<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 March 31, 1999
Commission File No. 0-20144
-------
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
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 May 7, 1999, the latest practicable date, 220,200 shares of the
registrant's common shares, $1.00 par value, were issued and outstanding.
Transitional Small Business Disclosure Format: Yes No X
--- ---
Page 1 of 59
<PAGE> 2
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial
Condition 3
Consolidated Statements of Earnings 5
Consolidated Statements of Comprehensive
Income 7
Consolidated Statements of Cash Flows 8
Notes to Consolidated Financial Statements 11
Management's Discussion and Analysis
of Financial Condition and Results of
Operations 18
PART II - OTHER INFORMATION 57
SIGNATURES 59
</TABLE>
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<PAGE> 3
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
ASSETS 1999 1998
-------- --------
<S> <C> <C>
Cash and due from banks $ 2,310 $ 1,419
Federal funds sold 2,800 3,900
Interest-bearing deposits in other financial
institutions 297 319
-------- --------
Cash and cash equivalents 5,407 5,638
Certificates of deposit in other financial
institutions 290 469
Investment securities designated as available
for sale - at market, amortized cost of
$7,400 and $806 at March 31, 1999 and
June 30, 1998 7,403 809
Investment securities held to maturity - at
amortized cost, approximate market value of
$602 and $812 at March 31, 1999 and
June 30, 1998 599 809
Mortgage-backed securities designated as
available for sale - at market, amortized cost
of $19,067 and $18,413 at March 31, 1999
and June 30, 1998 18,966 18,354
Mortgage-backed securities held to maturity - at
amortized cost, approximate market value of
$13,088 and $14,592 at March 31, 1999 and
June 30, 1998 13,111 14,641
Loans held for sale - at lower of cost or market 1,312 882
Loans receivable - net 70,149 71,476
Office premises and equipment - at depreciated
cost 2,196 2,250
Real estate acquired through foreclosure 132 -
Federal Home Loan Bank stock - at cost 840 797
Accrued interest receivable on loans 616 678
Accrued interest receivable on mortgage-backed
securities 168 189
Accrued interest receivable on investments and
interest-bearing deposits 129 25
Goodwill - net of accumulated amortization 308 333
Prepaid expenses and other assets 669 425
Prepaid federal income taxes 22 15
-------- --------
TOTAL ASSETS $122,317 $117,790
======== ========
</TABLE>
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<PAGE> 4
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (CONTINUED)
(In thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
-------- --------
<S> <C> <C>
Deposits $ 98,409 $ 94,988
Advances from the Federal Home Loan Bank 12,674 12,674
Loan of Employee Stock Ownership Plan 15 30
Advances by borrowers for taxes and insurance 400 300
Accounts payable on mortgage loans serviced for
others 633 492
Accrued interest payable 30 38
Other liabilities 140 175
Deferred Federal income taxes 512 430
-------- --------
Total liabilities 112,813 109,127
Commitments - -
Shareholders' equity
Preferred shares - 250,000 shares of $1.00
par value authorized; no shares issued - -
Common shares - 2,250,000 shares of $1.00
par value authorized; 222,200 and 208,500
shares issued and outstanding at March 31,
1999 and June 30, 1998, respectively 222 209
Additional paid-in capital 1,884 1,680
Retained earnings - substantially restricted 7,478 6,841
Less required contributions for shares acquired
by Employee Stock Ownership Plan (ESOP) (15) (30)
Accumulated other comprehensive income:
Unrealized losses on securities designated as
available for sale - net of related tax effects (65) (37)
-------- --------
Total shareholders' equity 9,504 8,663
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $122,317 $117,790
======== ========
</TABLE>
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<PAGE> 5
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
For the nine and three months ended March 31,
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended Three months ended
March 31, March 31,
--------------------- --------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest income
Loans $4,512 $4,750 $1,467 $1,610
Mortgage-backed securities 1,449 1,309 441 462
Investment securities 220 84 109 24
Interest-bearing deposits and other 208 154 53 66
------ ------ ------ ------
Total interest income 6,389 6,297 2,070 2,162
Interest expense
Deposits 3,662 3,431 1,185 1,167
Borrowings 555 570 182 196
------ ------ ------ ------
Total interest expense 4,217 4,001 1,367 1,363
------ ------ ------ ------
Net interest income 2,172 2,296 703 799
Provision for losses on loans 23 18 7 6
------ ------ ------ ------
Net interest income after provision
for losses on loans 2,149 2,278 696 793
Other income
Loan servicing fees (costs) (8) 36 12 7
Gain on sale of mortgage loans 436 277 150 189
Gain (loss) on sale of mortgage-backed
securities (1) 20 -- 7
Gain on sale of investment securities 34 -- 10 --
Service fees, charges and other operating 43 33 10 12
------ ------ ------ ------
Total other income 504 366 182 215
General, administrative and other expense
Employee compensation and benefits 890 839 301 297
Occupancy and equipment 290 277 99 96
Data processing 67 76 25 24
Federal deposit insurance premiums 43 39 15 14
Franchise taxes 72 72 22 25
Advertising 76 69 22 22
Amortization of goodwill 25 25 9 8
Other operating 174 150 59 53
------ ------ ------ ------
Total general, administrative and
other expense 1,637 1,547 552 539
------ ------ ------ ------
Earnings before income taxes
(subtotal carried forward) 1,016 1,097 326 469
</TABLE>
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<PAGE> 6
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS (CONTINUED)
For the nine and three months ended March 31,
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended Three months ended
March 31, March 31,
-------------------- --------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Earnings before income taxes
(subtotal brought forward) $1,016 $1,097 $ 326 $ 469
Federal income taxes
Current 206 299 60 133
Deferred 96 81 23 29
------ ------ ------ ------
Total federal income taxes 302 380 83 162
------ ------ ------ ------
NET EARNINGS $ 714 $ 717 $ 243 $ 307
====== ====== ====== ======
EARNINGS PER SHARE:
Basic $ 3.39 $ 3.44 $ 1.14 $ 1.47
====== ====== ====== ======
Diluted $ 3.17 $ 3.27 $ 1.04 $ 1.40
====== ====== ====== ======
</TABLE>
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<PAGE> 7
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the nine and three months ended March 31,
(In thousands)
<TABLE>
<CAPTION>
Nine months ended Three months ended
March 31, March 31,
------------------- -------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net earnings $ 714 $ 717 $ 243 $ 307
Other comprehensive income, net of related tax effects:
Unrealized gains (losses) on securities
designated as available for sale
Unrealized gains (losses) arising
during the period (6) 165 (9) 177
Reclassification adjustment:
gain included in net earnings (22) (13) (7) (4)
----- ----- ----- -----
(28) 152 (16) 173
----- ----- ----- -----
Comprehensive income $ 686 $ 869 $ 227 $ 480
===== ===== ===== =====
</TABLE>
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<PAGE> 8
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended March 31,
(In thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows provided by (used in) operating
activities:
Net earnings for the period $ 714 $ 717
Adjustments to reconcile net earnings to
net cash provided by (used in) operating
activities:
Amortization of premiums and accretion of
discounts on investment securities, net 1 -
Amortization of premiums and accretion of
discounts on mortgage-backed securities, net 61 8
Gain on sale of investment securities (34) -
Loss (gain) on sale of mortgage-backed securities 1 (20)
Provision for losses on loans 23 18
Gain on sale of mortgage loans (156) (102)
Accretion of discount on loans (2) (2)
Amortization of deferred loan origination fees (36) (28)
Loans originated for sale in the secondary market (21,837) (14,118)
Proceeds from sale of loans in the secondary
market 22,407 14,295
Depreciation and amortization 123 119
Federal Home Loan Bank stock dividends (43) (41)
Amortization of goodwill 25 25
Increases (decreases) in cash due to changes in:
Accrued interest receivable on loans 62 (51)
Accrued interest receivable on mortgage-backed
securities 21 (18)
Accrued interest receivable on investments
and interest-bearing deposits (104) (7)
Prepaid expenses and other assets (244) (166)
Accrued interest payable (8) 7
Other liabilities (35) 23
Federal income taxes
Current (7) 24
Deferred 96 81
-------- --------
Net cash provided by operating activities 1,028 764
</TABLE>
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<PAGE> 9
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended March 31,
(In thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows provided by (used in) investing activities:
Proceeds from sale of investment securities
designated as available for sale $ 3,863 $ -
Proceeds from called investment securities held
to maturity 285 1,800
Purchase of investment securities designated
as available for sale (10,424) (247)
Purchase of investment securities held to maturity (75) (1,310)
Proceeds from sale of mortgage-backed securities
designated as available for sale 1,993 6,352
Purchase of mortgage-backed securities designated as
available for sale (4,514) (8,319)
Purchase of mortgage-backed securities held to
maturity (2,187) (3,623)
Principal repayments on mortgage-backed securities
designated as:
Available for sale 1,865 379
Held to maturity 3,657 764
Purchase of loans (481) (561)
Loan disbursements (21,410) (22,605)
Loan principal repayments 22,257 17,710
Purchase of office premises and equipment (69) (31)
(Increase)decrease in certificates of deposit in
other financial institutions - net 179 (102)
-------- --------
Net cash used in investing activities (5,061) (9,793)
Cash flows provided by (used in) financing activities:
Issuance of and credits to deposit accounts 61,456 64,988
Withdrawals from deposit accounts (58,035) (53,901)
Proceeds from Federal Home Loan Bank advances - 5,000
Repayments of Federal Home Loan Bank advances - (3,726)
Advances by borrowers for taxes and insurance 100 115
Accounts payable on mortgage loans serviced for
others 141 354
Proceeds from the exercise of stock options 217 -
Dividends paid on common shares (77) (63)
-------- --------
Net cash provided by financing activities 3,802 12,767
-------- --------
Net increase (decrease) in cash and cash equivalents (231) 3,738
Cash and cash equivalents at beginning of period 5,638 2,715
-------- --------
Cash and cash equivalents at end of period $ 5,407 $ 6,453
======== ========
</TABLE>
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<PAGE> 10
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended March 31,
(In thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 213 $ 275
======= =======
Interest on deposits and borrowings $ 4,225 $ 3,994
======= =======
Supplemental disclosure of noncash investing activities:
Foreclosed mortgage loans transferred to
real estate acquired through foreclosure $ 150 $ -
======= =======
Loans disbursed to finance the sale of real
estate acquired through foreclosure $ 18 $ -
======= =======
Transfers of loans held for investment
to held for sale classification $ 814 $ 766
======= =======
Transfer of allowance for loan losses
from a general to a specific allocation $ 35 $ -
======= =======
Loan charge-offs $ - $ 4
======= =======
Recognition of mortgage servicing rights in
accordance with Statement of Financial Accounting
Standards No. 125 $ 280 $ 175
======= =======
Unrealized gains (losses) on securities designated
as available for sale - net of related tax effects $ (28) $ 152
======= =======
</TABLE>
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<PAGE> 11
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three month periods ended
March 31, 1999 and 1998
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 nine and three month periods
ended March 31, 1999 and 1998 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").
-11-
<PAGE> 12
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three month periods ended
March 31, 1999 and 1998
2. Principles of Consolidation (continued)
---------------------------
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 requires. All significant intercompany
balances and transactions have been eliminated in the accompanying consolidated
financial statements.
3. Effects of Recent Accounting Pronouncements
-------------------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenue, expenses, gains and
losses) in a full set of general-purpose financial statements. Comprehensive
income consists of net earnings or loss for the current period and other
comprehensive income - revenue, expenses, gains and losses that bypass the
income statement and are reported directly in a separate component of equity.
Other comprehensive income includes, for example, foreign currency items,
minimum pension liability adjustments and unrealized gains and losses on certain
investment securities. SFAS No. 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. It does not require a specific format for that
financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. SFAS No. 130 requires that an enterprise (i) classify items of other
comprehensive income by their nature in a financial statement and (ii) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 was effective for fiscal years beginning after
December 15, 1997, and required restatement of prior year financial statements
presented for comparative purposes. For the nine and three months ended March
31, 1999, Towne Financial presented a separate statement of comprehensive income
and other information pursuant to the provisions of SFAS No. 130. In accordance
with the Statement, prior period financial statements presented for comparative
purposes were restated to conform with SFAS No. 130.
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<PAGE> 13
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three month periods ended
March 31, 1999 and 1998
3. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 significantly changes
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about reportable segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 uses a "management approach" to disclose financial and descriptive
information about the way that management organizes the segments within the
enterprise for making operating decisions and assessing performance. A
reportable segment, referred to as an operating segment, is a component of an
enterprise about which separate financial information is produced internally,
that is evaluated by the chief operating decision-maker to assess performance
and allocate resources. Enterprises are required to report segment profit or
loss, certain specific revenue and expense items and segment assets based on
financial information used internally for evaluating performance and allocating
resources. An enterprise is also required to describe how its operating segments
were determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in its financial statements and any changes in the measurement of
segment amounts from the previous period. For many enterprises, the management
approach will likely result in more segments being reported. In addition, SFAS
No. 131 requires significantly more information to be disclosed for each
reportable segment than is presently being reported in annual financial
statements and also requires that selected information be reported in interim
financial statements. SFAS No. 131 was effective for fiscal years beginning
after December 15, 1997, but earlier application was encouraged. Segment
information reported in earlier years was to be restated to conform to the
requirements of SFAS No. 131. Enterprises were not required to report segment
information in interim financial statements in the year of adoption, but
comparative financial information was required beginning with the second year
after adoption. The adoption of SFAS No. 131 did not have a material impact on
Towne Financial's consolidated financial statements as management did not
believe that implementation of this Statement resulted in the identification of
other reportable business segments at this time.
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<PAGE> 14
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three month periods ended
March 31, 1999 and 1998
3. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post-retirement Benefits," which revises employers'
disclosures about pension and other Postretirement benefit plans. It eliminates
certain current disclosures and requires additional information about changes
in the benefit obligation and the fair values of plan assets. It also
standardizes the disclosure requirements of SFAS No. 87, No. 88 and No. 106 to
the extent practicable and recommends a parallel format for presenting
information about pensions and other postretirement benefits. SFAS No. 132 does
not change any of the measurement or recognition provisions provided for in SFAS
No. 87, No. 88 or No. 106, and provides reduced disclosure requirements for
nonpublic entities. SFAS No. 132 was effective for fiscal years beginning after
December 15, 1997, with earlier application encouraged. Restatement of
disclosures for earlier periods was required unless the information was not
readily available, in which case the notes to the financial statements would
include all available information and a description of the information not
available. The adoption of SFAS No. 132 did not have a material impact on Towne
Financial's consolidated financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes uniform accounting and
reporting standards for derivative financial instruments and other similar
financial instruments and for hedging activities. SFAS No. 133 requires all
derivatives to be measured at fair value and be recognized as either assets or
liabilities in the statement of financial position. SFAS No. 133 also specifies
new methods of accounting for hedging transactions, prescribes the items and
transactions that may be hedged and specifies detailed criteria to be met to
qualify for hedge accounting. The definition of a derivative financial
instrument is complex, but in general, it is an instrument with one or more
underlyings, such as an interest rate or foreign exchange rate, that is applied
to a notional amount, such as an amount of currency, to determine the settlement
amount(s). It generally requires no significant initial investment and can be
settled net or by delivery of an asset that is readily convertible to cash. SFAS
No. 133 applies to derivatives embedded in other contracts, unless the
underlying of the embedded derivative is clearly and closely related to the host
contract. In
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<PAGE> 15
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three month periods ended
March 31, 1999 and 1998
3. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------
addition, SFAS No. 133 includes a provision that permits the transfer of held to
maturity securities to the available for sale category or the trading category
on the date of adoption of the Statement. Such transfers from the held to
maturity category will not call into question an entity's intent to hold other
debt securities to maturity in the future. SFAS No. 133 precludes certain fair
value hedges of held to maturity securities and precludes certain cash flow
hedges of the variable interest payments of held to maturity securities. SFAS
No. 133 therefore includes the provision permitting transfer of securities out
of the held to maturity category because it will enable an entity to hedge the
securities or the cash flows from the securities in the future. The unrealized
holding gain or loss on a held to maturity security that is transferred to the
available for sale category should be reported as part of the cumulative effect
adjustment in accumulated other comprehensive income, together with other
transition adjustments reported in other comprehensive income on adoption of
SFAS No. 133. If the security is transferred to the trading category, the
unrealized holding gain or loss should be reported as part of the cumulative
effect adjustment of adopting SFAS No. 133 in arriving at net income. SFAS No.
133 should be adopted in its entirety; it cannot be adopted piecemeal. All
provisions of SFAS No. 133 should therefore be applied on initial application.
The Statement is effective for fiscal years beginning after June 15, 1999. Early
adoption is permitted as of the beginning of any fiscal quarter that begins
after the Statement was issued. Management does not believe that the adoption of
SFAS No. 133 will have a material adverse effect on Towne Financial's
consolidated financial position or results of operations.
In December 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." The Statement amends SFAS No.
65, "Accounting for Certain Mortgage Banking Activities," to require a mortgage
banking entity that securitizes mortgage loans held for sale to classify any
retained mortgage-backed securities and other retained interests based on the
entity's ability and intent to sell or hold those investments. Retained
mortgage-backed securities should be classified as trading, available for sale,
or held to maturity, as provided under SFAS No. 115, "Accounting for Certain
Investments in Debt and
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<PAGE> 16
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three month periods ended
March 31, 1999 and 1998
3. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------
Equity Securities." However, any retained mortgage-backed securities that a
mortgage banking enterprise commits to sell before or during the securitization
process must be classified as trading. SFAS No. 134 conforms the accounting
treatment for these transactions by a mortgage banking enterprise with the
accounting for securities retained after the securitization of other types of
assets, such as credit card receivables, by a nonmortgage banking enterprise.
The Statement was effective for the first fiscal quarter beginning after
December 15, 1998, with early application encouraged. On adoption of the
Statement, an entity could reclassify mortgage-backed securities and other
beneficial interests retained after the securitization of mortgage loans held
for sale from the trading category, except for those with sales commitments in
place. Transfers from the trading category resulting from the adoption of SFAS
No. 134 should be accounted for under SFAS No. 115, that is, the unrealized gain
or loss at the date of the transfer will have already been recognized in
earnings and should not be reversed. Management did not believe that the
adoption of SFAS No. 134 had a material adverse effect on Towne Financial's
consolidated financial position or results of operations.
4. Earnings Per Share
------------------
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share,"
which requires institutions to present basic earnings per share and, if
applicable, diluted earnings per share, respectively. Basic earnings per share
is computed without including potential common shares, i.e., no dilutive effect.
Diluted earnings per share is computed taking into consideration common shares
outstanding and dilutive potential common shares, including options, warrants,
convertible securities and contingent stock agreements.
In accordance with the provisions of SFAS No. 128, basic earnings per
share was computed by dividing net earnings available to common shareholders by
the weighted-average number of common shares outstanding during each of the
periods presented. Basic earnings per share has been computed based on 210,574
and 208,500 weighted-average shares of common stock outstanding for the nine
month periods ended March 31, 1999 and 1998, respectively, and
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<PAGE> 17
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three month periods ended
March 31, 1999 and 1998
4. Earnings Per Share (continued)
------------------
213,931 and 208,500 weighted-average shares of common stock outstanding for the
three month periods ended March 31, 1999 and 1998, respectively. Unlike the
primary earnings per share calculation of Accounting Principles Board ("APB")
Opinion No. 15, the denominator of basic earnings per share does not include
dilutive common stock equivalents, such as convertible securities, warrants, or
stock options. As a result, exercisable options, attendant to Towne Financial's
Stock Option and Incentive Plans, were not considered in the computation of
basic earnings per share.
Diluted earnings per share, which replaced fully-diluted earnings per
share under APB Opinion No. 15, takes into consideration common shares
outstanding (as computed under basic earnings per share) and dilutive potential
common shares. As a result, diluted earnings per share was computed assuming
exercise of all Towne Financial's outstanding stock options. Weighted-average
common shares deemed outstanding for purposes of computing diluted earnings per
share totaled 225,024 and 219,218 for the nine month periods ended March 31,
1999 and 1998, respectively, and 230,746 and 219,218 for the three month periods
ended March 31, 1999 and 1998, respectively.
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<PAGE> 18
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
- --------------------------
In the following pages, management presents an analysis of Towne
Financial's consolidated financial condition as of March 31, 1999, and the
consolidated results of operations for the nine and three month periods ended
March 31, 1999, as compared to the same periods in 1998. In addition to this
historical information, the following discussion contains forward-looking
statements that involve risks and uncertainties. Economic circumstances, Towne
Financial's operations and Towne Financial's actual results could differ
significantly from those discussed in the forward-looking statements. Some of
the factors that could cause or contribute to such differences are discussed
herein but also include changes in the economy and interest rates in the nation
and in Towne Financial's general market area.
Without limiting the foregoing, some of the forward-looking statements
included herein include the following:
1. Management's determination of the amount of and adequacy of
the allowance for loan losses;
2. The effect of changes in interest rates;
3. Management's analysis and discussion of the interest rate
risk, liquidity and regulatory capital of Blue Ash;
4. Management's belief that Towne Financial's and Blue Ash's
activities will not be materially affected by proposed changes
in the regulation of all savings institutions and their
holding companies;
5. Management's opinion as to the effects of recent accounting
pronouncements on Towne Financial's consolidated financial
statements;
6. Management's assessment of the risks of potential problems
that could arise from the failures of computer systems and
programming to recognize the year 2000; and
7. Management's belief that Towne Financial will not likely incur
significant expense to implement the necessary corrective
measures regarding any year 2000 related problems.
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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, 1998 to March 31, 1999
- ------------------------------------------------------------------------------
At March 31, 1999, Towne Financial's consolidated assets totaled $122.3
million, representing an increase of $4.5 million, or 3.8%, over the $117.8
million asset level at June 30, 1998. The increase in asset size experienced
during the nine months ended March 31, 1999 was funded principally through an
increase in deposits of $3.4 million, or 3.6%, and, to a lesser extent, an
increase in shareholders' equity of $841,000, or 9.7%, and an increase realized
in all noninterest-bearing liabilities of $280,000, or 19.5%, all of which were
partially offset by a decrease in borrowings of $15,000, or 0.1%. Such increase
in total assets was primarily due to an increase in investment securities of
$6.4 million, or 394.6%, which was partially offset by a reduction in
mortgage-backed securities of $918,000, or 2.8%, a reduction in loans receivable
and loans held for sale of $897,000, or 1.2%, and a reduction in cash, cash
equivalents and certificates of deposit in other financial institutions of
$410,000, or 6.7%. The current period's growth in assets followed an increase of
$15.2 million, or 14.9%, during fiscal 1998 and $10.4 million, or 11.2%, during
fiscal 1997. Towne Financial's growth during the nine month period ended March
31, 1999 and over the last two years was generally indicative of management's
efforts to increase net interest income levels by effectively leveraging the
capital base. The growth in total assets was also consistent with management's
short-term goals and with its strategic objective of continuing to grow the size
of the operations within the existing branch structure.
Cash and due from banks, federal funds sold, interest-bearing deposits
and certificates of deposits in other financial institutions totaled
approximately $5.7 million at March 31, 1999, a decrease of $410,000, or 6.7%,
from June 30, 1998 levels of $6.1 million. The reduction during the nine months
ended March 31, 1999 in cash, cash equivalents and certificates of deposit in
other financial institutions was largely driven by the dissemination of excess
cash and liquid funds into primarily higher yielding investment securities and,
to a lesser extent, certain fixed-rate mortgage-backed and related securities.
As the Corporation's liquidity position increased during the 1999 period as a
result of a continued growth in deposits, which was coupled with a reduction in
the loan portfolio as loan prepayments and loan sales
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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, 1998 to March 31, 1999
- ------------------------------------------------------------------------------
(continued)
accelerated in a historically low interest rate environment, management elected
to channel such increasing liquidity into the investment and mortgage-backed
securities portfolios to take advantage of certain market opportunities as well
as to increase its overall investment yield in a declining and flat yield curve
environment. The increase in investment securities of $6.4 million, or 394.6%,
and the purchase of $6.7 million in mortgage-backed securities during the nine
months ended March 31, 1999 were predominately funded by an increase in deposits
of $3.4 million, or 3.6%, a decrease in loans receivable and loans held for sale
of $897,000, or 1.2%, a decrease in cash and other liquid assets of $410,000, or
6.7%, and cash flows received from accelerated prepayments on certain
mortgage-backed securities. Growth in the investment securities portfolio
outpaced growth in deposits and proceeds received from loan sales and repayments
on loans and securities, causing the reduction in cash and cash equivalents at
March 31, 1999.
Investment securities designated as available for sale and held to
maturity totaled $8.0 million at March 31, 1999, an increase of $6.4 million, or
394.6%, over June 30, 1998 levels of $1.6 million. This increase in investment
securities reflected the purchase of predominately municipal obligations of
$10.4 million, which was partially offset by proceeds received from the sale of
municipal obligations of $3.9 million and proceeds received from the call of
securities of $285,000. With interest rates having fallen so rapidly during the
nine months ended March 31, 1999, the Corporation experienced an increase in
liquidity and a shortening in duration on many security positions within the
investment and mortgage-backed securities portfolios. This was especially true
considering the amount of cash flow which has and will be coming into the
portfolio through called U.S. Government and agency obligations and mortgage
prepayments on loans and securities in the months ahead. The result is exposure
to a continued decline in interest rates. The Corporation's interest rate risk
position has changed as the decline in interest rates has accelerated cash flows
from callable and mortgage securities. As a result, the Corporation has become
heavily exposed to falling interest rates. To correct this exposure, the
purchase of fixed-rate assets was
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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, 1998 to March 31, 1999
- ------------------------------------------------------------------------------
(continued)
needed. The wide spreads and steepness of the municipal yield curve made
tax-free securities especially attractive to correct exposure to falling
interest rates during the nine months ended March 31, 1999. As a result, the
excess funds from the deposit growth as well as from proceeds from loan sales
and prepayments on loans and mortgage-backed securities were utilized to
purchase tax-free fixed-rate municipal obligations designated as available for
sale with eight to ten years of call protection and maturities ranging from
twelve to twenty-five years. These securities were acquired for the purpose of
not holding them to maturity, to obtain attractive tax-equivalent yields in a
declining interest rate environment, to recognize additional earnings through
profits from sale of securities in future periods to offset the pressures of
narrowing net interest margins and to lengthen out maturities within the
investment portfolio so as to combat the shortened portfolio duration as a
result of accelerating calls and prepayments on securities. The overall increase
in investment securities during the nine months ended March 31, 1999 not only
resulted from a slowdown in the growth of the loan portfolio, but also resulted
from management's decision to leverage funds into higher yielding assets, such
as municipal obligations.
