<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
Commission File No. 0-20144
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TOWNE FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
OHIO 31-1334563
- ------------------ ----------------------
(State or other (I.R.S. Employer
jurisdiction of Identification
of incorporation Number)
or organization)
4811 COOPER ROAD
BLUE ASH, OHIO 45242
- --------------------- --------------------
(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code: (513) 791-1870
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- -------
As of February 3, 1997, the latest practicable date, 208,500 shares of the
registrant's common shares, $1.00 par value, were issued and outstanding.
Transitional Small Business Disclosure Format: Yes No X
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Page 1 of 41
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TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial 3
Condition
Consolidated Statements of Earnings 5
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 10
Management's Discussion and Analysis 14
of Financial Condition and Results of
Operations
PART II - OTHER INFORMATION 40
SIGNATURES 41
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<TABLE>
<CAPTION>
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
DECEMBER 31, JUNE 30,
ASSETS 1996 1996
----------- ------
<S> <C> <C>
Cash and due from banks $ 1,125 $ 1,645
Federal funds sold 1,200 1,900
Interest-bearing deposits in other financial
institutions 80 66
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Cash and cash equivalents 2,405 3,611
Certificates of deposit in other financial
institutions 91 98
Investment securities held to maturity - at
amortized cost, approximate market value of
of $797 and $1,282 at December 31, 1996 and
June 30, 1996 800 1,300
Mortgage-backed securities designated as
available for sale - at market, amortized cost
of $16,194 and $16,073 at December 31, 1996
and June 30, 1996 15,882 15,680
Mortgage-backed securities held to maturity - at
amortized cost, approximate market value of
$11,604 and $11,673 at December 31, 1996 and
June 30, 1996 11,804 11,948
Loans held for sale - at lower of cost or market 1,943 1,894
Loans receivable - net 58,274 53,177
Office premises and equipment - at depreciated cost 2,367 2,408
Federal Home Loan Bank stock - at cost 717 692
Accrued interest receivable on loans 489 543
Accrued interest receivable on mortgage-backed
securities 171 175
Accrued interest receivable on investments and
interest-bearing deposits 15 20
Goodwill and other intangible assets - net of
accumulated amortization 386 405
Prepaid expenses and other assets 174 244
Prepaid federal income taxes 89 19
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TOTAL ASSETS $95,607 $92,214
======= =======
</TABLE>
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<TABLE>
<CAPTION>
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (CONTINUED)
(In thousands, except share data)
DECEMBER 31, JUNE 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1996
------------ --------
<S> <C> <C>
Deposits $ 75,516 $ 75,618
Advances from the Federal Home Loan Bank 11,575 8,424
Loan of Employee Stock Ownership Plan 74 89
Advances by borrowers for taxes and insurance 479 229
Accounts payable on mortgage loans serviced for
others 338 340
Accrued interest payable 33 36
Other liabilities 71 139
Deferred federal income taxes 250 182
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Total liabilities 88,336 85,057
Commitments -- --
Shareholders' equity
Preferred shares - 250,000 shares of $1.00
par value authorized; no shares issued
and outstanding -- --
Common shares - 2,250,000 shares of $1.00
par value authorized; 208,000 shares issued
and outstanding at December 31, 1996 and
June 30, 1996 208 208
Additional paid-in capital 1,675 1,675
Retained earnings - substantially restricted 5,668 5,622
Less required contributions for shares acquired
by Employee Stock Ownership Plan (ESOP) (74) (89)
Unrealized losses on securities designated as
available for sale - net of related tax effects (206) (259)
-------- --------
Total shareholders' equity 7,271 7,157
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 95,607 $ 92,214
======== ========
</TABLE>
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<TABLE>
<CAPTION>
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
For the three and six months ended December 31,
(In thousands, except per share data)
Six months ended Three months ended
December 31, December 31,
------------------ -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Loans $ 2,503 $ 2,167 $ 1,286 $ 1,106
Mortgage-backed securities 886 859 440 440
Investment securities 47 27 23 16
Interest-bearing deposits and other 56 64 29 30
------- ------- ------- -------
Total interest income 3,492 3,117 1,778 1,592
Interest expense
Deposits 1,868 1,632 934 848
Borrowings 312 339 167 171
------- ------- ------- -------
Total interest expense 2,180 1,971 1,101 1,019
------- ------- ------- -------
Net interest income 1,312 1,146 677 573
Provision for losses on loans 9 -- 4 --
------- ------- ------- -------
Net interest income after provision
for losses on loans 1,303 1,146 673 573
Other income
Loan servicing fees 51 58 23 29
Gain on sale of mortgage loans 65 82 36 69
Gain on mortgage-backed securities
transactions -- 74 -- 74
Loss on sale of real estate acquired
through foreclosure (1) -- (1) --
Service fees, charges and other operating 17 19 6 10
------- ------- ------- -------
Total other income 132 233 64 182
General, administrative and other expense
Employee compensation and benefits 493 479 253 249
Occupancy and equipment 168 175 83 83
Data processing 49 46 24 23
Federal deposit insurance premiums 442 66 33 34
Franchise taxes 46 38 23 19
Advertising 40 46 19 17
Amortization of goodwill and other
intangible assets 19 19 9 9
Other operating 102 85 51 45
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Total general, administrative and
other expense 1,359 954 495 479
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Earnings before income taxes
(subtotal carried forward) 76 425 242 276
</TABLE>
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<TABLE>
<CAPTION>
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS (CONTINUED)
For the three and six months ended December 31,
(In thousands, except per share data)
Six months ended Three months ended
December 31, December 31,
---------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings before income taxes
(subtotal brought forward) $ 76 $425 $242 $276
Federal income taxes
Current (10) 131 75 91
Deferred 40 19 9 6
---- ---- ---- ----
Total federal income taxes 30 150 84 97
---- ---- ---- ----
NET EARNINGS $ 46 $275 $158 $179
==== ==== ==== ====
EARNINGS PER SHARE $.22 $1.32 $.76 $.86
==== ==== ==== ====
</TABLE>
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<TABLE>
<CAPTION>
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended December 31,
(In thousands)
1996 1995
---- ----
<S> <C> <C>
Cash flows provided by (used in) operating
activities:
Net earnings for the period $ 46 $ 275
Adjustments to reconcile net earnings to
net cash provided by (used in) operating
activities:
Amortization of premiums and accretion of
discounts on mortgage-backed securities, net 11 9
Gain on mortgage-backed securities
transactions -- (74)
Provision for losses on loans 9 --
Gain on sale of mortgage loans (65) (82)
Amortization of deferred loan origination fees (21) (18)
Loans originated for sale in the secondary market (864) (5,747)
Proceeds from sale of loans in the secondary
market 1,281 3,160
Depreciation and amortization 75 77
Loss on sale of real estate acquired through
foreclosure 1 --
Federal Home Loan Bank stock dividends (25) (23)
Amortization of goodwill and other intangible
assets 19 19
Increases (decreases) in cash due to changes in:
Accrued interest receivable on loans 54 (34)
Accrued interest receivable on mortgage-backed
securities 4 (12)
Accrued interest receivable on investments
and interest-bearing deposits 5 (6)
Prepaid expenses and other assets 70 166
Accrued interest payable (3) --
Other liabilities (68) (19)
Federal income taxes
Current (70) 11
Deferred 40 19
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Net cash provided by (used in) operating
activities 499 (2,279)
</TABLE>
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<TABLE>
<CAPTION>
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended December 31,
(In thousands)
1996 1995
---- ----
<S> <C> <C>
