lifetime interest rate
cap. Prior to fiscal 1994, Blue Ash had a lifetime interest rate cap of 6.0%
over the term of the loan. Blue Ash also has a ten-year/one-year ARM that
adjusts every year after an initial ten-year rate set. This ARM is initially
tied to the 10-year U.S. Treasury index and then the one-year U.S. Treasury
index on each adjustment date thereafter. Unlike the one-year and three-year
ARM, there is no periodic cap and there is a 6% lifetime cap on the
ten-year/one-year ARM.
Nonresidential real estate lending is generally considered to involve a
higher degree of risk then residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. If the cash flow on the property is
reduced, for example, as leases are not obtained or renewed, the borrower's
ability to repay may be impaired. Blue Ash generally requires that the property
securing the loan generate a positive cash flow after giving effect to debt
service and other expenses. Blue Ash has endeavored to reduce the risk in
nonresidential lending by evaluating the credit history and past performance of
the borrower, the location of the real estate, the quality of management
constructing and operating the property, the debt service ratio, the quality and
characteristics of the income stream generated by the property and appraisals
supporting the property's valuation. Blue Ash also reviews any tenant leases and
requires that the payments under such leases be assigned to the Company. Blue
Ash currently requires borrowers to agree to submit financial statements
annually to allow Blue Ash to effectively monitor the loan. Additionally, Blue
Ash's nonresidential loans are relatively small and are secured by small
nonresidential properties which are frequently occupied by the borrower.
Management believes that these types of nonresidential properties, especially in
Blue Ash's lending area, have not been as depressed as in other regions of the
country. Blue Ash follows strict underwriting guidelines before
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originating these types of loans, and Blue Ash does not originate such loans
beyond its normal lending territory.
Under OTS capital regulations, Blue Ash is required to maintain higher
amounts of capital for nonresidential real estate loans as compared to
qualifying residential mortgage loans, to reflect a perceived higher degree of
credit risk associated with such assets. See "Regulation -- Regulatory Capital
Requirements."
Blue Ash is currently, and has in the past, been active in the
origination of loans secured by nonresidential real estate properties. At June
30, 1997, nonresidential real estate loans outstanding totaled $10.2 million and
represented 15.3% of the total net loan portfolio. This compared to $10.4
million in nonresidential real estate loans outstanding at June 30, 1996, or
18.9% of total net loans. The great majority of this nonresidential loan
portfolio was created during fiscal 1994 and 1993 as a result of loan
originations of $7.6 million and $6.6 million, respectively. Loan originations
during fiscal 1997 and 1996 amounted to only $2.3 million and $749,000,
respectively, as Blue Ash was not as actively involved in such nonresidential
lending to the same degree as fiscal 1994 and 1993. Blue Ash's largest
nonresidential loan is secured by a warehouse/office structure located in
Sharonville, Ohio. Such loan had a balance of $732,000 at June 30, 1997. Blue
Ash's second largest nonresidential real estate loan in the portfolio amounted
to $704,000 at June 30, 1997 and was secured by six warehouse buildings located
in Fairfield, Ohio. Both of these loans are located in Blue Ash's lending area
and were performing according to their original loan terms at June 30, 1997.
Blue Ash had total outstanding commitments of approximately $2.3 million to
originate nonresidential real estate loans at June 30, 1997. Such commitments
consisted solely of one adjustable-rate loan, secured by a wedding reception and
banquet facility, with an interest rate of 9.25%, of which $1.3 million of the
loan was committed to be sold on a participating basis to another financial
institution at June 30, 1997, due to loans-to-one borrower limitations. At June
30, 1997, Blue Ash had $227,000 in outstanding nonresidential loans that were
delinquent 30 days or more. See "Delinquent Loans, Non-Performing Assets and
Classified Assets."
LAND LOANS. Blue Ash makes loans secured by unimproved real estate.
These land loans are originated as adjustable-rate loans for terms up to five
years, with an amortization period of ten years and a maximum LTV of 75%. The
interest rates on these loans are generally based on the specified prime rate as
previously discussed plus 2%. At June 30, 1997, Blue Ash had $616,000, or 0.9%
of total loans, in outstanding land loans. At such date, Blue Ash had $82,000 in
outstanding land loans that were delinquent 30 days or more. See "Delinquent
Loans, Non-Performing Assets and Classified Assets."
CONSUMER LOANS. Blue Ash makes consumer loans almost exclusively to
depositors on the security of their deposit accounts. Such loans are made at
adjustable rates of interest, and
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the principal amount of the loan cannot exceed 90% of the face value of the
pledged deposit. Interest is due monthly or quarterly, and principal is due on
demand. The interest rate on these loans is usually 2% above the rate paid on
the amount used for collateral. Additionally, on a rare occasion, Blue Ash
originates automobile loans solely to its employees at an adjustable rate of
interest equal to the specified prime rate. These automobile loans are not
available to the directors or executive officers. At June 30, 1997, Blue Ash had
approximately $253,000, or 0.4% of total loans, invested in deposit and other
consumer loans.
HOME EQUITY LINES OF CREDIT AND SECOND MORTGAGES. Blue Ash offers home
equity line of credit loans. These are typically secured by second mortgages.
The line of credit agreements currently being offered by Blue Ash provide that
borrowers can obtain advances up to their credit limit for a period of ten
years, and at that time, they must repay any remaining outstanding balance. Home
equity line of credit loans generally have interest rates which adjust monthly
based on changes in the composite prime rate of 75% of the thirty largest U.S.
banks, as reported by THE WALL STREET JOURNAL. Blue Ash typically originates
home equity line of credit loans based on a combined LTV of not more than 80%
for the first mortgage and the line of credit. However, Blue Ash does offer home
equity line of credit loans up to a total LTV of 90% based upon certain
specified criteria, with a maximum loan amount of $25,000. In order to qualify
for such terms, the property securing the loan has to be in very good condition
and the borrower has to have good job stability, perfect credit history over the
last two years and an established savings pattern. Additionally, second mortgage
loans are also made for terms to maturity of up to ten years, typically at fixed
rates of interest. Such loans are secured by a second mortgage on the property
which Blue Ash typically holds a first mortgage.
During the year ended June 30, 1997, Blue Ash originated $2.6 million
in home equity line of credit loans. The outstanding loan balance of such loans,
totaling $2.7 million, represented 4.0% of the total loans outstanding at June
30, 1997. At such date, home equity line of credit loans of $129,000 were
delinquent 30 days or more. See "Delinquent Loans, Non-Performing Assets and
Classified Assets."
COMMERCIAL LOANS. Blue Ash does not issue any letters of credit and
originate or purchase any loans for commercial, business or agricultural
purposes, other than loans secured by real estate.
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from
a number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by Blue Ash's lending staff
and Board of Directors, and walk-in customers.
Loan applications for permanent mortgage loans are taken by one of Blue
Ash's branch managers or loan officers. Blue Ash
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obtains a credit report, verification of employment and other documentation
concerning the credit-worthiness of the borrower. An appraisal of the fair
market value of the real estate which will be given as security for the loan is
prepared by an independent fee appraiser approved by the Board of Directors. For
residential properties, an environmental study is conducted only if the
appraiser or a director has reason to believe that an environmental problem may
exist. For most nonresidential properties, an environmental report is required.
For most multi-family and nonresidential mortgage loans, a personal guarantee of
the borrower's obligation to repay the loan is required. Blue Ash also obtains
information with respect to prior projects completed by the borrower. Upon
completion of the appraisal and the receipt of information on the borrower, the
application for a loan is submitted to the Loan Committee and/or the Board of
Directors for approval or rejection. Any loan application which does not conform
in all respects with Blue Ash's underwriting guidelines are reviewed and
accepted or rejected by the full Board of Directors.
In the approval process for the loans it originates, Blue Ash assesses
the applicant's ability to make principal and interest payments on the loan and
the value of the property securing the loan. On ARM loans, Blue Ash currently
qualifies the applicant based on his or her ability to repay the loan based on
the fully-indexed rate, not the introductory rate. At June 30, 1997, Blue Ash's
introductory ARM rates are approximately 13 to 263 basis points below the
fully-indexed rates.
If a mortgage loan application is approved, an attorney's opinion of
title is obtained on the real estate which will secure the mortgage loan. Blue
Ash does not obtain title insurance, unless the property securing the loan is a
planned unit development ("PUD") or a condominium on a fixed-rate loan or the
property is multi-family or nonresidential real estate. Borrowers are required
to carry satisfactory fire and casualty insurance and flood insurance, if
applicable, and to name Blue Ash as an insured mortgagee.
The procedure for approval of construction loans is the same as for
permanent mortgage loans, except that an appraiser evaluates the building plans,
construction specifications and estimates of construction costs. Blue Ash also
evaluates the feasibility of the proposed construction project and the
experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral.
Certain of Blue Ash's loans carry prepayment penalties and provisions
that the entire balance of the loan is due upon sale of the property securing
the loan.
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<PAGE> 25
LOAN ORIGINATIONS, PURCHASES AND SALES. During the past several years,
Blue Ash has been actively originating new fixed-rate and adjustable-rate loans.
Adjustable-rate loans originated by Blue Ash are generally held in Blue Ash's
loan portfolio. Fixed-rate loans are originated in a manner which will
facilitate their sale in the secondary market, even though Blue Ash might retain
for the portfolio certain of these loans. In the early 1980's, Blue Ash
originated mortgage loans only at adjustable rates. In the late 1980's, Blue Ash
began originating a limited amount of fixed-rate mortgage loans, most of which
it held in its portfolio. In late 1991, Blue Ash commenced selling substantially
all of its fixed-rate mortgage loans it had originated. During fiscal 1996,
however, Blue Ash changed its strategy with respect to fixed-rate loans. Instead
of originating for sale substantially all of its fixed-rate loans, Blue Ash
elected to retain these loans for the portfolio subject to certain interest rate
risk considerations. Such a change in strategy was due in part to Blue Ash's
positive gap position in fiscal 1996 and was consistent with its long-term goals
and objectives of continued growth and profitability. When loans are sold, Blue
Ash retains the responsibility for servicing the loans, and serviced $41.6
million, $47.6 million and $48.2 million of loans held by others at June 30,
1997, 1996 and 1995, respectively. Blue Ash receives servicing income of 0.25%
to 0.38% per year on the principal balance of the loans it services.
Blue Ash has generally not participated in loans originated by other
institutions to a large extent. However, Blue Ash has in its portfolio
participations originated and serviced by others totaling $1.4 million at June
30, 1997. Blue Ash will consider further participation in loans in the future if
management deems it to be in the interest of Blue Ash.
25
<PAGE> 26
The following table presents Blue Ash's origination, purchase and sale
activities with respect to its loans and mortgage-backed securities during the
years indicated.
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Loans originated:
Construction $ 2,509 $ 2,866 $ 2,207
1-to-4 family 20,115 23,341 14,728
Home equity lines of credit 2,578 1,387 1,239
5 or more units 530 505 --
Nonresidential real estate 2,345 749 1,505
Land 187 500 200
Deposit account 402 83 131
Consumer and other -- 12 --
------- ------- -------
Total loans originated(1) $28,666 $29,443 $20,010
======= ======= =======
Loans and mortgage-backed
securities purchased:
Loans $ 258 $ 49 $ 350
Repurchase of loans sold in
the secondary market -- -- 702
Insured, guaranteed or
collateralized mortgage-backed
securities(2) 2,021 16,475 3,988
------- ------- -------
Total loans and mortgage-
backed securities purchased $ 2,279 $16,524 $ 5,040
======= ======= =======
Loans and mortgage-backed
securities sold:
Residential real estate loans $ 1,949 $ 8,201 $ 4,207
Nonresidential real estate loans -- -- 499
Mortgage-backed securities(3) 1,148 10,803 861
------- ------- -------
Total loans and mortgage-
backed securities sold $ 3,097 $19,004 $ 5,567
======= ======= =======
- ------------------------------
<FN>
(1) Includes loans originated for sale in the secondary market.
(2) Includes securities designated as available for sale and held to
maturity.
(3) Includes securities designated as available for sale.
</TABLE>
OTS regulations generally limit the aggregate amount that a savings
association can lend to one borrower to an amount equal to 15% of the
association's unimpaired capital and unimpaired surplus (collectively,
"Unimpaired Capital"). A savings association may loan to one borrower an
additional amount not to exceed 10% of the association's Unimpaired Capital if
the additional amount is fully secured by certain forms of "readily marketable
collateral." Real estate is not considered "readily marketable collateral." In
addition, the regulations require that loans to certain related or affiliated
borrowers be aggregated for purposes of such limits. Two exceptions to these
limits permit loans to one borrower of up to $500,000 "for any purpose" and,
subject to certain conditions, including OTS prior approval, loans to one
borrower for the development of domestic residential housing units in amounts up
to the lesser of $30,000,000, or 30% of the savings association's Unimpaired
Capital.
Based upon such limits, Blue Ash was able to lend approximately $1.1
million to any one borrower at June 30, 1997. Blue Ash's five largest loans or
groups of loans to one borrower,
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<PAGE> 27
including related entities, aggregated $888,000, $791,000, $732,000, $704,000
and $683,000 at June 30, 1997. The $888,000 loan concentration consisted of
seven nonowner-occupied single-family residences and one land loan which are all
concentrated within the same general local area. The $791,000 loan concentration
consisted of two nonowner-occupied single-family mortgage loans, one line of
credit loan secured by a single-family nonowner-occupied residence and one line
of credit loan secured by land in Blue Ash's lending area. All of Blue Ash's
five largest loans or groups of loans were performing in accordance with their
original loan terms at June 30, 1997, and all were located in Blue Ash's lending
area.
LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on
loans, Blue Ash realizes loan origination fee and other fee income from its
lending activities and also realizes income from late payment charges,
application fees, prepayments of loans, loan modifications, changes in property
ownership and for other miscellaneous services. Loan origination fees, or
"points," are paid by borrowers for mortgage loans.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments and general economic
conditions. All nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized in accordance with SFAS No. 91 as
an adjustment to yield over the life of the related loan.
DELINQUENT LOANS, NON-PERFORMING ASSETS AND CLASSIFIED ASSETS. When a
borrower fails to make a required payment on a loan, Blue Ash attempts to cause
the deficiency to be cured by contacting the borrower. In most cases,
deficiencies are cured promptly. For mortgage loans, a notice is mailed to the
borrower after a payment is 15 days past due and a late penalty is assessed
against the borrower at such time. After a payment is 30 days past due, the loan
is scheduled for individual attention. Additional late notices are sent to the
borrower followed by a telephone call, if necessary. After a payment is 60 days
past due, Blue Ash sends the borrower a notice of default. Blue Ash then reviews
the status of such loan more closely and, if appropriate, appraises the
condition of the property and reviews the financial circumstances of the
borrower. Based upon the results of any such investigation, Blue Ash may: (1)
counsel the borrower to develop a repayment program for the collection of past
due amounts; (2) seek evidence, in the form of a listing contract, of efforts by
the borrower to sell the property if the borrower has stated that he is
attempting to sell; or (3) request a deed-in-lieu of foreclosure. When a loan
becomes delinquent more than 90 days, foreclosure proceedings or other
proceedings, as necessary, are generally initiated to minimize any potential
loss. This process may be accelerated for consumer borrowers or other borrowers
if Blue Ash feels that acceleration may be warranted based on underlying
circumstances. A decision as to whether and when to initiate foreclosure
proceedings is based on such factors as the amount of the outstanding loan in
relation to the original indebtedness, the extent of the delinquency and the
borrower's ability and willingness to cooperate in curing
27
<PAGE> 28
delinquencies. If a foreclosure occurs, the real estate is sold at public sale
and may be purchased by Blue Ash.
Real estate acquired by Blue Ash as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until sold. When
property is acquired, at the date of acquisition, it is initially recorded at
fair value establishing a new cost basis and any writedown or writeup resulting
therefrom is charged or credited to the allowance for possible loan losses.
After foreclosure, valuations are periodically performed by management and the
real estate acquired through foreclosure is carried at the lower of cost or fair
value less estimated selling expenses. Real estate loss provisions are recorded
if the properties' fair value subsequently declines below the value determined
at the recording date. If the fair value of real estate acquired through
foreclosure less estimated selling expenses subsequently increases and is
greater than the carrying amount, the real estate valuation allowance is reduced
to, but not below zero. Increases or decreases in the real estate valuation are
charged or credited to income. Between the date a loan becomes delinquent and
the date it is acquired by Blue Ash, all costs incurred in maintaining Blue
Ash's interest in the property are capitalized in an amount which may not exceed
the estimated fair value. After the date of acquisition, all costs incurred in
maintaining the property are expensed and costs incurred for the improvement or
development of such property are capitalized in an amount which may not exceed
the estimated fair value less the estimated disposition costs. At June 30, 1997,
Blue Ash did not have any outstanding balance in real estate acquired through
foreclosure.
Under generally accepted accounting principles, Blue Ash is required to
account for certain loan modifications or restructurings as "troubled debt
restructurings." In general, the modification or restructuring of a debt
constitutes a troubled debt restructuring if Blue Ash, for economic or legal
reasons related to the borrower's financial difficulties, grants a concession to
the borrower that Blue Ash would not otherwise consider. Debt restructurings or
loan modifications for a borrower do not necessarily always constitute troubled
debt restructurings, however, and troubled debt restructurings do not
necessarily result in nonaccrual loans. Blue Ash did not have any loans which
were classified as a troubled debt restructuring at June 30, 1997.
Loans are placed on nonaccrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on nonaccrual
status, previously accrued but unpaid interest is deducted from interest income.
Blue Ash does not accrue interest on real estate loans past due 90 days or more
unless, in the opinion of management, the value of the property securing the
loan exceeds the outstanding balance of the loan (principal, interest and
escrows) and collection is probable. Loans may be reinstated to accrual status
when all payments are brought current and, in the opinion of management,
collection of the remaining balance can be reasonably expected. Blue Ash had
$377,000, $541,000 and $277,000
28
<PAGE> 29
of accruing loans delinquent more than 90 days as of June 30, 1997, 1996 and
1995, respectively.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated, in dollar amounts and as a percentage of each
category of Blue Ash's loan portfolio. The amounts presented represent the
recorded investment after deduction for specific valuation allowances of the
related loans, rather than the actual payment amounts which are past due.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------
1997(1) 1996 1995
-----------------------------------------------------------------------------------
Percent Percent Percent
of total of total of total
Number Amount(2) loans(3) Number Amount(2) loans(3) Number Amount(2) loans(3)
------ --------- -------- ------ --------- -------- ------ --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loan delinquent for(4):
30-59 days 14 $ 526 0.79% 12 $ 422 0.77% 15 $1,090 2.38%
60-89 days 8 564 0.84 5 309 0.56 8 639 1.39
90 days and over 8 403 0.60 10 675 1.22 11 301 0.66
-- ------ ---- -- ------ ---- -- ------ ----
Total delinquent loans 30 $1,493 2.23% 27 $1,406 2.55% 34 $2,030 4.43%
== ====== ==== == ====== ==== == ====== ====
- ----------------------------------
<FN>
(1) At June 30, 1997, delinquencies of 30 days or more include 21
one-to-four family residential loans with outstanding balances totaling
$1,054,000, one residential construction loan with an outstanding
balance totaling $1,000, three nonresidential loans with outstanding
balances totaling $227,000, two land loans with outstanding balances
totaling $82,000, and three home equity line of credit loans with
outstanding balances totaling $129,000.
(2) Amounts shown are net of specific valuation allowances, undisbursed
portion of loans in process and deferred loan origination fees.
(3) Includes loans held for sale, which are recorded at the lower of cost
or market value.
(4) The number of days a loan is delinquent is measured from the day the
payment was due under the terms of the loan agreement.
</TABLE>
Blue Ash adopted SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan" on July 1, 1995. Under SFAS No. 114, a loan is considered impaired
based on current information and events, if it is probable that Blue Ash will be
unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. The measurement of
impaired loans is generally based on the present value of expected future cash
flows discounted at the loan's interest rate, except that all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral. At June 30, 1997 and 1996, Blue Ash had not identified any
loans as being impaired under SFAS No. 114, nor were any loans so designated
during the years ended June 30, 1997 and 1996.
29
<PAGE> 30
The following table sets forth information with respect to
non-performing assets identified by Blue Ash, including nonaccrual loans,
accruing loans delinquent 90 days or more, restructured loans, real estate
acquired through foreclosure and total non-performing assets, at the dates
indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Accruing loans delinquent
90 days or more $377 $541 $277
Loans accounted for on a
nonaccrual basis:
One-to-four family residential 26 134 --
Nonresidential real estate -- -- 24
Consumer and other -- -- 1
---- ---- ----
Total nonaccrual loans 26 134 25
Other non-performing assets -- -- --
---- ---- ----
Total non-performing assets $403 $675 $302
==== ==== ====
Total non-performing loans as
a percentage of total loans 0.60% 1.23% 0.66%
==== ==== ====
Total non-performing assets as
a percentage of total assets 0.39% 0.73% 0.38%
==== ==== ====
Specific loan loss allowance $ -- $ 5 $ --
General loan loss allowance
(unallocated as to any
specific loan type) 244 226 220
---- ---- ----
Total loan loss allowance $244 $231 $220
==== ==== ====
Allowance for loan losses as a
percentage of non-performing loans 60.5% 34.2% 72.8%
==== ==== ====
Allowance for loan losses as a
percentage of non-performing assets 60.5% 34.2% 72.8%
==== ==== ====
</TABLE>
Blue Ash's nonaccrual loans at June 30, 1997 consisted of one
single-family residential loan with an aggregate book value, less specific
valuation allowances, if any, of $26,000. Such residential real estate loan was
located in Blue Ash's designated lending area. At June 30, 1997, accruing loans
delinquent more than 90 days consisted of seven loans totaling $377,000, of
which five loans totaling $295,000 consisted of single-family real estate and
two loans of $82,000 consisted of land.
30
<PAGE> 31
During the years ended June 30, 1997 and 1996, interest income which
would have been recognized if nonaccrual loans had performed pursuant to
contractual terms totaled approximately $1,000 and $4,000. Blue Ash incurred no
loss of interest income due to nonaccrual loans for the year ended June 30,
1995. At June 30, 1997, there are no loans which are not currently classified as
nonaccrual, 90 days past due or restructured where known information about the
possible credit problems of borrowers caused management to have serious doubts
as to the ability of the borrowers to comply with present loan repayment terms
and which may result in disclosure of such loans in the future.
OTS regulations require that each insured savings institution classify
its own assets on a regular basis. Problem assets are classified as
"substandard," "doubtful" or "loss." "Substandard" assets have one or more
defined weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
corrected. "Doubtful" assets have the same weaknesses as "substandard" assets,
with the additional characteristics that (i) the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable and (ii) there is a high possibility of loss. An asset
classified "loss" is considered uncollectible and of such little value that its
continuance as an asset of the institution is not warranted. The regulations
also contain a "special mention" category consisting of assets which do not
currently expose an institution to a sufficient degree of risk to warrant
classification but which possess credit deficiencies or potential weaknesses
deserving management's close attention.
Generally, Blue Ash classifies as "substandard" all loans that are
delinquent more than 90 days, unless management believes the delinquency status
is short-term due to unusual circumstances. Loans delinquent fewer than 90 days
may also be classified if the loans have the characteristics described above
rendering classification appropriate. At June 30, 1997, Blue Ash's classified
assets totaled $478,000, or 0.5% of total assets.
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<PAGE> 32
The aggregate amounts of Blue Ash's classified assets at the dates
indicated were as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Classified assets:
Special Mention $ 75 $ -- $ 36
Substandard 403 676 255
Doubtful -- -- --
Loss -- 5 --
---- ---- ----
Total classified assets $478 $681 $291
==== ==== ====
</TABLE>
In connection with examinations of insured institutions, federal
examiners have authority to identify problem assets and, if appropriate,
classify them. If an institution does not agree with an examiner's
classification of an asset, it may appeal this determination to the District
Director of the OTS. Blue Ash had no disagreements with the examiners regarding
the classification of assets at the time of the last examination.
OTS regulations require that Blue Ash establish prudent general
valuation allowances for loan losses on any loan classified as substandard or
doubtful. If an asset, or portion thereof, is classified as loss, Blue Ash must
either establish specific allowances for losses in the amount of 100% of the
portion of the asset classified loss, or charge off such amount. General loss
allowances established to cover possible losses related to assets classified
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses do not
qualify as regulatory capital. Federal examiners may disagree with an insured
institution's classifications and amounts reserved. For information concerning a
recent OTS proposal which provides specific guidance in establishing and
maintaining general loss allowances with respect to classified and other assets,
see "Allowance for Loan Losses."
ALLOWANCE FOR LOAN LOSSES. An allowance for loan losses is maintained
at a level that management considers adequate to provide for potential losses
based upon an evaluation of known and inherent risks in the loan portfolio. The
allowance for loan losses is based on estimated net realizable values unless it
is probable that loans will be foreclosed, in which case allowances for loan
losses are based on fair value. Senior management, with oversight responsibility
provided by the Board of Directors, reviews on a quarterly basis the allowance
for loan losses as it relates to a number of relevant factors, including but not
limited to, trends in the level of non-performing assets and classified loans,
current and anticipated economic conditions in the designated lending area, past
loss experience, adverse situations that may affect the
32
<PAGE> 33
borrower's ability to repay, the estimated value of any underlying collateral
and possible losses arising from specific problem assets. To a lesser extent,
management also considers loan concentrations to single borrowers and changes in
the composition of the loan portfolio. The allowance is increased by provisions
for loan losses which are charged against income. For additional information,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note A-6 of Notes to Consolidated Financial Statements.
While 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 adversely
affected if circumstances differ substantially from the assumptions used in
making the final determination. In addition, the OTS and the FDIC, as an
integral part of their examination process, periodically review Blue Ash's
allowance for loan losses. Such agencies may require Blue Ash to recognize
additions to such allowance based on their judgments about information available
to them at the time of their examination.
At June 30, 1997, 1996 and 1995, Blue Ash's allowance for loan losses
totaled $244,000, $231,000 and $220,000, respectively, none of which was
allocated to a particular type of loan at June 30, 1997 and 1995. At June 30,
1996, Blue Ash's allowance for loan losses was comprised of a general loan
allowance totaling $226,000 and a specific loan loss allowance of $5,000.
The following table sets forth an analysis of Blue Ash's allowance for
loan losses and selected ratios for the years indicated.
<TABLE>
<CAPTION>
For the Year ended June 30,
---------------------------
1997 1996 1995
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 231 $ 220 $ 220
Loans charged-off (5) -- --
Recoveries -- -- --
Provision for losses on loans
(charged to operations) 18 11 --
----- ----- -----
Balance at end of year $ 244 $ 231 $ 220
===== ===== =====
Ratio of net charge-offs to
average loans outstanding during
the year --% --% --%
Ratio of allowance for loan losses
to nonaccrual loans 938.5% 172.4% 880.0%
===== ===== =====
Ratio of allowance for loan losses
to total loans(1) 0.37% 0.42% 0.48%
===== ===== =====
- --------------------------
<FN>
(1) Includes loans held for sale, which are recorded at the lower
of cost or market value.
</TABLE>
33
<PAGE> 34
Blue Ash reviews on a monthly basis its loan portfolio, including
problem loans, to determine whether any loans require classification and/or the
establishment of appropriate allowances. Because the loan loss allowance is
based on estimates, it is monitored regularly on an ongoing basis and adjusted
as necessary to provide an adequate allowance. The increase of $13,000 in the
allowance for loan losses during the year ended June 30, 1997 was attributed to
the overall growth in the loan portfolio of 21.3%, which was partially offset by
the lower level of internally-classified assets at June 30, 1997. Blue Ash's
internally-classified assets totaled approximately $478,000 at June 30, 1997,
as compared to $681,000 at June 30, 1996. Management believed that existing loan
loss allowances at June 30, 1997 were adequate to cover unforeseen loan losses
based on the ongoing review of such internally-classified assets and other
factors previously discussed.
Effective in fiscal 1994, the OTS, in conjunction with the Office of
the Comptroller of the Currency, the FDIC and the Federal Reserve Board, issued
an Interagency Policy Statement on the Allowance for Loan and Lease Losses
("Policy Statement"). The Policy Statement, which effectively superseded
previous OTS proposed guidance, included guidance (i) on the responsibilities of
management for the assessment and establishment of an adequate allowance and
(ii) for the agencies' examiners to use in evaluating the adequacy of such
allowance and the policies utilized to determine such allowance. The Policy
Statement also set forth quantitative measures for the allowance with respect to
assets classified substandard and doubtful, described below, and with respect to
the remaining portion of an institution's loan portfolio. Specifically, the
Policy Statement set forth the following quantitative measures which examiners
may use to determine the reasonableness of an allowance: (i) 50% of the
portfolio that is classified doubtful; (ii) 15% of the portfolio that is
classified substandard and (iii) for the portions of the portfolio that have not
been classified (including loans designated special mention), estimated credit
losses over the upcoming twelve months based on facts and circumstances
available on the evaluation date. While the Policy Statement set forth this
quantitative measure, such guidance was not intended as a "floor" or "ceiling."
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities (which also are
known as mortgage participation certificates or pass-through certificates)
typically represent a participation interest in a pool of single-family or
multi-family mortgages, the principal and interest payments on which are passed
from the mortgage originators, through intermediaries (generally U.S. Government
agencies and government-sponsored enterprises) that pool and repackage the
participation interests in the form of securities, to investors such as Blue
Ash. Such U.S. Government agencies and government-sponsored enterprises, which
guarantee the payment of principal and interest to investors, primarily include
the Federal
34
<PAGE> 35
Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage
Association ("FNMA"), and the Government National Mortgage Association ("GNMA").
Besides investing in mortgage-backed securities insured or guaranteed by the
FHLMC, the FNMA or the GNMA, Blue Ash has also invested in mortgage-backed
securities issued by the Small Business Administration ("SBA").
The FHLMC is a public corporation chartered by the U.S. Government. The
FHLMC issues participation certificates backed principally by conventional
mortgage loans. The FHLMC guarantees the timely payment of interest and the
ultimate return of principal. The FNMA is a private corporation chartered by the
U.S. Congress with a mandate to establish a secondary market for conventional
mortgage loans. The FNMA guarantees the timely payment of principal and interest
on FNMA securities. FHLMC and FNMA securities are not backed by the full faith
and credit of the United States, but because the FHLMC and the FNMA are U.S.
Government-sponsored enterprises, these securities are considered to be among
the highest quality investments with minimal credit risks. The GNMA is a
government agency within the Department of Housing and Urban Development which
is intended to help finance government-assisted housing programs. GNMA
securities are backed by FHA-insured and VA-guaranteed loans, and the timely
payment of principal and interest on GNMA securities are guaranteed by the GNMA
and backed by the full faith and credit of the U.S. Government. Because the
FHLMC, the FNMA and the GNMA were established to provide support for low- and
middle-income housing, there are limits to the maximum size of loans that
qualify for these programs. For example, the FNMA and the FHLMC currently limit
their loans secured by a single-family, owner-occupied residence to $214,600. To
accommodate larger-sized loans, and loans that, for other reasons, do not
conform to the agency programs, a number of private institutions have
established their own home-loan origination and securitization programs. The SBA
is an agency of the U.S. Government. The SBA issues participation certificates
backed principally by commercial real estate and/or other business collateral.
The SBA was established by the U.S. Congress with a mandate to increase the
ability of small businesses to borrow money thereby expanding and increasing
employment. The timely payment of principal and interest on SBA securities is
guaranteed by the SBA and is backed by the full faith and credit of the U.S.
Government.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as
the prepayment risk, are passed on to the certificate holder. Accordingly, the
life of a mortgage-backed pass-through security approximates the life of the
underlying mortgages. The actual maturity of a mortgage-backed security varies,
depending on when
35
<PAGE> 36
the mortgagors prepay or repay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accreted over the estimated term of the securities using the
level yield method. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed security, and these assumptions are reviewed
periodically to reflect the actual prepayment. The actual prepayments of the
underlying mortgages depend on many factors, including the type of mortgage, the
coupon rate, the age of the mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates. The difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates is an important
determinant in the rate of prepayments. During periods of falling mortgage
interest rates, prepayments generally increase, and, conversely, during periods
of rising mortgage interest rates, prepayments generally decrease. If the coupon
rate of the underlying mortgage significantly exceeds the prevailing market
interest rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages. Prepayment experience is
more difficult to estimate for adjustable-rate mortgage-backed securities.
At June 30, 1997, $5.6 million, or 20.8%, of Blue Ash's mortgage-backed
and related securities portfolio consisted of participation certificates. These
securities represented 5.4% of Blue Ash's total assets. All of Blue Ash's
participation certificates at June 30, 1997 were fully guaranteed as to
principal and interest by the FHLMC, the FNMA, the GNMA and the SBA.
Blue Ash's mortgage-backed and related securities include
collateralized mortgage obligations, as well as other mortgage-related
securities ("CMO/REMICs"), as interest-rate sensitive portfolio investments.
CMO/REMICs are securities derived by reallocating cash flows from
mortgage-backed securities or pools of mortgage loans in order to create
multiple classes, or tranches of securities with coupon rates that differ from
the underlying collateral as a whole. Blue Ash invests in these as an
interest-rate sensitive investment portfolio alternative to mortgage loans.
CMO/REMICs have been developed in response to investor concerns regarding the
uncertainty of cash flows associated with the prepayment option of the
underlying mortgagor and are typically issued by governmental agencies,
governmentally-sponsored enterprises and special purpose entities, such as
trusts, corporations or partnerships, established by financial institutions or
other similar institutions. A CMO/REMIC can be collateralized by loans or
securities which are insured or guaranteed by the
36
<PAGE> 37
FHLMC, the FNMA or the GNMA. In contrast to pass-through mortgage-backed
securities, in which cash flow is received pro rata by all security holders, the
cash flow from the mortgages underlying a CMO/REMIC is segmented and paid in
accordance with a predetermined priority to investors holding various CMO/REMIC
classes. By allocating the principal and interest cash flows from the underlying
collateral among the separate CMO classes, different classes of bonds are
created, each with its own stated maturity, estimated average life, coupon rate
and prepayment characteristics.
Prepayments in Blue Ash's mortgage-related securities portfolio may be
affected by declining and rising interest rate environments. In a low and
declining interest rate environment, prepayments would be expected to increase.
In such an event, Blue Ash's CMO/REMICs purchased at a premium price could
result in actual yields to Blue Ash that are lower than anticipated yields. Blue
Ash's floating-rate CMO/REMICs would be expected to generate lower yields as a
result of the effect of falling interest rates on the indexes for determining
payment of interest. Additionally, the increased principal payments received may
be subject to reinvestment at lower rates. Conversely, in a period of rising
rates, prepayments would be expected to decrease, which would make less
principal available for reinvestment at higher rates. In a rising rate
environment, floating-rate instruments would generate higher yields to the
extent that the indexes for determining payment of interest did not exceed the
life-time interest rate caps. Such prepayment may subject Blue Ash's CMO/REMICs
to yield and price volatility.
Blue Ash's CMO/REMICs are predominately monthly adjustable-rate
securities indexed primarily to the 11th district cost of funds ("COFI"). This
lagging index has a close resemblance to the overall cost of funds of financial
institutions and has historically provided attractive yields. Because of its
lagging effect, COFI tends to be more attractive during periods of falling
interest rates. The remaining adjustable-rate securities in Blue Ash's portfolio
are indexed to either (i) the 10-year treasury ("CMT"), a long term index that
tends to be more attractive during periods of a steepening yield curve, or (ii)
the specified prime rate as previously discussed.
At June 30, 1997, $21.2 million, or 79.2%, of Blue Ash's
mortgage-backed and related securities portfolio consisted of CMO/REMICS.
Approximately $19.9 million, or 93.7%, of Blue Ash's CMO/REMIC's at June 30,
1997 were collateralized by loans which are insured or guaranteed directly, or
indirectly, through mortgage-backed securities underlying the obligations by the
FHLMC, the FNMA or the GNMA. The remaining 6.3% of the CMO/REMICs were privately
insured by corporations and other financial institutions.
At June 30, 1997, Blue Ash's CMO/REMICs, representing 20.6% of total
assets, had a total market value of $21.0 million and
37
<PAGE> 38
amortized cost of $21.4 million. Although management believes this unrealized
loss of $446,000, or 2.1% decline, to be temporary, a recovery to par value
market prices is not anticipated until a period of falling interest rates.
The following table sets forth the purchases, sales, principal
repayments and other activity of Blue Ash's mortgage-backed securities
portfolio, including those designated as available for sale, for the years
indicated.
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $27,628 $24,976 $23,566
Mortgage-backed securities
purchased 2,021 16,475 3,988
Proceeds from sale of mortgage-
backed securities designated
as available for sale (1,148) (10,803) (861)
Gain (loss) on sale of mortgage-
backed securities 14 149 (2)
Principal repayments (1,896) (2,714) (1,820)
Amortization of premiums and
accretion of discounts - net (11) (28) (45)
Unrealized gains (losses) on
securities designated as
available for sale 124 (427) 150
------- ------- -------
Balance at end of year $26,732 $27,628 $24,976
======= ======= =======
</TABLE>
Mortgage-backed securities generally increase the quality of Blue Ash's
assets by virtue of the insurance or guarantees that back them, are more liquid
than individual mortgage loans and may be used to collateralize borrowings or
other obligations of Blue Ash. At June 30, 1995, certain mortgage-backed
securities were used to collateralize outstanding borrowings under reverse
repurchase agreements. The carrying value of such securities totaled
approximately $3.7 million at June 30, 1995.
The Corporation accounts for certain investments in debt and equity
securities pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." SFAS No. 115 requires the classification of certain debt
and equity securities as held to maturity, trading or available for sale. SFAS
No. 115 also addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values (market value) and for all
investments in debt securities. Such investments are classified in three
categories and accounted for as follows: (i) debt securities that the
Corporation has the positive
38
<PAGE> 39
intent and ability to hold to maturity are classified as held to maturity and
reported at amortized cost; (ii) debt and equity securities that are held for
current resale are classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings; and (iii) debt and equity
securities not classified as either securities held to maturity or trading
securities are classified as securities available for sale and reported at fair
value, with unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity. Under SFAS No. 115, securities that
could be sold in the future because of changes in interest rates or other
factors are not classified as held to maturity. As required by SFAS No. 115,
management determines the appropriate classification of mortgage-backed
securities at the time of purchase.
The Corporation classifies its mortgage-backed securities into two
classifications depending on certain underlying characteristics of the
securities. In considering the Corporation's ability to hold securities,
collateralized mortgage obligations are reviewed for possible regulatory
mandated divestiture under existing banking regulations. In December 1995, a
one-time reassessment of the Corporation's mortgage-backed securities held to
maturity was undertaken, as permitted by the Financial Accounting Standards
Board under a special report related to the implementation of SFAS No. 115. In
connection with this one-time reassessment, the Corporation transferred
mortgage-backed securities with an amortized cost of $2.4 million from held to
maturity to available for sale in order to permit more responsiveness to changes
in interest rates and other balance sheet factors. At June 30, 1997, the
Corporation had approximately 43% of its mortgage-backed securities classified
as held to maturity and 57% as available for sale.
39
<PAGE> 40
The following tables set forth certain information relating to Blue
Ash's mortgage-backed securities portfolio (including those designated as
available for sale) at June 30, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
June 30, 1997
-------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- --------- ---------- ---------
(In thousands)
Mortgage-backed securities
- --------------------------
held to maturity:
-----------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation
Participation certificates $ 1,106 $ 9 $ (4) $ 1,111
Collateralized mortgage
obligations 3,987 -- (57) 3,930
Federal National Mortgage
Association
Participation certificates 854 5 (6) 853
Collateralized mortgage
obligations 4,173 14 (141) 4,046
Government National
Mortgage Association
Collateralized mortgage
obligations 80 1 -- 81
Small Business Administration
Participation certificates 1,046 1 (9) 1,038
Residential Funding Corporation
Collateralized mortgage
obligations 189 -- (9) 180
Salomon Brothers, Inc.
Collateralized mortgage
obligations 28 -- -- 28
------- --- ----- -------
$11,463 $ 30 $(226) $11,267
======= ==== ===== =======
Mortgage-backed securities
- --------------------------
available for sale:
-------------------
Federal Home Loan Mortgage
Corporation
Participation certificates $ 1,881 $ 11 $ (27) $ 1,865
Collateralized mortgage
obligations 2,363 -- (24) 2,339
Federal National Mortgage
Association
Participation certificates 679 8 (7) 680
Collateralized mortgage
obligations 9,504 13 (245) 9,272
Santa Barbara Savings
and Loan
REMIC participation
certificates 737 -- (6) 731
The Prudential Home Mortgage
Securities Company, Inc.
Collateralized mortgage
obligations 374 8 -- 382
------- ---- ----- -------
$15,538 $ 40 $(309) $15,269
======= ==== ===== =======
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
June 30, 1996
-------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
(In thousands)
Mortgage-backed securities
- --------------------------
held to maturity:
-----------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation
Participation certificates $ 1,286 $ 8 $ (7) $ 1,287
Collateralized mortgage
obligations 3,986 -- (94) 3,892
Federal National Mortgage
Association
Participation certificates 909 2 (5) 906
Collateralized mortgage
obligations 4,293 3 (170) 4,126
Government National
Mortgage Association
Collateralized mortgage
obligations 126 -- (1) 125
Small Business Administration
Participation certificates 1,119 3 (5) 1,117
Residential Funding Corporation
Collateralized mortgage
obligations 189 -- (9) 180
Salomon Brothers, Inc.
Collateralized mortgage
obligations 40 -- -- 40
------- ---- ----- -------
$11,948 $ 16 $(291) $11,673
======= ==== ===== =======
Mortgage-backed securities
- --------------------------
available for sale:
-------------------
Federal Home Loan Mortgage
Corporation
Participation certificates $ 1,773 $ 7 $ (25) $ 1,755
Collateralized mortgage
obligations 2,793 8 (65) 2,736
Federal National Mortgage
Association
Participation certificates 1,805 16 (10) 1,811
Collateralized mortgage
obligations 8,392 -- (322) 8,070
Santa Barbara Savings
and Loan
REMIC participation
certificates 937 -- (3) 934
The Prudential Home Mortgage
Securities Company, Inc.
Collateralized mortgage
obligations 373 1 -- 374
------- ---- ----- -------
$16,073 $ 32 $(425) $15,680
======= ==== ===== =======
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
June 30, 1995
-------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
(In thousands)
Mortgage-backed securities
- --------------------------
held to maturity:
-----------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation
Participation certificates $ 1,535 $ 7 $ (10) $ 1,532
Collateralized mortgage
obligations 2,685 8 (50) 2,643
Federal National Mortgage
Association
Participation certificates 1,037 2 (6) 1,033
Collateralized mortgage
obligations 6,353 5 (279) 6,079
Small Business Administration
Participation certificates 1,320 11 (4) 1,327
Residential Funding Corporation
Collateralized mortgage
obligations 189 -- (9) 180
Salomon Brothers, Inc.
Collateralized mortgage
obligations 54 -- -- 54
------- ---- ----- -------
$13,173 $ 33 $(358) $12,848
======= ==== ===== =======
Mortgage-backed securities
- --------------------------
available for sale:
-------------------
Federal Home Loan Mortgage
Corporation
Participation certificates $ 2,059 $ 6 $ (24) $ 2,041
Collateralized mortgage
obligations 3,271 51 (35) 3,287
Federal National Mortgage
Association
Participation certificates 1,616 8 (11) 1,613
Collateralized mortgage
obligations 4,072 50 (67) 4,055
Government National
Mortgage Association
Participation certificates 749 58 -- 807
------- ---- ----- -------
$11,767 $173 $(137) $11,803
======= ==== ===== =======
</TABLE>
42
<PAGE> 43
The carrying values of mortgage-backed securities, including those
designated as available for sale, are comprised of the following at June 30,
1997, 1996 and 1995.
<TABLE>
<CAPTION>
Carrying
value
-------------------------------------
June 30,
-------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Mortgage-backed securities held
to maturity - at amortized cost $11,463 $11,948 $13,173
Mortgage-backed securities
designated as available
for sale - at fair value 15,269 15,680 11,803
------- ------- -------
Total mortgage-backed securities $26,732 $27,628 $24,976
======= ======= =======
</TABLE>
For additional information relating to Blue Ash's mortgage-backed
securities, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Notes A-2 and B of Notes to Consolidated Financial
Statements.
INVESTMENT SECURITIES. The investment policy of Blue Ash is designed
primarily to provide and maintain liquidity and to generate a favorable return
on investments without incurring undue interest rate risk, credit risk and
investment portfolio asset concentrations. Blue Ash invests in investment
securities in order to diversify its assets, manage cash flow, obtain yield and
maintain the minimum levels of liquid assets which savings institutions are
required to maintain. Historically, Blue Ash has invested excess funds in
mortgage-backed securities rather than investment securities due to the higher
yield on mortgage-backed securities. As a result, investment securities have not
comprised a significant portion of Blue Ash's assets.
Blue Ash is authorized to invest in obligations issued or fully
guaranteed by the U.S. Government, certain federal agency obligations, certain
time deposits, negotiable certificates of deposit issued by commercial banks and
other insured financial institutions, investment grade corporate debt
securities, municipal obligations, federal funds sold, overnight deposits and
other specified investments. Federal regulations require Blue Ash to maintain an
investment in FHLB of Cincinnati stock and a minimum amount of liquid assets
which savings institutions are required to maintain.
43
<PAGE> 44
The following table sets forth the composition of Blue Ash's investment
portfolio and interest-bearing deposits at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ ---------------------------------
Carrying % of Market % of Carrying % of Market % of Carrying % of Market % of
value total value total value total value total value total value total
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Government
agency obligations $1,399 46.5% $1,399 46.5% $1,000 24.7% $ 983 24.3% $ 200 6.7% $ 203 6.8%
Corporate debt
securities -- -- -- -- 200 4.9 199 4.9 200 6.7 199 6.7
Municipal obligations -- -- -- -- 100 2.5 100 2.5 100 3.4 100 3.4
------ ----- ----- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total investment
securities 1,399 46.5 1,399 46.5 1,300 32.1 1,282 31.7 500 16.8 502 16.9
Other investments:
Certificates of
deposits in
other financial
institutions 466 15.5 466 15.5 98 2.4 98 2.4 198 6.7 198 6.6
Interest-bearing
deposits in other
financial
institutions 205 6.8 205 6.8 66 1.6 66 1.6 1,633 54.8 1,633 54.8
Federal funds sold 200 6.6 200 6.6 1,900 46.8 1,900 47.1 -- -- -- --
Federal Home Loan
Bank stock 742 24.6 742 24.6 692 17.1 692 17.2 646 21.7 646 21.7
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total investments
and interest-
bearing deposits $3,012 100.0% $3,012 100.0% $4,056 100.0% $4,038 100.0% $2,977 100.0% $2,979 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
The following table sets forth the scheduled maturities, carrying
values, market values and average yields for Blue Ash's investments and
interest-bearing deposits at June 30, 1997. All of such securities and
interest-bearing deposits mature in fifteen years or less.
<TABLE>
<CAPTION>
At June 30, 1997
-------------------------------------------------------------
Five years or less Five to ten years After ten years
------------------- ------------------- ------------------
Carrying Average Carrying Average Carrying Average
value yield value yield value yield
----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government agency
obligations $ 500 6.99% $ 699 7.52% $200 7.63%
Certificates of deposit in
other financial institutions 371 6.65 -- -- 95 8.00
Interest-bearing deposits in
other financial institutions 205 5.23 -- -- -- --
Federal funds sold 200 5.34 -- -- -- --
Federal Home Loan Bank stock 742 7.25 -- -- -- --
------ ---- ------ ---- ---- ----
Total investments and
interest-bearing deposits $2,018 6.68% $ 699 7.52% $295 7.75%
====== ==== ====== ==== ==== ====
</TABLE>
44
<PAGE> 45
<TABLE>
<CAPTION>
At June 30, 1997
---------------------------------------
Total investments and
interest-bearing deposits
---------------------------------------
Average Weighted
life Carrying Market average
in years value value yield
-------- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government agency
obligations 8.13 $1,399 $1,399 7.35%
Certificates of deposit in
other financial institutions 5.45 466 466 6.93
Interest-bearing deposits in
other financial institutions -- 205 205 5.23
Federal funds sold -- 200 200 5.34
Federal Home Loan Bank stock -- 742 742 7.25
---- ------ ------ ----
Total investments and
interest-bearing deposits 4.62 $3,012 $3,012 6.98%
==== ====== ====== ====
</TABLE>
The Corporation's investment securities which are classified as held to
maturity are recorded at cost, with any premium or discount amortized or
accreted to maturity of the security. It is management's positive intent to hold
such securities until maturity, and the Corporation has the ability to hold the
securities until maturity. The Corporation, to date, has not engaged and does
not intend to engage in the immediate future in trading investment securities.
At June 30, 1997, investments in the debt and/or equity securities of
any one non-governmental issuer did not exceed more than 10% of the
Corporation's total equity.
SOURCES OF FUNDS
GENERAL. Deposits have traditionally been the primary source of Blue
Ash's funds for use in lending and other investment activities. In addition to
deposits, Blue Ash derives funds from interest payments and principal
repayments/prepayments on loans and mortgage-backed securities, income on
earning assets, service charges and gains on the sale of mortgage loans and
other assets. Repayments on loans and mortgage-backed securities are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market conditions.
Borrowings from the FHLB and the Federal National Mortgage Association ("Fannie
Mae") are being used on a relatively short-term basis to compensate for
reductions in the availability of funds from other sources. Borrowings from the
FHLB are also being used on a longer-term basis for general business purposes.