Mortgage-backed securities designated as available for sale and
mortgage-backed securities held to maturity decreased by approximately $918,000,
or 2.8%, during the nine months ended March 31, 1999. This decrease in the
mortgage-backed securities portfolio was attributed to principal repayments on
securities of $5.5 million, proceeds from the sale of securities designated as
available for sale, including losses, of $2.0 million, amortization of premiums
and accretion of discounts on securities, net, of $61,000 and a net increase in
unrealized market losses on securities designated as available for sale of
$42,000, all of which were partially offset by purchases of $1.6 million in
floating-rate collateralized mortgage obligations designated by management as
held to maturity, purchases of $543,000 in fixed-rate participation certificates
designated as held to maturity and purchases of $4.5 million in fixed-rate
collateralized mortgage obligations and participation certificates designated as
available for sale. In addition to growing the investment portfolio, management
elected to change the mix as well as to increase the
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<PAGE> 22
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, 1998 to March 31, 1999
- ------------------------------------------------------------------------------
(continued)
level of its mortgage-backed securities during the nine months ended March 31,
1999 as the loan portfolio growth slowed in attempts to diversify its investment
holdings and to increase the volume of interest-earning assets relative to the
equity base (leverage) in order to improve net interest income and overall net
earnings. However, the Corporation experienced heavier than expected prepayments
on its mortgage-backed securities due to the decline in overall interest rates.
Such accelerated prepayment activity on securities in conjunction with proceeds
received from sales on securities more than fully offset the Corporation's
purchase activity during the 1999 period, thereby reducing the overall level of
mortgage-backed securities at March 31, 1999. As a result, the reduction in the
mortgage-backed securities portfolio was utilized, in part, to help fund the
increase in the investment securities portfolio, specifically the purchase of
tax-free fixed-rate municipal obligations. From time to time, when opportunities
exist, the Corporation utilizes advances from the Federal Home Loan Bank in the
acquisition of certain securities in order to lock in an attractive spread
between investment and borrowing. In continuing its efforts from prior periods
to better diversify the mortgage-backed securities portfolio so as to improve
overall performance and yield, the Corporation acquired during the nine months
ended March 31, 1999 short- to immediate-term fixed-rate securities designated
as available for sale, a monthly floating-rate collateralized mortgage
obligation indexed to the composite prime rate of 75% of the thirty largest U.S.
banks as reported by THE WALL STREET JOURNAL and a monthly floating-rate short
average life collateralized mortgage obligation indexed to the Eleventh District
cost of funds. By investing in short- to intermediate-term fixed-rate
securities, specifically collateralized mortgage obligations and participation
certificates, management intended to capitalize if and when the Federal Reserve
Board began cutting short-term interest rates, which appeared artificially high
in relation to long-term interest rates. The floating-rate security tied to the
composite prime rate was acquired in order to take advantage of an attractive
spread to the comparable U.S. treasury index without incurring a greater
prepayment risk stemming from a lower interest rate environment that existed
during the nine months ended March 31, 1999. The floating-rate security tied to
the
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<PAGE> 23
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, 1998 to March 31, 1999
- ------------------------------------------------------------------------------
(continued)
Eleventh District cost of funds was acquired as a defensive measure and to take
advantage of a lower interest rate environment currently in effect. The
Corporation also invested in a fully securitized fixed-rate Government National
Mortgage Association project loan that offered an attractive yield and good lock
out protection. As a result of these acquisitions, management wanted to be in
position to not only improve its current overall yield on mortgage-backed
securities, but to more favorably capitalize in a declining interest rate
environment.
Loans receivable and loans held for sale decreased in the aggregate by
approximately $897,000, or 1.2%, during the nine months ended March 31, 1999.
This decline was largely attributed to loan sales, net of gains, of $22.3
million, principal repayments on loans of $22.3 million and loans acquired
through foreclosure of $150,000, all of which were partially offset by loan
disbursements, loan purchases and loans originated for sale in the secondary
market of $43.7 million. The reduction in the loan portfolio was primarily due
to a decrease of $1.4 million, or 11.9%, in nonresidential real estate and land
loans, a decrease of $257,000, or 9.8%, in home equity line of credit loans and
a decrease of $128,000, or 3.3%, in multi-family construction and residential
real estate loans, all of which were partially offset by an increase of
$794,000, or 1.5%, in one-to-four family residential real estate and
construction loans and an increase of $33,000, or 16.9%, in passbook loans to
deposit customers and other secured consumer loans. Over the past few years,
Blue Ash has substantially grown in the loan portfolio as a result of a
continued greater loan origination volume in all types of loans, management's
strategy to primarily hold loans in the portfolio subject to certain interest
rate risk limitations and management's strategy to redeploy funds from other
asset categories into lending activities to the extent practicable. The strategy
to hold loans has reflected management's continued desire to grow the
Corporation largely through loan portfolio growth, management's desire to obtain
a better loan portfolio mix of adjustable- and fixed-rate loans by increasing
the fixed-rate portion of its loan portfolio and management's intent to increase
its loan-to-deposit ratio. During the nine months ended March 31, 1999 as well
as during the
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<PAGE> 24
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, 1998 to March 31, 1999
- ------------------------------------------------------------------------------
(continued)
last two previous quarters, however, due to a decline in long-term interest
rates toward historical lows, combined with a shift to a very flat yield curve,
management redirected its efforts and strategies to originating for sale in the
secondary market all conforming single-family residential mortgage loans in
order to reduce its exposure to interest rate risk. Adhering to this change in
strategy, coupled with heavy principal repayments and payoffs on loans,
including a couple of large balance nonresidential real estate loans, resulted
in a reduction of loans receivable and loans held for sale at March 31, 1999.
During this period of generally lower interest rates, loan originations and loan
sales were at higher levels than in prior periods due to an increased loan
demand consisting primarily of refinancings and fixed-rate loans. During the
nine months ended March 31, 1999, total loan originations and purchases were a
robust $43.7 million, as compared to $37.3 million during the nine months ended
March 31, 1998, an increase of $6.4 million, or 17.3%. Specifically, loans
originated for sale in the secondary market increased significantly during the
nine months ended March 31, 1999, as compared to the nine months ended March 31,
1998 from $14.1 million to $21.8 million, while loans originated and purchased
for the portfolio declined period-to-period from $23.2 million to $21.9 million.
It was management's strategy to accelerate loan originations during this lower
interest rate period by utilizing loan sales as a means to accommodate the
increased loan volume, thereby slowing loan portfolio growth and increasing
other operating income from gains on sale of loans in the secondary market.
Management utilized sales of loans in the secondary market as a means of meeting
the consumer preference for fixed-rate loans. If interest rates remain at all
time historical lows, selling residential mortgage loans in the secondary market
will continue to be a part of Blue Ash's future plans, as this practice will
enable Blue Ash to enhance the management of its liquidity position as well as
effect changes in its asset and liability mix. Despite the reduction in the loan
portfolio which was dictated by a declining interest rate environment, overall
loan origination volume remained very strong during the nine months ended March
31, 1999 due to the continued strong marketing and selling effort by management
to originate loans and the continual development and refinement of new loan
products and programs to better serve the lending area.
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<PAGE> 25
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, 1998 to March 31, 1999
- ------------------------------------------------------------------------------
(continued)
At March 31, 1999, the Corporation's allowance for loan losses totaled
$270,000, an increase of $6,000, or 2.3%, over the $264,000 level represented at
June 30, 1998. During the nine months ended March 31, 1999, the Corporation
increased its allowance for general loan losses by $23,000, transferred $35,000
in allowance for loan losses from a general to a specific allocation and
incurred loan charge-offs of $17,000 on foreclosed single-family residential
mortgage loans which were subsequently transferred to real estate acquired
through foreclosure. The Corporation's internally-classified assets, net of a
specific valuation allowance, totaled approximately $841,000 at March 31, 1999,
as compared to $885,000 at June 30, 1998. Non-performing and nonaccrual loans,
on the other hand, totaled only $340,000, or 0.48% of loans receivable and loans
held for sale, at March 31, 1999, as compared to $885,000, or 1.22% of loans
receivable and loans held for sale, at June 30, 1998. The reduction in
internally-classified assets during the nine months ended March 31, 1999 was
primarily due to an aggregate decrease both in number and outstanding balance in
the classification of single-family residential mortgage loans, which was
partially offset by the initial classification of a single-family construction
loan as "Special Mention." The improvement in non-performing and nonaccrual
loans was largely due to the reduction in single-family residential and lot loan
delinquencies of 90 days or more during the 1999 period. In the opinion of
management, such internally-classified assets and non-performing and nonaccrual
loans in the aggregate represented an approximate 70-75% loan-to-value ratio at
March 31, 1999 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
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<PAGE> 26
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, 1998 to March 31, 1999
- ------------------------------------------------------------------------------
(continued)
provision for general loan losses of $23,000 recorded during the nine months
ended March 31, 1999 was attributed to management's assessment of the current
level of internally-classified and non-performing and nonaccrual loans, the
current composition of loans within the portfolio and Blue Ash's overall growth
within the loan portfolio over the past few years. Management believed that the
loan loss allowance existing at March 31, 1999 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 March 31, 1999 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 which could adversely
affect the Corporation's results of operations. At March 31, 1999, the
Corporation's allowance for loan losses consisted of a general valuation
allowance, as defined by the regulations of the Office of Thrift Supervision
("OTS"), of $252,000 and a specific loan loss allowance of $18,000, and
represented 0.38% of the total amount of loans outstanding, including those
loans designated as held for sale, and 31% of internally-classified assets.
Deposits totaled $98.4 million at March 31, 1999, an increase of $3.4
million, or 3.6%, over the $95.0 million in deposits outstanding at June 30,
1998. The increase in total overall deposits was primarily the result of an
increase in certificates of deposit of $1.3 million, or 1.8%, which was coupled
with an increase in transaction accounts (NOW accounts, money market deposit
accounts, passbook accounts and Christmas club accounts) of $2.1 million, or
10.9%. The increase in certificates of deposit (primarily certificates of
deposit with original terms to maturity of two years or less) during the nine
months ended March 31, 1999 was attributed to an increase in certificate of
deposit balances obtained from the local market area of $5.5 million, or 6.2%,
which was partially offset by a decline in outstanding brokered deposits of $2.1
million, or 35.5%. In an effort to sustain deposit growth during the nine months
ended March 31, 1999, management continued its strategy in part of funding the
growth in assets by carefully growing the deposit base through certificates of
deposit. The increase in certificates of deposit from Blue Ash's local market
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<PAGE> 27
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, 1998 to March 31, 1999
- ------------------------------------------------------------------------------
(continued)
area during the nine months ended March 31, 1999 was attributed to the influx of
new accounts resulting from continued strong marketing efforts and competitive
pricing on certificate of deposit accounts. The emphasis in brokered deposits
and other out-of-state funds was de-emphasized by management as they became a
less attractive alternative funding source. The need for brokered deposits
lessened as the loan portfolio growth slowed in the declining interest rate
environment and cash flows from loans and mortgage-backed securities
accelerated. From time to time, however, when circumstances dictate in the
future, management will continue its strategy of selectively obtaining brokered
deposits and other out-of-state funds to supplement its deposit base. As long as
demand for new loan production remains strong in the periods ahead, brokered
deposits will continue to be a viable funding source, as management is reluctant
to aggressively price above market and seek at all times certificates of deposit
from its local market area. The increase in transaction accounts during the nine
months ended March 31, 1999 was due to an increase in NOW accounts of $1.3
million, or 32.6%, an increase in money market deposit accounts of 685,000, or
10.3%, and an increase in passbook and club accounts of $53,000, or 0.6%. As
part of its efforts to increase the deposit base, management continued its more
assertive efforts during the nine months ended March 31, 1999 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. As a result of
these marketing and selling efforts, the outstanding balance of all customer
checking accounts increased by $504,000, or 14.4%, and the number of overall
checking accounts increased by 9.8% during the nine months ended March 31, 1999.
In terms of checking account growth at the Mason branch office, which is located
in a fast-developing and growing area, there was an increase of 35.3% in the
number of accounts open and an increase of 21.1% in the outstanding balance of
such accounts during the nine months ended March 31, 1999. The overall growth in
deposits during the nine months ended March 31, 1999 reflected management's
continuing efforts to maintain steady growth and was consistent with
management's short-
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<PAGE> 28
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, 1998 to March 31, 1999
- ------------------------------------------------------------------------------
(continued)
term and long-term goals. From time to time, however, in an attempt to closely
control its overall cost of funds and based on the current interest rate
environment, management may temporarily elect to use alternative funding
sources, such as brokered deposits. It is the continued goal of management to
increase loan production and the level of loan retention, thereby increasing the
need for overall deposits and available liquid assets. Management expects to
continue meeting the need for deposits, for the most part, through increased
marketing and competitive pricing of the Company's deposit products, which could
result in additional operating expenses and interest expense.
Total borrowings, which consisted principally of Federal Home Loan Bank
advances at March 31, 1999, totaled approximately $12.7 million at March 31,
1999, as compared to $12.7 million at June 30, 1998. During the nine months
ended March 31, 1999, there was a principal repayment of $15,000 in regards to
the outstanding Employee Stock Ownership Plan loan that is secured by the
Corporation's common stock. Although there was no activity with regards to
borrowings from the Federal Home Loan Bank during the nine months ended March
31, 1999, Federal Home Loan Bank advances have been actively pursued and
utilized by the Corporation for a variety of reasons in prior periods and will
continue to be used when necessary in future periods. 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. Federal Home Loan Bank advances are utilized by Blue
Ash for funding in times of low cash availability, as well as funding specific
needs, such as large loans. Another use is the funding of investments and
mortgage-backed securities, where an attractive spread is offered when compared
to the cost of borrowing, and where both the security and the borrowing may have
similar terms to maturity or similar repricing patterns. Management believes
that the use of Federal Home Loan Bank advances is a prudent measure in the
above instances. Additionally, Federal Home Loan Bank advances may also be used
as an instrument in the control of interest rate risk when appropriate or for
restructuring purposes. In future periods, management may acquire additional
Federal Home Loan Bank advances to fund loan production, to acquire investments
and mortgage-backed
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<PAGE> 29
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, 1998 to March 31, 1999
- ------------------------------------------------------------------------------
(continued)
securities, or as a tool to manage the interest rate risk of Blue Ash.
Shareholders' equity totaled $9.5 million at March 31, 1999, an
increase of $841,000, or 9.7%, over the total of $8.7 million at June 30, 1998.
The increase in shareholders' equity was primarily due to net earnings for the
period of $714,000, proceeds from the exercise of stock options of $217,000 and
a reduction in required contributions of the Employee Stock Ownership Plan of
$15,000, all of which were partially offset by the payment of dividends to
shareholders of $77,000 and an increase in unrealized market losses on
securities designated as available for sale, net of related tax effects, of
$28,000. At March 31, 1999, shareholders' equity as a percentage of total assets
was 7.8%.
Blue Ash is subject to minimum regulatory capital standards promulgated
by the OTS. Failure to meet minimum capital requirements can initiate certain
mandatory - and possibly additional discretionary - actions by regulators that,
if undertaken, could have a direct material effect on Blue Ash's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, Blue Ash must meet specific capital guidelines that
involve quantitative measures of its assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. Blue Ash's
capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors. The minimum
capital standards of the OTS generally require the maintenance of regulatory
capital sufficient to meet each of three tests, hereinafter described as the
tangible capital requirement, the core capital requirement and the risk-based
capital requirement. The tangible capital requirement provides for minimum
tangible capital (defined as shareholders' equity less all intangible assets)
equal to 1.5% of adjusted total assets. The core capital requirement provides
for minimum core capital (tangible capital plus certain forms of supervisory
goodwill and other qualifying intangible assets) equal to 3.0% of adjusted total
assets, while the risk-based capital requirement currently provides for the
maintenance of core capital plus general loan loss allowances equal to 8.0% of
risk-weighted assets as of March 31,
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<PAGE> 30
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, 1998 to March 31, 1999
- ------------------------------------------------------------------------------
(continued)
1999. In computing risk-weighted assets, Blue Ash multiplies the value of each
asset on its statement of financial condition by a defined risk-weighted factor,
e.g., one-to-four family residential loans carry a risk-weighted factor of 50%.
Management has determined that Blue Ash is in compliance with each of
the three capital requirements at March 31, 1999. Specifically, Blue Ash's
tangible and core capital of $9.0 million, or 7.4% of total adjusted assets,
exceeded the respective minimum requirements of $1.8 million and $3.7 million at
that date by approximately $7.2 million, or 5.9% of total adjusted assets, and
$5.3 million, or 4.4% of total adjusted assets. Additionally, Blue Ash's
risk-based capital of approximately $9.2 million at March 31, 1999, or 16.0% of
risk-weighted assets (including a general loan loss allowance of $252,000),
exceeded the current 8.0% requirement of $4.6 million by approximately $4.6
million, or 8.0% of risk-weighted assets.
The OTS has proposed an amendment to the core capital requirement that
would increase the minimum requirement to a range of 4.0% - 5.0% of adjusted
total assets for substantially all savings associations. Management anticipates
no material change to Blue Ash's excess regulatory capital position if the
proposal is adopted in its present form.
The OTS adopted a final rule in August 1993 incorporating an interest
rate risk component into the risk-based capital rules. Under the rule, an
institution with a greater than "normal" level of interest rate risk will be
subject to a deduction of its interest rate risk component from total capital
for purposes of calculating the risk-based capital requirement. An institution
with a greater than "normal" interest rate risk is defined as an institution
that would suffer a loss of net portfolio value ("NPV") exceeding 2.0% of the
estimated market value of its assets in the event of a 200 basis point increase
or decrease in interest rates. NPV is the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts. A resulting change in NPV of more than 2% of the estimated market
value of an institution's assets will require the institution to deduct from its
capital 50% of that excess change. The rule
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<PAGE> 31
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, 1998 to March 31, 1999
- ------------------------------------------------------------------------------
(continued)
provides that the OTS will calculate the interest rate risk component quarterly
for each institution. The OTS has indicated that no institution will be required
to deduct an interest rate risk component from capital for purposes of computing
the risk-based capital requirement until further notice. In general,
institutions which have risk-based capital in excess of 12% and assets under
$300 million are exempt from the new requirement unless the OTS requires
otherwise. The OTS will continue, however, to closely monitor the level of
interest rate risk at individual institutions and retains the authority, on a
case-by-case basis, to impose a higher individual minimum capital requirement
for individual institutions with significant interest rate risk. At March 31,
1999, Blue Ash had total assets of $122.3 million and risk-based capital of
16.0% which would have qualified Blue Ash for this exemption had the new
requirements been in effect at such date.
-31-
<PAGE> 32
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine Month Periods Ended March 31, 1999
- -------------------------------------------------------------------------------
and 1998
- --------
General
- -------
Net earnings totaled $714,000 for the nine months ended March 31, 1999,
a decrease of $3,000, or 0.4%, from the $717,000 in net earnings recorded for
the nine months ended March 31, 1998. The slight decline in net earnings was
primarily attributable to a decrease in net interest income after provision for
losses on loans of $129,000, or 5.7%, and an increase in general, administrative
and other expense of $90,000, or 5.8%, which were both partially offset by an
increase in other income of $138,000, or 37.7%. The decrease in net interest
income after provision for losses on loans was further accentuated by the
presentation during the nine months ended March 31, 1999 of interest income on
tax-exempt municipal securities on a tax-free basis instead of on a
tax-equivalent basis, creating some difficulty and inconsistencies in accurately
comparing total interest income and net interest income from the 1999 period to
the 1998 period as there were no municipal securities in the portfolio during
the 1998 period. The decrease in earnings level before federal income taxes of
$81,000, or 7.4%, resulted in a decrease in the provision for federal income
taxes of $78,000, or 20.5%. The decrease in the provision for federal income
taxes was also attributed to a reduction in the Corporation's effective tax rate
resulting primarily from the federal tax treatment of accumulating bank
qualified municipal securities.
Net Interest Income and Provision for Losses on Loans
- -----------------------------------------------------
The Corporation's net interest income decreased by $124,000, or 5.4%,
during the nine months ended March 31, 1999, as compared to the same period in
the prior year. The decrease in net interest income during the nine months ended
March 31, 1999 was primarily the result of an increase in total interest
expense, due to increases in the average outstanding balances of deposits and
borrowings, which were partially offset by decreases in the weighted-average
rates paid on deposits and borrowings. Total interest expense on the
Corporation's interest-bearing liabilities for the nine months ended March 31,
1999, as compared to the same period in the prior year, increased by $216,000,
or 5.4%, due to overall increases of $9.1 million, or 9.0%, in the average
-32-
<PAGE> 33
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine Month Periods Ended March 31, 1999
- -------------------------------------------------------------------------------
and 1998 (continued)
- --------
Net Interest Income and Provision for Losses on Loans (continued)
- -----------------------------------------------------
outstanding balances of such interest-bearing liabilities, which were partially
offset by overall declines of 18 basis points (100 basis points equal 1%), from
5.30% to 5.12%, in the weighted-average rates paid on the Corporation's
interest-bearing liabilities. The increase in total interest expense during the
nine months ended March 31, 1999 was partially offset by an increase in total
interest income, primarily due to increases in the average outstanding balances
of mortgage-backed securities, investment securities and other interest-earning
assets, which were partially offset by a decrease in the average outstanding
balance of loans and to declines in the weighted-average rates earned on all the
Corporation's interest-earning assets. Total interest income on the
Corporation's interest-earning assets increased by $92,000, or 1.5%, during the
nine months ended March 31, 1999, as compared to the same period in the prior
year, due to overall increases of $10.0 million, or 9.6%, in the average
outstanding balances of such interest-earning assets, which were partially
offset by overall declines of 51 basis points, from 8.02% to 7.51%, in the
weighted-average yields earned on such interest-earning assets. The downward
movement in the average yields earned on the Corporation's interest-earning
assets as compared to the average yields paid on the Corporation's
interest-bearing liabilities reflected assets repricing downward more rapidly
than liabilities. Such changes in yields earned and paid were reflected in the
interest rate spread, which had decreased from 2.72% during the nine months
ended March 31, 1998 to 2.39% during the nine months ended March 31, 1999, and
the net yield (net interest income as a percentage of average interest-earning
assets), which had decreased from 2.93% during the nine months ended March 31,
1998 to 2.61% during the nine months ended March 31, 1999. The major factors
contributing to the decreases in the interest rate spread and net yield
period-to-period were the decline in long-term interest rates toward historical
lows and the extremely flat yield curve which continued to evolve during the
nine months ended March 31, 1999, which made it more difficult for the
Corporation to earn a significant positive spread on new deposit activity.
-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 Nine Month Periods Ended March 31, 1999
- -------------------------------------------------------------------------------
and 1998 (continued)
- --------
Net Interest Income and Provision for Losses on Loans (continued)
- -----------------------------------------------------
Interest income on loans decreased by $238,000, or 5.0%, during the
nine months ended March 31, 1999, as compared to the same period in the prior
year. The decrease in interest income on loans during the nine months ended
March 31, 1999 was due to a decrease of $1.4 million, or 2.0%, in the average
balance of loans outstanding, which was coupled with a decline of 27 basis
points, from 8.75% to 8.48%, in the weighted-average rate earned on loans. The
decrease in the average outstanding balance of loans period-to-period reflected
a situation in which loan principal repayments, sales and payoffs exceeded loan
originations and purchases. Over the past few years, there had been a tremendous
growth in the loan portfolio which had been attributed to a strong origination
volume and management's strategy, to the extent practicable, to portfolio
fixed-rate mortgage loans subject to certain interest-rate risk limitations.
Over the past fifteen months, however, this loan growth in the portfolio was
curtailed by the rapidly declining interest rate environment which had the
effect of accelerating prepayments on loans and refinancing of higher rate
mortgage loans. In addition, management began refocusing its efforts during this
declining interest rate environment on originating for sale in the secondary
market all conforming fixed-rate mortgage loans, which had the effect of
reducing the loan portfolio. The majority of loans that were sold in the
secondary market during the 1999 period were refinances of loans that were
initially originated for the portfolio in prior periods at higher interest
rates. The decrease in the average yield earned on loans during the nine months
ended March 31, 1999 was principally the result of the acceleration of
prepayments on higher yielding fixed-rate mortgage loans held in the loan
portfolio in the low interest rate environment, the downward repricing of
existing adjustable-rate ("teaser") mortgage loans and the reduction
period-to-period in the average outstanding balance of higher rate
nonresidential real estate and land loans.
Interest income on mortgage-backed securities designated as available
for sale and held to maturity increased by $140,000, or 10.7%, during the nine
months ended March 31, 1999, as compared to the same period in the prior year.
The increase in interest income on mortgage-backed securities during the nine
months ended March
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<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 Nine Month Periods Ended March 31, 1999
- -------------------------------------------------------------------------------
and 1998 (continued)
- --------
Net Interest Income and Provision for Losses on Loans (continued)
- -----------------------------------------------------
31, 1999 was the result of an increase in the average outstanding balance of
mortgage-backed securities of $5.8 million, or 20.9%, which was partially offset
by a decline in the weighted-average rate earned on such assets of 53 basis
points, from 6.30% to 5.77%. The increase in the average outstanding balance of
mortgage-backed securities reflected the purchases of primarily fixed-rate and
floating-rate collateralized mortgage obligations and fixed-rate participation
certificates, which were partially offset by principal repayments and sales of
securities. As long-term interest rates declined and greater emphasis was placed
on originating fixed-rate loans for sale during the nine months ended March 31,
1999, management elected to shift more funds from other asset categories into
the mortgage-backed securities portfolio as loan portfolio growth slowed from
the increased refinancing and payoff of higher rate portfolio fixed-rate loans.
Such increase in the average balance of mortgage-backed securities outstanding
was attributable in part to a strategy adopted by management to sustain
continued growth in asset levels by primarily using deposits and repayment cash
flows to fund purchases of such assets. From time to time when circumstances
dictate and opportunities exist, purchases of mortgage-backed securities are
leveraged against advances from the Federal Home Loan Bank to obtain a
particular interest rate spread. The increased volume of mortgage-backed
securities, which offset the lack of growth in the loan portfolio, helped
improve the Corporation's overall interest rate spread and net earnings level as
well as achieve better diversification of securities within the portfolio. The
decrease in the weighted-average yield earned on mortgage-backed securities
period-to-period generally reflected the greater principal repayments on higher
yielding securities due to a lower interest rate environment during the nine
months ended March 31, 1999, the recognition against earnings of greater premium
amounts on securities resulting from faster prepayment speeds and shorter
estimated average lives and the downward movement in the U.S. treasury rates,
the specified prime rate and the Eleventh District cost of funds rate which a
majority of the Corporation's adjustable-rate and floating-rate mortgage-backed
securities and collateralized mortgage obligations are tied to in determining
interest rate changes.