Cash flows provided by (used in) investing activities:
Proceeds from maturities of investment securities
held to maturity $ 210 $ --
Proceeds from called investment securities held
to maturity 400 --
Purchase of investment securities held to maturity (110) (400)
Proceeds from sale of mortgage-backed securities
designated as available for sale -- 1,560
Purchase of mortgage-backed securities designated as
available for sale (608) (3,826)
Purchase of mortgage-backed securities held to
maturity (349) (680)
Principal repayments on mortgage-backed securities
designated as:
Available for sale 490 135
Held to maturity 479 574
Loan disbursements (12,666) (9,487)
Loan principal repayments 7,179 5,184
Purchase of office premises and equipment (34) (31)
Decrease in certificates of deposit in other
financial institutions - net 7 100
-------- --------
Net cash used in investing activities (5,002) (6,871)
Cash flows provided by (used in) financing activities:
Issuance of and credits to deposit accounts 40,939 36,361
Withdrawals from deposit accounts (41,041) (27,355)
Proceeds from Federal Home Loan Bank advances 3,151 7,706
Repayments of Federal Home Loan Bank advances -- (5,100)
Repayments of obligations for securities sold
under agreements to repurchase -- (3,504)
Advances by borrowers for taxes and insurance 250 274
Accounts payable on mortgage loans serviced for
others (2) 24
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Net cash provided by financing activities 3,297 8,406
-------- --------
Net decrease in cash and cash equivalents (1,206) (744)
Cash and cash equivalents at beginning of period 3,611 3,513
-------- --------
Cash and cash equivalents at end of period $ 2,405 $ 2,769
======== ========
</TABLE>
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<TABLE>
<CAPTION>
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended December 31,
(In thousands)
1996 1995
---- ----
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 60 $ 120
======= ======
Interest on deposits and borrowings $ 2,183 $1,971
======= ======
Supplemental disclosure of noncash investing
activities:
Transfers from loans receivable to real estate
acquired through foreclosure $ 108 $ --
======= ======
Loans disbursed to finance the sale of
real estate acquired through foreclosure $ 107 $ --
======= ======
Transfers of mortgage-backed securities from
held to maturity to available for sale
classification $ -- $2,371
======= ======
Unrealized gains on securities designated
as available for sale - net of related
tax effects $ 53 $ 85
======= ======
</TABLE>
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<PAGE> 10
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six month periods ended December 31, 1996 and 1995
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 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.
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-QSB and, therefore, do not
include information or footnotes necessary for a complete presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. However, all adjustments (consisting
of only normal recurring accruals) which, in the opinion of management, are
necessary for a fair presentation of the consolidated financial statements have
been included. The results of operations for the three and six month periods
ended December 31, 1996 and 1995 are not necessarily indicative of the results
which may be expected for an entire fiscal year.
2. Principles of Consolidation
---------------------------
Towne Financial is a unitary savings and loan holding company. Since
the date of its incorporation, Towne Financial's activities have been limited
primarily to holding the common stock of its wholly-owned subsidiary, The Blue
Ash Building and Loan Company ("Blue Ash" or the "Company").
The accompanying consolidated financial statements include the accounts
of Towne Financial and Blue Ash. Future references to Towne Financial or Blue
Ash are utilized herein as the context
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TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and six month periods ended December 31, 1996 and 1995
2. Principles of Consolidation (continued)
---------------------------
requires. All significant intercompany balances and transactions
have been eliminated in the accompanying consolidated financial
statements.
3. Effects of Recent Accounting Pronouncements
-------------------------------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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. This Statement
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 its 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 an institution to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("Opinion 25"). Under the fair value based method, compensation cost
is measured at the
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TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and six month periods ended December 31, 1996 and 1995
3. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------
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 Opinion 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 Opinion 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 and is effective for years beginning after December 15, 1995 (fiscal 1997,
as to Towne Financial). Earlier application was permitted. Management has
determined that Towne Financial will continue to account for stock-based
compensation pursuant to Opinion 25, and, therefore, adoption of SFAS No. 123 on
July 1, 1996 did not have a material effect on Towne Financial's consolidated
financial position or results of operations.
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, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, the
financial components approach,
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TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and six month periods ended December 31, 1996 and 1995
3. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------
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. 121 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.
4. Earnings per Share
------------------
Earnings per share for the three and six month periods ended December
31, 1996 and 1995 have been computed based on 208,000 and 207,500
weighted-average shares outstanding during the respective periods. Fully-diluted
earnings per share has not been presented as there was no material dilutive
effect attendant to Towne Financial's Stock Option and Incentive Plan during the
respective periods.
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<PAGE> 14
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Discussion of Financial Condition Changes from June 30, 1996 to
- ---------------------------------------------------------------
December 31, 1996
- -----------------
At December 31, 1996, Towne Financial's consolidated assets totaled
$95.6 million, representing an increase of $3.4 million, or 3.7%, over the $92.2
million asset level at June 30, 1996. The increase in asset size experienced
during the six months ended December 31, 1996 was the result of an increase in
borrowings of $3.1 million, or 36.8%, and to a lesser extent, an increase
realized in other liabilities of $245,000, or 26.5%, and an increase in
shareholders' equity of $114,000, or 1.6%, all of which were partially offset by
a decrease in deposits of $102,000, or 0.1%. Such increase in assets was
primarily due to an increase in loans receivable and loans held for sale of $5.1
million, or 9.3%, which was partially offset by a decrease in cash and cash
equivalents of $1.2 million, or 33.4%, and a decrease in investment securities
held to maturity of $500,000, or 38.5%. The growth in total assets during the
six months ended December 31, 1996 was consistent with management's short-term
goals and with its strategic objective of continuing to grow the size of the
operations within its existing branch structure.
Cash and due from banks, federal funds sold, interest-bearing deposits,
certificates of deposit in other financial institutions and investment
securities held to maturity totaled approximately $3.3 million at December 31,
1996, a decrease of approximately $1.7 million, or 34.2%, from June 30, 1996
levels of $5.0 million. As a result, regulatory liquidity approximated only 5.5%
at December 31, 1996, as compared to 7.5% at June 30, 1996. This decrease in
cash and cash equivalents and investment securities resulted 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 six
months ended December 31, 1996.