DEPOSITS. Blue Ash's deposit products include a broad selection of
deposit instruments, including negotiable order of
45
<PAGE> 46
withdrawal ("NOW") accounts, money market deposit accounts, regular passbook
savings accounts, Christmas club accounts, term certificate accounts and
individual retirement accounts ("IRAs"). Interest rates paid, maturity terms,
service fees and withdrawal penalties for the various types of accounts are
established periodically by management of Blue Ash based on its liquidity
requirements, growth goals and interest rates paid by competitors. Deposit
account terms vary, with the principal differences being the minimum balance
required, the time periods the funds must remain on deposit and the interest
rate. Blue Ash relies primarily on competitive pricing policies, advertising and
customer service to attract and retain these deposits.
Blue Ash has been competitive in the types of accounts and in interest
rates it has offered on its deposit products, but does not necessarily seek to
match the highest rates paid by competing institutions. With the significant
decline in interest rates paid on deposit products, Blue Ash, in fiscal 1994,
experienced disintermediation of deposits into competing investment products.
During the rising interest rate environment in fiscal 1995, however, Blue Ash
increased its deposit base as depositors transferred funds back into certificate
of deposit accounts, which became more attractive as market rates increased. The
increase in the deposit base continued in fiscal 1997 and 1996 due to the
aggressive marketing efforts and competitive pricing strategies employed by the
management of Blue Ash. During fiscal 1996, Blue Ash introduced a limited
9-month, 15-month and 35-month certificate of deposit program in an effort to
generate additional deposits. These certificate of deposit programs were more
competitively priced than standard certificate of deposit programs and resulted
in approximately $13.7 million in new deposits and rollover deposits from
maturing certificates of deposit in fiscal 1996. In an effort to sustain
continued deposit growth during fiscal 1997, Blue Ash strategically began
obtaining brokered deposits and other out-of-state funds to supplement its
deposit base. These deposits were typically obtained at interest rates at or
below local market interest rates being offered and had terms to maturity of
typically fifteen months or less. The increased need for brokered deposits in
fiscal 1997 stemmed from the greater level of competition among other banks and
savings and loan institutions for local certificate of deposit balances and
management's reluctance to aggressively price above market and seek at all times
certificates of deposit from its local market area. During the year ended June
30, 1997, outstanding brokered deposits increased by $4.1 million, from $695,000
at June 30, 1996 to $4.8 million at June 30, 1997. The overall growth in
deposits over the last three years was consistent with management's short-term
and long-term goals. It is the continued goal of management to increase loan
production and the level of loan retention, thereby increasing the need for
overall deposits and available liquid assets. Although market demand generally
dictates which deposit maturities and rates will be accepted by the public, Blue
Ash intends to continue to promote
46
<PAGE> 47
longer-term deposits to the extent possible and is consistent with its asset and
liability management goals. Further, given its other available funding
alternatives, Blue Ash has the ability to suspend brokered deposit activity at
any time and has the ability to fund its maturities on all brokered deposits
without placing undue risk on its liquidity position or cost of funds.
At June 30, 1997, Blue Ash's certificates of deposit totaled $62.5
million, or 76.4% of total deposits. Of such amount, approximately $48.9 million
in certificates of deposit mature within one year. Based on past experience and
Blue Ash's prevailing pricing strategies, management believes that a substantial
percentage of such certificates will renew with Blue Ash at maturity. If there
is a significant deviation from historical experience, Blue Ash can utilize
borrowings from the FHLB or Fannie Mae as an alternative to this source of
funds.
The following table sets forth the dollar amount of deposits in the
various types of savings programs offered by Blue Ash at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------
1997 1996 1995
----------------- ----------------- ------------------
Percent Percent Percent
of total of total of total
Amount deposits Amount deposits Amount deposits
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
- ---------------------
Passbook and club accounts(1) $ 8,088 9.9% $ 8,398 11.1% $ 8,204 13.7%
NOW accounts(2) 4,228 5.2 3,148 4.2 3,755 6.3
Money market deposit
accounts(3) 6,966 8.5 7,438 9.8 8,410 14.1
------- ----- ------- ----- ------- -----
Total transaction accounts 19,282 23.6 18,984 25.1 20,369 34.1
Certificates of deposit(4):
- ---------------------------
2.00 - 3.99% -- -- -- -- 1,368 2.3
4.00 - 5.99% 50,370 61.6 46,642 61.7 13,028 21.8
6.00 - 7.99% 12,142 14.8 9,992 13.2 24,898 41.6
8.00 - 9.99% -- -- -- -- 121 0.2
------- ----- ------- ----- ------- -----
Total certificates of deposit 62,512 76.4 56,634 74.9 39,415 65.9
------- ----- ------- ----- ------- -----
Total deposits $81,794 100.0% $75,618 100.0% $59,784 100.0%
======= ===== ======= ===== ======= =====
- ------------------------------
<FN>
(1) Blue Ash's weighted average interest rates paid on passbook and club
accounts fluctuate with the general movement of interest rates. The
weighted average rates on passbook and club accounts were 2.78%, 2.78%
and 3.04% at June 30, 1997, 1996 and 1995, respectively.
(2) Blue Ash's weighted average interest rate paid on NOW accounts
fluctuates with the general movement of interest rates. At June 30,
1997, 1996 and 1995, the weighted average rates on NOW accounts were
2.06%, 2.12% and 2.11%, respectively.
(3) Blue Ash's weighted average interest rate paid on money market deposit
accounts fluctuates with the general movement of interest rates. At
June 30, 1997, 1996 and 1995, the weighted average rates on money
market deposit accounts were 3.10%, 3.18% and 3.20%, respectively.
(4) Individual Retirement Accounts ("IRAs") are included within the various
certificate of deposit balances. IRAs totaled $9.0 million, $8.3
million and $6.7 million at June 30, 1997, 1996 and 1995, respectively.
</TABLE>
47
<PAGE> 48
The following table presents, by various interest rate categories, the
remaining maturity information for Blue Ash's certificates of deposit at June
30, 1997.
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------
Over Over
Up to 1 year to 2 years to Over
Interest Rate one year 2 years 3 years 3 years Total
- ------------- -------- --------- ----------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
2.00 - 3.99% $ -- $ -- $ -- $ -- $ --
4.00 - 5.99% 45,332 3,853 544 641 50,370
6.00 - 7.99% 3,539 5,068 2,866 669 12,142
8.00 - 9.99% -- -- -- -- --
------- ------ ------ ------ -------
Total certificates
of deposit $48,871 $8,921 $3,410 $1,310 $62,512
======= ====== ====== ====== =======
</TABLE>
The following table presents the amount of Blue Ash's certificates of
deposit of $100,000 or more by the time remaining until maturity at June 30,
1997.
<TABLE>
<CAPTION>
Maturity At June 30, 1997
-------- ----------------
(In thousands)
<S> <C>
Three months or less $1,641
Over 3 months to 6 months 1,178
Over 6 months to 12 months 2,210
Over twelve months 1,278
------
Total $6,307
======
</TABLE>
The following table sets forth Blue Ash's deposit account balance
activity for the years indicated.
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------
1997 1996 1995
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $75,618 $59,784 $52,031
Deposits 80,544 69,259 69,887
Withdrawals (77,541) (56,423) (63,874)
------- ------- -------
Net increase before
interest credited 3,003 12,836 6,013
Interest credited 3,173 2,998 1,740
------- ------- -------
Ending balance $81,794 $75,618 $59,784
======= ======= =======
Net increase $ 6,176 $15,834 $ 7,753
======= ======= =======
Percent increase 8.17% 26.49% 14.90%
==== ===== =====
</TABLE>
48
<PAGE> 49
BORROWINGS. Deposits are the primary source of funds for Blue Ash's
lending and investment activities and for its general business purposes. If the
need arises, Blue Ash may supplement its funds with advances from the FHLB of
Cincinnati to meet withdrawal requirements on its deposit accounts. As of June
30, 1997, Blue Ash had outstanding $12.0 million in advances from the FHLB of
Cincinnati. Blue Ash also had outstanding borrowings of $60,000 which were used
to fund the Employee Stock Ownership Plan. Principal and interest (based on
Fifth Third Bank's Prime Rate) are payable semi-annually over seven (7) years.
See Notes A-11 and H of Notes to Consolidated Financial Statements.
The FHLB functions as a central reserve bank providing credit for
savings institutions and certain other member financial institutions. As a
member, Blue Ash is required to own capital stock in the FHLB of Cincinnati and
is authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States Government), provided
certain standards related to creditworthiness have been met. Advances are made
pursuant to several different programs. Each credit program has it own interest
rate and range of maturities. The FHLB of Cincinnati prescribes the acceptable
uses for the advances made pursuant to each program. Depending on the program,
limitations on the amount of advances are based either on a fixed percentage of
an institution's net worth or on the FHLB's assessment of the institution's
creditworthiness. The FHLB of Cincinnati is required to review its credit
limitations and standards at least once every six months. Under current
regulations, an institution must meet certain qualifications to be eligible for
FHLB advances. The extent to which an institution is eligible for such advances
will depend upon whether it meets the Qualified Thrift Lender Test (the "QTL
Test"). See "Regulation - OTS Regulations -- Qualified Thrift Lender Test." If
an institution meets the QTL Test, it will be eligible for 100% of the advances
it would otherwise be eligible to receive. If an institution does not meet the
QTL Test, it will be eligible for such advances only to the extent it holds
specified QTL Test assets. At June 30, 1997, Blue Ash was in compliance with the
QTL test.
49
<PAGE> 50
The following table sets forth the maximum month-end and average
balances of FHLB advances for the years indicated.
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------
1997 1996 1995
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Maximum amount of FHLB
advances outstanding during
year $12,000 $10,924 $12,318
Average amount of FHLB
advances outstanding during
year $10,971 $ 9,076 $10,158
Weighted average interest rate of
FHLB advances outstanding during
year based on month-end balances 6.04% 6.11% 5.52%
Amount of FHLB advances outstanding
at end of year $12,000 $ 8,424 $ 8,318
Weighted average interest rate of
FHLB advances outstanding at end
of year 6.05% 6.16% 5.77%
</TABLE>
As an alternative borrowing source, Blue Ash has utilized borrowings
from Fannie Mae. From time to time, Blue Ash enters into transactions in which
it agrees to transfer to Fannie Mae certain investments and mortgage-backed
securities against the transfer of funds by Fannie Mae, with a simultaneous
agreement by Fannie Mae to transfer to Blue Ash such securities at a date
certain or on demand, against the transfer of funds by Blue Ash. In substance,
these transactions ("reverse repurchase agreements") represent borrowings
collateralized by specific securities. In practice, reverse repurchase
agreements allow Blue Ash to borrow funds at a fixed or floating interest rate
using its securities as collateral. Blue Ash can add liquidity to the portfolio
without parting with the specific assets.
Borrowings under reverse repurchase agreements are exempt from deposit
insurance premiums and federal reserve requirements. While reverse repurchase
agreements are structured legally as a sale/repurchase transaction, they are
accounted for as a financing. As a result, no gain or loss is recorded. Finally,
Blue Ash as a borrower under these agreements, is entitled to all security
payments (principal, interest and prepayments) made during the terms of these
borrowings. At June 30, 1997, Blue Ash did not have any outstanding borrowings
under reverse repurchase agreements with the Fannie Mae.
50
<PAGE> 51
The following table sets forth the maximum month-end and average
balances of borrowings under reverse repurchase agreements for the years
indicated.
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Maximum amount of obligations for
securities sold under agreements
to repurchase during year $ -- $3,504 $3,504
Average amount of obligations for
securities sold under agreements to
repurchase during year -- 1,080 848
Weighted average interest rate of
outstanding obligations for securities
sold under agreements to repurchase
during year based on month-end balances --% 6.09% 6.12%
Amount of obligations for securities
sold under agreements to repurchase
at end of year -- -- 3,504
Weighted average interest rate for
outstanding obligations for securities
sold under agreements to repurchase at
end of year --% --% 6.02%
</TABLE>
AVERAGE BALANCES, INTEREST AMOUNTS, YIELDS AND RATES
Net interest income is affected by (i) the difference ("interest rate
spread") between rates of interest earned on interest-earning assets and rates
of interest paid on interest-bearing liabilities and (ii) the relative amounts
of interest-earning assets and interest-bearing liabilities. When
interest-earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. Savings
institutions have traditionally used interest rate spreads as a measure of net
interest income. Another indication of an institution's net interest income is
its "net yield on interest-earning assets" which is net interest income divided
by average interest-earning assets. The following table sets forth certain
information relating to Blue Ash's average balance sheet information and
reflects the average yield on interest-earning assets and the average cost of
interest-bearing liabilities for the years indicated. Such yields and costs are
derived by dividing income or expense by the average monthly balances of
interest-earning assets or interest-bearing liabilities, respectively, for the
years presented. During the years indicated, nonaccruing loans, if any, are
included in the net loan category. Average balances are derived from month-end
balances. Management does not believe that the use of month-end balances instead
of daily balances has caused any material difference in the information
presented.
51
<PAGE> 52
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Loans receivable(1) $60,750 $5,232 8.61% $51,542 $4,421 8.58% $42,434 $ 3,575 8.42%
Mortgage-backed
securities(2) 27,457 1,757 6.40 27,219 1,767 6.49 22,476 1,338 5.95
Investment securities 1,238 91 7.35 792 57 7.20 758 51 6.73
Interest-bearing
deposits and other 1,847 112 6.06 2,504 165 6.59 2,001 126 6.30
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-earning
assets 91,292 7,192 7.88 82,057 6,410 7.81 67,669 5,090 7.52
Non-interest earning
assets 5,251 5,270 5,446
------- ------- -------
Total assets $96,543 $87,327 $73,115
======= ======= =======
Interest-bearing
liabilities:
Passbooks $ 8,263 228 2.76 $ 8,293 245 2.95 $ 8,563 250 2.92
NOWs 3,816 66 1.73 3,476 62 1.78 4,037 78 1.93
MMDAs 7,210 227 3.15 7,981 254 3.18 10,274 322 3.13
Certificates 57,560 3,271 5.68 48,859 2,875 5.88 31,464 1,585 5.04
------- ------ ---- ------- ------ ---- ------- ------ ----
Total deposits 76,849 3,792 4.93 68,609 3,436 5.01 54,338 2,235 4.11
FHLB advances
and other
borrowings(3) 11,046 669 6.06 10,261 627 6.11 11,227 624 5.56
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-
bearing
liabilities 87,895 4,461 5.08 78,870 4,063 5.15 65,565 2,859 4.36
------ ---- ------ ---- ------ ----
Non-interest bearing
liabilities 1,338 1,303 1,051
------- ------- -------
Total liabilities 89,233 80,173 66,616
Shareholders' equity 7,310 7,154 6,499
------- ------- -------
Total liabilities and
shareholders' equity $96,543 $87,327 $73,115
======= ======= =======
Net interest income;
interest rate spread $2,731 2.80% $2,347 2.66% $2,231 3.16%
====== ==== ====== ==== ====== ====
Net yield (net interest
income as a percent of
average interest-earning
assets) 2.99% 2.86% 3.30%
==== ==== ====
Average interest-earning
assets to interest-bearing
liabilities 103.86% 104.04% 103.21%
====== ====== ======
- --------------------------------
<FN>
(1) Includes loans held for sale, which are recorded at the lower of cost
or market value.
(2) Includes mortgage-backed securities held to maturity and
mortgage-backed securities designated as available for sale.
(3) Includes obligations for securities sold under agreements to repurchase
and loan of The Blue Ash Building and Loan ESOP.
</TABLE>
52
<PAGE> 53
Blue Ash monitors its interest rate risk, or sensitivity of its net
interest income to changes in interest rates, since the level of such risk
significantly affects certain of its operating strategies. Net interest income
is subject to volatility due to (i) a mismatch in the timing of maturity or
repricing of interest-earning assets and interest-bearing liabilities and (ii)
changes in the relative levels of interest rates for different maturities along
the yield curve (i.e., the shape of the yield curve). The Board of Directors and
management are responsible for reviewing asset/liability policies and Blue Ash's
interest rate risk position.
One means of evaluating the sensitivity of an institution's net
interest income to changes in interest rates is to examine the extent to which
its assets and liabilities are "interest rate sensitive" and by monitoring an
institution's interest rate sensitivity "gap". An asset or liability is said to
be interest rate sensitive within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds the amount of interest
rate sensitive assets. During a period of falling interest rates therefore, the
net interest income of an institution with a positive gap may be adversely
affected due to its interest-earning assets repricing to a greater extent than
its interest-bearing liabilities, while an institution with a negative gap would
likely have an opposite result. Conversely, during a period of rising interest
rates, the net interest income of an institution with a positive gap position
may increase since it is able to increase the yield on its interest-earning
assets more rapidly than the cost of its interest-bearing liabilities, while an
institution with a negative gap would likely have an opposite result.
The following table sets forth the amounts of Blue Ash's
interest-earning assets and interest-bearing liabilities outstanding at June 30,
1997, which may, based upon certain assumptions, reprice or mature in each of
the future time periods shown. Except as stated below, the amount of assets and
liabilities shown which reprice or mature during a particular period were
determined in accordance with the earlier of the term to repricing or the
contractual terms of the asset or liability. Blue Ash's loan prepayment and
deposit decay rate assumptions are management's estimates derived from regional,
state and local data which management uses in monitoring Blue Ash's interest
rate position.
53
<PAGE> 54
<TABLE>
<CAPTION>
Over Over
three Over one Over five Over ten
One day months Over six through three through through Over
to three to six months to three through ten twenty twenty
months months one year years five years years years years Total
------ ------ -------- ----- ---------- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans
One-to-four family
residential
Adjustable(1) $ 7,824 $ 3,808 $ 5,776 $ 8,743 $ 1,583 $ -- $ -- $ -- $27,734
Fixed(2) 120 120 241 1,080 1,181 3,475 8,487 10,386 25,090
Multi-family
residential
Adjustable(3) 666 210 736 635 -- 388 -- -- 2,635
Fixed(4) 26 27 54 80 40 17 -- -- 244
Nonresidential
Adjustable(3)(5) 1,031 1,067 3,923 2,999 -- 1,074 -- -- 10,094
Fixed(4) 2 3 5 17 18 60 46 -- 151
Land
Adjustable(3) 489 74 53 -- -- -- -- -- 616
Nonmortgage loans
Deposit accounts(3) 250 -- -- -- -- -- -- -- 250
Consumer and other(3) 3 -- -- -- -- -- -- -- 3
Mortgage-backed and
related securities(6)
Participation
certificates 3,354 1,162 940 11 7 31 46 -- 5,551
CMO/REMICs 19,465 91 315 1,026 142 130 12 -- 21,181
Investment
securities(7) -- -- -- -- 500 699 200 -- 1,399
Interest-bearing
deposits(8) 1,147 -- -- 180 191 -- 95 -- 1,613
------- ------- -------- -------- -------- -------- ------- ------- -------
Total rate sensitive
assets $34,377 $ 6,562 $ 12,043 $ 14,771 $ 3,662 $ 5,874 $ 8,886 $10,386 $96,561
======= ======= ======== ======== ======== ======== ======= ======= =======
Interest-bearing
liabilities:
Deposit accounts
Passbook and club
accounts(9)(10) $ 343 $ 344 $ 688 $ 2,088 $ 1,362 $ 1,729 $ 1,195 $ 339 $ 8,088
NOW accounts(9)(11) 391 391 782 1,432 383 515 282 52 4,228
Money market deposit
accounts(9)(12) 1,376 1,376 2,751 550 343 395 158 17 6,966
Certificates of
deposit(13) 11,309 12,536 25,026 12,331 1,310 -- -- -- 62,512
Borrowings
Federal Home Loan
Bank advances(14) 2,826 -- 2,500 -- 3,428 3,246 -- -- 12,000
Loan of Employee
Stock Ownership
Plan(15) 60 -- -- -- -- -- -- -- 60
------- ------- -------- -------- -------- -------- ------- ------ -------
Total rate
sensitive
liabilities $16,305 $14,647 $ 31,747 $ 16,401 $ 6,826 $ 5,885 $ 1,635 $ 408 $93,854
======= ======= ======== ======== ======== ======== ======= ====== =======
Interest rate
sensitivity gap $18,072 $(8,085) $(19,704) $ (1,630) $ (3,164) $ (11) $ 7,251 $9,978 $ 2,707
======= ======= ======== ======== ======== ======== ======= ====== =======
Cumulative interest
rate sensitivity gap $18,072 $ 9,987 $ (9,717) $(11,347) $(14,511) $(14,522) $(7,271) $2,707 $ 2,707
======= ======= ======== ======== ======== ======== ======= ====== =======
Cumulative interest
rate sensitivity gap
as a percentage of
total assets 17.62% 9.74% (9.47%) (11.06%) (14.15%) (14.16%) (7.09%) 2.64% 2.64%
===== ===== ===== ====== ====== ====== ===== ==== ====
Cumulative interest-
earning assets as a
percentage of interest-
bearing liabilities 210.8% 132.3% 84.5% 85.7% 83.1% 84.2% 92.2% 102.9% 102.9%
===== ===== ===== ===== ===== ==== ==== ===== =====
</TABLE>
- ---------------------------------
Footnotes on page 55.
54
<PAGE> 55
(1) Includes adjustable-rate first mortgage loans, second mortgage loans,
construction loans and home equity line of credit loans based on
contractual term to repricing.
(2) Includes fixed-rate first mortgage loans, second mortgage loans and
construction loans which are assumed to reprice in accordance with
prepayment assumptions based on regional, state and local data for
savings associations in the State of Ohio. Such prepayment assumptions
have also been derived from prepayment assumption models previously
utilized by the OTS through June of 1997. Assumed annual prepayment
rates ranging from 7% to 18%, based on the loan coupon rate, were used.
(3) Based on contractual term to repricing.
(4) Based on contractual term to maturity and assuming annual prepayment
rates used, ranging from 8% to 15%.
(5) Includes adjustable-rate first mortgage loans, second mortgage loans
and construction loans.
(6) Includes adjustable-rate mortgage-backed and related securities based
on contractual term to repricing and fixed-rate mortgage-backed and
related securities which are assumed to reprice in accordance with
prepayment assumptions based on regional, state and local data for
savings associations and assumption models utilized previously by the
OTS as previously indicated. For fixed rate mortgage-backed and related
securities, assumed annual prepayment rates ranging from 7% to 18%,
based on the loan coupon rate, were used.
(7) Based on contractual term to maturity.
(8) Includes federal funds sold, interest-bearing deposits, certificates of
deposits in other financial institutions and Federal Home Loan Bank
stock.
(9) Based on an approximation of OTS assumptions and certain assumptions
based on regional, state and local data for savings associations in the
State of Ohio.
(10) Assumes an annual decay rate of 17% for the first three years, 16% for
the fourth and fifth years and 14% thereafter on the cumulative
declining balance.
(11) Assumes an annual decay rate of 37% for the first year, 32% for the
second and third years and 17% thereafter on the cumulative declining
balance.
(12) Assumes an annual decay rate of 79% for the first year and 21%
thereafter on the cumulative declining balance.
(13) Certificates of deposit are shown repricing based on contractual terms
to maturity.
(14) Federal Home Loan Bank advances are shown repricing based on
contractual terms to maturity.
(15) Loan of Employee Stock Ownership Plan is based on contractual term to
repricing.
As the above table indicates, Blue Ash has a negative cumulative gap
for assets and liabilities, maturing or repricing within one year, equal to
9.47% of total assets. Thus, decreases in interest rates during this time period
would generally increase Blue Ash's net interest income, while increases in
interest rates would generally decrease Blue Ash's net interest income. However,
certain shortcomings are inherent in the method of analysis presented in the
above table. Although certain assets and liabilities may have similar maturities
or periods of repricing, they may react in different degrees to changes in
market interest rates. The interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types of assets and liabilities may lag behind changes
in market interest rates. Certain assets, such as adjustable-rate mortgages,
have features which restrict changes in interest rates, and prepayment and early
withdrawal levels would likely deviate significantly from those assumed in
calculating the table. The ability of many borrowers to service their debt may
decrease in the event of an interest rate increase.
Although the action taken by management of Blue Ash has reduced the
potential effects of changes in interest rates on Blue Ash's results of
operations, significant increases in interest
55
<PAGE> 56
rates may adversely affect Blue Ash's net interest income because its
adjustable-rate, interest-earning assets generally are not as responsive to
changes in interest rates as its interest-bearing liabilities due to terms which
generally permit only annual adjustments to the interest rates and which
generally limit the amount which interest rates thereon can adjust at such time
and over the life of the related asset.
The following table sets forth, for the years and at the date
indicated, the weighted average yields earned on Blue Ash's interest-earning
assets, the weighted average interest rates paid on interest-bearing
liabilities, the interest rate spread and the net yield on average
interest-earning assets. Such yields and costs are derived by dividing income or
expense by the average balances of assets or liabilities, respectively, for each
year presented. Average balances are derived from month-end balances. Management
does not believe that the use of month-end balances instead of daily balances
has caused any material difference in the information presented.
<TABLE>
<CAPTION>
At Year ended June 30,
June 30, -------------------------
1997 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average yield on loan portfolio 8.58% 8.61% 8.58% 8.42%
Weighted average yield on mortgage-
backed securities 6.40 6.40 6.49 5.95
Weighted average yield on investment
securities 7.35 7.35 7.20 6.73
Weighted average yield on other interest-
earning assets 6.66 6.06 6.59 6.30
Weighted average yield on all interest-
earning assets 7.92 7.88 7.81 7.52
Weighted average interest rate paid on
deposits 5.04 4.93 5.01 4.11
Weighted average interest rate paid on
FHLB advances and other borrowings 6.06 6.06 6.11 5.56
Weighted average interest rate paid on
all interest-bearing liabilities 5.17 5.08 5.15 4.36
Interest rate spread (spread between
weighted average interest rate on all
interest-earning assets and all
interest-bearing liabilities) 2.75 2.80 2.66 3.16
Net yield (net interest income as a
percentage of average interest-earning
assets) N/A 2.99 2.86 3.30
</TABLE>
RATE/VOLUME ANALYSIS
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected Blue Ash's interest income and expense during the years indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume
56
<PAGE> 57
multiplied by prior year rate), (ii) changes in rate (change in rate multiplied
by prior year volume), (iii) changes in rate/volume (changes in rate multiplied
by changes in volume) and (iv) total change in rate and volume.
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995 1995 vs. 1994
--------------------------------- --------------------------------- ---------------------------------
Increase Increase Increase
(Decrease) Due to (Decrease) Due to (Decrease) Due to
--------------------- --------------------- --------------------
Total Total Total
Rate/ Increase Rate/ Increase Rate/ Increase
Rate Volume Volume (Decrease) Rate Volume Volume (Decrease) Rate Volume Volume (Decrease)
---- ------ ------ ---------- ---- ------ ------ ---------- ---- ------ ------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income
attributable to:
Loans receivable(1) $ 16 $790 $ 5 $811 $ 68 $ 767 $ 11 $ 846 $ 89 $ 556 $ 20 $665
Mortgage-backed
securities(2) (25) 15 -- (10) 121 282 26 429 145 (211) (20) (86)
Investment securities(3) 1 32 1 34 4 2 -- 6 8 (33) (3) (28)
Other interest-earning
assets(4) (13) (43) 3 (53) 6 32 1 39 217 (99) (143) (25)
----- ---- ---- ----- ---- ------ ---- ------ ---- ----- ----- ----
Total interest-
earning assets $ (21) $794 $ 9 $ 82 $199 $1,083 $ 38 $1,320 $459 $ 213 $(146) $526
===== ==== ==== ==== ==== ====== ==== ====== ==== ===== ====== ====
Interest expense
attributable to:
Passbooks $ (16) $ (1) $ -- $(17) $ 3 $ (8) $ -- $ (5) $ 28 $ (24) $ (3) $ 1
NOWs (2) 6 -- 4 (6) (11) 1 (16) 2 20 -- 22
MMDAs (2) (25) -- (27) 5 (72) (1) (68) 11 (32) -- (21)
Certificates (98) 511 (17) 396 264 877 149 1,290 239 (57) (10) 172
----- ---- ---- ---- ---- ----- ---- ------ ---- ----- ----- ----
Total interest-bearing
deposits (118) 491 (17) 356 266 786 149 1,201 280 (93) (13) 174
FHLB advances and
other borrowings(5) (5) 48 (1) 42 62 (54) (5) 3 34 56 2 92
----- ---- ----- ---- ---- ----- ---- ------ ---- ----- ----- ----
Total interest-bearing
liabilities $(123) $539 $(18) $398 $328 $ 732 $144 $1,204 $314 $ (37) $ (11) $266
===== ==== ==== ==== ==== ===== ==== ====== ==== ===== ===== ====
Increase in net interest
income $384 $ 116 $260
==== ====== ====
- -----------------------------------
<FN>
(1) Includes loans held for sale, which are recorded at the lower of cost
or market value.
(2) Includes mortgage-backed securities held to maturity, which are
recorded at amortized cost, and mortgage-backed securities designated
as available for sale, which are recorded at fair value at June 30,
1996, 1995 and 1994.
(3) Includes investment securities held to maturity, which are recorded at
amortized cost at June 30, 1996, 1995 and 1994.
(4) Includes federal funds sold, interest-bearing deposits, certificates of
deposit in other financial institutions and Federal Home Loan Bank
stock.
(5) Includes obligations for securities sold under agreements to repurchase
and loan of the ESOP.
</TABLE>
COMPETITION
Blue Ash faces strong competition both in making real estate and other
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from other savings institutions, commercial banks, consumer
finance companies, credit unions, leasing companies and mortgage bankers who
also make loans secured by real estate located in Blue Ash's lending area. Blue
Ash competes for real estate loans principally on the basis of the
57
<PAGE> 58
interest rates and loan fees it charges, the types of loans it originates and
the quality of services it provides to borrowers. Competition is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels and other factors which
are not readily predictable.
Blue Ash faces substantial competition in attracting deposits from
other savings institutions, commercial banks and credit unions and with the
issuers of commercial paper and other securities, such as shares in money market
and mutual funds in its lending area, including many large institutions which
have greater financial and marketing resources available to them. The ability of
Blue Ash to attract and retain deposits depends on its ability to provide an
investment opportunity that satisfies the requirements of investors as to rate
of return, liquidity, risk and other factors. Blue Ash competes for these
deposits by offering a variety of deposit accounts at competitive rates,
convenient business hours, convenient branch locations with inter-branch deposit
and withdrawal privileges and 24-hour ATM processing.
Of the 33 thrifts which have their principal offices in Hamilton
County, at June 30, 1997, Blue Ash ranked approximately 12th in asset size and
deposit share.
FIRREA eliminated many of the distinctions between commercial banks and
savings institutions and holding companies and allowed bank holding companies to
acquire savings institutions. FIRREA has generally resulted in an increase in
the competition encountered by savings institutions and has resulted in a
decrease in both the number of savings institutions and the aggregate size of
the savings industry.
The size of financial institutions competing with Blue Ash is likely to
increase as a result of changes in statutes and regulations eliminating various
restrictions on interstate and inter-industry branching. Such increased
competition in this area may have an adverse effect upon Blue Ash.
PERSONNEL
As of June 30, 1997, Blue Ash had 24 full-time employees and one
part-time employee. Blue Ash believes that relations with its employees are
excellent. Blue Ash offers health, disability, life and dependent care benefits.
In addition, Blue Ash offers certain retirement benefits. None of the employees
of Blue Ash are represented by a collective bargaining unit.
58
<PAGE> 59
REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of Towne Financial and Blue Ash. The description
of these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
GENERAL
Towne Financial is a savings and loan holding company within the
meaning of the Home Owners Loan Act of 1933, as amended (the "HOLA").
Consequently, Towne Financial is subject to regulation, examination and
oversight by the OTS and must submit periodic reports thereto. Because Towne
Financial is a corporation organized under Ohio law, it is also subject to
provisions of the Ohio Revised Code applicable to corporations generally.
As a savings and loan association chartered under the laws of Ohio,
Blue Ash is subject to regulation, examination and oversight by the
Superintendent of the Division of Savings and Loan Associations in the
Department of Commerce of the State of Ohio (the "Ohio Superintendent"). Because
Blue Ash's deposits are insured by the FDIC, Blue Ash also is subject to
regulation and examination by the OTS, as its primary federal regulator, and by
the FDIC. Blue Ash must file periodic reports with the Ohio Superintendent and
the OTS concerning its activities and financial condition, including an
independent audit. Examinations are conducted periodically by these federal and
state regulators to determine whether Blue Ash is in compliance with various
regulatory requirements and is operating in a safe and sound manner.
Because it accepts federally insured deposits and offers transaction
accounts, Blue Ash is also subject to certain regulations issued by the Board of
Governors of the Federal Reserve System ("FRB") including without limitation,
Regulation B (Equal Credit Opportunity), Regulation D (Reserves), Regulation E
(Electronic Fund Transfers), Regulation Z (Truth in Lending) and Regulation CC
(Availability of Funds). As creditors of loans secured by real property, and as
owners of real property, financial institutions such as Blue Ash may be subject
to potential liability under various statutes and regulations applicable to
property owners generally, including statutes and regulations relating to the
environmental condition of real property.
Congress is considering legislation to eliminate the federal savings
and loan charter and the separate federal regulation of savings and loan
associations and the Department of the Treasury is preparing a report for
Congress on the development of a common charter for all financial institutions.
Pursuant to such legislation, Congress may eliminate the OTS and Blue Ash may be
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regulated under federal law as a bank or may be required to change its charter.
Such change in regulation or charter would likely change the range of activities
in which Blue Ash may engage and would probably subject Blue Ash to more
regulation by the FDIC.
In addition, Towne Financial might become subject to a different form
of holding company regulation which may limit the activities in which Towne
Financial may engage and subject Towne Financial to additional regulatory
requirements, including separate capital requirements. Towne Financial cannot
predict when or whether Congress may actually pass legislation regarding Towne
Financial's and Blue Ash's regulatory requirements or charter. Although such
legislation may change the activities in which Towne Financial and Blue Ash may
engage, it is not anticipated that the current activities of either Towne
Financial or Blue Ash will be materially affected by those activity limits.
OHIO CORPORATION LAW
MERGER MORATORIUM STATUTE. Chapter 1704 of the Ohio Revised Code
regulates certain takeover bids affecting certain public corporations which have
significant ties to Ohio. This statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between such an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first becomes an Interested Shareholder, the
Board of Directors of the issuing corporation has approved the purchase of
shares which resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination
may not occur unless (i) one of the specified exceptions applies, (ii) the
holders of at least two-thirds of the voting shares, and of at least a majority
of the voting shares not beneficially owned by the Interested Shareholder,
approve the business combination at a meeting called for such purpose, or (iii)
the business combination meets certain statutory criteria designed to ensure
that the issuing public corporation's remaining shareholders receive fair
consideration for their shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. However,
the statute still prohibits for twelve months any business combination that
would have been prohibited but for the adoption of such an opt-out amendment.
The statute also provides that it will continue to
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apply to any business combination between a person who became an Interested
Shareholder prior to the adoption of such an amendment as if the amendment had
not been adopted. Neither the Articles of Incorporation of Towne Financial nor
Blue Ash opt out of the protection afforded by Chapter 1704.
CONTROL SHARE ACQUISITION. Section 1701.831 of the Ohio Revised Code
(the "Control Share Acquisition Statute") requires that certain acquisition of
voting securities which would result in the acquiring shareholder owning 20%,
33-1/3%, or 50% of the outstanding voting securities of Towne Financial (a
"Control Share Acquisition") must be approved in advance by the holders of at
least a majority of the outstanding voting shares represented at a meeting at
which a quorum is present and a majority of the portion of the outstanding
voting shares is represented at such a meeting, excluding the voting shares
owned by the acquiring shareholder. The Control Share Acquisition Statute was
intended, in part, to protect shareholders of Ohio corporations from coercive
tender offers.
TAKEOVER BID STATUTE. Ohio law also contains a statute regulating
takeover bids for any Ohio corporation, including savings and loan associations.
Such statute provides that no offeror may make a takeover bid unless (i) at
least 20 days prior thereto the offeror announces publicly the terms of the
proposed takeover bid and files with the Ohio Division of Securities (the
"Securities Division") and provides the target company with certain information
in respect of the offeror, his ownership of the company's shares and his plans
for the company, and (ii) within ten days following such filing either (a) no
hearing is required by the Securities Division, (b) a hearing is requested by
the target company within such time but the Securities Division finds no cause
for hearing exists, or (c) a hearing is ordered and upon such hearing the
Securities Division adjudicates that the offeror proposes to make full, fair and
effective disclosure to offerees of all information material to a decision to
accept or reject the offer.
The takeover bid statute also states that no offeror shall make a
takeover bid if he owns 5% or more of the issued and outstanding equity
securities of any class of the target company, any of which were purchased
within one year before the proposed takeover bid, and the offeror, before making
any such purchase, failed to announce his intention to gain control of the
target company, or otherwise failed to make full and fair disclosure of such
intention to the persons from whom he acquired such securities. The United
States District Court for the Southern District of Ohio has determined that the
Ohio takeover bid statute is preempted by federal regulation.
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OHIO SAVINGS AND LOAN LAW
The Ohio Superintendent is responsible for the regulation, examination
and supervision of Ohio savings and loan associations in accordance with the
laws of the State of Ohio. Ohio law prescribes the permissible investments and
activities of Ohio savings and loan associations, including the types of lending
that such associations may engage in and the investments in real estate,
subsidiaries and corporate or government securities that such associations may
make. The ability of Ohio associations to engage in these state-authorized
investments and activities is subject to oversight and approval by the FDIC, if
such investments or activities are not permissible for a federally-chartered
savings association. See "Federal Deposit Insurance Corporation -- State
Association Activities."
The Ohio Superintendent also has approval authority over any mergers
involving or acquisitions of control of Ohio savings and loan associations. The
Ohio Superintendent may initiate certain supervisory measures or formal
enforcement actions against Ohio associations. Ultimately, if the grounds
provided by law exist, the Superintendent may place an Ohio association in
conservatorship or receivership.
The Ohio Superintendent conducts regular examinations of Blue Ash
approximately every eighteen months. Such examinations are usually conducted
jointly with one or both federal regulators. The Ohio Superintendent imposes
assessments on Ohio associations based on their asset size to cover the cost of
supervision and examination.
In addition to being governed by the laws of Ohio specifically
governing savings and loan associations, Blue Ash is also governed by Ohio
corporate law, to the extent such law does not conflict with the laws
specifically governing savings and loan associations.
OFFICE OF THRIFT SUPERVISION
GENERAL. The OTS is an office in the Department of the Treasury and is
subject to the general oversight of the Secretary of the Treasury. The Director
of the OTS is responsible for the regulation and supervision of all
federally-chartered savings associations and all other savings associations, the
deposits of which are insured by the FDIC in the SAIF. The OTS issues
regulations governing the operation of savings associations, regularly examines
such associations and imposes assessments on savings associations based on their
asset size to cover the costs of general supervision and examination. The OTS
also may initiate enforcement actions against savings associations and certain
persons affiliated with them for violations of laws or regulations or for
engaging in unsafe or unsound practices. If the grounds
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provided by law exist, the OTS may appoint a conservator or receiver for a
savings 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 disclosure, equal credit opportunity, fair credit
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 transaction. Community
reinvestment regulations will 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 such areas. Blue
Ash has received a "satisfactory" examination rating under those regulations.
OPERATING STANDARDS. Pursuant to the Federal Deposit Insurance
Corporation Improvement Act of 1991 (the "Improvement Act"), the OTS was
required to prescribe standards for savings associations related to (i) internal
controls, information systems and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate exposure; (v) asset
growth; and (vi) compensation, fees and benefits. The compensation standards
prohibited, as an unsafe and unsound practice, any employment contract,
compensation or benefit agreement, fee arrangement, perquisite, stock option
plan, post-employment benefit or other compensatory arrangement that would
provide any executive officer, employee, director or principal shareholder with
excessive compensation, fees or benefits or with compensation that would result
in a material financial loss to Blue Ash. The OTS was also charged by the
Improvement Act with prescribing standards for savings associations and their
holding companies specifying (i) a maximum ratio of classified assets to
capital; (ii) minimum earnings sufficient to absorb losses without impairing
capital; and (iii) to the extent feasible, a minimum ratio of market value to
book value for publicly traded shares of Blue Ash or the holding company.
REGULATORY CAPITAL REQUIREMENTS. Blue Ash is required by OTS
regulations to meet certain minimum capital requirements. The following table
sets forth the amount and percentage level of regulatory capital of Blue Ash at
June 30, 1997, and the amount by which it exceeds, fully phased-in requirements.
Tangible and core capital are reflected as a percentage of adjusted total
assets. Risk-based (or total) capital, which consists of core and supplementary
capital, is reflected as a percentage of risk-weighted assets. Assets are
weighted at percentage levels ranging from 0% to 100% depending on their
relative risk.
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<TABLE>
<CAPTION>
At June 30, 1997
------------------------
Amount Percent
------ -------
(Dollars in thousands)
<S> <C> <C>
Tangible Capital $7,437 7.3%
Requirement 1,537 1.5
------ ----
Excess $5,900 5.8%
====== ====
Core Capital $7,437 7.3%
Requirement 3,074 3.0
------ ----
Excess $4,363 4.3%
====== ====
Risk-based Capital $7,681 14.8%
Risk-based Requirement 4,138 8.0
------ ----
Excess $3,543 6.8%
====== ====
</TABLE>
Current capital requirements call for tangible capital (which for Blue
Ash is equity capital under generally accepted accounting principles adjusted
for goodwill, excess mortgage servicing rights and unrealized losses on certain
securities designated as available for sale) of 1.5% of adjusted total assets,
core capital (which for Blue Ash consists solely of tangible capital) of 3.0% of
adjusted total assets and risk-based capital (which for Blue Ash consists of
core capital plus general valuation allowances of $244,000) of 8% of
risk-weighted assets. The OTS has proposed to amend the core capital requirement
so that those institutions that do not have the highest examination rating and
an acceptable level of risk will be required to maintain core capital from 4% to
5%, depending on the institution's examination rating and overall risk. Blue Ash
does not anticipate that it will be adversely affected if the core capital
requirement regulation is amended as proposed. Its current core capital level is
7.3% of adjusted total assets.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement, savings associations would have to
measure the impact of an immediate 200 basis point change in interest rates on
the value of its portfolio, as determined under the methodology established by
the OTS. If the measured interest rate risk is above the level deemed normal
under the regulation, Blue Ash would have to deduct one-half of that excess
exposure from its total capital when determining its level of risk-based
capital. In general, institutions with less than $300 million in assets and a
risk-based capital ratio of greater than 12% will not be subject to this
requirement. Blue Ash currently qualifies for this exception. Pending
implementation of the interest rate risk component, the OTS has the authority to
impose a higher individualized capital requirement on any savings
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association it deems to have excess interest rate risk. The OTS also may adjust
the risk-based capital requirement on an individual basis for any association to
take into account risks due to concentrations of credit and non-traditional
activities.
Pursuant to the Improvement Act, the OTS has adopted regulations
governing prompt corrective action to resolve the problems of capital deficient
and otherwise troubled savings associations. At each successively lower defined
capital category, an association is subject to more restrictive and numerous
mandatory or discretionary regulatory actions or limits, and the OTS has less
flexibility in determining how to resolve the problems of the institution. The
OTS has defined these capital levels as follows: (i) well-capitalized
associations must have total risk-based capital of at least 10%, core
risk-based capital (consisting only of items that qualify for inclusion in core
capital) of at least 6% and core capital of at least 5%; (ii) adequately
capitalized associations are those that meet the regulatory minimum of total
risk-based capital of 8%, core risk-based capital (consisting only of items that
qualify for inclusion in core capital) of 4% and core capital of 4% (except for
associations receiving the highest examination rating and with an acceptable
level of risk, in which case the level is at least 3%); (iii) undercapitalized
associations are those that do not meet regulatory limits, but that are not
significantly undercapitalized; (iv) significantly undercapitalized associations
have total risk-based capital of less than 6%, core risk-based capital
(consisting only of items that qualify for inclusion in core capital) of less
than 3% and core capital of less than 3%; and (v) critically undercapitalized
associations are those with core capital of less than 2% of total assets. In
addition, the OTS generally can downgrade an association's capital category,
notwithstanding its capital level, if, after notice and opportunity for hearing,
the association is deemed to be engaging in an unsafe or unsound practice
because it has not corrected deficiencies that resulted in it receiving a less
than satisfactory examination rating on matters other than capital or it is
deemed to be in an unsafe or unsound condition. An undercapitalized association
must submit a capital restoration plan to the OTS within 45 days after it
becomes undercapitalized. Such an association will be subject to increased
monitoring and asset growth restrictions and will be required to obtain prior
approval for acquisitions, branching and engaging in new lines of business.
Furthermore, critically undercapitalized institutions must be placed in
conservatorship or receivership within 90 days of reaching that capitalization
level, except under limited circumstances. Blue Ash's capital at June 30, 1997
meets the standards for a well-capitalized institution.
The Improvement Act prohibits a savings association from making a
capital distribution to anyone or paying management fees to any person having
control of the association if, after such distribution or payment, the
association would be undercapitalized.
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In addition, each company controlling an undercapitalized association must
guarantee that the association will comply with its capital plan until the
association has been adequately capitalized on an average during each of four
preceding calendar quarters and must provide adequate assurances of performance.
The aggregate liability pursuant to such guarantee is limited to the lesser of
(i) an amount equal to 5% of the association's total assets at the time the
institution became undercapitalized or (ii) the amount that is necessary to
bring the association into compliance with all capital standards applicable to
such association at the time the association fails to comply with its capital
restoration plan.
LIQUIDITY. OTS regulations require that savings associations maintain
an average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state or federal agency
obligations) equal to a monthly average of not less than a specified percentage
of its net withdrawable savings deposits plus borrowings payable in one year or
less. This liquidity requirement, which is currently 5%, may be changed from
time to time to any amount within the range of 4% to 10%, depending upon
economic conditions and the savings flows at all associations. Federal
regulations also require each association to maintain an average daily balance
of short-term liquid assets at a specified percentage, currently 1%, of the
total of its net withdrawable savings accounts and borrowings payable in one
year or less. Monetary penalties may be imposed upon associations failing to
meet liquidity requirements. The eligible liquidity of Blue Ash, as computed
under current regulation at June 30, 1997, was approximately $4.7 million, or
5.8%, and exceeded the then applicable 5.0% liquidity requirement by
approximately $617,000, or 0.8%. At June 30, 1997, Blue Ash exceeded the then
applicable 1.0% liquidity requirement of $819,000, or 1.0%, by approximately
$2.1 million, or 2.5%.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to meet
the QTL test. Prior to September 30, 1996, there was only one QTL test which
required savings associations 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, stock issued by any
FHLB, the FHLMC or the 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 9 out of every 12 months. Congress created a second QTL test,
effective September 30, 1996, pursuant to which a savings association may also
meet the QTL test under the Internal Revenue Code of 1986, as amended (the
"Code"), for thrift institution status. According to the test under the Code, at
least 60% of the institution's assets (on a tax basis) must consist of
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specified assets (generally loans secured by residential real estate or
deposits, educational loans, cash 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
will be subject to certain operating and regulatory restrictions. A savings
association that fails to meet the QTL Test will not be eligible for new FHLB
advances. See "Federal Home Loan Banks." At June 30, 1997, Blue Ash had QTL
investments equal to approximately 84.2% of its total portfolio assets.
LENDING LIMITS. OTS regulations generally limit the aggregate amount
that a savings association can lend to one borrower to an amount equal to 15% of
the association's Unimpaired Capital. A savings association may loan to one
borrower an additional amount not to exceed 10% of the association's Unimpaired
Capital, if the additional amount is fully secured by certain forms of "readily
marketable collateral." Real estate is not considered "readily marketable
collateral." Certain types of loans are not subject to these limits. In applying
these limits, the regulations require that loans to certain related borrowers be
aggregated. Notwithstanding the specified limits, an association may lend to one
borrower up to $500,000 "for any purpose" and, subject to certain conditions
including OTS prior approval, may lend to one borrower for the development of
domestic residential housing units in an amount up to the lesser of $30,000,000,
or 30% of the savings association's unimpaired capital and surplus. At June 30,
1997, Blue Ash was in compliance with these lending limits. See "Lending
Activities -- Loan Originations, Purchases and Sales."
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to insiders are also
subject to Section 22(g) and (h) of the Federal Reserve Act ("FRA"), which place
restrictions on loans to executive officers, directors and principal
shareholders and their related interests. Generally, such loans must conform to
limits on loans to one borrower, and the total of such loans to executive
officers, directors, principal shareholders and their related interests cannot
exceed the association's Unimpaired Capital. Most loans to directors, executive
officers and principal shareholders must be approved in advance by a majority of
the "disinterested" members of the board of directors of the association with
any "interested" director not participating. All loans to directors, executive
officers and principal shareholders must be made on terms substantially the same
as offered in comparable transactions with the general public. Loans to
executive officers are subject to additional restrictions. Blue Ash was in
compliance with such restrictions at June 30, 1997.
All transactions between savings associations and their affiliates must
comply with Section 23A and 23B of the FRA. An affiliate of a savings
association is any company or entity that controls, is controlled by or is under
common control with the
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savings association. Towne Financial is an affiliate of Blue Ash. Generally,
Sections 23A and 23B of the FRA (i) limit the extent to which a savings
association or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, (ii) limit the aggregate of all such transactions with all affiliates
to an amount equal to 20% of such capital stock and surplus, and (iii) require
that all such transactions be on terms substantially the same, or at least as
favorable to the association, as those provided in transactions with a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar types of
transactions. In addition to the limits in Sections 23A and 23B, a savings
association may not make any loan or other extension of credit to an affiliate
unless the affiliate is engaged only in activities permissible for a bank
holding company and may not purchase or invest in securities of any affiliate
except shares of a subsidiary. Blue Ash was in compliance with these
requirements and restrictions at June 30, 1997.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions, including dividend payments. An association which has converted
to stock form is prohibited from declaring or paying any dividends or from
repurchasing any of its stock if, as a result, the net worth of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion. OTS
regulations also establish a three-tier system limiting capital distributions
according to ratings of associations based on their capital level and
supervisory condition.