-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 Nine Month Periods Ended March 31, 1999
- -------------------------------------------------------------------------------
and 1998 (continued)
- --------
Net Interest Income and Provision for Losses on Loans (continued)
- -----------------------------------------------------
Interest and dividend income on investment securities and other
interest-earning assets increased in the aggregate by $190,000, or 79.8%, during
the nine months ended March 31, 1999, as compared to the same period in the
prior year. The increase during the nine months ended March 31, 1999 was
primarily due to increases of $3.9 million, or 252.8%, and $1.7 million, or
57.4%, in the average outstanding balances of investment securities and other
interest-earning assets (primarily interest-bearing deposits in other financial
institutions), respectively, which were partially offset by declines of 13 basis
points, or 1.8%, and 98 basis points, or 14.3%, in the weighted-average rates
earned on investment securities and other interest-earning assets, respectively.
The increase in the average outstanding balance of investment securities during
the nine months ended March 31, 1999 was principally due to the purchase of
municipal obligations. As interest rates continued falling toward historical
lows, the purchasing of new U.S. Government agency obligations became less
attractive as interest rate spreads tightened and call periods shortened. As a
result, the Corporation began purchasing tax-free fixed-rate municipal
obligations with good call protections and relatively attractive tax-equivalent
yields in comparison to other investment alternatives. These municipal
securities were primarily designated as available for sale and were utilized to
supplement the overall asset yield while loan portfolio growth slowed. The
decrease in the weighted-average yield earned on investment securities was the
function of a lower interest rate environment period-to-period, as newer
securities' purchases were obtained at lower rates than those securities
previously purchased, and the call of higher rate U.S. Government agency
obligations. The increase in other interest-earning assets was attributed in
part to continued growth in assets period-to-period and to an increase in excess
liquidity and expected cash flows from called investment securities and
accelerated mortgage prepayments as a result of interest rates having fallen so
rapidly. The decrease in the weighted-average rate earned on such
interest-earning assets period-to-period was the direct result of a lower
interest rate environment during the nine months ended March 31, 1999 and the
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<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 Nine Month Periods Ended March 31, 1999
- -------------------------------------------------------------------------------
and 1998 (continued)
- --------
Net Interest Income and Provision for Losses on Loans (continued)
- -----------------------------------------------------
significantly greater level of lower earning federal funds sold in the portfolio
during the 1999 period.
Interest expense on deposits, the largest component of the
Corporation's interest-bearing liabilities, increased by $231,000, or 6.7%,
during the nine months ended March 31, 1999, as compared to the same period in
the prior year. The increase in interest expense on deposits during the nine
months ended March 31, 1999 was due to an increase of $8.8 million, or 10.0%, in
the average balance of deposits outstanding, which was partially offset by a
decrease of 16 basis points, from 5.19% to 5.03%, in the weighted-average rate
paid on deposits. The increase in the average balance of 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 $7.8 million, or 11.3%, which was coupled
with an increase of $1.0 million, or 5.4%, 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 and
selling efforts by management and competitive pricing strategies. In addition,
from time to time, management has utilized brokered deposits and other
out-of-state funds as an alternative source of funds in an effort to continue
the growth in certificates of deposit. In many cases, interest rates paid on
brokered deposits were actually the same or lower than interest rates paid on
local deposits. The increase in transaction accounts was largely due to
management's continued strong efforts to expand its core deposit base through
increased customer checking accounts so as to better develop cross-selling
opportunities of other Company products and services as well as to lower overall
cost of funds. The increase in the average outstanding balance of deposits
period-to-period was necessary to continually fund the growth in the loan,
investment and mortgage-backed securities portfolios. The decrease in the
weighted-average rate paid on deposit accounts period-to-period reflected lower
market rates of interest, which was partially
-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 Nine Month Periods Ended March 31, 1999
- -------------------------------------------------------------------------------
and 1998 (continued)
- --------
Net Interest Income and Provision for Losses on Loans (continued)
- -----------------------------------------------------
offset by a greater percentage of higher rate certificate of deposit balances to
total deposit balances during the nine months ended March 31, 1999.
Specifically, the weighted-average rate paid on certificates of deposit
decreased from 5.88% during the nine months ended March 31, 1998 to 5.65% during
the nine months ended March 31, 1999, and the weighted-average rate paid on
transaction accounts decreased slightly from 2.65% during the nine months ended
March 31, 1998 to 2.62% during the nine months ended March 31, 1999. The
increase in the higher costing certificate of deposit balances as a percentage
of total deposits increased period-to-period from 78.7% to 79.6%.
Interest expense on borrowings, consisting primarily of fixed-rate
Federal Home Loan Bank advances, special convertible fixed-rate advances and, to
a lesser extent, an adjustable-rate loan of the ESOP at March 31, 1999,
decreased by $15,000, or 2.6%, during the nine months ended March 31, 1999, as
compared to the same period in the prior year. The decrease in interest expense
on borrowings during the nine months ended March 31, 1999 was attributed to a
decline of 27 basis points, or 4.4%, in the weighted-average rate paid on
borrowings, which was partially offset by an increase of $237,000, or 1.9%, in
the average outstanding balance of borrowings. Such increase in the average
outstanding balance of borrowings period-to-period was the result of management
utilizing new borrowings from the Federal Home Loan Bank to assist, in part, in
funding the Corporation's lending and investment activities. Advances from the
Federal Home Loan Bank were utilized by management as an alternative funding
source to deposits in order to provide additional liquidity and sources of funds
to the lending function during periods of cash outflows, as well as to pursue
its lending and investment programs when the opportunities existed. During the
nine months ended March 31, 1999, the weighted-average rate paid on borrowings
was reduced to 5.83%, a decline of 27 basis points from the 6.10% during the
nine months ended March 31, 1998. This decline in the weighted-average rate paid
period-to-period generally reflected management's restructuring efforts of its
borrowing mix by lengthening out maturities in a lower interest rate environment
that prevailed when
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<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 Nine Month Periods Ended March 31, 1999
- -------------------------------------------------------------------------------
and 1998 (continued)
- --------
Net Interest Income and Provision for Losses on Loans (continued)
- -----------------------------------------------------
such restructuring was undertaken. Management accomplished its objectives by
taking advantage of special convertible fixed-rate advances offered at
attractive rates by the Federal Home Loan Bank and paying off higher rate
short-term LIBOR-based advances as well as replacing a maturing five year
fixed-rate advance. Such restructuring of its total borrowings allowed the
Corporation the opportunity to reduce its cost of funds on $6.0 million of
borrowings by approximately 43 basis points.
The Corporation's provision for losses on loans increased by $5,000, or
27.8%, during the nine months ended March 31, 1999, as compared to the same
period in the prior year. The provision for losses on loans, which was comprised
solely of discretionary additions to the general loan loss allowance during the
nine months ended March 31, 1999, represents a charge to earnings to maintain
the allowance for loan losses at a level management believes is adequate to
absorb losses in the loan portfolio. The 1999 nine 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, growth in the loan
portfolio, changes in the composition of loans 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 has resulted in minimal loan losses (charge-offs) over
the past five years. The Corporation's provision for losses on loans during the
nine months ended March 31, 1999 was principally attributable to management's
current assessment of its internally-classified and non-performing and
nonaccrual loans and to the growth in the loan portfolio which has been mostly
prevalent over the past several years. Management uses the best information
available in providing for possible loan losses and believes that the allowance
is adequate to cover any unforeseen losses in the loan portfolio at March 31,
1999. However, future adjustments to
-39-
<PAGE> 40
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine Month Periods Ended March 31, 1999
- -------------------------------------------------------------------------------
and 1998 (continued)
- --------
Net Interest Income and Provision for Losses on Loans (continued)
- -----------------------------------------------------
the allowance could be necessary and net earnings could be affected if
circumstances and/or economic conditions differ substantially from the
assumptions used in making the initial determinations.
As a result of the foregoing changes in interest income, interest
expense and provision for losses on loans, net interest income after provision
for losses on loans decreased during the nine months ended March 31, 1999 by
$129,000, or 5.7%, as compared to the same period in the prior year.
Other Income
- ------------
Total other income increased by $138,000, or 37.7%, from $366,000
during the nine months ended March 31, 1998 to $504,000 during the nine months
ended March 31, 1999. The primary reasons for this rise in other income during
the nine months ended March 31, 1999 were an increase in gain on sale of
mortgage loans of $159,000, or 57.4%, an increase in gain on sale of investments
and mortgage-backed securities of $13,000, or 65.0%, and an increase in service
fees, charges and other operating income of $10,000, or 30.3%, all of which were
partially offset by a decrease in loan servicing fees of $44,000.
The Corporation recognized gains (including mortgage servicing rights
pursuant to SFAS No. 125) on the sale of mortgage loans in the secondary market
of $436,000 and $277,000 during the nine months ended March 31, 1999 and 1998,
respectively. Such gains were the result of Blue Ash selling its fixed-rate
single-family residential mortgage loans to the Federal Home Loan Mortgage
Corporation in the secondary market as a means of minimizing interest rate risk
as well as generating additional funds for lending and other purposes. Loan
sales volume increased significantly during the nine months ended March 31,
1999, as the demand for fixed-rate single-family residential mortgage loans was
stronger within Blue Ash's lending area than during the nine months ended March
31, 1998 due to a lower interest rate environment prevailing during the 1999
period. As a result, proceeds from the
-40-
<PAGE> 41
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine Month Periods Ended March 31, 1999
- -------------------------------------------------------------------------------
and 1998 (continued)
- --------
Other Income (continued)
- ------------
sale of loans in the secondary market increased from $14.3 million during the
nine months ended March 31, 1998 to $22.4 million during the nine months ended
March 31, 1999, an increase of $8.1 million, or 56.7%, and loans originated for
sale in the secondary market increased from $14.1 million during the nine months
ended March 31, 1998 to $21.8 million during the nine months ended March 31,
1999, an increase of $7.7 million, or 54.7%. In order to adequately meet the
increased demand for lower rate fixed-rate mortgages and refinancings of higher
rate fixed-rate mortgages and adjustables during the 1999 period, management
placed more emphasis on loans originated for sale in the secondary market as
opposed to holding loans in the portfolio as it had predominately done over the
past few years. Such a change in strategy had the effect of slowing loan
portfolio growth and core earnings, while at the same time increasing gains on
sale of loans and reducing the Corporation's overall exposure to interest rate
risk.
The increase in gain on sale of mortgage-backed securities and
investment securities of $13,000, or 65.0%, during the nine months ended March
31, 1999 was due to the recognition of gains to earnings from the sale of
primarily tax-free municipal securities. During the nine months ended March 31,
1999, there were proceeds of $3.9 million from the sale of municipal securities
and $2.0 million from the sale of mortgage-backed securities, while there were
$6.4 million in total sale proceeds from securities during the nine months ended
March 31, 1998. There were more opportunities in the 1999 period to recognize
gains from securities transactions based primarily on market conditions
prevailing at the times of sale and the types of securities traded. Such sales
activity in the 1999 period was predicated upon the declining interest rate
environment that prevailed and better diversifying the investment and
mortgage-backed securities portfolios so as to improve the Corporation's overall
yield and market performance to varying interest rate environments. In
particular, the Corporation took advantage of the declining interest rate
environment and attractive spreads as compared to other investment alternatives
by acquiring and then selling certain tax-free municipal obligations designated
as available for sale for the primary purpose of bolstering other
-41-
<PAGE> 42
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine Month Periods Ended March 31, 1999
- -------------------------------------------------------------------------------
and 1998 (continued)
- --------
Other Income (continued)
- ------------
income from the gains on sales in order to combat the effects of declining
overall yields on interest-earning assets and a tighter interest rate spread.
While there was a greater sales volume within the securities portfolio during
the 1998 period, there were fewer opportunities of taking profits at that time
as the Corporation was taking steps to better diversify and reposition its
securities portfolio. The decrease in loan servicing fees of $44,000 during the
nine months ended March 31, 1999 was principally attributed to an increase of
$61,000 in expenses for amortization and impairment of originated mortgage
servicing rights under SFAS No. 125 due to a greater mortgage servicing rights
portfolio during the 1999 period and to accelerated prepayments of mortgages
associated with a declining interest rate environment, which was partially
offset by an increase in normal loan servicing fees received of $17,000, or
22.4%, due to an increase of approximately $9.3 million, or 21.8%, in the
average outstanding balance of loans sold in the secondary market and to other
financial institutions. The increase in service fees, charges and other
operating income of $10,000, or 30.3%, reflected increased fees generated
period-to-period from NOW accounts, debit card processing, construction loan
draws, in-house inspection fees, certain loan processing-related fees and fee
income received from correspondent lenders for nonconforming and Federal Housing
Administration loans.
General, Administrative and Other Expense
- -----------------------------------------
Total general, administrative and other expense increased by $90,000,
or 5.8%, during the nine months ended March 31, 1999, as compared to the same
period in the prior year. The components of this increase in total general,
administrative and other expense during the nine months ended March 31, 1999
were comprised of an increase in employee compensation and benefits of $51,000,
or 6.1%, an increase in occupancy and equipment expense of $13,000, or 4.7%, an
increase in advertising expense of $7,000, or 10.1%, an increase in federal
deposit insurance premiums of $4,000, or 10.3%, and an increase in other
operating expense of $24,000, or 16.0%, all of which were partially offset by a
decrease in data processing expense of $9,000, or 11.8%.
-42-
<PAGE> 43
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine Month Periods Ended March 31, 1999
- -------------------------------------------------------------------------------
and 1998 (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 $51,000, or 6.1%, during the nine months ended March 31,
1999, as compared to the same period in the prior year, was primarily due to
normal merit increases, increases in staffing levels, increases in loan officer
salaries due to a change in the method of compensating certain of these
employees, increases in employee group health insurance premiums, increases in
loan officer bonus expense as a result of a greater lending volume, increases in
estimated annual bonus expense to employees and officers stemming from a higher
earnings base for purposes of calculating the bonus, increases in director
medical reimbursement expenses, increases in certain payroll-related taxes such
as social security taxes and workers' compensation and increases in officer,
director and employee reimbursement expenses, all of which were partially offset
by decreases in expenses related to the ESOP due to the additional expense
incurred in the 1998 period for the payout of benefits to terminated employees
and increases of $29,000, or 20.4%, in deferred loan origination costs in
accordance with SFAS No. 91 as a result of an approximate $6.4 million, or
17.3%, increase in total lending volume period-to-period and increased personnel
costs per loan during the 1999 period.
The increase in occupancy and equipment expense of $13,000, or 4.7%,
was largely due to increases in office building repair and maintenance,
depreciation on furniture, fixtures and equipment resulting from upgrading the
Corporation's internal computer systems, expenses associated with ATM
processing, real estate taxes, telephone and postage, all of which were
partially offset by decreases in furniture, fixture and equipment expenses and
light, heat and other utilities. The increase in advertising expense of $7,000,
or 10.1%, was principally attributable to a continuation of intensified
marketing and selling efforts by management which were directed toward the loan
origination function and attracting new deposits and to an increase in
classified advertising in newspapers for various job openings within the
Corporation. The decrease of $9,000, or 11.8%, in data processing and related
fees, which are based on the outstanding number of loan and deposit accounts,
reflected the negotiation of lower costs in the renewal of Blue
-43-
<PAGE> 44
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine Month Periods Ended March 31, 1999
- -------------------------------------------------------------------------------
and 1998 (continued)
- --------
General, Administrative and Other Expense (continued)
- -----------------------------------------
Ash's contract with its third party provider of data processing services in a
prior period, which was partially offset by an increased average deposit base as
well as growth in lending operations. The increase in federal deposit insurance
premiums of $4,000, or 10.3%, was primarily attributed to an increased average
deposit base period-to-period. The increase in other operating expense of
$24,000, or 16.0%, was primarily due to increases in supervisory assessments,
directors' and officers' insurance, annual audit and tax service, organizational
dues and subscriptions, NOW accounts, legal expenses pertaining to delinquent
and foreclosed loans, bank service charges, real estate owned expenses and
office supplies resulting from an expanding loan and savings operation.
Federal Income Taxes
- --------------------
The provision for federal income taxes totaled $380,000 for the nine
months ended March 31, 1999, as compared to $302,000 for the nine months ended
March 31, 1998, a decrease of $78,000, or 20.5%. The decrease in provision for
federal income taxes reflected the lower level of pre-tax earnings for the nine
months ended March 31, 1999, a decrease of $81,000, or 7.4%, from $1.1 million
during the nine months ended March 31, 1998 to $1.0 million during the nine
months ended March 31, 1999, which was coupled with a reduction in the
Corporation's effective tax rate period-to-period due largely to the tax-exempt
status regarding municipal securities. As a result, the level of federal income
tax expense for each of the nine month periods ended March 31, 1999 and 1998
generally reflected the level of pre-tax earnings for such periods, adjusted for
changes in the Corporation's effective tax rate. The Corporation's effective tax
rates amounted to 29.7% and 34.6% for the nine month periods ended March 31,
1999 and 1998, respectively.
-44-
<PAGE> 45
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 March 31, 1999
- --------------------------------------------------------------------------------
and 1998
- --------
General
- -------
Net earnings totaled $243,000 for the three months ended March 31,
1999, a decrease of $64,000, or 20.8%, from the $307,000 in net earnings
recorded for the three months ended March 31, 1998. The decrease in net earnings
was primarily attributable to a decrease in net interest income after provision
for losses on loans of $97,000, or 12.2%, a decrease in other income of $33,000,
or 15.3%, and an increase in general, administrative and other expense of
$13,000, or 2.4%. As previously discussed, the decrease in net interest income
after provision for losses on loans was further accentuated during the three
months ended March 31, 1999 by the reporting of interest income on municipal
securities on a tax-free basis yielding 5.03%, as opposed to a tax-equivalent
basis yielding 7.17%. The decrease in earnings level before federal income taxes
of $143,000, or 30.5%, resulted in a decrease in the provision for federal
income taxes of $79,000, or 48.8%. The decrease in the provision for federal
income taxes was also attributed to a reduction in the Corporation's effective
tax rate mainly as a result of the federal tax treatment from the accumulation
of bank qualified municipal securities during the 1999 period.
Net Interest Income and Provision for Losses on Loans
- -----------------------------------------------------
The Corporation's net interest income decreased by $96,000, or 12.0%,
during the three months ended March 31, 1999, as compared to the same period in
the prior year. The decrease in net interest income during the three months
ended March 31, 1999 was the result of a decrease of $92,000, or 4.3%, in total
interest income, due to a decrease in the average outstanding balance of loans
and to declines in the weighted-average rates earned on loans, mortgage-backed
securities and other interest-earning assets, which were partially offset by
increases in the average outstanding balances of mortgage-backed securities,
investment securities and other interest-earning assets and to an increase in
the weighted-average rate earned on investment securities. The decrease in total
interest income during the three months ended March 31, 1999 was coupled with an
increase in total interest expense of $4,000, or 0.3%, primarily due to an
increase in the average outstanding balance of deposits, which was partially
offset by a decrease in
-45-
<PAGE> 46
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 March 31, 1999
- --------------------------------------------------------------------------------
and 1998 (continued)
- --------
Net Interest Income and Provision for Losses on Loans (continued)
- -----------------------------------------------------
the average outstanding balance of borrowings and to declines in the
weighted-average rates paid on deposits and borrowings. As a result, the
Corporation's interest rate spread declined from 2.75% during the three months
ended March 31, 1998 to 2.36% during the three months ended March 31, 1999, a
decrease of 39 basis points, or 14.2%. Such decrease in the interest rate spread
period-to-period was attributed to decreases of 71 basis points, from 7.99% to
7.28%, in the overall weighted-average rates earned on all interest-earning
assets, which were partially offset by decreases of 32 basis points, from 5.24%
to 4.92%, in the overall weighted-average rates paid on all interest-bearing
liabilities. In addition, the Corporation's net yield decreased from 2.95%
during the three months ended March 31, 1998 to 2.56% during the three months
ended March 31, 1999, a decrease of 39 basis points, or 13.2%.
Interest income on loans decreased by $143,000, or 8.9%, during the
three months ended March 31, 1999, as compared to the same three month period in
the prior year. The decrease in interest income on loans during the 1999 period
was due to a decrease of $3.2 million, or 4.3%, in the average balance of loans
outstanding, which was coupled with a decrease of 42 basis points, from 8.70% to
8.28%, in the weighted-average rate earned on the loan portfolio. Similarly,
interest income on mortgage-backed securities decreased by $21,000, or 4.5%,
during the three months ended March 31, 1999, as compared to the same period in
the prior year. Such decrease in interest income on mortgage-backed securities
was the result of a decline in the weighted-average rate earned on
mortgage-backed securities of 95 basis points, from 6.31% to 5.36%, which was
partially offset by an increase in the average outstanding balance of
mortgage-backed securities of $3.7 million, or 12.5%. The decrease in the
average outstanding balance of loans period-to-period was a function of loan
sales, principal repayments and payoffs exceeding loan originations and
purchases due to the acceleration of loan prepayments and refinancings of higher
rate mortgage loans in a declining interest rate environment and management's
renewed emphasis on originating loans for sale in the secondary market. The
decrease in the average yield earned on
-46-
<PAGE> 47
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 March 31, 1999
- --------------------------------------------------------------------------------
and 1998 (continued)
- --------
Net Interest Income and Provision for Losses on Loans (continued)
- -----------------------------------------------------
loans was principally the result of a paydown in higher rate fixed-rate loans
originated for the loan portfolio and the downward repricing of existing
adjustable-rate mortgage loans. The decrease in the average balance of
mortgage-backed securities outstanding period-to-period was a function of
principal repayments and sales of securities exceeding purchases, as management
began shifting funds from proceeds from sales and repayment cash flows on
mortgage-backed securities towards the investment portfolio with the purchase of
tax-free municipal securities. The decline in the weighted-average yield earned
on mortgage-backed securities generally reflected the acceleration of principal
repayments on higher rate securities due to a lower interest rate environment in
the 1999 period and the downward movement of interest rate changes on the
Corporation's adjustable-rate and floating-rate mortgage-backed securities and
collateralized mortgage obligations.
Interest and dividend income on investment securities and other
interest-earning assets increased by $72,000, or 80.0%, during the three months
ended March 31, 1999, as compared to the same period in the prior year. The
increase during the three months ended March 31, 1999 was primarily due to an
increase of $6.9 million, or 494.1%, in the average outstanding balance of
investment securities, an increase of $385,000, or 11.0%, in the average
outstanding balance of other interest-earning assets and an increase in the
weighted-average rate earned on investment securities of 31 basis points, from
6.85% to 7.16%, all of which were partially offset by a decline in the
weighted-average rate earned on other interest-earning assets of 208 basis
points, from 7.53% to 5.45%. The increases in the average outstanding balance
and weighted-average rate earned on investment securities period-to-period were
attributed to the purchase of tax-free municipal securities at attractive
spreads in comparison to other investment alternatives that were tied to the
U.S. Treasury index. The increase in the average outstanding balance of other
interest-earning assets was mainly the result of an increase in interest-bearing
deposits and other short-term liquid funds from a sustained deposit growth and a
slowdown in loan portfolio growth, while the decrease in the weighted-average
yield earned on other interest-earning assets was attributable to the reduction
of short-term
-47-
<PAGE> 48
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 March 31, 1999
- --------------------------------------------------------------------------------
and 1998 (continued)
- --------
Net Interest Income and Provision for Losses on Loans (continued)
- -----------------------------------------------------
interest rates by the Federal Reserve Board during the 1999 period and the call
and maturity of higher yielding certificate of deposit investments in prior
periods.
Interest expense on deposits increased by $18,000, or 1.5%, during the
three months ended March 31, 1999, as compared to the same period in the prior
year. The increase in interest expense on deposits for the three months ended
March 31, 1999 was primarily attributed to a $7.1 million, or 7.8%, increase in
the average balance of deposits outstanding, which was partially offset by a
decline of 30 basis points, from 5.12% to 4.82%, in the weighted-average rate
paid on deposits, reflecting the lower market rates of interest paid during the
1999 period as compared to the 1998 period, especially on certificate of deposit
accounts. As previously indicated, the overall increase in the average
outstanding balance of deposits period-to-period, particularly term certificates
of deposit and customer checking accounts, was largely due to intensified
marketing efforts and competitive pricing strategies in these areas in order to
fund the Corporation's lending and investment activities.
Interest expense on borrowings decreased by $14,000, or 7.1%, during
the three months ended March 31, 1999, as compared to the same period in the
prior year. The decrease in interest expense on borrowings during the three
months ended March 31, 1999 was primarily the result of a decrease in the
average outstanding balance of borrowings of $199,000, or 1.5%, which was
coupled with a decline in the weighted-average rate paid on borrowings of 34
basis points, from 6.08% to 5.74%. The decrease in the average volume of
borrowings period-to-period was principally attributed to the repayment of
certain Federal Home Loan Bank advances as a part of a restructuring effort by
management in a prior period. These repayments were funded with excess liquidity
and deposit inflows, as it was management's intent of principally growing the
Corporation through an increased deposit base. The decrease in the
weighted-average rate paid on borrowings period-to-period reflected
-48-
<PAGE> 49
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 March 31, 1999
- --------------------------------------------------------------------------------
and 1998 (continued)
- --------
Net Interest Income and Provision for Losses on Loans (continued)
- -----------------------------------------------------
the lower costs of newer borrowings in comparison to borrowings obtained in
previous periods. During the fourth quarter of fiscal 1998, management utilized
special convertible fixed-rate advances from the Federal Home Loan Bank as part
of a restructuring effort to extend out the maturities of the Corporation's
borrowings. As previously discussed, such convertible advances gave the
Corporation an opportunity to lock in long-term money at a very low interest
rate as well as to replace higher rate short-term adjustable advances, thereby
lowering the overall cost of funds on borrowings in the 1999 period, as compared
to the 1998 period.