Mortgage-backed securities designated as available for sale and
mortgage-backed securities held to maturity increased by approximately $58,000,
or 0.2%, during the six months ended December 31, 1996. This increase was
attributed to the purchase of floating-rate collateralized mortgage obligations
totaling $957,000 and a net decrease in unrealized losses on securities
designated as available for sale of $81,000, which were partially offset by
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TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from June 30, 1996 to
- ---------------------------------------------------------------
December 31, 1996 (continued)
- -----------------
principal repayments on securities of $969,000 and amortization of premiums and
accretion of discounts on securities, net of $11,000. The increase in the
mortgage-backed securities portfolio during the six months ended December 31,
1996 was due in some part to management's intention of strategically increasing
the volume of interest earning assets relative to the equity base (leverage) in
order to improve earnings. Proceeds from a Federal Home Loan Bank advance were
utilized to fund the purchase of a floating-rate security in the 1996 period, as
there was an attractive spread when compared to the cost of the borrowing.
Another floating-rate security was acquired at a discount from principal
repayment cash flows on existing securities in the portfolio in order to take
advantage of an attractive yield in comparison to the thirty-year treasury
index. The growth in the mortgage-backed securities portfolio resulting from the
acquisition of the above-mentioned securities was partially offset by principal
repayments on securities as management decided to utilize certain repayment cash
flows to originate new loans.
Loans receivable and loans held for sale increased in the aggregate by
approximately $5.1 million, or 9.3%, during the six months ended December 31,
1996. This increase was largely attributed to loan disbursements, loan purchases
and loans originated for sale in the secondary market of $13.6 million, which
were partially offset by loan sales of $1.3 million, principal repayments on
loans of $7.2 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 $3.4 million in one-to-four family
residential real estate loans, including those designated as available for sale,
an increase of $790,000 in home equity line-of-credit loans, an increase of
$446,000 in nonresidential real estate loans, an increase of $358,000 in
multi-family residential real estate loans and an increase of $275,000 in
passbook loans to deposit customers. 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 and to redeploy funds from other asset categories into
lending activities to the extent practicable. In addition, the increase of $5.1
million in loans receivable and loans held for sale during the six months ended
December 31, 1996 was also attributed to a continued marketing effort by
management primarily through newspaper advertising and continual development
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<PAGE> 16
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from June 30, 1996 to
- ---------------------------------------------------------------
December 31, 1996 (continued)
- -----------------
of new loan products and programs to better serve its lending area.
At December 31, 1996, the Corporation's allowance for loan losses
totaled $235,000, an increase of $4,000 over the $231,000 level represented at
June 30, 1996. During the six months ended December 31, 1996, the Corporation
increased its allowance for general loan losses by $9,000, which was partially
offset by a charge-off of a $5,000 specific valuation allowance that was
established during a prior period. The Corporation's internally classified
assets totaled approximately $343,000 at December 31, 1996, as compared to
$681,000 at June 30, 1996. Non-performing and nonaccrual loans totaled $248,000,
or 0.41% of loans receivable and loans held for sale, at December 31, 1996, 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 approximate
55-60% loan-to-value ratio at December 31, 1996 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 affect 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 $9,000 recorded during the six months ended December 31,
1996 was attributed to the overall growth of 9.3% in the loan portfolio, which
was partially mitigated by the lower levels of internally classified assets and
non-performing and nonaccrual loans at December 31, 1996. Management believed
that the loan loss allowance existing at December 31, 1996 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 December 31, 1996 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
periods
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<PAGE> 17
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from June 30, 1996 to
- ---------------------------------------------------------------
December 31, 1996 (continued)
- -----------------
which could adversely affect the Corporation's results of operations. At
December 31, 1996, the Corporation's allowance for loan losses consisted
entirely of general valuation allowances, as defined by the regulations of the
Office of Thrift Supervision ("OTS"), and represented 0.39% of the total amount
of loans outstanding, including those loans designated as held for sale, and 69%
of internally classified assets.
Deposits totaled $75.5 million at December 31, 1996, a decrease of
$102,000 or 0.1%, over the $75.6 million in deposits outstanding at June 30,
1996. The reduction in total deposits was primarily due to a decline in
certificate of deposit accounts of $618,000, or 1.1%, which was partially offset
by an increase in transaction accounts (NOW accounts, money market deposit
accounts, passbook accounts and Christmas club accounts) of $516,000, or 2.7%.
Management made a more assertive effort during the six months ended December 31,
1996 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. The decrease in certificates of deposit was primarily due to the
increased level of competition for these type of funds from other banks and
savings and loan institutions and to management's reluctance to aggressively
seek at all times certificates of deposit from its local market area 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. In an effort to stabilize the decline in
overall certificate of deposit accounts during the 1996 period, 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 below local market interest rates and had terms to maturity of 15
months or less. During the six months ended December 31, 1996, outstanding
brokered deposits increased by $1.7 million, from $695,000 at June 30, 1996 to
$2.4 million at December 31, 1996. Even though overall deposits declined
slightly during the 1996 period, management's short-term and long-term goals are
still to maintain growth principally through deposits. 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
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<PAGE> 18
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from June 30, 1996 to
- ---------------------------------------------------------------
December 31, 1996 (continued)
- -----------------
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.
Total borrowings, which consisted principally of Federal Home Loan Bank
advances at December 31, 1996, increased by $3.1 million, or 36.8%, from $8.5
million at June 30, 1996 to $11.6 million at December 31, 1996. This increase in
borrowings during the six months ended December 31, 1996 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, adjusting monthly, as
part of a leveraging transaction in the purchase of a collateralized mortgage
obligation. 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.
Shareholders' equity increased by $114,000, or 1.6%, during the six
months ended December 31, 1996, as a result of period earnings of $46,000, a
decrease in unrealized losses on securities designated as available for sale of
$53,000 and a reduction in required contributions of the Employee Stock
Ownership Plan ("ESOP") of $15,000. At December 31, 1996, shareholders' equity
as a percentage of total assets was 7.6%.
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<PAGE> 19
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from June 30, 1996 to
- ---------------------------------------------------------------
December 31, 1996 (continued)
- -----------------
Blue Ash is required to meet each of three minimum capital standards
promulgated by the OTS, 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 December 31, 1996. Specifically, Blue Ash's
tangible and core capital of $7.1 million, or 7.4%, exceeded the respective
minimum requirements of $1.4 million and $2.9 million by approximately $5.7
million, or 5.9%, and $4.2 million, or 4.4%. Additionally, Blue Ash's risk-based
capital of approximately $7.3 million, or 15.4% (including a general loan loss
allowance of $235,000), exceeded the current 8.0% requirement of $3.8 million by
approximately $3.5 million, or 7.4%.