The first rating category is Tier 1, consisting of associations that,
before and after the proposed distribution, meet their fully phased-in capital
requirements. Associations in this category may make capital distributions
during any calendar year equal to the greater of 100% of net earnings, current
year-to-date, plus 50% of the amount by which the lesser of the association's
tangible, core or risk-based capital exceeds its fully phased-in capital
requirement for such capital component, as measured at the beginning of the
calendar year, or the amount authorized for a Tier 2 association. A Tier 1
association deemed to be in need of more than normal supervision by the OTS may
be downgraded to a Tier 2 or Tier 3 association. Blue Ash meets the requirements
for a Tier 1 association and has not been notified of any need for more than
normal supervision.
The second category, Tier 2, consists of associations that before and
after the proposed distribution meet their current minimum, but not fully
phased-in, capital requirements. Associations in this category may make capital
distributions of up to 75% of net earnings over the most recent four quarters.
Tier 3
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associations do not meet current minimum capital requirements and must obtain
OTS approval of any capital distribution. Tier 2 associations that propose to
make a capital distribution in excess of the noted safe harbor level must also
obtain OTS approval. Tier 2 associations proposed to make a capital distribution
within the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior to
such distribution. The OTS may object to the distribution during that 30-day
period based on safety and soundness concerns.
In December 1994, the OTS issued a proposal to amend the capital
distributions limits. Under that proposal, associations which are not owned by a
holding company and which have a CAMEL examination rating of 1 or 2 could make a
capital distribution without notice to the OTS, if they remain adequately
capitalized, as described above, after the distribution is made. Any other
association seeking to make a capital distribution that would not cause the
association to fall below the capital levels to qualify as adequately
capitalized or better, would have to provide notice to the OTS. Except under
limited circumstances and with OTS approval, no capital distributions would be
permitted if it caused the association to become undercapitalized or worse.
In addition, as a subsidiary of Towne Financial, Blue Ash is required
to give the OTS 30 days notice prior to declaring any dividend on its stock. The
OTS may object to the distribution during that 30-day period based on safety and
soundness concerns. Blue Ash did not pay any dividends to Towne Financial during
fiscal 1997.
HOLDING COMPANY REGULATION. Towne Financial is a unitary savings and
loan holding company within the meaning of the HOLA. As such, Towne Financial is
registered with the OTS and is subject to OTS regulations, examination,
supervision and reporting requirements. Congress is considering legislation that
may require that Towne Financial become a bank holding company regulated by the
FRB. Bank holding companies with more than $150 million in assets are subject to
capital requirements similar to those imposed on Blue Ash and have more
extensive interstate acquisition authority than savings and loan holding
companies. Bank holding companies are subject to more restrictive activity and
investment limits than savings and loan holding companies. No assurances can be
given that such legislation will be enacted, and Towne Financial cannot be
certain of the legislation's impact on its operations until it is enacted.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a
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subsidiary. Under certain circumstances, a savings and loan holding company is
permitted to acquire, with the approval of the OTS, up to 15% of the previously
unissued voting shares of an undercapitalized savings association for cash
without such savings association being deemed to be controlled by the holding
company. Except with the prior approval of the OTS, no director or officer of a
savings and loan holding company or person owning or controlling by proxy or
otherwise more than 25% of such company's stock may also acquire control of any
savings institution, other than a subsidiary institution, or any other savings
and loan holding company.
There are generally no restrictions on the activities of unitary
savings and loan holding companies and such companies are the only financial
institution holding companies which may engage in commercial activities and
expanded securities and insurance activities. The broad latitude to engage in
activities under current law can be restricted, if the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association. The OTS
may impose such restrictions as deemed necessary to address such risk, including
limiting (i) payment of dividends by the savings association, (ii) transactions
between the savings association and its affiliates, and (iii) any activities of
the savings association that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
association. Notwithstanding the foregoing rules as to permissible business
activities of a unitary savings and loan holding company, if the savings
association subsidiary of a holding company fails to meet the QTL Test, then
such unitary holding company would become subject to the activities restrictions
applicable to multiple holding companies. At June 30, 1997, Blue Ash met the QTL
Test.
If Towne Financial were to acquire control of another savings
institution, other than through a merger or other business combination with Blue
Ash, Towne Financial would become a multiple savings and loan holding company.
Unless the acquisition is an emergency thrift acquisition and each subsidiary
savings association meets the QTL Test, the activities of Towne Financial and
any of its subsidiaries (other than Blue Ash or other subsidiary savings
associations) would thereafter be subject to activity restrictions. The HOLA
provides that, among other things, no multiple savings and loan holding company
or subsidiary thereof that is not a savings institution shall commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity other than (i)
furnishing or performing management services for a subsidiary savings
institution, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing or liquidating assets owned by or acquired from a subsidiary
savings institution, (iv)
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holding or managing properties used or occupied by a subsidiary savings
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by federal regulation as of March 5, 1987, to be
engaged in by multiple holding companies, or (vii) those activities authorized
by the FRB as permissible for bank holding companies, unless the OTS by
regulation prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above must also be approved by
the OTS prior to being engaged in by a multiple holding company.
The OTS may approve acquisitions resulting in the formation of a
multiple savings and loan holding company that controls savings associations in
more than one state, only if the multiple savings and loan holding company
involved controls a savings association that operated a home or branch office in
the state of the association to be acquired as of March 5, 1987, or if the laws
of the state in which the institution to be acquired is located specifically
permit institutions to be acquired by state-chartered institutions or savings
and loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
institutions). As under prior law, the OTS may approve an acquisition resulting
in a multiple savings and loan holding company controlling savings associations
in more than one state in the case of certain emergency thrift acquisitions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period or without the
giving of such notice shall be invalid.
FEDERAL REGULATION OF ACQUISITIONS OF CONTROL OF TOWNE FINANCIAL AND
BLUE ASH. In addition to the Ohio law limitations on the merger and acquisition
of Towne Financial and Blue Ash previously discussed, federal limitations
generally require regulatory approval of acquisitions at specified levels. State
law similarly requires regulatory approval and also imposes certain
anti-takeover limitations. Under pertinent federal law and regulations, no
person, directly or indirectly, or acting in concert with others, may acquire
control of Towne Financial or Blue Ash without 60 days prior notice to the OTS.
"Control" is generally defined as having more than 25% ownership or voting
power; however, ownership or voting power of more than 10% may be deemed
"control" if certain factors are present. If the acquisition of control is by a
company, the acquiror must obtain approval, rather than give notice, of the
acquisition as a savings and loan holding company.
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Ohio law requires Superintendent approval of any acquisition of control
of Blue Ash directly or indirectly, including through Towne Financial. Control
is deemed to be at least 15% ownership or voting power. Ohio law permits
acquisitions of control by non-Ohio companies only if the law of the State of
the acquiror permits similar acquisitions in that State by Ohio companies.
In addition, any merger of Blue Ash must be approved by the OTS as well
as the Superintendent. Further, any merger of Towne Financial, in which Towne
Financial is not the resulting company, must also be approved by both the OTS
and the Superintendent as a holding company acquisition.
FEDERAL DEPOSIT INSURANCE CORPORATION.
DEPOSIT INSURANCE. The FDIC is an independent federal agency that
insures the deposits of federally-insured banks and thrifts, up to prescribed
statutory limits, and safeguards the safety and soundness of the banking and
thrift industries. The FDIC maintains and administers two separate insurance
funds, the Bank Insurance Fund ("BIF") for commercial banks and state savings
banks and the SAIF for savings associations. Blue Ash is a member of the SAIF
and its deposit accounts are insured by the FDIC, up to the prescribed limits.
The FDIC has examination authority over all insured depository institutions,
including Blue Ash, and has authority to initiate enforcement actions against
federally-insured savings associations, if the FDIC does not believe the OTS has
taken appropriate action to safeguard safety and soundness and the deposit
insurance fund.
The FDIC may terminate the deposit insurance of any insured depository
institution, including Blue Ash, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of Blue Ash's deposit insurance.
SAIF members are generally prohibited from converting to the status of
BIF members or merging with or transferring assets to a BIF member before the
date on which the SAIF first meets or exceeds the designated reserve level. The
FDIC, however, may approve such a transaction in the case of a SAIF member in
default or if the transaction involves an insubstantial portion of the deposits
of each participant. In addition, mergers, transfers of assets and
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assumptions of liabilities may be approved by the appropriate bank regulator so
long as deposit insurance premiums continue to be paid to the SAIF for deposits
attributable to the SAIF members plus an adjustment for the annual rate of
growth of deposits in the surviving bank without regard to subsequent
acquisitions. Each depository institution participating in a SAIF to BIF
conversion transaction is required to pay an exit fee to the SAIF and an
entrance fee to the BIF. A savings association may adopt a commercial bank or
savings bank charter if the resulting bank remains a SAIF member.
All state-chartered associations are generally limited to activities
and investments of the type and in the amount authorized for federally-chartered
associations, notwithstanding state law. The FDIC is authorized to permit such
associations to engage in state-authorized activities or investments that do not
meet this standard if they meet their capital requirements, if it is determined
that such activities or investments do not pose a significant risk to the SAIF.
ASSESSMENTS. 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.
Both the SAIF and the BIF are required by law to attain and thereafter
maintain a reserve ratio of 1.25% of insured deposits. The reserves of the SAIF
were below the level required by law, because a significant portion of the
assessments paid into the fund were used to pay the cost of prior thrift
failures. The reserves of the BIF met the level required by law in May 1995.
Because of the differing reserve levels of the funds, deposit insurance
assessments paid by healthy commercial banks were reduced significantly below
the level paid by healthy savings associations effective in mid-1995.
Assessments paid by healthy savings associations exceeded those paid by healthy
commercial banks by approximately $.19 per $100 in deposits in late 1995. This
difference in assessment rates equaled approximately $.23 per $100 in deposits
in 1996, as no BIF assessments were required for healthy commercial banks except
for a minimum $2,000 fee. This premium disparity had a negative competitive
impact on Blue Ash and other institutions in the SAIF.
The underfunded status of the SAIF had resulted in the introduction of
federal legislation intended to, among other
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things, recapitalize the SAIF and address the resulting premium disparity. On
September 30, 1996, legislation containing provisions for (i) recapitalizing the
SAIF, (ii) providing for the eventual merger of the SAIF with the BIF and (iii)
reallocating payment of the annual $780 million Financing Corporation ("FICO")
bond obligation was enacted into law. These provisions, entitled the Deposit
Insurance Funds Act of 1996 ("DIFA"), imposed a one-time special assessment on
institutions holding SAIF deposits at March 31, 1995. The special assessment was
imposed to capitalize the SAIF up the statutorily prescribed 1.25% designated
reserve ratio and was determined at 65.7 basis points per $100 of insured
deposits. Beginning January 1, 1997, SAIF members were to have the same
risk-based regular assessment schedule as BIF members - 0 to 27 basis points.
Thus, for most well-capitalized institutions like Blue Ash, there has been no
regular insurance premium assessed at the present time. However, the enacted
legislation does include a formula for sharing payment in the FICO obligation
between members of the BIF and the SAIF. From January 1, 1997 until December 31,
1999 under the formula, the FICO assessment rate for BIF-insured institutions is
approximately 1/5th of the FICO assessment rate for SAIF-insured institutions.
Thus, in addition to the regular deposit insurance assessment (if any),
BIF-insured institutions are assessed approximately $.013 per $100 in deposits
per year to cover the annual FICO payments while SAIF-insured institutions are
assessed approximately $.064 per $100 in deposits per year to cover the annual
FICO payments. Starting in the year 2000 until the FICO bonds are retired in
2019, banks and thrifts will pay the FICO assessment on a pro rata basis which
is estimated to be about 2.4 basis points per $100 of insured deposits for all
institutions. Finally, the legislation provides for the BIF and the
recapitalized SAIF to be merged on January 1, 1999 into a new Deposit Insurance
Fund ("DIF"), provided that no insured depository institution is a savings
association on that date.
The special assessment was payable to the FDIC on November 27, 1996,
and because the legislation was signed into law on September 30, the special
assessment was recorded on the Corporation's books as an expense on September
30, 1996. Blue Ash had $55.8 million in deposits at March 31, 1995. With the
special assessment at 65.7 basis points per $100 of insured deposits, Blue Ash
was required to pay $366,000 on a pre-tax basis. This assessment was tax
deductible, and it reduced net earnings and capital by $242,000 for the year
ended June 30, 1997. With the passage of this legislation, the annual SAIF
premiums are expected to be reduced by approximately $83,000 after consideration
of the tax effects. By the year 2000, the one-time special assessment is
expected to be made up through the reduction in SAIF premiums. While the
one-time special assessment had a significant impact on fiscal 1997 earnings,
the resulting lower annual premiums will benefit future years' earnings.
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FINANCIAL REPORTING. In accordance with the requirements of the
Improvement Act, the FDIC has proposed financial and regulatory reporting
requirements for institutions with assets of at least $500 million in assets.
Such institutions must submit an annual report to the FDIC and other appropriate
state and federal regulators, which contains audited statements by acceptable
audit firms and a management report on the institution's preparation of
financial statements, internal control systems and compliance with laws and
regulations relating to safety and soundness as designated by the FDIC. Such
laws and regulations are those governing affiliate transactions, insider loans
and dividend restrictions. FDIC guidelines contain procedures for ascertaining
the level of compliance in these areas. The annual report must also contain a
report of the independent auditor attesting to and reporting on the management
report. Institutions with assets of more than $3 billion must establish an
independent audit committee of their boards in accordance with the regulatory
requirements and the guidelines.
FRB REGULATIONS
RESERVE REQUIREMENTS. FRB regulations require savings associations to
maintain reserves against their transaction accounts (primarily NOW accounts)
and non-personal time deposits. FRB regulations currently require that reserves
of 3% of net transaction accounts up to $49.3 million (subject to an exemption
of up to $4.4 million), and that reserves of 10% be maintained against that
portion of total net transaction accounts in excess of $49.3 million. At June
30, 1997, Blue Ash was in compliance with its reserve requirements. However,
because required reserves must be maintained in the form of vault cash or a
noninterest-bearing account at a Federal Reserve Association, the effect of this
reserve requirement is to reduce an institution's earning assets.
TRUTH IN SAVINGS. The Improvement Act included the Truth in Savings
Act, which requires the FRB to establish regulations providing for clear and
uniform disclosure of the rates, fees and terms of deposit accounts. The FRB has
adopted regulations requiring specific disclosure before an account is opened,
in regularly provided statements and in advertisements, announcements and
solicitations initiated by a depository institution. The regulations also impose
substantive limits on the methods used to determine the balance of an amount on
which interest is calculated. These regulations became effective June 21, 1993.
The required disclosure includes details of deposit account yield information,
minimum balance requirements and fee impact on the yield. The regulations also
establish certain recordkeeping requirements.
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FEDERAL HOME LOAN BANKS
The FHLBs provide credit to their members in the form of advances. Blue
Ash is a member of the FHLB of Cincinnati and must maintain an investment in the
capital stock of that FHLB in an amount equal to the greater of 1.0% of the
aggregate outstanding principal amount of Blue Ash's residential mortgage loans,
home purchase contracts and similar obligations at the beginning of each year,
or 5% of its advances from the FHLB. Blue Ash is in compliance with this
requirement with an investment of stock in the FHLB of Cincinnati of $742,000 at
June 30, 1997.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required by law to obtain and maintain a security interest in
collateral in one or more of the following categories: fully disbursed, whole
first mortgage loans on improved residential property or securities representing
a whole interest in such loans; securities issued, insured or guaranteed by the
United States government or an agency thereof; deposits in any FHLB; or other
real estate related collateral (up to 30% of the member association's capital)
acceptable to the applicable FHLB, if such collateral has a readily
ascertainable value and the FHLB can perfect its security interest in the
collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance. The FHLB has established an "Affordable
Housing Program" to subsidize the interest rate of advances to member
associations engaged in lending for long-term, low- and moderate-income,
owner-occupied and affordable rental housing at subsidized rates. The FHLB of
Cincinnati reviews and accepts proposals for subsidies under said program twice
a year. Blue Ash has participated in this program.
TAXATION
FEDERAL TAXATION
Towne Financial and Blue Ash file a consolidated federal income tax
return on a fiscal June 30 year basis using the accrual method of accounting.
Towne Financial and Blue Ash are both subject to the federal tax laws and
regulations which apply to corporations generally. Prior to the enactment of the
Small Business Job Protection Act (the "Act"), which was signed into law on
August 20, 1996, certain thrift institutions, such as Blue Ash, 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
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the specific charge off method of Section 166 of the Code or the reserve method
of Section 593 of the Code.
Under Section 593, a thrift institution annually could 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 allowable
addition to bad debt reserves for qualifying loans either under the experience
method or the percentage of taxable income method. For fiscal tax years 1996 and
1995, Blue Ash used the percentage of taxable income method because such method
provided a higher bad debt deduction than the experience method.
Section 1616(a) of the Act repealed the Section 593 reserve method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize 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 percentage of taxable income method of
accounting for bad debts is no longer available for any financial institution.
A thrift institution required to change its method of computing
reserves for bad debt 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 is treated
as 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
qualifying real property loans (generally loans secured by improved real estate)
and its reserve for losses on nonqualifying loans (all other types of loans) as
of the close of its last taxable year beginning before January 1, 1996, over
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(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 is treated as a small bank, like Blue Ash, 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 July 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 July 1, 1996, had the thrift always used
the experience method.
For taxable years that begin after June 30, 1996, and before July 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 July 1, 1996.
A residential loan is a loan as described in Section 7701(a)(19)(C)(v)
(generally a loan secured by residential or 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 Act, which requires 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 Blue Ash to Towne Financial is deemed paid out
of its pre-1988 reserves under these rules, the pre-1988 reserves would be
reduced and Blue Ash'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 out
of the pre-1988 reserves. As of June 30, 1997, Blue Ash's pre-1988 reserves for
tax purposes totaled approximately $1.1 million. Blue Ash believes it had
approximately $2.1 million of accumulated earnings and profits for tax purposes
as of June 30, 1997, which would be available for dividend distributions,
provided regulatory restrictions applicable
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to the payment of dividends are met. No representation can be made as to whether
Blue Ash will have current or accumulated earnings and profits in subsequent
years.
In addition to the regular income tax, Towne Financial and Blue Ash are
subject to a minimum tax. An alternative minimum tax is imposed at a minimum tax
rate of 20% on "alternative minimum taxable income" (which is the sum of a
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. In addition, for taxable years after 1986 and
before 1996, Towne Financial and Blue Ash are also subject to environmental tax
equal to 0.12% of the excess of alternative minimum taxable income for the
taxable year (determined without regard to net operating losses and the
deduction for the environmental tax) over $2.0 million.
Towne Financial has not undergone an audit by the Internal Revenue
Service at any time during the last five years. In the opinion of management,
any examination of open returns would not result in a deficiency which could
have a material adverse effect on the financial condition of Towne Financial.
OHIO TAXATION
Towne Financial is subject to the Ohio corporation franchise tax,
which, as applied to Towne Financial, is a tax measured by both net income 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 8.9% of computed Ohio taxable income in excess
of $50,000 or (ii) 0.582% times taxable net worth.
In computing its tax under the net worth method, Towne Financial may
exclude 100% of its investment in the capital stock of Blue Ash after the
Conversion, as reflected on the balance sheet of Towne Financial, in computing
its taxable net worth as long as it owns at least 25% of the issued and
outstanding capital stock of Blue Ash. The calculation of the exclusion from net
worth is based on the ratio of the excludable investment (net of any
appreciation or goodwill included in such investment) to total assets multiplied
by the net value of the stock. As a holding company, Towne Financial may be
entitled to various other deductions in computing
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taxable net worth that are not generally available to operating companies.
A special litter tax is also applicable to all corporations, including
Towne Financial, 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.
Blue Ash is a "financial institution" for State of Ohio tax purposes.
As such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of Blue Ash's book
net worth determined in accordance with generally accepted accounting
principles. As a "financial institution," Blue Ash is not subject to any tax
based upon net income or net profits imposed by the State of Ohio.
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ITEM 2. DESCRIPTION OF PROPERTY.
As of June 30, 1997, Blue Ash conducted its business from its main
office in Blue Ash and from additional full-service branches located in Mason,
Amelia and Cherry Grove, Ohio.
The following table sets forth certain information at June 30, 1997,
regarding the properties on which the main office and each branch office of Blue
Ash is located.
<TABLE>
<CAPTION>
Year Net
Location Opened Owned or Leased Book Value(1)
- -------- ------ --------------- -------------
<C> <C> <C> <C>
Main Office
- -----------
4811 Cooper Road 1952 Owned $788,000
Cincinnati, Ohio 45242
Full-Service Branch Offices
- ---------------------------
1187 Ohio Pike 1980 Owned $278,000
Amelia, Ohio 45102
8620 Beechmont Avenue 1993 Owned $270,000
Cincinnati, Ohio 45255
6501 Mason-Montgomery Road 1994 Owned $616,000
Mason, Ohio 45040
- --------------------------
<FN>
(1) At June 30, 1997, Blue Ash's furniture, fixtures and equipment had a
net book value of $383,000.
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
Neither Towne Financial nor Blue Ash is aware of any material pending
legal proceedings. From time to time, Blue Ash is a party to legal proceedings
incidental to its business to enforce its security interest in collateral
pledged to secure loans made by Blue Ash.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Incorporated by reference to the information contained in the Towne
Financial Corporation Annual Report to Shareholders for the year ended June 30,
1997 (the "Annual Report"), under the caption "Market for Towne Financial's
Common Shares and Related Security
Holder Matters" on pp. 8-9 of the Annual Report.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Incorporated by reference to the information under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pp. 14-54 of the Annual Report.
ITEM 7. FINANCIAL STATEMENTS.
Incorporated by reference to the Consolidated Financial Statements
contained in the Annual Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Incorporated by reference to the information contained in the
definitive Proxy Statement for the 1997 Annual Meeting of Shareholders of Towne
Financial Corporation to be filed on or about September 26, 1997 (the "Proxy
Statement") under the captions "Election of Directors", "Executive Officers Who
Are Not Directors" and "Compliance with Section 16(a) of the Securities Exchange
Act of 1934."
ITEM 10. EXECUTIVE COMPENSATION.
Incorporated by reference to the information contained in the Proxy
Statement under the caption "Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Incorporated by reference to the information contained in the Proxy
Statement under the caption "Voting Securities."
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to the information contained in the
Proxy Statement under the caption "Certain Transactions."
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
---------
3.1 Amended Articles of Incorporation of the Corporation incorporated by
reference to Exhibit 3.2 to the Corporation's Registration Statement on
Form S-1, Registration No. 33-43347, as amended (the "Registration
Statement").
3.2 Code of Regulations of the Corporation incorporated by reference to
Exhibit 3.3 to the Registration Statement.
10.1 1992 Stock Option Plan incorporated by reference to Exhibit
14(a)(3)10.4 of the Form 10-K filed by the Corporation for the year
ended June 30, 1992.
10.2 1997 Stock Option Plan.
10.3 Form of Employment Agreement between The Blue Ash Building and Loan
Company and William S. Siders.
10.4 Form of Employment Agreement between The Blue Ash Building and Loan
Company and William T. Thornell.
10.5 Form of Employment Agreement between The Blue Ash Building and Loan
Company and Joseph L. Michel.
13 Annual Report to Shareholders.
22 The only subsidiary of the Corporation is The Blue Ash Building and
Loan Company, an Ohio corporation.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
--------------------
No reports on Form 8-K have been filed during the last quarter
of the fiscal year covered by this Report.
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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.
TOWNE FINANCIAL CORPORATION
By: /s/ Ralph E. Heitmeyer
-----------------------------
Date: September 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Neil S. Strawser
-----------------------------
Neil S. Strawser
Director and Chairman of the Board
Date: September 24, 1997
By: /s/ Ralph E. Heitmeyer
-----------------------------
Ralph E. Heitmeyer
Director and President
Date: September 24, 1997
By: /s/ William S. Siders
-----------------------------
William S. Siders
Director and Executive Vice President
Date: September 24, 1997
By: /s/ Herb L. Krombholz
-----------------------------
Herb L. Krombholz
Director and Vice President
Date: September 24, 1997
By: /s/ William T. Thornell
-----------------------------
William T. Thornell
Director and Vice President
Date: September 24, 1997
By: /s/ Joseph L. Michel
-----------------------------
Joseph L. Michel
Chief Financial Officer, Vice
President and Treasurer
Date: September 24, 1997
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EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Pages
- ------ ----------- --------------
3.1 Amended Articles of Incorporation
(incorporated by reference).
3.2 Code of Regulations
(incorporated by reference).
10.1 1992 Stock Option Plan (incorporated
by reference).
10.2 1997 Stock Option Plan 86
10.3 Form of Employment Agreement between
The Blue Ash Building and Loan
Company and William S. Siders. 92
10.4 Form of Employment Agreement between
The Blue Ash Building and Loan
Company and William T. Thornell. 102
10.5 Form of Employment Agreement between
The Blue Ash Building and Loan
Company and Joseph L. Michel. 112
13 Annual Report to Shareholders. 122
22 The only subsidiary of the Corporation
is The Blue Ash Building and Loan
Company, an Ohio corporation.
27 Financial Data Schedule 223
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Exhibit 10.2
TOWNE FINANCIAL CORPORATION
1997 STOCK OPTION PLAN
1. PURPOSE.
The purpose of the 1997 Stock Option Plan (the "Plan") is to provide
opportunities to key management personnel and the Board of Directors of Towne
Financial Corporation (the "Corporation") and its subsidiary to purchase common
shares (the "Common Stock") of the Corporation, thereby encouraging them to
acquire a proprietary and vested interest in the growth and performance of the
Corporation, and, in general, to generate an increased incentive to contribute
to the Corporation's future success and prosperity, thus enhancing the value of
the Corporation for the benefit of shareholders. The Plan shall be subject to
approval by a majority of the shareholders of the Corporation within twelve
months of the date of adoption of the Plan by the Board of Directors of the
Corporation. Each stock option granted under the Plan is intended to be an
incentive stock option within the meaning of Section 422A of the Internal
Revenue Code of 1986 (the "Internal Revenue Code") except (i) to the extent that
any such option would exceed the limitations set forth in Section 6 below; (ii)
for options specifically designated at the time of grant as not being incentive
stock options; and (iii) for options granted to directors who are not salaried
employees of the Corporation or its subsidiary.
2. ADMINISTRATION.
The Plan shall be administered by the Board of Directors of the
Corporation (the "Board"). Subject to the provisions of the Plan, the Board
shall be authorized to interpret the Plan, to establish, amend, and rescind any
rules and regulations relating to the Plan, and to make all other determinations
necessary or advisable for the administration of the Plan. The Board may correct
any defect, supply any omission or reconcile any inconsistency in the Plan or in
any option in the manner and to the extent it shall deem desirable to carry it
into effect. The determinations of the Board in the administration of the Plan,
as described herein, shall be final and conclusive. The validity, construction
and effect of the Plan and any rules and regulations relating to the Plan shall
be determined in accordance with the laws of Ohio.
The Board may from time to time appoint a Stock Option Committee (the
"Committee") consisting of not less than two members of the Board, none of whom
shall be a salaried employee of the Corporation or its subsidiary, and each of
whom shall qualify in all respects as a "disinterested person" as defined in
Rule 16b-3 of the Securities and Exchange Commission under the Securities
Exchange Act of 1934. The Board, in its sole discretion, may provide that the
role of the Committee shall be limited to making recommendations to the Board
concerning any determinations to be made and actions to be taken by the Board
pursuant to or with respect to the Plan, or the Board may delegate to the
Committee such powers and authorities related to the administration of the Plan
as the Board shall determine, consistent with the Articles of Incorporation and
the Code of Regulations of the Corporation and applicable law. The Board may
remove members, add members, and fill vacancies on the Committee from time to
time, all in accordance with the Corporation's Articles of Incorporation and the
Code of Regulations, and with applicable law. The majority vote of the
Committee, or acts reduced to or approved in writing by a majority of the
members of the Committee, shall be the valid acts of the Committee.
<PAGE> 2
3. ELIGIBILITY.
Persons eligible to participate under the Plan (the "Participants")
shall be limited to key management personnel and the Board of Directors of the
Corporation and its subsidiary as designated by the Board.
Nothing in the Plan or in any option granted thereunder shall confer
any right on a Participant to continue in the employ of the Corporation or its
subsidiary or shall interfere in any way with the right of the Corporation or
its subsidiary, as the case may be, to terminate the Participant's employment at
any time.
A Participant's rights with respect to options granted under the Plan
shall be subject to the approval of the Plan by the majority of the shareholders
of the Corporation within twelve months of the adoption of the Plan by the
Board.
4. TYPES OF AWARDS.
Awards under the Plan may be either incentive stock options (ISOs)
within the meaning of Section 422A of the Internal Revenue Code, or
non-statutory options under Section 83 of the Internal Revenue Code. No
incentive stock options shall be granted under the Plan after ten years from the
date the Plan is adopted by the Board or approved by the shareholders of the
Corporation, whichever is earlier.
5. SHARES SUBJECT TO PLAN.
Subject to adjustment as provided in Section 10 below, an aggregate of
20,000 shares of Common Stock of the Corporation shall be reserved and available
for grant under the Plan. If an option ceases to be exercisable in whole or in
part, the shares representing such option shall continue to be available under
the Plan for purposes of granting options with respect thereto. In the future,
if another company is acquired, any Common Stock covered by or issued as a
result of the assumption or substitution of outstanding grants of the acquired
company shall not be deemed issued under the Plan and shall not be subtracted
from the shares of Common Stock available for grant under the Plan. The Common
Stock deliverable under the Plan may consist in whole or in part of authorized
and unissued shares or treasury shares.
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<PAGE> 3
6. STOCK OPTIONS.
All stock options granted under the Plan shall be subject to the
following terms and conditions:
(a) The Board may, subject to the provisions of the Plan and such other
terms and conditions as the Board may prescribe, grant to any Participant
options to purchase shares of Common Stock, which options may be ISOs or
non-statutory options or both. The grant of an option shall be evidenced by a
signed written agreement ("Stock Option Agreement") containing such terms and
conditions as the Board may prescribe.
(b) The purchase price per share of Common Stock of options granted
under the Plan shall be determined by the Board but shall not be less than one
hundred (100%) percent of the fair market value of the Common Stock on the date
the option is granted, or not less than one hundred ten (110%) percent of the
fair market value of the Common Stock if the employee owns in excess of ten
(10%) percent of the total combined voting power of all classes of stock of the
Corporation or its subsidiary, as defined in Section 422A of the Internal
Revenue Code ("a 10% Stockholder"). The fair market value of the Common Stock
shall be determined in good faith by the Board. If as of the date the option is
granted the Common Stock is traded over-the-counter, the fair market value shall
be deemed to be the mean "bid" and "asked" prices of the Common Stock. The Board
shall determine the exercise price for non-statutory options.
(c) Unless otherwise prescribed by the Board in the Stock Option
Agreement, each option granted under the Plan shall be exercisable (i) as to not
more than 20% of the total number of shares granted under the option, during the
first year after the grant of the option; (ii) as to not more than 40%, during
the first two years after the grant of the option; (iii) as to not more than
60%, during the first three years after the grant of the option; (iv) as to not
more than 80%, during the first four years after the grant of the option; and
(v) the total number of shares not previously exercised, during the remaining
term of the option. The right of cumulation shall exist in that, to the extent
not previously exercised or terminated, option installments shall accumulate and
be exercisable, in whole or in part, in any subsequent period, but no
installment of the option shall be exercisable later than ten years from the
date the option is granted. No option shall be exercisable after the expiration
of ten (10) years from the date it is granted, except in the case of "a 10%
Stockholder", in which case no option shall be exercisable after the expiration
of five (5) years from the date it is granted.
(d) The Board shall establish procedures governing the exercise of
options and shall require that written notice of exercise be given and that the
option price be paid in full in cash at the time of exercise. As soon as
practicable after receipt of each notice and full payment, the Corporation shall
deliver to the Participant a certificate or certificates representing the
acquired Common Stock.
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<PAGE> 4
7. COMPLIANCE WITH SECURITIES LAWS.
At the time of exercise of any option, the Board may require the
Participant to execute any document or take any action which may be then
necessary to comply with the Securities Act of 1933 and the rules and
regulations promulgated thereunder, or any other applicable federal or state
laws regulating the sale and issuance of securities, and the Board may, if it
deems necessary, include provisions in the Stock Option Agreement to assure such
compliance. The Board may, from time to time, change its requirements with
respect to enforcing compliance with federal and state securities laws,
including the request for and enforcement of letters of investment intent, such
requirements to be determined by the Board in its judgment as necessary to
assure compliance with said laws. Such changes may be made with respect to any
particular option or stock issued upon exercise thereof.
8. NONASSIGNABILITY OF AWARDS.
No option granted under the Plan shall be assigned, transferred,
pledged or otherwise encumbered by a Participant, otherwise than by will, by
designation of a beneficiary after death or by the laws of descent and
distribution. Each option shall be exercisable during the Participant's lifetime
only by the Participant or, if permissible under applicable law, by the
Participant's guardian, legal representative or attorney-in-fact.
9. CHANGE OF CONTROL.
In order to maintain all of the Participants' rights in the event of a
Change of Control, the Board, as constituted before such Change of Control, in
its sole discretion, may, as to any outstanding option, either at the time an
option is made or any time thereafter, take any one or more of the following
actions: (a) provide for the acceleration of any time periods relating to the
exercise of any such option so that such option may be exercised in full on or
before a date fixed by the Board; (b) provide for the purchase of any such
option by the Corporation for its fair market value; (c) make such adjustment to
any such option then outstanding as the Board deems appropriate to reflect such
Change of Control; or (d) cause any such option then outstanding to be assumed,
or new rights substituted therefore, by the acquiring or surviving corporation
in such Change of Control. The Board may, in its discretion, include such
further provisions and limitations in any agreement documenting such options as
it may deem equitable and in the best interests of the Corporation. A "Change of
Control" shall be deemed to have occurred if (i) a tender offer shall be made
and consummated for the ownership of 30% or more of the outstanding voting
securities of the Corporation; (ii) the Corporation shall be merged or
consolidated with another corporation and as a result of such merger or
consolidation less than 75% of the outstanding voting securities of the
surviving or resulting corporation shall be owned in the aggregate by the former
shareholders of the Corporation as the same shall have existed immediately prior
to such merger or consolidation; however, for purposes of this calculation
voting securities of the Corporation held by affiliates (within the meaning of
the Securities Exchange Act of 1934) of any party to such merger or
consolidation shall not be included in the aggregate shares owned by the "former
shareholders of the Corporation"; (iii) the Corporation
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<PAGE> 5
shall sell substantially all of its assets to another corporation which is not a
wholly owned subsidiary; (iv) a person within the meaning of Section 3(a)(9) or
of Section 13(d)(3) of the Securities Exchange Act of 1934, shall acquire after
the date this Plan is adopted 20% or more of the outstanding voting securities
of the Corporation (whether directly, beneficially or of record), or a person,
within the meaning of Section 3(a)(9) or Section 13(d)(3) of the Securities
Exchange Act of 1934, controls in any manner the election of a majority of the
directors of the Corporation; or (iv) within any period of two consecutive years
after the effective date of the Plan, individuals who at the beginning of such
period constitute the Corporation's Board cease for any reason to constitute at
least a majority thereof, unless the election of each director who was not a
director at the beginning of such period has been approved in advance by
directors representing at least two-thirds of the directors then in office who
were directors at the beginning of the period. For purposes hereof, ownership of
voting securities shall take into account and shall include ownership as
determined by applying the provisions of Rule 13d-3(d)(1)(i) pursuant to the
Securities Exchange Act of 1934.
10. ADJUSTMENTS.
(a) In the event of any change affecting the Common Stock by reason of
any stock dividend or split, recapitalization, merger, consolidation, spin-off,
combination or exchange of shares or other corporate change, or any
distributions to common shareholders other than cash dividends, the Board shall
make such substitution or adjustment in the aggregate number or class of shares
which may be distributed under the Plan and in the number, class and option
price or other price of shares subject to the outstanding options granted under
the Plan as it deems to be appropriate in order to maintain the purpose of the
original grant.
(b) The Board shall be authorized to make adjustments in performance
award criteria or in the terms and conditions of the options in recognition of
unusual or non-recurring events affecting the Corporation or its financial
statements or changes in applicable laws, regulations or accounting principles.
The Board may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any option in the manner and to the extent it shall
deem desirable to carry it into effect.
11. WITHHOLDING.
At the Board's discretion, the recipient of any option under the Plan
may be required to pay to the Corporation, in cash, Common Stock or other
property, or in a combination thereof, the amount of any taxes required to be
withheld with respect to such option or, the Corporation shall have the right to
retain from such option a sufficient number of shares of Common Stock to satisfy
the applicable withholding tax obligation.
12. AMENDMENT OF THE PLAN.
The Plan may at any time or from time to time be terminated, modified
or amended by the shareholders of the Corporation, or by the affirmative vote of
a majority interest of the
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<PAGE> 6
Common Stock of the Corporation. The Board may amend, alter or discontinue the
Plan or any portion thereof at any time the Plan in such respects as it shall
deem advisable and to the extent permitted by the Internal Revenue Code and
Securities and Exchange Act of 1934 and the rules and regulations promulgated
thereunder, provided that no amendment shall be made without shareholder
approval which shall (a) increase the total number of shares reserved for
issuance pursuant to the Plan; (b) change the class of eligible Participants; or
(c) materially increase the benefits under the Plan. No modification or
amendment of the Plan shall adversely affect options granted to a participant
which are exercisable at the time of the modification or amendment.
13. INDEMNIFICATION OF BOARD.
In addition to such other rights of indemnification as they may have as
Directors or as members of the Board, the members of the Board shall be
indemnified by the Corporation against the reasonable expenses, including
attorneys' fees actually and necessarily incurred in connection with the defense
of any action, suit or proceedings, or in connection with any appeal thereof, to
which they or any of them may be a party by reason of any action taken or
failure to act under or in connection with the Plan or any option granted
thereunder, and against all amounts paid by them in settlement thereof (provided
such settlement is approved by independent legal counsel selected by the
Corporation) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such Board member is liable for
negligence or misconduct in the performance of his duties; provided that within
sixty (60) days after initiation of any such action, suit or proceeding the
Board member shall in writing offer the Corporation the opportunity, at its own
expense, to pursue and defend the same.
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<PAGE> 1
Exhibit 10.3
EMPLOYMENT CONTRACT
-------------------
THIS EMPLOYMENT CONTRACT (the "Agreement") is made and delivered in the
City of Blue Ash, Hamilton County, Ohio, effective as of the 1st day of January,
1997, by and between The Blue Ash Building And Loan Company (the "Company"), a
wholly owned subsidiary of Towne Financial Corporation (the "Holding Company"),
and William S. Siders, (the "Employee").
WHEREAS, the Board of Directors of the Company and the Holding Company
believe that it is in the best interest of the Company to enter into this
Agreement with the Employee in order to assure the continuity and retention of
key management of the Company and to reinforce and encourage the continued
attention and dedication of the Employee to the Company and to the duties
assigned to the Employee by the Company; and
WHEREAS, the Board of Directors of the Company has approved and
authorized the execution and delivery of this Agreement with the Employee
effective as of the date set forth in this Agreement;
NOW, THEREFORE, in consideration of the foregoing and in consideration
of the mutual exchange of promises and of the covenants performed and to be
performed, the Company and Employee agree as follows:
1. EMPLOYMENT. The Employee will be employed by the Company as
the Executive Vice-President of the Company. As Executive Vice-President of
the Company, the Employee shall render to the Company administrative and
management services as are customarily rendered by persons situated in
similar executive capacities. The Employee shall have such other duties and
powers as may from time to time be assigned by the Board of Directors of the
Company, provided that such duties are consistent with the position of the
Employee as the Company's Executive Vice-President. During the term of this
Agreement, the Employee shall devote best efforts and all business time and
attention to the business and affairs of the Company.
2. COMPENSATION
(a) SALARY. Company agrees to pay the Employee during the term
of this Agreement a salary as follows: from the effective date hereof through
the 31st day of December, 1997, a salary at an annual rate equal to $107,545.00,
payable to the Employee by the Company not less frequently than weekly in
accordance with past practices of the Company. The salary of the Employee shall
be adjusted on January 1st, of each year during the term of this Agreement as
determined by the Company's Board of Directors, and may be increased (but not
decreased) in such amounts as the Board of Directors of the Company in its
discretion may determine.
<PAGE> 2
(b) DISCRETIONARY BONUSES. The Employee shall be entitled to
participate in an equitable manner with all other executive officers of the
Company in discretionary bonuses as authorized and declared by the Board of
Directors of the Company for its executive employees. No other compensation
provided for in this Agreement shall be deemed a substitute for the right of the
Employee to participate in such bonuses when and as declared by the Company's
Board of Directors.
(c) EXPENSES. During the term of employment hereunder, the
Employee shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred in accordance with policies and procedures at least as
favorable to the Employee as those presently applicable to the senior executive
officers of the Company, provided that the Employee properly accounts therefore
in accordance with the policy of the Company.
3. BENEFITS.
(a) PARTICIPATION IN RETIREMENT AND EMPLOYEE BENEFIT PLANS.
The Employee shall be entitled while employed hereunder to participate in and
receive benefits under all plans relating to stock options, stock purchases,
pension, thrift, profit sharing, group life insurance, medical coverage,
education, cash or stock bonuses, and other retirement or employee benefits or
combinations thereof that are now or hereafter maintained for the benefit of the
executive employees of the Company or for the Company's employees generally.
Provided, however, that nothing herein shall be construed as requiring the
Company to adopt, maintain and/or continue any such benefit plan.
(b) FRINGE BENEFITS. The Employee shall be eligible while
employed hereunder to participate in and receive benefits under any other fringe
benefits which are or may become applicable to the executive employees of the
Company or to its employees generally.
4. TERM. The term of employment under this Agreement shall be a period
of three (3) years commencing upon the date of this Agreement (herein the
"Commencement Date"), subject to earlier termination as hereinafter provided.
Beginning on the first anniversary of the Commencement Date, and on each
anniversary thereafter, the term of employment under this Agreement shall be
extended for a period of one (1) year unless either the Company or the Employee
gives contrary written notice to the other not less than ninety (90) days in
advance of the date on which the term of employment under this Agreement would
otherwise be extended. Notwithstanding any other statement or provision herein,
this Agreement will not be automatically extended unless, prior thereto, such
extension is approved by the Board of Directors of the Company following a
formal performance evaluation review of the Employee
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<PAGE> 3
performed by the disinterested members of the Board of Directors of the Company
and the approval and justification of the approval are then recorded in the
minutes of the Board of Directors. Reference herein to the term of employment
under this Agreement shall refer to both such initial term and any extended
term.
5. VACATIONS. The Employee shall be entitled, without loss of
pay, to be absent voluntarily for reasonable periods of time from the
performance of the duties and responsibilities under this Agreement. All such
voluntary absences shall count as paid vacation time, unless the Board of
Directors of the Company otherwise approves. The Employee shall be entitled to
an annual paid vacation of 3 weeks per year or such longer period as the Board
of Directors of the Company may approve. The timing of paid vacations shall be
scheduled in a reasonable manner by the Employee. The Employee shall not be
entitled to receive any additional compensation from the Company on account of
failure to take a paid vacation. The Employee shall not be allowed to accumulate
unused paid vacation from one vacation year to the next, unless the Employee has
failed to use vacation time to which the Employee was entitled at the request of
the Company's Board of Directors.
6. TERMINATION OF EMPLOYMENT.
(a) (i) The Board of Directors of the Company may terminate
the employment of the Employee at any time, but any termination by the Board of
Directors other than termination for cause shall not prejudice the right of the
Employee to compensation or other benefits under this Agreement.
(ii) The Company and the Employee acknowledge and agree that
damages which will result to the Employee for termination without cause shall be
extremely difficulty or impossible to establish or prove. Therefore, the Company
and the Employee agree that unless the termination is a termination for cause,
the Company shall be obligated, concurrently with such termination, to make a
lump sum cash payment to the Employee, as liquidated damages, of an amount equal
to the then current salary of the Employee calculated for a period equal to the
remaining term of this Agreement. The Employee agrees that, except for such
other payments and benefits to which the Employee may be entitled as expressly
provided by the terms of this Agreement, such liquidated damages shall be in
lieu of all other claims which the Employee may make by reason of such
termination. Such payment to the Employee shall be made on or before the last
day of the employment of the Employee with the Company. The liquidated damages
amount shall not be reduces by any compensation which the Employee may receive
for other employment with another employer after termination of employment with
the Company.
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<PAGE> 4
(iii) In addition to the liquidated damages above described
that are payable to the Employee for termination without cause, the following
shall apply in the event of any termination without cause, any termination by
reason of disability or in the event of any termination subject to Section 7
hereof: (1) the Employee shall continue to participate in, and accrue benefits
under, all retirement, pension, profit sharing, employee stock ownership, and
other deferred compensation plans of the Company for the remaining term of this
Agreement as if the termination of employment of the Employee had not occurred
(with the Employee deemed to receive annually for the purposes of such plans the
Employee's then current salary [at the time of this termination] under Section 2
of this Agreement), except to the extent that such continued participation and
accrual is expressly prohibited by law or to the extent such plan constitutes a
"qualified plan" under Section 401 of the Internal Revenue Code of 1986, as
amended (the "Code"); (2) the Employee shall be entitled to continue to receive
all other employee benefits and then existing fringe benefits referred to in
Section 3 hereof for the remaining term of this Agreement as if the termination
of employment had not occurred; and (3) all insurance or other provisions for
indemnification, defense or hold harmless of officers or directors of the
Company which are in effect on the date the notice of termination is sent to the
Employee shall continue for the benefit of the Employee with respect to all of
his acts and omissions while an officer or director as fully and completely as
if such termination had not occurred and until the final expiration or running
of all period of limitation against action which may be applicable to such acts
or omissions.
(b) If the Employee is suspended from office and/or temporarily
prohibited from participating in the conduct of the Company's affairs by a
notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance
Act ("FDIA"), 12 U.S.C. Section 1818(e)(3); (g)(1), the Company's obligations
under this Agreement shall be suspended as of the date of service, unless
stayed by appropriate proceedings. If the charges in the notice are dismissed,
the Company may in its discretion (i) pay the Employee all or part of the
compensation withheld while its obligations under this Agreement were suspended
and (ii) reinstate in whole or in part any of the obligations which were
suspended.
(c) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Company's affairs by an
order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C.
Section 1818(e)(4); (g)(1), all obligations of the Company under this Agreement
shall terminate, as of the effective date of the order, but vested rights of
the parties shall not be affected.
(d) If the Company becomes in default (as defined in Section 3 (x)(1)
of the FDIA, 12 U.S.C. Section 1813(x)(1), all obligations under
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<PAGE> 5
this Agreement shall terminate as of the date of default, but this provision
shall not affect any vested rights of the parties.
(e) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Company: (i) by the Director of the Office of Thrift
Supervision ("OTS") or his or her designee at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Company under the
authority contained in Section 13(c) of the FDIA, 12 U.S.C. Section 1823(c); or
(ii) by the Director of the OTS or his or her designee at the time the Director
of the OTS or his or her designee approves a supervisory merger to resolve
problems related to operation of the Company or when the Company is determined
by the Director of the OTS to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not be
affected by any such action.
(f) In the event that the Company has terminated the Employee for
cause, but it is determined by a court of competent jurisdiction that cause did
not exist for such termination, or if it is determined by any such court that
the Company has failed to make timely payment of any amounts owed to the
Employee under this Agreement, the Employee shall be entitled to reimbursement
for all reasonable costs, including attorney fees, incurred in challenging such
termination or collecting such amounts. Such reimbursement shall be in addition
to all rights to which the Employee is otherwise entitled under this Agreement.
7. CHANGE IN CONTROL.
(a) If during the term of this Agreement there is a change in
control of the Company and/or the Holding Company, the Employee shall be
entitled to receive as a severance payment for services previously rendered to
the Company a lump sum cash payment as provided for herein (subject to Section
7(c) below) in the event the employment of the Employee is terminated,
voluntarily or involuntarily in connection with or within one year after the
change in control of the Company, unless such termination occurs by virtue of
normal retirement, permanent and total disability or death. Subject to Section
7(c) below, the amount of this payment shall equal three times the Employee's
average compensation which was payable by the Company and was includible in the
Employee's gross income for federal income tax purposes with respect to the five
most recent taxable years of the Company ending prior to such change in control
of the Company (or such portion of such period during which the Employee was a
full-time Employee of the Company), less $1.00. Payment under this Section 7(a)
shall be in lieu of any amount owed to the Employee as liquidated damages for
termina-
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<PAGE> 6
tion without cause under Section 6(a) hereof. Payment under this Section 7(a)
shall not be reduced by any compensation which the Employee may receive from
other employment with another employer after termination of the employment of
the Employee with the Company. In addition, Section 6(a)(iii) shall apply in the
case of any termination of employment within the scope of this Section 7(a).