The provision for losses on loans totaled $7,000 for the three months
ended March 31, 1999, as compared to $6,000 for the three months ended March 31,
1998, an increase of $1,000, or 16.7%. The provision for losses on loans during
the three months ended March 31, 1999 was comprised of discretionary additions
to the general loan loss allowance. 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 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 March 31, 1999 was predicated upon the
overall loan portfolio growth over the last several years and management's
review of non-performing and nonaccrual loans and anticipated losses on loans
for the period.
As a result of the foregoing changes in interest income, interest
expense and provision for losses on loans, net interest income after provision
for losses on loans decreased during the three months ended March 31, 1999 by
$97,000, or 12.2%, as compared to the same period in the prior year.
-49-
<PAGE> 50
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 March 31, 1999
- --------------------------------------------------------------------------------
and 1998 (continued)
- --------
Other Income
- ------------
Total other income decreased by $33,000, or 15.3%, from $215,000 during
the three months ended March 31, 1998 to $182,000 during the three months ended
March 31, 1999. The decrease in other income during the three months ended March
31, 1999 was principally due to a decrease in gain on sale of mortgage loans of
$39,000, or 20.6%, and a decrease in service fees, charges and other operating
income of $2,000, or 16.7%, both of which were partially offset by an increase
of $5,000, or 71.4%, in loan servicing fees and an increase of $3,000, or 42.9%,
in gain on sale of investment and mortgage-backed securities. The decrease in
gain on sale of mortgage loans of $39,000, or 20.6%, period-to-period was
primarily due to the decline in the volume of loan sales during the three months
ended March 31, 1999, as the demand for origination of fixed-rate mortgage loans
for sale in the secondary market given the low interest rate environment and
consumer preference for fixed-rate loans was more pronounced during the 1998
period. During the 1999 period, interest rates had mostly stabilized and the
flurry of refinancings of higher rate mortgage loans and subsequent sales of
such loans had already occurred in previous periods as interest rates were still
falling toward historical lows. The increase in gain on sale of investment and
mortgage-backed securities of $3,000, or 42.9%, was due to greater gains
realized on the sale of securities in the 1999 period, even though there was a
greater sales volume in the 1998 period. During the 1999 period, the Corporation
sold approximately $1.8 million in available for sale municipal securities at
gains of $10,000 and $1.5 million in available for sale mortgage-backed
securities at no gain, as compared to $4.2 million in aggregate sales at gains
of $7,000 during the 1998 period. There were greater market opportunities during
the 1999 period due to a declining interest rate environment to take some
profits on certain municipal securities within the investment portfolio as a
means of offsetting the decline in net earnings from a shrinking net interest
margin or interest rate spread. The increase in loan servicing fees of $5,000,
or 71.4%, was principally attributable to an increase in loan servicing fees
received of $7,000, or 26.9%, due to an increase period-to-period in the average
outstanding balance of loans sold of $10.0 million, or 22.5%, which was
partially offset
-50-
<PAGE> 51
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 March 31, 1999
- --------------------------------------------------------------------------------
and 1998 (continued)
- --------
Other Income (continued)
- ------------
by an increase of $2,000, or 10.5%, in amortization and impairment expense on
originated mortgage servicing rights under SFAS No. 125 due to accelerated
prepayments on loans. The decrease in service fees, charges and other operating
income of $2,000, or 16.7%, was primarily due to a reduction in fee income from
construction loan draws, inspections and loan processing-related matters and an
increase in costs incurred for the origination of no-cost home equity
line-of-credit loans, which were partially offset by an increase in fee income
from NOW accounts, debit card processing and correspondent origination and
service release premiums.
General, Administrative and Other Expense
- -----------------------------------------
Total general, administrative and other expense increased by $13,000,
or 2.4%, during the three months ended March 31, 1999, as compared to the same
period in the prior year, due primarily to an increase in employee compensation
and benefits of $4,000, or 1.3%, an increase in occupancy and equipment expense
of $3,000, or 3.1%, an increase in federal deposit insurance premiums of $1,000,
or 7.1%, an increase in data processing expense of $1,000, or 4.2%, an increase
in amortization of goodwill of $1,000, or 12.5%, and an increase in other
operating expense of $6,000, or 11.3%, all of which were partially offset by a
decrease in state franchise tax expense of $3,000, or 12.0%.
The increase in employee compensation and benefits of $4,000, or 1.3%,
during the three months ended March 31, 1999, as compared to the three months
ended March 31, 1998, was principally due to normal merit increases of officer
and employee salaries, an increase in staffing levels, an increase in director
medical reimbursement expenses, an increase in health insurance costs, an
increase in certain payroll-related taxes and a decrease in deferred loan
origination costs in accordance with SFAS No. 91 as a result of an approximate
$1.9 million, or 12.8%, decline in total loan origination volume
period-to-period, all of which were partially offset by a decrease in annual
bonus expense as a result of a lower earnings level used for calculating such
bonus, a decrease in loan officer bonus expense due to a reduced loan
-51-
<PAGE> 52
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 March 31, 1999
- --------------------------------------------------------------------------------
and 1998 (continued)
- --------
General, Administrative and Other Expense (continued)
- -----------------------------------------
origination volume, a decrease in workers' compensation premiums and state
unemployment taxes and a decrease in expenses related to the ESOP due to the
Plan having to purchase common shares at fair value of certain terminated
employees in a previous period.
The increase in occupancy and equipment expense of $3,000, or 3.1%,
period-to-period was the result of an increase in office building repairs and
maintenance, an increase in depreciation expense on furniture and equipment, an
increase in ATM processing expense and an increase in telephone expense, all of
which were partially offset by a decrease in furniture, fixtures and equipment
expenses and a decrease in postage. The increase in data processing and related
fees of $1,000, or 4.2%, was due to a larger volume of loan and deposit account
activity. The increase in federal deposit insurance premiums of $1,000, or 7.1%,
was mainly the result of an increased average deposit base, while the decrease
in state franchise taxes of $3,000, or 12.0%, was primarily attributed to a
higher level of state supervisory tax credits applied to the Corporation for
purposes of reducing its franchise tax liability and to a lower effective
franchise tax rate, which were partially offset by an enhanced average equity
position period-to-period. Other operating expense increased from $53,000 during
the three months ended March 31, 1998 to $59,000 during the three months ended
March 31, 1999, an increase of $6,000, or 11.3%, due primarily to an increase in
supervisory fees and assessments, an increase in annual audit and tax service,
an increase in NOW account expenses, an increase in organizational dues and
subscriptions, an increase in real estate owned expenses, an increase in legal
fees associated with certain holding company and other corporate-related matters
and an increase in office supplies resulting from an expanding loan and savings
operation, all of which were partially offset by a decrease in legal fees
associated with delinquent and foreclosed loans.
Federal Income Taxes
- --------------------
The provision for federal income taxes totaled $83,000 for the three
months ended March 31, 1999, as compared to $162,000 for the
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<PAGE> 53
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 March 31, 1999
- --------------------------------------------------------------------------------
and 1998 (continued)
- --------
Federal Income Taxes (continued)
- --------------------
three months ended March 31, 1998, a decrease of $79,000, or 48.8%. The decrease
in provision for federal income taxes reflected the lower level of pre-tax
earnings for the three months ended March 31, 1999, a decrease of $143,000, or
30.5%, from $469,000 during the three months ended March 31, 1998 to $326,000
during the three months ended March 31, 1999, which was coupled with a reduction
in the Corporation's effective tax rate period-to-period due largely to the
tax-exempt status regarding municipal securities. As a result, the level of
federal income tax expense for each of the three month periods ended March 31,
1999 and 1998 generally reflected the level of pre-tax earnings for such
periods, adjusted for changes in the Corporation's effective tax rate. The
Corporation's effective tax rate amounted to 25.5% and 34.5% for the three month
periods ended March 31, 1999 and 1998, respectively.
Year 2000 Compliance Issues
- ---------------------------
The Year 2000 issue is a serious operational problem which is
widespread and complex, affecting all industries. The Federal Financial
Institution Examination Council (the "FFIEC"), representing the views of each of
the primary financial institution regulators, has focused on the risk that
programming code in existing computer systems will fail to properly recognize
the new millennium when it occurs in the year 2000. According to various
studies, most computer programs and related hard-printed memory circuits have
been developed utilizing nine-digit date fields (YYMMDD) with the YY two-digit
field for the year and the basis for all calculation formulas. While this
two-digit approach has worked in the past, as the financial services industry
enters the year 2000, the two-digit field will not permit accurate calculations
based on current formulas. For example, January 1, 2000, will read as 000101;
many computers will recognize this date as January 1, 1900, or default to
January 1, 1980. In either case, the potential impact to data calculations will
be significant. Erroneous calculations may occur due to the computers' erroneous
reading of the year, or entire systems failures may occur. Other concerns
-53-
<PAGE> 54
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 March 31, 1999
- --------------------------------------------------------------------------------
and 1998 (continued)
- --------
Year 2000 Compliance Issues (continued)
- ---------------------------
have been raised regarding February 29, 2000, as well as September 9, 1999
(990999), which are new calculation challenges that may result in further
problems.
Most significantly affected are all forms of financial accounting,
including interest computations, due dates, pensions, personnel benefits,
investments, legal commitments, valuations, fixed asset depreciation lapse
schedules, tax filings and financial models. Additional problems may occur on
inventory, maintenance and file record retention programs. The total impact is
currently unknown; however, it is projected that failure to address these
programming code issues and make appropriate changes may expose an institution
to all types of risks, including credit, transaction, liquidity, interest rate,
compliance, reputation, strategic, price and foreign exchange.
Programming code changes to account for these issues will require from
thousands to millions of lines of code, representing a tremendous time
commitment and cost to correct. Many financial institutions, services and
vendors are on a tight time line for determining what programming changes to
fix, correcting the affected software programs, testing the new software code,
and then fully implementing the software changes.
Blue Ash established a Year 2000 Action Team, which includes senior
management representatives and other key employees, to assess the risk of
potential problems that might arise from the failures of computer programming to
recognize the year 2000 and to develop a plan to mitigate any such risk.
Research by the Action Team indicated that the greatest potential impact upon
Blue Ash was the risk related to vendors used by Blue Ash, particularly Blue
Ash's data processing service bureau. Most critical to the continuing operations
of Blue Ash is the data processing of all the customers' loan and savings
accounts. Blue Ash contracts with Intrieve, Inc. to provide the data processing
for this critical area. Quarterly progress reports from Intrieve, Inc. have
indicated levels of manpower and expertise sufficient to amend and test the
adequacy of their computer programming and systems prior
-54-
<PAGE> 55
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 March 31, 1999
- --------------------------------------------------------------------------------
and 1998 (continued)
- --------
Year 2000 Compliance Issues (continued)
- ---------------------------
to the arrival of the year 2000. Formal testing in relation to the Intrieve,
Inc. system occurred in November 1998. The tests encompassed an extensive
sampling of the Intrieve, Inc. online core processing, representing the testing
of deposits and loans. No significant problems occurred. All other vendors used
by Blue Ash have been identified and requests for year 2000 certifications have
been forwarded.
Since Blue Ash's primary computer applications are not internally
developed and contracted with third party vendors, the cost to address Blue
Ash's year 2000 issues has been isolated to hardware and system upgrades.
Upgrades of Blue Ash's internal hardware and software have occurred within the
teller and savings operation, accounting and loan operation in accordance with
Blue Ash's normal course of operations. Most of the computer systems replaced
were fully depreciated and upgrades and new hardware would have been necessary
in the near future. To date, the cost incurred has been approximately $60,000.
This cost has been mostly capitalized and will be amortized over a five-year
period. Future estimated costs are not expected to have a material impact on the
Corporation's consolidated financial statements.
With regards to handling the most reasonably likely year 2000 worst
case scenarios, the Board of Directors has authorized the Year 2000 Action Team
to establish policies, procedures and responsibilities for organization-wide
contingency planning. Contingency plans typically include identification of the
systems and third party risks that the plan covers, analysis of resources and
strategies to restore operations and a recovery program that identifies
participants, processes and any significant equipment needed. The Action Team
estimates the completion of such a written contingency plan by June 1999.
The year 2000 compliance program established by the Action Team
includes quarterly progress reports submitted to the Board of Directors and a
target date of December 31, 1998 for all required internal testing of each
system utilized, which was expected to be minimal. The Action Team believes that
Blue Ash met this target
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<PAGE> 56
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 March 31, 1999
- --------------------------------------------------------------------------------
and 1998 (continued)
- --------
Year 2000 Compliance Issues (continued)
- ---------------------------
date of December 31, 1998 and that all systems and hardware are Year 2000 ready.
There are unknown elements outside of management's control or ability to test,
such as power, water, telephone failure, which could affect operations. The
Action Team estimates, however, that the overall impact of year 2000 compliance
upon Blue Ash's results of operations, liquidity and capital resources will be
immaterial.
-56-
<PAGE> 57
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
PART II
ITEM 1. Legal Proceedings
-----------------
Neither the Corporation nor Blue Ash is involved in any pending legal
proceedings other than non-material legal proceedings occurring in the
ordinary course of business.
ITEM 2. Changes in Securities
---------------------
The following table sets forth information regarding all sales of
shares of Common Stock by the Corporation without registration for the
past three years. All of the sales were a result of the exercise of
options granted to directors, executive officers and employees of the
Corporation pursuant to the Corporation's 1992 Stock Option Plan. The
transactions were exempt from registration under Section 3(a)(11) of
the Securities Act of 1933. In each case, the exercise price was paid
in cash and no commissions or underwriting fees were paid.
Number of Exercise
Date Shares Price
---- --------- ----------
6/4/96 500 $ 5,750.00
1/13/97 500 5,750.00
11/9/98 1,500 17,250.00
1/12/99 500 5,750.00
3/2/99 1,500 17,250.00
3/3/99 1,000 11,500.00
3/3/99 1,500 17,250.00
3/4/99 1,500 17,250.00
3/9/99 1,500 17,250.00
3/9/99 1,000 12,000.00
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
---------------------------------
On March 11, 1999, Oak Hill Financial, Inc. ("Oak Hill Financial"), a
corporation chartered under the laws of the State of Ohio, and the
Corporation jointly announced the signing of an Agreement and Plan of
Merger in which the Corporation will be merged into Oak Hill Financial.
Under the terms of the agreement, Oak Hill Financial will exchange
4.125 of its common shares for each of the 222,100 outstanding shares
of the Corporation as of March 11, 1999. The exchange ratio is subject
to change if the value of Oak Hill Financial's common stock is above
$21.71 per share prior to closing. The Corporation will have the right
to terminate the Agreement and Plan of Merger if the average price of
Oak Hill Financial's common stock falls below $16.05 per share, unless
Oak Hill Financial increases the exchange ratio to compensate for the
difference between the price of Oak Hill Financial common stock at
closing and $16.05. Based on the average of Oak Hill Financial's
closing bid and ask price of $19.22 on March 10, 1999, the transaction
is valued at $17.6 million, or $79.28 per share of the Corporation's
common stock. The Merger will be accounted for as a
pooling-of-interests and is expected to be completed by October 1999,
pending Oak Hill Financial and the Corporation shareholder approval,
regulatory approval
-57-
<PAGE> 58
and other customary conditions of closing. The transaction is expected
to be a "tax-free" reorganization for federal income tax purposes. At
March 31, 1999, Oak Hill Financial reported total assets of $435.2
million, total deposits of $370.9 million and shareholders' equity of
$38.4 million.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
Reports on Form 8-K: None
Exhibit 2.1 Agreement and Plan of Merger [dated as of
March 11, 1999, between Oak Hill Financial,
Inc. and Towne Financial Corporation.]
Exhibit 2.2 Supplemental Agreement [dated as of March 11,
1999, between Oak Hill Financial, Inc. and
Towne Financial Corporation.]
Exhibit 27: Financial Data Schedule for the Nine Months
Ended March 31, 1999
-58-
<PAGE> 59
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: May 12, 1999 By:/s/ William S. Siders
-----------------------------
William S. Siders
Executive Vice President
Dated: May 12, 1999 By:/s/ Joseph L. Michel
----------------------------
Joseph L. Michel
Chief Financial Officer, Vice
President and Treasurer
-59-
<PAGE> 1
Exhibit 2.1
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made as of
March 11, 1999, between OAK HILL FINANCIAL, INC., a corporation chartered under
the law of Ohio ("Oak Hill Financial"), and Towne Financial Corporation, a
corporation that is chartered under the law of Ohio ("Towne"). (Oak Hill
Financial and Towne are collectively referred to herein as the "Constituent
Corporations.")
RECITALS
--------
A. Oak Hill Financial is a corporation organized and existing under the
laws of Ohio and is authorized to issue 5,000,000 shares of common stock,
without par value ("Oak Hill Financial Common"), of which 4,367,765 shares were
issued and outstanding as of December 31, 1998 (excluding treasury shares) and
200,000 reserved for issuance upon exercise of existing stock option, and (ii)
1,500,000 voting shares of preferred stock, without par value, and 1,500,000
non-voting shares of preferred stock, without par value, of which there are no
shares issued and outstanding as of the date hereof.
B. Towne is a corporation organized and existing under the laws of Ohio
and is authorized to issue 2,250,000 shares of common stock, with $1 par value
("Towne Common"), of which 222,100 shares are issued and outstanding as of the
date hereof, exclusive of treasury shares, and is authorized to issue 250,000
shares of preferred stock, with $1 par value, of which there are no shares
issued and outstanding as of the date hereof. An additional 24,900 shares may be
issued pursuant to outstanding stock options previously granted (collectively,
the "Towne Stock Options" and individually, a "Towne Stock Option") under the
1992 Stock Option Plan and 1997 Stock Option Plans (the "Towne Stock Option
Plans").
C. The respective Boards of Directors of Oak Hill Financial and Towne
have approved the merger of Towne into Oak Hill Financial substantially on the
terms and conditions contained in this Agreement.
AGREEMENT
---------
In consideration of the foregoing and the mutual promises contained
herein, the parties agree as follows:
1. MERGER. Subject to the terms and conditions hereof, and the terms
and conditions contained in a certain Supplemental Agreement, of even date
herewith, between Oak Hill Financial, and Towne (the "Supplemental Agreement"),
which is incorporated herein by reference, at the "Effective Time" (as such term
is defined in Section 2 hereof), Towne shall be merged into Oak Hill Financial
(the "Merger"). Oak Hill Financial shall be the surviving corporation in the
Merger (the "Surviving Corporation"), which shall continue its corporate
existence under the laws of Ohio following the consummation of the Merger. At
the Effective Time, the separate existence and corporate organization of Towne
shall cease.
2. EFFECTIVE TIME; EFFECTIVE DATE. The Merger shall be effective at
11:59 p.m., local Ohio time (the "Effective Time"), on (i) the day on which this
Agreement and the related Certificate of Merger have been filed in accordance
with the requirements of the laws of Ohio, or (ii) such later date as may be
specified in such Certificate of Merger (the "Effective Date").
3. NAME. The name of the Surviving Corporation shall be "Oak Hill
Financial, Inc.".
4. CHARTER. The Articles of Incorporation of Oak Hill Financial in
effect at the Effective Time shall be the articles of incorporation of the
Surviving Corporation, until amended in accordance with law.
5. DIRECTORS. The directors of the Surviving Corporation shall Evan E.
Davis, 1114 Moriah Road, Oak Hill, Ohio 45656; John D. Kidd, 2500 Five Points
Road, Jackson, Ohio 45640; D. Bruce Knox, 301 N. Market Street, McArthur, Ohio
45651; Richard P. LeGrand, 533 Aaron Avenue, Jackson, Ohio 45640; Barry M.
Dorsey, 505 W. College Avenue, Rio Grande, Ohio 45674; Rick A. McNelly, 1815
Kessinger School Road, Jackson, Ohio 45640; Donald R. Seigneur, 46 Fruit Hill
Drive, Chillicothe, Ohio 45601; C. Clayton Johnson, 701 Sixth Street,
Portsmouth, Ohio 45662; and H. Grant Stephenson, 5363 Godown Road, Columbus,
Ohio 43235; to serve until their successors are duly elected and qualified in
accordance with the Code of Regulations of the Surviving Corporation and the
laws of Ohio.
6. REGULATIONS. The Code of Regulations of Oak Hill Financial in effect
at the Effective Time shall be the regulations of the Surviving Corporation,
until amended in accordance with law.
7. STATUTORY AGENT. The name and address of the agent upon whom any
process, notice, or demand against any Constituent Corporation or the Surviving
Corporation may be served is H. Grant Stephenson, 41 South High Street, Suite
3100, Columbus, Ohio 43215.
8. CONVERSION OF SHARES.
(a) All shares of Oak Hill Financial Common that are issued and
outstanding immediately prior
<PAGE> 2
to the Effective Time shall continue to be issued and outstanding shares of Oak
Hill Financial Common at and after the Effective Time.
(b) At the Effective Time, the shares of Towne Common issued and
outstanding immediately prior to the Effective Time (exclusive of treasury
shares, if any, which shall be cancelled, and any shares as to which statutory
dissenters' rights are properly sought) shall be converted, by virtue of the
Merger and without further action on the part of the holders thereof, into the
right to receive shares of the common stock, without par value, of Oak Hill
Financial ("Oak Hill Financial Common"), as follows:
(i) Each outstanding share of Towne Common shall be
converted into the right to receive 4.125 shares of Oak Hill Financial
Common (the "Exchange Ratio"), provided, that if the Average Closing
Price is greater than 115% of the Starting Price, then each outstanding
share shall be converted into the right to receive such number of
shares as is equal to the product of multiplying 4.125 by a fraction,
the numerator of which is 115% of the Starting Price and the
denominator of which is the Average Closing Price. The Exchange Ratio
set forth in the preceding sentence shall be adjusted to reflect any
non-cash distribution, stock splits or stock dividends on Oak Hill
Financial Common occurring or having a record date after the date
hereof and prior to the Effective Time. Provided however that if prior
to the Effective Time of the merger, Oak Hill Financial publicly
announces that it has agreed to a transaction in which Oak Hill
Financial will be acquired by another company, the Exchange Ratio shall
be 4.125.
(ii) If the Average Closing Price of Oak Hill Financial
Common shall be less than 85% of the Starting Price, Towne Financial
shall have no obligation to consummate this Merger; provided however,
that this condition precedent to the obligation of Towne Financial to
consummate the Merger shall be satisfied if, when the Average Closing
Price of Oak Hill Financial Common shall be less than 85% of the
Starting Price, Oak Hill Financial, in conjunction with the Closing,
shall add to the number of shares of Oak Hill Financial Common in to
which Towne Financial Common shall be converted as otherwise determined
by application of Section 8(b)(i) above the number of shares required
to make the total dollar value of all of the shares of Oak Hill
Financial Common into which shares of Towne Financial are to be
converted, equal to the total dollar value of the shares of Oak Hill
Financial computed by multiplying the number of outstanding shares of
Towne Financial times the Exchange Ratio times 85% of the Starting
Price.
(iii) No fractional shares of Oak Hill Financial Common
shall be issued. Each holder of Towne Common who would otherwise be
entitled to receive a fractional part of a share of Oak Hill Financial
Common shall instead be entitled to receive cash in an amount equal to
the product resulting from multiplying such fraction by the Average
Closing Price Per Share of Oak Hill Financial Common. No interest shall
be payable with respect to such cash payment.
(c) Each outstanding share of Towne Common held by a person who
has demanded and perfected a right to relief as a dissenting shareholder under
Section 1701.85 of the Ohio Revised Code (the "Dissenters' Rights Law") and who
has not effectively withdrawn or lost such right ("Dissenting Shares") shall not
be converted into or represent a right to receive shares of Oak Hill Financial
Common pursuant to subsection 8(b) hereof, but the holder thereof shall be
entitled only to such rights as are granted by the Dissenters' Rights Law. Each
holder of Dissenting Shares who becomes entitled to relief as a dissenting
shareholder under the Dissenters' Rights Law with respect to such holder's
shares of Towne Common shall receive payment therefor from Oak Hill Financial in
accordance with the provisions of the Dissenters' Rights Law. If any holder of
Towne Common who demands relief as a dissenting shareholder under the
Dissenters' Rights Law with respect to such holder's shares of Towne Common
shall effectively withdraw or lose (through failure to perfect or otherwise),
the right to such relief, each share of Towne Common held by such holder shall
automatically be converted into the right to receive shares of Oak Hill
Financial Common pursuant to subsection 8(b) hereof.
(d) Each unexercised Towne Stock Option that is outstanding
immediately prior to the Effective Time shall be converted automatically at the
Effective Time into an option to purchase shares of Oak Hill Financial Common
under the Oak Hill Financial 1995 Stock Option Plan or similar Oak Hill
Financial plan (a "Oak Hill Financial Stock Option"), with the number of shares
of Oak Hill Financial Common to be subject to a particular Oak Hill Financial
Stock Option to be determined by converting the number of shares of Towne Common
subject to the Towne Stock Option into a number of Oak Hill Financial Common
shares in accordance with the procedure for converting outstanding Towne Common
shares into Oak Hill Financial Common shares as set forth in subsection 8(b)
hereof, except that all fractional shares will be rounded to the nearest whole
share, and with the exercise price for each share of Oak Hill Financial Common
subject to a particular Oak Hill Financial Stock Option to be equal to the
exercise price per Towne Common share under the Towne Stock Option divided by
the Exchange Ratio determined in accordance with subsection 8(b)(i) above;
provided, however, that, in the case of any Towne Stock Option to which Section
421 of the Internal Revenue Code of 1986, as amended (the "Code"), applies by
reason of its qualification under Section 422 of the Code, the terms of the Oak
Hill Financial Stock Option into which such Towne Stock Option is to be
converted, including the option price, the number of shares of Oak Hill
Financial Common purchasable pursuant to such option, and the terms and
conditions of exercise of such option, shall be determined so as to comply with
Section 424(a) of the Code. Upon such conversion, all rights under any and all
stock options and stock option plans previously granted or adopted by
<PAGE> 3
Towne shall terminate.
9. EXCHANGE OF CERTIFICATES; PAYMENT FOR FRACTIONAL SHARES.
(a) On the Effective Date, Oak Hill Financial shall deliver to
The Fifth Third Bank (the "Exchange Agent") the amount of cash necessary to pay
for all fractional shares of Oak Hill Financial Common in accordance with
subsection 8(b)(ii) hereof.