In August 1993, the OTS adopted an amendment to the regulatory
risk-based capital requirement to include an interest rate risk component to the
capital calculation. The amount of the interest rate risk component included in
the risk-based capital requirement is based on an individual institution's
interest rate risk position. Each savings institution must measure the effect of
a 200 basis point change in interest rates on the value of its portfolio as
determined under the methodology of the OTS. Interest rate risk is measured by
the decline in "net portfolio value" that would result from a 200 basis point
increase or decrease in market interest rates, whichever is lower. An
institution whose measured interest rate exposure exceeds 2% must deduct an
amount equal to one-half of the difference between its measured interest rate
risk and 2% multiplied by the estimated economic value of its total assets from
total capital in determining whether it meets its risk-based capital
requirement. 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. Reporting under the revised risk-based
capital
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<PAGE> 20
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from June 30, 1996 to
- ---------------------------------------------------------------
December 31, 1996 (continued)
- -----------------
requirement was to become effective in fiscal 1995; however, the OTS delayed the
adoption of the interest rate risk rule until further notice, pending the
testing of the OTS appeals process. The delay also provided the OTS an
opportunity to assess any further guidance from the other three Federal banking
agencies regarding their planned implementation of an interest rate risk capital
deduction. 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 impose a higher individual minimum capital requirement
for individual institutions with significant interest rate risk. At December 31,
1996, Blue Ash had total assets of $95.6 million and risk-based capital in
excess of 15.4% which management believes would have qualified Blue Ash for this
exemption had the new requirements been in effect at such date. Additionally,
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 institutions, except for those institutions
with the highest examination ratings and acceptable levels of risk. Management
anticipates no material change in Blue Ash's excess regulatory capital position
if the proposal is adopted in its present form.
The deposits of Blue Ash are currently insured by the Savings
Association Insurance Fund ("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 Federal Deposit Insurance Corporation
("FDIC") 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, 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
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<PAGE> 21
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from June 30, 1996 to
- ---------------------------------------------------------------
December 31, 1996 (continued)
- -----------------
holding SAIF deposits at March 31, 1995. The special assessment was imposed to
capitalize the SAIF up to the statutorily prescribed 1.25 percent designated
reserve ratio and was determined at 65.7 basis points per $100 of insured
deposits. Effective 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 is currently
no regular assessment incurred. 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 will be 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 will be assessed
$.013 per $100 in deposits per year to cover the annual FICO payments while
SAIF-insured institutions will be assessed $.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 earnings and capital by $242,000 for the six months
ended December 31, 1996. With the passage of this legislation, the annual SAIF
assessments are expected to be reduced by approximately $82,000 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 1996 period
earnings, the resulting lower annual premiums will benefit future earnings.
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<PAGE> 22
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Month Periods Ended
- ---------------------------------------------------------------
December 31, 1996 and 1995
- --------------------------
General
- -------
Net earnings totaled $46,000 for the six months ended December 31,
1996, a decrease of $229,000, or 70.9%, from the $275,000 in net earnings
recorded for the six months ended December 31, 1995. The decrease in net
earnings was primarily attributable to an increase in general, administrative
and other expense of $405,000, or 42.5%, and a decrease in other income of
$101,000, or 43.3%, which were partially offset by an increase in net interest
income after provision for losses on loans of $157,000, or 13.7%. The $349,000,
or 82.1%, decrease in earnings level before federal income taxes resulted in a
decrease of $120,000, or 80.0%, in the provision for federal income taxes. As
previously discussed, the earnings level of $46,000 for the six months ended
December 31, 1996 was greatly affected by the $242,000 one-time after-tax charge
to net earnings, or $1.16 per share, to help replenish the SAIF to the required
statutory level. Excluding the detrimental effects on net earnings of the
nonrecurring charge related to the recapitalization of the SAIF, which was
partially offset by the reduction in SAIF premiums realized as a result of the
enacted legislation, net earnings for the six months ended December 31, 1996
would have been $282,000, as compared to $275,000 for the six months ended
December 31, 1995, an increase of $7,000, or 2.5%.
Net Interest Income and Provision for Losses on Loans
- -----------------------------------------------------
The Corporation's net interest income increased by $166,000, or 14.5%,
during the six months ended December 31, 1996, as compared to the same period in
the prior year. The increase in net interest income during the six months ended
December 31, 1996 was primarily the result of an increase in total interest
income, due to increases in the average outstanding balances on all the
Corporation's interest-earning assets, which were partially offset by declines
in the weighted average rates earned on all such interest-earning asset
categories. Total interest income on the Corporation's interest-earning assets
increased by $375,000, or 12.0%, during the six months ended December 31, 1996,
due to overall increases of $10.5 million, or 13.4%, in the average outstanding
balances on such assets, which were partially offset by overall decreases of 9
basis points (100 basis points equal 1%), or
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<PAGE> 23
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Month Periods Ended
- ---------------------------------------------------------------
December 31, 1996 and 1995 (continued)
- --------------------------
Net Interest Income and Provision for Losses on Loans (continued)
- -----------------------------------------------------
1.1%, in the weighted average yields earned on such assets. The increase in
total interest income during the six months ended December 31, 1996 was
partially offset by an increase in total interest expense, primarily due to an
increase in the average outstanding balance on deposits, which was partially
offset by a decrease in the average outstanding balance on borrowings and a
decline in the weighted average rate paid on deposits. Total interest expense on
the Corporation's interest-bearing liabilities for the six months ended December
31, 1996, as compared to the same period in the prior year, increased by
$209,000, or 10.6%, due to overall increases of $10.3 million, or 13.6%, in the
average outstanding balances on such liabilities, which were partially offset by
overall decreases of 14 basis points, or 2.7%, in the weighted average yields
paid on the Corporation's interest-bearing liabilities. The downward movement in
the average yields earned on the Corporation's interest-earning assets compared
to the average yields paid on the Corporation's interest-bearing liabilities
reflected liabilities repricing downward more rapidly than assets. Such trend
was reflected in the net interest spread, which had increased from 2.70% during
the six months ended December 31, 1995 to 2.75% during the six months ended
December 31, 1996. The major factor contributing to this increase in the
interest rate spread from period-to-period was believed to be management's
concerted effort in growing the loan portfolio by holding in the portfolio the
majority of loans originated in the current interest rate environment.
Interest income on loans increased by $336,000, or 15.5%, during the
six months ended December 31, 1996, as compared to the same period in the prior
year. The increase in interest income on loans during the six months ended
December 31, 1996 was due to an increase of $8.3 million, or 16.6%, in the
average balance of loans outstanding, which was partially offset by a decline of
8 basis points, or 0.9%, in the weighted average rate earned on loans. The
increase in the average outstanding balance on loans period-to-period 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
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<PAGE> 24
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Month Periods Ended
- ---------------------------------------------------------------
December 31, 1996 and 1995 (continued)
- --------------------------
Net Interest Income and Provision for Losses on Loans (continued)
- -----------------------------------------------------
interest rate risk limitations. The decline in loan yield generally reflected a
higher interest rate environment in periods leading into the 1995 six month
period as compared to a lower interest rate environment leading into the 1996
six month period. This was offset by management's decision to hold in the loan
portfolio fixed-rate mortgage loans in the current interest rate environment,
which has the effect of increasing the overall yield within the loan portfolio.