(b) A "change in control" for purposes of this Agreement shall
be deemed to have taken place if: (1) any person becomes the beneficial owner of
25% or more of the total number of voting shares of the Holding Company; (2) any
person becomes the beneficial owner of 10% or more, but less than 25% of the
total number of voting shares of the Holding Company, provided, however, that if
the Office of Thrift Supervision (the "OTS") has approved a rebuttal agreement
filed by such person or such person has filed a certification with the OTS, a
change in control will not be so deemed to have occurred unless the Board of
Directors of the Holding Company has made a determination that such beneficial
ownership constitutes or will constitute control; (3) any person (other than the
persons named as proxies solicited on behalf of the Board of Directors of the
Holding Company) holds revocable or irrevocable proxies as to the election or
removal of two or more directors of the Holding Company, for 25% or more of the
total number of voting shares of the Holding Company; (4) any person has
received the approval of the OTS under Section 10 of the Home Owner's Loan Act
(the "Holding Company Act"), or regulations issued thereunder to acquire control
of the Holding Company; (5) any person has received approval of the OTS under
the Change in Bank Control Act (the "Control Act"), or regulations issued
thereunder, to acquire control of the Holding Company; (6) any person has
commenced a tender or exchange offer, or entered into an agreement or received
an option, to acquire beneficial ownership of 25% or more of the total number of
voting shares of the Holding Company, whether or not the requisite approval for
such acquisition has been received under the Holding Company Act, the Control
Act, or the respective regulations issued thereunder; or (7) as the result of,
or in connection, any cash tender or exchange offer, merger, or other business
combination, sale of assets or contested election, or any combination of the
foregoing transactions, the persons who were directors of the Holding Company
before such transaction shall cease to constitute at least two-thirds of the
Board of Directors of the Holding Company or any successor institution. For
purposes of this Section 7(b) a "person" includes an individual, corporation,
partnership, trust, association, joint venture, poole, syndicate, unincorporated
organization, joint stock company, a limited liability company or similar
organization or group acting in concert. A person for these purposes shall be
deemed to be a beneficial owner as that term is used in Rule 13d-3 under the
Securities Exchange Act of 1934.
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<PAGE> 7
(c) Notwithstanding any other provisions of this Agreement or of any
other agreement, contract, or understanding heretofore or hereafter entered into
between the Employee and the Company except an agreement, contract, or
understanding hereafter entered into that expressly modifies or excludes
application of this Section 7(c) (the "Other Agreements"), and notwithstanding
any formal or informal plan or other arrangement heretofore or hereafter adopted
by the Company for the direct or indirect provision of compensation to the
Employee (including groups or classes of participants or beneficiaries of which
the Employee is a member), whether or not such compensation is deferred, is in
cash, or is in the form of a benefit to or for the Employee (a "Benefit Plan"),
the Employee shall not have any right to receive any payment, or other benefit
under this Agreement, any Other Agreement, or any Benefit Plan if such payment
or benefit, taking into account all other payments or benefits to or for the
Employee under this Agreement, all Other Agreements and all Benefit Plans, would
cause any payment to the Employee under this Agreement to be considered a
"parachute payment" within the meaning of Section 280G(b)(2) of the Internal
Revenue Code of 1986, as amended (the "Code") (a "Parachute Payment"). In the
event that the receipt of any such payment or benefit under this Agreement, any
Other Agreement, or any Benefit Plan would cause the Employee to be considered
to have received a Parachute Payment under this Agreement, then the Employee
shall have the right, in the Employee's sole discretion, to designate those
payments or benefits under this Agreement, any other Agreement, and/or any
Benefit Plans, which should be reduced or eliminated so as to avoid having the
payment to the Employee under this Agreement be deemed to be a Parachute
Payment.
8. DISABILITY. If during the term of employment hereunder the Employee
shall become disabled or incapacitated to the extent that the Employee is unable
to perform the duties of Executive Vice-President, the Employee shall be
entitled to receive disability benefits of the type provided for other
executive employees of the Company. During the period of time that the Employee
receives disability benefits, the rights of the Employee to receive the salary
stated in Section 2 hereof shall be suspended.
9. TERMINATION - DEATH. In the event of the death of the Employee
during the term of employment under this Agreement and prior to any termination
hereunder, the Employee's estate, or such person as the Employee may have
previously designated in writing, shall be entitled to receive from the Company
the salary of the Employee through the last day of the calendar month in which
death shall have occurred.
10. INVOLUNTARY TERMINATION-DEFINITION. Except as otherwise provided in
Section 7 of this Agreement the term "Involuntary Termination" in this Agreement
means the termination of employment of the Employee without the express written
consent of the
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<PAGE> 8
Employee. The Employee shall be considered to be involuntarily terminated (1) if
the employment of the Employee is involuntarily terminated for any reason other
than for cause or (2) terminated pursuant to Section 6(b) through (e) or (3)
terminated by reason of death, or (4) there occurs a material diminution of or
interference with the Employee's duties and responsibilities as Executive
Vice-President of the Company. By way of example and not by way of limitation,
any of the following actions, if unreasonable or materially adverse to the
Employee, shall constitute such diminution or interference unless consented to
in writing by the Employee: (1) a change in the principal workplace of the
Employee to a location of more than 50 miles from the main office of the
Company; (2) a material demotion of the Employee, a reduction in the number or
seniority of other Company personnel reporting to the Employee, or a reduction
in the frequency with which, or in the nature of the matters with respect to
which, such personnel are to report to the Employee, other than as part of a
Company wide reduction in staff; or (3) a reduction or adverse change in salary,
perquisites, benefits, contingent benefits or vacation time which had
theretofore been provided to the Employee, other than as part of an overall
program applied uniformly and with equitable effect to all members of the senior
management of the Company.
11. TERMINATION FOR CAUSE. In case of termination of the employment of
the Employee for cause, the Company shall pay the Employee salary through the
date of termination and thereafter, the Company shall have no further obligation
to the Employee under this Agreement which shall be considered as terminated for
all purposes. The Employee shall not have the right to receive compensation or
other benefits for any period after termination for cause. Notwithstanding the
foregoing, the Employee shall not be deemed to have been terminated for cause
unless and until there shall have been delivered to the Employee a copy of a
resolution, duly adopted by the affirmative vote of not less than a majority of
the disinterested members of the Board of Directors at a meeting of the Board
called and held for such purpose after reasonable notice to the Employee and an
opportunity for the Employee, together with counsel for the Employee, to be
heard before the Board, stating that in the good faith opinion of the Board of
Directors of the Company, the Employee was guilty of conduct constituting
"cause" and specifying the particulars thereof in detail. The term "termination
for cause" shall mean termination because of personal dishonesty of the
Employee, incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform duties, willful violation of any
substantive law, rule or regulation or final cease and desist order, or material
breach of any provision of this Agreement.
12. VOLUNTARY TERMINATION. The Employee may voluntarily terminate
employment at any time upon ninety (90) days written notice to the Company or
upon such shorter period as may be agreed
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<PAGE> 9
between the Employee and the Board of Directors of the Company. In the event of
such voluntary termination, the Company shall be obligated to continue to pay
the salary of the Employee only through the date of termination, at the time
such payments are due, and the Company shall have no further obligation to the
Employee under this Agreement.
13. NON-ASSIGNABILITY.
(a) This Agreement is personal to each of the parties hereto,
and neither party may assign or delegate any rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Company will require any successor or assign (whether direct
or indirect by purchase, merger, consolidation or otherwise) to all or substan-
tially all of the business and/or assets of the Company, by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession or
assignment had taken place. Failure of the Company to obtain such an assumption
agreement prior to the effective date of any such succession or assignment shall
be a breach of this Agreement and shall entitle the Employee to compensation
from the Company in the same amount and on the same terms as the compensation
pursuant to Section 7(a) hereof. For purposes of implementing the provisions of
this Section 13(a), the date on which any such succession becomes effective
shall be deemed the date of termination.
(b) This Agreement and all rights of the Employee hereunder
shall inure the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devises and legatees. If the Employee should die while any amount
would still be payable to the Employee hereunder if the Employee had continued
to live, all such amounts unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to be designees and legatees of the
Employee or other designee or in default of such designee, to the estate of the
Employee.
14. MISCELLANEOUS.
(a) NOTICES. For the purpose of this Agreement, notices and
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when personally delivered or sent by
certified mail, return receipt requested, postage prepaid, addressed (i) to the
Company at its home office to the attention of the Board of Directors of the
Company, with a copy to the Secretary of the Company and (ii) to the Employee at
the home address the Employee has most recently
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<PAGE> 10
provided to the Company or to such other address as either party may have
furnished to the other in writing in accordance herewith.
(b) AMENDMENTS. No amendments or additions to this Agreement
shall be binding unless in writing and signed by both parties, except as herein
otherwise provided.
(c) 12 USC SECTION 828(K). Any payments made to the Employee
pursuant to this Agreement, or otherwise, are subject to and conditioned upon
their compliance with 12 USC Section 1828(K) and any regulations promulgated
thereunder.
(d) GOVERNING LAW. This Agreement shall be governed by the
laws of the United States to the extent applicable and otherwise by the laws of
the State of Ohio.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
The Blue Ash Building And Loan Company
By:/s/ Ralph Heitmeyer
------------------------------------------
President
Employee:/s/ William S. Siders
------------------------------------
William S. Siders
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<PAGE> 1
Exhibit 10.4
EMPLOYMENT CONTRACT
-------------------
THIS EMPLOYMENT CONTRACT (the "Agreement") is made and delivered in the
City of Blue Ash, Hamilton County, Ohio, effective as of the 1st day of January,
1997, by and between The Blue Ash Building And Loan Company (the "Company"), a
wholly owned subsidiary of Towne Financial Corporation (the "Holding Company"),
and William T. Thornell, (the "Employee").
WHEREAS, the Board of Directors of the Company and the Holding Company
believe that it is in the best interest of the Company to enter into this
Agreement with the Employee in order to assure the continuity and retention of
key management of the Company and to reinforce and encourage the continued
attention and dedication of the Employee to the Company and to the duties
assigned to the Employee by the Company; and
WHEREAS, the Board of Directors of the Company has approved and
authorized the execution and delivery of this Agreement with the Employee
effective as of the date set forth in this Agreement;
NOW, THEREFORE, in consideration of the foregoing and in consideration
of the mutual exchange of promises and of the covenants performed and to be
performed, the Company and Employee agree as follows:
1. EMPLOYMENT. The Employee will be employed by the Company as
the Vice-President of the Company. As Vice-President of the Company,
the Employee shall render to the Company administrative and management services
as are customarily rendered by persons situated in similar executive capacities.
The Employee shall have such other duties and powers as may from time to time be
assigned by the Board of Directors of the Company, provided that such duties are
consistent with the position of the Employee as the Company's Vice-President.
During the term of this Agreement, the Employee shall devote best efforts and
all business time and attention to the business and affairs of the Company.
2. COMPENSATION
(a) SALARY. Company agrees to pay the Employee during the
term of this Agreement a salary as follows: from the effective date hereof
through the 31st day of December, 1997, a salary at an annual rate equal to
$86,000.00 payable to the Employee by the Company not less frequently than
weekly in accordance with past practices of the Company. The salary of the
Employee shall be adjusted on January 1st, of each year during the term of
this Agreement as determined by the Company's Board of Directors, and may be
increased (but not decreased) in such amounts as the Board of Directors of
the Company in its discretion may determine.
<PAGE> 2
(b) DISCRETIONARY BONUSES. The Employee shall be entitled to
participate in an equitable manner with all other executive officers of the
Company in discretionary bonuses as authorized and declared by the Board of
Directors of the Company for its executive employees. No other compensation
provided for in this Agreement shall be deemed a substitute for the right of the
Employee to participate in such bonuses when and as declared by the Company's
Board of Directors.
(c) EXPENSES. During the term of employment hereunder, the
Employee shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred in accordance with policies and procedures at least as
favorable to the Employee as those presently applicable to the senior executive
officers of the Company, provided that the Employee properly accounts therefore
in accordance with the policy of the Company.
3. BENEFITS.
(a) PARTICIPATION IN RETIREMENT AND EMPLOYEE BENEFIT PLANS.
The Employee shall be entitled while employed hereunder to participate in and
receive benefits under all plans relating to stock options, stock purchases,
pension, thrift, profit sharing, group life insurance, medical coverage,
education, cash or stock bonuses, and other retirement or employee benefits or
combinations thereof that are now or hereafter maintained for the benefit of the
executive employees of the Company or for the Company's employees generally.
Provided, however, that nothing herein shall be construed as requiring the
Company to adopt, maintain and/or continue any such benefit plan.
(b) FRINGE BENEFITS. The Employee shall be eligible while
employed hereunder to participate in and receive benefits under any other fringe
benefits which are or may become applicable to the executive employees of the
Company or to its employees generally.
4. TERM. The term of employment under this Agreement shall be a period
of three (3) years commencing upon the date of this Agreement (herein the
"Commencement Date"), subject to earlier termination as hereinafter provided.
Beginning on the first anniversary of the Commencement Date, and on each
anniversary thereafter, the term of employment under this Agreement shall be
extended for a period of one (1) year unless either the Company or the Employee
gives contrary written notice to the other not less than ninety (90) days in
advance of the date on which the term of employment under this Agreement would
otherwise be extended. Notwithstanding any other statement or provision herein,
this Agreement will not be automatically extended unless, prior thereto, such
extension is approved by the Board of Directors of the Company following a
formal performance evaluation review of the Employee
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<PAGE> 3
performed by the disinterested members of the Board of Directors of the Company
and the approval and justification of the approval are then recorded in the
minutes of the Board of Directors. Reference herein to the term of employment
under this Agreement shall refer to both such initial term and any extended
term.
5. VACATIONS. The Employee shall be entitled, without loss of
pay, to be absent voluntarily for reasonable periods of time from the
performance of the duties and responsibilities under this Agreement. All such
voluntary absences shall count as paid vacation time, unless the Board of
Directors of the Company otherwise approves. The Employee shall be entitled to
an annual paid vacation of 3 weeks per year or such longer period as the Board
of Directors of the Company may approve. The timing of paid vacations shall be
scheduled in a reasonable manner by the Employee. The Employee shall not be
entitled to receive any additional compensation from the Company on account of
failure to take a paid vacation. The Employee shall not be allowed to accumulate
unused paid vacation from one vacation year to the next, unless the Employee has
failed to use vacation time to which the Employee was entitled at the request of
the Company's Board of Directors.
6. TERMINATION OF EMPLOYMENT.
(a) (i) The Board of Directors of the Company may terminate
the employment of the Employee at any time, but any termination by the Board of
Directors other than termination for cause shall not prejudice the right of the
Employee to compensation or other benefits under this Agreement.
(ii) The Company and the Employee acknowledge and agree that
damages which will result to the Employee for termination without cause shall be
extremely difficulty or impossible to establish or prove. Therefore, the Company
and the Employee agree that unless the termination is a termination for cause,
the Company shall be obligated, concurrently with such termination, to make a
lump sum cash payment to the Employee, as liquidated damages, of an amount equal
to the then current salary of the Employee calculated for a period equal to the
remaining term of this Agreement. The Employee agrees that, except for such
other payments and benefits to which the Employee may be entitled as expressly
provided by the terms of this Agreement, such liquidated damages shall be in
lieu of all other claims which the Employee may make by reason of such
termination. Such payment to the Employee shall be made on or before the last
day of the employment of the Employee with the Company. The liquidated damages
amount shall not be reduces by any compensation which the Employee may receive
for other employment with another employer after termination of employment with
the Company.
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<PAGE> 4
(iii) In addition to the liquidated damages above described
that are payable to the Employee for termination without cause, the following
shall apply in the event of any termination without cause, any termination by
reason of disability or in the event of any termination subject to Section 7
hereof: (1) the Employee shall continue to participate in, and accrue benefits
under, all retirement, pension, profit sharing, employee stock ownership, and
other deferred compensation plans of the Company for the remaining term of this
Agreement as if the termination of employment of the Employee had not occurred
(with the Employee deemed to receive annually for the purposes of such plans the
Employee's then current salary [at the time of this termination] under Section 2
of this Agreement), except to the extent that such continued participation and
accrual is expressly prohibited by law or to the extent such plan constitutes a
"qualified plan" under Section 401 of the Internal Revenue Code of 1986, as
amended (the "Code"); (2) the Employee shall be entitled to continue to receive
all other employee benefits and then existing fringe benefits referred to in
Section 3 hereof for the remaining term of this Agreement as if the termination
of employment had not occurred; and (3) all insurance or other provisions for
indemnification, defense or hold harmless of officers or directors of the
Company which are in effect on the date the notice of termination is sent to the
Employee shall continue for the benefit of the Employee with respect to all of
his acts and omissions while an officer or director as fully and completely as
if such termination had not occurred and until the final expiration or running
of all period of limitation against action which may be applicable to such acts
or omissions.
(b) If the Employee is suspended from office and/or temporarily
prohibited from participating in the conduct of the Company's affairs by a
notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance
Act ("FDIA"), 12 U.S.C. Section 1818(e)(3); (g)(1), the Company's obligations
under this Agreement shall be suspended as of the date of service, unless
stayed by appropriate proceedings. If the charges in the notice are dismissed,
the Company may in its discretion (i) pay the Employee all or part of the
compensation withheld while its obligations under this Agreement were suspended
and (ii) reinstate in whole or in part any of the obligations which were
suspended.
(c) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Company's affairs by an
order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C.
Section 1818(e)(4); (g)(1), all obligations of the Company under this Agreement
shall terminate, as of the effective date of the order, but vested rights of
the parties shall not be affected.
(d) If the Company becomes in default (as defined in Section 3 (x)(1)
of the FDIA, 12 U.S.C. Section 1813(x)(1), all obligations under
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<PAGE> 5
this Agreement shall terminate as of the date of default, but this provision
shall not affect any vested rights of the parties.
(e) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Company: (i) by the Director of the Office of Thrift
Supervision ("OTS") or his or her designee at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Company under the
authority contained in Section 13(c) of the FDIA, 12 U.S.C. Section 1823(c); or
(ii) by the Director of the OTS or his or her designee at the time the Director
of the OTS or his or her designee approves a supervisory merger to resolve
problems related to operation of the Company or when the Company is determined
by the Director of the OTS to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not be
affected by any such action.
(f) In the event that the Company has terminated the Employee for
cause, but it is determined by a court of competent jurisdiction that cause did
not exist for such termination, or if it is determined by any such court that
the Company has failed to make timely payment of any amounts owed to the
Employee under this Agreement, the Employee shall be entitled to reimbursement
for all reasonable costs, including attorney fees, incurred in challenging such
termination or collecting such amounts. Such reimbursement shall be in addition
to all rights to which the Employee is otherwise entitled under this Agreement.
7. CHANGE IN CONTROL.
(a) If during the term of this Agreement there is a change in
control of the Company and/or the Holding Company, the Employee shall be
entitled to receive as a severance payment for services previously rendered to
the Company a lump sum cash payment as provided for herein (subject to Section
7(c) below) in the event the employment of the Employee is terminated,
voluntarily or involuntarily in connection with or within one year after the
change in control of the Company, unless such termination occurs by virtue of
normal retirement, permanent and total disability or death. Subject to Section
7(c) below, the amount of this payment shall equal three times the Employee's
average compensation which was payable by the Company and was includible in the
Employee's gross income for federal income tax purposes with respect to the five
most recent taxable years of the Company ending prior to such change in control
of the Company (or such portion of such period during which the Employee was a
full-time Employee of the Company), less $1.00. Payment under this Section 7(a)
shall be in lieu of any amount owed to the Employee as liquidated damages for
termina-
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<PAGE> 6
tion without cause under Section 6(a) hereof. Payment under this Section 7(a)
shall not be reduced by any compensation which the Employee may receive from
other employment with another employer after termination of the employment of
the Employee with the Company. In addition, Section 6(a)(iii) shall apply in the
case of any termination of employment within the scope of this Section 7(a).
(b) A "change in control" for purposes of this Agreement shall
be deemed to have taken place if: (1) any person becomes the beneficial owner of
25% or more of the total number of voting shares of the Holding Company; (2) any
person becomes the beneficial owner of 10% or more, but less than 25% of the
total number of voting shares of the Holding Company, provided, however, that if
the Office of Thrift Supervision (the "OTS") has approved a rebuttal agreement
filed by such person or such person has filed a certification with the OTS, a
change in control will not be so deemed to have occurred unless the Board of
Directors of the Holding Company has made a determination that such beneficial
ownership constitutes or will constitute control; (3) any person (other than the
persons named as proxies solicited on behalf of the Board of Directors of the
Holding Company) holds revocable or irrevocable proxies as to the election or
removal of two or more directors of the Holding Company, for 25% or more of the
total number of voting shares of the Holding Company; (4) any person has
received the approval of the OTS under Section 10 of the Home Owner's Loan Act
(the "Holding Company Act"), or regulations issued thereunder to acquire control
of the Holding Company; (5) any person has received approval of the OTS under
the Change in Bank Control Act (the "Control Act"), or regulations issued
thereunder, to acquire control of the Holding Company; (6) any person has
commenced a tender or exchange offer, or entered into an agreement or received
an option, to acquire beneficial ownership of 25% or more of the total number of
voting shares of the Holding Company, whether or not the requisite approval for
such acquisition has been received under the Holding Company Act, the Control
Act, or the respective regulations issued thereunder; or (7) as the result of,
or in connection, any cash tender or exchange offer, merger, or other business
combination, sale of assets or contested election, or any combination of the
foregoing transactions, the persons who were directors of the Holding Company
before such transaction shall cease to constitute at least two-thirds of the
Board of Directors of the Holding Company or any successor institution. For
purposes of this Section 7(b) a "person" includes an individual, corporation,
partnership, trust, association, joint venture, poole, syndicate, unincorporated
organization, joint stock company, a limited liability company or similar
organization or group acting in concert. A person for these purposes shall be
deemed to be a beneficial owner as that term is used in Rule 13d-3 under the
Securities Exchange Act of 1934.
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<PAGE> 7
(c) Notwithstanding any other provisions of this Agreement or of any
other agreement, contract, or understanding heretofore or hereafter entered into
between the Employee and the Company except an agreement, contract, or
understanding hereafter entered into that expressly modifies or excludes
application of this Section 7(c) (the "Other Agreements"), and notwithstanding
any formal or informal plan or other arrangement heretofore or hereafter adopted
by the Company for the direct or indirect provision of compensation to the
Employee (including groups or classes of participants or beneficiaries of which
the Employee is a member), whether or not such compensation is deferred, is in
cash, or is in the form of a benefit to or for the Employee (a "Benefit Plan"),
the Employee shall not have any right to receive any payment, or other benefit
under this Agreement, any Other Agreement, or any Benefit Plan if such payment
or benefit, taking into account all other payments or benefits to or for the
Employee under this Agreement, all Other Agreements and all Benefit Plans, would
cause any payment to the Employee under this Agreement to be considered a
"parachute payment" within the meaning of Section 280G(b)(2) of the Internal
Revenue Code of 1986, as amended (the "Code") (a "Parachute Payment"). In the
event that the receipt of any such payment or benefit under this Agreement, any
Other Agreement, or any Benefit Plan would cause the Employee to be considered
to have received a Parachute Payment under this Agreement, then the Employee
shall have the right, in the Employee's sole discretion, to designate those
payments or benefits under this Agreement, any other Agreement, and/or any
Benefit Plans, which should be reduced or eliminated so as to avoid having the
payment to the Employee under this Agreement be deemed to be a Parachute
Payment.
8. DISABILITY. If during the term of employment hereunder the Employee
shall become disabled or incapacitated to the extent that the Employee is unable
to perform the duties of Vice-President, the Employee shall be
entitled to receive disability benefits of the type provided for other
executive employees of the Company. During the period of time that the Employee
receives disability benefits, the rights of the Employee to receive the salary
stated in Section 2 hereof shall be suspended.
9. TERMINATION - DEATH. In the event of the death of the Employee
during the term of employment under this Agreement and prior to any termination
hereunder, the Employee's estate, or such person as the Employee may have
previously designated in writing, shall be entitled to receive from the Company
the salary of the Employee through the last day of the calendar month in which
death shall have occurred.
10. INVOLUNTARY TERMINATION-DEFINITION. Except as otherwise provided in
Section 7 of this Agreement the term "Involuntary Termination" in this Agreement
means the termination of employment
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<PAGE> 8
of the Employee without the express written consent of the Employee. The
Employee shall be considered to be involuntarily terminated (1) if the
employment of the Employee is involuntarily terminated for any reason other
than for cause or (2) terminated pursuant to Section 6(b) through (e) or (3)
terminated by reason of death, or (4) there occurs a material diminution of or
interference with the Employee's duties and responsibilities as Vice-President
of the Company. By way of example and not by way of limitation, any of
the following actions, if unreasonable or materially adverse to the Employee,
shall constitute such diminution or interference unless consented to in writing
by the Employee: (1) a change in the principal workplace of the Employee to a
location of more than 50 miles from the main office of the Company; (2) a
material demotion of the Employee, a reduction in the number or seniority of
other Company personnel reporting to the Employee, or a reduction in the
frequency with which, or in the nature of the matters with respect to which,
such personnel are to report to the Employee, other than as part of a Company
wide reduction in staff; or (3) a reduction or adverse change in salary,
perquisites, benefits, contingent benefits or vacation time which had
theretofore been provided to the Employee, other than as part of an overall
program applied uniformly and with equitable effect to all members of the
senior management of the Company.
11. TERMINATION FOR CAUSE. In case of termination of the employment of
the Employee for cause, the Company shall pay the Employee salary through the
date of termination and thereafter, the Company shall have no further obligation
to the Employee under this Agreement which shall be considered as terminated for
all purposes. The Employee shall not have the right to receive compensation or
other benefits for any period after termination for cause. Notwithstanding the
foregoing, the Employee shall not be deemed to have been terminated for cause
unless and until there shall have been delivered to the Employee a copy of a
resolution, duly adopted by the affirmative vote of not less than a majority of
the disinterested members of the Board of Directors at a meeting of the Board
called and held for such purpose after reasonable notice to the Employee and an
opportunity for the Employee, together with counsel for the Employee, to be
heard before the Board, stating that in the good faith opinion of the Board of
Directors of the Company, the Employee was guilty of conduct constituting
"cause" and specifying the particulars thereof in detail. The term "termination
for cause" shall mean termination because of personal dishonesty of the
Employee, incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform duties, willful violation of any
substantive law, rule or regulation or final cease and desist order, or material
breach of any provision of this Agreement.
12. VOLUNTARY TERMINATION. The Employee may voluntarily terminate
employment at any time upon ninety (90) days written
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<PAGE> 9
notice to the Company or upon such shorter period as may be agreed between the
Employee and the Board of Directors of the Company. In the event of such
voluntary termination, the Company shall be obligated to continue to pay the
salary of the Employee only through the date of termination, at the time such
payments are due, and the Company shall have no further obligation to the
Employee under this Agreement.
13. NON-ASSIGNABILITY.
(a) This Agreement is personal to each of the parties hereto,
and neither party may assign or delegate any rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Company will require any successor or assign (whether direct
or indirect by purchase, merger, consolidation or otherwise) to all or substan-
tially all of the business and/or assets of the Company, by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession or
assignment had taken place. Failure of the Company to obtain such an assumption
agreement prior to the effective date of any such succession or assignment shall
be a breach of this Agreement and shall entitle the Employee to compensation
from the Company in the same amount and on the same terms as the compensation
pursuant to Section 7(a) hereof. For purposes of implementing the provisions of
this Section 13(a), the date on which any such succession becomes effective
shall be deemed the date of termination.
(b) This Agreement and all rights of the Employee hereunder
shall inure the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devises and legatees. If the Employee should die while any amount
would still be payable to the Employee hereunder if the Employee had continued
to live, all such amounts unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to be designees and legatees of the
Employee or other designee or in default of such designee, to the estate of the
Employee.
14. MISCELLANEOUS.
(a) NOTICES. For the purpose of this Agreement, notices and
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when personally delivered or sent by
certified mail, return receipt requested, postage prepaid, addressed (i) to the
Company at its home office to the attention of the Board of Directors of the
Company, with a copy to the Secretary of the Company and (ii) to the Employee at
the home address the Employee has most recently
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<PAGE> 10
provided to the Company or to such other address as either party may have
furnished to the other in writing in accordance herewith.
(b) AMENDMENTS. No amendments or additions to this Agreement
shall be binding unless in writing and signed by both parties, except as herein
otherwise provided.
(c) 12 USC SECTION 1828(K). Any payments made to the Employee
pursuant to this Agreement, or otherwise, are subject to and conditioned upon
their compliance with 12 USC Section 1828(K) and any regulations promulgated
thereunder.
(d) GOVERNING LAW. This Agreement shall be governed by the
laws of the United States to the extent applicable and otherwise by the laws of
the State of Ohio.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
The Blue Ash Building And Loan Company
By:/s/ Ralph Heitmeyer
-------------------------------------------
President
Employee:/s/ William T. Thornell
-------------------------------------
William T. Thornell
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<PAGE> 1
Exhibit 10.5
EMPLOYMENT CONTRACT
-------------------
THIS EMPLOYMENT CONTRACT (the "Agreement") is made and delivered in the
City of Blue Ash, Hamilton County, Ohio, effective as of the 1st day of January,
1997, by and between The Blue Ash Building And Loan Company (the "Company"), a
wholly owned subsidiary of Towne Financial Corporation (the "Holding Company"),
and Joseph L. Michel, (the "Employee").
WHEREAS, the Board of Directors of the Company and the Holding Company
believe that it is in the best interest of the Company to enter into this
Agreement with the Employee in order to assure the continuity and retention of
key management of the Company and to reinforce and encourage the continued
attention and dedication of the Employee to the Company and to the duties
assigned to the Employee by the Company; and
WHEREAS, the Board of Directors of the Company has approved and
authorized the execution and delivery of this Agreement with the Employee
effective as of the date set forth in this Agreement;
NOW, THEREFORE, in consideration of the foregoing and in consideration
of the mutual exchange of promises and of the covenants performed and to be
performed, the Company and Employee agree as follows:
1. EMPLOYMENT. The Employee will be employed by the Company as
the Chief Financial Officer of the Company. As Chief Financial Officer of the
Company, the Employee shall render to the Company administrative and management
services as are customarily rendered by persons situated in similar executive
capacities. The Employee shall have such other duties and powers as may from
time to time be assigned by the Board of Directors of the Company, provided that
such duties are consistent with the position of the Employee as the Company's
Chief Financial Officer. During the term of this Agreement, the Employee shall
devote best efforts and all business time and attention to the business and
affairs of the Company.
2. COMPENSATION
(a) SALARY. Company agrees to pay the Employee during the term
of this Agreement a salary as follows: from the effective date hereof through
the 31st day of December, 1997, a salary at an annual rate equal to $58,245.00,
payable to the Employee by the Company not less frequently than weekly in
accordance with past practices of the Company. The salary of the Employee shall
be adjusted on January 1st, of each year during the term of this Agreement as
determined by the Company's Board of Directors, and may be increased (but not
decreased) in such amounts as the Board of Directors of the Company in its
discretion may determine.
<PAGE> 2
(b) DISCRETIONARY BONUSES. The Employee shall be entitled to
participate in an equitable manner with all other executive officers of the
Company in discretionary bonuses as authorized and declared by the Board of
Directors of the Company for its executive employees. No other compensation
provided for in this Agreement shall be deemed a substitute for the right of the
Employee to participate in such bonuses when and as declared by the Company's
Board of Directors.
(c) EXPENSES. During the term of employment hereunder, the
Employee shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred in accordance with policies and procedures at least as
favorable to the Employee as those presently applicable to the senior executive
officers of the Company, provided that the Employee properly accounts therefore
in accordance with the policy of the Company.
3. BENEFITS.
(a) PARTICIPATION IN RETIREMENT AND EMPLOYEE BENEFIT PLANS.
The Employee shall be entitled while employed hereunder to participate in and
receive benefits under all plans relating to stock options, stock purchases,
pension, thrift, profit sharing, group life insurance, medical coverage,
education, cash or stock bonuses, and other retirement or employee benefits or
combinations thereof that are now or hereafter maintained for the benefit of the
executive employees of the Company or for the Company's employees generally.
Provided, however, that nothing herein shall be construed as requiring the
Company to adopt, maintain and/or continue any such benefit plan.
(b) FRINGE BENEFITS. The Employee shall be eligible while
employed hereunder to participate in and receive benefits under any other fringe
benefits which are or may become applicable to the executive employees of the
Company or to its employees generally.
4. TERM. The term of employment under this Agreement shall be a period
of three (3) years commencing upon the date of this Agreement (herein the
"Commencement Date"), subject to earlier termination as hereinafter provided.
Beginning on the first anniversary of the Commencement Date, and on each
anniversary thereafter, the term of employment under this Agreement shall be
extended for a period of one (1) year unless either the Company or the Employee
gives contrary written notice to the other not less than ninety (90) days in
advance of the date on which the term of employment under this Agreement would
otherwise be extended. Notwithstanding any other statement or provision herein,
this Agreement will not be automatically extended unless, prior thereto, such
extension is approved by the Board of Directors of the Company following a
formal performance evaluation review of the Employee
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<PAGE> 3
performed by the disinterested members of the Board of Directors of the Company
and the approval and justification of the approval are then recorded in the
minutes of the Board of Directors. Reference herein to the term of employment
under this Agreement shall refer to both such initial term and any extended
term.
5. VACATIONS. The Employee shall be entitled, without loss
of pay, to be absent voluntarily for reasonable periods of time from the
performance of the duties and responsibilities under this Agreement. All such
voluntary absences shall count as paid vacation time, unless the Board of
Directors of the Company otherwise approves. The Employee shall be entitled
to an annual paid vacation of 3 weeks per year or such longer period as the
Board of Directors of the Company may approve. The timing of paid vacations
shall be scheduled in a reasonable manner by the Employee. The Employee shall
not be entitled to receive any additional compensation from the Company on
account of failure to take a paid vacation. The Employee shall not be allowed
to accumulate unused paid vacation from one vacation year to the next, unless
the Employee has failed to use vacation time to which the Employee was
entitled at the request of the Company's Board of Directors.
6. TERMINATION OF EMPLOYMENT.
(a) (i) The Board of Directors of the Company may terminate
the employment of the Employee at any time, but any termination by the Board of
Directors other than termination for cause shall not prejudice the right of the
Employee to compensation or other benefits under this Agreement.
(ii) The Company and the Employee acknowledge and agree that
damages which will result to the Employee for termination without cause shall be
extremely difficulty or impossible to establish or prove. Therefore, the Company
and the Employee agree that unless the termination is a termination for cause,
the Company shall be obligated, concurrently with such termination, to make a
lump sum cash payment to the Employee, as liquidated damages, of an amount equal
to the then current salary of the Employee calculated for a period equal to the
remaining term of this Agreement. The Employee agrees that, except for such
other payments and benefits to which the Employee may be entitled as expressly
provided by the terms of this Agreement, such liquidated damages shall be in
lieu of all other claims which the Employee may make by reason of such
termination. Such payment to the Employee shall be made on or before the last
day of the employment of the Employee with the Company. The liquidated damages
amount shall not be reduces by any compensation which the Employee may receive
for other employment with another employer after termination of employment with
the Company.
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<PAGE> 4
(iii) In addition to the liquidated damages above described
that are payable to the Employee for termination without cause, the following
shall apply in the event of any termination without cause, any termination by
reason of disability or in the event of any termination subject to Section 7
hereof: (1) the Employee shall continue to participate in, and accrue benefits
under, all retirement, pension, profit sharing, employee stock ownership, and
other deferred compensation plans of the Company for the remaining term of this
Agreement as if the termination of employment of the Employee had not occurred
(with the Employee deemed to receive annually for the purposes of such plans the
Employee's then current salary [at the time of this termination] under Section 2
of this Agreement), except to the extent that such continued participation and
accrual is expressly prohibited by law or to the extent such plan constitutes a
"qualified plan" under Section 401 of the Internal Revenue Code of 1986, as
amended (the "Code"); (2) the Employee shall be entitled to continue to receive
all other employee benefits and then existing fringe benefits referred to in
Section 3 hereof for the remaining term of this Agreement as if the termination
of employment had not occurred; and (3) all insurance or other provisions for
indemnification, defense or hold harmless of officers or directors of the
Company which are in effect on the date the notice of termination is sent to the
Employee shall continue for the benefit of the Employee with respect to all of
his acts and omissions while an officer or director as fully and completely as
if such termination had not occurred and until the final expiration or running
of all period of limitation against action which may be applicable to such acts
or omissions.
(b) If the Employee is suspended from office and/or temporarily
prohibited from participating in the conduct of the Company's affairs by a
notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance
Act ("FDIA"), 12 U.S.C. Section 1818(e)(3); (g)(1), the Company's obligations
under this Agreement shall be suspended as of the date of service, unless
stayed by appropriate proceedings. If the charges in the notice are dismissed,
the Company may in its discretion (i) pay the Employee all or part of the
compensation withheld while its obligations under this Agreement were
suspended and (ii) reinstate in whole or in part any of the obligations which
were suspended.
(c) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Company's affairs by an
order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C.
Section 1818(e)(4); (g)(1), all obligations of the Company under this Agreement
shall terminate, as of the effective date of the order, but vested rights of
the parties shall not be affected.
(d) If the Company becomes in default (as defined in Section 3 (x)(1)
of the FDIA, 12 U.S.C. Section 1813(x)(1), all obligations under
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<PAGE> 5
this Agreement shall terminate as of the date of default, but this provision
shall not affect any vested rights of the parties.
(e) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Company: (i) by the Director of the Office of Thrift
Supervision ("OTS") or his or her designee at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Company under the
authority contained in Section 13(c) of the FDIA, 12 U.S.C. ss.1823(c); or (ii)
by the Director of the OTS or his or her designee at the time the Director of
the OTS or his or her designee approves a supervisory merger to resolve problems
related to operation of the Company or when the Company is determined by the
Director of the OTS to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not be
affected by any such action.
(f) In the event that the Company has terminated the Employee for
cause, but it is determined by a court of competent jurisdiction that cause did
not exist for such termination, or if it is determined by any such court that
the Company has failed to make timely payment of any amounts owed to the
Employee under this Agreement, the Employee shall be entitled to reimbursement
for all reasonable costs, including attorney fees, incurred in challenging such
termination or collecting such amounts. Such reimbursement shall be in addition
to all rights to which the Employee is otherwise entitled under this Agreement.
7. CHANGE IN CONTROL.
(a) If during the term of this Agreement there is a change in
control of the Company and/or the Holding Company, the Employee shall be
entitled to receive as a severance payment for services previously rendered to
the Company a lump sum cash payment as provided for herein (subject to Section
7(c) below) in the event the employment of the Employee is terminated,
voluntarily or involuntarily in connection with or within one year after the
change in control of the Company, unless such termination occurs by virtue of
normal retirement, permanent and total disability or death. Subject to Section
7(c) below, the amount of this payment shall equal three times the Employee's
average compensation which was payable by the Company and was includible in the
Employee's gross income for federal income tax purposes with respect to the five
most recent taxable years of the Company ending prior to such change in control
of the Company (or such portion of such period during which the Employee was a
full-time Employee of the Company), less $1.00. Payment under this Section 7(a)
shall be in lieu of any amount owed to the Employee as liquidated damages for
termina-
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<PAGE> 6
tion without cause under Section 6(a) hereof. Payment under this Section 7(a)
shall not be reduced by any compensation which the Employee may receive from
other employment with another employer after termination of the employment of
the Employee with the Company. In addition, Section 6(a)(iii) shall apply in the
case of any termination of employment within the scope of this Section 7(a).
(b) A "change in control" for purposes of this Agreement shall
be deemed to have taken place if: (1) any person becomes the beneficial owner of
25% or more of the total number of voting shares of the Holding Company; (2) any
person becomes the beneficial owner of 10% or more, but less than 25% of the
total number of voting shares of the Holding Company, provided, however, that if
the Office of Thrift Supervision (the "OTS") has approved a rebuttal agreement
filed by such person or such person has filed a certification with the OTS, a
change in control will not be so deemed to have occurred unless the Board of
Directors of the Holding Company has made a determination that such beneficial
ownership constitutes or will constitute control; (3) any person (other than the
persons named as proxies solicited on behalf of the Board of Directors of the
Holding Company) holds revocable or irrevocable proxies as to the election or
removal of two or more directors of the Holding Company, for 25% or more of the
total number of voting shares of the Holding Company; (4) any person has
received the approval of the OTS under Section 10 of the Home Owner's Loan Act
(the "Holding Company Act"), or regulations issued thereunder to acquire control
of the Holding Company; (5) any person has received approval of the OTS under
the Change in Bank Control Act (the "Control Act"), or regulations issued
thereunder, to acquire control of the Holding Company; (6) any person has
commenced a tender or exchange offer, or entered into an agreement or received
an option, to acquire beneficial ownership of 25% or more of the total number of
voting shares of the Holding Company, whether or not the requisite approval for
such acquisition has been received under the Holding Company Act, the Control
Act, or the respective regulations issued thereunder; or (7) as the result of,
or in connection, any cash tender or exchange offer, merger, or other business
combination, sale of assets or contested election, or any combination of the
foregoing transactions, the persons who were directors of the Holding Company
before such transaction shall cease to constitute at least two-thirds of the
Board of Directors of the Holding Company or any successor institution. For
purposes of this Section 7(b) a "person" includes an individual, corporation,
partnership, trust, association, joint venture, poole, syndicate, unincorporated
organization, joint stock company, a limited liability company or similar
organization or group acting in concert. A person for these purposes shall be
deemed to be a beneficial owner as that term is used in Rule 13d-3 under the
Securities Exchange Act of 1934.
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<PAGE> 7
(c) Notwithstanding any other provisions of this Agreement or of any
other agreement, contract, or understanding heretofore or hereafter entered into
between the Employee and the Company except an agreement, contract, or
understanding hereafter entered into that expressly modifies or excludes
application of this Section 7(c) (the "Other Agreements"), and notwithstanding
any formal or informal plan or other arrangement heretofore or hereafter adopted
by the Company for the direct or indirect provision of compensation to the
Employee (including groups or classes of participants or beneficiaries of which
the Employee is a member), whether or not such compensation is deferred, is in
cash, or is in the form of a benefit to or for the Employee (a "Benefit Plan"),
the Employee shall not have any right to receive any payment, or other benefit
under this Agreement, any Other Agreement, or any Benefit Plan if such payment
or benefit, taking into account all other payments or benefits to or for the
Employee under this Agreement, all Other Agreements and all Benefit Plans, would
cause any payment to the Employee under this Agreement to be considered a
"parachute payment" within the meaning of Section 280G(b)(2) of the Internal
Revenue Code of 1986, as amended (the "Code") (a "Parachute Payment"). In the
event that the receipt of any such payment or benefit under this Agreement, any
Other Agreement, or any Benefit Plan would cause the Employee to be considered
to have received a Parachute Payment under this Agreement, then the Employee
shall have the right, in the Employee's sole discretion, to designate those
payments or benefits under this Agreement, any other Agreement, and/or any
Benefit Plans, which should be reduced or eliminated so as to avoid having the
payment to the Employee under this Agreement be deemed to be a Parachute
Payment.
8. DISABILITY. If during the term of employment hereunder the Employee
shall become disabled or incapacitated to the extent that the Employee is
unable to perform the duties of Chief Financial Officer, the Employee shall
be entitled to receive disability benefits of the type provided for other
executive employees of the Company. During the period of time that the
Employee receives disability benefits, the rights of the Employee to receive
the salary stated in Section 2 hereof shall be suspended.
9. TERMINATION - DEATH. In the event of the death of the Employee
during the term of employment under this Agreement and prior to any termination
hereunder, the Employee's estate, or such person as the Employee may have
previously designated in writing, shall be entitled to receive from the Company
the salary of the Employee through the last day of the calendar month in which
death shall have occurred.
10. INVOLUNTARY TERMINATION-DEFINITION. Except as otherwise provided in
Section 7 of this Agreement the term "Involuntary Termination" in this Agreement
means the termination of employment of the Employee without the express written
consent of the
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<PAGE> 8
Employee. The Employee shall be considered to be involuntarily terminated (1)
if the employment of the Employee is involuntarily terminated for any reason
other than for cause or (2) terminated pursuant to Section 6(b) through (e) or
(3) terminated by reason of death, or (4) there occurs a material diminution of
or interference with the Employee's duties and responsibilities as Chief
Financial Officer of the Company. By way of example and not by way of
limitation, any of the following actions, if unreasonable or materially
adverse to the Employee, shall constitute such diminution or interference
unless consented to in writing by the Employee: (1) a change in the principal
workplace of the Employee to a location of more than 50 miles from the main
office of the Company; (2) a material demotion of the Employee, a reduction in
the number or seniority of other Company personnel reporting to the Employee,
or a reduction in the frequency with which, or in the nature of the matters
with respect to which, such personnel are to report to the Employee, other
than as part of a Company wide reduction in staff; or (3) a reduction or
adverse change in salary, perquisites, benefits, contingent benefits or
vacation time which had theretofore been provided to the Employee, other
than as part of an overall program applied uniformly and with equitable
effect to all members of the senior management of the Company.
11. TERMINATION FOR CAUSE. In case of termination of the employment of
the Employee for cause, the Company shall pay the Employee salary through the
date of termination and thereafter, the Company shall have no further obligation
to the Employee under this Agreement which shall be considered as terminated for
all purposes. The Employee shall not have the right to receive compensation or
other benefits for any period after termination for cause. Notwithstanding the
foregoing, the Employee shall not be deemed to have been terminated for cause
unless and until there shall have been delivered to the Employee a copy of a
resolution, duly adopted by the affirmative vote of not less than a majority of
the disinterested members of the Board of Directors at a meeting of the Board
called and held for such purpose after reasonable notice to the Employee and an
opportunity for the Employee, together with counsel for the Employee, to be
heard before the Board, stating that in the good faith opinion of the Board of
Directors of the Company, the Employee was guilty of conduct constituting
"cause" and specifying the particulars thereof in detail. The term "termination
for cause" shall mean termination because of personal dishonesty of the
Employee, incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform duties, willful violation of any
substantive law, rule or regulation or final cease and desist order, or material
breach of any provision of this Agreement.
12. VOLUNTARY TERMINATION. The Employee may voluntarily terminate
employment at any time upon ninety (90) days written notice to the Company or
upon such shorter period as may be agreed
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<PAGE> 9
between the Employee and the Board of Directors of the Company. In the event of
such voluntary termination, the Company shall be obligated to continue to pay
the salary of the Employee only through the date of termination, at the time
such payments are due, and the Company shall have no further obligation to
the Employee under this Agreement.
13. NON-ASSIGNABILITY.
(a) This Agreement is personal to each of the parties hereto,
and neither party may assign or delegate any rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Company will require any successor or assign (whether direct
or indirect by purchase, merger, consolidation or otherwise) to all or substan-
tially all of the business and/or assets of the Company, by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession or
assignment had taken place. Failure of the Company to obtain such an assumption
agreement prior to the effective date of any such succession or assignment shall
be a breach of this Agreement and shall entitle the Employee to compensation
from the Company in the same amount and on the same terms as the compensation
pursuant to Section 7(a) hereof. For purposes of implementing the provisions of
this Section 13(a), the date on which any such succession becomes effective
shall be deemed the date of termination.
(b) This Agreement and all rights of the Employee hereunder
shall inure the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devises and legatees. If the Employee should die while any amount
would still be payable to the Employee hereunder if the Employee had continued
to live, all such amounts unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to be designees and legatees of the
Employee or other designee or in default of such designee, to the estate of the
Employee.
14. MISCELLANEOUS.
(a) NOTICES. For the purpose of this Agreement, notices and
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when personally delivered or sent by
certified mail, return receipt requested, postage prepaid, addressed (i) to the
Company at its home office to the attention of the Board of Directors of the
Company, with a copy to the Secretary of the Company and (ii) to the Employee at
the home address the Employee has most recently
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<PAGE> 10
provided to the Company or to such other address as either party may have
furnished to the other in writing in accordance herewith.
(b) AMENDMENTS. No amendments or additions to this Agreement
shall be binding unless in writing and signed by both parties, except as herein
otherwise provided.
(c) 12 USC SECTION 1828(K). Any payments made to the Employee
pursuant to this Agreement, or otherwise, are subject to and conditioned upon
their compliance with 12 USC Section 1828(K) and any regulations promulgated
thereunder.
(d) GOVERNING LAW. This Agreement shall be governed by the
laws of the United States to the extent applicable and otherwise by the laws of
the State of Ohio.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
The Blue Ash Building And Loan Company
By:/s/ Ralph Heitmeyer
------------------------------------------
President
Employee:/s/ Joseph L. Michel
------------------------------------
Joseph L. Michel
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<PAGE> 1
Exhibit 13
TOWNE FINANCIAL CORPORATION
Parent Company of
The Blue Ash Building and Loan Company
1997
ANNUAL REPORT
<PAGE> 2
TO OUR SHAREHOLDERS
On behalf of the directors, officers and employees of Towne Financial
Corporation ("Towne Financial") and The Blue Ash Building and Loan Company
("Blue Ash"), we would like to express our thanks and gratitude for your
continuing support and investment in Towne Financial. Since 1908, great efforts
have been made to make Blue Ash a safe, sound and profitable mutual savings and
loan. As a publicly-owned savings and loan holding company, whose primary
investment is Blue Ash, Towne Financial is still positioned to build on the
strong foundation laid by those past efforts.