(b) As promptly as practicable after the Effective Date, Oak
Hill Financial shall cause the Exchange Agent to prepare and mail to each holder
of record on the Effective Date of any shares of Towne Common a letter of
transmittal containing instructions for the surrender of all certificates for
shares of Towne Common. Upon the surrender by such holder of a certificate or
certificates for shares of Towne Common standing in such holder's name to the
Exchange Agent in accordance with the instructions set forth in the letter of
transmittal, such holder shall be entitled to receive in exchange therefor a
certificate representing the number of whole shares of Oak Hill Financial Common
into which the shares represented by the certificate or certificates so
surrendered shall have been converted and, if applicable, a check payable to
such holder in the amount necessary to pay for any fractional shares of Oak Hill
Financial Common which such holder would otherwise have been entitled to
receive, in accordance with subsection 8(b)(ii) hereof. No interest shall be
payable with respect to either the whole shares of Oak Hill Financial Common or
the cash payable in lieu of fractional shares. Immediately after the third
anniversary of the Effective Date, the Exchange Agent shall deliver to the
Surviving Corporation any unclaimed balance of cash owing with respect to
fractional shares and such cash shall be retained by, and become the property of
the Surviving Corporation, free and clear of any claims whatsoever.
(c) Neither Oak Hill Financial, the Surviving Corporation, nor
the Exchange Agent, shall be obligated to deliver a certificate for Oak Hill
Financial Common or a check for cash in lieu of fractional shares to a former
shareholder of Towne until such former shareholder surrenders the certificate or
certificates representing shares of Towne Common standing in such former
shareholder's name or, if such former shareholder is unable to locate such
certificate or certificates, an appropriate affidavit of loss and indemnity
agreement and bond as may be required by Oak Hill Financial. Until so
surrendered, each outstanding certificate for shares of Towne Common shall be
deemed for all corporate purposes (except the payment of dividends) to evidence
ownership of the number of whole shares of Oak Hill Financial Common into which
the shares of Towne Common represented thereby shall have been converted.
(d) After the Effective Date and until the outstanding
certificates formerly representing shares of Towne Common are so surrendered, no
dividends or distributions payable to holders of record of Oak Hill Financial
Common shall be paid to the holders of such outstanding Towne certificates in
respect thereof. Promptly upon surrender of such outstanding certificates there
shall be paid to the holders of the certificates for Oak Hill Financial Common
issued in exchange therefor the amount of dividends and other distributions, if
any, which theretofore became payable with respect to such full shares of Oak
Hill Financial Common, but which have not theretofore been paid on such stock.
No interest shall be payable with respect to the payment of any dividends or
other distributions. All such dividends or other distributions unclaimed at the
end of one year from the Effective Date shall, to the extent such dividends have
been previously paid to the Exchange Agent, be repaid by the Exchange Agent to
Oak Hill Financial, and thereafter the holders of such outstanding certificates
for Towne Common shall look, subject to applicable escheat, unclaimed funds, and
other laws, only to Oak Hill Financial as general creditors for payment thereof.
(e) The stock transfer books of Towne shall be closed as of the
close of business on the day that is two business days prior to the Effective
Date.
(f) Oak Hill Financial is empowered to adopt additional
reasonable rules and regulations with respect to the matters referred to in this
Section 9 not inconsistent with the provisions of this Agreement.
(g) Adoption of this Agreement by the shareholders of Towne
shall constitute ratification of the appointment of the Exchange Agent.
10. EFFECT OF THE MERGER.
(a) At the Effective Time, the effect of the Merger shall be as
provided by the applicable provisions of the laws of Ohio. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time, the
separate existence of Towne shall cease; all assets and property (real,
personal, and mixed, tangible and intangible, choses in action, rights, and
credits) then owned by each Constituent Corporation, or which would inure to
either of them, shall immediately, by operation of law and without any
conveyance, transfer, or further action, become the assets and property of the
Surviving Corporation. All rights and obligations of the Constituent
Corporations shall remain unimpaired and the Surviving Corporation shall succeed
to all such rights and obligations.
(b) From time to time, as and when requested by the Surviving
Corporation or by its successors, the officers and directors of Towne in office
at the Effective Time shall execute and deliver such instruments and shall take
or cause to be taken such further or other action as shall be necessary in order
to vest or perfect in the Surviving Corporation, or to confirm of record or
otherwise, title to, and possession of, all the assets,
<PAGE> 4
property, interests, rights, privileges, immunities, powers, franchises, and
authority of Towne and otherwise to carry out the purposes of this Agreement.
11. OFFICES. The principal executive offices of the Surviving
Corporation shall be located at 14621 State Route 93, Jackson, Ohio 45640.
12. SHAREHOLDER APPROVAL. This Agreement shall be submitted to the
shareholders of Towne and of Oak Hill Financial for adoption as soon as
reasonably practicable following the execution of this Agreement.
13. ADDITIONAL AGREEMENTS.
(a) Subject to the terms and conditions provided in this
Agreement, the parties hereto shall use their reasonable best efforts to take,
or cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper, or advisable under applicable laws and regulations to
consummate and make effective, as soon as reasonably practicable, the
transactions contemplated by this Agreement, subject, however, to the adoption
of this Agreement by the shareholders of Towne and the receipt of all required
regulatory approvals.
(b) Towne shall issue a warrant or warrants to Oak Hill
Financial, pursuant to the terms of a certain Warrant Purchase Agreement entered
into or to be entered into between Oak Hill Financial and Towne in accordance
with the terms of the Supplemental Agreement, granting to Oak Hill Financial or
its nominee the right to purchase certain shares of Towne Common under certain
conditions.
14. AMENDMENT. At any time prior to the Effective Time, the parties
hereto may amend, modify, or supplement this Agreement by mutual agreement
authorized by their respective boards of directors, whether before or after the
shareholders of Towne have adopted this Agreement, provided that the number of
shares of Oak Hill Financial Common into which shares of Towne Common are to be
converted as determined in Section 8 hereof shall not be changed after the
shareholders of Towne have adopted this Agreement without the approval of such
shareholders in the same manner as required for the adoption of this Agreement;
and provided, further, that this Agreement may not be amended, modified, or
supplemented, except by an instrument in writing executed and delivered by each
of the parties hereto.
15. TERMINATION. Unless extended by the mutual agreement of the parties
hereto, this Agreement may be terminated, notwithstanding the adoption thereof
by the shareholders of Towne, in the manner and under the circumstances set
forth in the Supplemental Agreement.
16. ENTIRE AGREEMENT. This Agreement, the Supplemental Agreement, and
any exhibits hereto or thereto constitute the entire agreement among the parties
with respect to the subject matter thereof and supersede all prior agreements
and understandings, oral or written, among the parties with respect to such
subject matter and no party shall be liable or bound to the others in any manner
by any covenants, representations, or warranties except as specifically set
forth herein or therein.
17. TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
18. ASSIGNMENT. Neither this Agreement nor any rights, interests, or
obligations hereunder shall be assigned or transferred by operation of law or
otherwise by any of the parties hereto without the prior written consent of the
other parties.
19. BENEFIT. Nothing in this Agreement, express or implied, is intended
to confer upon any person or entity other than the parties hereto and their
successors in interest any rights or remedies under or by reason of this
Agreement.
20. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original for all purposes, but
such counterparts taken together shall constitute one and the same instrument.
21. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Ohio without regard to its conflict of
laws principles.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
OAK HILL FINANCIAL, INC.
By: /s/ Neil S. Strawser
---------------------
Neil S. Strawser, Chairman of the Board
By: /s/ John D. Kidd
----------------
John D. Kidd, President
TOWNE FINANCIAL CORPORATION
<PAGE> 1
EXHIBIT 2.2
SUPPLEMENTAL AGREEMENT
THIS SUPPLEMENTAL AGREEMENT (this "Agreement") is made as of March 11,
1999, between OAK HILL FINANCIAL, INC., an Ohio corporation ("Oak Hill
Financial"), and TOWNE FINANCIAL CORPORATION, an Ohio corporation ("Towne
Financial").
RECITALS
A. Oak Hill Financial, Inc. is a registered bank holding company under the
Bank Holding Company Act of 1956, as amended. Oak Hill Banks ("Oak Hill Banks"),
a banking corporation chartered under the law of Ohio, is a wholly owned
subsidiary of Oak Hill Financial.
B. Towne Financial is an Ohio corporation. Blue Ash Building & Loan Company
("Blue Ash"), a building and loan association chartered under the law of Ohio,
is a wholly owned subsidiary of Towne Financial.
C. Concurrently with the execution and delivery of this Agreement, Oak Hill
Financial and Towne Financial are entering into an Agreement and Plan of Merger
(the "Merger Agreement"), which provides for the merger of Towne Financial into
Oak Hill Financial in accordance with the terms and conditions contained in the
Merger Agreement and in this Agreement (the "Merger").
D. The parties hereto desire to enter into this Agreement for the purpose
of setting forth certain representations, warranties, and covenants made by each
party as an inducement to the other parties to execute and deliver the Merger
Agreement and to consummate the Merger and to set forth certain additional terms
and conditions applicable to the Merger.
E. The Merger is intended to be a tax-free merger of Town Financial with
and into Oak Hill Financial pursuant to section 368(a)(1)(A) of the Internal
Revenue Code of 1986, as amended.
AGREEMENT
In consideration of the foregoing and of the mutual promises contained
herein, the parties agree as follows:
SECTION 1. DEFINITIONS
1.01 DEFINITIONS CONTAINED ELSEWHERE IN THIS AGREEMENT. For the purposes
of this Agreement, the following terms shall have the meanings assigned to them
in the preamble and Recitals of this Agreement:
(a) this "Agreement";
(b) "Towne Financial";
(c) "Oak Hill Banks";
(d) "Oak Hill Financial";
(e) the "Merger"; and
(f) the "Merger Agreement".
<PAGE> 2
1.02 DEFINITIONS CONTAINED IN THE MERGER AGREEMENT. For the purposes of
this Agreement, the following terms shall have the meanings assigned to them in
the Merger Agreement:
(a) the "Effective Date";
(b) the "Effective Time";
(c) the "Exchange Agent";
(d) the "Dissenters' Rights Law";
(e) "Towne Financial Common";
(f) "Dissenting Share"; and
(g) "Oak Hill Financial Common".
1.03 OTHER DEFINITIONS. For the purposes of this Agreement, certain other
terms shall be defined as follows:
(a) the "Accord" means the Legal Opinion Accord of the American Bar
Association Section of Business Law (1991);
(b) an "Acquisition Proposal" means an inquiry received from, or an
offer or proposal made by or on behalf of, any other corporation, firm,
association, person, or other entity relating to (i) the possible acquisition of
more than 25 percent of the shares of the capital stock of Towne Financial,
including, but not limited to, an exchange or tender offer therefor, (ii) the
possible acquisition of a majority of the assets of Towne Financial, (iii) a
merger or consolidation involving Towne Financial, other than a transaction in
which Towne Financial will be the owner of all of the stock of the surviving
corporation following the transaction, or (iv) a merger or consolidation
involving Towne Financial, other than a transaction in which Towne Financial
will be the surviving corporation and the current shareholders of Towne
Financial will be the owners of a majority of the stock of the surviving
corporation following the transaction;
(c) an "Affiliate" of a party means a director, officer, employee,
agent, or adviser of such party;
(d) the "Audited Financial Statements" mean the consolidated
financial statements of Towne Financial, consisting of balance sheets as of June
30, 1998, and statements of income, cash flows, and changes in shareholder's
equity for the fiscal years ended June 30, 1998, with the report thereon of
Grant Thornton LLP, certified public accountants;
(e) "Average Closing Price" shall mean the average of the daily
average of the closing bid and asked prices of Oak Hill Financial Common as
reported on the Nasdaq National Market System (as reported in a mutually agreed
upon authoritative source) for the twenty most recent full trading days in which
such shares are traded on the Nasdaq National Market System ending at the
closing of trading on the date three trading days prior to the Closing Date.
(f) "CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended;
(g) the "Code" means the Internal Revenue Code of 1986;
(h) "CRA" means the Community Reinvestment Act of 1977, as amended;
2
<PAGE> 3
(i) "Confidential Information" of or relating to a party means any
and all information received from or on behalf of such party or their Affiliates
concerning the Merger, the terms of this Agreement or the Merger Agreement, or
the assets, business, operations, or financial condition of such party or their
Affiliates, unless and to the extent that any such information is in the public
domain;
(j) the "Division of Financial Institutions " means the Division of
Financial Institutions, Ohio Department of Commerce;
(k) "Employee Benefit Plans" means any and all "employee benefit
plans" or "welfare benefit plans" as defined in ERISA;
(l) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended;
(m) "Environmental Law" means CERCLA, the Resource Conservation and
Recovery Act, the Hazardous Materials Transportation Act, the Toxic Substances
Control Act, the Federal Water Pollution Control Act, the Clean Water Act, the
Clean Air Act, regulations promulgated thereunder, and any other federal, state,
county, municipal, local, foreign, provincial, or other statute, law, ordinance,
or regulation which may relate to or deal with human health or the environment,
all as may be amended from time to time;
(n) "FDIC" means the Federal Deposit Insurance Corporation;
(o) the "Federal Reserve Board" means the Board of Governors of the
Federal Reserve System, or its delegate;
(p) "Hazardous Substances" means (i) any "hazardous substance" as
defined in Section 101(14) of CERCLA or regulations promulgated thereunder;
(ii) any "solid waste," "hazardous waste," or "infectious waste," as such terms
are defined in any other Environmental Law; (iii) asbestos, urea-formaldehyde,
polychlorinated biphenyls (PCBs), nuclear fuel or material, chemical waste,
radioactive material, explosives, known carcinogens, petroleum products and
by-products, and other dangerous, toxic, or hazardous pollutants, contaminants,
chemicals, materials, or substances listed or identified in, or regulated by,
any Environmental Law; and (iv) any other substances or materials which are
classified or considered to be hazardous or toxic under any Environmental Law;
(q) the "1934 Act" means the Securities Exchange Act of 1934, as
amended;
(r) the "1933 Act" means the Securities Act of 1933, as amended;
(s) "Knowledge" as used herein shall mean those facts that are known
or should reasonably have been known after due inquiry by the President, or any
Senior or Executive Vice President of any party hereto;
(t) the "Oak Hill Disclosure Memorandum" means a certain Disclosure
Memorandum, which is to be delivered by Oak Hill Financial to Towne Financial
within forty-five (45) days after the date of this Agreement, as the same has
been amended and supplemented through the date of this Agreement, and as the
same may subsequently be amended prior to the Effective Date;
(u) "Oak Hill Financial Stock Option Plan" means the Oak Hill
Financial 1995 Stock Option Plan as presently existing or hereafter amended;
(v) a "Principal Shareholder" of a party means a person who owns five
percent or more of the outstanding shares of any class of the capital stock of
such party;
(w) the "Real Property" means any and all real property owned or
leased by Towne Financial or Blue Ash, as appropriate, as of the date of this
Agreement or acquired at any time after the date of this Agreement and prior to
the Effective Time, together with any and all improvements thereon;
(x) the "Registration Statement" means the registration statement on
the appropriate form filed or to be filed by Oak Hill Financial with the SEC
under the provisions of the 1933 Act for the purpose of registering
3
<PAGE> 4
the shares of Oak Hill Financial Common to be issued by Oak Hill Financial
pursuant to the terms of the Merger Agreement, including, but not limited to,
the prospectus and proxy statement to be included therein as a part thereof;
(y) "SAIF" means the Savings Association Insurance Fund of the FDIC;
(z) the "SEC" means the Securities and Exchange Commission;
(aa) "Starting Date" shall mean the date of this Agreement;
(bb) "Starting Price" shall mean the average of the daily average of
bid and asked closing prices of Oak Hill Financial Common as reported on the
Nasdaq National Market System (as reported in a mutually agreed upon
authoritative source) for the twenty most recent full trading days in which such
shares are traded on the Nasdaq National Market System ending on the day before
the Starting Date;
(cc) "Tax" or "Taxes shall mean any federal, state, county, local, or
foreign income, profits, franchise, gross receipts, payroll, sales, employment,
use, property, withholding, excise, occupancy, and other taxes assessments,
charges, fares, or impositions, including interest, penalties, and additions
imposed thereon or with respect thereto.
(dd) the "Towne Disclosure Memorandum" means a certain Disclosure
Memorandum, to be delivered by Towne Financial to Oak Hill Financial within
forty-five (45) days after the date of this Agreement, as the same has been
amended and supplemented through the date of this Agreement, and as the same may
subsequently be amended prior to the Effective Date; and
(ee) an "Unsolicited Acquisition Proposal" means a written
Acquisition Proposal that is received by Towne Financial or made public by or on
behalf of the proponent of such Acquisition Proposal without any solicitation of
such proposal by any director, officer, employee, agent, or other person acting
on behalf of Towne Financial.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF TOWNE FINANCIAL
Towne Financial represents and warrants to Oak Hill Financial that, except
as set forth in the Towne Disclosure Memorandum:
2.01 ORGANIZATION AND AUTHORITY. Towne Financial is a unitary savings and
loan holding company duly organized, validly existing, and in good standing
under the laws of the State of Ohio, is duly qualified to do business and is in
good standing in all jurisdictions where its ownership or leasing of property or
the conduct of its business requires it to be so qualified, and has the
corporate power and authority to own its properties and assets, to carry on its
business as it is presently being conducted, and, subject to the approval of its
shareholders, and to the filing of all requisite regulatory applications and
notices and the receipt of all requisite regulatory approvals, to enter into and
carry out its obligations under this Agreement and under the Merger Agreement.
2.02 CAPITALIZATION. The authorized capital stock of Towne Financial
consists of 2,250,000 shares of Towne Financial Common, of which 222,100 shares
were issued and outstanding as of the date of this Agreement. All of the
outstanding shares of Towne Financial Common are duly and validly authorized,
issued, and outstanding and are fully paid and nonassessable. There are no
existing options, warrants, or commitments of any kind which might require the
issuance by Towne Financial of any additional shares of Towne Financial Common
or other equity securities of Towne Financial, except, the Warrants, the Towne
1997 Stock Option Plan and the Towne 1992 Stock Option Plan. The Disclosure
Memorandum includes a true and correct copy of each of Towne's Stock Option
Plans and a list of all option holders under such plans, the number of shares
subject to options held by each, the exercise price or prices of such options,
and the dates each option was granted, becomes exercisable, and terminates.
2.03 SUBSIDIARIES. The Towne Disclosure Memorandum lists all corporations
in which Towne Financial owns, directly or indirectly, five percent or more of
any class of capital stock as of the date of this Agreement, and indicates, with
respect to the equity securities of each such corporation as of such date, the
number of shares of each class authorized, the number of shares outstanding, and
the number of shares owned or controlled directly or
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indirectly by Towne Financial. Towne Financial owns all of the capital stock of
Blue Ash. Other than Blue Ash, Towne Financial does not own, directly or
indirectly, more than fifty percent (50%) of the capital stock of any other
corporation. Other than the Warrants, the Towne 1997 Stock Option Plan and the
Towne 1992 Stock Option Plan, there are no options, contracts, commitments,
understandings, or arrangements by which Towne Financial is bound to issue
additional shares of its equity securities. All of the shares of the capital
stock of Blue Ash held by Towne Financial are duly and validly authorized,
issued, and outstanding, fully paid and nonassessable, and owned by Towne
Financial free and clear of any claim, lien, encumbrance, or agreement with
respect thereto. Blue Ash is a state building and loan association duly
organized, validly existing, and in good standing under the laws of Ohio, is
duly qualified to do business and is in good standing in all jurisdictions where
its ownership or leasing of property or the conduct of its business requires it
to so qualified, and has the corporate power and authority, as well as any and
all necessary governmental authorization to own its properties and assets and to
carry on its business as it is presently being conducted. Blue Ash is a member
of the Federal Home Loan Bank System and its deposits are insured up to the
applicable limits by the SAIF.
2.04 DIRECTORS, OFFICERS, AND PRINCIPAL SHAREHOLDERS. The Towne Disclosure
Memorandum contains a true and complete list of all directors, executive
officers, and Principal Shareholders of Towne Financial and Blue Ash.
2.05 AUTHORIZATION. The execution, delivery, and performance of this
Agreement and the Merger Agreement by Towne Financial, and the consummation of
the transactions contemplated hereby and thereby have been duly approved by the
Board of Directors of Towne Financial, subject to the adoption of the Merger
Agreement and this Agreement by the shareholders of Towne Financial; and subject
to the adoption of the Merger Agreement and this Agreement by the shareholders
of Oak Hill Financial, and subject to applicable regulatory approvals for both
Oak Hill Financial and Towne Financial, and the expiration of waiting periods,
if any.
2.06 ABSENCE OF DEFAULTS. Neither the execution and delivery of this
Agreement or the Merger Agreement, nor the consummation of the Merger, nor
compliance by Towne Financial with any provisions hereof or thereof will
conflict with or result in a breach of any provisions of the articles or
certificate of incorporation, regulations, bylaws, or other charter documents of
Towne Financial or Blue Ash or result in a material breach or termination of, or
accelerate the performance required by, any note, bond, mortgage, lease,
agreement, or other instrument to which Towne Financial or Blue Ash is a party
or by which Towne Financial or Blue Ash may be bound.
2.07 FINANCIAL STATEMENTS. Towne Financial has delivered the Audited
Financial Statements to Oak Hill Financial. The Audited Financial Statements
fairly present the financial position, results of operations, and cash flows of
Towne Financial at the dates shown and for the periods indicated in conformity
with generally accepted accounting principles applied on a consistent basis.
There are no obligations or liabilities, whether absolute, accrued, or
contingent (including, without limiting the generality of the foregoing,
liabilities for taxes), of Towne Financial or Blue Ash which are required in
conformity with generally accepted accounting principles to be reflected or
disclosed in the Audited Financial Statements which have not been or will not be
so reflected or disclosed.
2.08 TITLE TO PROPERTIES.
(a) The Towne Disclosure Memorandum sets forth a complete and correct
list of all of the Real Property. Towne Financial or Blue Ash have good and
marketable title to all of the Real Property listed as owned by it in the Towne
Disclosure Memorandum and valid leasehold interests in all of the Real Property
listed as leased by it in the Towne Disclosure Memorandum, free and clear of any
liens and encumbrances except taxes and assessments not delinquent and utility
and other easements that do not interfere with the use of the property for the
business being conducted thereon. The Real Property and the present use thereof
do not violate any local zoning or similar land use laws, any governmental
regulations, or any restrictive covenants. To the Knowledge of Towne Financial
or Blue Ash, after reasonable investigation, (i) the Real Property and the use
thereof by Towne Financial or Blue Ash do not encroach upon any property owned
by any other person, and (ii) no property owned by any other person encroaches
upon any of the Real Property.
(b) Complete and correct copies of all deeds and leases relating to
the Real Property are included in the Towne Disclosure Memorandum.
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(c) Each item of the personal property owned by Towne Financial or
Blue Ash, including without limitation all contractual rights and assets
reflected in the Audited Financial Statements or acquired after December 31,
1998 (except for assets sold or otherwise disposed of in the ordinary course of
business since such date or assets which, either individually or in the
aggregate, are not material to the operations or financial condition of Towne
Financial or Blue Ash), is owned by Towne Financial or Blue Ash, free and clear
of any lien or encumbrance, except for assets securing loans from the Federal
Home Loan Bank of Cincinnati and assets pledged for public deposits, if any.
2.09 ABSENCE OF UNDISCLOSED LIABILITIES. Except to the extent reflected or
reserved against on the Audited Financial Statements, Towne Financial and Blue
Ash have no liabilities, whether absolute, accrued, contingent, or otherwise,
due or to become due, including without limitation any liabilities as guarantor
under any guaranty or liabilities for taxes, except liabilities and taxes
incurred in the ordinary course of business, which have had or will have a
material adverse effect on the business, financial condition, or results of
operations of Towne Financial or Blue Ash.
2.10 ABSENCE OF CERTAIN CHANGES. Since December 31, 1998, neither Towne
Financial nor Blue Ash has:
(a) made or permitted to be made any changes in its capital or
corporate structure, certificate or articles of incorporation, regulations,
bylaws, or other charter documents;
(b) merged with any other corporation or bank, or permitted any other
corporation or bank to merge into or consolidate with either of them; acquired
control over any other firm, bank, corporation, or organization; or created any
subsidiaries;
(c) issued, sold, delivered, or agreed to issue, sell, or deliver any
additional shares of its capital stock or any options, warrants, or rights to
acquire any such capital stock, or securities convertible into or exchangeable
for such capital stock, except for capital stock issued pursuant to the exercise
of stock options previously issued, in accordance with their respective terms;
(d) purchased, sold, transferred, or otherwise acquired or disposed
of, or agreed to purchase, sell, transfer, acquire, or dispose of, any capital
stock or other securities of any kind, or options or other rights to acquire any
such securities, of any other entity (including, but not limited to, any such
transactions involving Towne Financial or Blue Ash with respect to the capital
stock or other securities), other than in the ordinary course of business;
(e) incurred any indebtedness, obligations, or liabilities, whether
absolute, accrued, contingent, or otherwise, including, without limitation,
liabilities as guarantor under any guaranty, other than indebtedness,
obligations, and liabilities incurred in the ordinary course of its business or
incurred under the contracts and commitments referred to in Section 2.18 hereof;
(f) issued as borrower any promissory notes, guarantees, or other
evidences of indebtedness, other than in the ordinary course of business;
(g) forgiven or cancelled any indebtedness or contractual obligation,
other than in the ordinary course of business;
(h) mortgaged, pledged, or subjected to any lien or lease any of its
assets, tangible or intangible, or permitted or suffered any such asset to be
subjected to any lien or lease, other than in the ordinary course of business;
(i) purchased, sold, transferred, liquidated, or otherwise acquired
or disposed of any assets or properties, or entered into any contract for any
such purchase, sale, transfer, liquidation, acquisition, or disposition, other
than in the ordinary course of business;
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(j) entered into any lease of real or personal property, other than
in the ordinary course of business;
(k) declared, paid, made, or set apart any sum or property for, any
dividend or other distribution, or otherwise paid or transferred any funds or
property to its shareholders, except for a dividend plan as follows: $.12 per
share, record date March 12, 1999, payable March 30, 1999;
(l) increased the wages, salaries, compensation, pension or other
fringe benefits, or perquisites payable to any executive officer by more than
approximately five percent of the amount thereof in effect as of December 31,
1998, or granted any severance or termination pay, or entered into any contract
to make or grant any severance or termination pay, or entered into any
employment or consulting contract which is not terminable by Towne Financial or
Blue Ash, without cause and without penalty, upon notice of 30 days or less;
(m) made any loans or loan commitments, other than in the ordinary
course of business, to any director, officer, or Principal Shareholder (or any
person or business entity controlled by or affiliated with such director,
officer, or Principal Shareholder);
(n) modified, altered, amended, terminated, or withdrawn from
participation in any Employee Benefit Plan or any other plan or benefit provided
to one or more employees, or paid or distributed any sum from any such plan
except to participants in the ordinary course of the operation of the plan, or
made any payment or contribution to any such plan except as required by the
terms of such plan or consistent with past practices, but, in any event, not to
exceed eight percent (8%) of eligible salaries, in the aggregate, on an annual
basis. For the purpose of this section the distribution immediately prior to the
Closing of bonuses accrued during calendar year 1999 shall be considered to be
in the ordinary course of operation of the bonus plan, provided such accruals
shall have been made in accordance with terms of the plan and the prior practice
of Towne Financial and Blue Ash;
(o) entered into any transaction involving the expenditure of more
than $50,000, other than in the ordinary course of business, except pursuant to
and in accordance with the terms of the contracts and commitments referred to in
Section 2.18 hereof;
(p) adopted any change in any accounting policy or method;
(q) revalued any asset or adjusted any reserve other than in the
ordinary course of business;
(r) failed to keep in full force and effect insurance and bonds at
least equal in amount and scope of coverage to the insurance and bonds carried
on December 31, 1998;
(s) suffered any material adverse change in its business, financial
condition, income, assets, or liabilities;
(t) suffered any damage, destruction, or loss (whether or not covered
by insurance) which has had a material adverse effect, in any case or in the
aggregate, on its business, financial condition, operations, projects,
properties, or assets;
(u) suffered any strike, work stoppage, slow-down, or other labor
disturbance; or
(v) suffered any loss of employees or customers which has had a
material adverse effect on its business, operations, or prospects.