Interest income on mortgage-backed securities designated as either
available for sale or held to maturity increased by $27,000, or 3.1%, during the
six months ended December 31, 1996, as compared to the same period in the prior
year. The increase during the six months ended December 31, 1996 was due to a
$1.6 million, or 6.1%, increase in the average balance of mortgage-backed
securities outstanding, which was partially offset by an 18 basis point, or
2.7%, decline in the weighted average rate earned thereon. The increase in the
average balance of mortgage-backed securities outstanding during the six months
ended December 31, 1996 reflected the purchase of primarily floating-rate
collateralized mortgage obligations designated as available for sale and the
purchase of collateralized mortgage obligations designated as held to maturity
for liquidity and diversification purposes in the 1996 six month period and
periods leading up to the 1996 six month period, which were partially offset by
principal repayments on securities with respect to the underlying loans and
sales of securities in the 1995 six month period. 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 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 net interest spread and net earnings
level. The decrease in the weighted average yield earned on the Corporation's
mortgage-backed securities period-to-period was the result of downward interest
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<PAGE> 25
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Month Periods Ended
- ---------------------------------------------------------------
December 31, 1996 and 1995 (continued)
- --------------------------
Net Interest Income and Provision for Losses on Loans (continued)
- -----------------------------------------------------
rate changes on adjustable-rate securities due to an overall net downward
movement in market interest rates.
Interest and dividend income on investment securities held to maturity
and other interest-earning assets increased by $12,000, or 13.2%, during the six
months ended December 31, 1996, as compared to the same period in the prior
year. The increase during the six months ended December 31, 1996 was due
primarily to an increase of $544,000, or 77.7%, in the average balance
outstanding on investment securities and to an increase of $83,000, or 4.3%, in
the average balance outstanding on other interest-earning assets (primarily
interest-bearing deposits in other financial institutions), which were partially
offset by decreases of 15 basis points, or 1.9%, and 109 basis points, or 16.2%,
in the weighted average rates earned on investment securities and other
interest-earning assets, respectively. The increase in the average outstanding
balance on investment securities during the six months ended December 31, 1996
was largely attributable to the purchase of callable U.S. Government agency
obligations in the 1995 six month period and periods leading up to the 1996 six
month period. Such 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" during a
flat yield curve environment that predominately existed at the time of these
purchases. The decline in the weighted average rate earned on investment
securities was due to the maturity of a higher-yielding corporate debt security
in a prior period, which was partially offset by the investing in several
callable U.S. Government agency issues, taking advantage of the attractive rate
features. The increase in the average outstanding balance on other
interest-earning assets was attributed in part to increased liquidity needs
resulting from significant asset growth period-to-period. The decline in yield
on the Corporation's other interest-earning assets period-to-period was due in
large part to two interest rate reductions by the Federal Reserve in the 1995
six month period and the period leading up to the 1996 six month period.
Interest expense on deposits, the largest component of the
Corporation's interest-bearing liabilities, increased by $236,000,
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<PAGE> 26
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Month Periods Ended
- ---------------------------------------------------------------
December 31, 1996 and 1995 (continued)
- --------------------------
Net Interest Income and Provision for Losses on Loans (continued)
- -----------------------------------------------------
or 14.5%, during the six months ended December 31, 1996, as compared to the same
period in the prior year. The increase in interest expense on deposits during
the six months ended December 31, 1996 was due to an increase of $11.2 million,
or 17.3%, in the average balance of deposits outstanding, which was partially
offset by a decrease of 12 basis points, or 2.4%, in the weighted average rate
paid on deposits. The increase in the average balance on deposits outstanding
during the periods 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 $11.6 million, or 26.1%, which was
partially offset by a decline of $464,000, 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 increased
marketing efforts by management and competitive pricing strategies. In addition,
during the 1996 six month period, 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,
rates paid on brokered deposits were actually lower than rates paid on local
deposits. The increase in the average outstanding balance on deposits was
necessary to predominately fund the growth in the loan portfolio. The decrease
in the weighted average rate paid on deposit accounts period-to-period reflected
lower market rates of interest during the six months ended December 31, 1996, as
compared to the six months ended December 31, 1995.
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, decreased by $27,000, or 8.0%, during the six months ended December 31,
1996, as compared to the same period in the prior year. The decrease in interest
expense on borrowings during the six months ended December 31, 1996 was
attributed solely to a decrease of $888,000, or 7.9%, in the average outstanding
balance on borrowings. There was no change in the 1996 six month period, as
compared to the 1995 six month
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<PAGE> 27
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Month Periods Ended
- ---------------------------------------------------------------
December 31, 1996 and 1995 (continued)
- --------------------------
Net Interest Income and Provision for Losses on Loans (continued)
- -----------------------------------------------------
period, in the weighted average rate paid on borrowings, which was 6.06%. The
decrease in the average outstanding balance on borrowings period-to-period was
the result of principal repayments on Federal Home Loan Bank advances and other
short-term borrowings during the 1995 six month period and periods leading up to
the 1996 six month period. These repayments in prior periods were funded with
excess liquidity and deposit inflows, as it was management's intent of
principally growing the Corporation through an increased deposit base. Such
decrease in the average outstanding balance on borrowings was partially offset
by increased borrowing activity in the 1996 six month period, as management
utilized new borrowings from the Federal Home Loan Bank to assist in funding the
Corporation's lending and investment activities.
The Corporation's provision for losses on loans increased by $9,000
during the six months ended December 31, 1996, as compared to the same period in
the prior year. The provision for losses on loans was comprised solely of
discretionary additions to the general loan loss allowance. The 1996 six month
period 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 the six months ended December 31, 1996 was principally attributable to
loan portfolio growth of 9.3%, 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.
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<PAGE> 28
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Month Periods Ended
- ---------------------------------------------------------------
December 31, 1996 and 1995 (continued)
- --------------------------
Net Interest Income and Provision for Losses on Loans (continued)
- -----------------------------------------------------
As a result of the foregoing, net interest income after provision for
losses on loans increased during the six months ended December 31, 1996 by
$157,000, or 13.7%, as compared to the same period in the prior year.
Other Income
- ------------
Total other income decreased by $101,000, or 43.3%, from $233,000
during the six months ended December 31, 1995 to $132,000 during the six months
ended December 31, 1996. The principal causes for this decline in other income
were a decrease in gain on mortgage-backed securities transactions of $74,000, a
decrease in gain on sale of mortgage loans of $17,000, or 20.7%, a decrease in
loan servicing fees of $7,000, or 12.1%, 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 $2,000, or 10.5%.