The consolidated financial reports and information included in the
Sixth Annual Report of Towne Financial are as of and for the year ended June 30,
1997. Towne Financial closed fiscal 1997 with assets totaling an unprecedented
$102.6 million, an increase of $10.4 million, or 11.2%, from fiscal 1996 asset
levels. Coupled with this significant double-digit asset growth in fiscal 1997
were double-digit increases in total assets of 16.0% in fiscal 1996 and 14.5% in
fiscal 1995. Over the last seven years Towne Financial has almost doubled in
asset size. It is important to stress that the growth in assets experienced
during fiscal 1997, as well as over the last few years, can be tangibly measured
and is symbolic of the increasing consumer preference for transacting business
with a community-based financial institution. It should also be noted that such
growth in the asset base has been consistent with our short-term and long-term
goals and objectives, as we continue expanding our customer base within existing
and new market areas.
The consolidated financial results for the year ended June 30, 1997
continue to reflect our strategic focus that prudent management of risk is a key
operating priority while still remaining responsive to the best interests of our
shareholders and the communities we serve. Fiscal 1997 saw a matter of
significant importance reach conclusion. On September 30, 1996, a final decision
regarding the recapitalization of the Savings Association Insurance Fund
("SAIF") was made by Congress and signed into law by the President. The
legislation resulted in a one-time after-tax charge to earnings of $242,000. As
a result, consolidated net earnings for the year ended June 30, 1997 stood at
$365,000, a decrease of $156,000, or 29.9%, from the $521,000 in consolidated
net earnings reported in fiscal 1996, and earnings per share on a fully-diluted
basis decreased from $2.51 per share in fiscal 1996 to $1.66 per share in fiscal
1997. Despite reporting lower levels, the earnings level during fiscal 1997 was
very strong, considering the federal government's SAIF assessment that
negatively affected Blue Ash, as well as many other financial institutions
across the country. However, we are pleased that the issue has been resolved
and that we may now move forward with some degree of certainty.
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<PAGE> 3
Without the one-time charge for the SAIF assessment, which was partially offset
by the future benefits derived from the reduced SAIF premiums resulting from the
recapitalization of the SAIF, fiscal 1997 consolidated net earnings would have
been stated at $559,000, as compared to $521,000 in fiscal 1996, an increase of
$38,000, or 7.3%. At such a level, fiscal 1997 net earnings would have been the
highest since fiscal 1994 and 1993, when those levels were accomplished in a
very favorable interest rate environment. The components fueling the 7.3%
increase in fiscal 1997 net earnings, exclusive of the effects of the SAIF
charge, were the significant increase in net interest income of $384,000, or
16.4%, and stringent expense control as evidenced by a modest 3.2% increase in
general, administrative and other expense, not including the overall effects of
the SAIF charge, which were partially offset by a decline in gain on sale of
mortgage loans of $97,000, or 60.2%, and a decline in gain on sale of securities
designated as available for sale of $135,000, or 90.6%. Loan sales declined
sharply during fiscal 1997, as secondary market activities were deemphasized and
a stronger focus was placed on originating fixed-rate loans for the portfolio.
Given the significant amount of gains recorded in fiscal 1996 from the
sale of loans and securities, we are particularly gratified by the fiscal 1997
earnings level, as core earnings in fiscal 1997 increased significantly.
Specifically, net interest income, which is the interest income generated by
interest-earning assets after the deduction of interest expense associated with
deposits and borrowed money, increased by $384,000, or 16.4%, from $2.3 million
in fiscal 1996 to a record level of $2.7 million in fiscal 1997. This
improvement can be attributed to two factors: growth in interest-earning assets
and an increase in interest rate spread. Simply put, our interest rate spread,
the difference between what we pay our depositors and what we receive from our
borrowers, rose from 2.66% in fiscal 1996 to 2.80% in fiscal 1997. Beginning in
fiscal 1996 and continuing in fiscal 1997, we made a concentrated effort on
increasing the interest rate spread by employing various strategies such as
holding fixed-rate loans for the loan portfolio, and these efforts met with
success. Our plan for fiscal 1998 calls for continuing improvement in our
interest rate spread through disciplined loan and deposit pricing and improved
core funding.
Our primary business activity, mortgage lending, had another extremely
strong growth year in fiscal 1997, as demand for mortgage loans to finance home
sales and construction in our lending area remained relatively strong. Loan
originations and purchases in fiscal 1997 totaled approximately $28.9 million,
as compared to $29.5 million in fiscal 1996. Even though total loan originations
were slightly higher in fiscal 1996, fiscal 1997 levels were more
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<PAGE> 4
impressive as they were achieved in a generally higher interest rate
environment. Also, there was a significant reduction in loan sale activity in
fiscal 1997, therefore a lower production of loans originated for sale in the
secondary market, due in part to a change in strategy of originating fixed-rate
loans for sale in fiscal 1996. Therefore, loans originated for the portfolio
increased by $7.1 million, or 35.2%, in fiscal 1997, from $20.1 million in
fiscal 1996 to $27.2 million in fiscal 1997. As a result of this strong loan
origination volume for the portfolio in fiscal 1997, the loan portfolio grew a
robust 21.3%, from $55.1 million at June 30, 1996 to $66.8 million at June 30,
1997. Since 1992, the loan portfolio has grown by almost $40.0 million, or 148%.
Such growth in loans can be attributed to the improvement in our
loan-to-deposits ratio of 73% at June 30, 1996 to 82% at June 30, 1997. Finally,
our strong lending operation can be attributed to an aggressive marketing and
selling effort of our lending products and services to the communities we lend
to and to the continual development and refinement of new and innovative lending
programs that give us a more competitive advantage.
Looking ahead, we see opportunities to continue to grow our loan
portfolio and to grow it at attractive spreads. Changing a long standing
strategy in fiscal 1996 of originating all fixed-rate loans for sale has
provided Blue Ash with the added flexibility to operate in a wide range of
interest rate and economic environments. As we move forward into fiscal 1998 and
beyond, we expect to concentrate our efforts at increasing our lending presence
into newer market areas. It is our continued goal to increase loan production
and the level of loan retention, obtaining such goal mainly through customer
deposit growth.
During fiscal 1997, we placed a stronger emphasis on our asset risk
management. Maintaining a safe and sound depository with high asset quality
remains a primary objective. Despite a 21.3% increase in the loan portfolio in
fiscal 1997, our non-performing assets to total assets decreased from 0.73% to
0.39% and our loan loss allowance as a percentage of non-performing and
nonaccrual loans increased from 34.2% to 60.5%. In order to be a successful
mortgage lender, a commitment to asset quality and review is essential. Based
upon this commitment and the improvements made in this area in fiscal 1997, we
will continue to work hard to successfully manage credit risk and charge-offs in
fiscal 1998 and beyond.
We are pleased to report that shareholders' equity totaled $7.6 million
at June 30, 1997, or $36.63 per common share. As of June 30, 1997, Blue Ash's
regulatory capital position has been built to a level that considerably exceeds
all current federally-mandated minimum capital requirements. Blue Ash's
regulatory
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capital at that date was almost two times greater than the most stringent of the
minimum regulatory capital requirements.
The key to our growth is how well we manage it. With every new branch
and every new product come new opportunities and new challenges. Changing
technology continues to require investment to ensure that we are both efficient
and cost effective. Our ability and willingness to accept and adopt new
technologies and to quickly adapt to the ever-changing needs of our customers
regarding our products and services will determine how successful we are in
growing our business as we head into the next century. Keeping this in mind, we
are not complacent with the current year's growth rate, as we continue to
explore new branching possibilities and additional services to provide to our
customers. During fiscal 1997, we invested in new loan origination software
which gives us the capability of directly interfacing with the Federal Home Loan
Mortgage Corporation, our primary source for selling loans. This new technology
enables us to automate the loan underwriting process and to eliminate time in
processing loan applications, which, in turn, allows for faster credit decisions
and better overall service to our loan customers. Since we are one of the first
companies to have this new technology in our local area, it gives us a distinct
competitive advantage. In addition, during fiscal 1997, we introduced a new
"free checking" account at our Mason office and placed an overall stronger
emphasis on obtaining new checking accounts at all our offices. The goals for
increasing checking accounts are to attract new core deposit customers, lower
the average cost of funds and provide a strong volume of cross-selling
opportunities for other company products. We believe that branching out into new
markets and expanding and improving current services to our customers is
essential so that Blue Ash can compete and grow amidst the ever-increasing
technology of the financial services industry. Continued reinvestment of our
earnings will help sustain this growth and maximize shareholder value.
Additional efforts to improve shareholder value as we head into fiscal
1998 include paying our first ever quarterly cash dividend of $.10 per share on
September 30, 1997. The payment of such cash dividend will not in any way
jeopardize or compromise our primary goal of continuing to grow the Corporation.
Our vision of the future sees an industry where not only competition,
but ever-continuing change creates daily challenges and opportunities. The
traditional role of savings institutions as the nation's primary housing lenders
is diminishing and savings institutions are subject to increasing competition
from commercial banks and mortgage bankers. The determination to succeed and
move forward is evident in this Corporation regardless of the roadblocks that
are put before us. As mentioned earlier, the SAIF assessment had a negative
impact on earnings in fiscal 1997 and it
4
<PAGE> 6
reminds us of the importance of congressional action. The fact that brokers and
credit unions, among others, face fewer regulations regarding community
reinvestment and other areas, puts Towne Financial and our peers at a severe
disadvantage. The tax exemption that is afforded the credit unions is but one
inequity that needs regulatory attention. We accept the fact that we will always
have competitors; what we ask for is to compete as equals.
The savings institution industry itself also faces an uncertain
regulatory environment in which applicable laws, regulations and enforcement
policies may be subject to significant change. There is currently legislation
pending in Congress that will attempt to eliminate the savings association
charter and thrift holding company structure. Such legislation would also
attempt to modernize banking activities and provide for the diversification of
our financial services products to include such things as sales of insurance and
annuities. We will continue to keep you informed of this proposal or any other
similar proposal as it progresses through the legislative process, although no
assurance can be given that the proposal will be enacted into law or in what
form it might be enacted.
Our future remains challenging and quite exciting. We expect our
Company's operations to become far more complex and are convinced that five
years from now savings institutions will not resemble depositories of the past.
The industry, the consumer and the economy have changed and will continue to do
so. Operating efficiently and containing costs will be a key ingredient in our
future success. We believe that Towne Financial's strength and prudent business
approach enable us to compete successfully in today's business, regulatory and
economic environment, as well as tomorrow's. To know where you are going, you
have to have some idea where you have been. Over the years we have had the good
fortune to grow and succeed. With the solid foundation established by Blue Ash's
growth through operations and branch expansion, we feel confident looking toward
the opportunities and challenges of the future.
We are encouraged by the opportunities that lie before us - new
communities, new products, new customers and a new commitment to community
banking. As always, we remain committed to greater service and greater
achievement. We hope that you will continue to be a part of our success, and
thank you for your belief, trust and confidence in Towne Financial.
Sincerely,
/s/ William S. Siders
William S. Siders
Executive Vice President
and Managing Officer
5
<PAGE> 7
BUSINESS OF TOWNE FINANCIAL CORPORATION
Towne Financial Corporation ("Towne Financial", or the "Corporation"),
an Ohio corporation, is a unitary savings and loan holding company which owns
all of the issued and outstanding common shares of The Blue Ash Building and
Loan Company ("Blue Ash", or the "Company"), a savings and loan association
incorporated under the laws of the State of Ohio. In 1992, Towne Financial
acquired all of the common shares issued by Blue Ash upon its conversion from a
mutual savings and loan association to a stock savings and loan association (the
"Conversion"). Since the completion of this transaction, Towne Financial's
activities have been limited primarily to holding the common shares of Blue Ash.
Future references to the Corporation or the Company are utilized herein as the
context requires.
Blue Ash's overall operating philosophy has evolved from the
fundamental goal of providing affordable home ownership for the communities it
serves and providing a safe, competitive return for its depositors. Serving the
Cincinnati, Ohio, area since 1908, Blue Ash conducts business from its main
office at 4811 Cooper Road in Blue Ash, Ohio, and from three full-service branch
offices located in Mason, Cherry Grove and Amelia. Specifically, Blue Ash
considers its principal market areas to be the northeastern and eastern areas of
Cincinnati, Ohio. With the addition of the Mason office in fiscal 1995, Blue Ash
put forth an even more concerted effort to market and establish itself in the
northeastern area of Cincinnati, a rapidly growing area. In addition to the
Company's efforts to continue expanding operations into new markets and
increasing the Company's assets and profitability, Blue Ash continued to expand
its customer retail services during fiscal 1997 in order to successfully compete
in today's ever-changing business and economic environment. During fiscal 1997,
Blue Ash invested in a new loan origination software package which streamlines
the loan application process for the benefit of its loan customers and
implemented a "free checking" account program at its Mason office in order to
attract new customers and obtain a greater volume of lower cost core deposits.
As a community-oriented financial institution, Blue Ash offers a range
of retail banking services to residents of the Greater Cincinnati area through
its four offices. Blue Ash is principally engaged in the business of attracting
deposits from the general public and using such deposits, together with
borrowings and other funds, to originate first mortgage loans secured by
one-to-four family residential real estate located in Blue Ash's lending area.
Blue Ash also originates loans for the construction of one-to-four family
residential real estate, loans secured by multi-family (over
6
<PAGE> 8
four units) real estate, nonresidential real estate, land, home equity line of
credit loans secured by residential real estate, passbook and secured consumer
loans. Blue Ash also invests in U.S. Government and agency obligations,
corporate debt securities, municipal obligations, interest-bearing deposits and
certificates of deposits in other financial institutions, federal funds sold,
government guaranteed mortgage-backed and related securities and other
investments permitted by applicable law. Funds for lending and other investments
are obtained primarily from savings deposits, borrowings, loan repayments and
proceeds from the sale of loans in the secondary market. Blue Ash's revenues are
primarily derived from interest income on real estate loans, interest income on
mortgage-backed and related securities, gain on sale of loans in the secondary
market, and to a lesser extent, interest income on investments and
interest-bearing deposits, servicing fee income on loans sold, fees from lending
and deposit activities, gain on sale of securities designated as available for
sale, and gain on sale of real estate acquired through foreclosure and other
assets. Blue Ash's most significant expenses are interest on deposits and
borrowings and administrative expenses related to personnel, occupancy and
equipment, federal deposit insurance premiums, data processing services,
franchise taxes, advertising and federal income taxes.
As a savings and loan holding company, Towne Financial is subject to
regulation, supervision and examination by the Office of Thrift Supervision of
the United States Department of the Treasury (the "OTS"). As a savings and loan
association incorporated under the laws of the State of Ohio, Blue Ash is
subject to regulation, supervision and examination by the OTS, the Federal
Deposit Insurance Corporation (the "FDIC") and the Ohio Division of Savings and
Loan Associations (the "Division"). Deposits in Blue Ash are insured up to the
applicable limits by the Savings Association Insurance Fund (the "SAIF") of the
FDIC. Blue Ash is also a member of the Federal Home Loan Bank of Cincinnati (the
"FHLB") and is further subject to certain regulations of the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board") governing reserves
required to be maintained against deposits and certain other matters. The
business and regulation of Blue Ash are also subject to legislative changes from
time to time.
7
<PAGE> 9
MARKET FOR TOWNE FINANCIAL'S COMMON
SHARES AND RELATED SECURITY HOLDER MATTERS
There were 208,500 common shares of Towne Financial outstanding on
September 9, 1997, held of record by approximately 125 shareholders. At the
present time, there is no active public trading market for the Corporation's
common shares. The common shares are listed over-the-counter through the
National Daily Quotation Bureau, Inc.
Towne Financial has not declared or paid any cash dividends through
June 30, 1997. On August 20, 1997, however, Towne Financial declared its first
ever quarterly cash dividend of $.10 per share to be paid on September 30, 1997,
to shareholders of record as of September 15, 1997. Dividends are paid based
upon the determination of the Board of Directors of the Corporation that such
payment is consistent with the short-term and long-term interests of Towne
Financial. The factors affecting this determination include Towne Financial's
current and projected earnings, operating results, financial condition,
regulatory restrictions, future growth plans and other relevant factors.
The principal source of earnings to Towne Financial on an
unconsolidated basis consists of dividends, if any, on Blue Ash's stock paid to
Towne Financial. Consequently, declarations of cash dividends by Towne Financial
will depend upon dividend payments by Blue Ash to Towne Financial, which
payments are subject to various restrictions. On August 20, 1997, Blue Ash
declared a capital distributon in the form of a dividend of $50,000 to be
distributed to Towne Financial on September 30, 1997 for the payment by Towne
Financial of a cash dividend to its shareholders and for other general corporate
purposes.
In addition to certain federal income tax considerations, OTS
regulations impose limitations on the payment of dividends and other capital
distributions by savings and loan associations. Under OTS regulations applicable
to converted savings associations, Blue Ash is not permitted to pay a cash
dividend on its common shares if Blue Ash's regulatory capital would, as a
result of the payment of such dividend, be reduced below the amount required for
the Liquidation Account (the account established for the purpose of granting a
limited priority claim on the assets of Blue Ash in the event of a complete
liquidation to those members of Blue Ash before the conversion who maintain a
savings account at Blue Ash after the conversion) or applicable regulatory
capital requirements prescribed by the OTS.
8
<PAGE> 10
OTS regulations applicable to all savings associations provide that a
savings association which immediately prior to, and on a pro forma basis after
giving effect to, a proposed capital distribution (including a dividend) has
total capital (as defined by OTS regulations) that is equal to or greater than
the amount of its fully phased-in capital requirement is generally permitted
without OTS approval (but subsequent to 30 days prior notice to the OTS of the
planned dividend) to make capital distributions, including dividends, during a
calendar year in an amount not to exceed the sum of (i) 100% of its net earnings
to date during the calendar year, plus an amount equal to one-half of the amount
by which its total capital-to-assets ratio exceeded its fully phased-in
capital-to-assets ratio at the beginning of the calendar year or (ii) 75% of its
net earnings for the most recent four quarters. Savings associations with total
capital in excess of the fully phased-in capital requirement that have been
notified by the OTS that they are in need of more than normal supervision will
be subject to restrictions on dividends. A savings association that fails to
meet current minimum capital requirements is prohibited from making any capital
distributions without the prior approval of the OTS.
Blue Ash currently meets its fully phased-in capital requirement and,
unless the OTS determines that Blue Ash is an institution requiring more than
normal supervision, Blue Ash may pay dividends in accordance with the foregoing
provisions of the OTS regulations. Unrestricted retained earnings of Blue Ash at
June 30, 1997, available for payment of dividends to Towne Financial under the
foregoing regulations, were at least $2.1 million.
9
<PAGE> 11
SELECTED CONSOLIDATED
FINANCIAL INFORMATION AND OTHER DATA
The following tables set forth certain information concerning the
consolidated financial condition, earnings and other data regarding Towne
Financial at the dates and for the years indicated. The consolidated financial
information should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere herein. For additional
information about the Corporation, reference is also made to "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
At June 30,
Selected consolidated financial --------------------------------------------
condition and other data: 1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $102,558 $92,214 $79,484 $69,405 $75,508
Interest-bearing deposits (1) 1,613 2,756 2,477 1,367 9,381
Investment securities designated
as held for sale - at lower of
amortized cost or market (2) --- --- --- --- 5,027
Investment securities held to
maturity - at amortized cost (2) 1,399 1,300 500 1,228 ---
Mortgage-backed securities
designated as held for
sale - at lower of
amortized cost or market (2) --- --- --- --- 23,974
Mortgage-backed securities
designated as available
for sale - at market (2) 15,269 15,680 11,803 8,959 ---
Mortgage-backed securities
held to maturity - at
amortized cost (2) 11,463 11,948 13,173 14,607 ---
Loans receivable - net (3) 66,817 55,071 45,783 38,771 31,633
Deposits 81,794 75,618 59,784 52,031 58,790
Advances from the Federal Home
Home Loan Bank 12,000 8,424 8,318 10,000 10,000
Obligations for securities sold
under agreements to repurchase --- --- 3,504 --- ---
Shareholders' equity - net,
restricted (4) 7,638 7,157 6,883 6,357 5,771
Number of:
Real estate loans outstanding (5)(6) 960 853 749 644 596
Deposit accounts 7,521 7,609 6,772 6,239 6,789
Full-service offices 4 4 4 3 3
</TABLE>
- --------------------------------
Footnotes on page 12
10
<PAGE> 12
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------
Summary of earnings: 1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest income $7,192 $6,410 $5,090 $4,564 $4,257
Interest expense 4,461 4,063 2,859 2,593 2,532
------ ------ ------ ------ ------
Net interest income 2,731 2,347 2,231 1,971 1,725
Provision for losses on loans 18 11 --- 30 59
------ ------ ------ ------ ------
Net interest income after
provision for losses on loans 2,713 2,336 2,231 1,941 1,666
Other income 212 470 262 207 628
General, administrative and
other expense 2,359 2,001 1,873 1,673 1,289
------ ------ ------ ------ ------
Earnings before federal income
taxes and cumulative effect of
changes in accounting methods 566 805 620 475 1,005
Federal income taxes 201 284 229 142 301
------ ------ ------ ------ ------
Earnings before cumulative effect
of changes in accounting methods 365 521 391 333 704
Cumulative effect of changes in
accounting methods (7) --- --- --- 299 ---
------ ------ ------ ------ ------
Net earnings $ 365 $ 521 $ 391 $ 632 $ 704
====== ====== ====== ====== ======
Earnings per common and common
equivalent share:
Earnings before cumulative
effect of changes in
accounting methods $ 1.70 $ 2.51 $ 1.89 $ 1.61 $ 3.40
Cumulative effect of changes
in accounting methods --- --- --- 1.44 ---
------ ------ ------ ------ -----
Net earnings $ 1.70 $ 2.51 $ 1.89 $ 3.05 $ 3.40
====== ====== ====== ====== ======
Earnings per share - assuming
full dilution:
Earnings before cumulative
effect of changes in
accounting methods $ 1.66 $ 2.51 $ 1.89 $ 1.61 $ 3.40
Cumulative effect of changes
in accounting methods --- --- --- 1.44 ---
------ ------ ------ ------ ------
Net earnings $ 1.66 $ 2.51 $ 1.89 $ 3.05 $ 3.40
====== ====== ====== ====== ======
</TABLE>
- --------------------------------
Footnotes on page 12
11
<PAGE> 13
(1) Includes federal funds sold, interest-bearing deposits in other
financial institutions, certificates of deposit in other financial
institutions and Federal Home Loan Bank stock.
(2) The Corporation adopted Statement of Financial Accounting Standards
("SFAS") No. 115 as of June 30, 1994. In connection therewith, the
Corporation reclassified all of its investment securities and
mortgage-backed securities from held for sale to either an available
for sale or held to maturity classification. For additional
information, see Notes A-2 and B of Notes to Consolidated Financial
Statements.
(3) Includes loans held for sale, which are recorded at the lower of cost
or market value.
(4) See Notes I and K of Notes to Consolidated Financial Statements
regarding restrictions on equity.
(5) Includes home equity line of credit loans.
(6) Whole mortgage loans serviced by Blue Ash and sold in the secondary
market are not included.
(7) Includes cumulative effect of changes in accounting for income taxes
(SFAS No. 109) and investments in certain debt and equity securities
(SFAS No. 115).
12
<PAGE> 14
<TABLE>
<CAPTION>
At or for the Year ended June 30,
------------------------------------------
Selected Financial Ratios (1): 1997 1996 1995 1994 1993
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Interest rate spread (2):
Average during year 2.80% 2.66% 3.16% 2.72% 2.66%
End of year 2.75 2.52 2.73 2.91 2.99
Net yield on average
interest-earning assets 2.99 2.86 3.30 2.85 2.93
Average interest-earning assets
as a percentage of average
interest-bearing liabilities 103.86 104.04 103.21 103.58 106.29
Return on equity (net earnings
divided by average equity) (3) 4.99 7.28 6.03 10.42 13.02
Return on assets (net earnings
divided by average total
assets) (3) 0.38 0.60 0.54 0.85 1.14
Equity-to-assets ratio (average
equity divided by average
total assets) 7.57 8.19 8.89 8.18 8.77
Allowance for loan losses as a
percentage of non-performing
loans at end of year 60.55 34.22 72.85 36.85 69.09
Allowance for loan losses as a
percentage of total loans
at end of year 0.37 0.42 0.48 0.57 0.60
Non-performing loans as a
percentage of total loans
at end of year (4) 0.60 1.23 0.66 1.54 0.87
Non-performing assets as a
percentage of total assets
at end of year (4) 0.39 0.73 0.38 1.10 0.98
General, administrative and other
expense as a percentage of
average total assets (3) 2.44 2.29 2.56 2.26 2.09
- --------------------------------
<FN>
(1) With the exception of end of year ratios, all ratios are based on
average monthly balances during the years presented.
(2) Interest rate spread represents the difference between the weighted
average yield earned on interest-earning assets and the weighted
average rate paid on interest-bearing liabilities.
(3) Before consideration of the non-recurring charge incurred in fiscal
1997 for the SAIF recapitalization assessment and the subsequent
benefits resulting from reduced premiums, the ratios set forth below
would have been as follows:
Return on equity 7.64%
Return on assets 0.58%
General, administrative and
other expense as a percentage
of average total assets 2.14%
(4) Non-performing loans consist of nonaccrual loans and accruing loans
that are contractually past due 90 days or more, and non-performing
assets consist of non-performing loans and real estate acquired by
foreclosure or deed-in-lieu thereof.
</TABLE>
13
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
In addition to the historical information contained herein, the
following discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, Towne Financial's operations and Towne
Financial's actual results could differ significantly from those discussed in
the forward-looking statements. Some of the factors that could cause or
contribute to such differences are discussed herein but also include changes in
the economy and interest rates in the nation and in Towne Financial's general
market area. The forward-looking statements contained herein include, but are
not limited to, those with respect to the following matters:
1. Management's determination of the amount of allowance for
loan losses;
2. The effect of changes in interest rates;
3. Changes in deposit insurance premiums;
4. Legislative changes that may change the regulatory
requirements of Towne Financial and Blue Ash;
5. Management's belief that Towne Financial's and Blue Ash's
activities will not be materially affected by proposed
changes in the regulation of all savings institutions and
their holding companies;
6. Management's opinion as to the effects of recent
accounting pronouncements on Towne Financial's
consolidated financial statements.
Towne Financial's activities have been limited primarily to holding the
common shares of Blue Ash since acquiring such common shares in connection with
the Conversion. Prior to completion of the Conversion, the Corporation did not
own any material assets or transact any material business. At June 30, 1997, on
an unconsolidated basis, Towne Financial had no significant assets other than
the capital stock of Blue Ash and had no significant liabilities. Consequently,
the following discussion and analysis focuses primarily on the financial
condition and results of operations of Blue Ash.
14
<PAGE> 16
Blue Ash is primarily engaged in the business of attracting savings
deposits from the general public and investing such funds in real estate loans.
Blue Ash offers a full range of real estate lending, including construction and
permanent financing for residential, multi-family and nonresidential properties.
Additional real estate loans for second mortgages and home equity lines of
credit are marketed as well. To attract loan customers, Blue Ash aggressively
pursues relationships with realtors serving its lending area to communicate the
various lending programs and rates currently being offered. Blue Ash also
stresses its ability to quickly approve and close loans. Advertisements in local
newspapers and promotions to savings customers are also used to generate loan
activity. Management feels it is offering a variety of innovative loan programs
designed to fit the needs of the community. Programs designed to meet the credit
needs of its lending area include: (i) conventional mortgage loans for the
purchase and refinancing of single and multi-family dwellings which include 15
and 30-year fixed-rate loans and one, two, three and five-year adjustable-rate
loans; (ii) one-year adjustable-rate mortgage loans secured by one-to-four
family residential real estate that can be converted to fixed-rate mortgages;
(iii) one, two, three and five-year adjustable and fixed-rate conventional
mortgage loans for the purchase of developed building lots by individuals and
builders; (iv) 30-year fixed-rate loans on nonowner-occupied one-to-four family
residential investment properties; (v) short-term (six months to one year)
construction loans for the construction of single and multi-family dwellings and
nonresidential properties; (vi) permanent adjustable-rate mortgage loans on
nonresidential properties, including a ten-year/one-year adjustable rate
mortgage loan; (vii) monthly adjustable-rate line of credit loans secured by
residential and nonresidential property; and (viii) loans to individuals with
deposit instruments and securities as collateral. In addition to investing in
real estate loans, Blue Ash also invests in U.S. Government and agency
obligations, corporate debt securities, municipal obligations, interest-bearing
deposits and certificates of deposit in other financial institutions, federal
funds sold, government guaranteed mortgage-backed and related securities and
other investments permitted by applicable law.
Blue Ash faces strong competition both in making real estate and other
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from other savings institutions, commercial banks and mortgage
bankers who also make loans secured by real estate located in Blue Ash's lending
area. Blue Ash competes for real estate loans principally on the basis of the
interest rates and loan fees it charges, the types of loans it originates and
the quality of services it provides to borrowers. Blue Ash faces substantial
competition in attracting deposits from other savings institutions, commercial
banks, money market and mutual funds, and credit unions in its lending area,
including many large institutions which have greater financial and marketing
resources available to them. The ability of Blue Ash to attract
15
<PAGE> 17
and retain deposits depends on its ability to provide an investment opportunity
that satisfies the requirements of investors as to rate of return, liquidity,
risk and other factors. Blue Ash competes for these deposits by offering a
variety of deposit accounts at competitive rates, convenient business hours,
convenient branch locations with inter-branch deposit and withdrawal privileges
and 24-hour ATM drive-up services.
Blue Ash's profitability is primarily dependent upon its net interest
income, which is the difference between interest income on its loan,
mortgage-backed and investment portfolios and interest paid on deposits and
other borrowed funds. Net interest income is directly affected by the relative
amounts of interest-earning assets and interest-bearing liabilities and the
interest rates earned or paid on such amounts. Blue Ash's profitability is also
affected by the provision for loan losses as well as the level of other income
and other expense. Other income consists primarily of service charges and gains
on the sale of loans and other assets. General, administrative and other expense
includes salaries and employee benefits, occupancy and equipment expenses,
federal deposit insurance premiums, state franchise taxes, data processing
expenses, advertising expenses and miscellaneous other operating expenses.
The operating results of Blue Ash are also affected by general economic
conditions, the monetary and fiscal policies of federal agencies and the
regulatory policies of agencies that regulate financial institutions. Blue Ash's
cost of funds is influenced by interest rates on competing investments and
general market rates of interest. Lending activities are influenced by the
demand for real estate loans and other types of loans, which, in turn, is
affected by the interest rates at which such loans are made, general economic
conditions and the availability of funds for lending activities.
Blue Ash's current business strategy is to operate as a well-
capitalized, profitable and independent community-oriented savings association
dedicated to financing home ownership and providing quality service to its
customers. Blue Ash has sought to implement this strategy in recent years by:
(i) closely monitoring the needs of customers and providing personal, quality
customer service; (ii) emphasizing the origination of both one-to-four and
multi-family residential mortgage loans in the Company's lending area; (iii)
prudently growing and expanding its earnings base through branch expansion and
acquisitions; (iv) minimizing interest rate risk exposure through the constant
matching of asset and liability maturities and rates; (v) increasing residential
and nonresidential lending while maintaining high asset quality in the loan
portfolio; (vi) maintaining a strong retail deposit base; and (vii) maintaining
capital in excess of regulatory requirements.
16
<PAGE> 18
ASSET AND LIABILITY MANAGEMENT
The ability to maximize net interest income is largely dependent upon
the achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Blue Ash's interest rate spread,
which is the difference between the rates received on assets and the rates paid
on liabilities, is the principal determinant of income. The interest rate
spread, and therefore net interest income, can vary considerably over time
because asset and liability repricing do not coincide. Moreover, the long-term
or cumulative effect of interest rate changes can be substantial. Interest rate
risk is defined as the sensitivity of an institution's earnings and net asset
value to changes in interest rates. In general, financial institutions are
vulnerable to an increase in interest rates to the extent that interest-bearing
liabilities mature or reprice more rapidly than interest-earning assets.
The measurement and analysis of Blue Ash's exposure to changes in the
interest rate environment is referred to as asset and liability management. Blue
Ash's Board of Directors has formulated and implemented asset and liability
management policies designed to better match the maturities and repricing terms
of Blue Ash's interest-earning assets and interest-bearing liabilities in order
to minimize the adverse effects on Blue Ash's results of operations of material
and prolonged increases in interest rates. Such management policies are designed
to accomplish Blue Ash's principal financial objective of enhancing long-term
profitability while reducing its interest rate risk. The principal elements of
such policies are to: (i) emphasize the origination and purchase of
adjustable-rate mortgage loans subject to market conditions; (ii) maintain
excess liquidity in relatively short-term, interest-bearing instruments; (iii)
maintain a substantial portion of its investments and mortgage-backed securities
in instruments having adjustable interest rates; (iv) sell fixed-rate mortgage
loans to the extent practicable; (v) maintain high levels of capital and strong
asset quality; (vi) attract transaction accounts which are considered to be more
resistant to changes in interest rates than certificate of deposit accounts; and
(vii) lengthen the maturity of its liabilities by seeking longer-term deposits
and borrowings when practicable.
As a result of implementing these asset and liability initiatives and
managing its exposure to changes in interest rates, Blue Ash has generally
acquired for its portfolio adjustable-rate assets. At June 30, 1997, $41.3
million, or 61.9%, of Blue Ash's loan portfolio consisted of adjustable-rate
loans and $24.8 million, or 92.9%, of Blue Ash's mortgage-backed securities
portfolio consisted of adjustable-rate mortgage-backed and related securities.
At June 30, 1996, $43.6 million, or 79.2%, of Blue Ash's loan portfolio
consisted of adjustable-rate loans and $25.2
17
<PAGE> 19
million, or 91.2%, of Blue Ash's mortgage-backed securities portfolio consisted
of adjustable-rate mortgage-backed and related securities. As market conditions
and exposure to interest rate changes dictate, Blue Ash will continue to
originate for sale in the future certain fixed-rate residential loans it deems
necessary in order to minimize its interest rate risk exposure. The Board of
Directors and management regularly re-evaluate market conditions as well as
relevant regulatory considerations with a view to establishing a desired level
of interest rate sensitivity and identifying methods of achieving such desired
levels. As a result of these efforts, Blue Ash's one year "gap" (the difference
between interest-earning assets deemed to mature or reprice in one year and the
amount of interest-bearing liabilities deemed to reprice during such year) was a
negative 9.5% of total assets at June 30, 1997. Thus, decreases in interest
rates during this time period would generally increase Blue Ash's net interest
income, while increases in interest rates would generally decrease Blue Ash's
net interest income.
A negative gap leaves Blue Ash's earnings vulnerable to rising interest
rates because when interest rates are rising the interest income earned on
assets may increase more slowly than the interest expense paid on Blue Ash's
liabilities as interest-bearing liabilities reprice at a faster pace than
interest-earning assets. A decrease in interest rates would be expected to cause
interest income to decline more slowly than interest expense. However, despite
Blue Ash's negative gap, certain limitations are inherent when analyzing its gap
position. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in the market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets such as adjustable-rate mortgage
loans have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of changes in
interest rates, prepayment and decay rates would likely deviate significantly
from those assumed in calculating the gap. Finally, the ability of many
borrowers to afford the payments on their adjustable-rate mortgage loans may
decrease in the event of an interest rate increase.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. One method utilized by Blue
Ash to monitor its interest rate risk has been the analytical review of interest
rate risk reports prepared by the OTS. Such reports provide a detailed
evaluation of Blue Ash's net portfolio
18
<PAGE> 20
value within different interest rate scenarios and analyze Blue Ash's interest
rate sensitivity gap, which is defined as the difference between the amount of
interest-earning assets anticipated, based upon certain assumptions, to mature
or reprice within a specific time period and the amount of interest-bearing
liabilities anticipated, based upon certain assumptions, to mature or reprice
within that same period. A positive gap occurs when interest-earning assets
exceed interest-bearing liabilities repricing during a designated time period.
Conversely, a negative gap occurs when interest-bearing liabilities exceed
interest-earning assets repricing within a designated time period. During a
period of falling interest rates therefore, the net interest income of an
institution with a positive gap may be adversely affected due to its
interest-earning assets repricing to a greater extent than its interest-bearing
liabilities, while an institution with a negative gap would likely have an
opposite result. Conversely, during a period of rising interest rates, the net
interest income of an institution with a positive gap position may increase
since it is able to increase the yield on its interest-earning assets more
rapidly than the cost of its interest-bearing liabilities, while an institution
with a negative gap would likely have an opposite result.
Management presently monitors and evaluates the potential impact of
interest rate changes upon the market value of Blue Ash's portfolio equity and
the level of net interest income on a quarterly basis. The OTS adopted a final
rule in August 1993 incorporating an interest rate risk component into the
risk-based capital rules. Under the rule, an institution with a greater than
"normal" level of interest rate risk will be subject to a deduction of its
interest rate risk component from total capital for purposes of calculating the
risk-based capital requirement. An institution with a greater than "normal"
interest rate risk is defined as an institution that would suffer a loss of net
portfolio value ("NPV") exceeding 2.0% of the estimated market value of its
assets in the event of a 200 basis point increase or decrease in interest rates.
NPV is the difference between incoming and outgoing discounted cash flows from
assets, liabilities and off-balance sheet contracts. A resulting change in NPV
of more than 2% of the estimated market value of an institution's assets will
require the institution to deduct from its capital 50% of that excess change.
The rule provides that the OTS will calculate the interest rate risk component
quarterly for each institution. The OTS has indicated that no institution will
be required to deduct an interest rate risk component from capital for purposes
of computing the risk-based capital requirement until further notice. In
general, institutions which have risk-based capital in excess of 12% and assets
under $300 million are exempt from the new requirement unless the OTS requires
otherwise. The OTS will continue, however, to closely monitor the level of
interest rate risk at individual institutions and retains the authority, on a
case-by-case basis, to
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<PAGE> 21
impose a higher individual minimum capital requirement for individual
institutions with significant interest rate risk. At June 30, 1997, Blue Ash had
total assets of $102.6 million and risk-based capital in excess of 14.8% which
would have qualified Blue Ash for this exemption had the new requirements been
in effect at such date.
At June 30, 1997, 2% of the present value of Blue Ash's assets was
approximately $2.1 million. Because the interest rate risk of a 200 basis point
increase in market interest rates (which was greater than the interest rate risk
of a 200 basis point decrease) was $3.3 million at June 30, 1997, Blue Ash would
have been required to deduct $582,000 (50% of the $1.2 million difference) from
its capital in determining whether Blue Ash met its risk-based capital
requirement. Despite such reduction, however, Blue Ash's risk-based capital at
June 30, 1997, if the new interest rate risk requirements were in effect, would
still have exceeded the regulatory requirement by approximately $3.0 million, or
5.7%.
The following table presents Blue Ash's NPV as of June 30, 1997 as
calculated by the OTS, based on information provided to the OTS by Blue Ash.
NET PORTFOLIO VALUE
<TABLE>
<CAPTION>
ESTIMATED
CHANGE IN NPV AS A
INTEREST RATES ESTIMATED PERCENTAGE AMOUNT
(BASIS POINTS) NPV OF ASSETS OF CHANGE PERCENT
<S> <C> <C> <C> <C>
+400 $ 3,476 3.62% $(7,693) (69)%
+300 5,813 5.87 (5,356) (48)
+200 7,864 7.75 (3,305) (30)
+100 9,687 9.34 (1,482) (13)
--- 11,169 10.56 --- --
-100 12,091 11.28 922 8
-200 12,364 11.46 1,195 11
-300 12,638 11.63 1,469 13
-400 13,224 12.05 2,055 18
</TABLE>
In managing its asset and liability mix, Blue Ash may, at times --
depending on the relationship between long and short-term interest rates, market
conditions and consumer preference -- place somewhat greater emphasis on
maximizing its interest rate spread than on strictly matching the interest rate
sensitivity of its assets and liabilities. The Board of Directors believes that
the increased net earnings resulting from a modest mismatch in the maturity of
its asset and liability portfolios can, during periods of stable interest rates,
provide high enough returns to justify the increased exposure which can result
from such a mismatch. In view of its positive gap position at the time and other
factors previously discussed, Blue Ash changed its strategy with respect to
fixed-rate mortgage loans in fiscal 1996. Instead of originating
20
<PAGE> 22
for sale all residential fixed-rate loans, management elected to portfolio
fixed-rate loans subject to certain interest rate risk limitations. This change
in strategy was largely due in part to the Board of Directors' and management's
desire to maximize, to the extent practicable, Blue Ash's interest rate spread
and core earnings. As a result of originating fixed-rate loans for the portfolio
in fiscal 1996 and continuing so in fiscal 1997, Blue Ash's overall sensitivity
to changes in interest rates increased from fiscal 1996 to fiscal 1997, and its
overall one year gap went from a positive 3.9% at June 30, 1996 to a negative
9.5% at June 30, 1997. By adopting such a strategy, the Board of Directors and
management anticipated such an increase in interest rate exposure ratios and a
negative one year gap position and were willing to accept these things in
exchange for improving Blue Ash's interest rate spread and overall profitability
in fiscal 1997. At June 30, 1997 there would have been a decrease in Blue Ash's
NPV of approximately 30% of the present value of its assets, assuming a 200
basis point increase in interest rates. At June 30, 1996, a 200 basis point
increase in interest rates would have only produced a decline of approximately
17% in the present value of its assets. The increased risks at June 30, 1997
associated with interest rate sensitivity was more than offset by the rewards of
greater profitability and of a greater interest rate spread of 2.75% at June 30,
1997, as compared to only 2.52% at June 30, 1996. During fiscal 1997, the Board
of Directors established a new target range for Blue Ash's interest rate
sensitivity gap for a 200 basis point increase in interest rates from (20%) to
(30%) to coincide with its change in loan origination strategy for fixed-rate
loans in fiscal 1996. As indicated in the table above, Blue Ash operated within
this revised target range during fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the ability of a financial institution to generate
sufficient cash to fund current loan demand, meet savings withdrawals and pay
operating expenses. All financial institutions must manage their liquidity to
meet anticipated funding needs at a reasonable cost, and have contingency plans
to meet unanticipated funding needs or the loss of a funding source.
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<PAGE> 23
Blue Ash's liquidity is a product of its operating, investing and
financing activities. These activities are summarized below for the years ended
June 30, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
For the Years ended
June 30,
------------------------------------
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Net earnings for the year $ 365 $ 521 $ 391
Adjustments to reconcile
net earnings to net cash
provided by (used in)
operating activities 350 ( 1,245) ( 588)
------- ------- -------
Net cash provided by (used in)
operating activities 715 ( 724) ( 197)
Net cash used in
investing activities (11,428) (11,713) ( 7,458)
Net cash provided by
financing activities 9,817 12,535 9,498
------- ------- -------
Net increase (decrease) in
cash and cash equivalents (896) 98 1,843
Cash and cash equivalents
at beginning of year 3,611 3,513 1,670
------- ------- -------
Cash and cash equivalents
at end of year $ 2,715 $ 3,611 $ 3,513
======= ======= =======
</TABLE>
The primary investing activities of Blue Ash include investing in loans
and mortgage-backed securities. The origination of loans and purchases of
mortgage-backed securities have recently been funded primarily from loan and
mortgage-backed securities repayments, sales of loans and mortgage-backed
securities, maturities of investment securities and proceeds from deposits and
borrowings. During the year ended June 30, 1997, purchases of mortgage-backed
securities totaled $2.0 million, loans receivable and loans held for sale
increased by $11.7 million, customer deposits increased by $6.2 million and
borrowings increased by $3.6 million. During the year ended June 30, 1996,
purchases of mortgage-backed securities totaled $16.5 million, loans receivable
and loans held for sale increased by $9.3 million and customer deposits
increased by $15.8 million, while borrowings declined by $3.4 million. During
the year ended June 30, 1995, purchases of mortgage-backed securities totaled
$4.0 million, loans receivable and loans held for sale increased by $7.0
million, customer deposits increased by $7.8 million and borrowings increased by
$1.8 million.
Blue Ash's primary sources of funds are deposits, borrowings, sales of
mortgage loans, sales of investments and mortgage-backed securities, maturities
of investment securities, amortization, prepayments and maturities of
outstanding loans and mortgage-backed securities and funds provided by
operations. While scheduled loan and mortgage-backed securities amortization and
maturing interest-bearing deposits and investment securities are relatively
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<PAGE> 24
predictable sources of funds, deposit flows and loan and mortgage-backed
securities prepayments are greatly influenced by economic conditions, the
general level of interest rates and competition. Blue Ash manages the pricing of
its deposits to maintain a deposit base deemed appropriate and desirable. Blue
Ash invests excess funds in FHLB overnight deposits, federal funds sold and
other short-term interest-earning assets which provide liquidity to meet lending
requirements. The particular sources of funds utilized by Blue Ash from time to
time are selected based on comparative costs and availability. Blue Ash has at
various times decided not to pay rates on deposits as high as the rates paid by
its thrift and bank competitors. As a result, Blue Ash has borrowed funds from
the FHLB of Cincinnati and from other commercial banks. In addition, Blue Ash
has selectively obtained brokered deposits and other out-of-state monies as a
supplement to its local deposits when such funds are attractively priced in
relation to the local market. At June 30, 1997, Blue Ash had outstanding $12.0
million in advances from the FHLB, $60,000 outstanding on a loan for the
Employee Stock Ownership Plan ("ESOP") from an independent third party and $4.8
million in outstanding brokered deposits and other out-of-state funds. During
fiscal 1995, as another alternative funding source, Blue Ash entered into
reverse repurchase agreements, or collateralized borrowings, with the Federal
National Mortgage Association ("Fannie Mae"). A reverse repurchase agreement (or
"repo") is defined as a transaction involving the sale of securities with an
agreement to repurchase the exact same securities at a prenegotiated price on a
predetermined future date. In practice, repos allow Blue Ash to borrow funds at
a fixed or floating rate using its investments and mortgage-backed securities as
collateral. Liquidity can be added to Blue Ash's portfolio without parting with
the specific assets. At June 30, 1995, Blue Ash had outstanding borrowings under
reverse repurchase agreements of $3.5 million. During fiscal 1996, all
outstanding borrowings under reverse repurchase agreements were repaid in full.
The OTS requires minimum levels of liquid assets. OTS regulations
presently require Blue Ash to maintain specified levels of "liquid" investments
in qualifying types of United States Government and agency obligations and other
investments having maturities of five years or less. Such minimum requirement is
an amount equal to 5% of the sum of Blue Ash's average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less. The
liquidity requirement, which may be changed from time to time by the OTS to
reflect changing economic conditions, is intended to provide a source of
relatively liquid funds upon which Blue Ash may rely if necessary to fund
deposit withdrawals and other short-term funding needs.
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<PAGE> 25
The liquidity of Blue Ash, as measured by the ratio of cash, cash
equivalents (not committed, pledged or required to liquidate specific
liabilities) and qualifying investments and mortgage-backed securities to the
sum of net withdrawable savings plus borrowings payable within one year, was
5.8% at June 30, 1997, as compared to 7.5% at June 30, 1996. This decline in
liquidity during fiscal 1997 was primarily attributed to significant loan
portfolio growth of $11.7 million, an increase in certificate of deposit
investments in other financial institutions of $368,000 and a decrease in
investments and mortgage-backed securities qualifying as liquid assets of
$152,000, all of which were partially offset by an increase in deposits of $6.2
million, an increase in borrowings of $3.6 million and a decrease in the
mortgage-backed securities portfolio of $896,000. At June 30, 1997, Blue Ash's
"liquid" assets totaled approximately $4.7 million, which was approximately
$617,000 in excess of the current OTS minimum requirement at such date.
Historically, management has generally strived to maintain excess regulatory
liquidity equal to 50-80% of outstanding loan commitments which totaled $3.9
million at June 30, 1997.
In addition to the regulatory liquidity requirement, Blue Ash is
required to maintain short-term liquid assets equal to 1.0% of the average sum
of net withdrawable deposits and other liabilities, as defined by the OTS.
Management has generally strived to maintain an average short-term liquidity
ratio of 2.5% to 3.5%. Blue Ash's short-term liquidity ratio at June 30, 1997
was 3.5%, or approximately $2.1 million in excess of the minimum required amount
at such date.
Liquidity management is both a daily and long-term function. Excess
liquidity is generally invested in short-term investments such as FHLB of
Cincinnati overnight deposits, time deposits or federal funds sold. On a
longer-term basis, Blue Ash maintains a strategy of investing in various
mortgage-backed and related securities and lending products. During the year
ended June 30, 1997, Blue Ash used its sources of funds primarily to meet its
ongoing commitments to pay maturing savings certificates and savings
withdrawals, fund loan commitments and maintain its portfolio of investments and
mortgage-backed and related securities. At June 30, 1997, the total approved
loan commitments outstanding amounted to $3.9 million, of which $1.3 million was
committed to be sold on a participating basis to another financial institution.
At the same date, commitments under unused lines of credit secured by
one-to-four family residential property amounted to $2.3 million, commitments
under unused lines of credit secured by nonresidential real estate totaled
$69,000 and the unadvanced portion of loans in process and undisbursed loans
approximated $2.1 million. As an additional liquidity source, Blue Ash has a
$5.0 million line of credit facility with the FHLB of Cincinnati, which
24
<PAGE> 26
it entered into during fiscal 1997. There was $800,000 outstanding under such
facility at June 30, 1997. Certificates of deposit scheduled to mature in one
year or less at June 30, 1997 totaled $48.9 million. Management of Blue Ash
believes that the Company has adequate resources, including principal
prepayments, repayments of loans and mortgage-backed securities and other
funding sources such as FHLB advances and repos, to fund all of its commitments
to the extent required and to meet and exceed its foreseeable short-term and
long-term liquidity needs. Blue Ash could also decide to raise funds through the
sale of loan products or available for sale securities. In addition, although
Blue Ash has extended commitments to fund loans or lines of credit,
historically, Blue Ash has not been required to fund all of its outstanding
commitments. Management believes that a significant portion of maturing deposits
will remain with Blue Ash as it can adjust the rates of certificates of deposit
in order to retain such deposits in changing interest rate environments;
however, there can be no assurance that Blue Ash can retain all such deposits.