2.11 TAXES. Towne Financial and Blue Ash have filed or caused to be filed
all federal and other Tax returns which are required to be filed and have paid
or made provision for payment of all Taxes shown as due on such returns. No
deficiencies for any Tax, assessment, or governmental charge have been proposed,
asserted, or assessed against Towne Financial or Blue Ash that have not been
settled and paid. The Tax returns of Towne Financial or Blue Ash have not been
examined by the Internal Revenue Service for any of the six years preceding the
date of this Agreement and the statute of limitations has not been extended for
any Tax year.
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2.12 LABOR MATTERS. Neither Towne Financial nor Blue Ash is a party to any
collective bargaining or other union agreement with any of its employees, or is
involved in any labor dispute.
2.13 LITIGATION. There is no action, suit, proceeding, or claim by any
governmental agency or other person or entity nor any investigation by any
governmental agency pending or, to the Knowledge of Towne Financial or Blue Ash,
threatened against (i) Towne Financial or Blue Ash, (ii) the assets, business,
or goodwill of Towne Financial or Blue Ash, or (iii) any director, officer, or
Principal Shareholder of Towne Financial, in relation to the business of Towne
Financial or Blue Ash or any such person's capacity as a director, officer, or
Principal Shareholder of Towne Financial or Blue Ash. Neither Towne Financial
nor Blue Ash knows of no basis or grounds for any such action, suit, proceeding,
claim, or investigation. Neither Towne Financial nor Blue Ash is subject to any
supervisory agreement, consent order or decree, cease and desist order, or other
restriction on the business or assets of Towne Financial or Blue Ash.
2.14 ENVIRONMENTAL MATTERS.
(a) To the Knowledge of Towne Financial or Blue Ash, Towne Financial
and Blue Ash are and have been at all times in substantial compliance with all
applicable Environmental Laws and neither Towne Financial nor Blue Ash have
engaged in any activity resulting in a material violation of any applicable
Environmental Law. No orders, hearings, actions, or other proceedings by or
before any court or governmental agency in which Towne Financial or Blue Ash is
a party are pending or, to the Knowledge of Towne Financial or Blue Ash,
threatened in connection with any alleged violation of any applicable
Environmental Law (i) by Towne Financial or Blue Ash or (ii) in relation to any
part of the Real Property and neither Towne Financial nor Blue Ash has Knowledge
of any investigations or inquiries with respect to any such alleged violation.
No claims have been made or, to the Knowledge of Towne Financial or Blue Ash,
threatened at any time by any third party against Towne Financial or Blue Ash
relating to damage, contribution, cost recovery, compensation, loss, or injury
resulting from any Hazardous Substance. To the Knowledge of Towne Financial or
Blue Ash, neither Towne Financial nor Blue Ash has caused or permitted any
Hazardous Substance to be integrated into the Real Property or any component
thereof in such manner or quantity as may reasonably be expected to or in fact
would pose a threat to human health or the value of the Real Property. None of
the Real Property has been used by Towne Financial or Blue Ash for the storage
or disposal of Hazardous Substances nor to the Knowledge of Towne Financial or
Blue Ash, is any of the Real Property contaminated by any Hazardous Substance.
To the Knowledge of Towne Financial or Blue Ash, none of the Real Property has
in the past contained or presently contains any underground storage tanks. To
the Knowledge of Towne Financial or Blue Ash, neither Towne Financial nor Blue
Ash has interest, direct or indirect, in any property owned by a third party
which has been contaminated by Hazardous Substances (excluding any property as
to which the sole interest of Towne Financial or Blue Ash is that of a lien
holder or mortgagee, but including any property as to which title has been taken
by Towne Financial or Blue Ash pursuant to mortgage foreclosure or similar
proceeding and any property as to which Towne Financial or Blue Ash has
participated in the financial management to a degree sufficient to influence the
property's treatment of Hazardous Substances).
(b) To the Knowledge of Towne Financial or Blue Ash, the
representations set forth in paragraph (a) above are also true and correct in
relation to any and all real property owned or leased by it at any time prior to
the date of this Agreement, together with any improvements located thereon.
2.15 COMMUNITY REINVESTMENT ACT COMPLIANCE. Towne Financial and Blue Ash
are in compliance with the applicable provisions of the CRA and the regulations
promulgated thereunder, and has received a CRA rating of satisfactory or better
from the Office of Thrift Supervision. Towne Financial and Blue Ash know of no
fact or circumstance or set of facts or circumstances which would cause them to
fail to comply with such provisions or to cause the CRA rating of Blue Ash to
fall below satisfactory.
2.16 COMPLIANCE WITH LAWS. Towne Financial and Blue Ash hold all permits,
licenses, certificates of authority, orders, and approvals of, and have made all
filings, applications, and registrations with, all governmental or regulatory
bodies that are required in order to permit them to carry on their respective
businesses as they are presently conducted. To the Knowledge of Towne Financial
and Blue Ash, Towne Financial and Blue Ash have conducted its businesses so as
to comply in all material respects with all applicable statutes, regulations,
rules, and orders.
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2.17 INFORMATION PROVIDED BY TOWNE FINANCIAL AND BLUE ASH. None of the
information supplied or to be supplied by Towne Financial and Blue Ash for
inclusion in the Registration Statement, the application for approval, or any
other document to be filed with the Federal Reserve Board, the Division of
Financial Institutions, the SEC, or any other federal or state regulatory
authority in connection with the transactions contemplated herein or in the
Merger Agreement is or will be false or misleading with respect to any material
fact, or omits or will omit any material fact necessary in order to make the
statements therein not misleading.
2.18 MATERIAL CONTRACTS.
(a) The Towne Disclosure Memorandum contains a complete and correct
list of all written or oral agreements, leases, and other obligations and
commitments of the following types, to which either Towne Financial or Blue Ash
is a party, by which Towne Financial or Blue Ash or any of their property is
bound, or which has been authorized by either Towne Financial or Blue Ash:
(i) promissory notes, guaranties, mortgages, security agreements,
or other evidences of indebtedness of Towne Financial or Blue Ash;
(ii) partnership or joint venture agreements;
(iii) employment, bonus, compensation, severance, or consulting
agreements;
(iv) collective bargaining agreements;
(v) Employee Benefit Plans and any other plans, benefits,
programs of benefits, or deferred compensation arrangements for the benefit
of directors, employees, or former or retired employees;
(vi) agreements or commitments for sale (other than in the
ordinary course of business) of assets exceeding $50,000 in the aggregate;
(vii) agreements or commitments for capital expenditures in
excess of $50,000 in the aggregate;
(viii) agreements or other documents creating liens or security
interests relating to any real or personal property owned, rented, or
leased by Towne Financial or Blue Ash and used in connection with the
business of such entity;
(ix) leases of, commitments to lease, and other agreements
relating to the lease or rental of, real or personal property by Towne
Financial or Blue Ash and used in connection with the business of such
entity;
(x) all policies of insurance and fidelity bonds of Towne
Financial or Blue Ash;
(xi) all direct or indirect loans or guaranties of loans to any
director, officer, or Principal Shareholder of Towne Financial or Blue Ash
or their spouses or children or any partnership, corporation, or other
entity in which any such director, officer, or Principal Shareholder or
their spouses or children, have a significant (ten percent or more)
interest; and
(xii) all other contracts and commitments not made in the
ordinary course of business.
(b) The Towne Disclosure Memorandum includes complete and correct
copies of all written agreements, leases and commitments, except loan
commitments less than $500,000, together with all amendments thereto, listed in
the Towne Disclosure Memorandum and a complete and correct written description
of all oral agreements listed in the Towne Disclosure Memorandum.
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(c) As of and through the date of this Agreement: (i) each agreement,
lease, and commitment of Towne Financial or Blue Ash is valid and subsisting and
in full force and effect in all material respects; (ii) Towne Financial and Blue
Ash have in all material respects performed all obligations required to be
performed by it to date under such agreements, leases, and commitments; and
(iii) no event or condition exists which constitutes or, after notice or lapse
of time, would constitute, a material default on the part of Towne Financial or
Blue Ash under any agreement, lease, or commitment.
2.19 EMPLOYEE BENEFIT PLANS.
(a) All Employee Benefit Plans maintained by Towne Financial or Blue
Ash comply in all material respects with the requirements of ERISA and the Code
and all such plans have been administered to date in compliance with the
requirements of ERISA, the Code, and subsequent legislation regulating ERISA
plans. Each of such plans that is an employee pension benefit plan within the
meaning of Section 3(2) of ERISA that is intended to be a qualified plan under
Section 401(a) of the Code has been amended to comply in all material respects
with current law as required or the remedial amendment period for such amendment
under Section 401(b) of the Code has not expired and Towne Financial or Blue Ash
has obtained favorable determination letters with respect to all such plans. As
of the date hereof, neither Towne Financial nor Blue Ash has liability on
account of any accumulated funding deficiency (as defined in Section 412 of the
Code) or on account of any failure to make contributions to or pay benefits
under any such plan nor is Towne Financial or Blue Ash aware of any claim
pending or threatened to be brought by any party regarding such matters. No
prohibited transaction has occurred with respect to any such plan that would
result, directly or indirectly, in the imposition of any excise tax under
Section 4975 of the Code; nor has any reportable event under Section 4043 of
ERISA occurred with respect to any such plan. Neither Towne Financial nor Blue
Ash has a defendant in any lawsuit or criminal action concerning such entity's
conduct as a fiduciary, party-in-interest, or disqualified person with respect
to any plan, nor is either of them engaged in litigation or a continuing
controversy with, or, to the knowledge of Towne Financial or Blue Ash, under
investigation or examination by, the Department of Labor, Internal Revenue
Service, Justice Department, or Pension Benefit Guaranty Corporation involving
compliance with ERISA or the provisions of the Code relating to employee benefit
plans. All reporting and disclosure requirements of ERISA and the Code have been
met in all respects by all such plans. Neither Towne Financial nor Blue Ash is
required to contribute to an Employee Benefit Plan that is a "multiemployer
plan" within the meaning of Section 3(37) of ERISA.
(b) The Towne Disclosure Memorandum lists all Employee Benefit Plans
and any and all other benefit plans or programs currently in effect for
employees, former employees, and retired employees of Towne Financial or Blue
Ash including, without limitation, those providing any form of medical, health,
and dental insurance, severance pay and benefits continuation, relocation
assistance, vacation pay, tuition aid, and matching gifts for charitable
contributions to educational or cultural institutions, whether or not subject to
ERISA. The Towne Disclosure Memorandum includes complete and correct copies of
all such plans or programs, including each trust or other agreement under which
any trustee or custodian holds funds or property of the plan and all current
financial and actuarial reports, all current reporting and disclosure documents
and filings, and currently effective Internal Revenue Service rulings or
determination letters in respect thereof. If any of the Employee Benefit Plans
listed in the Towne Disclosure Memorandum has not been amended to comply with
the Tax Reform Act of 1986 and subsequent legislation, Towne Financial will also
deliver to Oak Hill Financial information and documentation regarding such
plan's operation during the remedial amendment period which is sufficient to
enable Oak Hill Financial to amend such plans to comply with the Tax Reform Act
of 1986 and subsequent legislation.
2.20 INSURANCE POLICIES. The Towne Disclosure Memorandum contains a
complete and correct list of the insurance policies and fidelity bonds currently
maintained by Towne Financial or Blue Ash. The Towne Disclosure Memorandum
includes complete and correct copies of all such policies and bonds currently in
effect together with all riders and amendments thereto. All premiums due thereon
have been paid and Towne Financial or Blue Ash has complied in all respects with
the provisions of such policies and bonds. Neither Towne Financial nor Blue Ash
has failed to give any notice or present any claim under any insurance policy or
fidelity bond in due and timely fashion.
2.21 CAPITAL REQUIREMENTS. Towne Financial and Blue Ash are in compliance
with all currently applicable capital requirements and guidelines prescribed by
all appropriate federal regulatory agencies.
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2.22 LOAN LOSS RESERVES. Since December 31, 1998, neither Towne Financial
nor Blue Ash has incurred any unusual or extraordinary loan losses. The
allowance for loan losses reflected on the financial statements of Towne
Financial or Blue Ash has been determined in accordance with generally accepted
accounting principles and in accordance with all applicable regulations of all
appropriate regulatory agencies and is adequate in all material respects under
requirements of GAAP to provide for reasonably anticipated losses on outstanding
loans. Neither Towne Financial nor Blue Ash has Knowledge of any potential
losses that have not been considered in establishing the current allowance for
loan losses.
2.23 BROKERS; CERTAIN FEES. Neither Towne Financial nor Blue Ash, nor any
of their respective officers, directors, or employees, has employed any broker
or finder or incurred any liability for any financial advisory fees, brokerage
fees, commissions, or finder's fees in connection with this Agreement or the
Merger Agreement, or the transactions contemplated herein or therein.
2.24 MATERIAL FACTS. Neither this Agreement, the Merger Agreement, the
Towne Disclosure Memorandum, nor any list, schedule, or certificate furnished to
Oak Hill Financial by or on behalf of Towne Financial or Blue Ash contains any
untrue statement of a material fact or omits a material fact necessary in order
to make the statements contained therein not misleading in light of the
circumstances in which made.
2.25 TAX TREATMENT OF THE MERGER. Neither Towne Financial or Blue Ash, or
any Affiliate thereof, has taken any action or has any Knowledge of any fact or
circumstance that is reasonably likely to prevent the transactions contemplated
hereby, including the Merger, from qualifying as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF OAK HILL FINANCIAL
Oak Hill Financial and Oak Hill Banks represent and warrant, as the case
may be, to Towne Financial that, except as set forth in the Oak Hill Disclosure
Memorandum:
3.01 ORGANIZATION AND AUTHORITY OF OAK HILL FINANCIAL. Oak Hill Financial
is a corporation duly organized, validly existing, and in good standing under
the laws of the State of Ohio, is duly qualified to do business and is in good
standing in all jurisdictions where its ownership or leasing of property or the
conduct of its business requires it to be so qualified, and has the corporate
power and authority to own its properties and assets, to carry on its business
as it is presently being conducted, and to enter into and carry out its
obligations under this Agreement.
3.02 CAPITALIZATION. The authorized capital stock of Oak Hill Financial
consists of (i) 5,000,000 shares of common stock, without par value, of which
4,367,765 shares were issued and outstanding as of December 31, 1998 (including
treasury shares) and 200,000 reserved for issuance upon exercise of existing
stock option, and (ii) 1,500,000 voting shares of preferred stock, without par
value, and 1,500,000 non-voting shares of preferred stock, without par value, of
which there are no shares issued and outstanding as of the date hereof. All the
outstanding shares of Oak Hill Financial Common are duly and validly authorized,
issued, and outstanding and are fully paid and nonassessable. All of the shares
of Oak Hill Financial Common to be issued pursuant to the Merger Agreement will,
when so issued, be duly and validly authorized, issued, and outstanding, fully
paid and nonassessable, and the issuance of such shares will not be subject to
any preemptive or similar rights. The deposits of Oak Hill Banks are insured up
to the applicable limits by the Bank Insurance Fund ("BIF").
3.03 AUTHORIZATION OF OAK HILL FINANCIAL. The execution, delivery, and
performance of this Agreement by Oak Hill Financial, and the consummation of the
transactions contemplated hereby, have been duly approved by the Board of
Directors of Oak Hill Financial. As soon as practicable and, in any event,
within ten (10) business days after the SEC has declared the Registration
Statement effective, Oak Hill Financial will call and mail notice of a meeting
of its shareholders for the purpose of adopting the Merger Agreement and this
Agreement, which meeting shall be held not more than 45 days from the date the
notice is mailed, and the Board of Directors of Oak Hill Financial will
recommend to the shareholders that they vote their shares in favor of the
Merger.
3.04 ABSENCE OF DEFAULTS. Neither the execution and delivery of this
Agreement, nor the consummation of the Merger, nor compliance by Oak Hill
Financial with any of the provisions hereof will conflict with or result in a
breach of any provision of the charter or bylaws of Oak Hill Financial or result
in a material breach or
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termination of, or accelerate the performance required by, any material note,
bond, mortgage, lease, agreement, or other instrument to which Oak Hill
Financial is a party or to which Oak Hill Financial may be bound.
3.05 INFORMATION PROVIDED BY OAK HILL FINANCIAL. None of the information
supplied or to be supplied by Oak Hill Financial for inclusion in the
Registration Statement, application for approval, or any other document to be
filed with the Federal Reserve Board, the Division of Financial Institutions,
the SEC, or any other federal or state regulatory authority in connection with
the transactions contemplated herein or in the Merger Agreement is or will be
false or misleading with respect to any material fact, or omits or will omit any
material fact necessary in order to make the statements therein not misleading.
3.06 MATERIAL FACTS. Neither this Agreement nor the Merger Agreement
contains any untrue statement of a material fact or omits a material fact
necessary in order to make the statements contained therein not misleading in
light of the circumstances in which made; provided, however, that the scope of
this representation does not extend to any information relating to or furnished
by Towne Financial or Blue Ash.
3.07 FILING OF REPORTS. Oak Hill Financial Common is registered pursuant
to Section 12 of the 1934 Act. Oak Hill Financial has been subject to the
reporting requirements of Section 13 of the 1934 Act for a period of at least
90 days prior to the date hereof and has filed all reports required to be filed
thereunder during the twelve months preceding the date hereof. Since January 1,
1996, Oak Hill Financial has filed with the SEC all documents and reports
(including all amendments, exhibits, and schedules thereto and documents
incorporated by reference therein) required to be filed by Oak Hill Financial
under the 1934 Act and the 1933 Act, and the rules and regulations promulgated
by the SEC thereunder. None of such documents or reports, as of their respective
dates and as amended through the date hereof, contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in view of the
circumstances under which they were made, not misleading.
3.08 ABSENCE OF UNDISCLOSED LIABILITIES. Except to the extent reflected or
reserved against on the Oak Hill Disclosure Memorandum, Oak Hill Banks has no
liabilities, whether absolute, accrued, contingent, or otherwise, due or to
become due, including without limitation any liabilities as guarantor under any
guaranty or liabilities for taxes, except liabilities and taxes incurred in the
ordinary course of business, which have had or will have a material adverse
effect on the business, financial condition, or results of operations of Oak
Hill Banks.
3.09 ABSENCE OF CERTAIN CHANGES. Except as provided in the Oak Hill
Disclosure Memorandum, since December 31, 1998, Oak Hill Financial has not:
(a) made or permitted to be made any changes in their capital or
corporate structures, certificates or articles of incorporation, regulations,
bylaws, or other charter documents;
(b) merged with any other corporation or bank, or permitted any other
corporation or bank to merge into or consolidate with either of them; acquired
control over any other firm, bank, corporation, or organization; or created any
subsidiaries;
(c) issued, sold, delivered, or agreed to issue, sell, or deliver any
additional shares of their capital stock or any options, warrants, or rights to
acquire any such capital stock, or securities convertible into or exchangeable
for such capital stock, and except for capital stock issued pursuant to the
exercise of stock options previously issued, in accordance with their respective
terms;
(d) purchased, sold, transferred, or otherwise acquired or disposed
of, or agreed to purchase, sell, transfer, acquire, or dispose of, any capital
stock or other securities of any kind, or options or other rights to acquire any
such securities, of any other entity (including, but not limited to, any such
transactions involving either of Oak Hill Banks or Oak Hill Financial with
respect to the capital stock or other securities of the other of them), other
than in the ordinary course of business;
(e) incurred any indebtedness, obligations, or liabilities, whether
absolute, accrued, contingent, or otherwise, including, without limitation,
liabilities as guarantor under any guaranty, other than indebtedness,
obligations, and liabilities incurred in the ordinary course of their business;
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(f) adopted any change in any accounting policy or method;
(g) revalued any asset or adjusted any reserve, other than in the
ordinary course of business;
(h) failed to keep in full force and effect insurance and bonds at
least equal in amount and scope of coverage to the insurance and bonds carried
on December 31, 1998;
(i) suffered any material adverse change in their business, financial
condition, income, assets, or liabilities; and
(j) made no material increase in dividends until the Effective Date
of this Agreement.
3.10 TAXES. Oak Hill Financial has filed or caused to be filed all federal
and other tax returns which are required to be filed and have paid or made
provision for payment of all taxes shown as due on such returns. No deficiencies
for any tax, assessment, or governmental charge have been proposed, asserted, or
assessed against Oak Hill Financial that have not been settled and paid.
3.11 LITIGATION. There is no action, suit, proceeding, or claims by any
governmental agency or other person or entity nor any investigation by any
governmental agency pending or, to the Knowledge of Oak Hill Financial,
threatened against (i) Oak Hill Banks, (ii) Oak Hill Financial, (iii) the
assets, business or goodwill of Oak Hill Banks or Oak Hill Financial, or (iv)
any director, officer, or Principal Shareholder of Oak Hill Banks or Oak Hill
Financial, in relation to the business of Oak Hill Banks or Oak Hill Financial
or any such person's capacity as a director, officer, or Principal Shareholder
of Oak Hill Banks or Oak Hill Financial.
3.12 COMPLIANCE WITH LAWS. To the knowledge of Oak Hill Financial, Oak
Hill Banks and Oak Hill Financial hold all permits, licenses, certificates of
authority, orders, and approvals of, and have made all filings, applications,
and registrations with, all governmental or regulatory bodies that are required
in order to permit them to carry on their respective businesses as they are
presently conducted. To the Knowledge of Oak Hill Financial, Oak Hill Banks and
Oak Hill Financial have conducted their businesses so as to comply in all
material respects with all applicable statutes, regulations, rules, and orders.
3.13 ENVIRONMENTAL MATTERS.
(a) To the Knowledge of Oak Hill Financial, Oak Hill Banks is and has
been at all times in substantial compliance with all applicable Environmental,
and Oak Hill Banks has not engaged in any activity resulting in a material
violation of any applicable Environmental Law. No orders, hearings, actions, or
other proceedings by or before any court or governmental agency in which Oak
Hill Banks is a party are pending or, to the Knowledge of Oak Hill Financial,
threatened in connection with any alleged violation of any applicable
Environmental Law (i) by Oak Hill Banks or (ii) in relation to any part of the
Real Property, and Oak Hill Financial has no Knowledge of any investigations or
inquiries with respect to any such alleged violation. No claims have been made
or, to the Knowledge of Oak Hill Financial, threatened at any time by any third
party against Oak Hill Banks relating to damage, contribution, cost recovery,
compensation, loss, or injury resulting from any Hazardous Substance. To the
Knowledge of Oak Hill Financial, Oak Hill Banks has not caused or permitted any
Hazardous Substance to be integrated into the Real Property or any component
thereof in such manner or quantity as may reasonably be expected to or in fact
would pose a threat to human health or the value of the Real Property. None of
the Real Property has been used by Oak Hill Banks for the storage or disposal of
Hazardous Substances nor to the Knowledge of Oak Hill Financial, is any of the
Real Property contaminated by any Hazardous Substance. To the Knowledge of Oak
Hill Financial, none of the Real Property has in the past contained or presently
contains any underground storage tanks. To the Knowledge of Oak Hill Financial,
Oak Hill Banks has no interest, direct or indirect, in any property owned by a
third party which has been contaminated by Hazardous Substances (excluding any
property as to which the sole interest of Oak Hill Banks is that of a lien
holder or mortgagee, but including any property as to which title has been taken
by Oak Hill Banks pursuant to mortgage foreclosure or similar proceeding and any
property as to which Oak Hill Banks has participated in the financial management
to a degree sufficient to influence the property's treatment of Hazardous
Substances).
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(b) To the Knowledge of Oak Hill Financial, the representations set
forth in paragraph (a) above are also true and correct in relation to any and
all real property owned or leased by it at any time prior to the date of this
Agreement, together with any improvements located thereon.
3.14 EMPLOYEE BENEFIT PLANS. All Employee Benefit Plans maintained by Oak
Hill Banks or Oak Hill Financial comply in all material respects with the
requirements of ERISA and the Code and all such plans have been administered to
date in compliance with the requirements of ERISA, the Code, and subsequent
legislation regulating ERISA plans. Each of such plans that is an employee
pension benefit plan within the meaning of Section 3(2) of ERISA that is
intended to be a qualified plan under Section 401(a) of the Code has been
amended to comply in all material respects with current law as required or the
remedial amendment period for such amendment under Section 401(b) of the Code
has not expired and Oak Hill Banks or Oak Hill Financial has obtained favorable
determination letters with respect to all such plans. As of the date hereof, Oak
Hill Banks or Oak Hill Financial has no liability on account of any accumulated
funding deficiency (as defined in Section 412 of the Code) or on account of any
failure to make contributions to or pay benefits under any such plan nor is Oak
Hill Banks or Oak Hill Financial aware of any claim pending or threatened to be
brought by any party regarding such matters. No prohibited transaction has
occurred with respect to any such plan that would result, directly or
indirectly, in the imposition of any excise tax under Section 4975 of the Code;
nor has any reportable event under Section 4043 of ERISA occurred with respect
to any such plan. Neither Oak Hill Banks nor Oak Hill Financial is a defendant
in any lawsuit or criminal action concerning such entity's conduct as a
fiduciary, party-in-interest, or disqualified person with respect to any plan,
nor is either of them engaged in litigation or a continuing controversy with,
or, to the Knowledge of Oak Hill Financial, under investigation or examination
by, the Department of Labor, Internal Revenue Service, Justice Department, or
Pension Benefit Guaranty Corporation involving compliance with ERISA or the
provisions of the Code relating to employee benefit plans. All reporting and
disclosure requirements of ERISA and the Code have been met in all respects by
all such plans. Neither Oak Hill Banks nor Oak Hill Financial is required to
contribute to an Employee Benefit Plan that is a "multiemployer plan" within the
meaning of Section 3(37) of ERISA.