The decrease in gain on mortgage-backed securities transactions was due
to the lack of sales activity in the 1996 six month period, as compared to $1.5
million in securities sold at gains of $74,000 in the 1995 six month period.
Such sales activity in the prior period was undertaken by management in order to
realize profits, arising from a favorable interest rate environment, that had
accumulated on certain adjustable-rate collateralized mortgage obligations which
were tied to a particular lagging market index. The decrease in gain on sale of
mortgage loans was the result of a reduction in secondary market activities
during the 1996 six month period, as compared to the 1995 six month period, due
to management's strategy of holding in the portfolio certain fixed-rate mortgage
loans subject to certain interest rate risk limitations. The Corporation
recognized cash gains on sale of mortgage loans in the secondary market of
$26,000 and $82,000 during the six months ended December 31, 1996 and 1995,
respectively. As a result, proceeds from the sale of loans in the secondary
market declined from $3.2 million to $1.3 million period-to-period. This decline
in loan sale activity was partially offset by a decrease of $39,000 in
unrealized losses on loans identified as held for sale. Management identifies
certain loans which it
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<PAGE> 29
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Month Periods Ended
- ---------------------------------------------------------------
December 31, 1996 and 1995 (continued)
- --------------------------
Other Income (continued)
- ------------
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 the
six months ended December 31, 1996, the market value of loans in this category
increased, resulting in a writeup of these loans to their current market value.
The $39,000 in unrealized market gains was taken into earnings as an increase in
gain on sale of mortgage loans. The decrease in loan servicing fees of $7,000,
or 12.1%, during the 1996 six month period was principally attributed to a
decline period-to-period in the average outstanding balance on loans sold in the
secondary market and to other financial institutions, coupled with an increase
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 $2,000, or 10.5%, reflected the additional costs incurred
for the origination of no cost mortgages and line-of-credit loans which were
more prevalent in the 1996 six month period, which was partially offset by
increased fees generated from NOW accounts. In addition, the Corporation
recognized a $1,000 loss during the six months ended December 31, 1996 on the
sale of real estate acquired through foreclosure (single-family residence).
General, Administrative and Other Expense
- -----------------------------------------
Total general, administrative and other expense increased by $405,000,
or 42.5%, during the six months ended December 31, 1996, as compared to the same
period in the prior year. The components of this increase in total general,
administrative and other expense during the six months ended December 31, 1996
were comprised of an increase in employee compensation and benefits of $14,000,
or 2.9%, an increase in federal deposit insurance premiums of $376,000, an
increase in state franchise tax expense of $8,000, or 21.1%, an increase in data
processing expense of $3,000, or 6.5%, and an increase in other operating
expense of $17,000, or 20.0%, all of which were partially offset by a decrease
in occupancy and equipment expense of $7,000, or 4.0%, and a decrease in
advertising expense of $6,000, or 13.0%.
- 29 -
<PAGE> 30
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Month Periods Ended
- ---------------------------------------------------------------
December 31, 1996 and 1995 (continued)
- --------------------------
General, Administrative and Other Expense (continued)
- -----------------------------------------
The principal category of the Corporation's general, administrative and
other expense is employee compensation and benefits. The increase in this
expense category of $14,000, or 2.9%, during the six months ended December 31,
1996, as compared to the same period in the prior year, was primarily due to an
increase in salary expense related to normal merit increases and an increase in
director fees resulting from the appointment of a retired director to an
emeritus status, which were coupled with a decrease of $13,000, or 21.7%, in
deferred loan origination costs in accordance with SFAS No. 91 as a result of an
approximate $1.6 million, or 10.5%, decrease in total lending volume
period-to-period. These increases in employee compensation and benefits were
partially offset by a decrease in contributions to the ESOP plan and a decrease
in bonus expense related to the loan officer bonus program due to lower loan
production levels period-to-period.
The increase of $376,000 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
period-to-period, which were partially offset by a $10,000 reduction in SAIF
premium assessments after enactment of the SAIF legislation as previously
discussed. The increase in data processing expense of $3,000, or 6.5%, also
reflected an increased deposit base as well as growth in operations. The
increase in state franchise tax expense of $8,000, or 21.1%, was primarily
attributed to an enhanced average equity capital position period-to-period. The
decrease in occupancy and equipment expense of $7,000, or 4.0%, was largely due
to the reduction in office building repair and maintenance expenses, which were
partially offset by higher light, heat and utilities costs. The increase in
other operating expense of $17,000, or 20.0%, during the 1996 six month period
was due in part to an increase in supervisory assessments resulting from a
greater asset base, an increase in legal fees incurred in the normal course of
business, an increase in consulting fees associated with analyzing and upgrading
the Corporation's computer system, an increase in insurance costs and an
increase in real estate owned expenses. Despite the decline in advertising
expense during the 1996 six month period of $6,000, or 13.0%, advertising
remained at a relatively high level due to the continuation of intensified
- 30 -
<PAGE> 31
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Month Periods Ended
- ---------------------------------------------------------------
December 31, 1996 and 1995 (continued)
- --------------------------
General, Administrative and Other Expense (continued)
- -----------------------------------------
marketing efforts by management which were directed toward the loan origination
function and attracting new deposits.
Federal Income Taxes
- --------------------
The provision for federal income taxes totaled $30,000 for the six
months ended December 31, 1996, as compared to $150,000 for the six months ended
December 31, 1995, a decrease of $120,000, or 80.0%. The decrease in the
provision for federal income taxes reflected the lower level of pre-tax earnings
for the six months ended December 31, 1996, a decrease of $349,000, or 82.1%. As
previously discussed, the one-time charge to replenish the SAIF had a
detrimental impact on net earnings for the 1996 six month period. As a result,
the level of federal income tax expense for each of the six month periods ended
December 31, 1996 and 1995 generally reflected the level of pre-tax earnings for
such periods.
Legislation repealing the percentage of income 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 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 income method
applicable only to thrift institutions, or (ii) the experience method that was
also available to small banks. For tax years prior to 1996, Blue Ash 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
Towne Financial). 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
- 31 -
<PAGE> 32
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Month Periods Ended
- ---------------------------------------------------------------
December 31, 1996 and 1995 (continued)
- --------------------------
Federal Income Taxes (continued)
- --------------------
will depend 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 will have to switch to the specific charge-off method. Institutions
with assets of $500 million or less, such as Towne Financial, will be 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.
Since 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, there will be no impact
on Towne Financial's provision for federal income taxes resulting from the
recapture of the excess reserves. As the tax on the recapture is paid, Towne
Financial will reduce its deferred tax liability. For Towne Financial, this
excess bad debt reserve amounts to approximately $486,000 as of December 31,
1996. The approximate amount of the deferred tax liability relating to the
excess cumulative bad debt reserve is $165,000 as of December 31, 1996. This
amount will have to be ratably paid out over a six year period beginning in
1996, 1997 or 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
- 32 -
<PAGE> 33
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Month Periods Ended
- ---------------------------------------------------------------
December 31, 1996 and 1995 (continued)
- --------------------------
Federal Income Taxes (continued)
- --------------------
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.