Blue Ash is subject to minimum regulatory capital standards promulgated
by the OTS. Failure to meet minimum capital requirements can initiate certain
mandatory - and possibly additional discretionary - actions by regulators that,
if undertaken, could have a direct material effect on Blue Ash's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, Blue Ash must meet specific capital guidelines that
involve quantitative measures of its assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. Blue Ash's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors. The minimum
capital standards of the OTS generally require the maintenance of regulatory
capital sufficient to meet each of three tests, hereinafter described as the
tangible capital requirement, the core capital requirement and the risk-based
capital requirement. The tangible capital requirement mandates maintenance of
shareholders' equity less all intangible assets equal to 1.5% of adjusted total
assets. The core capital requirement provides for the maintenance of tangible
capital plus certain forms of supervisory goodwill and other qualifying
intangible assets equal to 3.0% of adjusted total assets, while the risk-based
capital requirement mandates maintenance of core capital plus general loan loss
allowances equal to 8.0% of risk-weighted assets, as defined by OTS regulations.
Management has determined that Blue Ash is in compliance with each of
the three capital requirements at June 30, 1997. Specifically, Blue Ash's
tangible and core capital of $7.4 million, or 7.3% of total adjusted assets,
exceeded the respective minimum
25
<PAGE> 27
requirements of $1.5 million and $3.1 million at that date by approximately $5.9
million, or 5.8% of total adjusted assets, and $4.3 million, or 4.3% of total
adjusted assets. Additionally, Blue Ash's risk-based capital of approximately
$7.7 million at June 30, 1997, or 14.8% of risk-weighted assets (including a
general loan loss allowance of $244,000), exceeded the current 8.0% requirement
of $4.1 million by approximately $3.6 million, or 6.8% of risk-weighted assets.
The OTS has proposed an amendment to the core capital requirement that
would increase the minimum requirement to a range of 4.0% - 5.0% of adjusted
total assets for substantially all savings associations. Management anticipates
no material change to Blue Ash's excess regulatory capital position if the
proposal is adopted in its present form.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of Towne Financial and related
consolidated financial data presented herein have been prepared in accordance
with generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in relative purchasing power of money over time due to
inflation. The impact of inflation is reflected in the increased cost of Towne
Financial's operations.
Unlike most industrial companies, virtually all of the assets and
liabilities of Towne Financial are monetary in nature. As a result, interest
rates generally have a more significant impact on Towne Financial's performance
than do the effect of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the price of
goods and services. In the current interest rate environment, the liquidity and
maturity structures of Towne Financial's assets and liabilities are critical to
the maintenance of acceptable performance levels.
POTENTIAL IMPACT ON FUTURE RESULTS OF OPERATIONS
OF CURRENT AND PENDING LEGISLATION
The deposits of Blue Ash are currently insured by the SAIF. Both the
SAIF and the Bank Insurance Fund ("BIF"), the federal deposit insurance fund
that covers commercial bank deposits, are required by law to attain and
thereafter maintain a reserve ratio of 1.25% of insured deposits. The BIF had
achieved a fully funded status in contrast to the SAIF and, therefore, the FDIC
26
<PAGE> 28
substantially reduced the average deposit insurance premium paid by commercial
banks to a level approximately 75% below the average premium paid by savings
institutions.
The underfunded status of the SAIF had resulted in the introduction of
federal legislation intended to, among other things, recapitalize the SAIF and
address the resulting premium disparity. On September 30, 1996, the Omnibus
Appropriations Act (the "Act") was signed into law. The legislation authorized a
one-time charge on SAIF-insured deposits at a rate of $.657 per $100.00 of March
31, 1995 deposits. As a result, Blue Ash's assessment amounted to $366,000
($242,000 net of tax). Additional provisions of the Act included new BIF and
SAIF premiums and the merger of BIF and SAIF. The new BIF and SAIF premiums
included a premium for repayment of the Financing Corporation ("FICO") bonds
plus any regular insurance assessment, currently nothing for the lowest risk
category institutions. Until full pro-rata FICO sharing is in effect, the FICO
premiums for BIF and SAIF are approximately 1.3 and 6.4 basis points,
respectively, beginning as of January 1, 1997. Full pro-rata FICO sharing is to
begin no later than January 1, 2000. BIF and SAIF are to be merged on January 1,
1999, provided the bank and savings association charters are merged by that
date. While the one-time special assessment had a significant impact on fiscal
1997 earnings, the resulting lower annual premiums will benefit future years'
earnings.
Legislation repealing the percentage of earnings bad debt reserve
provisions of the Internal Revenue Code previously applicable to qualifying
thrift institutions was enacted into law on August 20, 1996. The legislation,
which is part of The Small Business Job Protection Act of 1996 (the "Jobs Act"),
requires all thrift institutions to pay tax on or recapture their excess bad
debt reserves accumulated since 1988. The legislation substantially equalizes
the taxation of banks and thrift institutions, but it protects thrifts from
taxes on "bad debt reserves" established prior to 1988. The Jobs Act eliminates
the percentage of taxable income method for deducting bad debt reserves for all
thrifts for tax years beginning after December 31, 1995 (July 1, 1996, as to
Towne Financial). Under the legislation, Towne Financial is required to
recapture approximately $486,000 of its bad debt reserves as taxable income,
which represents the post-1987 additions to the reserves, and is unable to
utilize the percentage of earnings method to compute its reserves in the future.
Towne Financial has provided deferred taxes for this amount and will be
permitted to amortize the recapture of its bad debt reserves over six years.
Legislation has been introduced in Congress to eliminate the federal
regulation of savings and loan associations and to develop
27
<PAGE> 29
a common charter for all financial institutions. As a result, Towne Financial
might become subject to a different form of holding company regulation, which
may limit the activities in which it may engage and subject it to other
additional regulatory requirements, including separate capital requirements. In
addition, Congress may eliminate the OTS, and Blue Ash may be regulated under
federal law as a bank or may be required to change its charter. Such change in
regulation or charter would likely change the range of activities in which Blue
Ash may engage and would probably subject Blue Ash to more regulation by the
FDIC. Towne Financial and Blue Ash cannot predict when or whether Congress may
actually pass such legislation or whether such legislation will actually change
the regulation and permissible activities of Towne Financial and Blue Ash.
Although such legislation may change the activities in which both Towne
Financial and Blue Ash may engage, it is not anticipated that current activities
will be materially affected by those activity limits.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." SFAS No. 121 requires that long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used by an institution be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In performing the review for recoverability, the institution
should estimate the future cash flows expected to result from the use of the
asset and its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Measurement of an impairment loss
for long-lived assets and identifiable intangibles that an institution expects
to hold and use should be based on the fair value of the asset. SFAS No. 121 was
effective for financial statements for fiscal years beginning after December 15,
1995 (fiscal 1997, as to Towne Financial). Earlier application was encouraged.
Management adopted SFAS No. 121 on July 1, 1996, as required, without material
effect on Towne Financial's consolidated financial position or results of
operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," establishing financial accounting and reporting
standards for stock-based employee compensation plans. SFAS No. 123 defines a
fair value based method of accounting for an employee stock option or similar
equity instrument and encourages all institutions to adopt that method of
accounting for an employee stock option or similar equity instrument. However,
it also allows
28
<PAGE> 30
an institution to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the fair value based method, compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period. Under the intrinsic value
based method, compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date or other measurement date over the amount
an employee must pay to acquire the stock. Most fixed stock option plans -- the
most common type of stock compensation plan -- have no intrinsic value at grant
date, and as such, under APB Opinion No. 25 no compensation cost is recognized.
If a fair value based accounting method is adopted, the fair value of a stock
option is to be estimated using an option-pricing model that considers the
following: (i) the exercise price; (ii) the expected life of the option; (iii)
the current trading price of the stock; (iv) the expected price volatility of
the stock; (v) expected dividends on the stock; and (vi) the risk-free interest
rate. Once estimated based on the above factors, the fair value of an option is
not changed for subsequent developments. Compensation cost is recognized for
other types of stock-based compensation plans under APB Opinion No. 25,
including plans with variable, usually performance-based, features. SFAS No. 123
requires that an employer's financial statements include certain fair value
disclosures about stock-based employee compensation arrangements regardless of
the method used to account for them. Institutions that elected to remain with
the existing accounting are required to disclose in a footnote to the financial
statements pro forma net earnings and, if presented, earnings per share, as if
SFAS No. 123 had been adopted. The accounting requirements of SFAS No. 123 were
effective for transactions entered into during fiscal years that began after
December 15, 1995 (fiscal 1997, as to Towne Financial); however, institutions
were required to disclose information for awards granted in their first fiscal
year beginning after December 15, 1994. Earlier application was permitted.
Management had determined that Towne Financial will continue to account for
stock-based compensation pursuant to APB Opinion No. 25, and therefore, the
disclosure provisions of SFAS No. 123 did not have a material effect on Towne
Financial's consolidated financial position or results of operations upon
adoption on July 1, 1996.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
of Financial Assets, Servicing Rights and Extinguishment of Liabilities," that
provides accounting guidance on transfers of financial assets, servicing of
financial assets and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations,
29
<PAGE> 31
makes use of special purpose entities in the transaction, or otherwise has
continuing involvement with the transferred assets. The new accounting method,
referred to as the financial components approach, provides that the carrying
amount of the financial assets transferred be allocated to components of the
transaction based on their relative fair values. SFAS No. 125 provides criteria
for determining whether control of assets has been relinquished and whether a
sale has occurred. If the transfer does not qualify as a sale, it is accounted
for as a secured borrowing. Transactions subject to the provisions of SFAS No.
125 include, among others, transfers involving repurchase agreements,
securitizations of financial assets, loan participations, factoring arrangements
and transfers of receivables with recourse. An institution that undertakes an
obligation to service financial assets recognizes either a servicing asset or
liability for the servicing contract (unless related to a securitization of
assets, and all the securitized assets are retained and classified as held to
maturity). A servicing asset or liability that is purchased or assumed is
initially recognized at its fair value. Servicing assets and liabilities are
amortized in proportion to and over the period of estimated net servicing income
or net servicing loss and are subject to subsequent assessments for impairment
based on fair value. SFAS No. 125 provides that a liability is removed from the
balance sheet only if the debtor either pays the creditor and is relieved of its
obligations for the liability or is legally released from being the primary
obligor. SFAS No. 125 supersedes SFAS No. 122 and is effective for transfers and
servicing of financial assets and extinguishment of liabilities occurring after
December 31, 1997, and is to be applied prospectively. Earlier or retroactive
application is not permitted. Management does not believe that the adoption of
SFAS No. 125 will have a material adverse effect on Towne Financial's
consolidated financial position or results of operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share,"
which requires institutions to present basic earnings per share and, if
applicable, diluted earnings per share, instead of primary and fully-diluted
earnings per share, respectively. Basic earnings per share is computed without
including potential common shares, i.e., no dilutive effect. Diluted earnings
per share is computed taking into consideration common shares outstanding and
dilutive potential common shares, including options, warrants, convertible
securities and contingent stock agreements. SFAS No. 128, which supersedes APB
Opinion No. 15, is effective for interim and annual periods ending after
December 15, 1997, and prior year earnings per share disclosures presented for
comparative purposes (including those in interim financial statements, summaries
of earnings and selected financial data) should be restated. Early application
of SFAS No. 128 is not permitted, although institutions may disclose pro forma
earnings per share amounts computed using SFAS No. 128 in financial statement
notes in years before the
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effective date. Based upon the provisions of SFAS No. 128, Towne Financial's
basic and diluted earnings per share would have been $1.75 and $1.69,
respectively, for the year ended June 30, 1997, $2.51 and $2.44, respectively,
for the year ended June 30, 1996, and $1.89 and $1.86, respectively, for the
year ended June 30, 1995.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which requires institutions presenting a complete set of financial
statements to include details of comprehensive income that arise in the
reporting period. Comprehensive income consists of net earnings or loss for the
current year and other comprehensive income, expense, gains and losses that
bypass the statement of earnings and are reported in a separate component of
equity, i.e., unrealized gains and losses on certain investments and
mortgage-backed securities. SFAS No. 130 does not apply to an institution that
has no items of other comprehensive income in any year presented. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997, and requires
restatement of prior year financial statements presented for comparative
purposes. The adoption of SFAS No. 130 relates solely to the disclosure
provisions, and therefore, will not have a material effect on Towne Financial's
consolidated financial position or results of operations.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1997 AND 1996
At June 30, 1997, Towne Financial's consolidated assets totaled $102.6
million, representing an increase of $10.4 million, or 11.2%, over the $92.2
million asset level at June 30, 1996. The increase in asset size experienced
during the year ended June 30, 1997 was funded principally through an increase
in deposits of $6.2 million, or 8.2%, an increase in borrowings of $3.6 million,
or 41.7%, and to a lesser extent, an increase in shareholders' equity of
$481,000, or 6.7%, and an increase realized in all other liability categories of
$140,000, or 15.1%. Such increase in assets was primarily due to an increase in
loans receivable and loans held for sale of $11.7 million, or 21.3%, which was
partially offset by a decrease in mortgage-backed securities of $896,000, or
3.2%, and a decrease in cash and cash equivalents and certificates of deposit in
other financial institutions of $528,000, or 14.2%. The growth in total assets
during the year ended June 30, 1997 was consistent with management's short-term
goals and with its strategic objective of continuing to grow the size of the
operations within the existing branch structure.
Cash and due from banks, federal funds sold, interest-bearing deposits,
certificates of deposit in other financial institutions
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and investment securities held to maturity totaled approximately $4.6 million at
June 30, 1997, a decrease of approximately $429,000, or 8.6%, from June 30, 1996
levels of $5.0 million. As a result, regulatory liquidity approximated only 5.8%
at June 30, 1997, as compared to 7.5% at June 30, 1996. This decline in
regulatory liquidity was primarily due to a reduction in cash and cash
equivalents resulting from utilization of excess liquidity to help fund the
growth in the loan portfolio, which reflected management's desire to obtain
higher yields available from investments in loans. Such deployment of excess
cash and liquid assets into loans was needed as growth in the loan portfolio
outpaced growth in deposits and borrowings during the year ended June 30, 1997.
The decline in liquidity levels was consistent with management's strategic
efforts to improve the interest rate spread and to maximize net interest income,
as management decided that it could adequately operate within a liquidity range
of 5% to 6% as opposed to previous normal levels of 6% to 8%.
Mortgage-backed securities designated as available for sale and
mortgage-backed securities held to maturity decreased by approximately $896,000,
or 3.2%, during the year ended June 30, 1997. This decrease in the
mortgage-backed securities portfolio was attributed to principal repayments on
securities of $1.9 million, proceeds from the sale of securities designated as
available for sale, net of gains, of $1.1 million and amortization of premiums
and accretion of discounts on securities, net, of $11,000, which were partially
offset by purchases of floating-rate collateralized mortgage obligations of $1.4
million, the purchase of an adjustable-rate participation certificate of
$571,000 and a net decrease in unrealized market losses on securities designated
as available for sale of $124,000. The decrease in the mortgage-backed
securities portfolio during the year ended June 30, 1997 was the result to some
extent of the use of principal repayments and proceeds from the sale of
mortgage-backed securities to fund increased lending activity. In order to
sustain the steady level of growth in the loan portfolio, management decided to
utilize certain repayment cash flows generated from mortgage-backed securities
to originate new loans. From time to time, however, management has elected to
increase the level of its mortgage-backed securities in attempts to diversify
its holdings, to increase the block size of existing available for sale
positions within the portfolio for greater marketability and to increase the
volume of interest-earning assets relative to the equity base (leverage) in
order to improve its overall yield on mortgage-backed securities and to improve
overall net earnings. Proceeds from Federal Home Loan Bank advances were
utilized to fund the purchase of two floating-rate securities in fiscal 1997, as
there was an attractive spread when compared to the cost of borrowings. Another
floating-rate security was acquired at a discount from principal repayment
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cash flows on existing securities in the portfolio in order to take advantage of
an attractive yield in comparison to the thirty-year United States Treasury
index. In addition, proceeds from the sale of a longer-term floating-rate
collateralized mortgage obligation were used to fund the purchase of a
shorter-term adjustable-rate participation certificate issued by the Federal
Home Loan Mortgage Corporation so as to provide more liquidity in the
mortgage-backed securities portfolio without giving up any significant yield and
to achieve a stronger interest rate risk position in accordance with the
operating policies of the Corporation. As previously mentioned above, the
funding of the significant growth in the lending operation with certain
principal repayments and proceeds from the sale of mortgage-backed securities
more than offset the purchase of securities and the leveraging opportunities
engaged in by the Corporation during the year ended June 30, 1997.
Loans receivable and loans held for sale increased in the aggregate by
approximately $11.7 million, or 21.3%, during the year ended June 30, 1997. This
increase was largely attributed to loan disbursements, loan purchases and loans
originated for sale in the secondary market of $28.9 million, which were
partially offset by loan sales, net of gains, of $1.9 million, principal
repayments on loans of $15.2 million and loans transferred to real estate
acquired through foreclosure of $108,000. In terms of loan composition, the
growth in the loan portfolio was primarily due to an increase of $11.2 million,
or 28.6%, in one-to-four family residential real estate loans, an increase of
$484,000, or 21.9%, in home equity line of credit loans, an increase of
$333,000, or 12.9%, in multi-family residential real estate loans and an
increase of $154,000 in passbook loans to deposit customers, all of which were
partially offset by a decrease of $408,000, or 3.6%, in nonresidential real
estate and land loans. Blue Ash's growth in the loan portfolio was the result of
management's strategy to primarily hold loans in the current interest rate
environment subject to certain interest rate risk limitations, and to redeploy
funds from other asset categories into lending activities to the extent
practicable. This strategy to hold loans reflected management's continued desire
to grow the Corporation largely through loan portfolio growth, management's
desire to obtain a better loan portfolio mix of adjustable and fixed by
increasing the fixed-rate portion of its loan portfolio and management's intent
to increase its loan-to-deposits ratio. By adopting this strategy, management
achieved with success the above objectives it set out to accomplish in fiscal
1997. Not only did Blue Ash sustain over a 21% growth rate in the loan portfolio
during fiscal 1997, but Blue Ash improved its overall yield earned on loans from
8.35% at June 30, 1996 to 8.58% at June 30, 1997, which, in part, helped improve
its overall interest rate spread from 2.52% at June 30, 1996 to 2.75% at June
30, 1997. Blue Ash also had an increase in the
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fixed-rate portion of its loan portfolio from $11.5 million, or 20.8% of the
loan portfolio, at June 30, 1996 to $25.5 million, or 38.1% of the loan
portfolio, at June 30, 1997. In addition, the loan-to-deposits ratio
substantially increased from 72.8% at June 30, 1996 to 81.7% at June 30, 1997.
In part to the continued ongoing strategy of holding in the loan
portfolio fixed-rate mortgage loans, management reclassified during fiscal 1997
approximately $1.8 million of 30-year fixed-rate mortgage loans from a held for
sale classification to a held for investment classification, as management
changed its original intention of selling these loans in the secondary market.
These loans were valued at the lower of cost or market at the transfer date. In
evaluating whether loans are held for sale or investment, factors such as
liquidity, interest rate exposure, management policy and capital considerations
are considered. Due in part to the large holding of mortgage-backed securities
designated as available for sale, approximately 14.9% of total assets at June
30, 1997, management believed that the retention of the reclassified loans to
the loan portfolio would be better served in meeting its current objectives of
sustaining loan portfolio growth in the existing interest rate environment and
improving the overall yield on loans, as opposed to such loans providing an
alternative liquidity source if sold in the secondary market. Management
believes that it has the ability and intent to hold all of its loans, including
the loans reclassified from held for sale, for the foreseeable future or until
maturity. Further, not only was the increase of $11.7 million, or 21.3%, in
loans receivable and loans held for sale during the year ended June 30, 1997
attributed to management's strategy of holding fixed-rate mortgage loans in the
current interest rate environment, but the loan portfolio growth was also the
result of a continued strong marketing and selling effort by management to
originate loans and the continual development and refinement of new loan
products and programs to better serve the lending area.
At June 30, 1997, the Corporation's allowance for loan losses totaled
$244,000, an increase of $13,000, or 5.6%, over the $231,000 level represented
at June 30, 1996. During the year ended June 30, 1997, the Corporation increased
its allowance for general loan losses by $18,000, which was partially offset by
a charge-off of $5,000 on a single-family residence. The Corporation's
internally-classified assets totaled approximately $478,000 at June 30, 1997, as
compared to $681,000 at June 30, 1996. Non-performing and nonaccrual loans
totaled $403,000, or 0.60% of loans receivable and loans held for sale, at June
30, 1997, and $675,000, or 1.23% of loans receivable and loans held for sale, at
June 30, 1996. In the opinion of management, such internally-classified assets
and non-performing and nonaccrual loans in the aggregate represented an
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approximate 60-65% loan-to-value ratio at June 30, 1997 and were deemed
adequately secured in the event of default by the borrowers. Because the loan
loss allowance is based on estimates, it is monitored regularly on an ongoing
basis and adjusted as necessary to provide an adequate allowance. The
Corporation reviews on a monthly basis its loan portfolio, including problem
loans, to determine whether any loans require classification and/or the
establishment of appropriate allowances. The allowance for loan losses is
determined by management based upon past loss experience, trends in the level of
delinquent and problem loans, adverse situations that may effect the borrowers'
ability to repay, the estimated value of any underlying collateral and current
and anticipated economic conditions in Blue Ash's lending area. The provision
for general loan losses of $18,000 recorded during the year ended June 30, 1997
was attributed to the overall growth of 21.3% in the loan portfolio, which was
partially mitigated by the lower levels of internally-classified assets and
non-performing and nonaccrual loans at June 30, 1997. Management believed that
the loan loss allowance existing at June 30, 1997 was adequate to cover
unforeseen loan losses based upon the ongoing review of such
internally-classified assets and non-performing and nonaccrual loans. Although
management believed that its allowance for loan losses at June 30, 1997 was
adequate based on facts and circumstances available at the time, there can be no
assurance that additions to such allowance will not be necessary in future years
which could adversely affect the Corporation's results of operations. At June
30, 1997, the Corporation's allowance for loan losses consisted entirely of
general valuation allowances, as defined by the regulations of the OTS, and
represented 0.37% of the total amount of loans outstanding, including those
loans designated as held for sale, and 51% of internally-classified assets.
Deposits totaled $81.8 million at June 30, 1997, an increase of $6.2
million, or 8.2%, over the $75.6 million in deposits outstanding at June 30,
1996. The increase in total overall deposits was primarily the result of an
increase in certificates of deposit of $5.9 million, or 10.4%, which was coupled
with an increase in transaction accounts (NOW accounts, money market deposit
accounts, passbook accounts and Christmas club accounts) of $298,000, or 1.6%.
The increase in certificates of deposit (primarily certificates of deposit with
original terms to maturity of two years or less) during the year ended June 30,
1997 was attributed to an increase in brokered deposits, which was coupled with,
to a lesser extent, an increase of $1.8 million, or 3.1%, in certificate of
deposit balances obtained from the local market area. In an effort to sustain
continued deposit growth during fiscal 1997, Blue Ash strategically began
obtaining brokered deposits and out-of-state funds to supplement its deposit
base. These deposits were typically obtained at interest rates at or
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below local market interest rates and had terms to maturity of fifteen months or
less. During the year ended June 30, 1997, outstanding brokered deposits
increased by $4.1 million, from $695,000 at June 30, 1996 to $4.8 million at
June 30, 1997. Given its other available funding alternatives, Blue Ash has the
ability to suspend brokered deposit activity at any time and has the ability to
repay its maturities on all brokered deposits without placing any undue risk on
its liquidity position or cost of funds. The increased need for brokered
deposits in fiscal 1997 stemmed from the greater level of competition for local
certificate of deposit balances from other local banks and savings and loan
institutions and to management's reluctance to aggressively price above market
and seek at all times certificates of deposit from its local market areas as its
primary source of inflows, due to less expensive alternative funding sources
being available such as Federal Home Loan Bank advances and certain brokered
deposits and out-of-state funds.
As part of its efforts to increase the deposit base, management made a
more assertive effort during fiscal 1997 in its attempts to minimize the outflow
of funds from transaction accounts and to reacquire these deposit balances by
placing a stronger emphasis on the cross-selling of deposit products (i.e.
checking accounts) at the branch level and developing specific advertising
campaigns aimed at transaction account customers. Specifically, in order to
better market checking accounts to its customers, Blue Ash introduced a new
"free checking" account program during fiscal 1997 at its Mason office. This
program was set up to attract a greater volume of checking accounts at that
office and to lower deposit costs. If this "free checking" program is successful
in accomplishing its objectives, it is anticipated that this program would be
expanded to include all other existing offices in fiscal 1998. As a result of
this "free checking" program and all other marketing and selling efforts to
date, outstanding checking account balances of customers increased by
approximately $190,000 during fiscal 1997. The overall growth in deposits in
fiscal 1997 reflected management's continuing efforts to maintain steady growth
and was consistent with management's short-term and long-term goals. From time
to time, however, in an attempt to closely control its overall cost of funds and
based on the current interest rate environment, management may temporarily elect
to use alternative funding sources, such as brokered deposits. It is the
continued goal of management to increase loan production and the level of loan
retention, thereby increasing the need for overall deposits and available liquid
assets. Management expects to continue meeting the need for deposits, for the
most part, through increased marketing and competitive pricing of the Company's
deposit products, which could result in additional operating expenses and
interest expense.
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Total borrowings, which consisted principally of Federal Home Loan Bank
advances at June 30, 1997, increased by $3.6 million, or 41.7%, from $8.5
million at June 30, 1996 to $12.1 million at June 30, 1997. This increase in
borrowings during the year ended June 30, 1997 was due to proceeds received from
advances from the Federal Home Loan Bank. As previously discussed, Blue Ash
utilized a $600,000 one-year LIBOR-based advance and a $426,000 one-year
LIBOR-based advance, both adjusting monthly, as part of leveraging transactions
in the purchase of collateralized mortgage obligations, which also adjust
monthly to changes in interest rates. Also, Blue Ash accessed $800,000 from its
line of credit facility at the Federal Home Loan Bank and obtained a $1.0
million one-year LIBOR-based advance, adjusting monthly, during times of low
cash availability in order to help continue funding the growth in the loan
portfolio. From time to time, Federal Home Loan Bank advances are utilized as an
alternative funding source or as a supplement to deposits if the cost of such
borrowings is favorable in comparison to the cost of deposits. The remaining
$750,000 in new advances was for a longer-term, fixed-rate advance with a
maturity of five years and an interest rate of 6.20%. This fixed-rate advance
was obtained at a below market interest rate in order to fund single-family
mortgages to lower income borrowers under the Ohio Affordable Housing Fund
Program which was sponsored by the Federal Home Loan Bank. Such advance was
incurred in order to leverage the Corporation's capital and provide for current
and future growth in Blue Ash's loan portfolio. In the future, management may
acquire additional Federal Home Loan Bank advances to fund loan production, to
acquire investments and mortgage-backed securities, or as a tool to manage
interest rate risk of Blue Ash.
Shareholders' equity totaled $7.6 million at June 30, 1997, an increase
of $481,000, or 6.7%, over the total of $7.1 million at June 30, 1996. The
increase in shareholders' equity was due primarily to net earnings of $365,000,
the exercise of stock options of $6,000, a reduction in required contributions
of the Employee Stock Ownership Plan of $29,000 and a decrease in unrealized
market losses on securities designated as available for sale, net of related tax
effects, of $81,000. At June 30, 1997, shareholders' equity as a percentage of
total assets was 7.4%.
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COMPARISON OF THE RESULTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
General
-------
Net earnings amounted to $365,000 for the year ended June 30, 1997, a
decrease of $156,000, or 29.9%, from the $521,000 in net earnings recorded for
the year ended June 30, 1996. The decrease in net earnings was primarily
attributable to an increase in general, administrative and other expense of
$358,000, or 17.9%, and a decrease in other income of $258,000, or 54.9%, which
were partially offset by an increase in net interest income after provision for
losses on loans of $377,000, or 16.1%. The decrease in earnings level before
federal income taxes of $239,000, or 29.7%, resulted in a decrease in the
provision for federal income taxes of $83,000, or 29.2%. As previously
discussed, the earnings level of $365,000 for the year ended June 30, 1997 was
greatly affected by a nonrecurring $242,000 after-tax charge to net earnings, or
$1.10 per fully-diluted share, for the FDIC special assessment to recapitalize
the SAIF to the required statutory level in accordance with the recent
legislation enacted into law on September 30, 1996. Excluding the detrimental
effects on net earnings of the one-time SAIF recapitalization charge, which was
partially offset by the reduction in subsequent SAIF premiums realized as a
result of the enacted legislation, net earnings for the year ended June 30, 1997
would have been recorded at $559,000, as compared to $521,000 for the year ended
June 30, 1996, an increase of $38,000, or 7.3%.
Net Interest Income and Provision for Losses on Loans
-----------------------------------------------------
The Corporation's net interest income increased by $384,000, or 16.4%,
during the year ended June 30, 1997, as compared to the year ended June 30,
1996. The increase in net interest income during fiscal 1997 was primarily the
result of an increase in total interest income, due to increases in the average
outstanding balances of loans, mortgage-backed securities and investment
securities, and to increases in the weighted average rates earned on loans and
investment securities, which were partially offset by a decrease in the average
outstanding balance of other interest-earning assets and to declines in the
weighted average rates earned on mortgage-backed securities and other
interest-earning assets. Total interest income on the Corporation's
interest-earning assets increased by $782,000, or 12.2%, during fiscal 1997 due
to overall increases of $9.2 million, or 11.3%, in the average outstanding
balances of such assets, which were coupled with overall increases of 7 basis
points (100 basis points equals 1%), or 0.9%, in the weighted average yields
earned on such assets. The increase in
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total interest income during fiscal 1997 was partially offset by an increase in
total interest expense, primarily due to increases in the average outstanding
balances of deposits and borrowings, which were partially offset by declines in
the weighted average rates paid on deposits and borrowings. Total interest
expense on the Corporation's interest-bearing liabilities for fiscal 1997, as
compared to fiscal 1996, increased by $398,000, or 9.8%, due to overall
increases of $9.0 million, or 11.4%, in the average outstanding balances of such
liabilities, which were partially offset by overall declines of 7 basis points,
or 1.4%, in the weighted average yields paid on the Corporation's
interest-bearing liabilities. The upward movement in the average yields earned
on the Corporation's interest-earning assets compared to the downward movement
in the average yields paid on the Corporation's interest-bearing liabilities
reflected a widening of the interest rate spread during fiscal 1997, which
correlated into increased core earnings. Such positive movement in yields earned
and paid was reflected in the interest rate spread, which had increased from
2.66% in fiscal 1996 to 2.80% in fiscal 1997, while the net yield (net interest
income as a percentage of average interest-earning assets) increased from 2.86%
in fiscal 1996 to 2.99% in fiscal 1997. The major factor contributing to the
increases in the interest rate spread and net yield year-to-year was believed to
be management's concerted efforts in growing the loan portfolio by holding in
the portfolio the majority of fixed-rate loans originated in the current
interest rate environment.
Interest income on loans increased by $811,000, or 18.3%, during the
year ended June 30, 1997, as compared to the year ended June 30, 1996. The
increase in interest income on loans during fiscal 1997 was due to an increase
of $9.2 million, or 17.9%, in the average balance of loans outstanding, which
was coupled with an increase of 3 basis points, or 0.3%, in the weighted average
rate earned on loans. The increase in the average outstanding balance of loans
year-to-year reflected a continuation of loan demand in which loan originations
and purchases exceeded loan principal repayments, sales and payoffs. The growth
in the loan portfolio was also attributed to management's decision to portfolio
fixed-rate loans in the current interest rate environment subject to certain
interest rate risk limitations. The increase in the average yield earned on
loans was principally the result of management's strategy to hold fixed-rate
mortgage loans, so as to improve interest rate spread and overall net earnings.
The greater percentage of outstanding fixed-rate mortgage loans in the loan
portfolio in fiscal 1997, the upward repricing of existing adjustable-rate
("teaser") mortgage loans and strong consumer preferences toward originating
fixed-rate mortgages as opposed to lower rate adjustable mortgages in a
relatively stable interest rate environment are other contributing factors
leading to overall
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higher loan yields in fiscal 1997. All these factors were coupled with a
generally higher interest rate environment prevailing during fiscal 1997.
Interest income on mortgage-backed securities designated as available
for sale and held to maturity decreased by $10,000, or 0.6%, during the year
ended June 30, 1997, as compared to the year ended June 30, 1996. The decrease
in interest income on mortgage-backed securities was the result of a decrease in
the weighted average rate earned on such assets of 9 basis points, or 1.4%,
which was partially offset by an increase in the average outstanding balance of
mortgage-backed securities of $238,000, or 0.9%. The increase in the average
balance of mortgage-backed securities outstanding during fiscal 1997 reflected
the purchase of floating-rate collateralized mortgage obligations designated as
available for sale, the purchase of collateralized mortgage obligations
designated as held to maturity for liquidity and diversification purposes, the
purchase of an adjustable-rate participation certificate and the sale of
securities in fiscal 1996, all of which were partially offset by principal
repayments on securities with respect to the underlying loans and the sale of
securities in fiscal 1997. Such increase in the average balance of
mortgage-backed securities outstanding was attributable in part to a strategy
adopted by management to sustain continued growth in asset levels by primarily
using deposits and repayment cash flows to fund purchases of such assets. From
time to time when circumstances dictate and opportunities exist, purchases of
mortgage-backed securities are leveraged against advances from the Federal Home
Loan Bank to obtain a particular interest rate spread. The increased volume of
mortgage-backed securities, which supplemented the growth in the loan portfolio,
helped improve the Corporation's overall interest rate spread and net earnings
level. The increase in the average balance of mortgage-backed securities
outstanding, however, began shrinking during the second half of fiscal 1997 as
management shifted more proceeds from sales of securities and principal
repayments towards the origination of loans. Management's primary objective
during fiscal 1997 was to grow the loan portfolio by shifting funds from other
asset categories to the extent practicable. The decline in the weighted average
yield earned on mortgage-backed securities generally reflected the downward
movement of interest rate changes on the Corporation's adjustable-rate and
floating-rate mortgage-backed securities and collateralized mortgage
obligations.
Interest and dividend income on investment securities held to maturity
and other interest-earning assets decreased in the aggregate by $19,000, or
8.6%, during the year ended June 30, 1997, as compared to the year ended June
30, 1996. The decrease during fiscal 1997 was primarily due to a decrease of
$657,000, or 26.2%,
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in the average balance outstanding of other interest-earning assets (primarily
interest-bearing deposits in other financial institutions) and a decline of 53
basis points, or 8.0%, in the weighted average rate earned on other
interest-earning assets, which were partially offset by an increase of $446,000,
or 56.3%, in the average balance outstanding of investment securities and an
increase of 15 basis points, or 2.1%, in the weighted average rate earned on
investment securities. The increase in the average outstanding balance of
investment securities during fiscal 1997 was largely attributable to the
purchase of callable U.S. Government agency obligations in both fiscal 1997 and
1996, which was partially offset by the call of some of these securities and the
maturities of other investment securities during fiscal 1997. Such callable
obligations were generally offered at attractive, above market rates in order to
compensate the buyer for the call feature. These obligations were principally
viewed by management as "yield enhancers", especially during a flat yield curve
environment that predominately existed at the time of many of these purchases,
and helped improve the Corporation's overall yield on investment securities and
interest rate spread. The increase in the weighted average yield earned on
investment securities during fiscal 1997 was due to the purchase of callable
U.S. Government agency obligations at rates generally higher than those
securities called or matured in fiscal 1997, resulting from a generally higher
interest rate environment. The reduction in other interest-earning assets was
the function of a steadily growing lending operation, while the decline in yield
earned on such short-term liquid assets was due in part to two interest rate
reductions by the Federal Reserve in fiscal 1996, which was partially offset by
one interest rate increase in fiscal 1997.
Interest expense on deposits, the largest component of the
Corporation's interest-bearing liabilities, increased by $356,000, or 10.4%,
during the year ended June 30, 1997, as compared to the year ended June 30,
1996. The increase in interest expense on deposits during fiscal 1997 was due to
an increase of $8.2 million, or 12.0%, in the average balance of deposits
outstanding, which was partially offset by a decrease of 8 basis points, or
1.6%, in the weighted average rate paid on deposits. The increase in the average
balance of deposits outstanding during the fiscal years presented reflected a
significant increase in term certificates of deposit (primarily certificates of
deposit with original terms to maturity of two years or less) of $8.7 million,
or 17.8%, which was partially offset by a decline of $461,000, or 2.3%, in
deposit balances subject to daily repricing (passbook, money market deposit and
NOW accounts). Such increase in certificates of deposit emanated from
depositors' preference for shifting funds from deposits subject to daily
repricing to higher-yielding term certificates of deposit and from an influx of
new deposits due to
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increased marketing and selling efforts by management and competitive pricing
strategies. In addition, during fiscal 1997, management began utilizing more
frequently brokered deposits and other out-of-state funds as an alternative
source of funds in an effort to continue the growth in certificates of deposit.
In many cases, interest rates paid on brokered deposits were actually the same
or lower than interest rates paid on local deposits. The increase in the average
outstanding balance of deposits was necessary to predominately fund the growth
in the loan portfolio. The decrease in the weighted average rate paid on deposit
accounts year-to-year reflected lower market rates of interest during fiscal
1997, as compared to fiscal 1996. Specifically, the weighted average rate paid
on certificates of deposit decreased from 5.88% in fiscal 1996 to 5.68% in
fiscal 1997, which was coupled with a decrease in the weighted average rate paid
on transaction accounts from 2.84% in fiscal 1996 to 2.70% in fiscal 1997.
Interest expense on borrowings, consisting primarily of fixed-rate
Federal Home Loan Bank advances, adjustable-rate LIBOR-based advances and line
of credit advances and, to a lesser extent, an adjustable-rate loan of the ESOP,
increased by $42,000, or 6.7%, during the year ended June 30, 1997, as compared
to the year ended June 30, 1996. The increase in interest expense on borrowings
during fiscal 1997 was attributed to an increase of $785,000, or 7.7%, in the
average outstanding balance of borrowings, which was partially offset by a
decrease of 5 basis points, or 0.8%, in the weighted average rate paid on
borrowings. The increase in the average outstanding balance of borrowings
year-to-year was the result of management utilizing new borrowings from the
Federal Home Loan Bank to assist, in part, in funding the Corporation's lending
and investment activities. Such increase in the average outstanding balance of
borrowings was partially offset by significant principal repayments on Federal
Home Loan Bank advances and other short-term borrowings in fiscal 1996. These
repayments in fiscal 1996 were funded with excess liquidity and deposit inflows,
as it was management's intent of principally growing the Corporation through an
increased deposit base. During fiscal 1997, however, advances from the Federal
Home Loan Bank were utilized by management as an alternative funding source to
provide additional liquidity and sources of funds to the lending function during
periods of cash outflows, as well as to pursue its lending and investment
programs as previously discussed. During fiscal 1997, the weighted average rate
paid on borrowings declined to 6.06%, a decrease of 5 basis points, or 0.8%,
from 6.11% in fiscal 1996. This decrease in the weighted average rate paid
year-to-year generally reflected the lower costs of new borrowings in comparison
to borrowings obtained in prior years. Additionally, the interest rates paid on
the adjustable-rate portion of Federal Home Loan Bank advances in fiscal 1997
were generally lower than the interest
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<PAGE> 44
rates paid on that portion in fiscal 1996, as management utilized such advances
during periods of lower interest rates.
The Corporation's provision for losses on loans increased by $7,000, or
63.6%, during the year ended June 30, 1997, as compared to the year ended June
30, 1996. The provision for losses on loans was comprised solely of
discretionary additions to the general loan loss allowance. The fiscal 1997 loan
loss provision was the result of management's continued efforts to set the
allowance at a level considered to be appropriate based upon the internal
analysis of the risk of loss in the loan portfolio. Among the factors considered
in this analysis were the assessment of general economic conditions in Blue
Ash's lending area applied to the portfolio, analysis of specific loans in the
portfolio, known and inherent risk in the portfolio and other factors previously
discussed. The Corporation has historically followed strict underwriting
guidelines in its loan origination process, and this is considered to be one of
the many factors which have resulted in minimal loan losses (charge-offs) over
the past five years. The Corporation's provision for losses on loans during
fiscal 1997 was principally attributable to loan portfolio growth of 21.3%,
which was partially offset by the decrease in internally-classified assets and
non-performing and nonaccrual loans. Management is of the opinion that the
allowance for loan losses is adequate to cover any unforeseen losses in the loan
portfolio.
As a result of the foregoing changes in interest income, interest
expense and provision for losses on loans, net interest income after provision
for losses on loans increased during the year ended June 30, 1997 by $377,000,
or 16.1%, as compared to the year ended June 30, 1996.
Other Income
------------
Total other income decreased by $258,000, or 54.9%, from $470,000
during the year ended June 30, 1997 to $212,000 during the year ended June 30,
1996. The principal causes for this decline in other income were a decrease in
gain on sale of mortgage loans of $97,000, or 60.2%, a decrease in gain on sale
of mortgage-backed securities designated as available for sale of $135,000, or
90.6%, a decrease in loan servicing fees of $13,000, or 11.5%, an increase in
loss on sale of real estate acquired through foreclosure of $1,000 and a
decrease in service fees, charges and other operating income of $12,000, or
25.5%.
The decrease in gain on sale of mortgage loans was the result of a
reduction in secondary market activities during fiscal 1997, as compared to
fiscal 1996, due to management's strategy of holding in the loan portfolio
certain fixed-rate mortgage loans subject to
43
<PAGE> 45
certain interest rate risk limitations. The Corporation recognized cash gains on
the sale of mortgage loans in the secondary market of $17,000 and $125,000
during fiscal 1997 and 1996, respectively. As a result, proceeds from the sale
of loans in the secondary market declined from $8.2 million in fiscal 1996 to
$1.9 million in fiscal 1997, and loans originated for sale in the secondary
market decreased from $9.4 million in fiscal 1996 to $1.7 million in fiscal
1997. Prior to management's change in strategy of originating fixed-rate
mortgage loans in fiscal 1996, loan sales were frequently utilized as a means of
minimizing interest rate risk as well as generating additional funds for lending
and other purposes.
The decrease in gain on sale of mortgage-backed securities of $135,000,
or 90.6%, was due to the significant decline in sales activity during fiscal
1997, as compared to fiscal 1996. Proceeds from the sale of mortgaged-backed
securities were $1.1 million and $10.8 million during fiscal 1997 and 1996,
resulting in gains of $14,000 and $149,000, respectively. Such greater sales
activity in fiscal 1996 was undertaken by management for diversification
purposes and to realize profits, arising from a favorable interest rate
environment, that had accumulated on certain floating-rate collateralized
mortgage obligations which were tied to a particular lagging market index. The
decrease in loan servicing fees of $13,000, or 11.5%, during fiscal 1997 was
principally attributed to a decline of approximately $3.6 million, or 7.6%,
year-to-year in the average outstanding balance of loans sold in the secondary
market and to other financial institutions, which was coupled with an increase
of $4,000, or 66.7%, in expense for amortization and impairment of originated
mortgage servicing rights under SFAS No. 122. The decline in service fees,
charges and other operating income of $12,000, or 25.5%, reflected the increased
costs incurred by the Corporation in the origination of no-cost line of credit
loans which were more prevalent in fiscal 1997 and the reduction in fees
received from correspondent lenders, which were partially offset by increased
fees generated year-to-year from NOW accounts. In addition, the Corporation
recognized a loss of $1,000 during fiscal 1997 on the sale of real estate
acquired through foreclosure (single-family residence).
General, Administrative and Other Expenses
------------------------------------------
Total general, administrative and other expense increased by $358,000,
or 17.9%, during the year ended June 30, 1997, as compared to the year ended
June 30, 1996. The components of this increase in total general, administrative
and other expense during fiscal 1997 were comprised of an increase in employee
compensation and benefits of $36,000, or 3.7%, an increase in federal deposit
insurance premiums of $323,000, or 224.3%, an increase in state
44
<PAGE> 46
franchise tax expense of $9,000, or 10.7%, an increase in data processing
expense of $6,000, or 6.5%, and an increase in advertising expense of $3,000, or
3.5%, all of which were partially offset by a decrease in occupancy and
equipment expense of $14,000, or 3.8%, and a decrease in other operating expense
of $5,000, or 2.2%.
The principal category of the Corporation's general, administrative and
other expense is employee compensation and benefits. The increase in this
expense category of $36,000, or 3.7%, during fiscal 1997, as compared to fiscal
1996, was primarily due to normal merit increases, increases in employee group
health insurance premiums and decreases in deferred loan origination costs in
accordance with SFAS No. 91 as a result of an approximate $568,000, or 1.9%,
decrease in total lending volume year-to-year, all of which were partially
offset by decreases in employee salaries due to a temporary reduction in the
work staff in the savings and mortgage operations, decreases in contributions to
the ESOP plan and decreases in certain payroll-related taxes such as workers
compensation premiums and state unemployment taxes.
The increase of $323,000 in federal deposit insurance premiums was due
to the one-time special assessment of $366,000 to recapitalize the SAIF to
federally-mandated levels and to an increased average deposit base year-to-year,
which were partially offset by a reduction of $72,000 in regular SAIF premium
assessments after enactment of the SAIF legislation as previously discussed. The
increase in data processing expense of $6,000, or 6.5%, also reflected an
increased average deposit base as well as growth in lending operations. The
increase in state franchise tax expense of $9,000, or 10.7%, was primarily
attributed to an enhanced equity capital position year-to-year. The increase of
$3,000, or 3.5%, in advertising expense was principally attributable to a
continuation of intensified marketing and selling efforts by management, which
were directed toward the loan origination function and attracting new deposits.
The decrease in occupancy and equipment expense of $14,000, or 3.8%, was largely
due to the reduction in office building repair and maintenance expenses and
expenses associated with ATM processing, which were partially offset by higher
light, heat and utilities costs and furniture, fixtures and equipment expenses.
The decrease in other operating expense of $5,000, or 2.2%, during fiscal 1997
was due in part to a decrease in NOW processing expenses and a decrease in
office supplies and stationery costs, which were partially offset by an increase
in supervisory assessments resulting from a greater asset base and an increase
in consulting fees associated with analyzing new loan origination software and
upgrading the Corporation's computer system.
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<PAGE> 47
Federal Income Taxes
--------------------
The provision for federal income taxes totaled $201,000 for the year
ended June 30, 1997, as compared to $284,000 for the year ended June 30, 1996, a
decrease of $83,000, or 29.2%. The decrease in the provision for federal income
taxes reflected the lower level of pre-tax earnings for the year ended June 30,
1997, a decrease of $239,000, or 29.7%. As previously discussed, the one-time
charge to replenish the SAIF had a detrimental impact on net earnings for the
year ended June 30, 1997. As a result, the level of federal income tax expense
for each of the years ended June 30, 1997 and 1996 generally reflected the level
of pre-tax earnings for such years.
COMPARISON OF THE RESULTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
General
-------
Net earnings totaled $521,000 for the year ended June 30, 1996,
representing an increase of $130,000, or 33.2%, over the $391,000 in net
earnings recorded for the year ended June 30, 1995. The improvement in earnings
level during the year ended June 30, 1996 was primarily attributable to an
increase in net interest income after provision for losses on loans of $105,000,
or 4.7%, and an increase in other income of $208,000, or 79.4%, which were
partially offset by an increase in general, administrative and other expense of
$128,000, or 6.8%. The $185,000 increase in earnings before federal income taxes
resulted in an increase of $55,000, or 24.0%, in the provision for federal
income taxes.
Net Interest Income and Provision for Losses on Loans
-----------------------------------------------------
The Corporation's net interest income increased by $116,000, or 5.2%,
during the year ended June 30, 1996, as compared to the year ended June 30,
1995. The increase in net interest income during fiscal 1996 was primarily the
result of an increase in total interest income, due to increases in the average
outstanding balances and to increases in the weighted average rates earned on
all the Corporation's interest-earning assets. Total interest income on the
Corporation's interest-earning assets increased by $1.3 million, or 25.9%,
during fiscal 1996 due to overall increases of $14.4 million, or 21.3%, in the
average outstanding balances of such assets, which were coupled with overall
increases of 29 basis points, or 3.9%, in the weighted average yields earned on
such assets. The increase in total interest income during fiscal 1996 was
partially offset by an increase in total interest expense,
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<PAGE> 48
primarily due to an increase in the average outstanding balance of deposits and
to increases in the weighted average rates paid on deposits and borrowings,
which were partially offset by a decrease in the average outstanding balance of
borrowings. Total interest expense on the Corporation's interest-bearing
liabilities for fiscal 1996, as compared to fiscal 1995, increased by $1.2
million, or 42.1%, due to overall increases of $13.3 million, or 20.3%, in the
average outstanding balances of such liabilities, which were coupled with
overall increases of 79 basis points, or 18.1%, in the weighted average yields
paid on such liabilities. The upward movement in the average yields paid on the
Corporation's interest-bearing liabilities compared to the average yields earned
on the Corporation's interest-earning assets year-to-year reflected liabilities
repricing upward more rapidly than assets. Such trend was reflected in the
interest rate spread, which had decreased from 3.16% in fiscal 1995 to 2.66% in
fiscal 1996. The major factors which contributed to this reduction were believed
to be: (i) management's concerted efforts to expand its deposit base required
some premium to be paid over market rates in order to attract and retain deposit
accounts in fiscal 1996; and (ii) the flat yield curve which existed throughout
most of fiscal 1996 made it more difficult for the Corporation to earn a
significant positive spread on new deposit and new borrowing activity.