3.15 CAPITAL REQUIREMENTS. Oak Hill Financial is in compliance with all
currently applicable capital requirements and guidelines prescribed by all
appropriate federal regulatory agencies.
3.16 TAX TREATMENT OF THE MERGER. Oak Hill Financial has not taken any
action or has any knowledge of any fact or circumstance that is reasonably
likely to prevent the transactions contemplated hereby, including the Merger,
from qualifying as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code.
SECTION 4. COVENANTS OF TOWNE FINANCIAL AND BLUE ASH.
Towne Financial and Blue Ash covenant and agree as follows:
4.01 APPLICATIONS FOR REGULATORY APPROVALS; REGISTRATION STATEMENT. Towne
Financial and Blue Ash will cooperate, and will cause its respective directors,
officers, employees, agents, and advisers to cooperate, to the extent reasonably
necessary, with Oak Hill Financial and its advisers in connection with the
preparation of the Registration Statement and the applications for regulatory
approvals described in Section 5.02 hereof.
4.02 SHAREHOLDERS' MEETING. As soon as practicable and, in any event,
within ten business days after the SEC has declared the Registration Statement
effective, Towne Financial will call and mail notice of a meeting of its
shareholders for the purpose of adopting the Merger Agreement and this
Agreement, which meeting shall be held not more than 45 days from the date the
notice is mailed, and the Board of Directors of Towne Financial will to the
extent consistent with their fiduciary duty recommend to the shareholders that
they vote their shares in favor of the Merger.
4.03 CONDUCT OF BUSINESS. From the date of this Agreement until the
Effective Time, except as provided herein or as consented to by Oak Hill
Financial in writing, Towne Financial and Blue Ash will conduct their respective
operations only, and shall not take any action except, in the ordinary and usual
course of business, and Towne Financial and Blue Ash will use its best efforts
to preserve intact its business organization, assets, prospects, and business
relationships, to keep available the services of their officers and employees,
and to maintain existing
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relationships with other entities. Without limiting the generality of the
foregoing, subject to the exceptions stated above, during such period, Towne
Financial and Blue Ash will not except as provided herein:
(a) enter into any agreement or commitment of the character referred
to in subsections 2.18(a)(i) through (xii) hereof; or
(b) take or permit to be taken any action of a character which is
listed in subsections (a) through (q) of Section 2.10 hereof; provided, however,
that, after prior consultation with Oak Hill Financial, Towne Financial may take
or permit such of those actions as may be required pursuant to any change in
applicable accounting rules or standards, or by law or any applicable rules or
regulations of any governmental authority.
4.04 ACCESS TO INFORMATION. Towne Financial and Blue Ash shall give
representatives of Oak Hill Financial full access, during normal business hours
and upon reasonable notice, to all assets, properties, books, records,
agreements, and commitments of Towne Financial and Blue Ash, provided that such
access shall not unreasonably interfere with the operations of Towne Financial
and Blue Ash, and shall furnish to representatives of Oak Hill Financial all
such information concerning its and their affairs as Oak Hill Financial may
reasonably request. It is expressly understood that no investigation by Oak Hill
Financial pursuant to this Section 4.04 or otherwise shall affect any
representation or warranty made herein.
4.05 PRESS RELEASES. Towne Financial and Blue Ash shall consult in advance
with Oak Hill Financial as to the form and substance of any press release,
written communication with its shareholders, or other public disclosure of
matters related to the Merger Agreement, this Agreement, or the Merger, and
shall not issue any such press release, written communication, or public
disclosure without the prior written consent of Oak Hill Financial; provided,
however, that nothing contained herein shall prohibit Towne Financial and Blue
Ash from making any disclosure (after consultation with Oak Hill Financial with
respect thereto) which its counsel deems necessary under applicable law.
4.06 BEST EFFORTS. Towne Financial and Blue Ash shall use their best
efforts to take or cause to be taken all actions necessary, proper, or advisable
to consummate the Merger, including such actions as Oak Hill Financial may
reasonably request in writing, and should Oak Hill Financial so elect, to
consummate a merger of Blue Ash into an interim state-chartered commercial bank
formed by Oak Hill Financial for such purpose.
4.07 ACQUISITION PROPOSALS. Unless and until this Agreement shall have
been terminated by either party pursuant to Section 11 hereof, Towne Financial
and Blue Ash shall not (i) directly or indirectly, through any of its officers,
directors, agents, or affiliates, solicit, encourage, initiate, entertain,
consider, or participate in any negotiations or discussions with respect to any
Acquisition Proposal, or (ii) disclose any information not customarily disclosed
to any person or entity or provide access to its properties, books, or records
or otherwise assist or encourage any person or entity in connection with any
Acquisition Proposal; provided, however, that Towne Financial shall be entitled
to entertain, consider, and participate in negotiations and discussions
regarding an Unsolicited Acquisition Proposal, and to disclose such information
and provide such access in connection with such an Unsolicited Acquisition
Proposal, to the extent that the Board of Directors of Towne Financial
determines in good faith, after consultation with its financial advisor with
respect to the financial aspects of the Unsolicited Acquisition Proposal and the
Merger, and with legal counsel to Towne Financial, that failure to so consider
or participate in such negotiations or discussions would be inconsistent with
the fiduciary obligations of the directors of Towne Financial to the
shareholders of Towne Financial. Towne Financial shall give Oak Hill Financial
immediate notice of any such Acquisition Proposals.
4.08 ADVICE OF CHANGES. Between the date hereof and the Effective Date,
Towne Financial and Blue Ash shall advise Oak Hill Financial promptly, in
writing, of any material fact which, if existing or known on the date hereof,
would have been required to be set forth or disclosed in or pursuant to this
Agreement and any fact which, if existing or known on the date hereof, would
have made any of the representations contained herein untrue. Prior to the
Effective Date, Towne Financial and Blue Ash shall deliver to Oak Hill Financial
a supplement to the Towne Disclosure Memorandum, which shall contain a
description of any and all such matters.
4.09 CONFIDENTIALITY. From and after the date of this Agreement, Towne
Financial and Blue Ash shall, and shall cause its respective Affiliates to,
treat all Confidential Information of Oak Hill Financial and Oak Hill
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Banks, as confidential, and Towne Financial and Blue Ash shall, and shall cause
its respective Affiliates to, not use any such Confidential Information for any
purpose except in furtherance of the transactions contemplated hereby. In the
event this Agreement is terminated pursuant to Section 11 hereof, Towne
Financial and Blue Ash shall, and shall cause their respective Affiliates to,
promptly return to Oak Hill Financial all documents and workpapers, and all
copies thereof, containing any such Confidential Information of Oak Hill
Financial or Oak Hill Banks. The covenants of Towne Financial and Blue Ash
contained in this Section 4.09 are of the essence and shall survive any
termination of this Agreement and the closing of the transactions contemplated
hereby.
4.10 COORDINATION OF DIVIDENDS. Towne Financial agrees to cooperate with
Oak Hill Financial to ensure that the shareholders of Towne Financial receive a
regular quarterly dividend from either Towne Financial or Oak Hill Financial
during the quarter in which the Effective Date occurs, but that they do not
receive dividends from both Towne Financial and Oak Hill Financial during such
quarter.
4.11 TAX REPRESENTATIONS. Towne Financial and Blue Ash will use reasonable
efforts to cause the Merger, and will take no action which would cause the
Merger not to qualify for treatment as a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code for federal income tax purposes and
shall make such Tax representations as shall be reasonably requested of them.
4.12 POOLING. The accounting firm of Grant Thornton LLP has reviewed the
proposed Merger and determined that the Merger qualifies as a "pooling of
interest" for accounting purposes. Neither Towne Financial nor Blue Ash shall
intentionally take or cause to be taken any action, whether before or after the
Effective Date, which would disqualify the Merger as a "pooling of interests"
for accounting purposes or as a "reorganization" within the meaning of Section
368(a) of the Code.
4.13 FORM 13D OR 13G FILINGS. Towne Financial shall promptly advise Oak
Hill Financial of the filing of a Form 13D or 13G under the 1934 Act with
respect to Towne Financial Common and shall provide Oak Hill Financial with a
copy of any such Form 13D or 13G promptly after receipt thereof.
SECTION 5. COVENANTS OF OAK HILL FINANCIAL AND OAK HILL BANKS
Oak Hill Financial and Oak Hill Banks covenant and agree as follows:
5.01 ISSUANCE OF OAK HILL FINANCIAL COMMON; PAYMENT FOR FRACTIONAL SHARES.
At the Effective Time, Oak Hill Financial shall (i) issue all of the shares of
Oak Hill Financial Common into which shares of Towne Financial Common are to be
converted in the Merger and will deliver the certificates for such shares, or
cause the same to be delivered, to the Exchange Agent; and (ii) deliver to the
Exchange Agent the amount of cash to be paid in lieu of issuing fractional
shares of Oak Hill Financial Common in accordance with subsections 8(b)(ii) and
9(a) of the Merger Agreement.
5.02 APPLICATIONS FOR REGULATORY APPROVALS. As soon as reasonably
practicable after the execution of this Agreement, Oak Hill Financial shall
prepare and file such applications with the Office of Thrift Supervision, the
Federal Reserve Board, the Ohio Division of Financial Institutions, and any
other regulatory authorities having jurisdiction as may be required to secure
all necessary regulatory approvals of the Merger and shall use its best efforts
to secure such approvals. Oak Hill Financial may also seek regulatory approval
for the formation of a interim state-chartered commercial bank in which Blue Ash
would merged as of, or shortly after, the Effective Time. Oak Hill Financial
shall deliver a draft or drafts of such regulatory applications to Towne
Financial and provide Towne Financial a reasonable opportunity to review such
draft or drafts prior to filing the same.
5.03 REGISTRATION STATEMENT. As soon as reasonably practicable after the
execution of this Agreement, Oak Hill Financial shall prepare and file the
Registration Statement with the SEC, shall use its best efforts to cause the
Registration Statement to become effective, and shall take such action as may be
required to register or qualify for exemption such shares under the securities
laws of the states where registration or an exemption from registration may be
required. Oak Hill Financial shall deliver a draft or drafts of the Registration
Statement to Towne Financial and provide Towne Financial a reasonable
opportunity to review such draft or drafts prior to filing the same.
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5.04 SHAREHOLDERS' MEETING. As soon as practicable and, in any event,
within ten business days after the SEC has declared the Registration Statement
effective, Oak Hill Financial will call and mail notice of a meeting of its
shareholders for the purpose of adopting the Merger Agreement and this
Agreement, which meeting shall be held not more than 45 days from the date the
notice is mailed, and the Board of Directors of Oak Hill Financial will to the
extent consistent with their fiduciary duty recommend to the shareholders that
they vote their shares in favor of the Merger.
5.05 PRESS RELEASES. Oak Hill Financial shall consult in advance with
Towne Financial as to the form and substance of any press release, written
communication with its shareholders, or other public disclosure of matters
related to this Agreement, the Merger Agreement, or the Merger.
5.06 BEST EFFORTS. Oak Hill Financial will use its best efforts to take or
cause to be taken all actions necessary, proper, or advisable to consummate the
Merger.
5.07 CONFIDENTIALITY. From and after the date of this Agreement, Oak Hill
Financial and Oak Hill Banks shall, and shall cause their respective Affiliates
to, treat all Confidential Information of Towne Financial and Blue Ash as
confidential, and Oak Hill Financial and Oak Hill Banks shall, and shall cause
their respective Affiliates to, not use any such Confidential Information for
any purpose except in furtherance of the transactions contemplated hereby. In
the event this Agreement is terminated pursuant to Section 11 hereof, Oak Hill
Financial and Oak Hill Banks shall, and shall cause their respective Affiliates
to, promptly return to Towne Financial and Blue Ash all documents and
workpapers, and all copies thereof, containing any such Confidential Information
of Towne Financial and Blue Ash. The covenants of Oak Hill Financial and Oak
Hill Banks contained in this Section 5.07 are of the essence and shall survive
any termination of this Agreement, but shall terminate as of the closing of the
transactions contemplated hereby.
5.08 COORDINATION OF DIVIDENDS. Oak Hill Financial agrees to cooperate
with Towne Financial to ensure that the shareholders of Towne Financial receive
a regular quarterly dividend from either Towne Financial or Oak Hill Financial
during the quarter in which the Effective Date occurs, but that they do not
receive dividends from both Towne Financial and Oak Hill Financial during such
quarter.
5.09 INDEMNIFICATION OF DIRECTORS AND OFFICERS. Oak Hill Financial
acknowledges that, by operation of law, at the Effective Time, Oak Hill
Financial will assume any and all legally enforceable obligations of Towne
Financial and Blue Ash to indemnify and defend the directors and officers of
Towne Financial and Blue Ash pursuant to, to the extent of, and in accordance
with the terms and conditions of any such obligations that Towne Financial and
Blue Ash had to indemnify and defend such persons in effect immediately prior to
the Effective Time, in connection with such persons' status or services as
directors and officers of Towne Financial and Blue Ash, whether by contractual
right or by any provision of the articles of incorporation or code of
regulations of Towne Financial and or Blue Ash, with respect to any claim
asserted or made prior to or at any time after the Effective Time. All such
rights to indemnification with respect to any such claim shall continue until
the final disposition of such claim regardless of when such claim was made or
asserted; provided, however, that nothing contained herein shall increase or
lengthen the duration of Oak Hill Financial's obligations with respect to such
indemnification over that to which Towne Financial and Blue Ash would have been
subject had the Merger not been consummated. Oak Hill Financial agrees to use
its reasonable best efforts to cover directors and officers of Towne Financial
and Blue Ash in insurance policies.
5.10 POOLING. The accounting firm of Grant Thornton LLP has reviewed the
proposed Merger and determined that the Merger qualifies as a "pooling of
interests" for accounting purposes. Neither Oak Hill Financial nor Oak Hill
Banks shall intentionally take or cause to be taken any action, whether before
or after the Effective Date, which would disqualify the Merger as a "pooling of
interests" for accounting purposes or as a "reorganization" within the meaning
of Section 368(a) of the Code.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF ALL PARTIES
The obligations of each of the parties hereto to consummate the Merger are
subject to the fulfillment, on or before the Closing Date, of the following
conditions precedent:
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6.01 SHAREHOLDER APPROVAL. The Merger shall have been approved by the
affirmative vote of the holders of at least two-thirds of the issued and
outstanding shares of Towne Financial Common, and by the affirmative vote of the
holders of a majority of the issued and outstanding shares of Oak Hill
Financial.
6.02 REGULATORY APPROVALS. The Merger shall have been approved by the
Federal Reserve Board, the Ohio Division of Financial Institutions, and any
other governmental authority having jurisdiction, and any applicable waiting
periods shall have expired, with no such approval or authorization containing
any provision or be subject to any condition, which would be materially adverse
to the business of Towne Financial and Blue Ash, Oak Hill Financial or Oak Hill
Banks, either prior to or subsequent to the proposed merger of Towne Financial
and Oak Hill Financial.
6.03 LITIGATION. No suit, action, investigation by any governmental body,
or legal or administrative proceeding shall have been brought or threatened
which materially questions the validity or legality of the transactions
contemplated hereunder or under the Merger Agreement. For purposes hereof,
advisory opinions or written requests for information which could be used in
connection with such suit, investigation, or proceeding given by governmental
agencies may be deemed to constitute such a threat.
6.04 FAIRNESS OPINIONS. Towne Financial shall have received a fairness
opinion from RP Financial, LC, dated as of the date of the proxy statement
relating to the Merger stating that the exchange ratio is fair to the
shareholders of Towne Financial, as of such date, from a financial point of view
and Oak Hill Financial shall have received a fairness opinion from Trident
Financial Corporation dated as of the date of the proxy statement relating to
the Merger stating that the contemplated merger of Towne Financial and Oak Hill
Financial is fair to the shareholders of Oak Hill Financial, as of such date,
from a financial standpoint.
6.05 TAX OPINION. Oak Hill Financial and Towne Financial shall have
received an opinion of Porter, Wright, Morris & Arthur substantially to the
effect that:
(a) the Merger will constitute a reorganization within the meaning of
Section 368(a)(1)(A);
(b) no gain or loss will be recognized by Oak Hill Financial (except
for the inclusion in income of amounts resulting from any required changes in
accounting methods or similar items) upon the consummation of the Merger;
(c) no gain or loss will be recognized by Towne Financial (except for
the inclusion in income of amounts resulting from any required changes in
accounting methods or similar items) upon the consummation of the Merger;
(d) no gain or loss will be recognized by the shareholders of Towne
Financial who exchange their shares of Towne Financial Common for shares of Oak
Hill Financial Common, except to the extent of any cash received in lieu of a
fractional share of Oak Hill Financial Common;
(e) the basis of the shares of Oak Hill Financial Common to be
received by shareholders of Towne Financial who receive solely shares of Oak
Hill Financial Common will be the same as the basis of the shares of Towne
Financial Common surrendered in exchange therefor, reduced by any amount
allocated to a fractional share of Oak Hill Financial common with respect to
which cash is received.;
(f) the holding period of the shares of Oak Hill Financial Common
received by shareholders of Towne Financial will include the holding period of
the shares of Towne Financial Common surrendered in exchange therefor, provided
that the Towne Financial Common was held as a capital asset in the hands of the
shareholder of Towne Financial on the Effective Date;
(g) where solely cash is received by a shareholder of Towne Financial
in exchange for his or her shares of Towne Financial Common pursuant to the
exercise of dissenters' rights, the cash will be treated as having been received
by such shareholder as a distribution in redemption of his Oak Hill Financial
Common shares received in connection with this transaction, subject to the
provisions and limitations of Section 302 of the Code, and where, as a result of
such distribution, a shareholder owns no shares of Oak Hill Financial Common
either
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directly or through the application of Section 318(a) of the Code, the
redemption will be a complete termination of interest within the meaning of
Section 302(b)(3) of the Code and such cash will be treated as a distribution in
full payment in exchange for his or her shares of Towne Financial Common, as
provided in Section 302(a) of the Code; and under Section 1001 of the Code, gain
or (subject to the limitations of Section 267 of the Code) loss will be realized
and recognized to such shareholders in an amount equal to the difference between
the amount of such cash and the adjusted basis of the Towne Financial Common
shares surrendered, as determined under Section 1011 of the Code; and
(h) the payment of cash in lieu of fractional shares of Oak Hill
Financial Common will be treated for federal income tax purposes as if the
fractional shares were distributed as part of the exchange and then were
redeemed by Oak Hill Financial; such cash payments will be treated as having
been received as distributions in full payment in exchange for the stock
redeemed subject to the conditions and limitations of Section 302 of the Code.
In rendering such tax opinion, Porter, Wright, Morris & Arthur shall be
entitled to rely upon certain assumptions and representations of Towne
Financial's officers, directors and those shareholders of Towne Financial who
own one percent or more of the outstanding shares of Towne Financial Common, and
of officers of Oak Hill Financial reasonably satisfactory in form and substance
to Porter, Wright, Morris & Arthur.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF TOWNE FINANCIAL
The obligations of Towne Financial to consummate the Merger are subject to
the fulfillment on or before the Closing Date of the following additional
conditions precedent:
7.01 REPRESENTATIONS AND WARRANTIES. The representations and warranties
made by Oak Hill Financial herein shall be true and correct in all material
respects on the Effective Date with the same force and effect as though such
representations and warranties had been made on and as of such date; Oak Hill
Financial shall have performed in all material respects its obligations
hereunder and under the Merger Agreement to be performed on or before the
Closing Date; and an executive officer of Oak Hill Financial shall have executed
and delivered to Towne Financial a certificate or certificates, dated as of the
Closing Date, in respect of the foregoing matters and in respect of such other
matters as Towne Financial shall reasonably request.
7.02 OPINION OF COUNSEL. Towne Financial shall have received a favorable
opinion dated as of the Closing Date from Porter, Wright, Morris & Arthur,
counsel for Oak Hill Financial, to the effect that:
(a) Oak Hill Financial is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Ohio; Oak Hill
Financial has the corporate power and authority to own all of their properties
and assets and to carry on their businesses as presently conducted in all
jurisdictions in which such ownership exists or such business is conducted; and
Oak Hill Financial has the corporate power and authority to merge with Towne
Financial pursuant to this Agreement and the Merger Agreement;
(b) the execution and delivery of this Agreement and the Merger
Agreement did not, and the consummation of the Merger will not, conflict with
any provision of the articles or certificate of incorporation, regulations,
bylaws, or other charter documents of Oak Hill Financial;
(c) the execution and delivery of this Agreement and the Merger
Agreement and the consummation of the Merger have been authorized by all
necessary corporate action of Oak Hill Financial; and this Agreement and the
Merger Agreement are valid and binding agreements of Oak Hill Financial
enforceable in accordance with their terms, except as may be limited by
bankruptcy, insolvency, or other similar laws affecting enforcement of
creditors' rights generally and except that the enforceability of the
obligations of Oak Hill Financial is subject to general principles of equity;
(d) the shares of Oak Hill Financial Common to be issued by Oak Hill
Financial in the Merger have been authorized and, upon issuance, will be fully
paid and nonassessable and will not be subject to the preemptive rights of any
shareholder of Oak Hill Financial;
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(e) all necessary regulatory approvals have been received and all
applicable waiting periods have expired;
(f) Oak Hill Financial is a duly and validly registered Bank Holding
Company;
(g) Oak Hill Banks is a state-chartered bank; and
(h) Oak Hill Banks deposit accounts are insured by BIF to the fullest
extent permitted by law.
Such opinion may be governed by the Accord. In giving such opinion, such
counsel may rely as to matters of fact, without independent investigation, to
the extent such counsel deems such reliance to be customary, reasonable, and
appropriate, on certificates of federal, state, or local government officials
and on certificates of officers and directors of Oak Hill Financial or Oak Hill
Banks. Such counsel may expressly exclude any opinions as to choice of law
matters and antitrust matters and may add such other qualifications and
explanations of the basis of its opinions as are consistent with the Accord.
7.03 EFFECTIVENESS OF THE REGISTRATION STATEMENT; NASD LISTING. Towne
Financial shall have received a certificate from a duly authorized officer of
Oak Hill Financial to the effect that the Registration Statement has become
effective by an order of the SEC, the Oak Hill Financial Common to be exchanged
in the Merger has been qualified or is exempt under all applicable state
securities laws, and there has been no stop order issued or threatened by the
SEC that suspends or would suspend the effectiveness of the Registration
Statement, and no proceeding has been commenced or overtly threatened for such
purpose. The shares of Oak Hill Financial Common to be issued to Towne Financial
shareholders pursuant to the Merger Agreement shall have been authorized for
listing on the NASDAQ National Market upon official notice of issuance.
7.04 MATERIAL ADVERSE CHANGE. Since December 31, 1998, there shall not
have occurred any material adverse change in the results of operation, financial
condition, properties, or business of Oak Hill Financial on a consolidated
basis, other than any such change attributable to or resulting from (i) changes
in law, regulation, or generally accepted accounting principles of general
application to the banking or thrift industries, (ii) changes in economic
conditions that affect the banking and thrift industries generally, including
changes in the general level of interest rates, or (iii) any matter or matters
relating to Oak Hill Financial which have been disclosed in the Oak Hill
Financial Disclosure Memorandum as of the date of this Agreement.
SECTION 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF OAK HILL FINANCIAL
The obligations of Oak Hill Financial to consummate the Merger are subject
to the fulfillment on or before the Closing Date of the following additional
conditions precedent:
8.01 REGULATORY APPROVAL OF THE MERGER. The Merger shall have been
approved by the Federal Reserve Board, the Division of Financial Institutions,
and any other governmental authority having jurisdiction, and any applicable
waiting periods shall have expired, with no such approval or authorization
containing any provision which would be materially adverse to the business of
Oak Hill Financial or Oak Hill Banks.
8.02 REPRESENTATIONS AND WARRANTIES. The representations and warranties
made by Towne Financial and Blue Ash herein shall be true and correct in all
material respects on the Closing Date with the same force and effect as though
such representations and warranties had been made on and as of such date; Towne
Financial and Blue Ash shall have performed in all material respects its
obligations hereunder and under the Merger Agreement to be performed on or
before the Closing Date; and the chief executive officer and principal financial
officer of Towne Financial shall have executed and delivered to Oak Hill
Financial certificates, dated as of the Closing Date, in respect of the
foregoing matters and in respect of such other matters as Oak Hill Financial
shall reasonably request.
8.03 OPINION OF COUNSEL. Oak Hill Financial shall have received a
favorable opinion dated as of the Effective Date from Cors & Bassett, as counsel
for Towne Financial, acceptable to Oak Hill Financial, to the effect that:
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(a) Towne Financial is a unitary savings and loan holding company,
duly organized, validly existing, and in good standing under the laws Ohio; Blue
Ash is a member in good standing of the FHLB of Cincinnati; all eligible
accounts of deposit in Blue Ash are insured by the FDIC to the fullest extent
permitted by law; all corporate action required to be taken by the directors and
shareholders of Towne Financial to authorize the transactions contemplated by
this Agreement and the Merger Agreement have been taken; and Towne Financial has
the corporate power to effect the Merger in accordance with the terms of this
Agreement and the Merger Agreement;
(b) the execution and delivery of this Agreement and the Merger
Agreement did not, and the consummation of the Merger will not, conflict with
any provision of the articles or certificate of incorporation, regulations,
bylaws, or other charter documents of Towne Financial; and
(c) the execution and delivery of this Agreement and the Merger
Agreement and the consummation of the Merger have been authorized by all
necessary corporate action of Towne Financial; and this Agreement and the Merger
Agreement are valid and binding agreements of Towne Financial enforceable in
accordance with their terms, except as may be limited by bankruptcy, insolvency,
reorganization, or similar laws affecting enforcement of creditors' rights
generally and except that the enforceability of the obligations of Towne
Financial may be subject to general principles of equity.