- 33 -
<PAGE> 34
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended
- -----------------------------------------------------------------
December 31, 1996 and 1995
- --------------------------
General
- -------
Net earnings totaled $158,000 for the three months ended December 31,
1996, as compared to $179,000 for the same period in 1995, a decrease of
$21,000, or 11.7%. The decline in earnings level was principally attributed to a
decrease in other income of $118,000, or 64.8%, and an increase in general,
administrative and other expense of $16,000, or 3.3%, which were partially
offset by an increase in net interest income after provision for losses on loans
of $100,000, or 17.5%. The $34,000, or 12.3%, decrease in earnings before
federal income taxes resulted in a decrease of $13,000, or 13.4%, in the
provision for federal income taxes.
Net Interest Income and Provision for Losses on Loans
- -----------------------------------------------------
The Corporation's net interest income increased by $104,000, or 18.2%,
during the three months ended December 31, 1996, as compared to the same period
in the prior year. The increase in net interest income during the three months
ended December 31, 1996 was the result of an increase of $186,000, or 11.7%, in
total interest income, due to increases in the average outstanding balances on
all the Corporation's interest-earning assets and to increases in the weighted
average rates earned on loans and investment securities, which were partially
offset by declines in the weighted average rates earned on mortgage-backed
securities and other interest-earning assets. The increase in total interest
income during the three months ended December 31, 1996 was partially offset by
an increase in total interest expense of $82,000, or 8.0%, primarily due to
increases in the average outstanding balances on deposits and borrowings, which
were partially offset by declines in the weighted average rates paid on such
interest-bearing liabilities. As a result, the Corporation's net interest rate
spread increased from 2.62% for the three months ended December 31, 1995 to
2.79% for the three months ended December 31, 1996, an increase of 17 basis
points, or 6.5%, which was solely attributed to the decline in the overall
weighted average rates paid on all interest-bearing liabilities. In addition,
the Corporation's net yield on interest-earning assets increased from 2.83%
for the three months ended December 31, 1995 to 2.99% for the three months ended
December 31, 1996.
- 34 -
<PAGE> 35
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended
- -----------------------------------------------------------------
December 31, 1996 and 1995 (continued)
- --------------------------
Net Interest Income and Provision for Losses on Loans (continued)
- -----------------------------------------------------
Interest income on loans increased by $180,000, or 16.3%, during the
three months ended December 31, 1996, as compared to the same three month period
in the prior year. The increase in interest income on loans during the 1996
quarter was due to an increase of $7.9 million, or 15.3%, in the average balance
of loans outstanding, which was coupled with an increase of 7 basis points, or
0.8%, in the weighted average rate earned on the loan portfolio. Additionally,
interest income on mortgage-backed securities did not change when comparing the
1996 quarter to the 1995 quarter. The increase in the average outstanding
balance on mortgage-backed securities of $931,000, or 3.5%, during the 1996
quarter was fully offset by the decline in the weighted average rate earned on
such assets of 22 basis points, or 3.3%. The increases in the average
outstanding balances on loans and mortgage-backed securities were attributable
in part to a strategy deployed by management to grow the Corporation by using
deposits and, in certain circumstances, borrowings to fund the growth in these
portfolios. The increase in the average yield earned on loans was principally
the result of management's change in strategy of holding fixed-rate mortgage
loans in the portfolio subject to certain interest rate risk limitations. The
decline in the average yield earned on mortgage-backed securities generally
reflected the fall in market interest rates quarter-to-quarter.
Interest and dividend income on investments and other interest-earning
assets increased by $6,000, or 13.0%, during the three months ended December 31,
1996, as compared to the same period in the prior year. The increase during the
three months ended December 31, 1996 was due primarily to an increase of
$325,000, or 38.2%, in the average outstanding balance on investment securities,
an increase of $223,000, or 13.2%, in the average outstanding balance on other
interest-earning assets (primarily interest-bearing deposits) and an increase of
30 basis points, or 4.0%, in the weighted average rate earned on investment
securities, which were partially offset by a decline of 103 basis points, or
14.5%, in the weighted average rate earned on other interest-earning assets. The
increase in the weighted average yield and average outstanding balance on
investment securities was attributed to the purchase of callable U.S. Government
agency obligations at attractive, above market rates. The increase in the
- 35 -
<PAGE> 36
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended
- -----------------------------------------------------------------
December 31, 1996 and 1995 (continued)
- --------------------------
Net Interest Income and Provision for Losses on Loans (continued)
- -----------------------------------------------------
average outstanding balance on other interest-earning assets was mainly the
result of increased liquidity needs, while the decline in average yield was
attributable to a decline in short-term market rates quarter-to-quarter.
Interest expense on deposits increased by $86,000, or 10.1%, during the
three months ended December 31, 1996, as compared to the same period in the
prior year. The increase was primarily attributable to a $9.0 million, or 13.5%,
increase in the average balance of deposits outstanding quarter-to-quarter,
which was partially offset by a decrease of 15 basis points, or 3.0%, in the
weighted average rate paid on deposits, reflecting the general decline in market
interest rates. As previously indicated, the overall increase in the average
outstanding balance on deposits, particularly term certificates of deposit, was
largely due to intensified marketing efforts and competitive pricing strategies
in this area in order to assist in funding the Corporation's lending and
investment activities.
Interest expense on borrowings decreased by $4,000, or 2.3%, during the
current 1996 quarter, as compared to the same quarter in 1995. The decrease in
interest expense on borrowings during the 1996 quarter was primarily the result
of a decline in the weighted average rate paid on borrowings of 16 basis points,
or 2.6%, which was partially offset by an increase in the average outstanding
balance on borrowings of $30,000, or 0.3%. The increase in the average volume of
borrowings was attributed to the utilization of Federal Home Loan Bank advances,
as an alternative funding source to deposits, to fund loan originations and, to
a lesser extent, purchases of mortgage-backed securities. The decline in the
weighted average rate paid on borrowings was reflected in the lower overall cost
of obtaining such new borrowings.
The provision for losses on loans increased by $4,000 during the three
months ended December 31, 1996, as compared to the same period in the prior
year. As previously discussed, provisions for losses on loans are charged to
earnings to bring the total allowance to a level considered appropriate by
management based on historical experience, the volume and type of lending
conducted by Blue Ash, industry standards, the status of past due principal and
- 36 -
<PAGE> 37
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended
- -----------------------------------------------------------------
December 31, 1996 and 1995 (continued)
- --------------------------
Net Interest Income and Provision for Losses on Loans (continued)
- -----------------------------------------------------
interest payments, general economic conditions, particularly as they relate to
Blue Ash's lending area, and other factors related to the collectibility of the
loan portfolio. The provision for losses on loans during the three months ended
December 31, 1996 was predicated upon the overall loan portfolio growth and
management's review of non-performing loans and anticipated losses for the
period.