Interest income on loans increased by $846,000, or 23.7%, during the
year ended June 30, 1996, as compared to the year ended June 30, 1995. The
increase in interest income on loans during fiscal 1996 was due to an increase
of $9.1 million, or 21.5%, in the average balance of loans outstanding, which
was coupled with an increase in the weighted average rate earned on loans. The
weighted average rate earned on loans receivable and loans held for sale during
fiscal 1995 was 8.42%. During fiscal 1996, the weighted average rate rose to
8.58%, an increase of 16 basis points, or 1.9%. The increase in the average
outstanding balance of loans outstanding year-to-year reflected a continuation
of loan demand in which loan originations and purchases exceeded loan principal
repayments, sales and payoffs. The increase in loan yield was due in part to the
upward repricing of adjustable-rate ("teaser") mortgage loans during fiscal 1996
and to the decision by management to hold in the loan portfolio fixed-rate
mortgage loans in the current interest rate environment. The increase in average
yield was partially offset by prepayments in higher yielding fixed-rate loans,
which were replaced by lower yielding adjustable-rate and other loans during a
lower interest rate environment that existed for most of the fiscal 1996 year.
Interest income on mortgage-backed securities designated as available
for sale and held to maturity increased by $429,000, or 32.1%, during the year
ended June 30, 1996, as compared to the year
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<PAGE> 49
ended June 30, 1995. The increase in interest income on mortgage-backed
securities during fiscal 1996 was due to a $4.7 million, or 21.1%, increase in
the average balance of mortgage-backed securities outstanding, which was coupled
with a 54 basis point, or 9.1%, increase in the weighted average rate earned
thereon. The increase in the average balance of mortgage-backed securities
outstanding during fiscal 1996 reflected the purchase of primarily floating-rate
collateralized mortgage obligations designated as available for sale and the
purchase of collateralized mortgage obligations held to maturity for liquidity
and diversification purposes, which were partially offset by principal
prepayments and repayments on securities with respect to the underlying loans
and the sale of securities in fiscal 1996. Such increase in the average balance
of mortgage-backed securities outstanding was attributable in part to a strategy
adopted by management to sustain continued growth in asset levels by primarily
using deposits to fund purchases of such assets. From time to time when the
opportunities exist, purchases of mortgage-backed securities are leveraged
against advances from the Federal Home Loan Bank to obtain a particular interest
rate spread. The increased volume of mortgage-backed securities during fiscal
1996, which supplemented the growth in the loan portfolio, helped improve the
Corporation's overall yield on its interest-earning assets and improve net
earnings. The increase in the average yield earned on the Corporation's
mortgage-backed securities year-to-year was the result of upward interest rate
changes on adjustable-rate securities due to an overall net upward movement in
market interest rates.
Interest and dividend income on investment securities held to maturity
and other interest-earning assets increased by $45,000, or 25.4%, during the
year ended June 30, 1996, as compared to the year ended June 30, 1995. The
increase during fiscal 1996 was due primarily to an increase of $34,000, or
4.5%, in the average outstanding balance of investment securities and to an
increase of $503,000, or 25.1%, in the average balance outstanding of other
interest-earning assets (primarily interest-bearing deposits in other financial
institutions). Such increases in the average balances outstanding were coupled
with increases of 47 basis points, or 7.0%, and 29 basis points, or 4.6%, in the
weighted average rates earned on investment securities and other
interest-earning assets, respectively. The increase in the average outstanding
balance of investment securities in fiscal 1996 was largely attributable to the
purchase of callable U.S. Government agency obligations. Such obligations were
generally offered at attractive, above-market rates in order to compensate the
buyer for the call feature. The increase in the weighted average rate earned on
investment securities was due in part to the investing in several callable U.S.
Government agency issues, taking advantage of
48
<PAGE> 50
these attractive rate features. The increase in other interest-earning assets
was attributed in part to increased liquidity needs resulting from significant
asset growth year-to-year and the increase in the weighted average rate earned
on such assets was the direct result of the Federal Reserve raising interest
rates six times during prior periods, which were partially offset by two
interest rate reductions in fiscal 1996.
Interest expense on deposits increased by $1.2 million, or 53.7%,
during the year ended June 30, 1996, as compared to the year ended June 30,
1995. The increase in interest expense on deposits during fiscal 1996 was due to
an increase of $14.3 million, or 26.3%, in the average balance of deposits
outstanding, which was coupled with an increase of 90 basis points, or 21.9%, in
the weighted average rate paid on deposits. The increase in the average balance
of deposits outstanding during the fiscal years presented reflected a
significant increase in the average outstanding balance of term certificates of
deposit (primarily certificates of deposit with original terms to maturity of
two years or less) of $17.4 million, or 55.3%, which was partially offset by a
decline of $3.1 million, or 13.7%, in the average outstanding deposit balances
subject to daily repricing (passbook, money market deposit and NOW accounts).
Such increase in certificates of deposit emanated from depositors' preference
for shifting funds from deposits subject to daily repricing to higher yielding
term certificates of deposit and from an influx of new deposits due to increased
marketing and selling efforts by management and competitive pricing strategies.
The increase in deposits was needed to predominately fund the growth in the loan
portfolio. The increase in the weighted average rate paid on deposit accounts
year-to-year reflected higher market rates of interest paid during fiscal 1996,
as compared to fiscal 1995, especially on certificate of deposit accounts. The
weighted average rate paid on certificates of deposit rose from 5.04% in fiscal
1995 to 5.88% in fiscal 1996, while the weighted average rate paid on
transaction accounts of 2.84% did not change from fiscal 1995 to fiscal 1996.
Interest expense on borrowings, consisting primarily of fixed-rate
Federal Home Loan Bank advances, adjustable-rate LIBOR-based advances,
obligations for securities sold under agreements to repurchase and, to a lesser
extent, an adjustable-rate loan of the ESOP, increased slightly by $3,000, or
0.5%, during the year ended June 30, 1996, as compared to the year ended June
30, 1995. The increase in interest expense on borrowings was due to an increase
in the weighted average rate paid on borrowings of 55 basis points, or 9.9%,
which was partially offset by a decrease in the average outstanding balance of
borrowings of $966,000, or 8.6%. The increase in the weighted average rate paid
on borrowings during
49
<PAGE> 51
fiscal 1996, as compared to fiscal 1995, reflected the higher costs of new
borrowings in comparison to borrowings obtained in prior years. The reduction in
the average outstanding balance of borrowings, principally the $3.5 million in
obligations under reverse repurchase agreements which were repaid in fiscal
1996, was funded with excess liquidity as a result of increased deposit
activity. During fiscal 1996, advances from the Federal Home Loan Bank were
utilized by management to provide additional liquidity and sources of funds
during periods of cash outflows, as well as to enable Blue Ash to pursue its
lending and investment programs as previously discussed. However, the bulk of
these advances were repaid in fiscal 1996 from customer deposit inflows.
The Corporation's provision for losses on loans increased by $11,000
during the year ended June 30, 1996, as compared to the year ended June 30,
1995. The provision for losses on loans was comprised of $6,000 in discretionary
additions to the general loan loss allowance and $5,000 in specific loan losses
related to one single-family mortgage loan. The fiscal 1996 loan loss provision
was the result of management's continued efforts to set the allowance at a level
considered to be appropriate based upon the internal analysis of the risk of
loss in the loan portfolio. Among the factors considered in this analysis were
the assessment of general economic conditions in Blue Ash's lending area applied
to the portfolio, analysis of specific loans in the portfolio, known and
inherent risk in the portfolio, growth in the loan portfolio, changes in the
composition of loans and other factors previously discussed.
As a result of the foregoing changes in interest income, interest
expense and provision for losses on loans, net interest income after provision
for losses on loans increased during the year ended June 30, 1996 by $105,000,
or 4.7%, as compared to the year ended June 30, 1995.
Other Income
------------
Total other income increased by $208,000, or 79.4%, from $262,000
during the year ended June 30, 1995 to $470,000 during the year ended June 30,
1996. The principal reasons for this improvement in other income were an
increase in gain on sale of mortgage loans of $105,000, an increase in gain on
sale of mortgage-backed securities of $151,000 and, to a lesser extent, an
increase in service fees, charges and other operating income of $11,000, or
30.6%, which were partially offset by a decrease in loan servicing fees of
$8,000, or 6.6%, a decrease in gain on sale of real estate acquired through
foreclosure of $45,000 and a decrease in gain on sale of real estate held for
sale of $6,000.
50
<PAGE> 52
The Corporation recognized gains on sale of mortgage loans of $161,000
and $56,000 during the years ended June 30, 1996 and 1995, respectively. Such
gains were the result of Blue Ash selling its fixed-rate single-family
residential mortgage loans to the Federal Home Loan Mortgage Corporation in the
secondary market as a means of minimizing interest rate risk as well as
generating additional funds for lending and other purposes. Such sales increased
during fiscal 1996, as the demand for fixed-rate single-family residential
mortgage loans was stronger within Blue Ash's lending area than in fiscal 1995
due to a lower interest rate environment that prevailed during a large part of
fiscal 1996. As a result, proceeds from the sale of loans in the secondary
market increased from $4.7 million in fiscal 1995 to $8.2 million in fiscal
1996, an increase of $3.5 million, or 74.3%. In addition to greater sales
activity in fiscal 1996 leading to increased mortgage gains, the increase in
gain on sale of mortgage loans was also attributed to greater profit margins
realized on fiscal 1996 sales and the recognition of an additional $88,000 in
pre-tax gains resulting from the Corporation's adoption of SFAS No. 122
regarding the accounting of mortgage servicing rights as previously discussed,
which were partially offset by an increase in unrealized loss on loans
identified as held for sale in fiscal 1996. Blue Ash identifies certain loans
which it originates as held for sale in the secondary market. These loans are
accounted for at the lower of their historical cost or current market value.
During fiscal 1996, due to the upward movement in interest rates, the market
value of loans in this category declined, resulting in a writedown of these
loans to their current market value. The requirement that loans held for sale be
accounted for at fair value resulted in writedowns of such loans in the amount
of $52,000 in fiscal 1996. At June 30, 1996, the Company held $2.0 million in
first mortgage loans for sale with a current market value of $1.9 million.
The increase in gain on sale of mortgage-backed securities in fiscal
1996, as compared to fiscal 1995, was due to net gains realized in fiscal 1996
of $149,000 on the sale of collateralized mortgage obligations designated as
available for sale, which was coupled with a realized loss of $2,000 on the sale
of an available for sale security in fiscal 1995. Proceeds from the sale of
securities designated as available for sale were $10.8 million in fiscal 1996,
compared to only $861,000 in fiscal 1995. Such increased sale activity within
the mortgage-backed securities portfolio in fiscal 1996 was predicated upon the
declining interest rate environment in existence for the first eight months of
fiscal 1996 and the implementation of management's diversification strategy as
previously discussed.
The decrease in loan servicing fees of $8,000, or 6.6%, in fiscal 1996
was principally attributed to a decline year-to-year in
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<PAGE> 53
the average outstanding balance of loans sold in the secondary market and other
financial institutions of approximately $694,000, or 1.4%, which was coupled
with a charge for amortization expense of $5,000 on capitalized mortgage
servicing rights and excess service fee receivables recorded in fiscal 1996 upon
adoption of SFAS No. 122. The growth in service fees, charges and other
operating income reflected increased service fees on loans and savings deposits
in fiscal 1996. Additionally, the Company in fiscal 1995 recognized gain on sale
of real estate acquired through foreclosure of $45,000 and gain on sale of real
estate held for sale of $6,000 from the sale of excess land acquired as part of
the land used in the construction of the Mason office facility. These gains
recorded in fiscal 1995 were absent in fiscal 1996.
General, Administrative and Other Expense
-----------------------------------------
Total general, administrative and other expense increased from $1.9
million during the year ended June 30, 1995 to $2.0 million during the year
ended June 30, 1996, an increase of $128,000, or 6.8%. The components of this
increase in total general, administrative and other expense during fiscal 1996
were comprised of an increase in employee compensation and benefits of $9,000,
or 0.9%, an increase in occupancy and equipment expense of $49,000, or 15.4%, an
increase in data processing expense of $11,000, or 13.4%, an increase in federal
deposit insurance premiums of $21,000, or 17.1%, an increase in franchise tax
expense of $6,000, or 7.7%, and an increase in other operating expense of
$34,000, or 18.0%, all of which were partially offset by a decrease in
advertising expense of $2,000, or 2.3%.
The increase in general, administrative and other expense of $9,000, or
0.9%, during fiscal 1996 as compared to fiscal 1995, was primarily due to normal
merit increases, an increase in yearly bonus expense due to a higher earnings
level in fiscal 1996 and an increase in loan officer bonus expense. During
fiscal 1996, Blue Ash established a quarterly bonus program for all of its loan
officers in order to provide cash incentives for loan production over and above
normal levels determined by management. As a result, bonus expense related to
the loan officer bonus program was $20,000 in fiscal 1996. These increases in
employee compensation and benefits were partially offset by an increase of
$29,000, or 32.2%, in deferred loan origination costs in accordance with SFAS
No. 91 as a result of an approximate $8.4 million, or 40.0%, increase in total
lending volume year-to-year.
The increase in occupancy and equipment expense of $49,000, or 15.4%,
during the year ended June 30, 1996, as compared to the year ended June 30,
1995, was comprised of (i) an increase in office building repairs and
maintenance expense at the main office and
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<PAGE> 54
Cherry Grove office facilities; (ii) an increase in expense associated with
repairs, maintenance, telephone, utilities, postage and real estate taxes
resulting from the operation of the Mason office facility during the entire
fiscal 1996 year, as compared to being in operation only eight months in fiscal
1995; (iii) an increase in depreciation expense on the Corporation's office
premises and equipment due to the addition of the Mason office facility and to
overall increases in its fixed asset levels; (iv) an increase in expense
associated with providing ATM processing services at the main office location as
well as two branch office locations during fiscal 1996, which were not incurred
throughout the entire 1995 fiscal year; and (v) an increase in postage expense
due to an expanding lending and savings operation in fiscal 1996.
The increases in data processing expense of $11,000, or 13.4%, and
federal deposit insurance premiums of $21,000, or 17.1%, were mainly the result
of an increased average deposit base of $14.3 million, or 26.3%, year-to-year.
The increase in state franchise taxes of $6,000, or 7.7%, was primarily
attributed to an enhanced average equity capital position of approximately 10.1%
year-to-year. Despite the decline in advertising expense of $2,000, or 2.3%,
during fiscal 1996, advertising expense remained at a relatively high level due
to the continuation of intensified marketing efforts by management, which were
directed toward the loan origination function and attracting new deposits. These
expenses were somewhat offset by the decline in advertising expense directed
solely to the opening of the Mason office facility in fiscal 1995.
Other operating expense increased from $189,000 in fiscal 1995 to
$223,000 in fiscal 1996, an increase of $34,000, or 18.0%. This increase in
other operating expense was principally attributed to an increase in expenses of
$45,000 incurred in fiscal 1996 for legal and professional services and an
increase of $6,000 in office supplies as a result of an expanded loan and
savings operation, which were partially offset by a decrease of $4,000 in
organizational dues and subscriptions, a decrease of $2,000 in real estate owned
expense and a decrease of $11,000 in all other remaining expense categories due
mainly to the absence in fiscal 1996 of nonrecurring miscellaneous expenses from
fiscal 1995.
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Federal Income Taxes
--------------------
The provisions for federal income taxes totaled $284,000 for the year
ended June 30, 1996, compared to $229,000 for the year ended June 30, 1995, an
increase of $55,000, or 24.0%. The increase in federal income taxes reflected
the higher level of pre-tax earnings for the year ended June 30, 1996, an
increase of $185,000, or 29.8%. The level of federal income tax expense for each
of the years ended June 30, 1996 and 1995 generally reflected the level of
pre-tax income for such years.
54
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[GRANT THORNTON LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Towne Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Towne Financial Corporation and Subsidiary as of June 30, 1997 and 1996, and
the related consolidated statements of earnings, shareholders' equity and cash
flows for each of the three years ended June 30, 1997, 1996 and 1995. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Towne
Financial Corporation and Subsidiary as of June 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years ended June 30, 1997, 1996 and 1995, in conformity with generally
accepted accounting principles.
As more fully explained in Note A-3, the Corporation changed its method of
accounting for gains on sale of loans in fiscal 1996 pursuant to Statement of
Financial Accounting Standards No. 122.
/s/ Grant Thornton LLP
Cincinnati, Ohio
August 29, 1997
55
<PAGE> 57
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash and due from banks $ 2,310 $ 1,645
Federal funds sold 200 1,900
Interest-bearing deposits in other financial institutions 205 66
---------- ---------
Cash and cash equivalents 2,715 3,611
Certificates of deposit in other financial institutions 466 98
Investment securities held to maturity - at amortized cost, approximate
market value of $1,399 and $1,282 at June 30, 1997 and 1996 1,399 1,300
Mortgage-backed securities designated as available for sale - at market 15,269 15,680
Mortgage-backed securities held to maturity - at amortized cost, approximate
market value of $11,267 and $11,673 at June 30,
1997 and 1996 11,463 11,948
Loans held for sale - at lower of cost or market - 1,894
Loans receivable - net 66,817 53,177
Office premises and equipment - at depreciated cost 2,335 2,408
Federal Home Loan Bank stock - at cost 742 692
Accrued interest receivable on loans 562 543
Accrued interest receivable on mortgage-backed securities 166 175
Accrued interest receivable on investments and interest-
bearing deposits 31 20
Goodwill - net of accumulated amortization 367 405
Prepaid expenses and other assets 226 244
Prepaid federal income taxes - 19
---------- ---------
Total assets $ 102,558 $ 92,214
========== =========
</TABLE>
56
<PAGE> 58
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
<S> <C> <C>
Deposits $ 81,794 $75,618
Advances from the Federal Home Loan Bank 12,000 8,424
Loan of Employee Stock Ownership Plan 60 89
Advances by borrowers for taxes and insurance 260 229
Accounts payable on mortgage loans serviced for others 368 340
Accrued interest payable 28 36
Other liabilities 138 139
Accrued federal income taxes 9 -
Deferred federal income taxes 263 182
---------- --------
Total liabilities 94,920 85,057
Commitments - -
Shareholders' equity
Preferred shares - 250,000 shares of $1.00 par value authorized;
no shares issued - -
Common shares - 2,250,000 shares of $1.00 par value authorized;
208,500 and 208,000 shares issued and outstanding at June 30,
1997 and 1996, respectively 209 208
Additional paid-in capital 1,680 1,675
Retained earnings - substantially restricted 5,987 5,622
Less required contributions for shares acquired by
Employee Stock Ownership Plan (ESOP) (60) (89)
Unrealized losses on securities designated as available for
sale - net of related tax effects (178) (259)
---------- --------
Total shareholders' equity 7,638 7,157
---------- --------
Total liabilities and shareholders' equity $ 102,558 $ 92,214
========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
57
<PAGE> 59
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended June 30,
(In thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Interest income
Loans $5,232 $4,421 $3,575
Mortgage-backed securities 1,757 1,767 1,338
Investment securities 91 57 51
Interest-bearing deposits and other 112 165 126
------ ------ ------
Total interest income 7,192 6,410 5,090
Interest expense
Deposits 3,792 3,436 2,235
Borrowings 669 627 624
------ ------ ------
Total interest expense 4,461 4,063 2,859
------ ------ ------
Net interest income 2,731 2,347 2,231
Provision for losses on loans 18 11 -
------ ------ ------
Net interest income after provision for losses on loans 2,713 2,336 2,231
Other income
Loan servicing fees 100 113 121
Gain on sale of mortgage loans 64 161 56
Gain (loss) on sale of mortgage-backed securities 14 149 (2)
Gain on sale of real estate held for sale - - 6
Gain (loss) on sale of real estate acquired through foreclosure (1) - 45
Service fees, charges and other operating 35 47 36
------ ------ ------
Total other income 212 470 262
General, administrative and other expense
Employee compensation and benefits 1,002 966 957
Occupancy and equipment 353 367 318
Data processing 99 93 82
Federal deposit insurance premiums 467 144 123
Franchise taxes 93 84 78
Advertising 89 86 88
Amortization of goodwill 38 38 38
Other operating 218 223 189
------ ------ ------
Total general, administrative and other expense 2,359 2,001 1,873
------ ------ ------
Earnings before federal income taxes 566 805 620
Federal income taxes
Current 163 210 158
Deferred 38 74 71
------ ------ ------
Total federal income taxes 201 284 229
------ ------ ------
NET EARNINGS $ 365 $ 521 $ 391
====== ====== ======
EARNINGS PER SHARE:
On common and common equivalent
shares $ 1.70 $ 2.51 $ 1.89
====== ====== ======
On a fully diluted basis $ 1.66 $ 2.51 $ 1.89
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
58
<PAGE> 60
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended June 30, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
UNREALIZED
GAINS
REQUIRED (LOSSES) ON
CONTRIBUTIONS SECURITIES
ADDITIONAL FOR SHARES DESIGNATED AS
COMMON PAID-IN RETAINED ACQUIRED AVAILABLE
SHARES CAPITAL EARNINGS BY ESOP FOR SALE TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1994 $ 207 $ 1,664 $ 4,710 $ (148) $ (76) $ 6,357
Stock options exercised 1 5 - - - 6
Principal repayments on loan of ESOP - - - 30 - 30
Net earnings for the year ended June 30, 1995 - - 391 - - 391
Unrealized gains on securities designated as
available for sale - net of related tax effects - - - - 99 99
------- ------- ------- ------- ------- -------
Balance at June 30, 1995 208 1,669 5,101 (118) 23 6,883
Stock options exercised - 6 - - - 6
Principal repayments on loan of ESOP - - - 29 - 29
Net earnings for the year ended June 30, 1996 - - 521 - - 521
Unrealized losses on securities designated as
available for sale - net of related tax effects - - - - (282) (282)
------- ------- ------- ------- ------- -------
Balance at June 30, 1996 208 1,675 5,622 (89) (259) 7,157
Stock options exercised 1 5 - - - 6
Principal repayments on loan of ESOP - - - 29 - 29
Net earnings for the year ended June 30, 1997 - - 365 - - 365
Unrealized gains on securities designated as
available for sale - net of related tax effects - - - - 81 81
------- ------- ------- ------- ------- -------
Balance at June 30, 1997 $ 209 $ 1,680 $ 5,987 $ (60) $ (178) $ 7,638
======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
59
<PAGE> 61
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings for the year $ 365 $ 521 $ 391
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Amortization of premiums and accretion of discounts
on investment securities, net - - 3
Amortization of premiums and accretion of discounts
on mortgage-backed securities, net 11 28 45
(Gain) loss on sale of mortgage-backed securities (14) (149) 2
Provision for losses on loans 18 11 -
Gain on sale of mortgage loans (44) (73) (56)
Amortization of deferred loan origination fees (42) (37) (42)
Loans originated for sale in the secondary market (1,724) (9,374) (5,191)
Proceeds from sale of loans in the secondary market 1,949 8,201 4,706
Depreciation and amortization 153 152 132
Gain on sale of real estate held for sale - - (6)
Loss (gain) on sale of real estate acquired through foreclosure 1 - (45)
Federal Home Loan Bank stock dividends (50) (46) (38)
Amortization of goodwill 38 38 38
Increases (decreases) in cash due to changes in:
Accrued interest receivable on loans (19) (91) (110)
Accrued interest receivable on mortgage-backed securities 9 (12) (24)
Accrued interest receivable on investments and
interest-bearing deposits (11) (6) 11
Prepaid expenses and other assets 18 27 (49)
Accrued interest payable (8) - 7
Other liabilities (1) 27 26
Federal income taxes
Current 28 (15) (68)
Deferred 38 74 71
------- ------- -------
Net cash provided by (used in) operating activities 715 (724) (197)
------- ------- -------
</TABLE>
60
<PAGE> 62
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows provided by (used in) investing activities:
Proceeds from maturities of investment securities held to maturity $ 410 $ - $ 925
Proceeds from called investment securities held to maturity 400 400 -
Purchase of investment securities held to maturity (909) (1,200) (200)
Proceeds from sale of mortgage-backed securities designated
as available for sale 1,148 10,803 861
Purchase of mortgage-backed securities designated as available
for sale (1,672) (14,045) (3,988)
Purchase of mortgage-backed securities held to maturity (349) (2,430) -
Principal repayments on mortgage-backed securities designated as:
Available for sale 1,081 1,468 428
Held to maturity 815 1,246 1,392
Loan disbursements (27,093) (20,118) (14,850)
Repurchase of loans sold in the secondary market - - (702)
Loan principal repayments 15,189 12,102 9,197
Purchase of office premises and equipment (80) (39) (664)
Proceeds from sale of real estate held for sale - - 190
Proceeds from sale of real estate acquired through foreclosure - - 174
Capital expenditures on real estate acquired through foreclosure - - (37)
Purchase of Federal Home Loan Bank stock - - (84)
(Increase) decrease in certificates of deposit in other financial
institutions - net (368) 100 (100)
-------- -------- --------
Net cash used in investing activities (11,428) (11,713) (7,458)
Cash flows provided by (used in) financing activities:
Issuance of and credits to deposit accounts 83,717 72,257 71,627
Withdrawals from deposit accounts (77,541) (56,423) (63,874)
Proceeds from Federal Home Loan Bank advances 3,776 9,706 2,918
Repayments of Federal Home Loan Bank advances (200) (9,600) (4,600)
Proceeds from obligations for securities sold under
agreements to repurchase - - 4,391
Repayments of obligations for securities sold under
agreements to repurchase - (3,504) (887)
Advances by borrowers for taxes and insurance 31 89 (18)
Accounts payable on mortgage loans serviced for others 28 4 (65)
Proceeds from the exercise of stock options 6 6 6
-------- -------- --------
Net cash provided by financing activities 9,817 12,535 9,498
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (896) 98 1,843
Cash and cash equivalents at beginning of year 3,611 3,513 1,670
-------- -------- --------
Cash and cash equivalents at end of year $ 2,715 $ 3,611 $ 3,513
======== ======== ========
</TABLE>
61
<PAGE> 63
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 135 $ 225 $ 226
======== ======== ======
Interest on deposits and borrowings $ 4,469 $ 4,063 $2,852
======== ======== ======
Supplemental disclosure of noncash investing activities:
Foreclosed mortgage loans transferred to real estate acquired
through foreclosure $ 108 $ - $ 265
======== ======== ======
Loans disbursed to finance the sale of real estate held for sale $ - $ - $ 111
======== ======== ======
Loans disbursed to finance the sale of real estate acquired
through foreclosure $ 107 $ - $ 208
======== ======== ======
Transfers of loans from held for sale to held for investment
classification $ 1,755 $ - $ -
======== ======== ======
Transfers of mortgage-backed securities from held to maturity
to available for sale classification $ - $ 2,371 $ -
======== ======== ======
Unrealized gains (losses) on securities designated
as available for sale - net of related tax effects $ 81 $ (282) $ 99
======== ======== ======
Recognition of mortgage servicing rights in accordance
with SFAS No. 122 $ 20 $ 88 $ -
======== ======== ======
</TABLE>
The accompanying notes are an integral part of these statements.
62
<PAGE> 64
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Towne Financial Corporation ("Towne Financial", or the "Corporation")
conducts a general banking business in southwestern Ohio which consists of
attracting deposits from the general public and applying those funds to the
origination of loans for residential, consumer and nonresidential purposes.
The Corporation's profitability is significantly dependent on its net
interest income, which is the difference between interest income generated
from interest-earning assets (i.e. loans and investments) and the interest
expense paid on interest-bearing liabilities (i.e. customer deposits and
borrowed funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or
received by the Corporation can be significantly influenced by a number of
environmental factors, such as governmental monetary policy, that are
outside of management's control.
The financial information presented herein has been prepared in accordance
with generally accepted accounting principles ("GAAP") and general
accounting practices within the financial services industry. In preparing
consolidated financial statements in accordance with GAAP, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
revenues and expenses during the reporting period. Actual results could
differ from such estimates.
The following is a summary of the significant accounting policies which,
with the exception of the policy described in Note A-3, have been
consistently applied in the preparation of the accompanying consolidated
financial statements.
1. Principles of Consolidation
---------------------------
Towne Financial is a unitary savings and loan holding company. Since the
date of incorporation, Towne Financial's activities have been limited
primarily to holding the common stock of its subsidiary, The Blue Ash
Building and Loan Company ("Blue Ash", or the "Company").
The consolidated financial statements include the accounts of the
Corporation and the Company. Condensed financial statements of the
Corporation as of June 30, 1997 and 1996 and for the years ended June 30,
1997, 1996 and 1995 are presented in Note L. Future references are made to
either the Corporation or the Company as the context requires. All
significant intercompany balances and transactions have been eliminated in
the accompanying consolidated financial statements.
63
<PAGE> 65
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-Backed Securities
----------------------------------------------------
The Corporation accounts for investment securities and mortgage-backed
securities in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." SFAS No. 115 requires the classification of certain debt and
equity securities as held to maturity, trading or available for sale. SFAS
No. 115 also addresses the accounting and reporting for investments in
equity securities that have readily determinable fair values (market value)
and for all investments in debt securities. Such investments are classified
in three categories and accounted for as follows: (i) debt securities that
the Corporation has the positive intent and ability to hold to maturity are
classified as held to maturity and reported at amortized cost; (ii) debt and
equity securities that are held for current resale are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings, and (iii) debt and equity securities not classified as
either securities held to maturity or trading securities are classified as
securities available for sale and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component
of shareholders' equity. Under SFAS No. 115, securities that could be sold
in the future because of changes in interest rates or other factors are not
classified as held to maturity. As required by SFAS No. 115, management
determines the appropriate classification of investment securities and
mortgage-backed securities at the time of purchase.
The Corporation's investment securities which are classified as held to
maturity are recorded at cost, with any premium or discount amortized or
accreted to maturity of the security. It is management's positive intent to
hold such securities until maturity, and the Corporation has the ability to
hold the securities until maturity. The Corporation's investment securities
are comprised solely of U.S. Government agency obligations at June 30, 1997,
and U.S. Government agency obligations, municipal obligations and corporate
debt securities at June 30, 1996. Amortization and accretion of premiums and
discounts on investment securities held to maturity are recorded using the
interest method. Gains and losses on the sale of securities are recognized
using the specific identification method.
The Corporation classifies its mortgage-backed securities into two
classifications depending on certain underlying characteristics of the
securities. Mortgage-backed securities classified as held to maturity are
stated at the unpaid principal amount outstanding (cost), adjusted for
unamortized premiums and unaccreted discounts. Premiums and discounts are
amortized and accreted into operations using the interest method over the
estimated average life of the underlying loans collateralizing the
securities. The mortgage-backed securities classified as held to maturity
are carried at cost, as it is management's intent, and the Corporation has
the ability to hold the securities until maturity. In considering the
Corporation's ability to hold securities, collateralized mortgage
obligations are reviewed for possible regulatory mandated
64
<PAGE> 66
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-Backed Securities (continued)
----------------------------------------------------
divestiture under existing banking regulations. Mortgage-backed securities
classified as available for sale are stated at fair value, with unrealized
gains and losses excluded from earnings and reported net of tax as a
separate component of shareholders' equity until realized. Mortgage-backed
securities classified as available for sale are those that management
intends to sell or that would be sold for liquidity purposes, changes in
interest rates, prepayment risk and asset/liability management reasons, even
if there is not a present intention of such a sale. At June 30, 1997 and
1996, the Corporation's shareholders' equity reflected unrealized losses on
securities designated as available for sale, net of applicable tax effects,
of $178,000 and $259,000, respectively. Realized gains and losses on the
sale of mortgage-backed securities are recognized using the specific
identification method.
Trading account securities are held for resale in anticipation of short-term
market movements and are carried at fair value, with unrealized holding
gains and losses reflected in earnings. There were no investment securities
and mortgage-backed securities designated as trading securities at June 30,
1997 and 1996.
3. Mortgage Banking Activities
---------------------------
The Company conducts mortgage banking operations via the sale of certain
loans or participating interests in loans in order to generate servicing
income and to provide additional funds for lending. Loans held for sale are
identified at the point of origination and are carried at the lower of cost
or market, determined in the aggregate. Market is determined on the basis of
rates quoted in the secondary mortgage market. Net unrealized losses are
recognized through a valuation allowance by charges against income. In
computing cost, deferred loan origination costs (fees) are added to
(deducted from) the principal balances of the related loans. Gains and
losses on the sale of loans are based on the carrying amount of the loans
sold under the specific identification method.
During fiscal 1997, the Company transferred approximately $1.8 million in
fixed-rate loans from a held for sale to a held for investment
classification to better serve its objectives of sustaining loan portfolio
growth and improving its overall yield on loans. These loans were valued at
the lower of cost or market, determined in the aggregate, at the date of
transfer. At June 30, 1997, there were no loans identified as held for sale.
At June 30, 1996, loans held for sale were recorded at market, which
resulted in a charge to operations in fiscal 1996 for the unrealized loss
totaling $52,000.
65
<PAGE> 67
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
3. Mortgage Banking Activities (continued)
---------------------------
The Company retains the servicing on loans sold and agrees to remit to the
investor loan principal and interest at agreed-upon rates. These rates can
differ from the loan's contractual interest rate resulting in a "yield
differential". In addition to previously deferred loan origination fees and
cash gains, gains on sale of loans can represent the present value of the
future yield differential less a normal servicing fee, capitalized over the
estimated life of the loans sold. Normal servicing fees are determined by
reference to the stipulated minimum servicing fee set forth by the
government agencies to which the loans are sold. Such servicing fees are
representative of the Company's normal servicing costs. The resulting
capitalized excess servicing fee is amortized to operations over the life of
the loans using the interest method. If prepayments are higher than
expected, an immediate charge to operations is made. If prepayments are
lower, then the related adjustments are made prospectively.
In May 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 122, "Accounting for Mortgage Servicing Rights" which requires that the
Company recognize as separate assets, rights to service mortgage loans for
others, regardless of how those servicing rights are acquired. An
institution that acquires mortgage servicing rights through either the
purchase or origination of mortgage loans and sells those loans with
servicing rights retained allocates some of the cost of the loans to the
mortgage servicing rights. SFAS No. 122 eliminates the accounting
distinction between servicing rights acquired through purchase transactions
and those acquired through loan originations. Pursuant to the provisions of
SFAS No. 122, the relative fair value of mortgage servicing rights (normal
servicing fee income less applicable servicing costs) is allocated to the
cost of loans sold for purposes of determining gain or loss. SFAS No. 122
also requires that an institution allocate the cost of purchasing or
originating the mortgage loans between the mortgage servicing rights and the
loans when mortgage loans are securitized, if it is practicable to estimate
the fair value of mortgage servicing rights. Additionally, SFAS No. 122
requires that capitalized mortgage servicing rights and capitalized excess
servicing receivables be assessed for impairment. Impairment is measured
based on fair value. In determining fair value, and the amount of
impairment, if any, an institution would stratify mortgage servicing rights
based on the predominant risk characteristics of the underlying loans
serviced, such as loan type, loan size and note rate.
SFAS No. 122 was to be applied prospectively to fiscal years beginning after
December 15, 1995, to transactions in which an institution acquires mortgage
servicing rights and to impairment evaluations of all capitalized mortgage
servicing rights and capitalized excess servicing receivables whenever
acquired. Earlier application of SFAS No. 122 was encouraged in fiscal years
or interim periods for which financial statements or information had not
been issued. Retroactive application, however, was prohibited. The
Corporation adopted SFAS No. 122 effective July 1, 1995. The adoption of
SFAS No. 122 increased 1996 pre-tax earnings and net earnings by $88,000 and
$58,000, respectively.
66
<PAGE> 68
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
3. Mortgage Banking Activities (continued)
---------------------------
During the years ended June 30, 1997 and 1996, approximately $20,000 and
$88,000 of mortgage servicing rights were capitalized in connection with
SFAS No. 122. Mortgage servicing rights are amortized in proportion to, and
over the period of, estimated net servicing income over the estimated life
of the servicing portfolio. Amortization expense totaled $8,000 and $5,000
for the years ended June 30, 1997 and 1996. The estimated fair value of
capitalized mortgage servicing rights was approximately $93,000 and $88,000
at June 30, 1997 and 1996.
The mortgage servicing rights recorded by the Company, calculated in
accordance with the provisions of SFAS No. 122, were segregated into pools
for valuation purposes, using as pooling criteria the loan term and coupon
rate. Once pooled, each grouping of loans was evaluated on a discounted
earnings basis to determine the present value of future earnings that a
purchaser could expect to realize from each portfolio. Earnings were
projected from a variety of sources including loan servicing fees, interest
earned on float, net interest earned on escrows, miscellaneous income, and
costs to service the loans. The present value of future earnings is the
"economic" value for the pool, i.e., the net present value to an acquirer of
the acquired servicing.
The carrying amount of the mortgage servicing rights is measured for
impairment each quarter. If the carrying value of an individual pool exceeds
its fair value, a valuation allowance is established. At June 30, 1997,
there was a total valuation allowance established for impairment of $2,000.
No valuation allowance was recorded at June 30, 1996, as the carrying values
of the various pools were less than their respective fair values.
4. Loans Receivable
----------------
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for deferred loan origination fees and costs, the allowance for
losses on loans and discounts arising from the reclassification of loans
from held for sale to held for investment. Discounts on loans are accreted
to operations using the interest method over the average life of the
underlying loans.
Interest is accrued as earned unless the collectibility of the loan is in
doubt. Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income
equal to all interest previously accrued, and income is subsequently
recognized only to the extent that cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments has returned to normal, in which case the loan is
returned to accrual status. If the ultimate collectibility of the loan is in
doubt, in whole or in part, all payments received on nonaccrual loans are
applied to reduce principal until such doubt is eliminated.
67
<PAGE> 69
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
5. Loan Origination and Commitment Fees
------------------------------------
The Company accounts for loan origination fees in accordance with SFAS No.
91 "Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases." Pursuant to the
provisions of SFAS No. 91, origination fees received from loans, net of
certain direct origination costs, are deferred and amortized to interest
income using the interest method, giving effect to actual loan prepayments.
Additionally, SFAS No. 91 generally limits the definition of loan
origination costs to the direct costs attributable to originating a loan,
i.e., principally actual personnel costs. Fees received for loan commitments
that are expected to be drawn upon, based on the Company's experience with
similar commitments, are deferred and amortized over the life of the related
loan using the interest method. Fees for other loan commitments are deferred
and amortized over the loan commitment period on a straight-line basis.
6. Allowance for Losses on Loans
-----------------------------
It is the Company's policy to provide valuation allowances for estimated
losses on loans based on past loss experience, changes in the composition of
the loan portfolio, current trends in the level of delinquent and specific
problem loans, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral and current and
anticipated economic conditions in its primary lending areas. When the
collection of a loan becomes doubtful, or otherwise troubled, the Company
records a loan loss provision equal to the difference between the fair value
of the property securing the loan and the loan's carrying value, although
collection efforts continue and future recoveries may occur. In providing
valuation allowances, costs of holding real estate, including the cost of
capital, are considered. Major loans, including development projects, and
major lending areas are reviewed periodically to determine potential
problems at an early date. The allowance for loan losses is increased by
charges to earnings and decreased by charge-offs (net of recoveries).
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114 amends SFAS Nos. 5 and 15 to clarify
that a creditor should evaluate the collectibility of both contractual
interest and contractual principal on all loans when assessing the need for
loan loss reserves. In October 1994, the FASB issued SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure," which amends SFAS No. 114 to allow a creditor to use existing
methods for recognizing interest income on impaired loans. SFAS No. 114, as
amended by SFAS No. 118 as to certain income recognition provisions and
financial statement disclosure requirements, is applicable to all creditors
and to all loans that are individually and specifically evaluated for
impairment, uncollateralized as well as collateralized, except those loans
that are accounted for at fair value or at the lower of cost or fair value.
SFAS No. 114 requires that the expected loss of interest income on
nonperforming loans be taken into account when calculating loan loss
reserves and that specified impaired loans be measured based upon the
present value of expected future cash flows discounted at the loan's
effective interest rate or, as an alternative,
68
<PAGE> 70
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
6. Allowance for Losses on Loans (continued)
-----------------------------
at the loan's observable market price or fair value of the collateral if the
loan is collateral dependent. SFAS No. 114 does not apply to large groups of
small balance, homogeneous loans that are collectively evaluated for
impairment, leases or debt securities as defined under SFAS No. 115. A loan
is defined under SFAS No. 114 as impaired when, based on current information
and events, it is probable that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement. In
applying the provisions of SFAS No. 114, the Company considers its
investment in one-to-four family and multi-family residential loans, home
equity lines of credit loans and passbook loans to be homogeneous and
therefore excluded from separate identification for evaluation of
impairment. With respect to the Company's investment in nonresidential
loans, and its evaluation of any impairment thereon, such loans are
collateral dependent and as a result are carried as a practical expedient at
the lower of cost or fair value. Collateral dependent loans which are more
than ninety days delinquent are considered to constitute more than a minimum
delay in repayment and are evaluated for impairment under SFAS No. 114 at
that time. SFAS No. 114 also requires an institution to account for a
troubled debt restructuring involving a modification of terms at fair value
as of the date of restructuring. SFAS No. 114 was effective for years
beginning after December 15, 1994. The Corporation adopted the Statement
effective July 1, 1995, without material effect on consolidated financial
condition or results of operations.
The carrying values of impaired loans are periodically adjusted to reflect
cash payments, revised estimates of future cash flows and increases in the
present value of expected cash flows due to the passage of time. Cash
payments representing interest income are reported as such. Other cash
payments are reported as reductions in carrying value, while increases or
decreases due to changes in estimates of future payments and due to the
passage of time are reported as provision for loan losses expense.
For impairment recognized in accordance with SFAS No. 114, as amended, the
entire change in present value of expected cash flows is reported as
provision for loan losses expense in the same manner in which impairment
initially was recognized or as a reduction in the amount of bad debt expense
that otherwise would be reported. Interest on impaired loans is reported on
the cash basis. Impaired loans are loans that are considered to be
permanently impaired in relation to principal or interest based on the
original contract. Impaired loans are charged off in the same manner as all
loans subject to charge off. At June 30, 1997 and 1996, the Company did not
have any loans that would be defined under SFAS No. 114 as impaired.
69
<PAGE> 71
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
7. Office Premises and Equipment
-----------------------------
Office premises and equipment are carried at cost less accumulated
depreciation and include expenditures which extend the useful lives of
existing assets. Maintenance, repairs and minor renewals are expensed as
incurred.
For financial reporting, depreciation and amortization are provided for in
amounts sufficient to relate the cost of depreciable assets to operations,
principally on the straight-line and accelerated methods over the useful
lives of the assets, estimated to be thirty to forty years for buildings,
ten to fifteen years for building improvements, fifteen to twenty years for
land improvements and five to ten years for furniture, fixtures and
equipment. An accelerated depreciation method is used for tax reporting
purposes.
8. Real Estate Acquired through Foreclosure
----------------------------------------
Real estate properties acquired through loan foreclosure are initially
recorded at fair value at the date of foreclosure establishing a new cost
basis. An increase in the loan valuation allowance is recorded for any write
down in the loan's carrying value to fair value at the date of foreclosure.
After foreclosure, valuations are periodically performed by management and
the real estate acquired through foreclosure is carried at the lower of cost
or fair value. Real estate loss provisions are recorded if the properties'
fair value subsequently declines below the value determined at the recording
date. In determining the lower of cost or fair value after foreclosure,
costs relating to development and improvement of property are capitalized.
Costs relating to holding real estate acquired through foreclosure, net of
rental income, are charged against earnings as incurred. The specific
identification method is used to determine gain or loss on the sale of real
estate acquired through foreclosure. There was no real estate acquired
through foreclosure at June 30, 1997 and 1996.
9. Amortization of Goodwill
------------------------
Goodwill arising from an acquisition is being amortized to operations using
the straight-line method over a fifteen year period.
At June 30, 1997, goodwill consisted of the following:
<TABLE>
<CAPTION>
ORIGINAL UNAMORTIZED
BALANCE BALANCE
(In thousands)
<S> <C> <C>
Goodwill $504 $367
=== ===
</TABLE>
70
<PAGE> 72
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
9. Amortization of Goodwill (continued)
------------------------
The approximate scheduled amortization with respect to goodwill is as
follows:
<TABLE>
<CAPTION>
FUTURE
FISCAL YEAR ENDING JUNE 30, AMORTIZATION
(In thousands)
<S> <C>
1998 $ 34
1999 34
2000 34
2001 34
2002 34
2003 and years thereafter 197
----
$367
====
</TABLE>
Management periodically evaluates the carrying value of goodwill in relation
to the continuing earnings capacity of the acquired assets and assumed
liabilities.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed Of." SFAS No. 121
provides guidance on when to recognize and how to measure impairment losses
of long-lived assets and certain identifiable intangibles and how to value
long-lived assets to be disposed of. The Corporation adopted SFAS No. 121
effective July 1, 1996, as required, without material effect on consolidated
financial condition or results of operations.
10. Federal Income Taxes
--------------------
The Corporation accounts for federal income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109
established financial accounting and reporting standards for the effects of
income taxes that result from the Corporation's activities within the
current and previous years. Pursuant to the provisions of SFAS No. 109, a
deferred tax liability or deferred tax asset is computed by applying the
current statutory tax rates to net taxable or deductible temporary
differences between the tax basis of an asset or liability and its reported
amount in the consolidated financial statements that will result in taxable
or deductible amounts in future periods. Deferred tax assets are recorded
only to the extent that the amount of net deductible temporary differences
or carryforward attributes may be utilized against current year earnings,
carried back against prior years' earnings, offset
71
<PAGE> 73
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
10. Federal Income Taxes (continued)
--------------------
against taxable temporary differences reversing in future periods, or
utilized to the extent of management's estimates of taxes payable on future
taxable income. Deferred tax liabilities are provided on the total amount of
net temporary differences taxable in the future. A valuation allowance is
provided for deferred tax assets to the extent that the value of net
deductible temporary differences and carryforward attributes exceeds
management's estimates of taxes payable on future taxable income. Deferred
tax liabilities are provided on the total amount of net temporary
differences taxable in the future.
The Corporation's principal temporary differences between pretax financial
income and taxable income result primarily from the practice of preparing
the federal income tax return on the cash basis of accounting, while the
consolidated financial statements are prepared on the accrual basis of
accounting, and from different methods of accounting for deferred loan
origination fees and costs, Federal Home Loan Bank stock dividends, book and
tax bad debt deductions, the general loan loss allowance, capitalized
mortgage servicing rights, deferred compensation and gains on the sale of
mortgage loans utilizing the net yield method. Additionally, a temporary
difference is also recognized for depreciation expense utilizing accelerated
methods for federal income tax purposes.
The Corporation and the Company file a consolidated federal income tax
return. There is a tax allocation agreement in effect between the
Corporation and the Company.
11. Employee Benefits and Retirement Plan
-------------------------------------
Coincident with conversion to the stock form of organization, Towne
Financial established an Employee Stock Ownership Plan ("ESOP") which
provides retirement benefits for substantially all employees who have
completed six months of service and have attained the age of 21. The
Corporation recognized expense totaling $28,000, $32,000 and $33,000 related
to the ESOP for the years ended June 30, 1997, 1996 and 1995, respectively.
The Company provides incentive compensation through a discretionary bonus
plan to substantially all employees. Bonus compensation is determined
annually solely at the discretion of the Board of Directors. The provision
for bonus compensation under this plan totaled approximately $109,000,
$103,000 and $96,000 for the years ended June 30, 1997, 1996 and 1995,
respectively.
72
<PAGE> 74
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
11. Employee Benefits and Retirement Plan (continued)
-------------------------------------
In addition to providing employees with access to a discretionary bonus
plan, the Company provides a medical reimbursement plan to all outside
directors. The Company's obligation under the medical reimbursement plan is
for the payment or reimbursement of qualifying medical care expenses
incurred in any plan year by a director up to a maximum amount of $4,000
each per year. Qualifying medical care expenses are defined under the plan
as those expenses not covered by the director's primary health plan. Expense
under the medical reimbursement plan totaled approximately $5,000, $6,000
and $4,000 for the years ended June 30, 1997, 1996 and 1995, respectively.
12. Stock Option and Incentive Plan
-------------------------------
The Corporation has a Stock Option and Incentive Plan (the "Plan") that
provides for the issuance of 20,000 shares of authorized, but unissued
shares of common stock to management and the Board, at an option price of
not less than the fair market value of such shares at the date of grant of
each option. The Board of Directors granted all of the available options
under the Plan within four months upon completion of the Company's
conversion to the stock form of organization at an exercise price of $11.50
per share. Each option granted under the Plan is exercisable within a ten
year period according to a prescribed schedule. No option is exercisable
after the expiration of ten years from the date it is granted. During fiscal
1994, options for 2,500 shares were surrendered, while options for 2,500
shares were reissued at an exercise price of $12.00 per share. During fiscal
1997, 1996 and 1995, options for 500 shares per year were exercised, leaving
18,500 unexercised shares outstanding under the Plan at June 30, 1997.
On July 1, 1996, the Corporation adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which contains a fair value-based method for
valuing stock-based compensation that institutions may use, which measures
compensation cost at the grant date based on the fair value of the award.
Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, SFAS No. 123 permits institutions to
continue to account for employee stock options and similar equity
instruments under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." Institutions that continue to
account for stock options using APB Opinion No. 25 are required to make pro
forma disclosures of net earnings and earnings per share, as if the fair
valued-based method of accounting defined in SFAS No. 123 had been applied.