Such opinion may be governed by the Accord. In giving such opinion, such counsel
may rely as to matters of fact, without independent investigation, to the extent
such counsel deems such reliance to be customary, reasonable, and appropriate,
on certificates of federal, state, or local government officials and on
certificates of officers and directors of Towne Financial and Blue Ash. Such
counsel may expressly exclude any opinions as to choice of law matters and
antitrust matters and may add such other qualifications and explanations of the
basis of its opinions as are consistent with the Accord.
8.04 AGREEMENTS OF AFFILIATES. Each director of Towne Financial and their
"affiliates," for purposes of Rule 145 under the 1933 Act, shall deliver to Oak
Hill Financial prior to the Effective Date a written agreement, providing that
such person will not sell the shares of Oak Hill Financial Common to be received
by such person in the Merger unless such sales are pursuant to an effective
registration statement under the 1933 Act or pursuant to Rule 145 of the SEC or
another exemption from the registration requirements under the 1933 Act.
8.05 DISSENTING SHAREHOLDERS. The total number of shares of Towne
Financial Common, if any, as to which the right to dissent has been asserted
under Section 1701.85 of the Ohio Revised Code shall not exceed five percent
(5%) of the total number of outstanding shares of Towne Financial Common.
8.06 MATERIAL ADVERSE CHANGE. Since December 31, 1998, there shall not
have occurred any material adverse change in the consolidated results of
operations, financial condition, properties, or business of Towne Financial and
Blue Ash, other than any such change attributable to or resulting from
(i) changes in law, regulation, or generally accepted accounting principles of
general application to the banking or thrift industries, (ii) changes in
economic conditions that affect the banking and thrift industries generally,
including changes in the general level of interest rates, or (iii) any matter or
matters relating to Towne Financial and Blue Ash which have been disclosed in
the Towne Disclosure Memorandum as of the date of this Agreement.
8.07 TITLE INSURANCE. For each parcel of the Real Property described in
the Towne Disclosure Memorandum as being owned by Towne Financial and Blue Ash,
and for each lease for any parcel of the Real Property described in the Towne
Disclosure Memorandum as being leased by Towne Financial and Blue Ash, Oak Hill
Financial shall have obtained a title insurance commitment (ALTA 1966 form or
its equivalent) for a fee owner's title insurance policy or leasehold owner's
title insurance policy, as appropriate, each in an amount equal to the carrying
cost of the premises or leasehold interest to be insured (including all
improvements thereon), on the books of Towne Financial and Blue Ash as of
December 31, 1998. Each title insurance commitment shall show that marketable
fee simple title to the owned premises or that valid leasehold title to the
leased premises, as appropriate, is in the name of Towne Financial and Blue Ash,
and that it is free and clear of any liens and encumbrances except taxes and
assessments not delinquent and utility and other easements that do not interfere
with the use of the property for the business being conducted thereon. Each such
commitment shall provide that such fee owner's policy committed for therein
shall be an ALTA 1970 form, revised in 1984, and each leasehold owner's policy
shall be an ALTA 1975 form, or other form acceptable to Oak Hill Financial.
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8.08 SURVEY. Oak Hill Financial Banks shall have obtained current land
surveys of those parcels of the Real Property. Each survey to be conducted and
prepared by a duly licensed land surveyor, with such survey to be a duly
certified ALTA/ACSM field survey, which confirm that the Real Property is not
subject to any easements, restrictions, set backs, encroachments, or other
limitations except utility and other easements that do not interfere with the
use of the Real Property for the business then being conducted thereon, and that
the Real Property is not located in any flood hazard area.
8.09 PHASE I. For each parcel of the Real Property described in the Towne
Disclosure Memorandum as being leased or owned by Towne Financial and Blue Ash,
Oak Hill Financial shall have completed a "Phase I" environmental site
assessment prepared by a licensed environmental engineering firm indicating that
there is no evidence of contamination with Hazardous Substances or other
violations of environmental Laws and concluding that no testing or additional
investigations appears to be warranted.
8.10 CONSENTS AND APPROVALS. Towne Financial and Blue Ash shall have
obtained any and all consents or approvals that may be required under the terms
of (i) any contract, agreement, lease, or other obligation or commitment,
including, but not limited to, the types described in Section 2.18 hereof, to
which either Towne Financial or Blue Ash is a party or by which either Towne
Financial or Blue Ash, or any of their property or assets, is bound, or (ii) any
license or permit of Towne Financial or Blue Ash, in order to avoid the
occurrence of any breach or default which may result from the consummation of
the Merger and which, if not obtained, is reasonably likely to have,
individually or in the aggregate, a material adverse effect on Oak Hill
Financial, Oak Hill Banks, Towne Financial or Blue Ash.
8.11 AGREEMENT TO VOTE. Oak Hill Financial shall have received from each
of Towne Financial' shareholders who own in excess of five percent (5%) of the
outstanding shares of Towne Financial Common an agreement, substantially in the
form attached hereto as EXHIBIT A, to vote in favor of the Merger all shares of
Towne Financial Common owned by them or over which they have the power to vote.
8.12 SHAREHOLDERS' EQUITY. The total shareholders' equity of Towne
Financial as of the end of the most recent calendar quarter preceding the
Closing Date and as of the Closing Date shall not be less than the total
shareholders' equity of Towne Financial as of December 31, 1998, except for
Towne Financial' expenses relating to the Merger and adjustments relating to the
Merger as requested by Oak Hill Financial.
8.13 CONVERSION OF STOCK OPTIONS.
(a) All outstanding Towne Stock Options held by persons who are not
employees of either Towne Financial or Blue Ash Building & Loan Association on
the Effective Date, including, but not limited to, non-employee directors of
either of them, shall have been exercised, or terminated prior to the Effective
Date, or such persons shall have entered into agreements with Oak Hill Financial
substantially in the form attached hereto as EXHIBIT B, providing for the
conversion on the Effective Date of all Towne Stock Options held by them to Oak
Hill Stock Options in accordance with Section 8(d) of the Merger Agreement.
(b) All holders of outstanding Towne Stock Options who are employees
of either Towne Financial or Blue Ash Building & Loan Association on the
Effective Date shall have been exercised, or terminated prior to the Effective
Date, or shall have entered into agreements with Oak Hill Financial
substantially in the form attached hereto as EXHIBIT B, providing for the
conversion on the Effective Date of all Towne Stock Options held by them to Oak
Hill Stock Options in accordance with Section 8(d) of the Merger Agreement.
(c) Towne shall have certified to Oak Hill Financial as of the
Effective Date that the actions described in paragraph (a) and (b) of this
Section 8.13 have been taken.
8.14 EMPLOYMENT AGREEMENTS. All outstanding employment agreements between
Towne Financial and an employee or between Blue Ash and an employee (other than
the employment contract between William S. Siders and Towne Financial), shall
have been terminated or converted to employment agreements acceptable to Oak
Hill Financial and each employee shall have agreed in writing that no
termination fee is due a result of such termination or conversion.
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8.15 PRICE OF OAK HILL FINANCIAL COMMON. The Average Closing Price of Oak
Hill Financial Common shall be equal to, or greater than, 80% of the Starting
Price.
8.16 PENDING OR THREATENED LITIGATION. There is no action, suit,
proceeding, or claim by any shareholder or former shareholder of Towne
Financial, pending or threatened, against (i) Oak Hill Financial, Towne
Financial or Blue Ash, (ii) the assets, business, or goodwill of Oak Hill
Financial, Towne Financial or Blue Ash, or (iii) any director, officer, or
Principal Shareholder of Oak Hill Financial or Towne Financial, which is arising
from or is related to the consummation of the merger of Towne Financial and Oak
Hill Financial which is contemplated by this Agreement; provided however, that
this condition precedent to the obligation of Oak Hill Financial to close the
Merger shall be satisfied if coverage for any such claim shall have acknowledged
by an insurance carrier in a writing acceptable to Oak Hill Financial.
SECTION 9. CLOSING DATE
Unless the parties otherwise agree, the closing of the transactions
contemplated by this Agreement and the Merger Agreement ("Closing Date") shall
be held at 11:00 a.m. at the offices of Porter, Wright, Morris & Arthur in
Cincinnati, Ohio, on the last business day of the month in which the conditions
specified in Sections 6.01 and 6.02 hereof have been satisfied.
SECTION 10. AMENDMENT
At any time prior to the Closing Date, the parties, subject to paragraph 14
of the Merger Agreement, may modify, amend, or supplement this Agreement by
mutual agreement authorized by their respective boards of directors and
evidenced by an instrument in writing executed and delivered by the parties
hereto, whether before or after the shareholders of Towne Financial has adopted
this Agreement.
SECTION 11. TERMINATION
11.01 TERMINATION. This Agreement and the Merger Agreement shall terminate
on December 31, 1999, unless a later date is agreed upon in writing by the
parties, and may be terminated and the Merger may be abandoned at any time prior
to the Effective Time as follows:
(a) by the mutual consent, evidenced in writing, of the boards of
directors of Oak Hill Financial and Towne Financial;
(b) by the board of directors of Oak Hill Financial, by giving
written notice thereof to Towne Financial, which notice shall specify in
reasonable detail the grounds therefor: (i) if any condition precedent to
performance by Oak Hill Financial and Oak Hill Banks has not been satisfied or
waived; (ii) if Towne Financial has not fully performed its obligations and
agreements hereunder and under the Merger Agreement; or (iii) if any of the
representations of Towne Financial set forth herein are untrue or incorrect in
any material respect; or
(c) by the board of directors of Towne Financial, by giving written
notice thereof to Oak Hill Financial, which notice shall specify in reasonable
detail the grounds therefor: (i) if any condition precedent to performance by
Towne Financial has not been satisfied or waived; (ii) if Oak Hill Financial and
Oak Hill Banks have not fully performed their obligations and agreements
hereunder and under the Merger Agreement; or (iii) if any of the representations
of Oak Hill Financial set forth herein are untrue or incorrect in any material
respect.
11.02 SURVIVAL OF CERTAIN PROVISIONS UPON TERMINATION. Upon a termination
of this Agreement as provided herein, this Agreement and the Merger Agreement
shall become void and there shall be no further obligation or liability on the
part of any party hereto or their respective shareholders, directors, or
officers, except pursuant to Sections 4.09, 5.07, 11.03, and 12 hereof, which
shall survive a termination of this Agreement in accordance with the express
terms of such Sections.
11.03 TERMINATION FEE. During the term of this Agreement, if (i) an
Unsolicited Acquisition Proposal is submitted to and approved by the
shareholders of Towne Financial at any time prior to the Effective Time, or
(ii) an Unsolicited Acquisition Proposal is received by Towne Financial or is
made directly to the shareholders of Towne
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Financial at any time prior to the holding of the meeting of the shareholders of
Towne Financial to be called pursuant to Section 4.02 hereof, and the board of
directors of Towne Financial fails to recommend to the shareholders of Towne
Financial approval of the Merger Agreement or this Agreement, withdraws such
recommendation previously made to the shareholders of Towne Financial, or fails
to solicit proxies of shareholders of Towne Financial to approve the Merger, and
the Merger Agreement and this Agreement are subsequently rejected by the
shareholders of Towne Financial at such meeting, then, in either such event,
Towne Financial shall pay to Oak Hill Financial, within five business days after
a termination of the Merger Agreement and this Agreement following such an
event, a cancellation fee in the amount of $500,000, as liquidated damages, and
not as a penalty, and, upon the payment in full thereof, Towne Financial shall
have no further liability under this Agreement or the Merger Agreement. The
obligations of Towne Financial under this Section 11.03 shall survive a
termination of this Agreement, provided that, at the time of such termination,
(1) an event described in Section 7.04 hereof has not occurred, and (2) Towne
Financial does not have the right to terminate this Agreement by virtue of a
material breach of this Agreement or the Merger Agreement by Oak Hill Financial
or Oak Hill Banks.
SECTION 12. EXPENSES
Except as otherwise expressly provided herein, all expenses incurred by or
on behalf of the parties hereto in connection with the authorization,
preparation, execution, and consummation of this Agreement and the Merger
Agreement, including, without limitation, all fees and expenses of agents,
representatives, printers, and counsel employed by the parties hereto, and
taxes, if any, shall be borne solely by the party which has or shall have
incurred the same. The covenants of the parties contained in this Section 12
shall survive a termination of this Agreement for any reason.
SECTION 13. NOTICES
All notices, requests, demands, and other communications hereunder shall be
in writing and shall be deemed to have been duly given if delivered personally,
or by private mail or messenger service addressed as indicated below, or at such
other address as such party may designate in writing to the other parties, or
sent by facsimile and confirmed by first-class, certified mail, postage prepaid,
addressed as indicated below, or at such other address as such party may
designate in writing to the other parties:
(a) If to Towne Financial, to:
William S. Siders
Executive Vice President
4811 Cooper Road
Blue Ash, Ohio 45242
with a copy to:
Richard J. Valleau, Esq.
Cors & Bassett
537 East Pete Rose Way
Suite 400
Cincinnati, Ohio 45202-3502
(b) If to Oak Hill Financial or Oak Hill Banks, to:
John D. Kidd
President
Oak Hill Financial, Inc.
14621 State Route 93
Jackson, Ohio 45640
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with a copy to:
H. Grant Stephenson, Esq.
Porter, Wright, Morris & Arthur
41 South High Street
Columbus, Ohio 43215
SECTION 14. GENERAL PROVISIONS
14.01 ENTIRE AGREEMENT. This Agreement, together with the Merger Agreement
and the documents referred to or incorporated herein or therein, reflect the
entire agreement among the parties with respect to the subject matter thereof
and supersede all prior agreements and understandings, oral or written, among
the parties with respect to such subject matter, and no party shall be liable or
bound to any other party in any manner by any representations, warranties, or
covenants except as specifically set forth herein or therein.
14.02 WAIVER. At any time on or prior to the Effective Date, any party
hereto may (i) waive any inaccuracies in the representations and warranties of
the other parties contained in this Agreement and the Merger Agreement or in any
document delivered pursuant hereto or thereto, or (ii) waive compliance by the
other parties with any of the conditions, covenants, and agreements contained in
this Agreement or the Merger Agreement.
14.03 ASSIGNMENT. Neither this Agreement nor any rights, interests, or
obligations hereunder shall be assigned or transferred by operation of law or
otherwise by any of the parties hereto without the prior written consent of the
other party.
14.04 BENEFIT. Except as specifically provided herein, nothing in this
Agreement, express or implied, is intended to confer upon any person or entity
other than the parties hereto and their successors in interest any rights or
remedies under or by reason of this Agreement.
14.05 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original for all purposes, but
such counterparts taken together shall constitute one and the same instrument.
14.06 GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Ohio without regard to its conflicts of
laws principles.
14.07 INCORPORATION BY REFERENCE. The Merger Agreement, the Disclosure
Memoranda, and all Exhibits attached hereto are hereby incorporated by reference
herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
OAK HILL FINANCIAL, INC.
By: /s/ John D. Kidd
------------------------
John D. Kidd, President
TOWNE FINANCIAL CORPORATION
By: /s/ Neil S. Strawser
------------------------
Neil S. Strawser, Chairman of the Board
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EXHIBIT A TO SUPPLEMENTAL AGREEMENT
SHAREHOLDER AGREEMENT
The undersigned (the "Shareholder"), who is a shareholder of Towne
Financial Corporation., an Ohio corporation ("Towne Financial"), has executed
this Shareholder Agreement to be effective as of the date set forth next to such
Shareholder's signature below.
RECITALS
A. The Shareholder owns or has the power to vote, either exclusive or
shared, ____________ shares of the common stock, $1.00 par value, of Towne
Financial (together with all shares of such stock which the Shareholder
subsequently acquires or obtains the power to vote, the "Shares").
B. Towne Financial has entered into (i) a certain Agreement and Plan of
Merger with Oak Hill Financial, Inc., an Ohio corporation ("Oak Hill
Financial"), dated March 11, 1999 (the "Merger Agreement"), and (ii) a certain
Supplemental Agreement with Oak Hill Financial), also dated March 11, 1999 (the
"Supplemental Agreement"), pursuant to which Towne Financial is to be merged
into Oak Hill Financial (the "Merger").
C. Under the terms of the Merger Agreement, Towne Financial has agreed to
call a meeting of its shareholders for the purpose of voting upon the approval
of the Merger (together with any adjournments thereof, the "Shareholders'
Meeting").
D. It is a condition to the obligations of Oak Hill Financial under the
Merger Agreement and the Supplemental Agreement that certain shareholders of
Towne Financial, including the Shareholder, shall have agreed to vote their
shares of Towne Financial stock in favor of the Merger.
AGREEMENT
Accordingly, the parties hereto hereby agree as follows:
1. AGREEMENT TO VOTE. The Shareholder agrees to vote the Shares as follows:
(a) in favor of the adoption of the Merger Agreement and the
Supplemental Agreement and the approval of the Merger at the Shareholders'
Meeting;
(b) against the approval of any proposal relating to a competing merger
or business combination involving an acquisition of Towne Financial or the
purchase of all or a substantial portion of the assets of Towne Financial by any
person or entity other than Oak Hill Financial; and
(c) against any other transaction which is inconsistent with the
obligation of Towne Financial to consummate the Merger in accordance with the
Merger Agreement and the Supplemental Agreement.
2. LIMITATION ON VOTING POWER. It is expressly understood and acknowledged
that nothing contained herein is intended to restrict the Shareholder from
voting on any matter, or otherwise from acting, in the Shareholder's capacity as
a director or officer of Towne Financial with respect to any matter, including
but not limited to, the management or operation of Towne Financial.
3. TERMINATION. This Agreement shall terminate on the earlier of (a) the
first anniversary of this Agreement, (b) the date on which the Merger Agreement
and Supplemental Agreement are terminated in accordance
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with Section 11 of the Supplemental Agreement, (c) the date on which the Merger
is consummated, or (d) the death of the Shareholder.
4. REPRESENTATIONS, WARRANTIES, AND ADDITIONAL COVENANTS OF THE
SHAREHOLDER. The Shareholder hereby represents and warrants to Oak Hill
Financial that the Shareholder has the capacity and all necessary power and
authority to vote the Shares and that this Agreement constitutes a legal, valid,
and binding obligation of the Shareholder, enforceable in accordance with its
terms, except as may be limited by bankruptcy, insolvency, or similar laws
affecting enforcement of creditors rights generally. The Shareholder further
agrees that, during the term of this Agreement, the Shareholder will not sell or
otherwise voluntarily dispose of any of the Shares which are owned by the
Shareholder or take any other voluntary action which would have the effect of
removing the Shareholder's power to vote the Shares or which would be
inconsistent with this Agreement.
5. SPECIFIC PERFORMANCE. The undersigned hereby acknowledges that damages
would be an inadequate remedy for any breach of the provisions of this Agreement
and agrees that the obligations of the Shareholder hereunder shall be
specifically enforceable and that Oak Hill Financial shall be entitled to
injunctive or other equitable relief upon such a breach by the Shareholder. The
Shareholder further agrees to waive any bond in connection with the obtaining of
any such injunctive or equitable relief. This provision is without prejudice to
any other rights that Oak Hill Financial may have against the Shareholder for
any failure to perform his obligations under this Agreement.
6. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Ohio, without regard to its conflicts
of laws principles.
IN WITNESS WHEREOF, the undersigned has executed this Shareholder Agreement
as of the day and year first above written.
SHAREHOLDER:
Date: _____________________________
Signature
Print Name
ACKNOWLEDGMENT
STATE OF OHIO
COUNTY OF
The foregoing instrument was acknowledged before me this ___ day of
____________, 1999, by _____________________________.
________________________________________
Notary Public
My Commission expires:_________________.
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EXHIBIT B TO SUPPLEMENTAL AGREEMENT
STOCK OPTION CONVERSION AGREEMENT
This Agreement is entered into this ___ day of ___________, 1999, by and
among ________________________ (the "Optionholder"), OAK HILL FINANCIAL, INC.,
an Ohio corporation ("Oak Hill Financial"), and TOWNE FINANCIAL CORPORATION., an
Ohio corporation ("Towne Financial").
RECITALS
A. Oak Hill Financial is a registered bank holding company.
B. Oak Hill Financial and Towne Financial have entered into a certain
Agreement and Plan of Merger, dated March 11, 1999 (the "Merger Agreement"), and
Oak Hill Financial and Towne Financial have entered into a certain Supplemental
Agreement, also dated March 11, 1999 (the "Supplemental Agreement"), pursuant to
which Towne Financial is to be merged into Oak Hill Financial (the "Merger").
Upon the consummation of the Merger, Oak Hill Financial will be the successor by
merger to Towne Financial. (All capitalized terms used herein and not otherwise
defined herein shall have the meanings assigned to them in the Merger Agreement
or the Supplemental Agreement.)
C. The Optionholder is currently a director, officer, employee or former
employee of Towne Financial or Blue Ash Building & Loan Association.
D. The Optionholder is also currently the holder of a Towne Stock Option
(the "Towne Option") to purchase certain shares of Towne Common, pursuant to the
either the Towne 1992 Stock Option Plan or the Towne 1997 Stock Option Plan and
a certain Stock Option Agreement executed by the Optionholder and Towne
Financial pursuant to such plan (the "Towne Stock Option Agreement"). The total
number of shares subject to the Towne Option as of the date of this Agreement,
the exercise price for the shares which may be purchased under such option (the
"Towne Exercise Price"), the dates on or after which such option is exercisable,
and the number of shares as to which such option is exercisable after each
particular exercise date are set forth on Exhibit A which is attached hereto and
incorporated by reference herein.
E. The Towne Stock Option Agreement provides that it shall be binding upon
the successors of Towne Financial.
F. Oak Hill Financial has previously established and adopted the Oak Hill
1995 Stock Option Plan, a copy of which is attached as Exhibit B hereto and
incorporated by reference herein. The terms and conditions contained in the Oak
Hill 1995 Stock Option Plan relating to (among other things) the exercise of
options granted under that plan are different from those contained in either of
the Towne Stock Option Plans.
G. Pursuant to the terms of the Merger Agreement, upon the consummation of
the Merger, all shares of Towne Common are to be converted into shares of Oak
Hill Financial Common and all options granted under the Towne Stock Option Plans
are to be converted into options to purchase Oak Hill Financial Common subject
to the terms of the Oak Hill 1995 Stock Option Plan.
AGREEMENT
In consideration of the foregoing and of the mutual promises contained
herein, the parties agree as follows:
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1. Upon the consummation of the Merger, and effective as of the Effective
Time, the Towne Option shall be converted into a Oak Hill Stock Option subject
to all of the terms and conditions of the Oak Hill 1995 Stock Option Plan (the
"Oak Hill Option"), and all further rights of the Optionholder and obligations
of Towne Financial under the Towne Stock Option Plan and the Towne Stock Option
Agreement shall be extinguished.
(a) The number of shares of Oak Hill Financial Common to be subject to
the Oak Hill Option shall be equal to the number of shares of Towne Common
subject to the Towne Option as of the Effective Time multiplied by the
Conversion Ratio, rounded off to the nearest whole number of shares of Oak Hill
Financial Common.
(b) The exercise price to be payable upon an exercise of the Oak Hill
Option shall be equal to the Towne Exercise Price divided by the Conversion
Ratio.
(c) The dates after which the Towne Financial Option shall be
exercisable shall be the same as those provided under the Towne Option; and the
number of shares of Oak Hill Financial Common as to which the Oak Hill Option
shall be exercisable after each particular exercise date shall be in the same
ratio to the total number of shares subject to the Oak Hill Option as the number
of shares of Towne Common exercisable after the such exercise date is to the
total number of shares of Towne Common subject to the Towne Option, rounded to
the nearest whole number of shares of Oak Hill Financial Common.
(d) The Oak Hill Option shall be evidenced by and subject to the terms
of a Stock Option Agreement to be executed by the Optionholder pursuant to the
terms of the Oak Hill 1995 Stock Option Plan at or after the Effective Time,
which shall be effective as of the Effective Time.
(e) The Optionholder acknowledges and agrees that, for the purposes of
Section 424 of the Internal Revenue Code of 1986, as amended, and the
regulations promulgated thereunder, he or she will not receive any "additional
benefits" (as that term is defined in said Section 424 and the regulations
promulgated thereunder) as a result of the conversion of the Towne Option into
the Oak Hill Option hereunder, and hereby disclaims and agrees to return any
such additional benefits that he or she may receive.
2. Towne Financial shall notify Oak Hill Financial promptly if the
Optionholder's employment with Towne Financial or Blue Ash Building & Loan
Association is terminated at any time prior to the Effective Time, and shall
furnish to Oak Hill Financial at the Effective Time a certificate, signed by an
officer of Towne Financial, stating (if it is true) that the Optionholder is an
employee of Towne Financial or Blue Ash Building & Loan Association as of that
date and listing the number of shares of Towne Common subject to the Towne
Option as of that date. Any notice given pursuant to this Section shall be given
in accordance with the provisions of Section 13 of the Supplemental Agreement.
3. This Agreement shall terminate automatically upon a termination of the
Merger Agreement at any time prior to the consummation of the Merger, whereupon
this Agreement shall become null and void and no party shall have any further
rights or obligations hereunder.
4. The rights of the Optionholder under this Agreement may not be
transferred or assigned to any person other than the Optionholder, except by
will or the laws of descent and distribution.
5. This Agreement shall be construed and enforced in accordance with the
laws of the State of Ohio without regard to its conflict of laws principles.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
29
<PAGE> 30
THE OPTIONHOLDER: OAK HILL FINANCIAL, INC.
By:
Signature
Name:
Name (please type or print) Title:
TOWNE FINANCIAL CORPORATION
By
Name
Title:
30
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000880052
<NAME> TOWNE FINANCIAL CORP./OH
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 2,310
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<LOANS> 71,461
<ALLOWANCE> 270
<TOTAL-ASSETS> 122,317
<DEPOSITS> 98,409
<SHORT-TERM> 15
<LIABILITIES-OTHER> 1,715
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0
0
<COMMON> 222
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<TOTAL-LIABILITIES-AND-EQUITY> 122,317
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<INTEREST-TOTAL> 6,389
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<INCOME-PRE-EXTRAORDINARY> 714
<EXTRAORDINARY> 0
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<NET-INCOME> 714
<EPS-PRIMARY> 3.39
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<YIELD-ACTUAL> 2.61
<LOANS-NON> 95
<LOANS-PAST> 245
<LOANS-TROUBLED> 0
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<CHARGE-OFFS> 17
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<ALLOWANCE-CLOSE> 270
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</TABLE>