As a result of the foregoing, net interest income after provision for
losses on loans increased during the three months ended December 31, 1996 by
$100,000, or 17.5%, as compared to the same period in the prior year.
Other Income
- ------------
Total other income decreased by $118,000, or 64.8%, during the three
months ended December 31, 1996, as compared to the same period in the prior
year. This decrease in other income was primarily due to a decrease in gain on
sale of mortgage-backed securities transactions of $74,000, a decrease in gain
on sale of mortgage loans of $33,000, or 47.8%, and, to a lesser extent, a
decrease in loan servicing fees of $6,000, or 20.7%, a decrease in service fees,
charges and other operating income of $4,000, or 40.0%, and an increase in loss
on sale of real estate acquired through foreclosure of $1,000.
The decrease in gain on sale of mortgage-backed securities transactions
during the 1996 quarter was due to the lack of sales activity within the
securities portfolio. During the 1995 quarter, the Corporation sold
approximately $1.5 million in available-for-sale securities at gains of $74,000,
as management elected to realize profits on certain securities in a favorable
interest rate environment. The decrease in gain on sale of mortgage loans of
$33,000, or 47.8%, was the result of reduced secondary market activities by
management as it decided to originate fixed-rate mortgage loans for the
portfolio given the current interest rate environment, which was partially
offset by a decrease in unrealized losses on loans identified as held for sale.
The decrease in loan servicing fees of $6,000, or 20.7%, was principally
attributed to a decline quarter-to-quarter in the average outstanding balance on
- 37 -
<PAGE> 38
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended
- -----------------------------------------------------------------
December 31, 1996 and 1995 (continued)
- --------------------------
Other Income (continued)
- ------------
loans sold, which was coupled with an increase in amortization and impairment
expense on originated mortgage servicing rights under SFAS No. 122. The decrease
in service fees, charges and other operating income of $4,000, or 40.0%, was
primarily due to the increased costs incurred by the Corporation for the
origination of no cost line-of-credit loans and to the reduction of
miscellaneous fee income quarter-to-quarter. As previously discussed, the
Corporation incurred a $1,000 loss on the sale of real estate acquired through
foreclosure during the 1996 quarter.
General, Administrative and Other Expense
- -----------------------------------------
Total general, administrative and other expense increased by $16,000,
or 3.3%, during the three months ended December 31, 1996, as compared to the
same period in the prior year, due primarily to an increase in employee
compensation and benefits of $4,000, or 1.6%, an increase in state franchise tax
expense of $4,000, or 21.1%, an increase in advertising expense of $2,000, or
11.8%, an increase in data processing expense of $1,000, or 4.3%, and an
increase in other operating expense of $6,000, or 13.3%, all of which were
partially offset by a decrease in federal deposit insurance premiums of $1,000,
or 2.9%.
The increase in employee compensation and benefits of $4,000, or 1.6%,
quarter-to-quarter, was principally due to normal merit increases on employee
and officer salaries and to a decrease in deferred loan origination costs in
accordance with SFAS No. 91. The increase in data processing expense was the
function of an increased average deposit base quarter-to-quarter, while the
increase in state franchise taxes reflected an enhanced average equity capital
position. The increase in advertising expense was the result of management's
continued efforts to actively market its loan and savings products. The decline
in federal deposit insurance premiums quarter-to-quarter was primarily due to
reduced deposit insurance costs stemming from the passage of the SAIF
legislation, which was partially offset by a higher deposit base in the 1996
quarter, as compared to the 1995 quarter. Additionally, the increase in other
operating expense during the 1996 quarter, as compared to the 1995 quarter, was
attributed to an increase in supervisory assessments, an increase in real estate
owned expenses
- 38 -
<PAGE> 39
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended
- -----------------------------------------------------------------
December 31, 1996 and 1995 (continued)
- --------------------------
General, Administrative and Other Expense (continued)
- -----------------------------------------
and an increase in consulting services pertaining to the upgrading
of the Corporation's computer system.
Federal Income Taxes
- --------------------
The provision for federal income taxes totaled $84,000 for the three
months ended December 31, 1996, as compared to $97,000 for the three months
ended December 31, 1995, a decrease of $13,000, or 13.4%. The decrease in
provision for federal income taxes reflected the lower level of pre-tax earnings
for the three months ended December 31, 1996, a decrease of $34,000, or 12.3%.
The level of federal income tax expense for each of the three month periods
ended December 31, 1996 and 1995 generally reflected the level of pre-tax
earnings for such periods.
- 39 -
<PAGE> 40
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
PART II
ITEM 1. Legal Proceedings
-----------------
Not Applicable
ITEM 2. Changes in Securities
---------------------
Not Applicable
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not Applicable.
ITEM 5. Other Materially Important Events
---------------------------------
None
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibit 27 - Financial Data Schedule
- 40 -
<PAGE> 41
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 11, 1997 By: /s/ William S. Siders
-----------------------------------
William S. Siders
Executive Vice President
Dated: February 11, 1997 By: /s/ Joseph L. Michel
------------------------------------
Joseph L. Michel
Chief Financial Officer, Vice
President and Treasurer
- 41 -
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<CIK> 0000880052
<NAME> TOWNE FINANCIAL CORP/OH
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,125
<INT-BEARING-DEPOSITS> 80
<FED-FUNDS-SOLD> 1,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,882
<INVESTMENTS-CARRYING> 12,604
<INVESTMENTS-MARKET> 12,401
<LOANS> 60,217
<ALLOWANCE> 235
<TOTAL-ASSETS> 95,607
<DEPOSITS> 75,516
<SHORT-TERM> 2,430
<LIABILITIES-OTHER> 1,171
<LONG-TERM> 9,219
<COMMON> 208
0
0
<OTHER-SE> 7,063
<TOTAL-LIABILITIES-AND-EQUITY> 95,607
<INTEREST-LOAN> 2,503
<INTEREST-INVEST> 933
<INTEREST-OTHER> 56
<INTEREST-TOTAL> 3,492
<INTEREST-DEPOSIT> 1,868
<INTEREST-EXPENSE> 2,180
<INTEREST-INCOME-NET> 1,312
<LOAN-LOSSES> 9
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,359
<INCOME-PRETAX> 76
<INCOME-PRE-EXTRAORDINARY> 76
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
<YIELD-ACTUAL> 2.94
<LOANS-NON> 27
<LOANS-PAST> 221
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 231
<CHARGE-OFFS> 5
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 239
<ALLOWANCE-DOMESTIC> 239
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