Such disclosures are not required for the Corporation since no stock options
were granted in fiscal 1997. The Corporation's employee stock option plan is
accounted for under APB Opinion No. 25.
73
<PAGE> 75
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
12. Stock Option and Incentive Plan (continued)
-------------------------------
On August 20, 1997, the Board of Directors of the Corporation adopted the
Towne Financial Corporation 1997 Stock Option Plan (the "1997 Plan") subject
to approval by a majority of the shareholders of the Corporation. The
objective of the 1997 Plan is to enable the Corporation to compete
successfully in attracting, retaining and providing incentives to the
directors, officers and key employees of the Corporation and its subsidiary,
thereby encouraging them to acquire a proprietary and vested interest in the
growth and performance of the Corporation, and, in general, to generate an
increased incentive to contribute to the Corporation's future success and
prosperity, thus enhancing the value of the Corporation for the benefit of
the shareholders. Pursuant to the 1997 Plan, a maximum of 20,000 shares of
common stock will be reserved for issuance by the Corporation upon the
granting of options to certain directors, officers and key employees of the
Corporation or its subsidiary from time to time under the 1997 Plan. Any
shares of common stock issued under the 1997 Plan will be authorized but
unissued shares or issued shares which have been reacquired by the
Corporation. The Board of Directors has made no determination regarding the
granting of options under the 1997 Plan, if it is adopted by the
shareholders.
13. Earnings Per Share and Dividends Per Share
------------------------------------------
Earnings per common share and common equivalent share was computed by
dividing net earnings by the weighted-average number of shares of common
stock and common stock equivalents outstanding during each of the three
years presented. Earnings per common share and common equivalent share for
the years ended June 30, 1997, 1996 and 1995 has been computed based upon
214,344, 207,538 and 207,438 weighted-average shares of common stock and
common stock equivalents outstanding, respectively. Exercisable options,
attendant to Towne Financial's Stock Option and Incentive Plan, were
considered in the computation of earnings per common and common equivalent
shares.
Fully diluted earnings per share was computed assuming exercise of all Towne
Financial's outstanding stock options. Fully diluted earnings per share for
the years ended June 30, 1997, 1996 and 1995 has been computed based upon
219,106, 207,538 and 207,438 weighted-average shares of common stock and
common stock equivalents outstanding, respectively.
On August 20, 1997, the Board of Directors of the Corporation declared a
first ever quarterly cash dividend of $.10 per share to be paid September
30, 1997, to all shareholders of record as of September 15, 1997. A total
cash dividend of $21,000 will be paid based on 208,500 outstanding common
shares.
14. Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents includes
cash and due from banks, federal funds sold and interest-bearing deposits
due from other financial institutions with original maturities of less than
ninety days.
74
<PAGE> 76
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
15. Fair Value of Financial Instruments
-----------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the fair value of financial instruments, both assets
and liabilities whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair
values are based on estimates using present value and other valuation
methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Because of the
judgment and subjective considerations required in determining appropriate
and reasonable assumptions, the derived fair value estimates cannot be
substantiated by comparison to independent markets. Further, the amounts
which could be realized in immediate settlement of the instrument could vary
significantly from the fair value estimate depending upon bulk versus
individual settlements or sales as well as other factors. SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate net fair value
amounts presented do not represent the underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at June 30,
1997 and 1996:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in
the consolidated statements of financial condition for cash
and cash equivalents are deemed to approximate fair value due
to the frequency of repricing of these items.
CERTIFICATES OF DEPOSIT IN OTHER FINANCIAL INSTITUTIONS: The
carrying amounts presented in the consolidated statements of
financial condition for certificates of deposit in other
financial institutions are deemed to approximate fair value.
INVESTMENT SECURITIES HELD TO MATURITY, MORTGAGE-BACKED
SECURITIES DESIGNATED AS AVAILABLE FOR SALE AND
MORTGAGE-BACKED SECURITIES HELD TO MATURITY: For investments
and mortgage-backed securities, fair value is deemed to equal
the quoted market price or dealer quote.
LOANS HELD FOR SALE: For loans designated as held for sale,
fair value is determined on the basis of rates quoted in the
secondary mortgage market.
LOANS RECEIVABLE: The loan portfolio has been segregated into
categories with similar characteristics, such as one-to-four
family residential, home equity lines of credit, multi-family
residential, nonresidential real estate and land. These loan
categories were further delineated into fixed-rate and
adjustable-rate loans. The fair values for the resultant loan
categories were computed via discounted cash
75
<PAGE> 77
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
15. Fair Value of Financial Instruments (continued)
-----------------------------------
flow analysis, using current interest rates offered for loans
with similar terms to borrowers of similar credit quality. For
loans on deposit accounts and consumer and other loans, fair
values were deemed to equal the historic carrying values. The
historical carrying amount of accrued interest on loans is
deemed to approximate fair value.
FEDERAL HOME LOAN BANK STOCK: The carrying amount presented in
the consolidated statements of financial condition is deemed
to approximate fair value since a quoted market price is not
available on Federal Home Loan Bank stock.
DEPOSITS: The fair value of NOW accounts, passbook and club
accounts and money market deposits is deemed to approximate
the amount payable on demand at June 30, 1997 and 1996. Fair
values for fixed-rate certificates of deposit have been
estimated using a discounted cash flow calculation using the
interest rates currently offered for deposits of similar
remaining maturities.
ADVANCES FROM THE FEDERAL HOME LOAN BANK: The fair value of
Federal Home Loan Bank advances has been estimated using
discounted cash flow analysis, based on the interest rates
currently offered for advances of similar remaining maturities
or, when available, quoted market prices.
LOAN OF EMPLOYEE STOCK OWNERSHIP PLAN (ESOP): The fair value
of the ESOP loan is deemed to approximate the historical
carrying value due to the daily repricing of the loan's
interest rate.
ESCROW DEPOSITS AND AMOUNTS DUE ON LOANS SERVICED FOR OTHERS:
The carrying value of advances by borrowers and amounts due on
loans serviced for others is deemed to approximate fair value.
COMMITMENTS TO EXTEND CREDIT: For fixed-rate and
adjustable-rate loan commitments, the fair value estimate
considers the difference between current levels of interest
rates and committed rates.
76
<PAGE> 78
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
15. Fair Value of Financial Instruments (continued)
-----------------------------------
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments are as follows at June 30:
<TABLE>
<CAPTION>
1997 1996
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 2,715 $ 2,715 $ 3,611 $ 3,611
Certificates of deposit in other financial institutions 466 466 98 98
Investment securities held to maturity 1,399 1,399 1,300 1,282
Mortgage-backed securities designated as available
for sale 15,269 15,269 15,680 15,680
Mortgage-backed securities held to maturity 11,463 11,267 11,948 11,673
Loans held for sale - - 1,894 1,894
Loans receivable - net 66,817 68,625 53,177 54,635
Federal Home Loan Bank stock 742 742 692 692
------- -------- ------- -------
$98,871 $100,483 $88,400 $89,565
======= ======== ======= =======
Financial liabilities:
Deposits $81,794 $ 81,838 $75,618 $75,714
Advances from the Federal Home Loan Bank 12,000 11,840 8,424 8,199
Loan of Employee Stock Ownership Plan 60 60 89 89
Advances by borrowers and amounts due on loans
serviced for others 628 628 569 569
------- -------- ------- -------
$94,482 $ 94,366 $84,700 $84,571
======= ======== ======= =======
Off-balance sheet commitments:
Commitments to extend credit (notional amount of
$3,849 and $1,673 at June 30, 1997 and 1996) $ - $ 3,884 $ - $ 1,700
======= ======== ======= =======
</TABLE>
16. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the June 30,
1997 consolidated financial statement presentation.
77
<PAGE> 79
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The carrying values and estimated fair values of investment securities at
June 30 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
U. S. Government agency obligations $1,399 $1,399 $1,000 $ 983
Corporate debt securities - - 200 199
Municipal obligations - - 100 100
----- ----- ----- -----
$1,399 $1,399 $1,300 $1,282
===== ===== ===== =====
</TABLE>
At June 30, 1997, the Corporation's estimated fair value of investment
securities held to maturity was equal to the cost carrying value, consisting
of gross unrealized gains of $5,000 and gross unrealized losses of $5,000.
At June 30, 1996, the Corporation's estimated fair value of investment
securities held to maturity was $18,000 below the cost carrying value,
consisting of gross unrealized gains of $1,000 and gross unrealized losses
of $19,000.
The amortized cost and estimated fair value of investment securities at June
30, 1997, by term to maturity, are shown below. Expected maturities on
certain U.S. Government agency obligations may differ from contractual
maturities because the issuer may have the right to call the obligations
without prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
(In thousands)
HELD TO MATURITY:
<S> <C> <C>
Due within five years or less $ 500 $ 501
Due after five years through ten years 699 700
Due after ten years 200 198
----- -----
$1,399 $1,399
===== =====
</TABLE>
78
<PAGE> 80
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE B - INVESTMENTS SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at June 30, 1997 and
1996 (including those designated as available for sale) are shown below.
<TABLE>
<CAPTION>
1997
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES HELD TO MATURITY:
Federal Home Loan Mortgage Corporation
Participation certificates $ 1,106 $ 9 $ (4) $ 1,111
Collateralized mortgage obligations 3,987 - (57) 3,930
Federal National Mortgage Association
Participation certificates 854 5 (6) 853
Collateralized mortgage obligations 4,173 14 (141) 4,046
Government National Mortgage Association
Collateralized mortgage obligations 80 1 - 81
Small Business Administration
Participation certificates 1,046 1 (9) 1,038
Residential Funding Corporation
Collateralized mortgage obligations 189 - (9) 180
Salomon Brothers, Inc.
Collateralized mortgage obligations 28 - - 28
-------- -------- -------- --------
$ 11,463 $ 30 $ (226) $ 11,267
======== ======== ======== ========
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE:
Federal Home Loan Mortgage Corporation
Participation certificates $ 1,881 $ 11 $ (27) $ 1,865
Collateralized mortgage obligations 2,363 - (24) 2,339
Federal National Mortgage Association
Participation certificates 679 8 (7) 680
Collateralized mortgage obligations 9,504 13 (245) 9,272
Santa Barbara Savings and Loan
REMIC participation certificates 737 - (6) 731
The Prudential Home Mortgage Securities
Company, Inc.
Collateralized mortgage obligations 374 8 - 382
-------- -------- -------- --------
$ 15,538 $ 40 $ (309) $ 15,269
======== ======== ======== ========
</TABLE>
79
<PAGE> 81
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE B - INVESTMENTS SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)
<TABLE>
<CAPTION>
1996
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES HELD TO MATURITY:
Federal Home Loan Mortgage Corporation
Participation certificates $ 1,286 $ 8 $ (7) $ 1,287
Collateralized mortgage obligations 3,986 - (94) 3,892
Federal National Mortgage Association
Participation certificates 909 2 (5) 906
Collateralized mortgage obligations 4,293 3 (170) 4,126
Government National Mortgage Association
Collateralized mortgage obligations 126 - (1) 125
Small Business Administration
Participation certificates 1,119 3 (5) 1,117
Residential Funding Corporation
Collateralized mortgage obligations 189 - (9) 180
Salomon Brothers, Inc.
Collateralized mortgage obligations 40 - - 40
-------- -------- -------- --------
$ 11,948 $ 16 $ (291) $ 11,673
======== ======== ======== ========
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE:
Federal Home Loan Mortgage Corporation
Participation certificates $ 1,773 $ 7 $ (25) $ 1,755
Collateralized mortgage obligations 2,793 8 (65) 2,736
Federal National Mortgage Association
Participation certificates 1,805 16 (10) 1,811
Collateralized mortgage obligations 8,392 - (322) 8,070
Santa Barbara Savings and Loan
REMIC participation certificates 937 - (3) 934
The Prudential Home Mortgage Securities
Company, Inc.
Collateralized mortgage obligations 373 1 - 374
-------- -------- -------- --------
$ 16,073 $ 32 $ (425) $ 15,680
======== ======== ======== ========
</TABLE>
80
<PAGE> 82
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE B - INVESTMENTS SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)
The carrying values of mortgage-backed securities at June 30, 1997,
including those designated as available for sale, are shown below by
contractual terms to maturity. Expected maturities will differ from
contractual maturities because borrowers may generally prepay obligations
without prepayment penalties.
<TABLE>
<CAPTION>
CARRYING
VALUE
(In thousands)
<S> <C>
MORTGAGE-BACKED SECURITIES HELD TO MATURITY:
Due within one year $ 1,165
Due after one year through three years 1,417
Due after three years through five years 519
Due after five years through ten years 1,185
Due after ten years through twenty years 5,714
Due after twenty years 1,463
-------
$11,463
=======
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE:
Due within one year $ 146
Due after one year through three years 219
Due after three years through five years 214
Due after five years through ten years 534
Due after ten years through twenty years 8,567
Due after twenty years 5,589
-------
$15,269
=======
</TABLE>
Proceeds from the sale of mortgage-backed securities designated as available
for sale during the years ended June 30, 1997, 1996 and 1995 totaled $1.1
million, $10.8 million and $861,000, respectively, resulting in gross
realized gains of $14,000 and $175,000 during the years ended June 30, 1997
and 1996 and gross realized losses of $26,000 and $2,000 during the years
ended June 30, 1996 and 1995.
81
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TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE B - INVESTMENTS SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)
In December 1995, a one-time reassessment of the Corporation's
mortgage-backed securities designated as held to maturity was undertaken, as
permitted by the FASB's "Special Report" related to implementation of SFAS
No. 115. This special report allowed the Corporation to reclassify any of
its securities, including held to maturity debt securities, without calling
into question the intent of the Corporation to hold debt securities to
maturity in the future. Any transfers from the held to maturity category to
an available for sale classification resulted in unrealized gains or losses
being recognized as a separate component of shareholders' equity, net of
related tax effects. This special one-time reassessment had to occur all at
once within a forty-five day period ending December 31, 1995. In connection
with this special report, management elected to restructure the
Corporation's securities portfolio, and transferred mortgage-backed
securities held to maturity with an amortized cost of $2.4 million to
mortgage-backed securities designated as available for sale in order to
permit more responsiveness to changes in interest rates and other balance
sheet management factors. At the date of transfer, December 21, 1995, the
mortgage-backed securities transferred from a held to maturity
classification had net unrealized market losses of $36,000.
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Residential real estate
One-to-four family residential $ 49,549 $ 35,692
Home equity lines of credit 2,699 2,220
Multi-family residential 3,009 2,933
Construction 2,277 2,512
Nonresidential real estate 10,437 11,561
Land 631 884
Deposit account 250 96
Consumer and other 3 8
-------- --------
68,855 55,906
Less:
Undisbursed portion of loans in
process (1,632) (2,341)
Deferred loan origination fees (162) (157)
Allowance for loan losses (244) (231)
-------- --------
$ 66,817 $ 53,177
======== ========
</TABLE>
82
<PAGE> 84
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE C - LOANS RECEIVABLE (continued)
As depicted above, the Company's lending efforts have historically focused
on one-to-four family residential and multi-family residential real estate
loans, which comprise approximately $55.7 million, or 83% of the total loan
portfolio at June 30, 1997 and approximately $41.8 million, or 79% of the
total loan portfolio at June 30, 1996. Generally, such loans have been
underwritten on the basis of no more than an 80% loan-to-value ratio, which
has historically provided the Company with more than adequate collateral
coverage in the event of default. Nevertheless, the Company, as with any
lending institution, is subject to the risk that residential real estate
values could deteriorate in its primary lending area of southwestern Ohio,
thereby impairing collateral values. However, management is of the belief
that residential real estate values in the Company's primary lending area
are presently stable.
As discussed previously, the Company has sold whole loans and participating
interests in loans in the secondary market, retaining servicing on the loans
sold. Loans sold and serviced for others totaled approximately $41.6
million, $47.6 million and $48.2 million at June 30, 1997, 1996 and 1995,
respectively. During fiscal 1995, the Company repurchased approximately
$702,000 in remaining whole loans originally sold in the secondary market.
In the ordinary course of business, the Company has made loans to some of
its directors, officers and their related business interests. All related
party loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than the normal
risk of collectibility. The aggregate dollar amount of loans outstanding to
officers and directors was approximately $3,000, $8,000 and $12,000 at June
30, 1997, 1996 and 1995, respectively. During the year ended June 30, 1997,
there were no loans disbursed to officers and directors, while principal
repayments of $5,000 were received from officers and directors.
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows for
the years ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 231 $ 220 $ 220
Provision for losses on loans 18 11 -
Charge-off of loans (5) - -
----- ----- -----
Balance at end of year $ 244 $ 231 $ 220
===== ===== =====
</TABLE>
83
<PAGE> 85
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE D - ALLOWANCE FOR LOAN LOSSES (continued)
At June 30, 1997, the Company's allowance for loan losses was comprised
solely of a general loan loss allowance, which is includible as a component
of regulatory risk-based capital.
At June 30, 1997, 1996 and 1995, the Company had nonaccrual and
non-performing loans totaling $403,000, $675,000 and $302,000, respectively.
Interest income which would have been recognized if such nonaccrual loans
had performed pursuant to contractual terms totaled approximately $1,000 and
$4,000 for the years ended June 30, 1997 and 1996. The Company incurred no
loss of interest income due to nonaccrual loans for the year ended June 30,
1995.
The Company had no loans designated as impaired as described in SFAS No. 114
at June 30, 1997 and 1996, nor were any loans so designated during the years
ended June 30, 1997 and 1996.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at June 30 are comprised of the following:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Office buildings and improvements $ 1,884 $ 1,877
Furniture, fixtures and equipment 909 837
------- -------
2,793 2,714
Less accumulated depreciation and amortization (1,014) (861)
------- -------
1,779 1,853
Land 556 555
------- -------
$ 2,335 $ 2,408
======= =======
</TABLE>
84
<PAGE> 86
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE F - DEPOSITS
Deposits consist of the following major classifications at June 30:
<TABLE>
<CAPTION>
DEPOSIT TYPE AND WEIGHTED-
AVERAGE INTEREST RATE 1997 1996
AMOUNT % AMOUNT %
(Dollars in thousands)
<S> <C> <C> <C> <C>
Passbook and club accounts
1997 - 2.78% $ 8,088 9.9%
1996 - 2.78% $ 8,398 11.1%
NOW accounts, including noninterest-
bearing deposits of $1,514 in 1997
and $402 in 1996
1997 - 2.06% 4,228 5.2
1996 - 2.12% 3,148 4.2
Money market deposit accounts
1997 - 3.10% 6,966 8.5
1996 - 3.18% 7,438 9.8
------ ----- ------ -----
Total demand, transaction and passbook deposits 19,282 23.6 18,984 25.1
Certificates of deposit
Original maturities of
Less than 12 months
1997 - 5.60% 12,711 15.6
1996 - 5.14% 10,723 14.2
12 months
1997 - 5.75% 8,832 10.8
1996 - 5.49% 12,501 16.5
15 months
1997 - 5.88% 20,934 25.6
1996 - 5.65% 10,211 13.5
18 months
1997 - 5.62% 1,972 2.4
1996 - 6.42% 4,621 6.1
24 months
1997 - 5.77% 4,095 5.0
1996 - 6.14% 6,017 8.0
30 months
1997 - 6.06% 1,745 2.1
1996 - 5.93% 1,899 2.5
35 months
1997 - 5.93% 1,177 1.4
1996 - 5.58% 176 0.2
48 months
1997 - 5.82% 316 0.4
1996 - 5.65% 489 0.7
60 months
1997 - 5.62% 1,706 2.1
1996 - 5.62% 1,695 2.2
Individual retirement accounts
1997 - 5.96% 9,024 11.0
1996 - 5.85% 8,302 11.0
------ ----- ------ -----
Total certificates of deposit 62,512 76.4 56,634 74.9
------ ----- ------ -----
Total deposits $81,794 100.0% $75,618 100.0%
====== ===== ====== =====
</TABLE>
85
<PAGE> 87
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE F - DEPOSITS (continued)
The aggregate amount of short-term jumbo certificates of deposit with a
minimum denomination of $100,000 was approximately $6.3 million and $5.7
million at June 30, 1997 and 1996, respectively. Deposit amounts within
individual deposit accounts exceeding $100,000 are not federally insured.
During fiscal 1997 and 1996, the Company received and accepted brokered
deposits, which amounted to $4.8 million, or 5.9% of total deposits at June
30, 1997 and $695,000, or 0.9% of total deposits at June 30, 1996.
Interest expense on deposit accounts for the years ended June 30 is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Passbook and club accounts $ 228 $ 245 $ 250
NOW accounts 66 62 78
Money market deposit accounts 227 254 322
Certificates of deposit 3,271 2,875 1,585
------ ------ ------
$3,792 $3,436 $2,235
====== ====== ======
</TABLE>
Maturities of outstanding certificates of deposit are summarized as follows
at June 30:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Less than three months $11,309 $11,892
Three months to six months 12,536 12,790
Six months to one year 25,026 18,026
One to two years 8,921 8,955
Two to three years 3,410 2,081
Three to four years 1,119 1,551
Over four years 191 1,339
------- -------
$62,512 $56,634
======= =======
</TABLE>
86
<PAGE> 88
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at June 30, 1997 by
pledges of certain residential mortgage loans totaling $18.0 million, and
the Company's investment in Federal Home Loan Bank stock are summarized as
follows at June 30:
<TABLE>
<CAPTION>
INTEREST MATURING IN FISCAL
RATE YEAR ENDING IN 1997 1996
(In thousands)
<S> <C> <C> <C>
5.55% - 5.75% 1998 $ 5,326 $2,500
5.80% 2001 2,600 2,600
6.20% - 8.05% 2002 828 78
6.50% 2003 2,500 2,500
7.85% - 8.30% 2005 740 740
8.10% 2006 6 6
------- ------
$12,000 $8,424
======= ======
Weighted-average interest rate 6.05% 6.16%
==== ====
</TABLE>
NOTE H - LOAN OF EMPLOYEE STOCK OWNERSHIP PLAN
As discussed previously in Note A-11, the Corporation established an ESOP
which initially acquired 20,700 shares of common stock in the conversion
offering. In order to fund the acquisition of stock, the ESOP borrowed
$207,000 from an independent third-party lender, payable over a seven year
period. The sole security for the loan is the acquired stock and, while
neither the Company nor the Corporation have guaranteed the loan, future
contributions to retire the loan will be paid to the ESOP from current or
retained earnings. Accordingly, the Corporation has deducted the remaining
unpaid amount of the loan of the ESOP from shareholders' equity with the
corresponding future payments reflected as a liability. At June 30, 1997,
the ESOP held 20,264 shares of the Corporation's common stock, of which
approximately 6,512 shares had not been allocated to participants as of that
date.
87
<PAGE> 89
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE I - FEDERAL INCOME TAXES
The provision for federal income taxes on earnings differs from that
computed at the statutory corporate tax rate for the years ended June 30 as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at the statutory rate $192 $274 $211
Increase (decrease) in taxes resulting from:
Amortization of goodwill 11 11 11
Tax-exempt interest (1) (1) (3)
Exercise of nonqualified stock options (2) - -
Other 1 - 10
--- --- ---
Federal income tax provision per consolidated
financial statements $201 $284 $229
=== === ===
</TABLE>
Deferred federal income tax expense results from temporary differences
between the financial reporting and tax basis of assets and liabilities. A
reconciliation of the sources of the Corporation's temporary differences at
the statutory corporate tax rate to the amount of deferred federal income
tax expense is as follows for the years ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
EFFECT OF TEMPORARY DIFFERENCES AT STATUTORY CORPORATE TAX RATE:
Loan origination fees deferred for financial reporting
but recognized currently for tax purposes $ 30 $ 28 $ 28
Federal Home Loan Bank stock dividends - net of redemptions 17 16 24
Differences between book and tax depreciation 6 16 29
Effect of change from cash to accrual method for tax purposes (1) (18) (31)
Capitalized interest - - 1
Deferred compensation, accrued for financial reporting, deductible
for tax purposes when paid (3) (18) -
Capitalized mortgage servicing rights 4 28 -
Unrealized gains and losses on loans held for sale (9) 10 (1)
General loan losses, deductible for financial reporting,
recognized when finalized for tax purposes (6) (2) -
Percentage of earnings bad debt deduction - 14 21
---- ---- ----
Deferred federal income tax expense per
consolidated financial statements $ 38 $ 74 $ 71
==== ==== ====
</TABLE>
88
<PAGE> 90
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE I - FEDERAL INCOME TAXES (continued)
The composition of the Corporation's net deferred tax liability at June 30
is as follows:
<TABLE>
<CAPTION>
TAXES (PAYABLE) REFUNDABLE ON TEMPORARY 1997 1996
DIFFERENCES AT STATUTORY CORPORATE TAX RATE: (In thousands)
<S> <C> <C>
Deferred tax liabilities:
Federal Home Loan Bank stock dividends $(122) $(105)
Deferred loan origination costs (19) -
Book/tax depreciation differences (117) (111)
Capitalized interest (1) (1)
Deferred premium on loans sold (1) (1)
Capitalized mortgage servicing rights (32) (28)
Cash vs. accrual basis of accounting - (1)
Unrealized losses on loans held for sale - (9)
Percentage of earnings bad debt deduction (165) (165)
---- ----
Total deferred tax liabilities (457) (421)
Deferred tax assets:
Deferred loan origination fees - 11
Deferred compensation 20 17
Unrealized losses on securities designated as
available for sale 91 134
General loan loss allowance 83 77
---- ----
Total deferred tax assets 194 239
---- ----
Net deferred tax liability $(263) $(182)
==== ====
</TABLE>
The Company was allowed a special bad debt deduction based on a percentage
of earnings, generally limited to 8% of otherwise taxable income, or the
amount of qualifying and nonqualifying loans outstanding and subject to
certain limitations based on aggregate loans and deposit account balances at
the end of the year. The cumulative tax bad debt reserve in excess of book
allowance for loan losses for which a tax liability had not been recorded
totaled approximately $1.1 million at June 30, 1997. If the amounts that
qualify as deductions for federal income taxes are later used for purposes
other than bad debt losses, including distributions in liquidation, such
distributions will be subject to federal income taxes at the then current
corporate income tax rate. The approximate amount of the unrecognized
deferred tax liability relating to the cumulative bad debt deduction is
$377,000 at June 30, 1997.
Legislation repealing the percentage of earnings bad debt reserve provisions
of the Internal Revenue Code previously applicable to qualifying thrift
institutions was enacted into law on August 20, 1996. The legislation, which
is part of The Small Business Job Protection Act of 1996 (the "Jobs Act"),
requires all thrift institutions to pay tax on or recapture their excess bad
debt reserves accumulated since 1988. The legislation substantially
equalizes the taxation of banks and thrift institutions, but it protects
thrifts from taxes on bad debt reserves established prior to 1988. Under the
law in effect prior to the enactment of the Jobs Act, a thrift institution
annually could elect to deduct bad debts under either (i) the percentage of
taxable
89
<PAGE> 91
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE I - FEDERAL INCOME TAXES (continued)
income method applicable only to thrift institutions, or (ii) the experience
method that was also available to small banks. For tax years beginning
before July 1, 1996, the Company used the percentage of taxable income
method because that method provided a higher bad debt deduction than the
experience method. The Jobs Act eliminates the percentage of taxable income
method for deducting bad debt reserves for all thrifts for tax years
beginning after December 31, 1995 (July 1, 1996, as to the Corporation). All
thrifts are required to recapture or pay tax on all or a portion of their
bad debt reserves added since the base year (i.e., the last taxable year
beginning before January 1, 1988). The amount of reserves to be recaptured
is dependent upon whether or not an institution is a "large institution"
(i.e., assets exceed $500 million) under the bad debt rules for commercial
banks. Large institutions have to switch to the specific charge-off method.
Institutions with assets of $500 million or less, such as the Company, are
permitted to use the experience method to compute their bad debt deduction.
An institution is required to recapture the excess of its bad debt reserves
over the balance of the bad debt reserves outstanding at the end of the base
year ratably over a six year period beginning with the first taxable year
after December 31, 1995. Institutions can postpone the payment of these
taxes for up to two years if they meet a residential loan requirement during
tax years beginning before January 1, 1998. Generally, to meet the
residential loan requirement, an institution's mortgage lending activity
must equal or exceed its average mortgage lending activity for the six
taxable years preceding 1996, adjusted for inflation.
SFAS No. 109 requires thrift institutions to maintain a deferred tax
liability for the excess of the bad debt reserves at year end over the bad
debt reserves outstanding at the end of the base year. As a result, there
will be no impact on the Corporation's provision for federal income taxes
resulting from the recapture of the excess reserves. As the tax on the
recapture is paid, the Corporation will reduce its deferred tax liability
accordingly. For the Corporation, this excess bad debt reserve amounts to
approximately $486,000 at June 30, 1997. The approximate amount of the
deferred tax liability relating to the excess cumulative bad debt reserve is
$165,000 at June 30, 1997. This amount will have to be ratably paid out over
a six year period beginning most likely in fiscal 1999, as the Corporation
is expected to meet the residential loan requirement so as to exclude itself
from recapturing its excess bad debt reserves in fiscal 1997 and 1998.
The repeal of the thrift bad debt reserve provisions also means that the
merger of a thrift into a commercial bank will not trigger the recapture of
the base year reserve. As a result, it will no longer be necessary to
recognize additional financial statement income tax expense related to the
recapture of the base year reserve. Recapture of pre-1988 reserves resulting
from certain distributions, such as dividends and stock repurchases, or
because an institution ceases to qualify as a bank, are not exempt under the
new legislation.
90
<PAGE> 92
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE J - COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers including commitments to extend credit. Such commitments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the statement of financial condition. The contract
or notional amounts of the commitments reflect the extent of the Company's
involvement in such financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as those utilized for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments may
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. In extending commitments,
the Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if it is deemed necessary by the
Company upon extension of credit, is based on management's credit evaluation
of the counterparty. Collateral on loans may vary but the preponderance of
loans granted generally include a mortgage interest in real estate as
collateral.
At June 30, 1997, the Company had total outstanding commitments of
approximately $1.6 million to originate residential one-to-four family real
estate loans on the basis of at least an 80% loan-to-value ratio, of which
$400,000 were comprised of adjustable-rate loans at interest rates of 9.50%,
and $1.2 million were comprised of fixed-rate loans at interest rates
ranging from 7.63% to 9.50%. The Company also had total outstanding
commitments of approximately $2.3 million to originate nonresidential real
estate loans on the basis of at least an 80% loan-to-value ratio. Such
commitments consisted solely of one adjustable-rate loan, secured by a
wedding reception and banquet facility, at an interest rate of 9.25%, of
which $1.3 million of the loan was committed to be sold on a participating
basis to another financial institution at June 30, 1997, due to loans-to-one
borrower limitations. Additionally, the Company had unused lines of credit
under home equity loans of approximately $2.3 million at June 30, 1997 and
unused collateralized lines of credit secured by nonresidential real estate
of $69,000. In the opinion of management, all loan commitments equaled or
exceeded prevalent market interest rates as of June 30, 1997, and such
commitments have been underwritten on the same basis as that of the existing
loan portfolio. Management believes that all loan commitments are able to be
funded through cash flow from operations and existing excess liquidity. Fees
received in connection with these commitments have not been recognized in
earnings.
The Company has a $5.0 million line of credit facility with the Federal Home
Loan Bank of Cincinnati, which the Company entered into during fiscal 1997.
There was $800,000 outstanding under such facility at June 30, 1997.
91
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TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE J - COMMITMENTS AND CONTINGENT LIABILITIES (continued)
The Company was committed under a data processing services agreement in the
aggregate amount of approximately $93,000 at June 30, 1997. The future
minimum annual payments expected to be incurred under the contract are as
follows:
YEAR ENDING JUNE 30, (In thousands)
1998 $93
==
At June 30, 1997, the Company was also committed under a master data
processing agreement with Midwest Payment Systems ("MPS") primarily to be a
member of the "Jeanie" network in order to provide electronic banking
services to its customers via automatic teller machines ("ATMs"). During
fiscal 1997, the Company amended its original agreement with MPS by
extending the initial five year term of the contract by an additional five
years in lieu of certain cost concessions by MPS. The future minimum annual
payments expected to be incurred under the contract are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, (In thousands)
<S> <C>
1998 $ 24
1999 25
2000 25
2001 25
2002 25
2003 and years thereafter 48
----
Total future minimum payments expected $172
====
</TABLE>
Additionally, the Company was committed under a financial institution
venture agreement with MPS at June 30, 1997. Under the agreement, MPS and
the Company agree to cooperatively provide for the placement and operation
of ATMs at certain of the Company's office locations. In accordance with the
original terms of the agreement, all revenues generated and expenses
incurred in operating the ATMs were shared equally between MPS and the
Company. During fiscal 1997, however, the venture agreement between MPS and
the Company was amended to extend the initial five year term an additional
two years and for both parties to share equally in the monthly net profits
of the joint venture over the first $100, which must first be paid to MPS.
In lieu of these changes in the agreement, the Company was given certain
cost concessions regarding installation costs of the ATMs. The amended term
of this venture agreement is for seven years and expires in fiscal 2003.
92
<PAGE> 94
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE K - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL
The Company is subject to minimum regulatory capital standards promulgated
by the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on its financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's
capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
The minimum capital standards of the OTS generally require the maintenance
of regulatory capital sufficient to meet each of three tests, hereinafter
described as the tangible capital requirement, the core capital requirement
and the risk-based capital requirement. The tangible capital requirement
provides for minimum tangible capital (defined as shareholders' equity less
all intangible assets) equal to 1.5% of adjusted total assets. The core
capital requirement provides for minimum core capital (tangible capital plus
certain forms of supervisory goodwill and other qualifying intangible
assets) equal to 3.0% of adjusted total assets. The risk-based capital
requirement currently provides for the maintenance of core capital plus
general loan loss allowances equal to 8.0% of risk-weighted assets as of
June 30, 1997. In computing risk-weighted assets, the Company multiplies the
value of each asset on its statement of financial condition by a defined
risk-weighted factor, e.g. , one-to-four family residential loans carry a
risk-weighted factor of 50%.
The OTS has proposed an amendment to the core capital requirement that would
increase the minimum requirement to a range of 4.0% - 5.0% of adjusted total
assets for substantially all savings associations. Management anticipates no
material change to the Company's excess regulatory capital position if the
proposal is adopted in its present form.
As of June 30, 1997, management believes that the Company met all capital
adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
------------- -------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tangible Capital $7,437 7.3% greater than or equal to $1,537 greater than or equal to 1.5%
Core Capital $7,437 7.3% greater than or equal to $3,074 greater than or equal to 3.0%
Risk-based Capital $7,681 14.8% greater than or equal to $4,138 greater than or equal to 8.0%
<CAPTION>
TO BE "WELL-
CAPITALIZED" UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
--------------------------------------------------------------------
AMOUNT RATIO
<S> <C> <C>
Tangible Capital greater than or equal to $5,123 greater than or equal to 5.0%
Core Capital greater than or equal to $6,148 greater than or equal to 6.0%
Risk-based Capital greater than or equal to $5,173 greater than or equal to 10.0%
</TABLE>
93
<PAGE> 95
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE K - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (continued)
The Company's management believes that, under the current regulatory capital
regulations, the Company will continue to meet its minimum capital
requirements in the foreseeable future. However, events beyond the control
of the Company, such as increased interest rates or a downturn in the
economy in the Company's market area, could adversely affect future earnings
and, consequently, the ability to meet future minimum regulatory capital
requirements.
The deposit accounts of the Company and of other savings associations are
insured by the Federal Deposit Insurance Corporation ("FDIC") in the Savings
Association Insurance Fund ("SAIF"). The reserves of the SAIF were below the
level required by law, because a significant portion of the assessments paid
into the fund were used to pay the cost of prior thrift failures. The
deposit accounts of commercial banks are insured by the FDIC in the Bank
Insurance Fund ("BIF"), except to the extent such banks have acquired SAIF
deposits. Both the SAIF and the BIF are required by law to attain and
thereafter maintain a reserve ratio of 1.25% of insured deposits. The
reserves of the BIF met the level required by law in May 1995. As a result
of the respective reserve levels of the funds, deposit insurance assessments
paid by healthy savings associations exceeded those paid by healthy
commercial banks by approximately $.19 per $100 in deposits in 1995. In
1996, no BIF assessments were required for healthy commercial banks except
for a $2,000 minimum fee. This premium disparity had a negative competitive
impact on the Company and other institutions in the SAIF.
The underfunded status of the SAIF had resulted in the introduction of
federal legislation intended to, among other things, recapitalize the SAIF
and address the resulting premium disparity. On September 30, 1996,
legislation containing provisions for (i) recapitalizing the SAIF, (ii)
providing for the eventual merger of the SAIF with the BIF and (iii)
reallocating payment of the annual $780 million Financing Corporation
("FICO") bond obligation was enacted into law. These provisions, entitled
the Deposit Insurance Funds Act of 1996 ("DIFA"), imposed a one-time special
assessment on institutions holding SAIF deposits at March 31, 1995. The
special assessment was imposed to capitalize the SAIF up the statutorily
prescribed 1.25% designated reserve ratio and was determined at 65.7 basis
points per $100 of insured deposits. Beginning January 1, 1997, SAIF members
were to have the same risk-based regular assessment schedule as BIF members
- 0 to 27 basis points. Thus, for most well-capitalized institutions like
the Company, there has been no regular insurance premium assessed at the
present time. However, the enacted legislation does include a formula for
sharing payment in the FICO obligation between members of the BIF and the
SAIF. From January 1, 1997 until December 31, 1999 under the formula, the
FICO assessment rate for BIF-insured institutions is approximately 1/5th of
the FICO assessment rate for SAIF-insured institutions. Thus, in addition to
the regular deposit insurance assessment (if any), BIF-insured institutions
are assessed approximately $.013 per $100 in deposits per year to cover the
annual FICO payments while SAIF-insured institutions are assessed
approximately $.064 per $100 in deposits per year to cover the annual FICO
payments. Starting in the year 2000 until the FICO bonds are retired in
2019, banks and thrifts will pay the FICO assessment on a pro rata basis
which is estimated to be about 2.4 basis points per $100 of insured deposits
for all institutions. Finally, the legislation provides for the BIF and the
recapitalized SAIF to be merged on January 1, 1999 into a new Deposit
Insurance Fund ("DIF"), provided that no insured depository institution is a
savings association on that date.
94
<PAGE> 96
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE K - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (continued)
The special assessment was payable to the FDIC on November 27, 1996, and
because the legislation was signed into law on September 30, the special
assessment was recorded on the Corporation's books as an expense on
September 30, 1996. The Company had $55.8 million in deposits at March 31,
1995. With the special assessment at 65.7 basis points per $100 of insured
deposits, the Company was required to pay $366,000 on a pre-tax basis. This
assessment was tax deductible, and it reduced net earnings and capital by
$242,000 for the year ended June 30, 1997. With the passage of this
legislation, the annual SAIF premiums are expected to be reduced by
approximately $83,000 after consideration of the tax effects. By the year
2000, the one-time special assessment is expected to be made up through the
reduction of SAIF premiums. While the one-time special assessment had a
significant impact on fiscal 1997 earnings, the resulting lower annual
premiums will benefit future years' earnings.
NOTE L - CONDENSED FINANCIAL STATEMENTS OF TOWNE FINANCIAL
CORPORATION
The following condensed financial statements summarize the financial
position of Towne Financial Corporation as of June 30, 1997 and 1996, and
the results of its operations and its cash flows for each of the three years
ended June 30, 1997, 1996 and 1995.
Towne Financial Corporation
STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash $ 13 $ 32
Investment in The Blue Ash Building and
Loan Company 7,630 7,113
Organizational costs - net of amortization - 4
Prepaid expenses and other assets 13 59
------- -------
Total assets $ 7,656 $ 7,208
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and other liabilities $ 18 $ 51
Shareholders' equity
Common shares 209 208
Additional paid-in capital 4,966 4,961
Retained earnings 2,701 2,336
Less required contributions for shares acquired
by ESOP (60) (89)
Unrealized losses on securities designated as
available for sale - net of related tax effects (178) (259)
------- -------
Total shareholders' equity 7,638 7,157
------- -------
Total liabilities and shareholders' equity $ 7,656 $ 7,208
======= =======
</TABLE>
95
<PAGE> 97
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE L - CONDENSED FINANCIAL STATEMENTS OF TOWNE FINANCIAL
CORPORATION (continued)
Towne Financial Corporation
STATEMENTS OF EARNINGS
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C>
Revenue
Dividends received from subsidiary $- $ 56 $-
Equity in undistributed earnings of subsidiary 407 492 425
----- ----- -----
Total revenue 407 548 425
Expenses
Management fees 12 12 12
Amortization of organizational costs 4 5 4
Other operating 51 63 29
----- ----- -----
Total expenses 67 80 45
----- ----- -----
Net earnings before tax credits 340 468 380
Federal income tax credits (25) (53) (11)
----- ----- -----
Net earnings $ 365 $ 521 $ 391
===== ===== =====
</TABLE>
Towne Financial Corporation
STATEMENTS OF CASH FLOWS
Years ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings for the year $ 365 $ 521 $ 391
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Undistributed earnings of subsidiary (407) (492) (425)
Amortization of organizational costs 4 5 4
Increases (decreases) in cash due to changes in:
Prepaid expenses and other assets 46 (59) (6)
Accounts payable and other liabilities (33) 47 1
----- ----- -----
Net cash provided by (used in) operating activities (25) 22 (35)
Cash flows provided by financing activities:
Proceeds from the exercise of stock options 6 6 6
----- ----- -----
Net increase (decrease) in cash and cash equivalents (19) 28 (29)
Cash and cash equivalents at beginning of year 32 4 33
----- ----- -----
Cash and cash equivalents at end of year $ 13 $ 32 $ 4
===== ===== =====
</TABLE>
96
<PAGE> 98
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE L - CONDENSED FINANCIAL STATEMENTS OF TOWNE FINANCIAL
CORPORATION (continued)
The Corporation's activities during fiscal 1997, 1996 and 1995 were solely
limited to holding the Company's stock. There was no payment of dividends to
the shareholders during fiscal 1997, 1996 and 1995. As previously discussed
in Note A-13, the Board of Directors of the Corporation declared on August
20, 1997, a first ever quarterly cash dividend of $.10 per share to be paid
September 30, 1997, to all shareholders of record as of September 15, 1997.
As a condition to regulatory approval of the stock conversion and
reorganization to the holding company form of organization, the Company
agreed to limit the amount of dividends payable to the Corporation.
Regulations of the OTS impose limitations on the payment of dividends and
other capital distributions by savings associations. Under such regulations,
a savings association that, immediately prior to, and on a pro forma basis
after giving effect to, a proposed capital distribution, has total capital
(as defined by OTS regulations) that is equal to or greater than the amount
of its fully phased-in capital requirement is generally permitted without
OTS approval (but subsequent to 30 days prior notice to the OTS of the
planned dividend) to make capital distributions during a calendar year in
the amount of up to the greater of (i) 100% of its net earnings to date
during the year plus an amount equal to one-half of the amount by which its
total capital-to-assets ratio exceeded its fully phased-in capital-to-assets
ratio at the beginning of the year or (ii) 75% of its net earnings for the
most recent four quarters. Pursuant to such OTS dividend regulations, the
Company had the ability to pay dividends of approximately $2.1 million to
the Corporation at June 30, 1997.
NOTE M - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Corporation's consolidated quarterly
results for the years ended June 30, 1997 and 1996. Certain amounts, as
previously reported, have been reclassified to conform to the 1997
presentation.
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIODS ENDED
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1997 1997
(In thousands, except for share data)
<S> <C> <C> <C> <C>
Total interest income $ 1,714 $ 1,778 $ 1,805 $ 1,895
Total interest expense 1,079 1,101 1,112 1,169
------- ------- ------- -------
Net interest income 635 677 693 726
Provision for losses on loans 5 4 4 5
Other income 68 64 40 40
General, administrative and other expense 864 495 485 515
------- ------- ------- -------
Earnings (loss) before income taxes (credits) (166) 242 244 246
Federal income taxes (credits) (54) 84 86 85
------- ------- ------- -------
Net earnings (loss) $ (112) $ 158 $ 158 $ 161
======= ======= ======= =======
Earnings (loss) per share:
On common and common
equivalent shares $ (.52) $ .73 $ .74 $ .75
======= ======= ======= =======
On a fully diluted basis $ (.52) $ .73 $ .74 $ .71
======= ======= ======= =======
</TABLE>
97
<PAGE> 99
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1997, 1996 and 1995
NOTE M - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (continued)
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIODS ENDED
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1996 1996
(In thousands, except for share data)
<S> <C> <C> <C> <C>
Total interest income $1,525 $1,592 $1,623 $1,670
Total interest expense 952 1,019 1,031 1,061
------ ------ ------ ------
Net interest income 573 573 592 609
Provision for losses on loans - - 6 5
Other income 51 182 162 75
General, administrative and other expense 475 479 499 548
------ ------ ------ ------
Earnings before income taxes 149 276 249 131
Federal income taxes 53 97 87 47
------ ------ ------ ------
Net earnings $ 96 $ 179 $ 162 $ 84
====== ====== ====== ======
Earnings per share:
On common and common
equivalent shares $ .46 $ .86 $ .78 $ .41
====== ====== ====== ======
On a fully diluted basis $ .46 $ .86 $ .78 $ .41
====== ====== ====== ======
</TABLE>
98
<PAGE> 100
CORPORATE INFORMATION
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
TOWNE FINANCIAL CORPORATION
BOARD OF DIRECTORS
Neil S. Strawser, Director and Chairman of the Board
Ralph E. Heitmeyer, Director and President
William S. Siders, Director and Executive Vice President
Herb L. Krombholz, Director and Vice President
William T. Thornell, Director and Vice President
EXECUTIVE OFFICERS
William S. Siders, Executive Vice President
William T. Thornell, Vice President
Joseph L. Michel, Vice President, Treasurer and
Chief Financial Officer
Mildred Martin, Secretary
THE BLUE ASH BUILDING AND LOAN COMPANY
BOARD OF DIRECTORS
Neil S. Strawser, Director and Chairman of the Board
Ralph E. Heitmeyer, Director and President
William S. Siders, Director, Executive Vice President and
Managing Officer
Herb L. Krombholz, Director and Vice President
William T. Thornell, Director, Vice President and Chief
Lending Officer
EXECUTIVE OFFICERS
William S. Siders, Executive Vice President and
Managing Officer
William T. Thornell, Vice President and Chief Loan Officer
Joseph L. Michel, Vice President, Treasurer and
Chief Financial Officer
Mildred Martin, Secretary
Director Emeritus: John M. Kuhnell
Executive Offices: Towne Financial Corporation
4811 Cooper Road
Blue Ash, Ohio 45242
99
<PAGE> 101
Branch Locations: MAIN OFFICE
4811 Cooper Road
Blue Ash, Ohio 45242
(513) 791-1870
AMELIA OFFICE
1187 Ohio Pike
Amelia, Ohio 45102
(513) 753-7283
BEECHMONT OFFICE
8620 Beechmont Avenue
Cincinnati, Ohio 45255
(513) 474-4977
MASON OFFICE
6501 Mason-Montgomery Road
Mason, Ohio 45040
(513) 459-9660
Independent Auditors: Grant Thornton LLP
Cincinnati, Ohio
Legal Counsel: Cors & Bassett
Cincinnati, Ohio
Shareholder Services: Towne Financial acts as its own
transfer agent and registrar.
Annual Meeting: The Annual Meeting of Shareholders
of Towne Financial Corporation will
be held on October 29, 1997, at
10:00 a.m., Eastern Standard Time,
at the main office of Blue Ash, 4811
Cooper Road, Blue Ash, Ohio 45242.
Shareholders are cordially invited
to attend. A formal notice of the
meeting, together with a proxy
statement and a proxy card,
accompanies this Annual Report.
Form 10-KSB Annual
Report: A copy of Towne Financial's Annual
Report on Form 10-KSB, as
filed with the Securities
and Exchange Commission,
will be available at no
charge to shareholders upon
request
to:
Towne Financial Corporation
4811 Cooper Road
Blue Ash, Ohio 45242
ATTN: Joseph L. Michel, Chief Financial Officer
100
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000880052
<NAME> TOWNE FINANCIAL CORP/OH
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 2,310
<INT-BEARING-DEPOSITS> 205
<FED-FUNDS-SOLD> 200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,269
<INVESTMENTS-CARRYING> 12,862
<INVESTMENTS-MARKET> 12,666
<LOANS> 66,817
<ALLOWANCE> 244
<TOTAL-ASSETS> 102,558
<DEPOSITS> 81,794
<SHORT-TERM> 5,356
<LIABILITIES-OTHER> 1,066
<LONG-TERM> 6,704
<COMMON> 209
0
0
<OTHER-SE> 7,429
<TOTAL-LIABILITIES-AND-EQUITY> 102,558
<INTEREST-LOAN> 5,232
<INTEREST-INVEST> 1,848
<INTEREST-OTHER> 112
<INTEREST-TOTAL> 7,192
<INTEREST-DEPOSIT> 3,792
<INTEREST-EXPENSE> 4,461
<INTEREST-INCOME-NET> 2,731
<LOAN-LOSSES> 18
<SECURITIES-GAINS> 14
<EXPENSE-OTHER> 2,359
<INCOME-PRETAX> 566
<INCOME-PRE-EXTRAORDINARY> 566
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 365
<EPS-PRIMARY> 1.70
<EPS-DILUTED> 1.66
<YIELD-ACTUAL> 2.99
<LOANS-NON> 26
<LOANS-PAST> 377
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 231
<CHARGE-OFFS> 5
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 244
<ALLOWANCE-DOMESTIC> 244
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
